Classifications of Operations Systems

(Compiled by Boman Moradian from several texts)

Make-to-order v/s Make-for-stock

Volume / Flexibility
Service – Process Matrix

Make-to-order v/s Make-for-stock

Choice largely depends on the nature of product and its market

- cheap ball point pens
- expensive pens
- aircraft manufacturer
- supermarket
- up-market restaurant
Intermediate category : assemble-to-order
- fast food outlet
- automobiles

Volume / Flexibility

Projects
- oil rig construction
- development of a computer software package
- overhaul of an airliner

Job shop
- Low volume, low standardisation – one of a kind, custom design, general purpose
equipment, high margins, jumbled flow, estimating costs, estimating delivery times, order
tracing and expediting
- tool room
tailor
operation theatre

Continuous
- High volume, specialised equipment, high capital investment, high standardisation,
commodity, vertical integration, long runs, economies of scale, timing expansion and
technological changes
- nuts and bolts
- cement, sugar, petroleum
- photographic films

Batch
- Standardised designs, back-up suppliers, finished goods inventory, systematising diverse
elements, SPC, developing standards, large complex operations
- aero-engines
- mining equipment
- pumps, compressors
- mail collection

Disconnected line flow or Connected line flow

The Service – Process Matrix (Schmenner)

- Two Axes:

- Degree of Labour Intensity; ratio of labour cost to value of plant and equipment
Electric utilities : 14.21
Communications : 5.31
Amusement parks : 2.49
Hospitals : 1.63
Banking : 1.20
Hotels : 1.01
Retail trade : 0.62
Business services : 0.42

- Degree of Interaction and Customisation

Interaction : Degree to which the customer can intervene in the process (e.g.
restaurant), is not duration of contact (e.g. lectures)

Customisation : Degree to which the service provided is tailored to the needs of the
customers

Low Labour Intensity

- Capital decisions
- Technological advances
- Managing demand to avoid peaks and to promote off peaks
- Scheduling service delivery

High Labour Intensity

- Hiring, training, welfare
- Methods development and control
- Scheduling workforce

Low Interaction & Customisation

- Marketing
- Making service “warm”
- Attention to physical surroundings
- Managing fairly rigid hierarchy
- Need for standardised procedures

High Interaction & Customisation

- Fighting expenses increases
- Reacting to customer interventions in process
- Gaining employee loyalty
- Managing flat hierarchy
- Loose subordinate / superior relationship
- Managing advancement of people

Help companies assess their competitive stance and means by which they provide their
services

Possibility to move across the diagonal?

(e.g. banking and retailing becoming more automated, restaurants with more standardised
menus, professional service firms to specialise; pursuit is for controls and reduced costs)
 Variability

Definition: Variability is anything that causes the system to depart from regular, predictable
behavior
Variability is a fact of life (?)

Sources of Variability:
setups
work pace variation (n)
process times
machine failures
Maintenance times
differential skill levels
materials shortages
engineering change orders
yield loss
customer orders (n)
rework
product differentiation (n)
operator unavailability
material handling
power outages
material fluctuation (n)

Measuring Process Variability

Variability Classes in Factory Physics

Effective Process Times:

actual process times are generally LV
effective process times include setups, failure outages, etc.
HV, LV, and MV are all possible in effective process times

Relation to Performance Cases:

MV – Practical Worst Case
LV – between Best Case and Practical Worst Case
HV – between Practical Worst Case and Worst Case

Measuring Process Variability Example

Illustrating Flow Variability
Measuring Flow Variability
Propagation of Variability –
High Utilization Station
Propagation of Variability –
Low Utilization Station

Seeking Out Variability

General Strategies:
look for long queues (Little's law)
look for blocking
focus on high utilization resources
consider both flow and process variability
ask “why” five times
Specific Targets:
equipment failures
 setups
rework
anything that prevents regular arrivals and process times

Influence of Variability
Variability Law: Increasing variability always degrades the performance of a production system

Examples:
process time variability pushes best case toward worst case
higher demand variability requires more safety stock for same level of customer
service
higher cycle time variability requires longer lead time quotes to attain same
level of on-time delivery

Variability Buffering
Buffering Law: Systems with variability must be buffered by some combination of:
inventory
capacity
time

Interpretation: If you cannot pay to reduce variability, you will pay in terms of high WIP, under-
utilized capacity, or reduced customer service (i.e., lost sales, long lead times, and/or late
deliveries)

Buffer Flexibility
Buffer Flexibility Corollary: Flexibility reduces the amount of variability buffering required in a
production system

Examples:
Flexible Capacity: cross-trained workers
Flexible Inventory: generic stock (e.g., assemble to order)
Flexible Time: variable lead time quotes

Process Batch Versus Move Batch

Batching is an important determinant of performance.
What should the batch size be?

Process Batch:
Related to length of setup
The longer the setup the larger the lot size required for the same capacity
Move (transfer) Batch: Why should it equal process batch?
The smaller the move batch, the shorter the cycle time
The smaller the move batch, the more material handling
Process Batching
Process Batching Law: In stations with batch operations or significant changeover times:
The minimum process batch size that yields a stable system may be greater
than one.
As process batch size becomes large, cycle time grows proportionally with batch
size.
Cycle time at the station will be minimized for some process batch size, which
may be greater than one.

Cycle Time vs. Batch Size – 5 hr setup

Cycle Time vs. Batch Size – 2.5 hr setup
Setup Time Reduction
Where?
Stations where capacity is expensive
Excess capacity may sometimes be cheaper

Steps:

1. Externalize portions of setup

2. Reduce adjustment time (guides, clamps, etc.)

3. Technological advancements (hoists, quick-release, etc.)

Caveat: Don’t count on capacity increase; more flexibility will require more setups.

Move Batching
Move Batching Law: Cycle times over a segment of a routing are roughly proportional to the
transfer batch sizes used over that segment, provided there is no waiting for the conveyance
device.

Insights:
Basic Batching Tradeoff: WIP vs. move frequency
Queuing for conveyance device can offset CT reduction from reduced move
batch size
Move batching intimately related to material handling and layout decisions

Assembly Operations
Assembly Operations Law: The performance of an assembly station is degraded by increasing
any of the following:
Number of components being assembled
Variability of component arrivals
Lack of coordination between component arrivals

Observations:
This law can be viewed as special instance of variability law
Number of components affected by product/process design
Arrival variability affected by process variability and production control
Coordination affected by scheduling and shop floor control

Utilisation
Utilisation Law: If a station increases utilisation (w/o making any other changes), average WIP
and CT will increase in a highly nonlinear fashion

Rework
Rework Law: For a given throughput level, rework increases ( both the mean and the standard
deviation of ) the cycle time of a process

CT vs Rework

Cycle Time
Definition (Station Cycle Time): The average cycle time at a station is made up of the
following components:
cycle time =
move time +
queue time +
 setup time +
process time +
wait-to-batch time +
wait-in-batch time +
wait-to-match time

Reducing Queue Delay

Reducing Batching Delay

Reducing Matching Delay

Increasing Throughput

Burnout
Burnout Law:People get burned out
Why?
Can you blame them?
 Theory Of Constraints (TOC)

GOAL : To make money now as well as in future i.e. we can describe a company as “a money-
making machine”

Imagine you enter a shop selling money-making machines

Questions that jump into our mind:

What is the rate at which the machine generates money?

What is the “cost” of the machine?
How much money is captured by the machine?
How much money do we spend to operate it?

What is the rate at which the machine generates money?

THROUGHPUT : The rate at which the system generates money through sales

TH = Q i Σ (SP – VE)i per time unit from the system for a product
where i= products

TH = Throughput
Qi = Quantity produced and sold of the i th. product per unit time
SP = Selling Price per unit
VE = Variable Expenses per unit

Variable
Selling Productio
Contribt Th’put
n
Products Expenses n Margin
Price80 / day 70 / day 65 / day Rate
90 / day
Rs/unit Rs/day
Rs/unit units/day
Rs/unit
37,8
Bottleneck
1,000 180
820 210 00
A- is the maximum utilised equipment (may not necessarily be the slowest process)
(4)
-
(5)
- is where maximum inventory accumulates
- should be the most expensive resource (3)
37,4
1,120 220
B- should preferably be at the beginning of the process flow
900 170 00
(2) (3)
(4)
40,0
950 200
C 750 200 00
(5) (4)
(1)
39,0
1,100 260
D 840 150 00
(3) (1)
(2)
35,0
1,250 250
E 1,000 140 00
(1) (2)
 2. What is the “cost” of the machine?

How much money is captured by the machine?

INVENTORY : All the money the system invests in purchasing things the system intends to
sell

INV = Fixed Assets + Inventory

How much money do we spend to operate it?

OPERATING EXPENSES : All the money the system spends in turning inventory into
throughput

OE = All expenses not identifiable as variable expenses for any product

The GOAL of the firm is to

increase THROUGHPUT (T)

while simultaneously
reducing INVENTORY (I) and
reducing OPERATING EXPENSES (OE)

ROI = Profit / Investment

Throughput – Operating Expenses

ROI = -----------------------------------------------
Inventory

TH = Σ Qi (SP – VE)i per time unit from the system

i= products
OE = All expenses not identifiable as variable expenses for any product
INV = Fixed Assets + Inventory
Σ Qi (SP – VE ) i - OE
ROI = ------------------------------------
F. Assets + Inventory

Σ Qi ( SP – VE ) i - OE
ROI = --------------------------------------------
F. Assets + Inventory

Throughput : dependent on
- Production rate at the bottleneck
- Set-up / Change-over time at the bottleneck
- Transport time within the unit
- Rework at the bottleneck
- Rejection at and after the bottleneck; as well as in the system
- Downtime at the bottleneck

Selling Price : dependent on

- Market
- Lead time to customers
utilization of resources
cycle time
- Excess produced
- Produced late
- Seconds / Quality downgrade(COPQ ?)

Variable Expenses : dependent on

- Cost of raw materials
- Cost of packing materials
- Rework
- Manufacturability (designed quality)
- Freight
- Commission to selling agents

Operating Expenses : dependent on

- Depreciation
- Interest on long-term loans
- Interest on working capital
- Utilities
- Salaries (ctc)
- Wages (ctc)
- Insurance, etc.

Nine Scheduling Rules

Do not balance capacity – balance the flow

The level of utilization of a non-bottleneck resource is not determined by its own potential
but by some other constraint(s) in the system
 Utilization and activation of a resource are not the same

An hour lost at a bottleneck is an hour lost for the entire system

An hour saved at a non bottleneck is a mirage

Bottlenecks govern both, the T and the I in the system

Transfer batch may not and many times should not be equal to the process batch

A process batch should be variable both along its route and in time

Priorities can be set only by examining the system’s constraints. Lead time is a derivative
of the schedule

Unbalanced Capacity

In a process line with several stations -making all capacities the same is a bad decision
(possible if output times at all stations were constant or have very narrow distribution)

A variation in output times cause downstream stations to have idle time when upstream
stations take longer to process

When upstream stations process in a shorter time, inventory builds up between the stations

Also, the effects of statistical variations is cumulative

The variations can be smoothed by increasing WIP or increasing capacities downstream

Increasing WIP affects the cycle time

Attempt to balance the flow through the system – when flow is balanced, the capacities
remain unbalanced

Attempt to ‘shift’ the bottleneck upstream

Little's Law: the long-term relationship between I, T and Cycle time of a production
system is: INV = TH × Cycle Time

It applies to single stations, production lines, factories, and entire supply chains

It applies to systems with and without variability

It applies to single and multiple product systems

OPT

The approach takes into account

Revamped cost-accounting system
BOM
Due dates
Safety stocks
Use of bottleneck machines
Set-up times
WIP

System uses data from plant records

System determines the duration of the fixed interval and the optimum batch sizes for each
component or sub-assembly to be processed at each resource
 Getting a hold on measurements *

We are interested in finding measurements for a company whose goal is to make more money
now as well as in future. As long as we define its goal the way we have, what the company
generates (or should generate) is definitely only one thing - money. Thus, we can describe the
company as “a money-making machine”.

Imagine that you just entered the only shop that sells money-making machines. There are
many money-making machines in this shop, and you definitely want to choose one of them.
What input you need from the salesman in order to make your choice? Once we verbalize what
input we need, we have actually verbalized measurements.

The first needed piece of information that jumps into our mind is “What is the rate at which the
machine generates money?” Suppose that the salesman tells us that one particular machine
generates money at the rate of ten lakh rupees a month, and another at just five lakh rupees a
month. We choose the first one.

Is this enough? Definitely not. The cost of the machine is certainly on our minds. But let’s be
careful for a change. What do we mean by “cost?” Cost is one of those very dangerous words
that has more than one interpretation. We may ask, “What is the cost of the machine?” and
mean the purchase price. But we may ask the same question and mean the operating expense
- how much it costs to operate it. One interpretation is in the realm of investments, and the
other in the realm of spending. These are quite different interpretations. However, both
interpretations are of vital importance.

How should we phrase our questions? To ask the purchase price is not enough. We might face
some unpleasant surprises when we investigate the amount of inventory that the machine has
to carry in its belly is even more than the price of the machine itself. I would suggest that we
ask, “How much money is captured by the machine?” This quite different from the following
question that we still have to ask. “How much money will we have to pour into the machine on
an ongoing basis to turn the machine’s wheels?”

Similarly, at the Company level we have three simple questions:

*0 How much money is generated by our company?

*1 How much money is captured by our company?
*2 How much money do we spend to operate it?

The first one is THROUGHPUT. Throughput is defined as:

The rate at which the system generates money through sales.

It should be emphasized that throughput should not be confused with sales. What is the
difference? Suppose we sold a product a product for Rs. 100 per Kg. This does not mean that
throughput increased by Rs. 100. In the product sold, there are materials and parts that we
purchased from our suppliers for, let’s say, Rs. 42. This Rs. 42 is not money generated by our
system, it is money generated by our supplier’s system. Thus, in this case, the throughput will
be increased by Rs.58. Throughput is the selling price minus the amounts we paid to our
suppliers for the items that went into the product sold, no matter when we actually bought
these items.

In addition to purchased parts, there are other amounts we have to subtract from the selling
price in order to compute throughput. We have to deduct commission paid, duties paid, and
even freight. All these amounts are not money generated by our system.
The second measurement is INVENTORY. Inventory is defined as:

All the money the system invests in purchasing things the system
intends to sell.

This definition is exactly identical to the conventional definition, as far as machines, equipment
and buildings are concerned.

But when it comes to current assets, viz. Inventory; this definition departs drastically from the
convention. What value should we attach to a finished product stored in the warehouse?
According to the definition, we are allowed to assign just the price that we paid to our vendors
for the material and purchased parts that went into the product. There is no added value by
the system itself. Added value. To what? To the product. But our concern is not the product,
but rather the company. So what we actually have to ask ourselves is “When is the only point
of time that we add value to the company?” Only when we sell, not a minute before! The whole
concept of adding value to a product is distorted, so we should not be surprised if it will cause
distortions in the company’s behaviour. The added-value concept allows for ridiculous notion of
“inventory profits” and “inventory losses”.

Taking added value out of inventory does not mean that we do not have these outlays of
money. To account for them is the task of the third measurement - operating expense.

Operating Expense is defined as:

All the money the system spends in turning inventory into throughput.

Notice the different words chosen in the last two definitions. Invested in inventory, spent in the
system.

We should remember the impact of a distortion in the measurements.

Tell me how you measure me,

And I will tell you how I will behave.

If you measure me in an illogical way……

Do not complain about illogical behavior.

* From “The Haystack Syndrome - Sifting information out of the data ocean” by Eliyahu M.
Goldratt