Process Analysis II

 Inventory Buildup Diagrams

 Process Flow Analysis

 Linking Process Flows and Financial Performance

 Inventory Build-Up: Cannery Mini Case

Read the Cannery Mini Case on the next slide and

answer the questions at the end
 Inventory Buildup Diagram: Cannery MiniCase

Consider a firm that operates both a fleet of fishing boats and a

cannery for processing the fish. Each ton of fish processed at the
cannery yields 0.63 tons of finished product. At full capacity,
fishing yields 3600 tons/month for the first third of the year, 4800
tons for the middle third of the year, and 600 tons for the final
third of the year. The cannery has an average processing capacity
of 3000 tons per month.
a. How much processed fish can the cannery produce annually?
Describe the annual inventory pattern?
b. How will the pattern change if management forbids any inventory
accumulation beyond 2400 tons?
c. Should the firm consider increasing the cannery capacity to 3300
tons per month?
 Service Flow Example: Financing Applications at Auto-
Moto

Auto Moto Financial Services (A-M) provides financing to

qualified buyers of new cars and motorcycles. Auto-Moto receives
about 1000 loan applications per month and makes accept/reject
decisions based on an extensive review of each application. Until
last year A-M processed each application individually (Process I) .
On average, 20% of all applications received approval. An audit
showed that A-M had about 500 applications at various stages of the
approval/ rejection procedure. Customers have complained about
the time taken for processing applications and A-M plans to
streamline its decision making process. The consultants have
proposed the following changes to the process:
 Service Flow Example: Financing Applications at Auto-
Moto

Process II
• Have an Initial Review Team to preprocess all applications
according to strict but fairly mechanical guidelines
• Each application will be categorized as (i) A (looks excellent,
(ii) B (needs more detailed evaluation) or (iii) C (reject
summarily). A and B applications would be forwarded to
different specialist subgroups
• Each subgroup would then evaluate the applications in its
domain and make accept/reject decisions

The above process has been implemented on an experimental basis

and the details are shown in the figure on the next page.
 Service Flow Example: Financing Applications at Auto-
Moto

= 175 + 25
A 70% 200/m
(25) Accepted
25% 30%
1000/m
IRT 25% 10%
B
(200) (150) 800/m
90% Rejected
50% = 75 + 225 + 500
C
Service Flow Example: Financing Applications at Auto-
Moto

Compare Processes I and II at Auto Moto. Which process is

better?
Linking Process Flows and Financial Performance
 MBPF Inc. (Anupindi et al., p. 57)

MBPF Inc. manufactures pre-fabricated garages. Each garage

needs a roof which is punched out of purchased metal sheets
and a base which is bought from an external vendor. The
roof and the base are assembled together and sent to FG
Warehouse. The process flow is shown below.

Raw Materials (Roofs) Fabrication (Roofs)

Assembly Finished
Goods

Purchased Parts
(Bases)
MBPF Inc. Consolidated Statements of Income and
Retained Earnings, 20XX

All figures are in millions of $

MBPF Inc. Consolidated Balance Sheet
Dec. 31, 20XX

All figures are in millions of $

MBPF Inc. Inventories and Cost of Goods Details,
20XX

All figures are in millions of $

 Financial Flows through MBPF , 20XX

• Factory
Throughput, R = $175.8 m/year
Average Inventory, I = $ 50.6 m
Average Flow Time T = 50.6/175.8 years
= 0.288 years = 14.97 weeks
 It takes on average 14.97 weeks for a $ invested in the factory to be billed to
the customer

• Accounts Receivables Department

Throughput, RAR = $250.0 m/year
Average Inventory, IAR = $ 27.9 m
Average Flow Time TAR = 27.9/250 = 0.112 years = 5.8 weeks
 It takes on average 5.8 weeks after a sale is made for MBPF to collect its
sales dollars
 Financial Flows through MBPF , 20XX

• Accounts Payable Department

Throughput, RAP = $90.3 m/year
Average Inventory, IAP = $ 11.9 m
Average Flow Time TAP = 11.9/90.3 = 0.13 years = 6.9 weeks
 It takes on average 6.9 weeks for MBPF to pay a bill

• Cash to Cash Cycle Performance

Cost to Cash Cycle (Factory + Accounts Receivables) = 14.97 + 5.8 ~ 21 weeks
Less Accounts Payable Cycle = = 6.9 weeks

Cash to Cash Cycle = 21 – 6.9 = 14.1 weeks

Detailed Financial Flows at MBPF Inc.
 Flow Times through MBPF Inc.

Raw Fabrication Purchased Assembly Finished

Materials Parts Goods

Throughput R
$/year 50.1 110.3 40.2 175.8 175.8
$/week 0.96 2.12 0.77 3.38 3.38

Inventory 6.5 15.1 8.6 10.6 9.8

Flow Time T = 6.75 7.12 11.12 3.14 2.90

I/R (weeks)
 Representation of Inventory Value at MBPF Inc.

4.8

Flow Time (weeks)

 Inventory Turnover Ratio

 Inventory Turnover Ratio = Throughput /Average Inventory

= (1/Average Flow Time)

 Summary

 Inventory Buildup Diagrams

 Process Flow Analysis

 Linking Process Flows and Financial Performance