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
- price / cost / efficiency
- 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
- Flow rate
- Flow time
What does Wiki Say…
- 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
30 / 60 * 10 = 5
Inventory = 1 pizza every 5 minutes
Cost of goods sold: $20,000 million /year
Inventory: $391 mill
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
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:
Productivity = unit output produced / input used
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
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.
Overall Equipment Effectiveness Waterfall Graph
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.