OPSM 301 Operations Management

1. Koç University OPSM 301 Operations Management Class 4: Business process flows: Measurement Zeynep Aksin zaksin@ku.edu.tr

2. Announcements • New module: business process flows • Chapter 3 • Study questions and examples

3. Performance Measurement • External performance strongly depends on output, input, and resource markets, and transformation effectiveness of the process • Internal performance measures: processing cost, flow time, variety, service availability...

4. The Dynamics of a Process • We examine processes from the perspective of flow • To study process flows, we first answer three important questions: • On average, how many flow units pass through the process per unit time? • On average, how much time does a typical flow unit spend within process boundaries? • On average, how many flow units are within process boundaries at any point in time?

5. Operational Measures • On average, how many flow units pass through the process per unit time? THROUGHPUT or FLOW RATE (R)

6. 1 2 3 4 Terminology Throughput or Flow Rate (R) The average output of a production process per unit time. At the firm level, it is defined as the production per unit time that is sold.

7. Operational Measures • On average, how much time does a typical flow unit spend within process boundaries? FLOW TIME (T)

8. Terminology Flow Time (T) The flow time (also called variously throughput time, cycle time) of a given routing is the average time from release of a job at the beginning of the routing until it reaches an inventory point at the end of the routing. Flow time 1 2 3 4

9. Operational Measures • On average, how many flow units are within process boundaries at any point in time? INVENTORY (I)

10. 1 2 3 4 Terminology Work in Process inventory (I) The average inventory between the start and end point of a product is called work in process Inventory WIP (9 for this realization)

11. Slope (R), verical distance (I), horizontal distance(T)

12. Question • Koç University as a process: • How many students are enrolled on average? (within the process) • Need more information? Program length is 4 year. • What if program length were 6 years?  Inventory= Throughput x Flow Time X students enrolled 600 students graduate on average 600 new students admitted on average

13. Inventory I [units] ... ... ... ... ... Throughput Rate [units/hr] Flow Time T[hrs] LITTLE’S LAW • Relating throughput rate, flow time, and inventory

14. Inventory I [units] ... ... ... ... ... Time=0 Throughput Rate [units/hr] Flow Time T[hrs] Inventory I [units] ... Time=t ... ... ... ... Throughput Rate [units/hr] Flow Time T[hrs] Inventory I [units] ... ... ... ... ... Time=FT Throughput Rate [units/hr] Flow Time T[hrs] Understanding Little’s Law: Consider a first come first served Queue

15. An Intuitive Argument for Little's Law • Consider a process with the FCFS queue discipline • An order departs the process: At this moment there are I (Inventory) orders within the process • The orders that are in the process now are the ones that came after our departing order had arrived, in other words, they arrived during the waiting period of the departing order • Since order arrival rate is equal to the throughput rate, we have the following relationship: Inventory = Throughput Rate x Flow Time

16. Little’s Law basics • Little’s Law is for a system in steady state: input rate = output rate • Applies to most systems, even those with variability • Uses AVERAGE values

17. Example: flow unit is material • Fast food restaurant processes an average of 5000kgs, of hamburgers per week. Typical inventory of raw meat in cold storage is 2500kg. • Throughput R=5000kg/week • Average Inventory I=2500 kg. • Average flow time T=I/R=2500/5000=0.5 weeks

18. Example: flow unit is customers • A café in Beyoglu serves on average 60 customers per night. A typical night is about 10 hours. At any point there are on average 18 customers in the café. • Throughput R=60 customers/night; 6 customers/hour • Average Inventory I=18 customers • Average flow time T= I/R= 3 hours

19. Example: flow unit is cash • A steel company processes $400 million of iron ore per year. The cost of processing is $200 million per year. The average inventory is $100 million. How long does a typical dollar spend in the process? • R=$600 million/year • I=$100 million • T=I/R=1/6 year or 2 months

20. Example: Auto-Moto Financial Services • Auto-moto provides loans to qualified customers. The company receives about 1000 loan applications per 30-day working month and makes accept/reject decisions based on an extensive review of each application

21. Auto-Moto Financial Services • Currently, Auto-Moto processes each application individually. On average, 20% of all applications received approval. An internal audit showed that, on average, Auto-Moto had about 500 applications in process at various stages of the approval procedure, but on which no decisions had yet been made. • In response to customer complaints about the time taken to process each application, Auto-Moto called in OPSM Consulting Inc.

22. Current System 20% accept 200/month 1000/month review 500 80% reject 800/month

23. Example: cont’d • OPSM Consulting found out that although most applications could be processed rather quickly, some took a disproportionate amount of time because of insufficient and/or unclear documentation. They suggested the following Process II: • Because, the percentage of approved applications is fairly low, and Initial Review Team should be set up to pre-process all applications according to strict but fairly mechanical guidelines.

24. Auto-Moto Financial Services • Each application would fall into one of three categories: type A (looks excellent), type B (needs more detailed evaluation), and type C (reject summarily). Type A and B applications would be forwarded to different specialist subgroups • Each subgroup would then evaluate the applications in its domain and make accept/reject decisions

25. Example: (cont’d) • Process II was implemented on an experimental basis. The company found out that, on average, 25% of all applications were of type A, 25% were of B, and 50% were of C. Typically, about 70% of type A and 10% of B were approved on review.

26. Example (cont’d) • Internal audit checks showed that, on average, 200 applications were with the Initial Review Team undergoing preprocessing. Only 25 were with the Subgroup A Team undergoing the next stage of processing and approximately 150 were with the Subgroup B Team • Auto-moto would like to determine if the implemented changes have improved service performance.

27. Proposed System Subgroup A review 70% 200 /month accept 30% 25 25% 10% Subgroup B review 25% 1000 /month initial review 90% 800 /month 50% 150 reject 200 C

28. Proposed System Subgroup A review 70% 200 /month accept I=25 30% 25% 10% Subgroup B review 25% R=1000 /month initial review 90% 800 /month 50% I=150 reject I=200 C

29. New process • Flow units: applications • Initial review: R=1000, I=200 T=0.2 months or 6 days • Team A: R=250, I=25, T=3 days • Team B: R=250, I=150, T=18days • Type A: 9 days • Type B: 24 days • Type C: 6 days • Average: R=1000, I=375, T=11.25 days

30. New process: different flow unit definition • Flow units: approved/rejected applications • Approved: 70% of Type A and 10% of Type B= 0.7(250)+0.1(250)=175+25=200 applications/month • Tapproved=175/(175+25)*(TIR+TA)+ 25/(175+25)*(TIR+TB) = (175/200)*9 +(25/200)*24=10.875 days • Rejected: 30% of Type A and 90% of Type B and all C= 75+225+500=800 applications/month • Treject=11.343 days

31. Key learnings: Little’s Law • Relates three leading performance measures based on process flows: throughput, inventory, flow time • Applies to processes in steady state • Important to • First determine process boundaries for analysis • Then identify appropriate flow unit for your analysis