Class participation 20%

Assignments 20%
Quiz (open book) 20%
Final exam (close book but formulas will be written) 40%
Read course material in advance.

First one is strategy then tactical and then operational.

SESSION 2:
LITTLE LAW: relationship between time and money

The 3 elements of little law:

- On average, how much time does a typical flow unit spend within the process boundaries?
(how many times does a typical unit spend from enter the process to the end of process?)
Flow time
- On average, how many flow units pass through the process per unit of time?
Flow rate: min (input, capacity, demand) related to the speed of making money.
- On average, how many flow units are within the system boundaries at any point in time?
(freeze time, we check all the inventories) amount of money being stuck.

Average inventory= flow rate x average flow time

= Throughput rate x throughput Time

We need little law because sometimes we can’t determine the 3 component and we can use the 2
remaining for calculating the 3rd one.
Giving a size of the business the more volume on daily basis, the less time the unit spend time in the
process and then loosing value.

THEORY OF CONSTRAINT, the Goal

With limited resources, we need wise decision to spend it, based on the Little Law
 The faster the business turn the better it is, flow rate at max and flow time at min.
Better to be faster than cheaper.
You should spend all the resources to increase the flow rate, increase the bottle neck. The flow rate is
the constraint.

Example 1: Job Flow

An insurance company proceeds 10 000 claims per year. The average processing time is 3 weeks.
Assume it works 50 per weeks.
How many files on average are in the system.
Little law: inventory= flow time x flow rate
= 3 x (10 000/ 50)
= 600
/!\ at units, all the data should be in weeks

Example 2: Cash Flow

A steel company proceeds 400 million of iron ore per year, the cost of processing is 200 million. The
average inventory is 100 million.
How much time a dollar spends in the system?
Little law: flow time = inventory/flow rate
= 100 M /(400M + 200M)
= 1/6 y so 2 months

Example 3: Cash flow

50.6/175.8=0,28
Cost of goods sold = flow rate

Example 4 mock exam:

At the driving through counter of a fast-food outlet, an average of 10 car waits in line. The manager
wants to determine if the length od the line is having any impact. On potential sales. Her study
reveals that, on average 2 cars per minutes try to enter the area, but 25% of the drivers are dismayed
by the long waiting line, and so simply move on without placing orders. Assume that no cars enter the
line without the server. On average, how long does a car spend on the line?

Little law: flow time= inventory/ flow rate

= 10/ 2x0,75
= 6,66
Do not hesitate to draw a graph!

Example 5:
A financial service evaluates loan applications. It receives 1000 applications per 30 days, conduct
comprehensive reviews and makes decisions. On average, only 20% of application are accepted. On
average 500 files are with the company in various stages
How much time each type of fills spends in the system?
Flow time = inventory/ flow rate
= 500/1000
= 0,5 (half a MONTH)

Example 6:
1000 application
An initial preview single out 25% as category A, 25% as category B, and 50% on category C
70% of the files in category A are accepted, 10% of category B and 0% category C
200 files with initial review team, 25 files with team A, 150 for B
How much time each type of files spends on the system?

A: flow time= inventory A/ flow rate A

= 50 + 25 / 250
= 0,3

B: flow time = 150 + 50 / 250 = 0,8

C: flow time= 100/ 5000 = 0,2

/! \ take into account the 2 inventories

What is the average time? = 0,3 x 25 + 0,8 x 25 + 0,2 x 50 / 100 = 0,375 month
/! \ Use weight average
Assignment 1 tip forget the money track the flow of the car before adding the financial elements.
The money associated is related to the flow of the car.

SESSION 3: WAITING TIME

There are 4 variability in the waiting time.

- Arrival
- Activity time
- Availability of the ressources
- Exit

Time in queue = Activity time x ( Utilization/ 1- Utilization) x ((CV^2arrival + CV^2service)/2)

Arrival rate= 1/ Arrival time Interval

Service rate= 1/ Service Rate
Utilization= Arrival rate / Service rate
Coefficient= Standard deviation/ Mean
Activity time : time to finish a service.
Time in the queue= waiting time
System time= activity time+ time in the queue

Example 1:
in a city, traffic accidents with inter arrival time of 30min on average un an exponentially distributed
fashion. There is only 1 traffic police officer. On average, it takes 20 min to treat an accident and the
service time follows exponentially distributed fashion.
So because it’s exponentially distributed mean = standard deviation
20 is the service time

What is the capacity utilization of the police officer?

Utilization= Arrival rate/ Service rate = 2/3

What much time would the people involved in the traffic accident would have to wait before the
police officer can treat their case?
20 x (2/3)/(1/3) x 1 = 20 x (6/3) = 40 min

If the policy officer consumes 1 chocolate bar every 10min while she is not working. How many
chocolates bar she can consume in 24h?
48

Exemple2:
Traffic accident every 40min, on average with a coefficient of 1. 1 police officer in the city. Takes 30
min to treat an accident with a coefficient of 1. Every min spends by a citizen in a accident cost 1000e
3 accidents every 2 h  6 accidents every 4h

The policy department has a new training program to reach Hungarian drivers to drive more slowly,
which will reduce the accident rate by half? How much value this new program generates in 1y?
So, 3 accidents every 4h
Waiting time = 30 x (( 3/8)/(5/8))x 1 = 30 x 0,6 = 18
(18 + 30) x 1000 x 6 x 3 x 365 = 315 360 000

The policy department now train the police officer to work twice fast. How much money this program
will save the society?
Waiting time = 20 x ((3/16)/(13/16)x 1 = 4,61

Suppose the police officer give people random tickets when they have a traffic accident to deal with.
Shen can issue a 5000e penalty every 10 min. how much additional revenue the police department
can generate for the government

What if we have multiple officers and multiple accidents?

New formula :

After Eu enlargement vehicles arrive at a rate of 2 per minutes in a poison distribution/ There is are
now 2 lances and 2 inspectors (one inspector for one line) each of whom can control passport at the
rate of 3 min in an exponentially distributed fashion.
How many people are in the waiting line on average?

What would be the average time a vehicle must wait to get through the system?
(1/3)/2 x ((2/6)^square(2x3)-1)/(4/6) x 1 = 0,05

The inspectors reads one page of the books per minutes when he is not busy. How many pages the
inspectors can read in one hour?

In waiting system there is two parts: queue and service.

THE INVENTORY IS THE WAITING line is the flow rate x waiting time.
In service = flow rate x service time
 total inventory = flow rate x the process time (total time)
The little law can be applied for both parts and the total

SESSION 4: Inventory management

Different types of inventories:

- little law: Inventory = flow rate x flow time  we know the number,
- but we don’t know how is manage this inventory.
- waiting law: inventory in the waiting and in the service
- economic order quantity finds optimal combination, the combined cost of inventories and
transportation will be lowest.
- news boy
Quantity to order: sqr( (2x demand x transportation cost)/ holding cost)
Number of order= demand/ order quantity
Time between order= working day/ number of order

exercise:
ALBA uses 50 bags of coffee every month. Each bag costs 2.5 euros and hiring one person to get the
coffee costs 8.5 euros. The holding cost due to storage is 0.1 euros per bag per month. The cost of
capital is 2 percent per month.
Here we have purchasing cost, holding cost, cost of capital, cost of transportation.
Total cost = purchased cost + average inventory cost + Transportation cost
= 50x2.5 + 0.1(Q/2) + 8.5x(Q/50)

A company makes bicycles. It produces 450 bicycles a month. It buys the tires for bicycles from a
supplier at a cost of $20 per tire. The company’s inventory carrying cost is estimated to be 15% of
cost and the ordering is $50 per order. Calculate the EOQ In this problem

Quantity to order: sqr( (2x 450 x 50)/ 3)