The Corrupting Influence of

Variability

Dr. Jeff Hong

IELM Dept, HKUST
Fall 2010

Note03: Corrupting Influence 1

Revisit of the Motorola Case

Motorola Semiconductor Products Sector produces integrated circuits both

for use in Motorola products (e.g., cell phones) and for other OEMs
(original equipment manufacturers). They do this in vastly complex wafer
fabs that can cost US$2 billion or more to construct. Not surprisingly,
efficient utilization of these enormously expensive resources is a key
concern in the semiconductor industry. Despite this, Motorola deliberately
sizes capacity of each process in a wafer fab so that utilization will be no
higher than a specified limit, typically in the range of 75-85%.

Discussion: Why Motorola keeps a 15-25% excessive capacity?

Notice that the excessive capacity is very costly.

Note03: Corrupting Influence 2

The G/G/m Queue

CTq ≈ V × U × t
⎛
⎛ c + c ⎞⎜ u
2 2 2 ( m +1) −1 ⎞
≈ ⎜⎜ a
⎟⎟
e ⎟te
⎝ 2 ⎜
⎠⎝ m (1 − u ) ⎟
⎠

Note03: Corrupting Influence 3

Motorola Case Study
24

22

20

18

16

14
Cycle Time

12

10

4
Capacity
2

0
0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1 1.1 1.2
Utilization

Note03: Corrupting Influence 4

Capacity Laws

„ Capacity Law: In steady state, all plants will release

work at an average rate that is strictly less than
average capacity.

„ Utilization Law: If a station increases utilization

without making any other change, average WIP and
cycle time will increase in a highly nonlinear fashion.

„ Notes:
‰ Cannot run at full capacity (including overtime, etc.)
‰ Failure to recognize this leads to “fire fighting”

Note03: Corrupting Influence 5

 What Really Happens:
Systems without sufficient capacity
700

600

500

400
WIP

300

200

100

0
0 5 10 15 20 25 30 35 40 45
Day

Note03: Corrupting Influence 6

 What Really Happens:
Two Cases with Releases at 100% of Capacity
120 120

100 100

80 80
WIP

WIP
60 60

40 40

20 20

0 0
0 10 20 30 40 50 60 0 10 20 30 40 50 60
Day Day

Note03: Corrupting Influence 7

 What Really Happens:
Two Cases with Releases at 82% of Capacity
120 120

100 100

80 80
WIP

WIP
60 60

40 40

20 20

0 0
0 10 20 30 40 50 60 0 10 20 30 40 50 60

Day Day

Note03: Corrupting Influence 8

Overtime Vicious Cycle

1. Release work at plant capacity.

2. Variability causes WIP to increase.
3. Jobs are late, customers complain,…
4. Authorize one-time use of overtime.
5. WIP falls, cycle times go down, backlog is
reduced.
6. Breathe sigh of relief.
7. Go to Step 1!

Note03: Corrupting Influence 9

Mechanics of Overtime Vicious Cycle
50
CT without
45 Overtime

40

35
Cycle Time (hrs)

30

25

20

15
Original
10 Capacity

5 CT with
Capacity
Overtime
with Overtime
0
0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1 1.1 1.2 1.3 1.4 1.5
Release Rate (entities/hr)
Note03: Corrupting Influence 10
Motorola Case

„ How can Motorola increase utilization without

increasing WIP and CT?

CTq ≈ V × U × t
⎛ ca2 + ce2 ⎞⎛⎜ u 2 ( m +1) −1 ⎞⎟
≈ ⎜⎜ ⎟⎟ te
⎝ 2 ⎠⎜⎝ m(1 − u ) ⎟⎠

Note03: Corrupting Influence 11

Cycle Time vs. Utilization
24

22

20

18

16
Cycle Time (hrs)

14

12
High
10
Variability
8

6
Low
4 Variability
Capacity
2

0
0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1 1.1 1.2
Release Rate (entities/hr)

Note03: Corrupting Influence 12

Influence of Variability

„ Variability Law: Increasing variability always degrades the

performance of an operation system.

„ Examples:
‰ process time variability increases WIP and CT.
‰ 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

Note03: Corrupting Influence 13

Variability Buffering

„ Buffering Law: Systems with variability must be buffered by

some combination of:
1. inventory
2. capacity
3. 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).

Note03: Corrupting Influence 14

Variability Buffering Examples

„ Ballpoint Pens on Shelf:

‰ can’t buffer with time (who will backorder a cheap pen?)
‰ can’t buffer with capacity (too expensive, and slow)
‰ must buffer with inventory
„ Ambulance Service:
‰ can’t buffer with inventory (stock of emergency services?)
‰ can’t buffer with time (violates strategic objectives)
‰ must buffer with capacity
„ Organ Transplants:
‰ can’t buffer with WIP (perishable)
‰ can’t buffer with capacity (ethically anyway)
‰ must buffer with time

Note03: Corrupting Influence 15

Variability Buffering Examples

„ Capacity buffering of Toyota Production System

‰ Reducing variability at every opportunity
„ Reduce demand volatility (let dealer install certain parts, e.g., radios)
„ Reduce setup time, standardize work pace, etc. to smooth production
flow
„ Work with suppliers to reduce supplier variability
„ However, there are still remaining variability
‰ Scheduling plants for less than three shifts per day
‰ Making use of preventive maintenance periods at the end of
shifts to make up any shortfalls relative to production quotas
‰ By doing so, achieving a very predictable daily production rate

Note03: Corrupting Influence 16

Attacking Variability

„ Objectives
‰ reduce cycle time
‰ increase throughput
‰ improve customer service

„ Levers
‰ reduce variability directly
‰ buffer using inventory
‰ buffer using capacity
‰ buffer using time

Note03: Corrupting Influence 17

Reducing Cycle Time

„ Cycle time includes

‰ Moving time
‰ Processing time
‰ Queueing delay

Note03: Corrupting Influence 18

Reducing Queue Delay

CTq = V× U× t

⎛ ca2 + ce2
⎜
⎞
⎟
⎛ u ⎞
⎜ 2 ⎟ ⎜ ⎟
⎝ ⎠ ⎝1− u ⎠

Reduce Variability Reduce Utilization

• failures • arrival rate (yield, rework, etc.)
• setups • process rate (speed, time,
• uneven arrivals, etc. availability, etc)

Note03: Corrupting Influence 19

Customer Service

„ Elements of Customer Service:

‰ lead time
‰ fill rate (% of orders delivered on-time)
‰ quality

„ Law (Lead Time): The manufacturing lead time for a routing

that yields a given service level is an increasing function of
both the mean and standard deviation of the cycle time of the
routing.

Note03: Corrupting Influence 20

Improving Customer Service

„ LT = CT + z σCT

Reduce CT Visible Reduce Average CT Reduce CT Variability

to Customer • queue time generally same as methods
• delayed • batch time for reducing average CT:
differentiation • match time • improve reliability
• assemble to order • improve maintainability
• stock components • reduce labor variability
• improve quality
• improve scheduling, etc.

Note03: Corrupting Influence 21

Cycle Time and Lead Time

0.18

0.16 CT = 10 Lead Time = 14 days

σCT = 3
0.14

0.12
Densities

0.1
CT = 10 Lead Time = 27 days
0.08 σCT = 6
0.06

0.04

0.02

0
0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30 32 34 36 38 40
Cycle Time in Days

Note03: Corrupting Influence 22

Buffer Flexibility

„ Buffer Flexibility Law: Flexibility reduces the amount of

variability buffering required in an operation system.

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

Note03: Corrupting Influence 23

Flexibility in Assembly Plants

„ GM produces many different vehicles, e.g., Chevrolet Camaro,

Pontiac Grand Prix, Buick Riviera, GMC truck etc.

„ A vehicle assembly plant typically has a single assembly line, which

may be designed to assembly one or more types of vehicles

„ Vehicle assignments are determined by capacity investment

decisions that must be made between 1 and 3 years before
production begins.

„ Historically, the average difference between vehicle sales forecasts

made in this period and actual annual vehicle sales is about 40%
(both + and – )

„ Having flexibility is one strategy for dealing with this uncertainty

Note03: Corrupting Influence 24

Flexibility in Assembly Plants

„ A simple example
‰ Two plants each with an annual capacity of 100 units that produces two
products.
‰ The two products have random, but independent, demand with 50, 100
and 150 units being equally likely for each.
‰ Assume production levels can be set after observing demand and that
excess demand is lost.
‰ Consider the two cases of total flexibility (both plants can produce both
products) and no flexibility (each plant produces one product).
‰ With total flexibility, expected sales equals 178 units and capacity
utilization is 89%.
‰ With no flexibility, expected sales are 167 units and capacity utilization is
83%.

Note03: Corrupting Influence 25

Flexibility in Assembly Plants

„ If there are many plants and many products, how much

flexibility is enough?

„ A more complex example

‰ 10 products and 10 plants
‰ Each plant has a capacity of 100 units
‰ Demand for each product follows normal distribution with mean
100 units and standard deviation 40 units
‰ Assume that product demands are independent.

Note03: Corrupting Influence 26

Flexibility in Assembly Plants
„ No flexibility
products plants
1 1
2 2
3 3

4 4

5 5

6 6 • Totally 10 links
7 7 • Expected sales: 853 units
• Capacity utilization: 85.3%
8 8

9 9
10 10

Note03: Corrupting Influence 27

Flexibility in Assembly Plants
„ Total flexibility
products plants
1 1
2 2
3 3

4 4

5 5

6 6 • Totally 100 links

7 7 • Extremely costly
• Expected sales: 954 units
8 8
• Capacity utilization: 95.4%
9 9
10 10

Note03: Corrupting Influence 28

Flexibility in Assembly Plants
„ Partial flexibility
products plants
1 1
2 2
3 3

4 4

5 5

6 6 • Totally 20 links
7 7 • Expected sales: 950 units
• Capacity utilization: 95.0%
8 8
• Almost equivalent to total
9 9 flexibility
10 10

Note03: Corrupting Influence 29

Flexibility in Assembly Plants
„ Partial flexibility
products plants products plants
1 1 1 1
2 2 2 2
3 3 3 3
4 4 4 4
5
6
5
6
> 5
6
5
6
7 7 7 7
8 8 8 8
9 9 9 9
10 10 10 10
one chain five chains

Note03: Corrupting Influence 30

Flexibility in Assembly Plants

„ Critical managerial insights

‰ A small amount of flexibility added in the right way can
have virtually all the benefits of total flexibility

‰ The right way to add flexibility is to create fewer, longer

plant–product chains

‰ Creates circuits can further improve the flexibility

Note03: Corrupting Influence 31

Cross-Training Workers in a Local
Contract Manufacturing Service Company
„ Contract Manufacturing Service (CMS) companies offer contracts for
electronic assembly for another company. For instance, instead of
attempting to manufacture complex circuit boards themselves, OEM
companies often outsource their manufacturing operations to CMS
companies. In effect Contract manufacturing providers do not post
their brand name on any product, and both design and the brand
name belongs to the OEM.
„ Also known as Electrnoic Manufacturing Service (EMS)
„ Examples including Foxconn, VTech
„ A CMS company may manufacture many different products with
similar production processes
„ However, different products may require different amount of time in
the same process.

Note03: Corrupting Influence 32