Operations Management

Designing and Managing Processes

Prof. Svenja Sommer

[email protected]
 Course Roadmap 1-4

DESIGN AND DEPLOYMENT OF AN OPERATIONS STRATEGY

SOURCES OF OPERATIONS PROCESS DESIGN AND PROCESS BUSINESS

ADVANTAGE STRATEGY MANAGEMENT EXECUTION RESULTS

P-P- PROCESS QUEUING LEAN/JIT /

INSTRUMENTS ANALYSIS THEORY
Matrix QUALITY

SESSION OR 4:
CASE STUDY 1: Rittenhouse 2: Sc.berger 3: Benihana
Cleveland

FOCUS ON INTERNAL PROCESSES

2
How does SB obtain America’s
finest dark chocolate?

How do they describe

their product?

3
 Description of
Scharffen Berger’s Chocolate

4
 Description of
Scharffen Berger’s Chocolate
Ingredients Brand
• Rich Chocolate Flavor • Premium
(mostly dark chocolate) • Distinct
• from beans to bar • High end (and price)
• high quality beans • Like fine wine
• 9 types of beans
Process
• Traditional
• Artisanal /craftsmanship
• Tight quality control / attention to detail 5
 How does SB obtain America’s
finest dark chocolate?

How do they describe

their product?

What type of process is it?

6
 Review from last class:
Matching processes and products

Process standardization (volume) Low

Job Shop Inefficient
organizations

Med.

Cash cows Rigid Line

if feasible… Flow
High
High Med. Low
Variety, # of products
7
 MAKING CHOCOLATE:
FROM COCOA PODS TO CHOCOLATE BARS

COCOA
PODS UNROASTED ROASTER
CLEANER ROSTED BEANS
COCOA BEANS

TEMPERING
3-OUNCE BAR &MOLDING MELANGEUR WINNOWER
CONCHE

http://www.youtube.com/watch?v=Sg5ed8LfR08

8
 So, why is Jim Harris worried?

Planned capacity
increases:
• + 50%
• +100%
• +150%

Without compromising quality !!

9
 From art to industry

1962 2010
• Total production: <500 • Total production: 6,461 cars
• Ferrari 250 GTO: 19 • The California: 1395 cars
• Manufacturing process? • Manufacturing process?

Market value: Market value:

~$ 15-20 millions ~$ 150,000
2013: $52 millions
10
 Should Jim Harris buy the Ball Mill?

• Cost: $ 300k
• Capacity: 1,400 Kg
• Cycle time: 5 hours
• Must be used with the
conche

• Value of 1 full conche

batch = $ 30K
• Operating Margin: 40%
HOW SHOULD JIM MAKE A DECISION?
11
 What determines the output / throughput of a
process? The Smiley Game
Stage 1 Stage 2 Stage 3

12
 What determines the output / throughput of a
process? The Smiley Game
Stage 1 Stage 2 Stage 3

13
 What determines the output / throughput of a
process? The Smiley Game
Stage 1 Stage 2 Stage 3

14
 What determines the output / throughput of a
process? The Smiley Game
Stage 1 Stage 2 Stage 3

# in 1 min?
Who or what determines, how many faces the team draws?
15
What determines process throughput ?

Bottleneck:
an operation that has the
lowest capacity in the
process and thus limits the
system’s throughput

16
 What determines the output / throughput of a
process? The Smiley Game
Stage 1 Stage 2 Stage 3

If we hire a faster person in stage 3, what is the effect?

If we hire a faster person in stage 1, what is the effect? 17
 What determines the output / throughput of a
process? The Smiley Game
Stage 1 Stage 2 Stage 3

What happens if the blue pen is empty after 40 sec, and it takes 3 sec to
get a new one?  Output (# of completed faces) decreases
 Output (# of completed faces) increases
 Output (# of completed faces) remains the same
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 Working Working

Machine failure Lack of inputs

 Process stopped  Process stopped

No inventory makes resources dependent !

19
 Machine failure Process
 Process stopped working

process A process B

Inventory makes resources independent !

20
 What determines process throughput?
The Smiley Game
Stage 1 Stage 2 Stage 3

Can we do better?

21
 Stage 1 Stage 2 Stage 3

Stage 1 Stage 2 Stage 3

Stage 1 Stage 2
A few examples:
More but better?
22
 The language of operations:
a process view of the world
CT: CYCLE TIME = 1/TR
(avg. time elapsed
between two consecutive
products/customers
TT: THROUGHPUT TIME leaving the system)
(total time in the system)

CUSTOMER DEMAND

TR: THROUGHPUT RATE

(rate at which the system processes
VALUE-ADDING PROCESS
products /customers)

INVENTORY OR CAPACITY: maximum TR

CUSTOMERS IN A QUEUE

MATERIAL FLOW Average Throughput Rate

UTILIZATION = ρ 
Capacity
INFORMATION FLOW 23
 The language of operations:
a process view of the world
CT: CYCLE TIME = 1/TR
(avg. time elapsed
between two consecutive
products/customers
TT: THROUGHPUT TIME leaving the system)
(total time in the system)

CUSTOMER DEMAND

TR: THROUGHPUT RATE

(rate at which the system processes
products /customers)

24
 What is The Goal of the Enterprise?
The goal of the enterprise is to maximize throughput while
minimizing operating expenses and inventory
– Throughput rate = the rate at which the
system generates revenues
– Production is not revenue, products
must be sold!
– Capacity utilization is not the goal,
only a possible means to achieve it
– Operating expense = the rate at which
the system generates costs
– Inventory = the level of capital invested
in the system

25
 What determines the output / throughput of a
process? The Smiley Game
Stage 1 Stage 2 Stage 3

What is the capacity utilization in Stage 1? Stage 2? Stage 3?

Should we reward Stage 1? Penalize Stage 3?
26
Measure Capacity Ulilization only at the Bottleneck

… and the bottleneck could be SALES !

27
 Where should you place inventory buffers?

Network of the non critical resources

Safety
Pre- Stock
assembly

Final Network of
assembly the critical
resources

Pre-
assembly
Resource
bottleneck

Raw Manufacturing Assembly Orders

materials operations operations
OPT: Optimized Production Technology; E. M. Goldratt 1986

28
 Process Analysis and TOC* rules

1. Map processes: define process structure

Needs to be done by resource:

• 2 employees doing both tasks • 2 employees, each one task

*Theory of Constraints
29
 Process Analysis and TOC* rules

1. Map processes: define process structure

2. Calculate capacity at each station/step
3. Identify bottleneck and calculate process capacity
4. Manage bottleneck:
4.1 Exploit the bottleneck
4.2 Subordinate all other decisions to bottleneck
4.3 Identify opportunities for eliminating bottleneck
4.4 Eliminate bottleneck (if economically viable)
5. Do not let inertia set in: identify next bottleneck!

*Theory of Constraints 30
 Process Analysis Example:
Capacity of bread-making on Two Lines

Production in batches of 100 loaves at a time

Mix Proof Bake

Raw 45 min / 45 min / 60 min /

batch batch batch WIP FGI
Mat. Pack

40 min /
batch
Mix Proof Bake

30 min / 45 min / 60 min /

batch batch batch word file on
Blackboard
31
 Process Capacity
• Resources in series: Bottleneck determines capacity!
Capacity ?
Mix Proof Bake
= Min(60/45, 60/45, 1)
45 min / 45 min / 60 min /
batch batch batch = 1 batch / hr

• Same resources in parallel: Capacities add!

Mix Proof Bake
Capacity ?
Raw WIP = 2 batches / hr
Mat. 45 min 45 min 60 min

Mix Proof Bake

30 min 45 min 60 min

32
 Process Analysis Example:
Capacity of bread-making on Two Lines

Production in batches of 100 loaves at a time

Process capacity ?
= Min (2, 60/40) = 1.5 batches/hour
Mix Proof Bake

Raw 45 min / 45 min / 60 min /

batch batch batch WIP FGI
Mat. Pack

40 min /
batch
Mix Proof Bake

30 min / 45 min / 60 min /

batch batch batch

33
 Process Analysis Example:
Capacity of bread-making on Two Lines

40 min /
batch

Launch 1 batch every 2 hours. Capacity utilization?

• Throughput Rate (TR)=0.5 batches / hour
• Utilization = TR/Capacity= 0.5/1.5=33.33%
34
 Process Analysis Example:
Capacity of bread-making on Two Lines

40 min /
batch

Minimum TT (throughput time)?

Min TT=minimum(45+45+60; 30+45+60) + 40 = 175 min
CT?
CT of Bottleneck = 40 min/ batch 35
 Process Analysis Example:
Capacity of bread-making on Two Lines

40 min /
batch

# of batches in 8 hour per day, if process starts empty?

• 1st batch: min TT = 175 min
• Remaining time (305 min): CT = 40 min/batch
• 305 min/ (40 min/batch)= 7.625 => 8 batches in total 36
 What is the avg. CT of this process?

M1
15 min/u

M2
10 min/u

What is the capacity of the process?

Capacity M1 : 60 / 15 = 4 unit / hr
Capacity M2 : 60 / 10 = 6 units / hr Do
NOT
Process capacity: 10 units / hr add or avg.
processing times

Avg. Process CT: 60 / 10 = 6 min / unit

at full capacity
37
 Assignment for Next Class:
Croissant Baking Assembly Operation!!

Raw Mat. WIP

Roll & Dough
Dough Mix Proof Fill & 5 min / 50
Cut
Fold croissants

5 min / 50 15 min / 50 5 min / 50

croissants croissants croissants
Bake 20 min / 50
croissants

Raw Mat. WIP

Filling Mix Filling 10 min / 50
Pack
croissants
10 min / 50
croissants
FGI
Production in batches of 50 croissants
at a time
38
 Should Jim Harris buy the Ball Mill?

• Cost: $ 300k
• Capacity: 1,400 Kg
• Cycle time: 5 hours
• Must be used with the
conche

• Value of 1 full conche

batch = $ 30K
• Operating Margin: 40%
HOW SHOULD JIM MAKE A DECISION?
39
 How use 2 Conches with 1 Ballmill?

C1
10 hrs/b
BM
5 hrs/b
C2
10 hrs/b

C1
C2
BM

What is the TT?

What is the CT?
40
 How use 2 Conches with 1 Ballmill?
Scheduling influences the avg. TT (which includes waiting!),
but not the TR or CT!

C1
10 hrs/b
BM
5 hrs/b
C2
10 hrs/b

C1
C2
Buffer
BM

What is the TT?

What is the CT?
41
 Scharffen Berger

• Is adding the ball mill the right decision?

• What is the capacity increase when adding the BM??

What complicated the analysis?

• Different types of chocolate produced

• Different flow units processed in
different steps
• Yield rates
• Machine availability (here: shifts, but
also breakdowns, preventive
maintenance, cleaning /setup times, …)

42
 Determine average product

20%
2 hr/batch

50%
5 hr/batch

30%
7 hr/batch

“average” product:
20%*2+50%*5 + 30%*7 = 5 hr/batch
Scharffen Berger:
Processing time at conche varies
Average product = 62% chocolate (and assume there is really 62%
chocolate nips in 62% chocolate...)

43
 Different Machines
Process Different Flow Units:

Measure capacity in every step, using the same Flow Units

1. Choose Flow Unit (input measure or output measure)
2. Convert all other units into the equivalent flow unit
• Example: Ice cream production
– 0.25 kg of sugar per kg of ice cream
– Machine 1 can process 10 kg sugar per hour
– Machine 1 can process ??? kg of ice cream?
10 kg sugar 1 kg ice cream 40 kg ice cream
 
hr 0.25 kg sugar hr

44
 Scharffen Berger

• Is adding the ball mill the right decision?

• What is the new bottleneck?
Consider:

• Different types of chocolate produced

(62% average product)
• Different flow units processed in
different steps
• Yield rates
• Machine availability (here: shifts, but
also breakdowns, preventive
maintenance, cleaning /setup times, …)

For solutions, see excel

45
 Scharffen Berger: Points to remember

• Consider yield rates

• Do not forget to use the SAME flow unit
• Consider availability of machines:
shifts, but also: breakdowns, preventive
maintenance, cleaning /setup times, …
• If partially ready product cannot be stored:
Consider how many “batches” fit into production
time

For detailed calculations see Excel

46
 When adding capacity
the bottleneck might shift!
1. Conche  add Ball Mill

Bottleneck shifts to:

2. Roaster  Extra time (do more shifts)

Bottleneck shifts to:

3. Melangeur  additional melangeur

Bottleneck shifts to:

4. Tempering and molding  outsource? 47

 PayBack Analysis
given current capacity for T&M
• Ball Mill cost = $ 300,000, Melangeur= $ 50,000
• Additional n. of conche-equivalent batches per
month = 19
• Additional profit per month = 19 * $30,000 * 0.4 =
= $ 228,000
• Pay back time = 350,000/228,000 = 1.53 months
• Even with more conservative assumptions,
e.g., additional costs for shift on roaster or slightly
lower margins, it makes sense to invest in the new
machines!
48
 In reality, Scharffenberger has to clean the
Conche between batches of different chocolate.

What is the effect of setups?

49
 Simpler example:
2 hrs production; 1 hr setup (milk  dark)

• Example 1: 1 batch at a time

Production cycle

– 2 batches in 5 hrs = 0.4 batches / hr

• Example 2: 2 batches at a time
Production cycle

– 4 batches in 9 hrs = 0.44 batches / hr

50
 What happens to capacity,
when the batch size increases?
• Capacity increases with batch size …

0.5
Capacity 0.45
1/p

0.4

0.35

0.3

0.25

0.2

0.15

0.1

0.05

0 Batch Size
90
10
50

130
170
210
250
290
330

450
490
530
570
610
650
370
410

Any downside of increasing batch size?

51
 What happens to WIP inventory,
when the batch size increases?
• … but so does the inventory (and thus avg. TT)

Inventory Profile

ST ST ST ST ST ST ST ST time

Inventory Profile

B
A

ST ST ST ST ST ST time

52
Where do you want to use large batches?
Where do you NOT want to lose capacity?
0.5
Capacity 0.45
1/p

0.4

0.35

0.3

0.25

0.2

0.15

0.1

0.05

0 Batch Size
90
10
50

130
170
210
250
290
330

450
490
530
570
610
650
370
410

53
Manage by the Bottleneck

54
 Manage by the Bottleneck

• “An hour lost on a bottleneck is an hour lost for the entire

plant.”

• “An hour lost on a non-bottleneck is a mirage.”

• “Manage the plant by the bottlenecks.”

55
 Manage by the Bottleneck

• “An hour lost on a bottleneck is an hour lost for the entire

plant.”
– Quality control before bottleneck
– Keep inventory before bottlenecks to keep them busy
– Long batches on bottlenecks to avoid setups
– Increase capacity on bottlenecks whenever possible (machines, shifts)
• “An hour lost on a non-bottleneck is a mirage.”
– Short batches on non-bottlenecks, minimize inventory and production
lead time (without storage = determined by bottleneck)
– Don’t produce just to keep people/machines busy
• “Manage the plant by the bottlenecks.”
– Manage flows, not capacity (i.e., optimize globally, not locally)

56
 Should Schaffenberger outsource
tempering and molding?

Advantageous
of outsourcing

Risks/cost of
outsourcing

57
 Should Schaffenberger outsource
tempering and molding?

• Advantages of outsourcing T&M:

– Avoid bottleneck, leverage existing capacity and hence lower
cost solution (“prohibitively expensive to buy larger molding
machine”)

• Risks / potential costs:

– Quality control, transportation tricky and expensive, cost of bad
batch reaching market

• How can we ensure quality at the supplier?

– Dedicated equipment (remember ball mill problem in trial?), own
QC people at supplier, reference samples, supplier training

58
 Should Schaffenberger outsource
tempering and molding?

From Scharffen Berger’s (old) website:

• “Think of tempering as the alchemy of chocolate.

Tempered well, chocolate is glossy, breaks with a crisp
snap and melts smoothly in the mouth. If this step is
skipped or done poorly, chocolate becomes gray,
crumbly and almost dusty as it hardens.”

Question is: How unique is this process really…

59
 Should Scharffenberger outsource
tempering and molding ?

• What should Jim worry about? What not (as much)?

Quality /
service

High
?
Scharffen
Berger

Hershey’s
Low
Cost / Efficiency
High
Low

https://www.youtube.com/watch?v=YR_-aMVQWZI
60
 Putting operations into a context

Business
Strategy

Environment
Competitive
Operations Priorities
Strategy
Process
Operations
Decisions

Operational
Performance

Business
Performance
61
 An integrative framework

Competitive Business performance:

Financial and market
Strategy measures

Process
Process improvement
Process
Design
Execution
Choices

Flows, Layouts & Operational

Work Design performance
measures

Competitive priorities should drive ALL operational decisions!

62
 Epilogue

• Ball Mill installed successfully in July 2005

• Hershey went gourmet and in 2005 bought
ScharffenBerger and Joseph Schmidt to form the
Artisan Confections Company (ACC)
• Harris promoted head of ACC

63
 Epilogue

– Advantages: Leverage existing distribution network; access to

financial resources to expand capacity
– How they countered quality risk:
• Hershey’s realized difference in competitive priorities
=> need different processes and performance measures
• Created separately managed unit: focused factory in factory!
• Jim Harris (COO of Scharffen Berger) became head of new
division (need process knowledge)

64
 Next Class

• More on processes: the impact of variability

• Preparation:
– Read Benihana case (short summary) + determine
how profitable Benihana is (last page of case)
– Bring laptop (for online simulation)

• Homework Assignment 1 – due before next class

– Additional practice problems with solutions posted
– Slides, Key Lessons, Book chapter + video of in class
example posted

65