Continuing on the Business Foundations Specialization on Coursera I have started to learn the basics on improving business processes.

The basic overview on operations is how to increase productivity and deliver higher quality standards, most people see the focus on creating cost efficiencies but it also has a lot to do with the quality of service that is provided at every step of the customer experience.

Key concepts include process analysis, bottlenecks, flows rates, and inventory levels, and more.

The Four Dimensions of Performance:

  • time / responsiveness
  • variety
  • quality
  • price / cost / efficiency
  • Efficiency
  • Labour
  • Customers
  • Product quality – how good?
    • customer service
  • Process quality – as good as promised?
  • customer heterogeneity (the vast majority)
  • # items sold
  • % requests made happy
  • Responsiveness to demand

Efficient frontier: where all other players in the industry sit. (inside to the lower left)


Three indicators of performance

  1. Flow rate
  2. Inventory
  3. Flow time

The  measures:

Flow rate / throughput: number of flow units going through the process per unit of time ( customers / hour )
Flow time: time it takes a flow unit to go through from the beginning to the end of the process
Inventory: the number of flow units in the process at any given more meant in time
Flow unit: customers or product units
Processing time: how long does the worker spend on the task? (e.g. 46 seconds)
Capacity = 1 / processing time: how many units can the worker make per unit of time. If there is m works at the activity capacity = m / processing time. e.g. 1/46 (customers / time) x 3600 (seconds in an hour) = 78 customers per hour
Bottleneck: process step with the lowest capacity
Process capacity: capacity of the bottleneck
Flowrate = minimum { demand rate, process capacity }
Utilisation = Flow rate / Capacity
Flow time = time it takes a flow unit to go through the process
Inventory = number of flow units in the system

Little’s Law

What does Wiki Say…

“In queueing theory, a discipline within the mathematical theory of probability, Little’s result, theorem, lemma, law or formula[1][2] is a theorem by John Little which states:

The long-term average number of customers in a stable system L is equal to the long-term average effective arrival rate, λ, multiplied by the (Palm‑)average time a customer spends in the system, W; or expressed algebraically: L = λW.

It’s more powerful than you think.. but basically it helps figure out processing time and throughput and can be reversed to find out the unknown metric.

What it is:  Inventory = Flow rate / units * Flow time

e.g. customers order 30 pizzas per hour and pizza need to be in the oven for 10 minutes
30 / 60 * 10 = 5
Inventory = 1 pizza every 5 minutes

Inventory Turns

The Inventory turnover is a measure of the number of times inventory is sold or used in a time period such as a year. The equation for inventory turnover equals the Cost of goods sold divided by the average inventory.
e.g. Back in the day when we had both ..  Dell & Compaq
Cost of goods sold: $20,000 million /year
Inventory: $391 mill
Cost of goods sold: $25,263 million /year
Inventory: $2,003 mill
391 million = 20, 000 million * year
T = ( 391 / 20,000 ) * 365
  = 7 days
2,003 = 25263 * 365 * T
t = 2003 / 25263 * 365

= 28.93 days

Inventory Cost Calculation:

Per unit inventory cost = Annual inventory costs / inventory turns

e.g. Annual costs = 30%
Inventory turns = 6

per unit inventory cost: 30% / 6 = 5%

Simple process flow

You need to account for the fact that people are not robots and also that life is unpredictable.

If you could get either 0, 1 or 2 order with equal probability, and you have production capacity of between 0 – 2, and you can’t make the product before the order is taken, and customers will not be willing to wait.

Demand, Capacity, Result

Screen Shot 2015-06-12 at 8.02.29 am

Crude but invaluable table by Professor Christian Terwiesch

If you total the columns you can see even though you have the opportunity to make more products, in reality due to fluctuations of demand the result is only that of when you have both demand and capacity.

Five Reasons for Inventory:

Pipeline inventory: you will need some minimum inventory because of flow time >0
Seasonal inventory: driven by seasonal variation in demand and constant capacity
Cycle inventory: economies of scale in production (purchase drinks)
Safety inventory: buffer against demand (Mc Donald’s hamburgers)
Decoupling inventory / buffers: buffers between several internal steps.


Basic definition of productivity – Productivity is an average measure of the efficiency of production. It can be expressed as the ratio of output to inputs used in the production process, i.e. output per unit of input.
Productivity = unit output produced / input used
Example – labour productivity
Labour productivity = 4 units per labour hour
Multifactor productivity 
Productivity = Output / (Capital$ + Labour$ + Materials$ + Services$ + Energy$)
Waste and Inefficiencies 
Output: productive time; input; total time
Some measures of productivity have natural limits (e.g. labour time, Energy)

7 Sources of Waste

  • Overproduction – to produce sooner or in greater quantities than what  customers demand
  • Transportation – Unnecessary movement of parts of people between processes
  • Rework – Repetition or correction of a process
  • Overprocessing – Processing beyond what the customer requires
  • Motion – Unnecessary movement of parts or people within a process
  • Inventory – Number of flow units in the system
  • Waiting – Underutilising people or parts while a process completes are work cycle

Profit per hour calculations

Inclusion of time, demand, staff costs, fixed costs, unit costs, process capacity.
Example below has a profit per hour of ~ $35 changing the variable cost per unit of the sandwich ($1.5 to $1.35) will adjust this to $46 per hour, however if we reduce the activity time from 47 seconds to 42.3 seconds this will increase to $76 (over 100% increase)
NOTE – Only applies when there is the demand.
C5463124-B5D4-41AB-AA27-E8A0FC803284Source: Professor Christian Terwiesch

KPI Tree

Why use a KPI Tree? – Most strategic objectives are high-level outcomes. It’s very hard to agree with total confidence that you should, being able to visualise each element helps you understand precisely how one links to the other. KPI Tress are all about turning strategic objectives into meaningful KPIs.

Source: Professor Christian Terwiesch

Break Even Point

Source: BizBound

Overall Equipment Effectiveness Waterfall Graph


Source: iSixSigma


Line Balancing & Staffing to Demand

Takt time, derived from the German word Taktzeit, translated best as meter, is the average unit production time needed to meet customer demand. For example the customer wants to buy 10 units per week, the average time to build a unit must be 4 hours (or less) if the units are built during a 40 hour work week.


Assign tasks to resources so the total process time < takt time
Make sure that all tasks are assigned > Minimise the number of people needed (maximise labour utilisation)
What happens to labour utilisation as demand goes up? Difference between static and dynamic line balancing
Source: Professor Christian Terwiesch

Author: Stewart Barrett

Stewart Barrett is an agile, results oriented data driven digital strategist & business focused online marketer with over 10 years’ experience. Passionate about businesses that challenge and disrupt markets, who is inspired and fascinated by the ever-changing world of digital.

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