The Rady School of Management

Operations Strategy (Cont.)

Rady | MGT

Graphical Representation of Strategy

Current position and strategic direction of movement in
the competitive product space
Responsiveness

A
High Low
Price
Rady | MGT

Strategy vs. Operational Effectiveness

The operations frontier as the minimal curve containing
all current positions in an industry
Responsiveness

B
operations
frontier
C

High Low
Price
Session 2 | MGT 413
McMaster-Carr
• Over 400K products in stock
• Next-day and same-day delivery
• Generous returns policy

Starrett Stainless Steel No. 1025 5” Slide Calipers

Store Price
15%
McMaster-Carr $156
additional
MyToolStore.com $135.50
markup
Selam Transportation
• 7 car fleet
• Clean sedans
• Courteous drivers
• No online reservations
• Operational problems resulting from lack of capacity

One Way Ride from La Jolla to SAN

Car Service Price
Less than half
Selam Transportation $32 the price!
San Diego Sedan $75
Where do They Compete?

Responsiveness / Quality
High
Mc-Master Carr

operations
frontier

Selam Trans.

Low

High Low
Price
 What Company Is This?

Quality

B
operations
Minimum frontier
acceptable C
level for
quality

High Low
Price
Rady | MGT

Operational Effectiveness
• Developing processes and operating policies that support
the strategic position better than the processes and
policies of competitors
• Doing what you have chosen to do as best as you can
• Get on the frontier
– Contrast with operational innovation
Rady | MGT

Types of Strategies
• Market-driven strategy
– Start with a competitive priority and develop processes to support
them (traditional top-down)
• Process-driven strategy
– Start with a set of process competencies and subsequently select
a market position which is best supported by the processes

The KEY is that the Product-process matrix

product and process (Hayes and Wheelwright 1979)
properly match
Process Life Cycle
• Useful concept to help understand strategic options available
to a company (product life cycle)
• Classification of process types
– Job Shop (jumbled flow)
• Automated test equipment for consumer products (automatic toilet flusher)
• Orange County Choppers (custom bikes)

– Disconnected line flow (batch)

• Comfort Furniture on Miramar Rd.

– Connected line flow (assembly line)

• Auto assembly
• Brita Products Co. faucet mounted water filter

– Continuous flow
• Dupont’s titanium dioxide plant
 Product-Process Matrix
Process
Flexibility
High
Jumbled Flow.
JOB SHOP
Process segments
loosely linked. (Commercial Printer,

sts nity
Architecture firm)
Co rtu
o
pp

Disconnected Line BATCH

O

Flow/Jumbled Flow
but a dominant flow
(Heavy Equipment,
exists.
Auto Repair)

LINE FLOWS
Connected Line
Flow (assembly line) (Auto Assembly,

et
Car lubrication shop)

sts ck
Co f-po
-o
Continuous, automated,

ut
rigid line flow. CONTINUOUS

O
Process segments tightly FLOW
linked.
Low (Oil Refinery)

Low High Product

High Standardization
Commodity Products Few Major Products Many Products
Low Standardization
One of a kind
Variety
High volume Low Volume
Orange County Choppers
• Since 1999, OCC has produced custom choppers
• Air Force Chopper
Orange County Choppers
• Go Daddy Chopper
Orange County Choppers
• After the hit show American Chopper on The Discovery
Channel, OCC is getting into production choppers (4
varieties)
Orange County Choppers

• OCC has 9 years of experience running a low volume, low

standardization job shop
• OCC’s competitive product space
 High price (P) – Air Force Chopper $150K
 High quality (Q) – Custom machined
 High variety (V) – Unique designs
 Low response time (T) – Several month lead time
• Due to increased exposure and market demand, OCC is
adding a production line of four varieties starting at $30K
• Will a job shop still work as demand grows?
• What problems will OCC face?
 Orange County Choppers
Process
Flexibility
High
Jumbled Flow. JOB SHOP
Process segments
loosely linked. OCC
sts nity
Co rtu
o
pp

Disconnected Line BATCH

O

Flow/Jumbled Flow
but a dominant flow
exists.

LINE FLOWS
Connected Line
Flow (assembly line)

et
sts ck
Co f-po
-o
Continuous, automated,

ut
rigid line flow. CONTINUOUS

O
Process segments tightly FLOW
linked.
Low

Low High Product

High Standardization
Commodity Products Few Major Products Many Products
Low Standardization
One of a kind
Variety
High volume Low Volume
Take Home Points

• Firms operating in similar quadrants of the product-

process matrix face similar problems
• There are many other dimensions of value besides low
cost
• A process cannot perform well on every yardstick
• Focused processes are hard to beat
– It is much easier to be best in class
• Integrated process tend to be designed for the average
type
– Hence, never on the frontier
Professor August | MGT

Introduction to Process
Flow Measures
 Flow Rate (Throughput Rate)
MGT4
• In general, the inflow rate and the outflow rate fluctuate
Financial over
Accounting
time.
• In a stable environment, the average inflow rate is equal to the
average outflow rate
• The average flow rate or Throughput rate is assessed as the
number of jobs (customers, orders) per unit time.

MGT136
Advanced Accounting
Measure: Capacity
• Definition: The number of units that can be
processed per unit of time.
– Examples:
MGT133 MGT134
• Advanced
A cashierCost
can serve 20 customers
Federalper hour.-
Taxation
• The capacity of a web server isIndividuals
Accounting 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!)
Example: Process Capacity - Hamburgers

Raw
Material Cook Assemble 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?
• What is the capacity of the (entire) process?
Analysis

Suppose an order for 60 hamburgers is placed.

WhatMGT45
will happen? MGT181
Principles of 1:27 1:54 2:27 2:54 3:27 3:54
Enterprise
Accounting Finance

Assembly 10 10 10 10 10 10

Cooking MGT166
First 20
Ethics &
Second 20MGT112
Third 20
Global
Corporate Business
Responsibility Strategy
1:00 2:00 3:00
If order continues
MGT16
to come, how many more hamburgers
do we produce every minute?
Personal
Ethics at Work
Bottleneck Analysis
• 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.
Entrepreneurship
• The stove is the bottleneck resource; it pushes out the slowest
amount of hamburgers per time period.
Calculating Capacity

• The capacity of a process is determined by the slowest

(bottleneck) resource.
• To calculate the bottleneck resource, calculate
Entrepreneurship Finance 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.
Organizational
Marketing
• Would hiring an additional worker increase the revenue? What
Behavior
about firing?

Operations
Utilization Rate

Flow rate demanded (Capacity used)

Utilization rate 
Capacity Available

• Utilization rate is a measure of efficiency.

• The capacity of a cashier in Starbucks is 96
customers per shift.
• The cashier’s flow rate is 72 customers per shift.
• What is the capacity utilization?
 72/96 = 0.75
Utilization Rate
• 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 here? What

value do we get from calculating this ratio?
 Utilization Rate and Bottleneck

• Suppose demand for hamburgers is 10 hamburgers per minute

10
Stove Utilization rate  0.5 or 50%
20
10
Assembly Utilization rate  0.45 or 45%
22.2

• Notice that the Stove is the bottleneck, and that it has the
highest utilization?

• A broader definition of a Bottleneck is the resource with the

highest utilization
System Flow Rate
• System Flow Rate= Minimum(Demand, Capacity)

• Note that capacity=20 hamburgers/min

• 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
 Measure: Flow Time

How long it takes to turn patties into burgers?

1:27 1:54 2:27 2:54 3:27 3:54

Assembly 10 10 10 10 10 10

Cooking First 20 Second 20 Third 20

1:00 2:00 3:00

Flow Time (Throughput Time)

• Different units may spend different amount time.

• What is flow time?
– The average time a unit stays in the system

• What is the difference between Flow Rate and

Flow Time?
Flow Time

• Average time a customer spends in a bank

Waiting Processing

Customer arrives Service begins Service ends

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?
Work in Process

• Work in Process (WIP) Inventory: the number of

units in the system at a point in time.
– stored, waiting, or being processed.
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)

• Does WIP cost a business money?

 Measure: Work in Process

How many WIP do we have?

Waiting for
1:27 1:54 2:27 2:54 3:27 3:54
10 10 10
Assembly
Assembly 10 10 10 10 10 10

Cooking First 20 Second 20 Third 20

1:00 2:00 3:00

Is WIP a constant?
Example 2: Multiple Resources

P Chair Paint Shop

Assembly Line
C
S
C Inspection

P Table Stain Shop

T Assembly Line
S
T
Four Products
– Painted Chairs (PC), Stained Chairs (SC), Painted Tables (PB), Stained Tables
(ST)
Suppose
– Chair Assembly Line produces one chair every 2 minutes; Table Assembly Line
produces one table every 6 minutes; Paint Shop produces unit (chair or table)
every 4 minutes; Stain Shop produces one unit (chair or table) every 3 minutes;
Inspection takes one minute per unit
Demand for the products
– 8 PC’s, 11 SC’s, 6 PT’s, 5 ST’s (per hour)
Which resource is the bottleneck? What is the capacity of the factory in units/hr?
Example 2: Multiple Resources
• Chair Assembly
• Capacity=(1/2) unit/min*60 mins/hr=30 units/hr
• Table Assembly
• Capacity=(1/6) unit/min*60 mins/hr=10 units/hr
• Paint Shop
• Capacity=(1/4) unit/min*60 mins/hr=15 units/hr
• Stain Shop
• Capacity=(1/3) unit/min*60 mins/hr=20 units/hr
• Inspection
• Capacity=1 unit/min*60 mins/hr=60 units/hr
 An Equivalent Method
• Chair Assembly:
• Processing time needed per hour = (8*2 + 11*2 + 6*0 + 5*0) = 38 min
• Utilization rate = 38/60 = 63.3%
• Table Assembly
• Processing time needed per hour = (8*0 + 11*0 + 6*6 + 5*6) = 66 min
• (Implied) Utilization rate = 66/60 = 110% > 1 !
• Paint Shop
• Processing time needed per hour = (8*4 + 11*0 + 6*4 + 5*0) = 56 min
• Utilization rate = 56/60 = 93.3%
• Stain Shop
• Processing time needed per hour = (8*0 + 11*3 + 6*0 + 5*3) = 48 min
• Utilization rate = 48/60 = 80%
• Inspection
• Processing time needed per hour = (8*1 + 11*1 + 6*1 + 5*1) = 30 min
• Utilization rate = 30/60 = 50%
Rady | MGT

Flow Unit
• The item which flows through the process
• Determined by the person analyzing the process
• Examples
– DMV inspection center in New Jersey
– Southwest Airlines (baggage handling, boarding, turnarounds)

SWA
DMV
Flow unit = ____
Flow unit = ____
Rady | MGT

Essential 3 Process Measures

Characterize the performance of a process:
1. Flow time
– Total time spent by a flow unit within the process boundaries
2. Flow rate
– Number of flow units that pass through a specific point per unit
of time
3. Inventory
– Number of flow units within the process boundaries
Rady | MGT

Measuring Flow Time

• Dim Sum restaurant
– Flow unit: party of people
– Consider the process from 9:45am until 12:15pm

• How do we measure the flow time?

Dim Sum Restaurant Data

Party #1 #2 #3 #4 #5
Entry Time 9:50am 10:05am 10:10am 10:45am 11:00am
Exit Time 10:30am 12:00pm 11:00am 11:45am 12:00pm

Flow Time
Dim Sum Restaurant Data

Party #1 #2 #3 #4 #5
Entry Time 9:50am 10:05am 10:10am 10:45am 11:00am
Exit Time 10:30am 12:00pm 11:00am 11:45am 12:00pm

Flow Time 40 min 115 min 50 min 60 min 60 min

Rady | MGT

Measuring Inventory
• For each time unit, record the number of flow units within
the system boundaries
 Dim Sum Restaurant Data

Party #1 #2 #3 #4 #5
Entry Time 9:50am 10:05am 10:10am 10:45am 11:00am
Exit Time 10:30am 12:00pm 11:00am 11:45am 12:00pm

Flow Time 40 min 115 min 50 min 60 min 60 min

Time 9:45- 9:50- 10:05- 10:10- 10:30- 10:45- 11:00- 11:45- 12:00-
9:50 10:05 10:10 10:30 10:45 11:00 11:45 12:00 12:15
Inv.
 Dim Sum Restaurant Data

Party #1 #2 #3 #4 #5
Entry Time 9:50am 10:05am 10:10am 10:45am 11:00am
Exit Time 10:30am 12:00pm 11:00am 11:45am 12:00pm

Flow Time 40 min 115 min 50 min 60 min 60 min

Time 9:45- 9:50- 10:05- 10:10- 10:30- 10:45- 11:00- 11:45- 12:00-
9:50 10:05 10:10 10:30 10:45 11:00 11:45 12:00 12:15
Inv. 0 1 2 3 2 3 3 2 0
Rady | MGT

Measuring Flow Rate

• For a fixed point in the process (say, the entrance), record
the number of units which flow across the point for each
time unit

• What is the flow rate for the dim sum example in parties
per hour?
 Dim Sum Restaurant Data
Party #1 #2 #3 #4 #5
Entry Time 9:50am 10:05am 10:10am 10:45am 11:00am
Exit Time 10:30am 12:00pm 11:00am 11:45am 12:00pm

Flow Time 40 min 115 min 50 min 60 min 60 min

Time 9:45- 9:50- 10:05- 10:10- 10:30- 10:45- 11:00- 11:45- 12:00-
9:50 10:05 10:10 10:30 10:45 11:00 11:45 12:00 12:15
Inv. 0 1 2 3 2 3 3 2 0

Time 9:50- 10:05- 10:10- 10:45- 11:00- All other one minute
9:51 10:06 10:11 10:46 11:01 increment time bins
Flow
Rate
 Dim Sum Restaurant Data
Party #1 #2 #3 #4 #5
Entry Time 9:50am 10:05am 10:10am 10:45am 11:00am
Exit Time 10:30am 12:00pm 11:00am 11:45am 12:00pm

Flow Time 40 min 115 min 50 min 60 min 60 min

Time 9:45- 9:50- 10:05- 10:10- 10:30- 10:45- 11:00- 11:45- 12:00-
9:50 10:05 10:10 10:30 10:45 11:00 11:45 12:00 12:15
Inv. 0 1 2 3 2 3 3 2 0

Time 9:50- 10:05- 10:10- 10:45- 11:00- All other one minute
9:51 10:06 10:11 10:46 11:01 increment time bins
Flow 1 1 1 1 1 0
Rate
 5

Cumulative Inflow

4
Number of Parties

Cumulative Outflow

Inventory
2

9:45 am 10:15 am 10:45 am 11:15 am 11:45 am 12:15 pm

T ime of Day
Rady | MGT

Book Notation
• Flow rate at time

 Inflow rate:
 Outflow rate:
• Inventory at time

• Flow time (indexed per flow unit rather than time)
 e.g.
Rady | MGT

Tank Problem
• Specifications
– The pump removes water from the tank at 5 gals/min
– The inlet valve is an automatic control that follows a certain
pattern
– Tank holds only 900 gallons – any extra spills over the top
Tank Problem In
Class
• Rate of inventory buildup

900 gallon tank
P-6 P-4

V-2

P-5
E-1 P-3

E-2
Rady | MGT

Inflow Pattern
Time of Day Inflow Rate • Draw an inventory buildup
(gals/min)
diagram
10:00am-11:00am 2
11:00am-12:00pm 7.5
• If the tank is not empty at
12:00pm-1:00pm 10 6:00pm, then what time
1:00pm-2:00pm 20
would it be empty if we
2:00pm-3:00pm 2.5
continue to run the pump?
3:00pm-4:00pm 2.5
4:00pm-5:00pm 0
5:00pm-6:00pm 5
Rady | MGT

10:00am 11:00am 2 2 0 0
11:00am 12:00pm 7.5 5 2.5 150
12:00pm 1:00pm 10 5 5 450
1:00pm 1:30pm 20 5 15 900
1:30pm 2:00pm 20 20 0 900
2:00pm 3:00pm 2.5 5 -2.5 750
3:00pm 4:00pm 2.5 5 -2.5 600
4:00pm 5:00pm 0 5 -5 300
5:00pm 6:00pm 5 5 0 300
6:00pm 0 5 -5 300 – 5*60*t
 1000

Inventory Buildup Diagram

800

600
Water in T ank (gallons)

400

200

10:00 am 12:00 pm 2:00 pm 4:00 pm 6:00 pm 8:00 pm

T ime of Day
Rady | MGT

Averages of Process Measures

We are also interested in average measures:
1. Average flow time
– On average, how long a flow unit spends within the process
boundaries
2. Average flow rate (Throughput)
– On average, the number of flow units that pass through the
process
3. Average inventory
– On average, the number of flow units within the process
boundaries