OM301LectureThreeFlowsDR

8/8/2019 OM301LectureThreeFlowsDR

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1 cSamuel K. Eldersveld OM301 April 7, 2008

Operations Management Basics: Operations as a Flow Process

CONTROL

INPUTS TRANSFORM OUTPUTS

FlowFlow

Info & Feedback Info & Feedback

OM: Systems

Inputs and Outputs

Flow

Transformation

Feedback and Control

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Example from the text: PRESBYTERIAN HOSPITAL PHILADELPHIA

Inputs & Outputs = PatientsTransform = Angiography

Patients wait when they compete for the same limited resource.

Patients wait due to unpredictable nature of activities.

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Example: A flow unit is a single call

SWITCH COMPLETE

Abandon

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Inputs: Calls

SWITCH COMPLETE

Abandon

INPUTS (C ALL INITIATION)

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Input, transform

SWITCH COMPLETE

Abandon


PRODUCT C OR VIP

B

A, B OR C

ROUTING RULES

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Input, transform, output

SWITCH COMPLETE

Abandon


PRODUCT C OR VIP

B

A, B OR C

ROUTING RULES

OUTPUTS (C ALL RESOLUTION)

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Input, transform, output, feedback

SWITCH COMPLETE

Abandon


PRODUCT C OR VIP

B

A, B OR C

ROUTING RULES


Feedback SUPERVISOR

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Input, transform, output, feedback, control

SWITCH COMPLETE

Abandon


PRODUCT C OR VIP

B

A, B OR C

ROUTING RULES


Feedback SUPERVISORCONTROLS

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Call-center example: Typical OM tasks

Forecast CallVolume &

Customer Behavior

Define ServiceLevel Goals

Calculate RequiredNo. of Agents

Efficiently ScheduleAll Activities

EvaluatePerformance

Forecasting

System Design

Requirements Planning

Scheduling

Iterate: Feedback and Control

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Call-center example: Typical OM tasks

Forecast CallVolume &

Customer Behavior

Define ServiceLevel Goals

Calculate RequiredNo. of Agents

Efficiently ScheduleAll Activities

EvaluatePerformance

Forecasting

System Design

Requirements Planning

Scheduling

Iterate: Feedback and Control

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Competition, Strategy, Productivity

Organizations strive for increased productivity. Example: Call Center

Measurement and tracking of productivity goals:

1. Total call throughput

2. Number of calls handled per worker

Associated performance measures

1. 30-second average speed of answer (ASA)

2. Abandonment rate (AR) of 1% or less

3. % of callers with > 60s ASA

Systems analysis

1. ASA much higher during peak hours.

2. ASA much higher at certain centers (bottlenecks).

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Three Little Measures of Process Performance

Start thinking of the process (at the highest level) as a black box. Inputs are processed

into outputs. What is the flow unit? (e.g. Patient, phone call, manufactured item.)

1. The number of flow units in the process (system) is called the inventory.

2. The time it takes the flow unit to enter and exit the process is called the flow time.

3. The rate at which the process delivers output is called the flow rate.

Customers care about flow time! Inventory in a production environment is called work in

process (WIP). The flow rate is also commonly referred to as the throughput rate.

Process Flow Unit Flow/throughput Rate Flow Time Inventory

H&R Block Tax Returns Returns Processed 45,000 per day 0.25 days 11,250 retur ns

Landyatz Skateboard Manufacture Boards 1400 boards per week 0.1 weeks per board 140 boards

Expedia Travel Call center Calls 90 callers per hour 0.2 hours per call 18 callers

Business School OM301 Students 675 students per year 1/3 year 225 students.

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Simple call-center example: Flows and Littles Law

Incoming Calls Call Center (holding+in-service=inventory) Serviced Calls

What (interesting) questions can we ask about a process?

Inventory: I

Flow Time: T

Flow Rate: R

LITTLEs LAW, what is it?

Inventory(I) = Flow Rate(R) Flow Time(T)

# of Calls in the system(I) = Call Rate(R) Avg. time in system(T)

Implications of Littles Law: Out of the three fundamental performancemeasures (I,R,T), two can be chosen by management, and the other isGIVEN by nature.

EXAMPLE: If we hold throughput constant: Reducing flow time Reduces inventory

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Call-center example: Flows and Littles Law

Example: Suppose that a call center services an average of 75 callers per hour (and thereare no abandonments). Also, suppose that it takes, on average, a customer waits or is

speaking with a customer service representative for 12.8 minutes, the average time a

customer spends in the system. Then, we have:

Flow Time: T = 12.8 minutes per call60 minutes per hour

= 0.213 hours per call

Flow Rate: R = 75 calls per hour.

Now, what is I?

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Call-center example: Flows and Littles Law

Littles Law:I= R T

Using Littles Law we have the average number of calls in the call center system as:

No. of Calls in the system(I) = Call Flow Rate(R) Avg. Time in System(T)

= 75 0.213

= 16.

Hence, if there are M = 10 call service agents working, the expected (average) number of

callers waiting to have their call answered at any time is (IM) = (16 10) = 6 callers.

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Inventory Turns and Littles Law

Flow rate (R) = Cost of Goods Sold (COGS).

Inventory (I) = Cost of items on hand (average inventory).

Flow Time (T) = Avg. time a unit is in the system. =Inventory

COGS

This is data is available from a companys 10K report

TURNS: The number of times a company turns over its inventory

each period:

TURNS =1

T

R

I

COGS

I

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Example of Inventory Turns (things go better(?)) with Coke?

The Coca-Cola Company and Subsidiaries (2004 10K report)

Compound Growth Rates Year Ended December 31,

(In millions $ except pershare data and growth rates) 5 Years 10 Years 2004 2003SUMMARY OF OPERATIONS

Net operating revenues 5.5% 4.2% $ 21,962 $ 21,044

Cost of goods sold 4.9% 2.2% 7,638 7,762

Gross profit 5.9% 5.5% 14,324 13,282http://www2.coca-cola.com/investors/form_10K_2004.html

Coca-Cola (KO) revenues in 2004: $21.9B

The cost of goods sold was 35% of revenue

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Inventory from financial statements: Turnover with KO

Balance Sheet - Excerpt (in $millions)

2004 2003Inventories (avg.) $1,491 $1,252

Income Statement (Excerpt)

Cost of Goods Sold (flow rate) $7,638 $7,762

Data avg: 20032004:

I R T

Inventory ($) COGS ($) Time (Yrs.)

$1.37B $7.7B I

R= 0.178

Turns = 1Flow Time =1

T= COGSInventory =

COGSI

= 5.6.

Days for coke to go through its inventory: 3655.61

= 65.1.

Q: Why is Cokes turn rate lower than industry beverage average ( 8)?

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Practice Problem (see page 28 of the course notes)

For next time: Visit a web-site such as

http://finance.yahoo.com

and search for financial statements for two competing companies.

Download COGS (or costs of sales) from the income statement and

inventory from the balance sheet. Compute inventory turns:

Turns =COGS

Inventory

This is the type of preliminary research a stock-picker might conduct to

determine company-wide trends while performing a competitive analysis.

What does the analysis using your choices of companies tell you?

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Isnt Inventory BAD? If so, why do we have it?

1. Pipeline Inventory

Since it takes time for an flow unit to traverse the system, at any point in time units make

up inventory in transit or WIP. Examples: Grocery items moving from distribution to retail

or a caller to a call center waiting or with a service rep.

2. Seasonal Inventory

When capacity is fixed, but demand is variable. Campbells Chicken Noodle Soup.

Agricultural seasonality plays a role in raw materials inventories of wheat and corn being

higher at production facilities in the fall.

3. Cycle Inventory

Economies of scale (and set-up times) often make it economical to produce products in

batches. Even when demand is constant, when a batch is completed, inventory will be

present at the start of the demand cycle.

4. Decoupling Inventory and Buffers

Inventory between process steps act as buffers: especially important when subsequent

process steps have uncertain completion times or management desires steps to operate

independently or to allow independent breaks.

5. Safety Inventory

To allow for uncertain, unpredictable (stochastic = probabilistic) demand.

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Processes and flows: Five characteristic elements of a process

A processtransforms inputs into outputs.

There are five characteristic elements of

a process:

INPUTS PROCESS OUTPUTSFlowFlow

1. Inputs and outputs

2. Flow units

3. Network of activities and buffers: Process Flow Diagram (PFD)

4. Resources

5. Information structure.

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Process Components - Resources and Information structure

4. Organizational Resources: Tangible assets - two catagories:

Capital: Fixed assets such as land, buildings, facilities, equipment, IT systems.Labor: People such as engineers, operators, Customer service reps, sales staff.

Resources facilitate the transformation of inputs into outputs.

5. Information structure: A structure that shows what information is

needed and is available in order to to perform activities or make

managerial decisions.

A business process is often modeled as a network of activities performed by

resources that transform inputs into outputs. Process flow management is the

set of managerial policies that specify how a process should be operated over

time and which resources should be allocated over time to the activities.

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Process Flow Diagrams

The process network of activities and buffers is called a process flow

diagram (PFD).

RM PH LH CFB FB

FG Bri Dis FH

Schematic diagram Process-Flow Diagram

We represent each activity with a box, each buffer, or storage area for

inventory, with a triangle and mark the direction of flow units with arrows.

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How to create a PFD

Be the flow unit (ore): Take the perspective of the raw material input.

Envision the journey through the process.

Simplify the process: The PFD.

Activities: Boxes , Flows:, Inventories/buffers: RM .

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Types of Inventories and their representation

Types of inventory:

Raw Materials (raw inputs) RM

Work-in-process WIP

Finished Goods FG

With the PFD in hand: Compute the capacity of eachresource. Determine which is the bottleneck. Thisdetermines the overall process capacity.

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Determining Capacities

Capacity is a rate (= units processed per unit time).

It is an upper bound on effectiveness.

Our old friend Littles Law (I = R T) comes to help us determine

capacity measurements.

Example: Circored Iron Ore processing plant as described in the text,

we determine that the Fluid-bed reactor step requires 240 minutes to

process 400 tons of inputs. Thus, the capacity per hour of this step is

400

240= 1.667 tons per minute,

or equivalently,

400 tons

240 minutes

60 minutes

1 hour= 100 tons per hour.

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Bottlenecks

Bottleneck: The activity or resource that determines the flow

(throughput) rate of the entire process.

By speeding up a bottleneck we dont get rid of all bottlenecks, they will

just shift over to the next slowest activity.

Flow rate determines how much the process actually does produce.

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Bottlenecks (visually)

Process capacity (the theoretical maximum). Given a set of nresources or activities:

Process Capacity = Minimum(Capacity of Resource1, . . . ,Capacity of Resourcen)

The bottleneck of a process: weakest link = the resource with the smallest capacity.

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Exogenous factors may determine the flow rate of the process

What happens when...

...the system is starved of raw material inputs?

...if demand is less than the theoretical maximum flow of the system?

Ultimate Process Flow Rate Minimum{ Supply, Process Capacity, Demand }

Supply Demand

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Practice Problem: Baking Bread on Two Lines (page 32 course notes)

Bakery produces one type of bread.The bakery operates two parallel bakinglines...

... each line is equipped with a mixer , a proofer and an oven .

There is a single packaging line fed by the two baking lines.

A single RM inventory buffer feeds the two lines.

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Bread Baking II

Each baking line consists of 3 resource activities:

MIX: flour, yeast, water, and salt are first mixed.

PROOF: dough is moved to the proofer, a chamber that

encourages fermentation of dough by yeast.

BAKE: proofed dough is placed into pans are baked in the ovens.

After baking is completed on either of the bread-baking lines the loaves feed a single

WIP buffer; followed directly by a packaging activity step. When packaging is

completed, the finished products feed into a single storage area (a finished-goods buffer)

until trucks arrive to pick them up for delivery.

CAN YOU DRAW A PFD of this process?

Remember, there are two parallel lines mixing, proofing and baking...Try it!

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