Slide 1

The Process View

Slide 2

Examples of processes

Factorywood

metalguitars

Universitystudents alumni

Distribution center

bulk items small parcels

Calculatecredit risk

mortgage applications

approved loans

rejected loans

Processes can involve both goods and services. Processes can have multiple inputs and/or multiple outputs.

Slide 3

Defining a process’ scope

Calculatecredit risk

mortgage applications

approved loans

rejected loans

A process is a set of activities that accepts inputs and produces outputs. A process can be defined at an aggregate level:

A process can be defined at a micro level, with multiple sub-processes:

mortgage applications

approved loans

rejected loans

Collect datafrom client

Evaluate loan metrics

Underwritingdecision

Communicate decision to sales

Slide 4

Defining a process’ flow unit

The flow unit is what is tracked through the process and generally defines the process output of interest.

Universitystudents A personalumni

Processingplantmilk Lbs of milk powdermilk powder

Blooddonationcenter

people blood Pints of type AB blood

Processes Flow unit

Slide 5

Metrics of process analysis

I = Inventory = how many flow units are in the process R = Flow Rate = rate at which flow units enter or leave the process T = Flow Time = total time a flow unit is in the process

Little’s Law:

For example:

Call centerincoming calls

completed calls

Inventory = Flow Rate x Flow Time

or

I = R x T

R = On average 11 callers per minute

T = On average a caller spends 2.5 minutes with the call center

I = Average number of callers on the phone with the call center

= R x T = 11 x 2.5

= 27.5 callers

Slide 6

A Little’s Law application: In-transit inventory

O’Neill, based in California (CA), buys wetsuits from a supplier in Thailand: Each month they order on-average 15,000 wetsuits, R = 15,000 Shipping between Thailand and CA takes on-average 2 months, T = 2 I = R x T = 15,000 x 2 = 30,000 units are in-transit on average

T = 2 months

R = 15000/monthR = 15000/month

I = 30,000 wetsuits

Slide 7

Four different ways to count inventory

In terms of flow units (The “ I ” in I = R x T): Number of wetsuits, patients, tons of wheat, semiconductor chips, etc. Useful when the focus is on one particular flow unit.

In terms of $s (The “ I ” in I = R x T): The $ value of inventory This is an intuitive measure of a firm’s total inventory.

In terms of days-of-supply: The average number of days a unit spends in the system. Also, the number of days inventory would last at the average flow rate if

no replenishments arrive.

In terms of turns: The number of times the average amount of inventory exits the system.

Slide 8

Days-of-supply calculations

Days-of-supply is the “T ” in I = R x T

Days-of-supply = I / R = Inventory / Average daily flow rate

Can also be measured in different time lengths (Keep units consistent): Weeks-of-supply = Inventory / Average weekly flow rate Months-of-supply = Inventory / Average monthly flow rate Years-of-supply = Inventory / Average yearly flow rate

Our O’Neill example:

T = 2 months-of-supply

R = 15000/month

I = 30,000 wetsuits

Slide 9

Inventory turns calculations

Inventory Turns = 1 / T = R / I

Different measures of turns: Yearly turns = Average annual flow rate / Inventory Monthly turns = Average monthly flow rate / Inventory Weekly turns = Average weekly flow rate / Inventory Daily turns = Average daily flow rate / Inventory Keep units consistent!

O’Neill’s annual turns: R = 15000 x 12 = 180,000 per year I = 30,000 T = 2 months = 1/6 year Annual Turns = R / I = 180,000 / 30,000 = 6 Annual Turns = 1/T = 1 / (1/6) = 6

Slide 10

Turns and days-of-supply at Walmart in 2010*

I = Inventory = $33,160

R = COGS = $304,657

COGS = Cost of Goods Sold = Flow Rate The Flow Rate is not Sales (which was $405,046) because inventory is

measured in the cost to purchase goods, not in the sales revenue that may be earned from the goods.

Note: Some companies use the term “Cost of sales” to mean COGS

Annual turns = $304,657 / $33,160 = 9.19

Days-of-supply = $33,160 / ($304,657 / 365) = 39.7

* All figures in $Million from 2010 balance sheet and income statement

Slide 11

Walmart’s turns change from year to yearA

nnua

l tu

rns

(blu

e di

amon

ds)

Days-of-supply

(red squares)

0

20

40

60

80

100

120

140

0

1

2

3

4

5

6

7

8

9

10

1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015

Year

Slide 12

What it is: Inventory (I) = Flow Rate (R) * Flow Time (T)

How to remember it: - units

Implications:• Out of the three fundamental performance measures (I,R,T), two can be chosen by management, the other is GIVEN by nature• Hold throughput constant: Reducing inventory = reducing flow time

Given two of the three measures, you can solve for the third:• Indirect measurement of flow rate:

• Indirect measurement of inventory:

• Indirect measurement of flow time

Flow Rate: 5000kg/weekInventory: 2500kg

Little’s law: It’s more powerful than you think...

Inventory: 500 vehiclesFlow Time: 30 days on the lot

Flow Time: 6 hoursFlow Rate: 200 patients per day

Slide 13

Cost of Goods sold: 25,263 mill $/yearInventory: 2,003 mill $

Cost of Goods sold: 20,000 mill $/yearInventory: 391 mill $

Inventory Turns

Inventory TurnsComputed as:

Based on Little’s lawCareful to use COGS, not revenues

Inventory

COGSInventory turns=

Inventory Turns at Dell