The Wharton School Quarter II

The University of Pennsylvania Fall 1999

OPIM 631
Operations Management: Quality and Productivity
Note on Process Analysis

Introduction1
In this course, we look at organizations as processes. A process can, at the most
aggregate level, be thought of as a "black box" that transforms inputs (raw materials, un-
served customers) into outputs (finished goods, served customers). This transformation is
accomplished through resources (machines, workers, capital). For example, each year
The Wharton school transforms 6000 MBA applications into 780 graduates and 5220
rejected applications. The school's resources are its faculty and administration, the
buildings, the coffee machines, etc.

Whereas many other courses that you might take, including finance, economics, and
strategy, can live with this aggregate view, the approach of operations management is to
look inside the black box of this transformation process. Specifically, the objective of this
course is to enable you to:
1. analyze existing business processes along performance dimensions outlined below
2. improve business processes to achieve higher profits.
Thus, this course is about understanding and improving business processes.

Start with a picture

The most helpful tool in analyzing business processes is the process flow diagram. It is a
graphical way to describe the process and will help you to structure the information that
you find.

As with any management or consulting project, you first need to focus on a part of the
process that you want to analyze in greater detail, i.e. you need to define the process
boundaries and an appropriate level of detail. Placement of the process boundaries will
depend on the project you are working on. For example, in the operation of a hospital,
one project concerned with patient waiting time might look at what happens to the patient
before she sees a doctor (e.g. check-in, waiting time, encounter with the nurse). In this
project, the encounter with the doctor would be outside the boundaries of the analysis.
Another project related to the quality of surgery, however, might look at the encounter
with the doctor in great detail, while either ignoring the admissions process or treating it
with less detail.

A process operates on flow units, which are the entities flowing through the process (e.g.,
people, materials, information). A process flow diagram is a collection of boxes,
triangles, and arrows. Boxes stand for process steps (which can themselves be processes).

1
This note was prepared by Professors Terwiesch, Fisher, Ulrich, and Pearson as a first introduction to
process analysis. Its purpose is to help students with no experience in process analysis prepare the first
couple of cases in OPIM631.

OPIM 631 Note on Process Analysis 1

Triangles represent waiting areas or buffers holding inventory. Arrows represent the
route of flow of the flow units. If there are different flow units that take different routes
through the process flow diagram, it can be helpful to use different colors for the different
routes.
Simple Example
Assume your learning team needs to produce 100 bagel sandwiches with ham, cheese,
and veggies on them. After some experimentation, you find out that the tasks involved
take approximately the following durations:
- Cutting (0.5 minutes)
- Spreading mayonnaise (2.5 minutes)
- Cutting vegetables (3 minutes)
- Putting vegetables on bagel (2 minutes)
- Dressing (1 minute)
- Wrapping (1 minute)
You decide that each of the three of you (when it came to making bagels, the other
students on your team remembered that they had to prepare for a finance exam) will take
two tasks. Your process now looks like the process described in Figure 1. The triangles
between process steps indicate that there may be an accumulation of incomplete
sandwiches at those locations. All of the flow units within the process boundaries are
called work-in-process inventory or WIP (pronounced "whip").

Raw Bagels Finished Bagels

Cut/mayo Veggies Dressing/ Wrap

1 bagel / 3 min. 1 bagel / 5 min. 1 bagel / 2 min.

Figure 1: Simple bagel process

After operating for one hour, you realize that you are not too happy with this process
(except the person doing the dressing and the wrapping, who looks the least tired of the
three of you). Here is the current state of your system (kitchen):

Raw Bagels 10 Bagels

Huge pile nothing

Cut/mayo Veggies Dressing/ Wrap

100% busy 100% busy, 40% busy, was

got yelled at the one who yelled

Figure 2: Your kitchen after one hour of work

The first thing you notice after looking up from your work is a huge pile of bagels
waiting for veggies. The "cut and mayonnaise person" has clearly worked hard and
managed to prepare a total of 20 bagels in the one hour. From those 20, only 12 were
picked up by the "veggie person".

OPIM 631 Note on Process Analysis 2

This leads to the second issue, which is the frustration of the veggie person. Despite
doing his best, he never could keep up with the speed of the dress-and-wrapper. This
resulted in no WIP between the two and in under-utilization of the "dress-and-wrapper"
person (which gave her plenty of time to shout for more bagels).

Third, and most importantly, all three of you are somewhat disappointed when you
realize that you have only finished 11 bagels. Your preliminary analysis prior to starting
went like this: it takes 10 minutes of work to finish one bagel; if three persons work for
60 minutes, this should result in 3*60/10=18 bagels. However, only 11 bagels are
finished. So you fall short by almost 50%! After some discussion, you realize what
happened:
- It took ten minutes to "fill the pipe line" in your process, thus the first bagel was
done after 10 minutes.
- From minute 10 onwards, you finished one bagel every 5 minutes, despite the
hard work of the cut-and-mayo person.
But even then, why did the hard work not lead to more output? Was it really just a start-
up problem? Or, was there something more fundamental at work?

The Basic Measures of Process Performance

In process analysis, we focus on three fundamental performance measures:
- The number of flow units contained within the process is called the inventory (I)
(or WIP). Assuming we define the process boundary just before cutting and just
after wrapping, this inventory includes bagels currently being worked on by any
of the three of you and bagels between operations.
- The time it takes a flow unit to get through the process is called the Flow time (T).
An interesting question to ask is "how long does it take one bagel to move from
the beginning to the end of the process?" Although this question is somewhat
hypothetical in the present example, it would be an important variable if you were
selling bagels made to order.
- Finally, the most important measure is the rate (measured in [flow units/time]) at
which the process is delivering output, which we will call the Flow rate (R). R is
sometimes referred to as throughput rate. The maximum rate with which the
process can generate output is also called the capacity of the process.

You might be somewhat irritated that we have not talked about cost so far. However, note
that any improvement in inventory, flow rate, or flow time will have a direct impact on
cost, or even better, on profit. Shorter flow times will make it easier to rapidly respond to
customers (especially in make-to-order environments and service operations). Typically,
shorter flow time will result in additional unit sales and/or higher prices. Lower inventory
results in lower working capital requirements as well as many quality advantages that we
will explore in this course. Higher inventory is also directly related to longer flow times
(explained below). Thus a reduction in inventory also yields a reduction in flow time.
Higher flow rate translates directly into more revenues, assuming your process is

OPIM 631 Note on Process Analysis 3

currently capacity constrained, i.e. there is sufficient demand that you could sell any
additional output you make.

Process Analysis
After building the process flow diagram, the next step towards understanding and
improving a business process is to perform a process analysis. The objective of the
process analysis is to:
Find the process step that is limiting the rate at which the process generates
output. This limiting step is called the bottleneck.
Find the maximum rate at which the process can generate output (capacity). If
there is sufficient demand, the capacity of the process will correspond to the flow
rate defined above.
Compute the time it takes for a flow unit to go through the process, the flow time,
including processing time and waiting time.
Compute the time it takes to fulfill an order of a given size, e.g. 100 bagels.
There is no precise recipe2 for how to draw process flow diagrams and how to perform a
process analysis. You will learn how to perform these tasks over the next two or three
weeks as you prepare the cases for class. Figure 3 is a summary of the major steps.

1. Choose the process boundaries and the flow unit.

2. Understand how the physical process works and draw a process flow diagram.
Show process steps, inventory holding points, and arrows depicting product flow.

3. Determine the capacity of each step in the process expressed as the number of
flow units of product that can be processed per unit time.

4. Identify the capacity bottleneck. This is the step with least capacity.

5. Once the bottleneck is identified, think about how the bottleneck influences other
process steps as well as the overall behavior of the process. Calculate different
performance measures such as the process capacity, flow time, work in process
inventory, and labor utilization.

6. Consider changes to improve system performance.

Figure 3: Six steps for process analysis

2
Actually there are recipes for process analysis. However, in order to be applicable to all situations, the
recipe is rather complex and involves many, many definitions. Thus, we prefer to give you a somewhat
simplified version that will work in 80% of the cases and rely on your common sense for performing the
residual 20%.

OPIM 631 Note on Process Analysis 4

How to determine capacity?
As discussed above, each process step in a process flow diagram can be thought of a
process in itself. Therefore, the concept of capacity applies to both an individual process
step and to an entire process.

Let's revisit the bagel example. Remember that the first step (cutting and mayo
spreading) took 3 minutes per bagel, the second step (cutting veggies and putting them on
the bagel) took 5 minutes and the third step (dressing and wrapping) took 2 minutes.

The duration of the activities that comprise a process step is called the activity time. To
determine the capacity of an individual process step, we write:
capacity=1/activity-time.
E.g. for the first step, we write: capacity1=1/(3 minutes/bagel)=0.333 bagels/minute,
which we can rewrite as 0.333 bagels/minute = 0.333 bagels/minute * 60 minutes/hour =
20 bagels/hour. (These computations using measurement units might remind you of your
high school science class, and YES, your physics teacher was right after all: keep track of
the measurement units!) Similarly, we can compute capacities of the second step to be 12
bagels/hour and of the third step to be 30 bagels/hour.

If there is more than one person (or machine) carrying out a process step, the above
formula changes to:
capacity=number-of-workers/activity-time.
This is intuitive, as the capacity grows proportionally with the number of workers.

In simple processes with just one type of product (flow unit), we call the process step
with the least capacity the bottleneck. The capacity of the overall process is equal to the
capacity of the bottleneck. In the bagel example, this is the veggie process step, thus the
overall process capacity is 12 bagels/hour.

In processes with multiple product types, the analysis is a little more complicated. Why
can't we just do the same analysis as above? Consider the process flow diagram shown in
Figure 4, which describes a process where multiple variants of bagels get produced; e.g.
cream cheese, veggie bagels and bagels with grilled bacon and veggies.

This product mix complicates the process analysis. It is important to understand that the
capacity of the process crucially depends on the product mix. For example, the process
step "cream cheese" might have a very long activity time, resulting in a low capacity of
this activity. However, if only one out of a hundred customers requires cream cheese, this
low capacity would not be a problem.

Thus, to find the bottleneck and to determine capacity in a multi-product situation we

need to compare the available capacity with the requested capacity. The analysis is given
in Table 1. Numbers that are raw data (i.e. that you would find in the case or by
observing the real process) are printed in bold. Numbers that are derived by analysis are
printed in italics. We assume the demand is 180 bagels a day, of which there are 30

OPIM 631 Note on Process Analysis 5

 grilled-veggie, 110 veggie only, and 40 cream cheese. Assuming that the working day is
10 hours, demand is 3 grilled-veggie bagels/hour, 11 veggie bagels/hour, and 7 cream
cheese bagels/hour.

Put Grilled
Stuff on B.
Raw Bagels
Grilled-Veggie
Finished Bagels
Veggie
Cut
Cream Cheese
Veggies Wrap
on Bagel

Cream
Cheese

Figure 4: Process analysis for three bagel types

Cut Grilled Stuff Veggies Cream Cheese Wrap

Activity time 3 [min/bagel] 10 [min/bagel] 5 [min/bagel] 4 [min/bagel] 2 [min/bagel]
Available capacity 1/3 [bagel/min] 1/10 [bagel/min] 1/5 [bagel/min] 1/4 [bagel/min] 1/2 [bagel/min]
=20 [bagel/hour] =6 [bagel/hour] =12 [bagel/hour] =15 [bagel/hour] =30 [bagel/hour]
Requested capacity
grilled -veggie 3 [bagel/hour] 3 [bagel/hour] 3 [bagel/hour] 0 3 [bagel/hour]
+ veggie 11 [bagel/hour] 0 11 [bagel/hour] 0 11 [bagel/hour]
+ cream cheese 4 [bagel/hour] 0 0 4 [bagel/hour] 4 [bagel/hour]

= total 18 [bagel/hour] 3 [bagel/hour] 14 [bagel/hour] 4 [bagel/hour] 18 [bagel/hour]

Implied Utilization 18/20=90% 3/6=50% 14/12=117% 4/15=27% 18/30=60%

= requested Cap/
available Cap

Table 1: Finding the bottleneck in the multi product case

When computing the requested capacity, it is important to remember that some activities
(e.g. cutting) will be requested by all product types, whereas others (e.g. grilled stuff) will
only be requested by one product type. This will (hopefully) become clear by looking at
the process flow diagram.

By comparing the ratio of requested capacity and available capacity, which is also called
the implied utilization of the activity, we can now find the "busiest" activity, in this case
the veggie operation. As this ratio is above 100%, the process is capacity constrained and,
unless we can work overtime (i.e. add extra hours at the end of the day, in which case our
available capacity would go up), we will not be able to meet demand.

Littles Law
Flow Time, Flow Rate, and Inventory are related by the following identity (known as
Littles Law):
I = R * T.

OPIM 631 Note on Process Analysis 6

You might think this relationship is trivial, however, it is not and its proof is rather
complex for the general case (which includes stochastic variability) and by mathematical
standards is very recent. Little's Law is useful in finding any third variable when the other
two are known.

For example, if you want to find out how long patients - on average - spend in the waiting
room for a certain hospital operation, e.g. X-ray, you could do the following:
- observe the queue at a couple of random points during the day, giving you an
average inventory I. Let's say this number is 7 patients.
- look in your computer to see how many patients came through X-ray on that day,
giving you the average flow rate R. Let's say there were 100 patients over a period
of 8 hours, yielding R=100/8=12.5 patients/hour
- use Little's Law to compute T=I/R=7/12.5=0.56 hours=33.6 minutes
This formula will be helpful in computing T in many applications you will encounter.
Obviously, if you see how to compute T directly, then its easier not to use the formula.
Little's Law can also be used to find I given R and T or to find R given I and T.

When does Little's Law hold? The short answer is always. Little's Law does not depend
in which sequence the flow units (e.g. patients) are served3 (remember FIFO and LIFO
from your accounting class?). The only caveat is that if I, R or T vary over time, then
Littles Law is still valid, but only if used with average values of I, R and T.

Total Time x to process a given quantity of work Q

Remember the disappointment when finding out that you had produced only 11 bagels
when operating in the process of Figure 1? How could we have computed this before
starting the work?

We now understand that the veggie process step was the bottleneck, because it has the
least capacity. As we tried to push as many bagels through the system as possible, we
were capacity constrained and the flow rate of the system, once it got going, was equal to
the capacity: 12 bagels/hour.

So how long does it take to produce ten bagels, starting with an empty system? It will
take ten minutes (the sum of the three activity times) until the first bagel is completed.
This is the time to "fill the pipeline". From then onwards, we get an additional bagel
every five minutes. (This is because the Veggie operation can produce no more than one
bagel every five minutes.) Thus bagel 1 is produced after 10 minutes, bagel 2 is produced
after 15 minutes and bagel 10 is produced after 55 minutes.

More formally, we can write the following formula. The time x to finish Q units is:
x = T + (Q-1)/R

3
Note however, that changing the sequence will impact a given flow unit (e.g. the patient coming in first in
the morning). But Littles Law deals with averages, i.e. if patient A will wait longer, one or more other
patients will have less waiting time.

OPIM 631 Note on Process Analysis 7

For a continuous flow process, this time is:
x = T + Q/R.

Types of Processes
The decision to arrange your process as depicted in Figure 1 was not dictated by the
product (the recipe of the ham-cheese bagel) but it was your managerial choice. Consider
the two alternative process layouts in Figure 5.

Conveyor Belt
Raw Bagels Finished Bagels

Cut/mayo Veggies Wrap

Machine-Paced Line Flow

Cut/mayo Veggies Wrap

Raw Bagels Finished Bagels

Cut/mayo Veggies Wrap

Cut/mayo Veggies Wrap

Same Person

Three Parallel Work Cells

Figure 5: Two alternative process lay-outs

The first process is called a machine-paced line flow. A single conveyor belt carries the
bagels between workers and moves at a constant speed. Such a process is different from
the example we had in Figure 1, called a worker-paced line flow, as it does not allow for
a build up of inventory between the process steps. The pace with which the workers must
complete activities is dictated by the speed of the conveyor belt.

The second process corresponds to three work cells. In this example, each work cell
consists of one person who completes the entire set of activities to produce a completed
unit. As a result of this process layout, there is no need for inventory between the
activities.

Let's go and see some real organizations in action. Make sure to visit the following web-
pages, each of which offer a virtual tour through their (manufacturing) process:
Buell Motorcycles: http://www.buell.com/tour/factour.html
Monitor Sugar: http://www.monitorsugar.com/htmtext/Pictflow.htm
Peavey Guitars: http://www.peavey.com/wolfgang/index.html
Statton Furniture: http://www.statton.com/tourpics.htm

OPIM 631 Note on Process Analysis 8

How are the processes different from each other? Some produce a large variety of
products (e.g. Statton furniture), while others basically produce one single product
(Monitor). Some processes are highly automated, while others are largely manual. Some
processes resemble the legendary Ford assembly line, while others resemble more the
workshop in your local bike store

There are many other dimensions along which processes can differ. Empirical research
in operations management, which has looked at thousands of processes, has identified
five clusters or types of processes. Within each o the five clusters, processes are very
similar concerning variables such as product variety or production volume, as is
described in Table 2.

Product Product Specificity of

variety volume Process
Examples ( variants) (units / year) Technologies Process Flow / Layout
Job Shop Design High Low General purpose Similar process equipment
company (100+) (1-100) grouped together. Different
Consulting types of jobs proceed along
different paths through facility
Batch Apparel Medium Medium General purpose Similar process equipment
process sewing (10-100) (100-100k) grouped together. Most
Bakery batches follow similar path
Semi-
conductor
wafers
Worker- Auto Medium High Specialized Equipment laid out in order of
paced line assembly (1-50) (10k-1M) process steps. Linear flow,
flow Computer identical across products.
assembly
Machine- Large Auto 1-10 High Specialized Similar to worker paced line
paced line assembly (10k 1M) flow. However, the speed of
flow the operation is dictated by an
automated line.
Continuous Paper mill Low Very High Highly Straight line, direct connection
Process Oil refinery (1-10) specialized, between process steps
Food custom
processing designed

Table 2: Process types and their characteristics

Identifying the process type is more than an academic exercise in definitions.

Specifically, there are two benefits to this exercise:
1. When creating the process flow diagram, you will know whether your diagram
will look more like Figure 1 or one of the two cases described in Figure 5.
2. Similar process types tend to have similar problems. For example, as in the bagel
process described in Figure 1, worker paced lines tend to have the problem of
work-balancing and inventory build-up. Job-shops tend to suffer from long flow
times. Thus, once you know the process type, you can determine fairly quickly
the important issues in the case (or what problem your consulting customer is
facing).

OPIM 631 Note on Process Analysis 9

We will discuss these issues further in class, when we talk about the virtual plant tours.

How to Improve a Process?

Now that we have all the tools available to understand what is going on in a process, the
logical question becomes "How can we improve the performance of a process?" Again,
there is no single recipe, but at least a short list of generic answers:

Add capacity to the bottleneck. This is an improvement if the value of the

extra capacity exceeds the cost of the extra capacity. For example, if you
could get one additional person to help out on the veggies, it would improve
the flow rate through your process.
Improve balance by moving work from the bottleneck activity to a non
bottleneck activity. For example, your process in Figure 1 would improve if
the person who is in charge of the dressing / wrapping would take over the
task of putting the vegetables on the bagel. This would bring her activity time
up to 4 minutes/bagel (and thus her capacity up to 15 bagels / hour), but the
veggie activity would go to 3 minutes/bagel (capacity of 20 bagels/hour). As
the process capacity is determined by the activity with the least capacity, the
process capacity would move from 12 to 15 bagels/hour.
Determine the best span of control for a worker; e.g. do we have a cell with a
single worker who builds the entire product or do we have an assembly line on
which each worker performs a narrow, short task. Assuming that there is no
benefit of specializing in one activity (thus the times for performing each task
would remain unchanged if a worker carries out several activities), the work
cell layout in Figure 3 is extremely attractive. The activity time of completing
one bagel is 10 minutes/bagel. Thus an individual can produce 6 bagels/hour.
Multiplied by 3 workers, this would give 18 bagels/hour. This improvement
arises because no worker is forced to be idle.
If a process is demand rather than capacity constrained, stimulate demand by
offering additional value to the customer; e.g. higher quality, more product
variety or shorter lead time.

OPIM 631 Note on Process Analysis 10