Operations Management

The Goal

Performance Measurements
• Financial Measurements
– Cash Flow
– Net Profit
– Return on Investment
• Financial measurements work well at the higher level, but
they may be hard to use at the operational level

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 Performance Measurements
• Operational Measurements
– Throughput: The rate at which money is generated by the
system through sales
– Inventory: All the money that the system has invested in
purchasing things it intends to sell
– Operating expenses: All the money that the system
spends to turn inventory into throughput

• ROI » (Throughput – Oper. Exp.) / Inventory

Productivity
• Has the throughput increased?
• Has the inventory decreased?
• Has the operating expense decreased?

• Productivity is all the actions that bring a company closer to

its goals

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 Bottlenecks
• Identifying bottlenecks
– Calculations (process analysis)
– WIP buildup (exception: continuous processes)
• Bottlenecks drive the production process
– Determine throughput for the system

Care and Feeding of Bottlenecks

• Keep bottlenecks busy
– An hour lost at a bottleneck is an hour lost to the system
• Work on worthwhile things
– Things that lead to sales
• Increase capacity at the bottleneck
– Increase batch size
– Reduce setup times
– Increase processing rate

3
 Care and Feeding of Bottlenecks
• Redesign work so that it doesn't need to go through the
bottleneck
• Offload work from the bottleneck
– Use other equipment, even if slower, more defects
• Avoid working on defective parts
– Weed out defects before bottleneck

Handling Non-Bottlenecks
• Match flow to the bottleneck rate
– Balance flow, not capacity
• Reduce batch sizes to smooth flow to bottlenecks
– An hour saved at a non-bottleneck is a mirage
– May want transfer batch size smaller than production
batch size
• Make sure it doesn’t become a bottleneck
– Excess capacity to deal with “statistical fluctuations and
dependent events”

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 How to Manage Bottlenecks and
Non-Bottlenecks?
Basic configuration I

Case A
X Y Market

X Y
Bottleneck Nonbottleneck
Demand/month 200 units 200 units
Process time/unit 1 hour 45 mins
Avail. time/month 200 hours 200 hours

How to Manage Bottlenecks

and Non-Bottlenecks?
Basic configuration II

Case B
Y X Market
WIP

X Y
Bottleneck Nonbottleneck
Demand/month 200 units 200 units
Process time/unit 1 hour 45 mins
Avail. time/month 200 hours 200 hours

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 How to Manage Bottlenecks
and Non-Bottlenecks?
Case C

Basic Market
Configuration Assembly
III Spare Parts

X Y
X Y
Bottleneck Nonbottleneck
Demand/month 200 units 200 units
Process time/unit 1 hour 45 mins
Avail. time/month 200 hours 200 hours

How to Manage Bottlenecks and Non-

Bottlenecks?
Basic configuration IV
Case D
Market Market
FG
X Y
X Y
Bottleneck Nonbottleneck
Demand/month 200 units 200 units
Process time/unit 1 hour 45 mins
Avail. time/month 200 hours 200 hours

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 Control Logic: Drum, Buffer, Rope

Bottleneck (drum)

A B C D E F Market

Communication Inventory
(rope) (buffer)

Implications for Service

• Many lessons apply directly
– Bottlenecks
– Statistical fluctuations & dependent events
• Some key differences
– Hard to keep a buffer in front of bottleneck
– Focus more on offloading work
– Shift in time when possible
– Shift to other servers