Objectives
Process design: Amazons Challenge
Measures:
Capacity, Time, and More
How do we quantitatively evaluate a process?
Capacity
Time
Other?
BUAD 311 Operations Management
Session 2
ARES:
Charging Ahead to Push Electric Cars
Latest Starbucks Buzzword: Lean Japanese Techniques
1
Amazon in 1990s: Delivering Books
Amazons Potential Solutions
What do customers want?
Inventory
Large selection
Fast delivery
Low Price
How do we deal
with uncertainty ?
Or why is it so difficult to deliver books to
customers on time and at a low cost?
Eliminate the
uncertainty
Print on demand/eBook
Transfer/Share the
uncertainty
Transfer the inventory
to a distributor
Potential Solutions: Transfer the inventory
to the distributor
Example: In the early days of Amazon.com the
company did not keep any inventory of books.
Potential Solutions: Transfer the inventory
to the distributor
Amazons
Order
The supplier Ingram kept the books for Amazon.
Once Amazon received an order, it was transmitted to
Ingram.
Ingram would ship the book directly to the consumer.
Amazons Post
Order Process
Ingrams
Order
Ingrams Book
Inventory
Ingrams Post
Order Process
Potential Solutions: Transfer the
inventory to the distributor
ARES
Changing Ahead to Push Electric Cars
What are the advantages for such an
arrangement for Amazon and Ingram?
Risk pooling (less inventory is needed)
What are the disadvantages of this arrangement
for Amazon and Ingram?
Allocation priority
Business Process Measures
Analyzing Business Process
Internal Perspective:
Employee satisfaction, Quality, Yield, Service
Responsiveness, On-time delivery, Cost,
Customer Perspective:
Customer satisfaction, Custom retention, New
custom introduction, Per customer profitability,
Ultimately, business process defines the competitive
advantage and impacts the operating income, ROI, etc.
Inputs
Outputs
Transformation Process
Our purpose is to examine a transformation process
from the perspective of flows.
The unit being transformed is typically referred to as a
job and can represent a customer, an order, material,
money, information, etc.
Flow Rate (Throughput Rate)
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Measure: Capacity
Definition: The number of unit that can be
processed per unit of time.
In general, the inflow rate and the outflow rate
fluctuate over time.
In a stable environment, the average inflow rate
is equal to the average outflow rate
The average flow rate or Throughput rate
Examples:
assessed as the number of jobs (customers, orders)
per unit time.
A cashier can serve 20 customers per hour.
The capacity of a web server is 30,000 hits per min.
A doctor can perform 300 surgeries per year.
A stove can cook 20 hamburgers per min
or 0.33333 per second.
It is a rate. (Note: Units are important!)
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12
Process Capacity
Raw
Material
Cook
Assemble
Analysis
Suppose an order for 60 hamburgers is placed.
What will happen?
1:27 1:54 2:27 2:54 3:27 3:54
Deliver
Patties cook in 60 seconds; the stove holds 20 patties.
Assembly of a hamburger takes 27 seconds per
hamburger.
10 workers are available to assemble hamburgers.
What is the capacity of the stove? What is the capacity of
the workers?
13
What is the capacity of the (entire) process?
Assembly
10
Cooking
First 20
10
Second 20
10
10
10
10
Third 20
3:00
1:00
2:00
If order continues to come, how many more hamburgers
do we produce every minute?
Bottleneck Analysis
14
Calculating System Capacity
The stove, operating 100% of the time, can push
out: 20 hamburgers / 1 minute = 20 hamburgers
per minute.
The workers, operating 100% of the time, can
push out: 10 hamburgers / 27 seconds = 22.2
hamburgers per minute.
The stove is the bottleneck resource; it pushes
out the slowest amount of hamburgers per time
period.
15
The capacity of a process is determined by the
slowest (bottleneck) resource.
To calculate the bottleneck resource, calculate
the amount of stuff each resource can push out
per unit time. The bottleneck resource is the
resource that pushes out the least amount of
stuff per unit time.
Would hiring an additional worker increase the
revenue? What about firing?
16
Alternatively.
Alternatively.--2
Calculate Cycle Time (CT)
Average time between two successive
completions
Average time between two patties coming out
of stove
Then, Calculate
Stove
Stove Cycle Time (CT)=60/20=3.0 secs/hamburger
Stove Capacity=20/60 hamburgers/sec=1/3=0.33
hamburgers per second.
Assembly
Worker CT=27 secs/hamburger
Assembly has 10 (parallel)workers
Assembly CT=27 secs/(10 workers)= 2.7 secs/hamburger
Assembly Capacity= 1/2.7 = 0.37 hamburgers per second.
Series system
Bottleneck=Min[0.33(Stove),0.37(assembly]=Stove
System capacity=Bottleneck capacity=0.33 hamburgers/sec
Capacity= Max Flow (Throughput) Rate (FR)
= 1/CT
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Note: There is no reason to hire another worker at any cost.
Having an additional worker does not speed up the hamburger
delivery process.
18
Capacity Analysis
Utilization Rate
Suppose you reduce the number of workers in
assembly, what happens?
Utilization rate
9 workers
Assembly CT=
Assembly Flow Rate (FR)=
Utilization rate is a measure of efficiency.
The capacity of a cashier in Starbucks is 96
customers per shift.
The cashiers flow rate is 72 customers per shift.
What is the capacity utilization?
System capacity=
8 workers
Flow rate demanded (Capacity used)
Capacity Available
Assembly CT=
Assembly Flow Rate (FR)=
Bottleneck=
System capacity=
7 workers
6 workers
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Utilization Rate
72/96 = 0.75
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Utilization Rate and Bottleneck
Suppose demand for hamburgers is 10
hamburgers per minute
How can we interpret the number 0.75?
The cashier is busy 75% of the time.
25% of the time the cashier is idle and not doing any
productive work.
What are the managerial implications?
10
0.5 or 50%
20
10
Assembly Utilization rate
0.45 or 45%
22.2
Stove Utilization rate
Note that the bottleneck has the highest
utilization
A broader definition of a Bottleneck is the
resource with the highest utilization
Can utilization rate be greater than 1?
21
Bottleneck
Will bottleneck always operate at 100% of the
time?
22
System Flow Rate
System Flow Rate= Minimum(Demand, Capacity)
Note that capacity=20 hamburgers/min
What are the causes?
If Demand=25 hamburgers/min
System Flow Rate= Minimum(Demand, Capacity)
= Minimum(25,20)= 20 hamburgers/min
If Demand=18 hamburgers/min
System Flow Rate= Minimum(Demand, Capacity)
= Minimum(18,20)= 18 hamburgers/min
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Measure: Flow Time
Flow Time (Throughput Time)
How long it takes to turn patties into burgers?
1:27 1:54 2:27 2:54 3:27 3:54
Different units may spend different amount time.
What is flow time?
The average time a unit stays in the system
Assembly
Cooking
10
First 20
10
10
Second 20
1:00
10
10
10
Third 20
2:00
3:00
25
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Flow Time
Work in Process
Average time a customer spends in a bank
Waiting
Customer arrives
Work in Process (WIP) Inventory: the number of
units in the system at a point in time.
Processing
Service begins
Service ends
stored, waiting, or being processed.
Flow Time
Average time a book stays at the Amazon.com
warehouse
Book arrives Stored Order arrives
Picked
Packaged
Shipped
Flow Time
How do we measure Flow Time?
Is it easy to measure Flow Time?
27
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Work in Process
How do we measure Work in Process (WIP)?
Hand counting
WIP at period (t + 1) =
WIP at period (t);
PLUS Arrivals at period (t)
MINUS Shipments at period (t)
Measure: Work in Process
How many WIP do we have?
Waiting for
Assembly
10
Assembly
Cooking
10
First 20
Does WIP cost business money?
1:27 1:54 2:27 2:54 3:27 3:54
10
10
10
Second 20
1:00
10
10
10
10
Third 20
2:00
3:00
Is WIP a constant?
30
ARES
What Have We Learned?
Latest Starbucks Buzzword: Lean
Japanese Techniques
Process Selection
Example of Risk-pooling
http://www.mckinsey.com/insights/operations/wh
en_toyota_met_e-commerce_lean_at_amazon
Process Measures
Flow Rate (and Cycle Time)
Capacity
Flow Time
WIP
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Bottleneck
Next Time
Solution
Will bottleneck always operate at 100% of the
time?
Kristens Cookie Company
Read the case and be prepared for class discussion
No
To answer discussion questions
Note that Kristens cookie case slides (and all
case slides) will not be posted to Blackboard.
Why? What are the causes?
Demand may be lower than bottleneck capacity
Can utilization rate be greater than 1?
33
No
Capacity Analysis
Solution
Suppose you reduce the number of workers in
assembly, what happens?
9 workers
Assembly CT=(27/9)=3 secs/h
Assembly Flow Rate (FR)= (1/3)=0.33 h/sec
Bottleneck=MIN[0.33 (stove),0.33 (assembly)] both stove and assembly are bnecks
System capacity=0.33 h/sec
8 workers
Assembly CT=(27/8)=3.375 secs/h
Assembly Flow Rate (FR)= (1/3.375)=0.296 h/sec
Bottleneck=MIN[0.33 (stove),0.296 (assembly)] assembly is the bneck
System capacity=0.296 h/sec
7 workers
6 workers
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