Session 3 Operations Management Process View of the Organization Lecture Note Learning Objectives ■Process Mapping .Terminology:Inventory,Throughput rate, Throughput time ■Little'sLaw Case:Kristen's Cookie Company o 1-2 2008 by Prot.Jiabiano Ren
Process View of the Organization Lecture Note Operations Management Session 3 1-2 PowerPoint Presentation to accompany Operations Management © 2008 by Prof. Jianbiao Ren Learning Objectives Process Mapping Terminology: Inventory, Throughput rate, Throughput time Little’s Law Case: Kristen’s Cookie Company
Different Processes Stage 1 Stage 2 Stage 3 Multistage process Buffer Stage I Stage 2 Multistage process with buffer 1-3 Process Mapping Insert silver Pull arm Lose dollar into on slot a or Quit slo城achine machine lose Player activitics Win Internal slot machine activities Activate Pay payou winnings out No Move coir Yes Flowchart Symbols Move coin Tasks or operations Decision points to winnings bucket Flows of material queues (waiting lines) or customers 14
1-3 PowerPoint Presentation to accompany Operations Management © 2008 by Prof. Jianbiao Ren Different Processes 1-4 PowerPoint Presentation to accompany Operations Management © 2008 by Prof. Jianbiao Ren Process Mapping
Process Performance Batch Time unit time Operation time Setup time Run time Throughput time =Averuge time for a mit to move through Run Throughput the system time Throughput time Velocity= Value-added nime Cycle time Average time between Cyele completion o寸nirs Standards time Velocity Throughput raeCycle time Acnal output Throughput Standard outpur rate Output Productiviny Input Time activated Time Utilization available Utilization Time activaled Time available 1-5 Describe the Processes Inventory-Flow time-Throughput rate Inventory:Number(amount)of units within (before and after)the process Number of patients in the interventional radiology waiting room Number of students in the OM classroom. Tons of crude oil stored at refineries. In Revenue Management Context:Number of seats on a Southwest flight. Throughput time(Flow time):Amount of calendar time consumed to complete a process,includes waiting and idle time. .30 months is the minimum flow time for the CLFM program. 10 minutes is the flow time for my hair cut. 2 hours is the flow time to drive to Suzhou from Shanghai. Throughput rate:Number(amount)of units output from a process .33 CLFM students graduate per year from ACEM 25 cars enter the Fahua campus from Fahua Road every hour 17 M barrels of oil is refined per year in the U.S. 1-6 G20Re0L.E2t知
1-5 PowerPoint Presentation to accompany Operations Management © 2008 by Prof. Jianbiao Ren Process Performance 1-6 PowerPoint Presentation to accompany Operations Management © 2008 by Prof. Jianbiao Ren Describe the Processes Inventory – Flow time – Throughput rate Inventory: Number (amount) of units within (before and after) the process z Number of patients in the interventional radiology waiting room. z Number of students in the OM classroom. z Tons of crude oil stored at refineries. z In Revenue Management Context: Number of seats on a Southwest flight. Throughput time (Flow time): Amount of calendar time consumed to complete a process, includes waiting and idle time. z 30 months is the minimum flow time for the CLFM program. z 10 minutes is the flow time for my hair cut. z 2 hours is the flow time to drive to Suzhou from Shanghai. Throughput rate: Number (amount) of units output from a process z 33 CLFM students graduate per year from ACEM z 25 cars enter the Fahua campus from Fahua Road every hour z 17 M barrels of oil is refined per year in the U.S
Little's law Inventory I [units/hr] [【units 日.回 2幽 [hrs] Inventory Throughput rate x Throughput Time I=RxT Turnover Throughput rate/Inventory =1/T 1-7 C2008b Eo4 lastrno Rer Little's powerful law Powerful formula:Does not depend on The sequence of the service First-in-first-out or Last-in-first-out Distribution of the service times Uniform or Normal Formula is for the averages,anyway Out of the three measures(I,R,T),two can be chosen by management,the other is given by the formula. ■ When throughput rate is constant .Reducing inventory =Reducing Throughput time ■Burger King: .Burger Thruput=50kg/day,Inventory=25kg ■Burger flow time= Customer Thruput=60/hour,Inventory=18 ■Customer flow time= 18 2008 br ProE.Iebino Ren
1-7 PowerPoint Presentation to accompany Operations Management © 2008 by Prof. Jianbiao Ren Little’s law Inventory = Throughput rate x Throughput Time I = R x T Turnover = Throughput rate/ Inventory = 1/ T Inventory I [units] Flow rate/Throughput R [units/hr] ... ... ... ... ... Flow Time T [hrs] 1-8 PowerPoint Presentation to accompany Operations Management © 2008 by Prof. Jianbiao Ren Little’s powerful law Powerful formula: Does not depend on The sequence of the service First-in-first-out or Last-in-first-out Distribution of the service times Uniform or Normal Formula is for the averages, anyway Out of the three measures (I,R,T), two can be chosen by management, the other is given by the formula. When throughput rate is constant Reducing inventory = Reducing Throughput time Burger King: Burger Thruput=50kg/day, Inventory=25kg Burger flow time= Customer Thruput=60/hour, Inventory=18 Customer flow time=
Medical devices A manufacturing company producing medical devices reported $60,000,000 in sales over the last year.At the end of the same year,the company had an average inventory of $20,000,000 worth of ready-to-ship medical devices.When analyzing operations,we know that inventory turns=1 flow time. Assuming that units in inventory are valued(based on COGS)at $1000 per unit and are sold for $2000 per unit,how fast does the company turn its inventory? 1-9 2008 by ProE.Junkiao Ren More interesting observations: Little's powerful law with Cost of Goods Sold Dell has a COGS of $20 B per year The cost of the Dell's annual sales is 20 B Dell annually spends $20 B,which can be thought as the thruput in terms of dollars.Hence,thruput=$20 B Dell keeps $391 M worth of inventory,what is the flow time of Dell products? ■391/20,000=0.01955year=0.23 months=7days HP,COGS=$25.263 B per year,inventory $2 B,so flow time of HP products is 2/25.263 =0.079 year =0.95 months =28 days 7 days vs.28 days is a measurement of Dell's supply chain efficiency vs.HP's. What is Dell's secret? 1-10 2008 by ProE.Janbiao Ren
1-9 PowerPoint Presentation to accompany Operations Management © 2008 by Prof. Jianbiao Ren A manufacturing company producing medical devices reported $60,000,000 in sales over the last year. At the end of the same year, the company had an average inventory of $20,000,000 worth of ready-to-ship medical devices. When analyzing operations, we know that inventory turns = 1 / flow time. Assuming that units in inventory are valued (based on COGS) at $1000 per unit and are sold for $2000 per unit, how fast does the company turn its inventory? Medical devices 1-10 PowerPoint Presentation to accompany Operations Management © 2008 by Prof. Jianbiao Ren More interesting observations: Little’s powerful law with Cost of Goods Sold Dell has a COGS of $20 B per year The cost of the Dell’s annual sales is $ 20 B Dell annually spends $20 B, which can be thought as the thruput in terms of dollars. Hence, thruput=$20 B Dell keeps $391 M worth of inventory, what is the flow time of Dell products? 391/20,000 = 0.01955 year = 0.23 months = 7 days HP, COGS=$25.263 B per year, inventory $2 B, so flow time of HP products is 2/25.263 = 0.079 year = 0.95 months = 28 days 7 days vs. 28 days is a measurement of Dell’s supply chain efficiency vs. HP’s. What is Dell’s secret?
Even more interesting observations: Inventory turns vs.Gross margin Inventory turns(turnover)is the reciprocal of the flow time Dell turns inventory 52 times a year(once a week) -HP turns inventory about 12 times a year(once a month) Frequent inventory turns indicate that inventory is kept for a short amount of time before it is sent to the customer. While an item is in the inventory,we incur a percentage of its costs as inventory holding cost to compensate for the capital costs and Obsoleteness,Perishing,Pilferage,Storage costs. If the inventory holding cost is 30%per year,what is the holding cost per unit? -0.3/52=0.58%.The 0.58%of the cost of every unit Dell sells is due to inventory holding cost. What about HP? -0.3/12=2.5%. 1-11 2008 by ProE.Junkiao Ren Much more interesting observations: Inventory turns vs.Gross margin of Retailers Statement:Companies which turn 0 Retailer B inventory less frequently has higher Retailer B gross margin. Better statement:Companies which turn inventory less frequently sell unpopular,rare,slow moving items. They charge a premium to consumers 5 who want such items.That is why their gross margin is higher. Retailer A We must be careful while making generalizations from the graph on the left. Radio Shack However,these graphs are beneficial 0+ 0% 10% 20% 30% 40% 50% for benchmarking purposes. Gross Margin (% For example,it is very interesting to Souce:Gaur,Fisher,Raman (Manc 2005) know that food stores have an average of 10.78 inventory turns per year while jewelry stores have 1.68 turns per year. 1-12
1-11 PowerPoint Presentation to accompany Operations Management © 2008 by Prof. Jianbiao Ren Even more interesting observations: Inventory turns vs. Gross margin Inventory turns (turnover) is the reciprocal of the flow time – Dell turns inventory 52 times a year (once a week) – HP turns inventory about 12 times a year (once a month) Frequent inventory turns indicate that inventory is kept for a short amount of time before it is sent to the customer. While an item is in the inventory, we incur a percentage of its costs as inventory holding cost to compensate for the capital costs and Obsoleteness, Perishing, Pilferage, Storage costs. If the inventory holding cost is 30% per year, what is the holding cost per unit? – 0.3/52 = 0.58%. The 0.58% of the cost of every unit Dell sells is due to inventory holding cost. What about HP? – 0.3/12 = 2.5%. 1-12 PowerPoint Presentation to accompany Operations Management © 2008 by Prof. Jianbiao Ren 0 1 2 3 4 5 6 7 8 9 10 0% 10% 20% 30% 40% 50% Gross Ma rgin (%) Inventory Turns Much more interesting observations: Inventory turns vs. Gross margin of Retailers Retailer A Retailer B Statement: Companies which turn inventory less frequently has higher gross margin. Better statement: Companies which turn inventory less frequently sell unpopular, rare, slow moving items. They charge a premium to consumers who want such items. That is why their gross margin is higher. We must be careful while making generalizations from the graph on the left. However, these graphs are beneficial for benchmarking purposes. For example, it is very interesting to know that food stores have an average of 10.78 inventory turns per year while jewelry stores have 1.68 turns per year. Retailer A Retailer B Radio Shack area Source: Gaur, Fisher, Raman (ManSci 2005)
