Utility Components Customers Primarily Care About:

 Cost
 Response Time
 Variety
 Quality

The company has to be very good at one of these things, this involves a strategic trade-off

The efficient frontier theory (for these utility components), the idea is that a firm is considered
efficient when there are no other firms in one of the axes. There is decision-making involved in
choosing what to prioritize.

System Inhibitors are things that reduce efficiency and the bottom line because they cannot be
sold or used.
Three System Inhibitors:

 Waste:
o The consumption of inputs and resources that do not add value
o Items unsold (a mismatch of supply and demand)
 Variability:
o Predictable or unpredictable changes in demand or supply
o How the actions of one company affect others demand or supply
 Inflexibility:
o Inability to react to either changes in supply or demand

Process Review Chart:

The way of visualizing the operations of a business. It is used to better understand the business
and quantify it.
Process Analysis

‘Flow unit’ is what we follow through the business operations. For example, if we want to focus
on the interaction of a customer with a business, the flow unit is the customer because the
customer moves through the process, not the other way around.

Three Key Process Metrics

 Inventory:
o The answer of on average how many flow units we have within a process?
o Is related to Yield or revenue
 Flow Rate:
o The rate at which flow units travel through the process.
o How many flow units flow through the process for a time phrame.
o Is related to response time and thus, customer satisfaction and efficiency.
 Flow Time:
o How long does it take, on average, for a flow unit to complete the process?
o Is related to working capital and therefore, cost

Little’s Law
Inventory = Flow Rate x Flow Time

Resources and Resource Pools:

Each process activity may require one or more resources. Resources can be anything from tools
to cash to workers.
A resource pool is a collection of interchangeable resources, such as the workers in a factory who
can do one another’s work.

 Processing time:
o Time spent on processing a circle with a resource.
 Capacity:
o The capacity of a resource unit to process a circle
o Capacity = 1/processing time
 Capacity of a resource pool:
o The capacity of a resource pool to process a circle
o Capacity of a resource pool = m * processing time
  Flow Rate:
o How many customers can complete their circle per hour
o Flow Rate = Minimum{Demand Rate, Process Capacity}
o This is the same flow rate as before
 Utilization:
o The capacity being used
o The ratio between the actual number of flow units and the maximum number of
flow
o Utilization = Flow rate (Realized Capacity)/Process Capacity (Design Capacity)
o It shows the extent to which resources are utilized to generate outputs
o How busy the resource is: Idle rate = 1-utilization
o Utilization is usually not 100% because:
 Demand constraints;
 Avoid worker fatigue;
 Non-bottleneck resources in a multi-step process: the process is as fast as
its slowest part.
 Cycle Time:
o The average time between the interval of the system completing two consecutive
flow units
o Cycle time = 1/flow rate
o Gives an idea of the production rate/ pulse.
o Cycle time is different from processing time because it adds the waiting time
between the links in the process

Multi Step Processes:

The flow rate for a multi-step process is the flow rate of the bottleneck.
Flow rate = Minimum{Demand Rate, Process Capacity} = Minimum{Demand Rate, Bottleneck
Capacity}
Only the utilization rate of the bottleneck can reach 100% since they are the ones limiting the
process.
When flow rate equals bottleneck capacity then cycle time equals bottleneck’s processing time
Sum of all activity times = labor content
Takt time = 1/demand rate, which is the production rate or tempo to satisfy demand
Target Manpower = Labor content/Takt Time
Takt time and cycle time are closely related, as takt time is our dream cycle time
We should get cycle time as close as possible to takt time.

Cost of direct labor = wages per unit time/ flow time

Cost of direct labor shows how much employees are paid for doing the job, excluding idle time

Strategies to increase process capacity:

 Smart capacity management

o Taking differences in demand to adjust the process
o Eg staffing to match seasonality
o
 Offload bottleneck
o Line balancing: reassign activities
o Automation
o Outsourcing/ pre-processing
 Enables employees to spend more time on other tasks, increasing capacity
o This enables better efficiency
 Specialization
o Integrate work strategy
 One worker does the whole cycle by themselves
o Specialization:
 Pros:
 Eliminate setups
 Learning effects
 Lower-skilled labor
 Save equipment replication
 Cons:
 May not fully balance workload
o Idle time
 Workers may lose motivation
Process Interruptions
Setup time:
Set of activities that are required to produce flow units, but for which the time to
complete these activities does not depend directly on the number of units produced.

Batch:
The number of flow units produced after a setup is performed

Production cycle:
A repeating sequence can include setup time, production time, and idle time.

Capacity with setup time:

Capacity = Batch Size/(setup time + processing time *Batch Size)

Target Batch Size:

TBS = Target capacity*Setup Time/1-(Target Capacity*Processing Time)

Implied Utilization:
How busy the resource has to be to fulfill demand.
Implied Utilization = Demand rate in minutes of work/ Capacity in minutes of work
The part with the highest implied utilization rate is the bottleneck of the system.

Yield Rate (Yield Resource):

The percentage of flow units that continue to the next step.
Yield rate for one aspect of the cycle is calculated with how many enter that step not the whole
system.
Analyzing various strategies to increase efficiency, our recommendation is Option B: to increase
the batch size from 64 to 85 donuts. Although Option A has a greater average utilization, as seen
in the table, it increases the bottleneck capacity of the process to 30.51, which is greater than the
current demand. Implementing Option A would mean that the system is now demand-restricted,
and therefore, the investment needed for the three extra cutters might not be instantly profitable.
That being said, if the company expects an increase in demand, Option A would better suit the
situation.

Option B, on the other hand, has a lower average utilization rate than Option A but increases the
bottleneck capacity to match the demand. Therefore, the company would be producing just
enough donuts to sell in a day, enabling the changes to help the company instantly.

Quality Management

2 types of causes that result in quality issues

1) Normal variations:
Variations that are impossible to identify and solve.
2) Abnormal variations:
a. Variations that are possible to identify and solve; we aim to solve abnormal
variations from our production line.

Process Capability index:

Cp = (Upper Specification – Lower Specification)/6σ
Cp < 1  Process definitely incapable
Cp < Company chosen threshold  Process incapable

Control Charts based on Variable:

1) Measurable quality characteristics (continuous outcome)
a. Size, weight, strength  X bar chart
2) Using P-charts
 a. If there is an outlier, such that the proportion of defective rate is out of the upper
or lower bounds  the process is out of control

For high costs of restarting the process with little effect on health the companies use a larger Z
value because they do not want to stop the process for small mistakes.

However, for companies that can affect human life and health it is important to have a small Z
value to find and correct even the smallest mistakes.

System Design and Improvements

Demand Management Strategies:

The goal is to regulate customer inflow and achieve optimal distribution of demand across time,
channels, and servers.
 Reservation systems
 Pricing:
o Different prices for different times of service
 Omni-channel projects:
o Diverting customers from in-person stores to online stores
 Information of Congestion
o Electric traffic information
o Billboards to show ER wait times

Managing Service Capacity:

 Reduce processing time (of servers)

o Worker specialization
o Process redesign
 Simplification:
 Making servers accept payment at the table instead of going back
and forth
 Pre-processing
 Online check-in
 o Engage customers
 Self-serve spots
o Technology
 Bar codes, RFID tags, smartphone apps
 Use existing capacity well
o Dynamic resource management

Pooling vs Not-pooling:
Depends on the type of customers you have

1) Heterogeneous customers:
a. Customers that follow different routes in the system
b. Its better to split the routes based on the necessary resources and processing times
2) Homogeneous customers:
a. Customers that follow the same route in the system

If utilization rate > 1 there would be a line, which may reduce customer numbers because of
abandonment thus decreasing revenue.

Customer Behavioral Consideration

Sequence effect:
 Customers carry away an overall assessment of an experience based on:
o Trend in the sequence of pain or pleasure
o The high and low points
o The ending

Duration effect:
 People engaged in a task often don’t notice how long it takes
o Supermarkets place small items next to the lines to sell, low-price-high-margin
products to customers.
Rationalization:
 People want things to make sense, be rational, and be transparent
 o Customers feel better about queuing when they are informed

In queuing analysis, average numbers throughout the days are used.

Queuing analysis for the paramount case:

the processing capacity is higher than the demand rate, however, a line forms before the doors
open which leads to an ongoing line.

Waiting line management strategies tactics used by Paramount:

 Duration effect
o Open kitchen
o Complementary drinks
o Socialization with other people in the line while waiting
 Sequence Effect
o Line moves faster and faster as one gets closer to ordering food
o Providing drinks at the end of the line alongside with the idea of getting closer to
ordering
 Rationalization Effect:
o Line shows that the food is goof
o Seating policy board
 Pooling effect:
o They pool seats, kitchen and other staff to better serve customers
o They also pool the waiting line (single que)

Inventory Management

Inventory management goal: decide quantity, location, and type if inventory in a process
Demand and capacity characteristics:

 Demand variations
  Lead time
 Seasonal demand
 Capacity uncertainty

Changing inventory:

 Pricing:
o Reactive of proactive response to price changes can lead to pileup of inventory
o Price discounts can decrease inventory and free up capital as well as space
o Anticipating a higher value for its products

Inventory Costs:

 Stockout costs  too little inventory

o Urgency and loyalty affect customer response to stockout
 Holding costs  too much inventory

Inventory turns:
Measured by # of thimes the inventory is sold and replaced

IT = throughput/average inventory = 1/flow time, flow time is how long is it going to take us to
empty current inventory (in days)

Forecasting
Predicting the future value of a variable of interest, ie demand
Qualitative Methods:
 Executive opinions: managers have information and insights
 Sales force composites: combine sales force forecasts
 Market research: collect data to develop and test hypothesis
  Delphi method: conduct a series of discussions among experts until you reach a final
method

Analytical methods:
 If only demand over time data  time series method
 If other information next to demand over time data  regression

Time series method:

 Trend component:
o Long-term movement
 Seasonal component:
o Regular periodic fluctuation
 Cyclical component:
o Repeating swings over more than one year
 Irregular component:
o Erratic or residual fluctuations