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Outline. The Essence of Process Flow Process Measures Flow Time Flow Rate Inventory Little’s Law: Average Inventory = Average Flow Time × Throughput Throughput: The average flow rate in a stable process Process view of financial statements

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  1. Outline • The Essence of Process Flow • Process Measures • Flow Time • Flow Rate • Inventory • Little’s Law: Average Inventory = Average Flow Time × Throughput • Throughput: The average flow rate in a stable process • Process view of financial statements • Using Little’s Law to improve financial measures

  2. Five Elements of the Process View Process Management Information structure Network of Activities and Buffers Inputs Outputs Goods Services Flow units (customers, data, material, cash, etc.) Labor & Capital Resources

  3. Inventory Flow Rate Cost Flexibility Quality How target improvement? Identify and Monitor Operational Performance Measures Time

  4. Flow Time, Flow Rate, and Inventory • Flow Time • The time required by a flow unit to move through all the processes from entry to exit. • It is not the same for all flow units • different types of flow units • variability in the flow time of a flow unit. • Average flow time of a process is the average flow time of all flow units. • Flow Rate • The number of flow units passing a specific point (entry, exit or any intermediate point) in the process per unit of time. • It changes over time • variability in the flow rate • seasonality (e.g. tax season for a CPA) • Average flow rate in a stable process  Throughput • Inventory • The number of flow units within the boundaries of the process at any time

  5. Cost Time Inventory Flexibility Quality Flow time Flow rate The Essence of Process Flow Customer expectations   Customer satisfaction Customer Value Proposition   Process competencies Financial performance   Essence of process flow 

  6. Is the Security Checkpoint a stable Process? A Stable Process • In a Stable Process • Average outflow capacity (process capacity) must be greater than average inflow rate, while average inventory is not zero. • Average inflow rate is the same as average outflow rate. • Throughput (R) is the average flow rate • Ideally, R should be equal to the customer demand. Scanner can handle 12 passengers per minute It can easily handle inflow Average inflow rate is 600 passengers/hr, or 10 passengers/min

  7. Inventory = Throughput x Flow Time I = RT Flow rate/ThroughputR [units/hr] Inventory I [units] ... ... ... ... ... Flow Time T[hrs] The Little’s Law Average flow time (T): how much time does a typical flow unit spend within the process within boundaries.

  8. Little’s Law: Examples Compute the flow time at Vancouver Airport. Average queue size =I = 17.5 passengers Throughput or R = 600/60 = 10 passengers/minute Flow time T  RT=I  T= I/R T= 17.5 /10 = 1.75 minutes per average passenger.

  9. Little’s Law: Examples What is the Average Flow Time for $1 in MBPF Co? We have • I=2000 garages, with no inventory buildup (i.e. stable process) • R=1000 garages/week. Each garage costs $3,300 to produce. We can translate this info into $ I = 2,000(3,300) = $6,600,000 tied up in inventory (average). R = 1,000(3,300) = $3,300,000/week. • I=RT  T=I/R • T = 6,600,000/3,300,000 = 2 weeks.

  10. Little’s Law applied to different process flow examples • Monetary Flow.For the new euro introduction in 2002, Wim Duisenberg had to decide how many new Euro coins to stamp by 2002. Euroland’s central banks’ cash-in-coins handling was estimated at €300 billion per year. The average cash-in-coins holding time by consumers and businesses was estimated at 2 months. How many Euro coins were to be made? • Customer Flow. Taco Bell processes on average 1,500 customers per day (15 hours). On average there are 75 customers in the restaurant (waiting to place the order, waiting for the order to arrive, eating etc.). How long does an average customer spend at Taco Bell and what is the average customer turnover?

  11. Little’s Law applied to different process flow examples • Job Flow. The Travelers Insurance Company processes 10,000 claims per year. The average processing time is 3 weeks. Assuming 50 weeks in a year, what is the average number of claims “in process”. • Material Flow. Wendy’s processes an average of 5,000 lb. of hamburgers per week. The typical inventory of raw meat is 2,500 lb. What is the average hamburger’s cycle time and Wendy’s turnover? • Cash Flow. Motorola sells $300 million worth of cellular equipment per year. The average accounts receivable in the cellular group is $45 million. What is the average billing to collection process cycle time?

  12. Little’s Law: Cash Flow • Steel Company: Processes $400M of iron ore per year. The cost of • processing the ore is $200M per year. The average inventory is • $100M. How long does a dollar spend in the process? • The flow unit is a cost dollar. • The process is the steel manufacturing operations • The value of the inventory includes both ore and processing cost. I = $100M/year • A Total of $400M + $200M = $600M flows through the process each year. Throughput R = $600M/year Average flow time T = I/R = 100/600 = 1/6 year = 2 months

  13. Two Implications of Little’s Law Question: A general manager at Baxter states that her inventory turns three times a year. She also states that everything that Baxter buys gets processed and leaves the docks within six weeks. Are these statements consistent? Of the 3 operational measures of performance, inventory, throughput and average flow time – a process manager only needs to focus on 2 measures, as they directly determine the third measure via Little’s Law. For a given level of throughput in any process, the only way to reduce flow time is to reduce inventory and vice versa.

  14. Process Ip=500 1000/month 1000/month Little’s Law: Auto-Moto Financial Services • Auto-Moto receives 1,000 applications per month (30 working days). In the old process, each application is handled individually, with 20% of applications being approved. 500 were in the process at any time. Average flow time T = ? Average flow time T = I/R = 500/1,000 months = 0.5 month or 15 days. The firm recently implemented a new loan application process. In the new process, applicants go through an initial review and are divided into three categories

  15. Admission Flow • Marshall provides higher education to executives and receives about 1000 applications per month. • The evaluation starts with a preliminary classification with basic information: • Group A: Applicants with desired recommendations, working experience, etc. (50% of the applicants) • Group B: Other applicants. (50% of the applicants) • Applicants in group A will be further considered through an advanced review. • Applicants in group B will be rejected.

  16. Work In Process (WIP) • On average there were: • 200 applications in the preliminary review stage • 100 applications in the advanced review stage • How long does group A spend in the application process? • How long does group B spend in the application process? • How long is the average process time?

  17. Admission Flow Chart Accept Process 100 50% 1000 200 Reject Process 50% How long do the applicants spend in the preliminary stage? RT=I  T = I/R=200/1000 = 0.2 month Applicants spend 0.2(30) = 6 days in the first stage Applicants from group B receive an answer in 6 days on average

  18. Admission Flow • How long do the applicants from group A spend in the advanced review stage? I =100 , R = 1000(0.5) = 500 TR= I  T=I/R  T= 100/500 = 0.2 Applicants from group A spend 0.2(30) = 6 days on average in the advanced review stage. Applicants from group A receive answer in 12 days (6 + 6) on average.

  19. Admission Flow • What is the average processing time? • 0.5(6)+12*0.5(12) = 9 days • Is there an alternative way to calculate the average waiting time? Do it------ Little’s Law holds for complicated systems.

  20. Assignment (Due next week) • 1. Bank XYZ receives 20 loan requests per hour on average. Each loan request goes through an initial processing stage, after which an “accept or reject” decision is made. Approximately 80% of the loans are accepted, and these require additional processing. Rejected loans require no additional processing. Suppose that on average 5 loans are in the initial processing stage, and 25 (accepted) loans are in the additional processing stage. • What is the average processing time required for a loan request? •  What is the average processing time required for a rejected loan? •  What is the average processing time required for an accepted loan (including the initial processing stage)?

  21. Assignment (Due next week) • 2. A call center employs 1000 agents. Every month 50 employees leave the company and 50 new employees are hired. •  How long on average does an agent work for this call center? •  Suppose the cost of hiring and training a new agent is $1000. The manager of this call center believes that increasing agents’ salary would keep them working longer term in the company. The manager wants to increase the average time that an agent works for the call center to 24 months, or 2 years. •  If an agent works for the call center for 24 months on average, how much can the company save on hiring and training costs over a year? Hint: first determine the current annual cost for hiring and training, then determine the new annual cost for hiring and training. • How much the monthly salary of each agent can be increased?

  22. Practice 1: Auto-Moto New Process Subprocess A Review IA = 25 70% 200/month Accepted 30% 25% 10% Subprocess B Review IB = 150 Initial Review IIR=200 1000/month 25% 90% 50% 800/month Rejected Compute average Flow time of an application. Compute Average Flow Time for Activities IR, A, and B. Compute average Flow time of a rejected application, an accepted application, and use them to Compute average Flow time of an application.

  23. Problem 3.4, MBPF A hospital emergency room (ER) is currently organized so that all patients register through an initial check-in process. At his or her turn, each patient is seen by a doctor and then exits the process, either with a prescription or with admission to the hospital. Currently 55 people per hour arrive at the ER, 10% of who are admitted to the hospital. On average, 7 people are waiting to be registered and 34 are registered and waiting to see a doctor. The registration process takes, on average, 2 minutes per patient. Among patients who receive prescriptions, average time spent with a doctor is 5 minutes. Among those admitted to the hospital, average time is 30 minutes. On average, how long does a patient spend in the ER? Assume the process to be stable; that is, average inflow rate equals average outflow rate.

  24. Directions • o) Draw the flow process chart • b) On average how long a patient spend in ER? • c) On average how many patients are in ER? • Hints: • Compute flow time in buffer 1 • Compute average activity time of Doctor • Compute the average flow time in this process • Compute average flow time for a simple prescription patient • Compute average flow time for a potential admission patient • Compute number of patients in Doctor activity • Compute the average number of patients in the process.

  25. Problem 3.5, MBPF A triage system has been proposed for the ER described in Exercise 3.4. As mentioned earlier, 55 patients per hour arrive at the ER. Under the proposed triage plan, entering patients will classify them as Simple Prescriptions or Potential Admits. While Simple Prescriptions will move on to an area staffed for regular care, Potential Admits will be taken to the emergency area. Planners anticipate that the initial examination will take 3 minutes. They expect that, on average, 20 patients will be waiting to register and 5 will be waiting to be seen by the triage nurse. Recall that registration takes an average of 2 minutes per patient. Planners expect eh Simple Prescriptions area to have, on average, 15 patients waiting to be seen. As before, once a patient’s turn come, each will take 5 minutes of a doctor’s time. The hospital anticipates that, on average, the emergency area will have only 1 patient waiting to be seen . As before, once that patient’s turn comes, he or she will take 30 minutes of a doctor’s time. Assume that, as before, 90% of all patients are Simple Prescriptions, assume, too, that the triage nurse is 100% accurate in making classifications. Under the proposed plan, how long on average, will a patient spend in the ER? On average, how long will a Potential Admit spend in the ER? On average, how many patients will be in the ER? Assume the process to be stable; that is, average inflow rate equals average outflow rate.

  26. Directions • o) Draw the flow process chart • a) On average how many patients are in ER? • b) On average, how long a patient spend in ER? • Hints: • Average flow rate is still 55 per hour (50 is typo) • Planners estimate that initial examination takes 3 minutes. It is the flow time in triage activity. It is 3 it is not 1. One, as we will see in the future chapters is an estimate for the theoretical flow time. • Compute average flow rate in buffer 3 and buffer 4. • Compute average flow time in all buffers. • Compute average number of patients in all activities.

  27. Problem 3.6, MBPF Refer again to Exercise 3.5. Once the triage system is put in place, it performs quite close to expectations. All data conform to planners’ expectations except for one set-the classifications made by the nurse practitioner. Assume that the triage nurse has been sending 91% of all patients to the Simple Prescription area when in fact only 90% should have been so classified. The remaining 1% is discovered when transferred to the emergency area by a doctor. Assume all other information from Exercise 3.5 to be valid. On average, how long does a patient spend in the ER? On average, how long does a Potential Admit spend in the ER? On average, how many patients are in the ER? Assume the process to be stable; that is, average inflow rate equals average outflow rate.

  28. Directions • o) Draw the flow process chart • b) On average how many patients are in this process? • c) On average, how long a patient spend in this process? • Hints: • Compute flow rates at Buffer 3 • Compute flow rates at Buffer 4

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