SOM 306
Monday, February 10, 2014
Typewell; Dave Strong
Sirob Malkonian, Pamela Torres

Professor:   Thank you for attending the first session of our third week of class.  So as you see we have defined a specific pace for this class and you should be careful not to fall behind the pace.  Your performance on quiz 0.5 was better than quiz 0.  How?  

Female Student:   More time.  

Professor:   Okay good.  We know if we study more we can perform much better, because quiz 0.5 was 10 times more difficult than quiz 0.  Okay?  

While I have recorded all the material of process view and strategy I still go through some of these concepts.  We learned that in a process we have 5 components.  Inputs, and leave the process in terms of output.  We have a network of activities and buffers.  Value added and non-value added processes.  We have human and capital resources which facilitate the process.  Then information structure to provide feedback for quality and control and so on.  

I have tried to look at the ... CSUN undergraduate studies process from the point of view of an operations manager and see why we are not performing as good as we should.  

I am saying with that initial concept we can look at everything from a process view perspective.  

So we have CSUN freshmen, regional, some international, transfers ..  Some regional, some national, some international.   They go into the system with human resources and capital resources.  There's a network of value added and non-value added.  Then we have feedback, and graduates and drop outs.  

The dropout rate at CSUN is high, based on simple computation I have done.  Around 10% of freshmen leave in the first year.  Only 14% of students graduate in 4 years.  33% over 5 years, only 67% of CSUN students graduate after 9 years.  

In any process, in order to evaluate any process we evaluate it based on external measures, internal measures and financial measures.  Here I look at financial measures.  

This is financial measures for for-profit organizations and value change measures for non-profit organization.  

For any organization to survive, if they are for profit they need good financial performance.  To reach these goals they should satisfy customers and stakeholders.  

If you have listened to my lecture, customers define what they want in a 4 dimensional space.  These are defined as ordered .... that last row does not exist.  Take a seat as your permanent seat throughout the course.  If you need to leave the classroom before the lecture ends you need to leave a note for me at the beginning of class.  Saying "for this reason I will leave."  Please take a permanent seat!  

They define the product in a 4 dimensional space.  We can call it order qualifiers.  They say a product should have at least these characteristics to convince me to buy it at this specific price.  Order qualifiers.  

If you think a little you see product attributes are different in different markets.  If you manufacture airplanes, wealthy people look for different things than commercial companies who want to use the plane to move people like you and me.  The product attributes, order qualifiers and order winners in these market segments are entirely different.  

Customers define a product in a 4 dimensional space, we should look at this specific market segment if we want to enter it, we create a package of customer value.  We propose a value that is at a level or above a level they have defined.  

Therefore customer value proposition can also be considered at order winners.  

Order qualifiers are those customers define and are the minimum requirement to satisfy the customer to think of buying our product.  Those attributes are defined by price, quality, type and variety.  

We propose to this segment our customer value proposition.  Order winners.  If you want to be order winners, those characteristics convince the customers to buy our products.  

So customer value proposition and process competencies.  We should develop levers that help us deliver the customer value propositions.  Those process competencies are also defined in 4 dimensional space.  

If Wal-Mart wants to sell its product at a reasonable price their process competencies should deliver the product at that cost.  

Flexibility, should be able to deliver variety defined in product attributes.   They should meet the flow time expected.  Flow time means from the time the customer wants to get the product until the time they get it.   

Or the time they want to produce the product until they get it produced.  

So to do that we need to satisfy our customers and stakeholders.  We should match perception and expectations.  To deliver the customer value proposition we should have process competencies.  We have cost, quality, flexibility and flow time.  

This is an example of pictorial representation.  When you replace narratives with a picture [On overhead.]   

Finally we see the most important thing is flow time.  If we have smooth process and short flow time it is believed it will help us to reach our goals in all other dimensions.  But it doesn't mean I should only focus on flow.  

First, a process which has fast flow time has low costs.  What is fast flow time.  We enter the process with a specified case, smoothly pass through operations and leave the system.  

Therefore you have less time to collect overhead costs.  Your costs we will reduced your variable cost, when you pass smooth you also pass fast.  If you can create a smooth flow in any process.  In graduation flow of CSUN, an environment in which everyone graduates in 5 years, cost goes down.  Quality will go up, because to pass in 5 years you need specific quality.  It's the same in production processes.  

At CSUN if you want to have a smooth flow, you will get an F if you are not good.  It is difficult to get an F in class.  Then you stop right there.  

In production process, if a product is damaged or doesn't have the right quality that station is stopped.  That's a basic principle of smooth flow.  If there is a variation from perfect quality that station should stop production until it is resolved.  

Smooth flow leads to low cost, high quality and flexibility.  Which can deliver variety.  Why?  When we have smooth flow we have little inventory.  Not too many workers in process.  If in the front end customers change their mind and want something else.  Or in the back end, if there's an advancement in technology, we can finish the small batch and produce the new product the customer wants or advancement in technology.  

Throughout this course we will become familiar with something called Little’s law.  In this we talk about the relationship of flow time, throughput and inventory.  

That's a critical example, it's the most important equation in the college of business.  I think it's more than the equation that equates to assets equal liability.  

It says throughout times flow times = inventory.  

Let's look at this equation from the point of graduate of students at CSUN.  Or at college of business.  

On average, in the past 12 years, college of business has had 1574 input and output.  That's true, on average for last 12 years.  1574 students.  In terms of regional, statewide, nationwide and international students that come to college of business.  They have left in terms of graduates or drop outs.  Or transfers.  

Population of college was 6144.  Let's make it simple, suppose average population was 6000 and throughput was 1500.  Then the Little’s law says throughput × flow time = inventory.  

Throughput is 1500, flow time we don't know.  Inventory is 6000.  

What will happen frequently in the next chapter, process measures.  When you forget what is inventory or flow time, think of this question.  6000 is average of the college.  Throughput is 1500.  

So what is T?  4 years.  Throughput was defined in terms of year.  Throughput was 1500, so average graduation rate at CSUN is 4 years.  

Don't forget, that are drop outs or transfers.  It is not 4 years average.  It is average lifetime of student at CSUN.  So not graduation.  Average lifetime at CSUN.   In general, in a macro view, if we don't differentiate, average lifetime of a student at CSUN is 4 years.  

But these students are freshmen, transfer students.  Usually if they perform perfect, how many years do transfer years need?  2?  With how many units do they come to college of business?  

Female Student:   60.  

Professor:   Or more?  You expect to graduate after 2 years, usually.  

So the average life at CSUN is 4 years, including the people who leave CSUN, around 8 to 10% of students leave.  

So that brings down this, we have transfer students.  Therefore 4 is a large number.  If it was just for freshmen that's great.  But it's a weighted average for freshmen, drop outs.  For freshmen the dropout rate is more than 4 years.  

So freshmen are around 40% of college of business population and dropout rate is 11% in this college.  

Having said that, these are numbers I have [On overhead.]  

If we assume, time to drop out is 25% time to graduation for freshman student.  We assume if they spend 6 years at CSUN, a drop out spends 25% of this, 1.5 years.  

To time to graduation for total is 50%, if I do that calculation it's 6 years average graduation rate for freshmen.  Usually we do calculations like this as we are not 100% sure the assumptions are correct because we are not sure the time a drop out spends at CSUN is 1/4 of the time of a freshmen and a time the freshmen spends is twice that people spend at CSUN.  

When you make assumptions, because you are not 100% sure they are correct, you conduct sensitivity analysis.  You say "I assume this is 11%, what will happen if it is 5%? 15%? 25%?"  

In that case you prepare a table like this [On overhead.]   I prepared that table using excel data table.  You all need to know how.  You put say y = x + z and then put the x numbers from here to here ... then it will fill the table for you.  

[On overhead.]  

The time to drop off to time to graduation is 25%.  

So if we say 50% here, the average is 6 years.  If you make it small it goes to 6.1 or 6.2.  

What we learned from this discussion is process view can be applied everywhere.  We can get some concepts, ideas, methods, methodologies and we can apply to anything.  

Second we learn the Little’s law.  Throughput × flow time = inventory.  

So use this example to remember what it is.  We also learn that what we should try - enhance our communication skills by pictorial and tabular representation.  This was tabular representation, [On overhead.]   This is pictorial representation.  [On overhead.]   

Those are two implicit objectives of the class, when you prepare a report you use nice tables.  

Female Student:   Pictorial and what?  

Professor:   Tabular.  I think we learned something else, but I forget [Class laughing.]  

Female Student:   On a test or quiz will it say which is inventory or flow time?  I can't distinguish them.  

Professor:   Then you should learn.  

Female Student:   I don't understand, that's why I am asking.  

Professor:   If we say every year 1500 people come to CSUN, that is throughput.  What comes in and will go out.  Okay?  That is throughput.  When we say 6000 people are there, that means inventory.  Let's look at another example [On overhead.]   

If I give you this problem in a quiz, that's all I will tell you.  The rest is on you.  Say you go to a clinic and you - suppose every day at 11am you go to a clinic.  It only works for one hour at 11am.  

Suppose all other hours are the same as 11.  You see 15 people there.  Tomorrow 40, next day 60, next day 44.  You collect the data for 30 days, then divide it by 30.  Then you find the average, 50 people are there, right?  

Then you look at the entrance or exit door.  Every 3 minutes on average one person leaves.  So you looked at the process, 50 people are on average waiting there, every 3 minutes one person leaves or one comes in.  Okay?  

If every 3 minutes one person leaves, how many leave an hour?  If every 3 minutes a person leaves the system, how many leave per hour?  20 people, right?  On average 20 people come in, 20 people go out.  

On average 1500 students come to CSUN, 1500 students leave CSUN.  How many people are there?  At CSUN 6000, in that clinic or DMV there are 50.  Right?  

Throughput is 20 per hour.  Flow time, we don't know.  Inventory, 50.  50 ÷ 20 = 2.5 hours.  Because each hour 20 come in.  

If you worry you don't know the process, think about it.  If you worry about what to do on this question in the quiz don't worry, it's not on the quiz [Class laughing.]   

We will spend a long time going through this equation again and again.  

When you don't have anything else to do think of the CSUN example I gave you and the clinic example I gave you, to see if I gave you another situation and if you will be able to differentiate inventory and throughput.  

Throughput is what is coming in or out.  Inventory is what is over there.  Yes?  

Male Student:   So people walking in and out of class are throughput and average people in class is inventory?  

Professor:   That is exactly correct.  But this law is applied in long term, not over one hour.  

Okay, again if you worry about not grasping this concept we will go through it in many other examples.  In this course we have a system view.  So we assume everything is a system composed of parts and interrelationships organized to achieving a useful goal.  

A system can grow like this, we can add one more professor or we can create more relationship between SOM professor and Finance to enforce what is taught in the other class.  

In system theory we say 2 is greater than 1 + 1 because that relationship between those 2 individuals and those 2 departments create a synergy greater than those 2 individuals 

Look at the process of purchasing, marketing and production in a seasonal system.  If demand is low in one period and high in another marketing want demand here, but not here.  

Purchasing department says demand for the product is high, if you purchase raw material here, you pay a lot of money.  As you evaluate me based on purchasing cost I'm not willing to purchase at this time.  I will purchase at the time raw materials are lower.  

Production says I can't hire people as demand goes up, I need a smooth production system.  

Let me go through a useful example and I will deliver several interesting things.  A few minutes ago I delivered Little’s law.  Let me deliver another interesting concept.  

Look at this system.  [On overhead.]   Process 1 and process 2.  This takes 10 minutes, this takes 5.  What is the capacity of the system?  How many units can I produce an hour?  

Female Student:   4?  

Professor:   I have 2 process.  I am here, takes me 5 minutes to do my job.  This takes me 10 minutes.  

Suppose a student comes in, sees me for 10 minutes on average, sees the chairman for 5 minutes, then leave.  How many can we handle an hour?  

Female Student:   4.  

Male Student:   6.  

Professor:   So ... it takes me 10 minutes to serve a student.  In one hour there's 60 minutes.  I can handle 6 students per hour.  Any objection?  

The chairman can handle each student for 5 minutes, so he can handle 12.  

Male Student:   He can't do 12.  

Professor:   Objection?  

Male Student:   He can handle 12 but he can't do 12.  

Professor:   Objection?  

Let's forget it is me and my chairman.  Suppose these are two production process.  This is activity 1, this is activity 2.  Activity 1 can handle 6 units production, activity 2 can do 12.  

Suppose last year we produce 6 units per hour.  So I produce 6, the second process also produce 6 per hour, we were able to produce ... let me change this [On overhead.]   

[writing on board] 

Any objection?  

This process can handle each product in 5 minutes.   In the first place.  Because the process has 60 minutes per hour, 60 divide 5 is 12.  

Male Student:   You are still bottle necking at 10.  

Professor:   Give me a minute.  Let me have a few minutes, then we will go to that.  

Suppose last year we produce 6 units, with process 2 and we have $100 to reward these two processes.  How much should we give each?  

We produce 6 units per hours, this one produced 6 units per hour.  We have $100 to reward them.  How much should we pay?  50/50?  Less to this one?  I will write it down.  

[writing on board.]  Equal?  Who says pay more to process 1?  The people who can produce 12 and only did 6?  

Male Student:   They didn't make more than 6 units.  

Professor:   No.  They produced 6.  

Male Student:   Neither process is capable of doing more than 6.  

Professor:   Last year we produce 6 units per hour.  That means the first process produced 6 units per hour.  The second produced 6 per hour.  So these two processes have produced 6 per hour last year.  

We have $100 to reward them.  Should we pay equally?  Who says pay station 1 more?  

Male Student:   They can produce 12.  

Professor:   They produced 6.  

Male Student:   If you give them more resources they could produce more.  

Professor:   More than?  

Male Student:   More than 6.  

Professor:   Anyone else want to give more to station 1?  Anyone else?  6 people?  Who says give more to station 2?  6.  

Who says give them equally?  12.  What do the others say?  

Male Student:   Build a secondary station 1.  

Professor:   Don't move ahead.  We have $100, should we give them equally?  Should we give to department 1, department 2 or equal?  Please raise your hands.  

14 say pay department 1 more.  Who says pay 2 more?  25.  

Who says equally?  What about the others?  You should be in one of the three groups.  The answer is we have no reason to pay more to any of them.  We pay equally.  

So this year we pay $50 to department 1, $50 to department 2.  If you listened to the lecture, you are excellent student, let me wait for the people who haven't been helpful and haven't listened to the lecture.  

We pay $50 to department 1, $50 to department 2.  Next year, on average these people produce 9 units.  On average department 2 produce 5.  

Who should be rewarded?  One, two or equal?  Who says one?  

Female Student:   Repeat the question.  

Professor:   Last year department one and two each produced 6 units.  We rewarded equally, $50 each.  

This year department one produced 9 units per hour.  Department two produced 5 per hour.  Should we give more to department one, more to department two or equal?  

Who says pay more to department one who produced 9 units per hour?  

Who says pay department two?  

Who says equally?  

Who says no one?  

We shouldn't pay anyone because the system in the second year performs worse than in the first year.  We should link performance of each subsystem to the performance of the total system.  All components of a total system should be linked to performance of the total system.  

These people have produced 9 units per hour and created a lot of inventory, they have turned useful raw material into not much useful product.  Maybe customers change their mind next year.  They have produced 4 units extra inventory.  In a week 160 extra units of inventory.  What should I do with this?  

We learned two things.  When we try to improve performance of a system find the weakest link.  A chain is as strong as its weakest link.  Doesn't matter if you make the other links stronger.  We need to go, as our friend says.  These people make only 6 units, they lift their production to 6 or 7 units per hours.  

So 2 things we learned here.  First, when we try to improve anything we should find what is the weakest link and focus on the weakest link.  Second, we need to tie the performance of each subsystem to the total system.  

Male Student:   What was that word?  

Professor:   "Tie."  Or link.  

Oh!  The third thing we learnt, no system can perform at 100%.  Later we will learn that no system can perform at 100%.  Anyone who claims the system performs at 120% either he doesn't know what they are talking about or he or she has extended time.  For example we say 6 units per hours, that would be 48 units per day if we work 8 hours.  If we work 10 hours it's more than that.  

We are always working under capacity.  We cannot meet capacity, let alone exceed.  We will prove it later on.  

So we learn a little about theory of constrain.  You look at the weakest link.  Link the performance of the weakest link to the performance of the total system.  

No system can perform at 100%.  What is your question?  

Male Student:   If the second system performed at 80% you'd never pay them?  

Professor:   Yes.  In the second system they produce 5 per hour, which is less.  

Male Student:   [Can't hear/can't understand.]  

Professor:   It depends.  In simple environment maybe this is better.  In complex maybe this is better.  We don't know.  If we bring 2 good basketball players like Shaq and Kobe, maybe they are individually good but don't play well together.  

Male Student:   So these 2 working at 6 a year is better than working separately at separate levels.  

Professor:   They cannot work separate, the output of this subsystem and linked to this.  Yes, if this produced 1 million a year and this produced 5.9, we are not.  

Male Student:   In what case do you pay more?  

Professor:   We not pay nobody.  If you go tom 6 to 5 you pay nobody.  

Female Student:   Pay salaries?  

Professor:   No $100 reward.  

Female Student:   How much you will invest?  

Professor:   No.  Reward.  

Male Student:   Maybe that process is taking 60 minutes because it is more complex.  Where the other only takes 30.  

Professor:   Because last year they did 6.  Okay?  

Female Student:   They need more people?  

Professor:   We can have a lot of other things we will discuss, but this is specific.  The issue is that if we double this and produce 12 and 12, maybe the battle neck is external.  Maybe the demand is 7 units, maybe another station is not justified.  

For the time being the question is this.  There is lots of answers to this.  

Female Student:   Less people.  

Professor:   There's one person doing it.  

Female Student:   Oh, okay.  [Class laughing.]   

Professor:   This is extremely dangerous pattern of thought.  When we say these people produce 12, these produce 6, let's hire 50% of them.  This is not what I am achieving in this class.  Through the semester you will never hear me say fire these people.  I live in throughput.  I'm an advocate of throughput.  I don't contaminate myself with costs.  

Only when I have implemented all my capabilities to improve throughput and not succeeded I make take bread from the table of some family.  In this class cost reduction is our last alternative.  We try our best to improve throughput.  If we have a situation like this.  First we try not to produce 6.  No system can perform 100% capacity.  Suppose we can produce 5.5 units.  So we use our efforts not to faille behind 5.5 units.  

We tell these people, when there is a red light, go help those people.  The first thing is to not allow the capacity of the bottleneck to be small.  

Then we look at the total system and find if the bottleneck is not external - external bottleneck means there's no more than 5.5 units of demand.  Therefore we focus on the external bottleneck first.  If there is extra capacity - I don't want to extend the problem that much.  It will not deliver the basic concept.  

I don't want to go to 100 ways to improve the situation.  If the bottleneck is external we allocate some capacity to work on marketing to make it go from 5.5 to 6.  If it goes to 6 we may allocate this time to increase from 6 to 7.   Okay?  

One concept - we talked about several concepts.  We are talking about throughput, we find bottleneck and try to increase it.  

If you want other concepts - suppose if we combine the 2 jobs.  Suppose it takes 17 minutes.  This takes 5, this takes 10 right now.  This is an important concept called "pool it"[sp?]   

They are very efficient, 12 in station 1, 6 in station 2 is the most efficient means of production.  

We cannot go below, suppose we combine these two, instead of 15 minutes, now we spend 17 minutes.  

So we have a system like this [writing on board] 

Products come in, depending which station is empty they go to the empty station.  It takes 17 minutes to produce one unit.  What is the capacity of the system?  In one hour.  17.  

So 60 ÷ 17 × 2.  

Female Student:   7.05.  

Professor:   Do you follow this?  So this needs 17 minutes to complete one product    60 ÷ 17 = 3.5 

Male Student:   Roughly 3.5 per hour.  

Professor:   So almost 7 per hour.  If we do this we spend more time.  Instead of 15 minutes we spend 17 minutes.  But total system capacity goes up from 6 units per hour to 7 units.  

That's a benefit.  Letting people do other jobs makes it more efficient.  Any questions? 

Okay.  

In this course we talk about reliability and quality and reliability in flow time.  Reliability in quality means good quality that remains good over time.  

Reliability in flow time is low standard deviation.  

Suppose FedEx tells you the average delivery time in their system is 20% hours.  But 2% of packages are delivered in 2 months.  I don't think you'd give them anything.  You won't want to be in the 2% who has their package delivered in 2 months.  

So reliability may mean quality or flow time, which is standard devotion of flow time.  Any questions?  

We talked about order qualifiers and order winners.  The gap between these two, how much order winners are greater than order qualifiers or customer surplus.  

"I expected this product, now I am getting this product."  But this definition isn't only in one definition of price.  

They expected this soon this 4 dimensional space, "I got this."  The difference is customer surplus.  They select products with services that provide maximum customer surplus.  Okay?  

When we talk about product price it's not just what we pay.  When we talk about price for the customer we are not just talking about price but the total cost of ownership.  So we replace price with total cost of ownership.  

It's the total cost of the product with maintenance, system and so on.  Whatever the cost the product will have for the customer throughout its life.  

Many processes focus on reducing costs because many people cannot benefit from a product just because their revenue isn't enough.  Many process have focused on reducing costs.  The leader of this philosophy was Henry Ford who took a complex and broke it down.  It was done by very skilled people, people with high skill when skill goes up, cost goes up.  

He tried to get this complex job, done at slow pace by high skilled people, and cut it down so each piece can be handled by someone who knows nothing but 2 hours training gets them in line.  

It's this perspective that makes Ford capable of creating a philosophy of creating many products for average people like we see in the hospital in Canada and poor people in the Ravind hospital in India.  

Competition in Ford's era was in one dimension, price.  The first attempt was to make it available to poorer people.  After that, the second dimension was variety.  Henry Ford said you can have the car in any color you want as long as it is black.  

They said you can have it in 2 or 3 models at General Motors.  That took a lot of market from Ford who was forced to redesign his plant.  Later Japanese products were lowest quality, then they got to top of quality.  Then flow time came into market by FedEx, UPS and Japanese.  U.S. industry took the machines and perform under parameters.  The Japanese tried to reduce time.  

Thank you.  Listen to the recordings.  

[End of class.]