Process Arithmetic

How to Solve Problems in Wharton’s

OPIM 631

Version 2.4

Richard Lai

Electronic copy available at: http://ssrn.com/abstract=1538827

 ii

Copyright © 2010, 2011 by Richard Lai

All rights reserved.

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 Errata to Version 2.4

iii

Corrected some typos, and an error on page 69 (the bottleneck

should be the second, not the first, station). Many thanks to
Stephanie Williams for correcting me on these.

Please email [email protected]

Electronic copy available at: http://ssrn.com/abstract=1538827

Table of Contents

iv

1 Definitions ....................................................................................... 10
1.1 Key Definitions ................................................................................. 10
1.1.1 Activity ................................................................................................... 10
1.1.2 Units ........................................................................................................ 11
1.1.3 Resources.............................................................................................. 11
1.1.4 Activity Time and Activity Capacity........................................... 12
1.1.5 Buffer ...................................................................................................... 13
1.1.6 Process ................................................................................................... 13
1.1.7 Assume Averages in Steady State, Unless Otherwise Stated
14
1.1.8 Process Capacity, Demand Rate, Flow Rate............................ 14
1.1.9 Flow Time ............................................................................................. 15
1.1.10 Utilization and Implied Utilization ............................................. 15
1.1.11 Input Rate (Optional)....................................................................... 18

1.2 Self-Check Questions ..................................................................... 19

2 Question-Analysis Map ................................................................ 21
3 Single-Product Process Analysis .............................................. 26
3.1 Questions ............................................................................................ 26
3.2 Step-by-Step ...................................................................................... 27
3.3 Answers ............................................................................................... 28
4 Multi-Product Process Analysis ................................................ 31
4.1 Questions ............................................................................................ 31
 4.1.1 Diverging process .............................................................................. 31
4.1.2 Diverging process with specialized units ................................ 32
4.1.3 Converging processes ...................................................................... 32

4.2 Step-by-Step ...................................................................................... 32

4.3 Answers ............................................................................................... 35
4.3.1 Diverging process .............................................................................. 35
4.3.2 Diverging process with specialized units ................................ 36
v 4.3.3 Converging processes ...................................................................... 38

5 Inventory Cost Analysis and Little’s Law ............................... 39

5.1 Questions ............................................................................................ 39
5.2 The Amazing Little’s Law ............................................................ 40
5.3 Some Ways to Remember Little’s Law .................................. 42
5.4 Little’s Law in Financial Statements ....................................... 42
5.5 Step-by-Step ...................................................................................... 44
5.6 Answers ............................................................................................... 45
6 Labor Cost Analyses ...................................................................... 47
6.1 Questions ............................................................................................ 47
6.2 Step-by-Step ...................................................................................... 48
6.3 Answers ............................................................................................... 50
6.4 Labor Utilization versus Other Utilizations ......................... 54
7 Start Analyses ................................................................................. 56
7.1 Questions ............................................................................................ 56
7.2 Step-by-Step ...................................................................................... 56
7.3 Answers ............................................................................................... 58
8 Stop Analyses .................................................................................. 60
8.1 Questions ............................................................................................ 60
8.2 Step-by-Step ...................................................................................... 61
8.3 Answers ............................................................................................... 62
9 Set-up and Down Times, and Batching ................................... 64
 9.1 Questions ............................................................................................ 64
9.2 Batching Concepts .......................................................................... 65
9.2.1 How Set-Up Time, Activity Time, and Batch Size Affect
Capacity ................................................................................................. 65
9.2.2 Representing an Activity With Set-up Time ........................... 66

9.3 Step-by-Step ...................................................................................... 67

9.4 Answers ............................................................................................... 69
vi
9.5 Self-Check Questions ..................................................................... 75
10 Load Balancing ............................................................................... 78
10.1 Questions ............................................................................................ 78
10.2 Step-by-Step ...................................................................................... 79
10.3 Answers ............................................................................................... 83
11 Managing Variability: Queueing Analysis .............................. 85
11.1 Questions ............................................................................................ 86
11.2 Step-by-Step ...................................................................................... 87
11.3 Answers ............................................................................................... 90
12 Managing Variability: Throughput Losses ............................ 94
12.1 Questions ............................................................................................ 94
12.2 Step-by-Step ...................................................................................... 95
12.3 Answers ............................................................................................... 98
A Glossary .......................................................................................... 102
B Index ................................................................................................110
 Figures

vii

Figure 1. An activity (square) manned by a resource (worker) that

adds value to units (circles), some of which are waiting in a
buffer (triangle). .......................................................................................... 11
Figure 2. A process is a sequence of activities........................................ 13
Figure 3. Utilization. ........................................................................................... 17
Figure 4. Implied utilization. .......................................................................... 18
Figure 5. Step-by-step: single-product process analysis. .................. 27
Figure 6. Step-by-step: multi-product process analysis. ................... 33
Figure 7. Specialized units............................................................................... 37
Figure 8. Converging processes. ................................................................... 38
Figure 9. Cumulative in’s and out’s at a hospital. .................................. 41
Figure 10. Step-by-step: Little’s Law. ......................................................... 44
Figure 11. Step-by-step: labor analysis. .................................................... 48
Figure 12. Step-by-step: start analysis. ..................................................... 57
Figure 13. Step-by-step: stop analysis. ...................................................... 61
Figure 14. How Set-Up Time, Activity Time, and Batch Size Affect
Capacity ........................................................................................................... 65
Figure 15. An activity with set-up, producing one product.............. 66
Figure 16. An activity with set-up, producing multiple products. . 67
Figure 17. Step-by-step: batch analysis...................................................... 68
Figure 18. Increasing batch size increases process capacity, up to a
point. ................................................................................................................. 70
Figure 19. Flow time in batched activities. .............................................. 72
Figure 20. Can the make activity ever be a bottleneck? ..................... 76
Figure 21. Process capacity as a function of batch size. ..................... 77
Figure 22. Step-by-step: load balancing. ................................................... 79
Figure 23. Step-by-step: queueing analysis. ............................................. 88
viii
Figure 24. Step-by-step: throughput loss analysis. ............................... 96
Figure 25. Cascading servers. ......................................................................100
 Guide for the Reader

ix

These are course notes for “OPIM 631: Productivity and Quality,”
the first of two quarters in the core MBA curriculum for operations
management at the Wharton School of the University of
Pennsylvania. I write these to supplement the excellent text we use,
Cachon and Terwiesch’s “Matching Supply with Demand.”

These notes are not intended to be a book, nor a standalone, nor to

be sufficient. I write them in response to students’ feedback.
Specifically, I feel that students want and need to:

• Quickly recognize when to use what analysis—e.g., is

this a situation that calls for Little’s Law?
• Focus on the arithmetic of processes. Students can think
of motivational applications themselves.
• Learn how to analyze in a step-by-step fashion, in a
ready-to-use reference.

I re-iterate that students will find Cachon and Terwiesch the best
operations book in the market. It also has an extensive collection
of problems. And we use it for OPIM 632. It is a genuine
investment.

I welcome feedback to make these notes clearer and more useful

for future generations of students, and to correct errors. Please
email [email protected] .

Richard Lai
Philadelphia and New York, 2010
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1 Definitions 10

A
process is a sequence of activities which we undertake
repeatedly. We begin these notes by clarifying the
language used to describe processes.

1.1 Key Definitions

Let’s start with how we represent an activity, its various features,
and then identify what a process is.

1.1.1 Activity
We define an activity as work step that adds value to a unit. It is
also called a station, step, or task.

Figure 2 shows an activity (square), manned by at least one

resource (worker) that adds value to units (circles), some of which
are waiting in a buffer (triangle).

Panel (a) shows the full representation, and panel (b), a simplified
representation more often used. In panel (b), we do not show the
units, and we use this representation only when our activity has
one resource.

The level of analysis of an activity depends on what we want to

study or optimize. For example, if we wish to investigate micro-
 PROCESS ARITHMETIC Ver 2.0

steps of work, then we would use finer activities.

Figure 1. An activity (square) manned by a resource

(worker) that adds value to units (circles), some of which
are waiting in a buffer (triangle).

(a) Full representation.

11

Panel (b). Simplified representation of an activity, ignoring

units and assuming it has only one resource.

1.1.2 Units
Unless otherwise stated, we assume the simple case in which units
are all of one type, and we produce one unit from every unit that
arrives. Later, we introduce complexities such as assembling a
final product unit from intermediate units of different types.

For now, we assume that units are fungible. This implies that there
are no unit-specific characteristics, such as obsolescence, since we
cannot even tell one unit from another. Later, we will relax this
assumption somewhat when we study units that drop out of
queues.

1.1.3 Resources
In Figure 2, the activity is manned by one worker. A resource is
either a worker or a machine. At an activity, all the resources are
the same, with the same activity time (see below) and resource
Ver 2.0 PROCESS ARITHMETIC

capacity.

Resource capacity is the rate with which the resource can work.
Notice that we use capacity to denote a speed (such as “10
units/hour”), not a holding volume (such as “10 units”).

Each resource is either idle or works on one unit at the resource

capacity—no slowing down, no taking breaks, or temporary re-
assignments to other activities. Put 12
another way, a unit cannot be worked on
by multiple resources, and a resource
cannot work on multiple units at the
same time.

We also assume that resources at the

same activity have the same capacity—i.e.,
[Each resource
one does not work faster than the other. is either idle or
Of course, resources in different activities works on one
could have different capacities.
unit at the
1.1.4 Activity Time and Activity resource
Capacity capacity—no
Activity time is the time each resource slowing down,
takes to add value to one unit at the
no taking
activity. We require that the time be
positive, not zero, fixed: resources don’t breaks, or
go faster or slower. temporary re-
So an equivalent way to express resource assignments to
capacity is: other activities.]
1
Resource capacity = .
activity time

For example, if it takes a resource 2 hours to work on each unit, the

resource capacity is ½ units/hour. Activity capacity is the sum of
all the resource capacities:

Activity capacity = sum of resource capacities

 PROCESS ARITHMETIC Ver 2.0

1
= × number of resources.
activity time

The last holds because we assume that each resource has the same
resource capacity, which is 1/activity time.

1.1.5 Buffer
13 When units arrive faster than an activity
can process them, we can model what
[We require that
happens to these units. At one extreme,
they just drop off and go elsewhere. At activity times be
the other extreme, they all can wait and positive, not
accumulate in a buffer as shown in Figure zero, and fixed:
1. Unless otherwise stated, we assume
that the buffer has unlimited storage resources don’t
space for units. go faster or
slower.]
Unlike resources, buffers have no capacity,
add no value to units they hold, and have
no activity times, although units in buffers
suffer waiting times. We also assume that
the moment a resource is freed up, the
buffer—if it is holding one or more unit—will feed a unit into the
resource. Which unit should the buffer release? It does not matter,
since for now, units are fungible.

1.1.6 Process
Finally, we come to a process: a sequence of activities; see Figure 2.

Figure 2. A process is a sequence of activities.

We call Figure 2 a process map and it is often a useful first step in

analyzing processes.
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1.1.7 Assume Averages in Steady State, Unless Otherwise

Stated
Unless otherwise stated, we consider averages. For example, when
we talk about a unit, we mean the average unit, not a particular
unit such as the first unit produced at the start of a process, which
would be going through an empty process rather than one that
might have some inventory along the activities.
14
We also assume that processes at steady state. For example, we do
not usually consider a process in which one activity produces at a
faster rate than a subsequent activity, without stopping. This
would inflate the inventory between the two activities until
inventory becomes infinite. Instead, we assume that the fast
activity might produce at its (fast) rate, then remains idle, then
starts again, and so on. Or we may assume that process runs over
the course of a day with time to attend to back-logs (see chapter 8,
“Stop Analyses,” page 60).

1.1.8 Process Capacity, Demand Rate, Flow Rate

Process capacity is the minimum of all activity capacities:

Process capacity = min(activity capacities),

since the speed with which the process can make units is limited by
the slowest activity.

If process capacity is the speed with which we can make things,

demand rate is the speed with which we want units to be made.
The smaller of these two is the actual rate that happens, and is
called the flow rate, or throughput,:

Flow rate = min(demand rate, process capacity)

= min(demand rate, activity capacities).

When the demand rate is smaller than the process capacity, we call
the process demand constrained. If the converse is true, we call it
supply constrained.
 PROCESS ARITHMETIC Ver 2.0

Flow rate is a way of expressing productivity. An equivalent way of

expressing productivity is cycle time, or takt time:
1
Cycle time = .
�low rate

This is the time interval between the production of two units. For
example, if the flow rate is 2 units per hour, then cycle time is ½
hours/unit.
15
1.1.9 Flow Time
This is the elapsed time that a unit takes, going through the process
from beginning to end. In other words:

Process flow time = all activity times + all buffer waiting times.

Notice that flow time is not cycle time. In a hospital, it might take
us 15 hours going from station to station with lots of waiting in
between (flow time), but treated patients could emerge every 6
seconds (cycle time).

Flow time is also called sojourn time.

1.1.10 Utilization and Implied Utilization

Each activity has a utilization, defined as:

�low rate
Utilization = .
activity capacity

An equivalent way to define utilization is to recast the above as

follows:

�low rate �low rate

Utilization = = 1
activity capacity × number of resources
activity time

�low rate × activity time person-hours use/hour

= =
number of resources person−hours available/hour

For example, if we have to make 6 units/hour (flow rate) in which

each unit takes ½ person-hour (activity time), using 4 workers
(resources), then time used is 6 × ½ = 3 person-hours per hour and
Ver 2.0 PROCESS ARITHMETIC

time available is 4 person-hours/hour. So utilization is ¾ = 75%.

A bottleneck is that activity for which utilization is highest. Figure

3 represents utilization using the dark line as a fraction of the
entire line. This is true whether in panel (a), when the demand rate
exceeds the process capacity—which is defined by the lowest
capacity among the activities—or otherwise, as in panel (b).

Also, note that in panel (a) when demand rate exceeds process 16
capacity, the bottleneck utilization is at 100%, but that is not the
case in panel (b).

Notice that the measure of utilization in Figure 3, panel (a) loses

information about the demand rate because there, the numerator is
flow rate. Another measure is implied
utilization:

demand rate
Implied utilization =
activity capacity
= [A bottleneck is
person-hours demanded/hour
. the activity with
person−hours available/hour
the highest
Now, as shown in Figure 4, panel (a), utilization or
implied utilization can be more than 100%.
Indeed, even the first activity has an highest implied
implied utilization of more than 100%. utilization.]
One way to interpret implied utilization is
that it is the additional capacity that needs
to be added to an activity for it to serve the
demand rate, assuming of course that other activities are adjusted
to do so, too.

There is another reason to use implied utilization: it is often easy to

calculate, because demand rates may be just given. To use
utilization, we need process capacities, which must be derived by
an extra step of finding the minimum of activity capacities.

In Figure 4, panel (b), we see that implied utilization and regular

utilization are the same.
 PROCESS ARITHMETIC Ver 2.0

As for utilization, the bottleneck is the activity with the highest

implied utilization. In Figure 4, panel (a), we do not call the first
activity a bottleneck even though it has an implied utilization over
100%, because if we can make only a very small marginal
investment, that should still go to the second activity, since it is the
activity that is relatively more constraining.

Figure 3. Utilization.
17
Utilization is divided by

Panel (a): Demand rate > process capacity

Demand rate
Capacity

Process capacity Flow rate

First Bottle- Last

activity neck activity

Panel (b). Demand rate < process capacity

Capacity

Process capacity
Demand rate Flow rate

First Bottle- Last

activity neck activity

We can identify the bottleneck using either utilization or implied

utilization because these two go up or down together, even if they
do not do so by the same absolute magnitude.

Finally, we should mention that one last way to determine a

bottleneck is to ignore flow rate or demand rate altogether, and
simply look for the activity with the smallest capacity. This is a
Ver 2.0 PROCESS ARITHMETIC

valuable technique if all we know is that the activities face the same
demand rate, even if we do not know what it is.

However, it is a misleading formula if activities face different flow

rates or demand rates, as when the process is handling multiple
types of unit flows and some activities face higher rates than others;
see section 4, “Multi-Product Process Analysis,” page 31.

Figure 4. Implied utilization. 18

Implied utilization is divided by

The height of a bar represents capacity.

Panel (a): Demand rate > process capacity

Capacity

Demand rate
Process capacity Flow rate

First Bottle- Last

activity neck activity

Panel (b). Demand rate < process capacity

Process capacity
Capacity

Demand rate Flow rate

First Bottle- Last

activity neck activity

1.1.11 Input Rate (Optional)

We should mention that some texts also introduce an input rate—
the speed at which units are supplied to an activity. For now, we
assume that this is the same as the demand rate, so the activity is at
 PROCESS ARITHMETIC Ver 2.0

a steady state. Later, we introduce complexities such as an input

rate that is lower than the demand rate, so that the activity is
sometimes starved. The input rate cannot be persistently more
than the demand rate, or we would eventually have an infinite
number of units in our buffer.

1.2 Self-Check Questions

19
To calibrate your understanding of the material, answer these
questions without first looking at the answers, which follow the
questions below.

1. Bottleneck’s activity time = cycle time: true or false?

2. When is activity capacity = 1/activity time?
3. When is activity time = cycle time?
4. Cycle time = average activity time: true or false?
5. Is utilization at bottleneck activity always at 100%?
6. When is flow time = cycle time?
7. (Tricky) Activity time = resource time: true or false?

Below are the answers:

1. True if input and demand are not constraints and there is

only one resource. Then process flow rate is the activity
capacity of the bottleneck. Cycle time is the reciprocal of
the former, and activity time is the reciprocal of the latter.
2. When there is only one resource at the activity. If there
are multiple resources, activity capacity = 1/activity time ×
number of resources.
3. When the activity is the bottleneck and the bottleneck
activity has one resource (see answer to question 1, too).
Non-bottleneck activities work faster so their activity
times are shorter than the cycle time.
4. False. We can think of cycle time as the average activity
time + average waiting time across all activities (and even
then, this is true only if activities have one resource). So
the equation is missing the average waiting time on the
right hand side.
Ver 2.0 PROCESS ARITHMETIC

5. No. When demand rate is lower than process capacity,

flow rate is the demand rate. At the bottleneck, the activity
capacity is the process capacity. Putting these together, we
have flow rate is lower than activity capacity, which means
that utilization is less than 100%.
6. One possibility is when there is one activity with no
waiting before it—inputs are always ready to be acted
upon. Then the flow time is just that activity time. The
20
cycle time is then also that activity time, which is flow time.
7. (Tricky) True. This is because we define activity time to
be the time spent on one unit. Since a resource works on
one unit, we could also call this the resource time. If an
activity has multiple resources, it could be spending time
on multiple units at the same time. There is no name for
the time spent on multiple units.
 PROCESS ARITHMETIC Ver 2.0

21
2 Question-Analysis
Map

I
summarize the questions described at the beginning of each
chapter, and the analyses that are suitable for answering them.
Students should use this question-to-analysis map as a
guideline and stepping stone to deeper understanding, rather than
as a mechanical map.

It may also help to have the keywords on the left. Whenever you
see them, it is likely that the analyses to the right apply.

Keywords Questions Chapter, tool, page

• Bottleneck • How long does it take to make 1,000 3. Single-Product
• Process computers? Process Analysis,
capacity • How long does it take for a mortgage page 21
• Flow rate or application to go through a bank’s
throughput process, from beginning to end?
• Where’s the bottleneck? That is, at
which station should I invest first to boost
the rate of producing cars?
• How many tourists hoping to buy theatre
tickets at West End have could be not
served each day?
• How will a rise in oil demand affect the
utilization of an oil refinery?
• How many more cars can this process
make a day?
• Bottleneck • Diverging processes 4. Multi-Product
• Process o Where is the bottleneck in this Process Analysis,
 Ver 2.0 PROCESS ARITHMETIC

capacity process? page 31

• Flow rate or o How many more pizzas and fried
throughput dough per hour can we make without
putting in additional capacity
anywhere?
• Diverging process with multi-tasking
resources
• Converging processes
• Flow time • What is Cisco’s inventory turn? 5. Inventory Cost
• Inventory • What is the dollar inventory cost for Analysis and Little’s
turn every Samsung TV set sold in a Best Law, page 39 22
Buy store?
• How long does a milk carton stay in
Costco’s inventory before it is sold?
• In a certain city, there are 1,200 students
in 6-year elementary schools, 600 in 4-
year secondary schools, and 400 in the
4-year colleges. Every year, how many
students drop out at each transition?
• For many, many hours on New Year’s
Eve, revelers move along New York
City’s Broadway at 4 miles per hour. If
the MBTA subway announces that it
carried 6,000 revelers per hour at the
end of Broadway during that period, how
many revelers were there, per hour,
during that period?
• Back-log • How many customers are back-logged 8, Stop Analyses,
every day? page 60
• A process’ capacity may be slower than
demand rate, but our process has a
head-start, either because we could
begin with some inventory or we start
producing before demand comes in.
Since process capacity is slower than the
demand rate, eventually demand catches
up. When is that time when customers
have to start waiting?
• How long does it take to clear the back-
log?
• How many waiting customers are there
at 4 pm?
• How much does it cost to hold the
back-log?
• Suppose, to keep customers’ goodwill
when they have to wait, we give them a
$10 discount for every hour they wait.
What is the total cost of keeping
customers waiting?
 PROCESS ARITHMETIC Ver 2.0

• Empty • In a pastry factory, pastries are made 7, Start Analyses,

process with some consecutive activities. Every page 56
day, we start with an empty factory. How
long does it take to make the first
pastry of the day? Assume that the
factory is supply-constrained. How long
to make the first 1000 pastries?
• Suppose the pastry factory starts making
pastries at 7 am, but it also wants to
have pastries ready for sale at 7 am,
23 supplying How many pastries in its start-
of-day-inventory must it have, if the
effective demand rate is ½ pastry a
minute?
• Labor • What is the labor content in the 6, Labor Cost
production of a pair of Nike shoes? In Analyses, page 47
other words, how much activity time is
spent making each unit?
• What is the cost of direct labor in
making a pair of Nike shoes? Now, we
want the wages paid to produce a pair.
• How much labor idle time is built into
this assembly line?
• What is the average labor utilization in
an apparel factory?
• Should we adopt work-cells, in which
we collapse the activities so that each
worker works in parallel and on all
activities?
• Suppose activity times and pay per hour
are fixed. If increasing the number of
resources reduces average labor
utilization, does it always increase direct
labor costs per unit?
• Batching • At an activity, how do set-up time, 9, Set-up and Down
activity time, and batch size affect Times, and Batching,
capacity? page 64
• What is the batch size to maximize flow
rate?
• How long does it take to make 45 units
at steady state?
• How long does it make the first 5 units
starting from an empty system?
• Balancing • If a worker leaves, how should we re- 10, Load Balancing,
balance the activities in the process page 78
among the remaining workers?
• What is the maximum number of
workers to achieve optimal balancing?
That is, having more workers would not
 Ver 2.0 PROCESS ARITHMETIC

increase process capacity.

• How should we combine activities to
achieve optimal capacity?
• Queue or • What is the average time to check in at 11. Managing
buffer or wait an airport check-in area which has 4 Variability: Queueing
• Standard counters, if the check-in time has a mean Analysis, page 85
deviation of 3 minutes per passenger and a
• Coefficient of coefficient of variation of 2? Assume that
variation customers arrive randomly, and on
average, every 4 minutes.
• And how far will the line snake around 24
the block?
• How many counters are free on the
average?
• What is the average number of people
being served at the 3 counters?
• How does have three separate queues,
each with 1/3 of the previous arrival
rates, affect the utilization of the
counters?
• How does separation affect wait times?
• Now, instead of having separate lines for
each counter, the airline decides to pool
their queue to their 3 counters with the
queue to another airline’s 4 counters.
How does that affect waiting time? The
other airline has the same characteristics
in terms of a, cva, p, and cvp. While the
correlation between the processing times
for the two airlines’ counters is 0, the
correlation between inter-arrival times is
0.5.
• [Tricky] How do priority rules to
determine which passenger in a queue
gets served first (such as first-in-first-out
or shortest-processing-time-first) affect
average waiting time?
• Loss • What average fraction of patients being 12, Managing
• Standard transported by ambulance to a hospital Variability:
deviation has to suffer ambulance diversion Throughput Losses,
• Coefficient of because that hospital is busy? page 94
variation • How much does revenue improve if we
were to add a gas pump, so as not to
lose customers who drive past when they
see that all our current 6 pumps are
busy?
• Continuing the previous question, how
would utilization improve if we replace
all our 6 pumps with high-speed pumps
 PROCESS ARITHMETIC Ver 2.0

instead?
• [Tricky] Cascading servers. Suppose a
primary Google server can process 1
query every 9 nanoseconds. Internet
users sends a query to the server every
6 nanoseconds, which has cv=1. If the
server is busy, Internet users consider
the query a failure. To reduce the
number of failures, we can channel
queries to a secondary server when the
25 primary one is busy. How many queries
fail at the secondary server every
nanosecond?
Ver 2.0 PROCESS ARITHMETIC

3 Single-Product 26
Process Analysis

I
n tackling operational questions, half the battle is to recognize
the question type. In this chapter, the tool is single-product
process analysis. We use the term “product” to mean “type of
unit.” So this analytical tool can be used to answer questions
related to the processing of one type of unit.

3.1 Questions
When you see questions like the following, you should recognize
that single-product process analysis is probably applicable:

1. How long does it take to make 1,000 computers?

2. How much revenues and profits do we make in a day?
3. How long does it take for a mortgage application to go
through a bank’s process, from beginning to end?
4. Where is the bottleneck? That is, at which station should I
invest first to boost the rate of producing cars?
5. How many tourists hoping to buy theatre tickets at West
End could not be served each day?
6. How will a rise in oil demand affect the utilization of an oil
refinery?
7. How many more cars can this process make a day?
 PROCESS ARITHMETIC Ver 2.0

Below is a step-by-step description of analyzing a process with a

single type of product—e.g., making just pizzas, but not pizzas and
fried dough which might have a common activity such as kneading
flour, that can be used for pizzas or fried dough; for the latter, see
chapter 4, “Multi-Product Process Analysis,” page 31.

3.2 Step-by-Step
27
Consider making and wrapping candies. We first lay out these
fairly mechanical steps in Figure 5. Of course, the data may be
given in different order. For example, instead of given activity
times to calculate activity capacities, we might be given the latter to
calculate the former. But by and large, these steps should get us to
answering the questions just posed.

Figure 5. Step-by-step: single-product process analysis.

Step 1: Draw process map.

Make Wrap

Step 2: Put activity times into activity squares.

Make Wrap
2 3
min/u min/u

Step 3: Put activity capacities above squares.

½ units/min 1/3 units/min

Make Wrap
2 3
min/u min/u
Ver 2.0 PROCESS ARITHMETIC

Step 4: Put demand rate below the out-arrow, and implied

utilizations below squares. Activity with highest implied
utilization is bottleneck.

½ units/min 1/3 units/min

Make Wrap
2 3
min/u min/u ¼ units/min
¼ / ½ = 50% ¼ /1/3 = 75% 28

Bottleneck

Step 5: Put process capacity above the out-arrow and flow

rate and cycle time at the out-arrow.
LEGEND
Act capacity
Process cap
Act
time
Demand rate
Implied utilization

½ units/min 1/3 units/min

Make Wrap 1/3 units/min
2 3 ¼ units/min (CT=4 min/unit)
min/u min/u ¼ units/min
¼ / ½ = 50% ¼ /1/3 = 75%

Of course, we do not mean that we blindly execute all five steps

even if some are not needed. If we do not require cycle time, then
we should skip step 4, for example.

3.3 Answers
Now, we can return to the types of questions posed earlier and see
how we might answer them in this context.

1. How long does it take to make 1,000 units?

This would be 1,000 × cycle time.

 PROCESS ARITHMETIC Ver 2.0

2. How much revenues and profits do we make in a day?

This is just the per-unit revenue or profit multiplied by the

flow rate in units per day.

3. How long does it take for a mortgage application to go

through a bank’s process, from beginning to end?

29 This would be flow time.

4. Where is the bottleneck? That is, at which station should I

invest first to boost the rate of producing cars?

The bottleneck is that activity which has the highest

implied utilization (or just utilization).

5. How many tourists hoping to buy theatre tickets at West

End could not be served each day?

Suppose the bottleneck activity’s implied utilization is

110%. If the demand rate is 880 tourists served per day,
this means that the number that could be served by the
bottleneck activity is 880/110×100=800 tourists. So we
cannot serve 80 tourists every day.

Note that this calculation assumes no variability: tourists

are always lining up to be served.

6. How will a rise in oil demand affect the utilization of an oil

refinery?

Let us use our make-wrap process in Figure 5. Suppose

demand doubles from ¼ units/min to ½ units/min. Since
the question asks for utilization rather than implied
utilization, here is what we get:
Ver 2.0 PROCESS ARITHMETIC

Flow rate (units/min) Utilization

Make Wrap
1� 1�
4 4
Before ¼ , demand constrained 1� = 50% 1� = 75%
2 3
1� 1�
1� , 3 3
After 3 supply constrained 1� = 67% 1� = 100%
2 3

7. How many more cars can this process make a day, if

demand rises above process capacity? 30

We use our example in Figure 5, step 4 to illustrate how

we might answer this type of questions. Before the rise in
demand, the process is demand-constrained and makes
units at ¼ units/min. With the rise in demand, the process
is now process-constrained, and makes units at the rate of
the bottleneck, which is 1/3 units/min. Therefore, we
make 1/3 – ¼ or 1/12 more units/min.
 PROCESS ARITHMETIC Ver 2.0

31
4 Multi-Product
Process Analysis

T
he questions we tackle using multi-product process analysis
are the same as those for single-product process, but now
with different products.

4.1 Questions
Here are some example questions:

4.1.1 Diverging process

A factory makes pizzas and fried dough using three stations: (1)
flour kneading, which takes 10 minutes per unit, (2) baking takes
30 minutes per unit, and (3) frying takes 20 minutes per unit. To
make a pizza, we need a unit to go through kneading and baking.
To make a unit of fried dough, we need a unit to go through
kneading and frying. The demand for pizza is one every 120
minutes and that for fried dough is one every 60 minutes.

1. Where is the bottleneck in this process?

2. How many more pizzas and fried dough per hour can we
make without putting in additional capacity anywhere?
Ver 2.0 PROCESS ARITHMETIC

4.1.2 Diverging process with specialized units

What if in the above, the dough for pizzas needs 20 minutes per
unit, unlike the 10 minutes for fried dough? In other words, dough
is still one activity—not separate activities for pizzas and fried
dough—but its resources have different activity times for
specialized kneading, depending on whether the output is for pizza
or fried dough.
32
4.1.3 Converging processes
We assemble toy cars with a chassis and
four wheels. How fast can we make toy
cars, given the activity capacities for
making chassis, making wheels, and [The key
assembling the two?
consideration is
to ensure that
4.2 Step-by-Step
process
Here are the steps to solve the pizza-fried
capacities and
dough problem above. The steps are
similar to those for single-product demand rates
process analysis; see Figure 6. for sub-
The key difference is to now think of sub-
processes are
processes that feed into others (as linked.]
kneading feeds into baking and frying) or
are assembled from others (as in watches
are assembled from exterior and interior
components).

This difference comes to light in step 4, where we ensure that

process capacities and demand rates for sub-processes are linked:

1. Process capacities. Looking at just their own activities,

each sub-process have process capacities like these:
a. Kneading: 6 units/hour
b. Baking: 2 units/hour
c. Frying: 3 units/hour
 PROCESS ARITHMETIC Ver 2.0

But there is now a linked constraint, so that we have to

consider capacities among the sub-processes. Since
kneading feeds into baking and frying, which together have
a process capacity of 2+3=5 units/hour, the process
capacity for the kneading sub-process is just 5, not 6
units/hour.
What if kneading capacity is smaller than 5 units/hour, so
that it is kneading that constrains baking and frying rather
33
than the other way around? Suppose the kneading
capacity is 4 units/hour. Then we have to figure out how
many units/hour to feed to baking and how many to frying.
This depends on the margin we make from each product
type. For example, if pizza is the higher margin product,
then we feed all kneading to baking (2 units/hour) and the
remaining kneading (4-2=2units/hour) to frying. This
means that now, frying capacity is 2 units/hour, rather
than 3 units/hour.
2. Demand rates. We are given demand rates for two
products: pizzas and fried dough. Again, we ensure that
the sub-processes constrain each other, so the demand
rate for kneading is the sum of those for baking and frying:
½ + 1 = 1½ units/hour.

Figure 6. Step-by-step: multi-product process analysis.

Step 1: Draw process map. Put kneading, baking, frying into

boxes, write pizzas and fried dough to the right, then draw
arrows connecting these. We ignore the buffer triangles
since these questions do not concern them.

Bake PIZZAS

Knead

Fry FRIED DOUGH

Ver 2.0 PROCESS ARITHMETIC

Step 2: Put activity times into activity squares.

Bake
30 PIZZAS
min/u
Knead
10
min/u
Fry
20 FRIED DOUGH
min/u 34

Step 3: Put activity capacities above squares.

2 u/hr
Bake
30 PIZZAS
6 u/hr
min/u
Knead
10 3 u/hr
min/u
Fry
20 FRIED DOUGH
min/u

Step 4: Put demand rates below the out-arrows of each sub-

process, and implied utilizations below squares. Activity
with highest implied utilization is bottleneck.
2 u/hr
Bake
30 PIZZAS
6 u/hr
min/u ½ u/hr
Knead 0 .5/2 = 25%
10 3 u/hr
min/u ½ +1
Fry
1 .5/6 = 25% u/hr FRIED DOUGH
20
min/u 1 u/hr
1/3= 33%

Bottleneck
 PROCESS ARITHMETIC Ver 2.0

Step 5 (if needed): Put process capacities above the out-

arrows of each sub-process, and flow rates and cycle times
at the out-arrows. The key is to ensure that the sub-
processes constrain each other. Here, kneading capacity is
the minimum of its 6 u/hr and the 5 u/hr from pizza+fried
dough.
LEGEND
Act capacity
Process cap
35 Act
time
Demand rate
Implied utilization 2 u/hr
Bake 2 u/hr
30 ½ u/hr (CT=2 hr/u)
6 u/hr ½ u/hr
min/u
Knead 5 u/hr
10 3 u/hr
min/u ½ +1
u/hr Fry 3 u/hr
20 1 u/hr (CT=1 hr/u)
min/u 1 u/hr

Notice that we did not identify the bottleneck by finding the activity
with the smallest capacity. That would be baking, with only 2
units/hour. But with a mixed-unit process, the demand rate differs
in each sub-process, so we have to account for the demand rate (as
when using implied utilization) or the flow rate (as when using
utilization).

4.3 Answers
Now, we return to the questions posed at the beginning of the
chapters.

4.3.1 Diverging process

1. Where is the bottleneck in this process?

We answered this question earlier in Figure 6, step 4.

Frying has the highest implied utilization and is therefore
the bottleneck.
Ver 2.0 PROCESS ARITHMETIC

2. How many more pizzas and fried dough per hour can we
make without putting in additional capacity anywhere?

We first consider each of the activities separately, to see

how many units can each produce without additional
capacity. We do this by subtracting the existing demand
rate from the activity capacity:

• Kneading. 6–1½ = 4½ more units/hour. 36

• Baking. 2–½ = 1½ more units/hour.
• Frying. 3-1 = 2 more units/hour.

Therefore, we can make 1½ more pizzas/hour and 2 more

fried dough/hour. Kneading can cope with both increases.

4.3.2 Diverging process with specialized units

Suppose kneading for pizzas needs 20 minutes per unit, unlike the
10 minutes for fried dough. How do we calculate kneading’s
implied utilization? To make this example even more interesting,
let us now have three resources at the dough station. Note that
each kneading resource could work on either a 20-minute job for
pizza or a 10-minute job for fried dough; resources are not
specialized by product. That is why we will continue to draw
kneading as one, not two, activity.

We need to modify Figure 6, step 4. There are two ways to proceed:

1. Adding demand rates (Figure 7, Step 4a). Note the three

workers we now explicitly draw on kneading. The
kneading sub-activity for making pizza has a capacity of 3
resources × 3 units/hour/resource = 9 units/hour. The
key is to add up the sub-activities’ implied utilizations,
resulting in kneading’s implied utilization.
2. Adding person-hours (Figure 7, Step 4b). Here, we first
convert demand rates to person-hours demanded per hour.
At kneading, instead of adding utilizations from its two
sub-activities, we can find the person-hours demanded
there using demand rates from pizzas and fried dough.
 PROCESS ARITHMETIC Ver 2.0

As we would expect, these two approaches produce the same

implied utilizations.

Figure 7. Specialized units.

Step 4a (Adding demand rates). Put demand rates below the

out-arrows of each sub-process, and implied utilizations
below squares. At kneading, add the implied utilizations of
the two sub-activities.
37
LEGEND
Act capacity
Process cap
Act
Flow rate
time
Demand rate
Implied utilization

2 u/hr
3×3=9 u/hr
Bake
Knead 30 PIZZAS
20 min/u ½ u/hr
min/u
½ /9=1/18 ½ u/hr ½/2 = 25%
3×6 =18u/hr 3 u/hr
Knead 1 u/hr Fry
10 min/u 20 FRIED DOUGH
min/u 1 u/hr
1/18
1/3= 33%
1/18+1/18=11%

Step 4b (Adding person-hours). Convert demand rates to

person-hours demanded per hour, and put implied
utilizations below squares. At kneading, add the person-
hours using demand rates from pizzas and fried dough.

3 p-hr/hr
1 p-hr/hr
Bake
Knead 30 PIZZAS
20 min/u min/u ½ u/hr=30/60 × ½ =¼p-hr/hr
20/60 ×½ + ¼ /1 = 25%
10/60×1= 1 p-hr/hr
1/3 p-hr/hr
Knead Fry
10 min/u 20 FRIED DOUGH
min/u 1 u/hr=20/60 × 1 =1/3 p-hr/hr
1/3= 33%
1/3 / 3 =11%
Ver 2.0 PROCESS ARITHMETIC

4.3.3 Converging processes

Consider toy cars that are assembled a chassis (which takes 20
minutes each to make) and four wheels (3 minutes to make each).
This is an example of a converging process. Suppose the numbers
are as in Figure 8.

Figure 8. Converging processes.

Step 5a: Put process capacities above the out-arrow, and 38

flow rates and cycle times at the out-arrows.

1/(3×4)=1/12 u/hr
Wheels
3 hr/u
1/10 u/hr
each
12/20 = 60% Assembly 1/20 u/hr TOY CARS
1/20 u/hr 10 hr/u 1/20 u/hr
Chassis 10/20 = 50%
20 hr/u
20/20 = 100%

Bottleneck

The key idea is to know what is the unit of analysis, which should
be the same; recall our explanation of unit:
“we produce one unit from every unit
that arrives.” (section 1.1.2, “Units,” page
11).
[The key idea is
Here, we treat a toy car as a unit, so at the to know the unit
wheel-making activity, we analyze not
of analysis: a
wheels but sets of four wheels,
Therefore, even though it takes just 3 wheel or a set of
minutes to make a wheel, the capacity at four wheels?]
that activity is 1/(3 hours × 4 wheels).

Otherwise, the analysis is as with

diverging processes.
 PROCESS ARITHMETIC Ver 2.0

39
5 Inventory Cost
Analysis and Little’s
Law

O
ne tradeoff between worker- versus machine-paced
processes is that the former tends to higher inventory
costs. With worker-paced processes, faster activities
can pile up inventory before the slower ones treat the
units; the advantage is that we can redeploy the faster
ones to other activities. With machine-paced
processes, workers most stay at their positions along conveyor
belts and cannot be redeployed,; the advantage is that there is no
inventory cost on the conveyor belts, To address this tradeoff, we
need to determine the cost of inventory and labor. This chapter
looks at inventory costs, the next at labor costs. This chapter also
considers Little’s Law, a theory behind measures of inventory. THe
Law is also a simple but powerful tool in many areas of operational
analyses

5.1 Questions
When you see questions like the following, one of the first things
that pop in your mind might be Little’s Law:
Ver 2.0 PROCESS ARITHMETIC

1. What is Cisco’s inventory turn?

2. What is the dollar inventory cost for every Samsung TV set
sold in a Best Buy store?
3. How long does a milk carton stay in Costco’s inventory
before it is sold?
4. In a certain city, there are 1,200 students in 6-year
elementary schools, 600 in 4-year secondary schools, and
400 in the 4-year colleges. Every year, how many students
40
drop out at each transition?
5. For many, many hours on New Year’s Eve, revelers move
along New York City’s Broadway at 4 miles per hour. If the
MBTA subway announces that it carried 6,000 revelers per
hour at the end of Broadway during that period, how
many revelers were there, per hour, during that period?

What these questions have in common are three parameters:

inventory, flow rate, and flow time. Let us denote these as I, R, and
T. We already defined the latter two in sections 1.1.7 (“

Process Capacity, Demand Rate, Flow Rate,” page 14) and 1.1.9
(“Flow Time,” page 15). Inventory is the number of units in the
process at the time of consideration. Therefore, unlike flow rate—
which is a “flow” measured in units per time—inventory is a “stock”
measured in just units.

5.2 The Amazing Little’s Law

Little’s Law, named after John D.C. Little of MIT, says that within a
process:

Average I = average R × average T.

An excellent way to describe this is in Cachon & Terwiesch (page

17). Consider the hospital as a process, with incoming and
outgoing patients. We can map the cumulative in’s and out’s as in
Figure 9. As patients come into the hospital, the “cumulative in”
line goes up. Likewise, the “cumulative out” line goes up as
patients leave.
 PROCESS ARITHMETIC Ver 2.0

At any point in time, the vertical distance between cumulative in’s

and out’s depict the number of patients still in the hospital—i.e., the
inventory. The horizontal distance denotes the average flow time a
patient spends in the hospital. It is an average because we are not
particularly concerned about the order of patients; we do not need
to assume that a patient that enters the hospital before another has
to leave before the latter.
41 In a sense, Little’s Law is intuitively simple: it has many analogies,
almost like speed (R) is distance (I) divided by time (T).

Figure 9. Cumulative in’s and out’s at a hospital.

Cumulative
in’s and
out’s

I
T
R

Time
Adapted from Cachon-Terwiesch.

But the Law is also amazing because it holds even if:

• Units enter and leave in different order; we mentioned this

two paragraphs above;
• Units arrive in uniformly or in clumps (non-independence);
in Figure 9, this means it does not matter how big or small
the steps are, and
• Demand and supply are variable; in Figure 9, this means
that it does not matter if the slopes of cumulative in’s and
out’s lines could go steeper or more gradual at different
times; we are only interested in average slope.

But of course, there are some conditions. The Law applies only to:
Ver 2.0 PROCESS ARITHMETIC

• Averages. We are not talking about specific units, or I, R, T

at specific times.
• Processes at steady state. In Figure 9, this means that the
cumulative in’s and out’s average slopes are parallel over
the long run. Otherwise, when the two slopes either
converge or diverge, the process collapses with no or an
infinite amount of inventory.
42
5.3 Some Ways to
[Because I is
Remember Little’s Law
valued at cost,
There are two ways that might be helpful. we use cost of
One is remember I=R×T as: goods sold
(COGS) for R the
I = Remember × That!
flow rate, rather
The other way is to use a triangle like so: than revenues.]

I
R T

By reading the lines as division lines, this also facilitates

remembering that I=RT, R=I/T , and T =I/R.

5.4 Little’s Law in Financial Statements

We can find Little’s Law in financial statements

• I is the inventory on a balance sheet

• R is the sales per year on the income statement. Because I
is valued at cost, we use cost of goods sold (COGS) for R,
rather than revenues.

We next describe some well-used concepts from these I and R.

Inventory turn = R/I.

 PROCESS ARITHMETIC Ver 2.0

This can be interpreted as amount of inventory that we need to

hold as working capital, to support a sales rate of R. Those who
want to be more precise might use the average I over the period
for which R is calculated. For example, if R is annual COGS, then the
average I is that of the beginning and end of year inventory.

The reciprocal of inventory turn is called days of inventory:

43 Days of inventory, T = 365×I/R = 365×1/inventory turn.

We use 365 days if R is an annual rate. Of course, if R were say, a

quarterly rate, then we would use the number of days in a quarter
instead.

Finally, we are often interested in the inventory holding cost per

unit of product. This could be expressed as a percent of the unit’s
cost:

annual inventory percent charge

Inventory (percent) cost per unit sold =
annual inventory turn

Suppose the inventory percent charge is 12% per year—we can

think of this as 12% of the inventory value being dissipated every
year, due to obsolescence, shrinkage, etc. Since what we want is
this charge per unit sold, not per unit held as inventory, we divide
the inventory charge by inventory turn. Notice that in the above
formula, the numerator is in percent per year and the denominator
in number per year. So the unit for inventory (percent) cost per
unit sold is just percent; it is independent of time period.

Also, we are sometimes asked to express inventory cost not as a

percent of a unit, but as a dollar cost:

Inventory (dollar) cost per unit sold =

inventory (percent) cost per unit sold × COGS per unit.

The caution here is again, to use COGS rather than price.

Ver 2.0 PROCESS ARITHMETIC

5.5 Step-by-Step
How do we use Little’s Law to answer the questions posed at the
beginning of this chapter? The steps can be helpful. In particular,
we will refer to the “schools problem” and “Broadway problem”
described at the beginning of this chapter (page 39).

Figure 10. Step-by-step: Little’s Law.

44
Step 1: Define process boundary.
• The process may be defined by what goes on inside a
company.
• There may be sub-processes, one feeding into others. In
the “schools problem,” there are three sub-processes,
corresponding to elementary schools, secondary schools,
and colleges.
• Sometimes, the boundary is up to us to define. In the
“Broadway problem,” we could define it as a 4-mile section
of Broadway, so we know revelers cover this section in an
hour given their speed. But we could have used any length
of Broadway.

Step 2: Write down the two of three metrics—I, R, or T—given.

• You might be given inventory turn (R/I), but with R or I,
you can find I or R.
• Days of inventory, T = 365×I/R.
• It does not matter if I, R, or T are in dollars or units, or year
or days, as long as all measures are consistent across all
three metrics.
• If in dollars, however, it is important to have inventory
valued at cost rather than at price, so as to avoid adding
margin into the measure.

Step 3: Determine the third metric from the two given.

• Use the mnemonic in section 5.3, “Some Ways to
Remember Little’s Law,” page 42.
 PROCESS ARITHMETIC Ver 2.0

Step 4: If needed, determine inventory costs.

• Inventory (percent) cost per unit sold =
annual inventory percent charge
annual inventory turn
• Inventory (dollar) cost per unit sold = inventory (percent)
cost per unit sold × COGS per unit.

45 5.6 Answers
1. What is Cisco’s inventory turn?

This is straightforward: divide Cisco’s COGS by its

inventory. The key is to remember to use COGS, not
revenues. If inventory is available for both the beginning
and end of the period over which COGS is determined, then
it is also better to take the average inventory rather than
the beginning or ending inventory.

2. What is the dollar inventory cost for every Samsung TV set

sold in a Best Buy store?

We can use the formula direct from the earlier description.

First, find the inventory cost per unit sold, expressed as a
percent of a unit. Then we multiply this by the COGS per
unit.

3. How long does a milk carton stay in Costco’s inventory

before it is sold?

This is just the flow time, or T. In financial statements, we

calculate this as days of inventory=365×I/R if R is annual.

4. In a certain city, there are 1,200 students in 6-year

elementary schools, 600 in 4-year secondary schools, and
400 in the 4-year colleges. Every year, how many students
drop out at each transition?

In each type of education institution, we have information

on inventory (number of students) and flow time (years in
Ver 2.0 PROCESS ARITHMETIC

each type). So we can find the flow rates, in and out.

• Elementary. R=1200/6=200 students/year.

• Secondary. R=600/4=150 students/year.
• College. R=400/4=100 students/year.

If there are no other flows into or out of these institutions,

then the drop-out rates are:
46
• Elementary to secondary = 200-150 = 50
students/year.
• Second to college = 150-100 = 50 students/year.

5. For many, many hours on New Year’s Eve, revelers move

along New York City’s Broadway at 4 miles per hour. If the
MBTA subway announces that it carried 6,000 revelers per
hour at the end of Broadway during that period, how
many revelers were there, per hour, during that period?

Any length of Broadway could be a process. We define our

process as a 4-mile length. In this process, T=1 hour and
R=6000 revelers/hour. So I=RT=6000 revelers.
 PROCESS ARITHMETIC Ver 2.0

47
6 Labor Cost
Analyses

S
o far, we have mostly focused on units, rather than time. But
for labor-intensive processes, we are more concerned with
labor cost and utilization, rather than inventory cost (section
5.4, “Little’s Law in Financial Statements,” page 42) or capacity
utilization (section 1.1.10, “Utilization and Implied Utilization,”
page 15).

In many—but not all—questions on labor, the demand rate is not

given and we assume that demand exceeds process capacity.

6.1 Questions
The labor analyses in this chapter will be
useful in answering questions like: [When the
demand rate is
1. What is the labor content in the
production of a pair of Nike not given, we
shoes? In other words, how assume demand
much time is spent making each is higher than
unit?
2. What is the cost of direct labor process
in making a pair of Nike shoes? capacity.]
Ver 2.0 PROCESS ARITHMETIC

Now, we want the wages paid to produce a pair.

3. How much labor idle time is built into this assembly line?
4. What is the average labor utilization in an apparel
factory?
5. Should we adopt work cells, in which we collapse the
activities so that each worker works in parallel and on all
activities?
6. Suppose activity times and pay per hour are fixed. If
48
increasing the number of resources reduces average
labor utilization, does it always increase direct labor costs
per unit?

6.2 Step-by-Step
Let us use a numerical example to illustrate the steps.

To make tables, we assign two workers to make legs (each leg takes
10 minutes), followed by one worker to assemble four legs to each
an imported table top (1 minute per leg), and a final worker to
package the table (5 minutes per table). The leg-makers are paid
$50 per hour while the rest, $30 per hour.

The steps in Figure 11 will get us to analyze the labor involved.

Figure 11. Step-by-step: labor analysis.

Step 1: Draw process map. Be clear about the unit (table,

not legs) and resources (2 for making legs).

Make Assemble Pack

 PROCESS ARITHMETIC Ver 2.0

Step 2: Put activity times into activity squares.

Make Assemble Pack

40 min 4 min 5 min

49 Step 3: Put activity capacities above squares.

2×60/40=3 u/hr 60/4=15 u/hr 60/5=12 u/hr

Make Assemble Pack

40 min 4 min 5 min

Step 4: Put demand rate below the out-arrow, and implied

utilizations below squares. Activity with highest implied
utilization is bottleneck.
This is not given, so we assume that demand rate is very high and
the process is supply-constrained.

Step 5: Put process capacity above the out-arrow and flow

rate and cycle time at the out-arrow.

2×60/40=3 u/hr 60/4=15 u/hr 60/5=12 u/hr

Make Assemble Pack 3 u/hr

3 u/hr (CT=20min/u)
40 min 4 min 5 min

Step 6: Put utilizations under each square.

2×60/40=3 u/hr 60/4=15 u/hr 60/5=12 u/hr

Make Assemble Pack 3 u/hr

3 u/hr (CT=20min/u)
40 min 4 min 5 min

Util = 3/3 = 100% 3/15-20% 3/12=25%

Ver 2.0 PROCESS ARITHMETIC

6.3 Answers
Now, we are in a position to answer the questions posed. In many
ways, we are re-visiting the same concepts from previous chapters.

1. What is the labor content in the production of a pair of

Nike shoes? In other words, how much time is spent
making each unit?
50
This is just all the activity times:

Labor content (per unit) = sum of activity times.

To be precise, labor content is

measured in person-minutes.
But recall that resources do not
multi-task, so the activity times [Labor content
above by one resource at any one
time.
per unit is the
sum of activity
Even though the “make” activity times,
has two resources, the question
regardless of the
asks for labor time for one pair of
shoes. At the “make” activity, number of
each pair of shoes receive only resources per
40 minutes of activity time from
activity.]
any one of the two resources, so
the number of resources is
irrelevant in calculating labor
content.

2. What is the cost of direct labor in making a pair of Nike

shoes? Now, we want the wages paid to produce a pair.

Understand we are not referring to payment for labor

content (useful time spent making the shoes), but for what
we pay in wages (including idle time).
 PROCESS ARITHMETIC Ver 2.0

• Flow rate approach. The total wage bill is

2×$50=$100/hour for the leg-makers and
2×$30=$60/hour for the other two workers, making a
total of $160/hour. The flow rate says we make 3
units/hour. So the direct labor cost is $160/3=$53.33
per unit. More generally:

Total wages/hr All resources × pay/hr

51 Cost of direct labor/unit = = .
Flow rate in units/hr Flow rate in units/hr

Since 1/flow rate is called cycle time, we can also write:

Cost of direct labor/unit = Total wages per hr × cycle time in hrs.

• Flow time approach. Now, we figure the elapsed

time—that is, flow time including activity and idle
times—each unit spends in the process and pay for
that time.

Cost of direct labor/unit = flow time (hrs for 1 unit) × pay/hr.

There are several ways to calculate the flow time:

o Machine-paced line. Here, the flow time is just
the number of activities times the cycle time.
o Worker-paced line with one activity, or a work
cell, in which a worker does all the activities (in
effect making this a one-activity process, aka a
cluster). Now the flow time is the sum of the
activity times, since there is no buffer waiting time.
o Worker-paced line based on pull. This is what
we have been implicitly assuming in previous
chapters! In other words, each worker and its
subsequent buffer together holds exactly one unit
in inventory. Start work on a new unit only when
the succeeding activity takes the unit in the
subsequent buffer. At each activity and its
subsequent buffer, the inventory is the number of
resources. By Little’s Law, flow time is therefore
number of resources / flow rate. This gives
Ver 2.0 PROCESS ARITHMETIC

exactly the other formula for cost of direct labor:

pay per hour × total resources/ flow rate.

3. How much labor idle time is built into this assembly line?

In a period of one cycle time at one activity when one unit

is made:

Labor content = activity time, and 52

Time paid for = Number of resources × cycle time.

Therefore, idle time at an activity is:

Activity idle time per unit = (Number of resources in activity×cycle

time) – activity time.

Recall from question 1 that labor content is also measured

in person-minutes. Time paid for is definitely in person-
minutes. And of course, idle time is in person-minutes.

Idle time, of course, could be summed up for all activities

in a process:

Process idle time per unit = (Number of resources in process×cycle

time) – activity times.

Just to clarify (read answer to question 1 again, if needed):

the last term—all activities times—is independent of the
number of resources, since it is always one resource that is
expending activity time on one unit at any one time. One
the other hand, the time paid for is the number of all
resources × cycle time: over the time elapsed as we
produce one unit (cycle time), we have to pay for all
resources during that time.

4. What is the average labor utilization in an apparel

factory?

We can illustrate the answer using our table example.

 PROCESS ARITHMETIC Ver 2.0

• Time approach. The utilization can be written for the

average unit produced:

Labor content All activity times

Average labor utilization = = .
Time paid for All resources × cycle time

In our numerical example, this is, in minutes =

(40+4+5)/(4×20)=49/80=61.25%.
53 • Utilization approach. This is also simple, since
Figure 11, step 6 has all the utilization information:

Average labor utilization = average of resource utilizations.

In our example, this is

(100%+100%+20%+25%)/
4 = 61.25%. Notice the first
two terms are for the two [When using the
resources in the “make” utilization
activity, and their utilization
is same.
approach, take
the average of
Caution: The average is over resource
resources, not activities,
utilizations, not
because activities with more
resources need to be over- activity
weighted; after all, we are utilizations.]
computing labor (or
resource) utilization.

7. Should we adopt work cells, in

which we collapse the activities so that each worker works
in parallel and on all activities?

This works only if the workers can be reassigned to do all

activities; this might not be the case in our numerical
example in which two leg-makers get paid more than the
other two workers.
Ver 2.0 PROCESS ARITHMETIC

But consider a case in which the workers are homogenous

and are paid the same wages. Then we are concerned only
with labor utilization, which was 61.25% above.

If we adopt work cells, there is no more buffer waiting.

Think of there being four identical processes, each with
one big combined activity with activity time 40+4+5=49
minutes, which is also the cycle time. The labor utilization
is now 100%. 54

The cost of production is a function of flow time, so we can

also compare the two, from Figure 11, step 6:

• Original: total resources × cycle time = 3×20min = 1 hr

• Work cell: sum of activity times = 49 min.

8. Suppose activity times and pay per hour are fixed. If

increasing the number of resources reduces average
labor utilization, does it always increase direct labor costs
per unit?

We know that:

All activities times

• Average labor utilization =
All resources × cycle time
• Direct labor costs = All resources × cycle time × pay/hr

It is given that activity times and pay per hour are fixed. So
the only thing common to the two formulas above is “All
resources × cycle time.”

If increasing resources reduces average labor utilization—

that is “All resources × cycle time” becomes bigger—then it
implies that direct labor costs increases. So the answer is
“yes.”

6.4 Labor Utilization versus Other Utilizations

If we look at the activity level, labor utilization is the same as
 PROCESS ARITHMETIC Ver 2.0

utilization as defined in section 1.1.10 (page 15). To see this,

rewrite labor utilization at one activity as:

Activity time
Labor utilization =
Number of resources × cycle time

1 1
= ×
cycle time Number of resources/Activity time

1
55 = Flow rate×
Activity capacity

= Utilization.

At the process level, labor and regular utilizations are different:

1
Utilization = Flow rate×
Process capacity

1 1
= × Number of resources at bottleneck.
cycle time � �
Activity time at bottleneck

Sum of activity times

Labor utilization =
Sum of resources × cycle time

1 1
= × Sum of resources .
cycle time �Sum of activity times�

The difference is in the second term in both equations above.

Utilization is with reference to process capacity—the capacity at
the bottleneck activity. What is labor utilization with reference to,
this ratio of sum of resources to sum of activity times? It is the
best-case process capacity, when there is no waiting time at all.
There are several equivalent ways to think about this best-case
process capacity, which has no waiting time:

• It is perfectly balanced, or
• It is a work cell, in which resources freely move between
activities or in which each resource does all activities, so
there is no resource idle time.

Think about this: is labor utilization always lower than utilization?

Ver 2.0 PROCESS ARITHMETIC

7 Start Analyses 56

I
n many cases, we are interested in starts—when processes are
empty of work (we study process stops in chapter 8, “Stop
Analyses,” page 60).

7.1 Questions
The typical questions for which start analyses might be useful look
like these:

1. In a pastry factory, pastries are made with some

consecutive activities. Every day, we start with an empty
factory. How long does it take to make the first pastry of
the day? Assume that the factory is supply-constrained.
How long to make the first 1000 pastries?
2. Suppose the pastry factory starts making pastries at 7 am,
but it also wants to have pastries ready for sale at 7 am,
How many pastries in its start-of-day-inventory must it
have, if the effective demand rate is ½ pastry a minute?

7.2 Step-by-Step
The approach for finding much time the first unit through an empty
process takes the familiar steps; see Figure 12.
 PROCESS ARITHMETIC Ver 2.0

Figure 12. Step-by-step: start analysis.

Step 1: Draw process map.

Activity Activity Activity Activity Activity Activity

1 2 3 4 5 6

Step 2: Put activity times into activity squares.

57

Activity Activity Activity Activity Activity Activity

1 2 3 4 5 6
10 min 20 min 7 min 3 min 16 min 10 min

Step 3: Put activity capacities above squares.

1/10 u/min 2×1/20 u/min 1/7 u/min 1/3 u/min 1/16 u/min 1/10 u/min
Activity Activity Activity Activity Activity Activity
1 2 3 4 5 6
10 min 20 min 7 min 3 min 16 min 10 min

Step 4: Put demand rate below the out-arrow, and implied

utilizations below squares. Activity with highest implied
utilization is bottleneck.
This is not given, so we assume that demand rate is very high and
the process is supply-constrained.

Step 5: Put process capacity above the out-arrow and flow

rate and cycle time at the out-arrow.

1/10 u/min 2×1/20 u/min 1/7 u/min 1/3 u/min 1/16 u/min 1/10 u/min
Activity Activity Activity Activity Activity Activity
1 2 3 4 5 6 1/16 u/min (CT=16 min/u)
10 min 20 min 7 min 3 min 16 min 10 min 1/16 u/min

Step 6: Calculate the time to make first unit.

• Worker-paced process. In an empty process, the first unit
simply rushes through all the activities without waiting. But
notice that at activity 2 where there are two resources, the first
Ver 2.0 PROCESS ARITHMETIC

unit still takes 20 minutes, because our set up is that each unit
can be worked on by one resource at any time. To the time to
make the first is the sum of all activity times. Here, it is
10+20+7+3+16+10=66 minutes. The flow time diagram below
might help:

First unit can start here (no previous

unit to block it at activity 2)
Subsequent units start here,
so as to arrive at activity 2
only when previous unit is
58
1 unit
finished with activity 2
o o
Minutes: 10 20 7 3 16 10

• Machine-paced process. The conveyor belt goes from activity

to activity at the pace of cycle time, which is 16 minutes. If
there is only one resource per activity, the time for the first
unit to be produced is number of activities × cycle time. In our
case, this is 6 × 16 = 96 minutes. But here, we have 2 resources
at activity 2. From a process point of view, activity 2 can
produce a unit every 10 minutes, but from a unit’s point of
view, it stays at activity 2 for 20 minutes: an extra 4 minutes
beyond the 16 minute cycle time. So whether for the first or
subsequent units, the flow time is 96+4=100 minutes. The
flow diagram below might help:

Waits

1 unit

o o o o o o o
Minutes: 10 20 7 3 16 10
Cycle time of 16 min

7.3 Answers
The answers to our questions are now straightforward:

1. In a pastry factory, pastries are made with some

consecutive activities. Every day, we start with an empty
 PROCESS ARITHMETIC Ver 2.0

factory. How long does it take to make the first pastry of

the day? Assume that the factory is supply-constrained.
How long to make the first 1000 pastries?

The answer to “how long for the first unit” is in Figure 12,
step 6.

The answer to “how long for the first 1000 units” can be
59 broken down into that for the first unit. The remaining
999 units will be produced one unit every cycle time,
regardless of whether we have a worker- or machine-
paced process.

2. Suppose the pastry factory starts making pastries at 7 am,

but it also wants to have pastries ready for sale at 7 am,
How many pastries in its start-of-day-inventory must it
have, if the effective demand rate is ½ pastry a minute?

For the time until the first unit is produced, we have to rely
on start-of-day-inventory. Let us use the worker-paced
example above, in which it takes 66 minutes to produce
the first unit. During this time, we need ½×66=33 pastries
as start-of-day-inventory.

As an aside, the demand rate of ½ pastry a minute is still

larger than the process capacity of 1/16 pastry a minute,
so at some point, the shop has to catch up with a back-log
of demand, as in chapter 8, “Stop Analyses,” page 60.
Ver 2.0 PROCESS ARITHMETIC

8 Stop Analyses 60

T
he previous chapter deals with process starts. This chapter
deals with processes that stop after running a while. The
setting is usually that of a process which is run every day.
During the day, the process’ capacity cannot meet the demand rate,
accumulating in a back-log. After some time, demand stops and the
process cannot stop until it clears up the back-log, and then
another day starts.

8.1 Questions
The questions we seek to answer have these forms:

1. How many customers are back-logged every day?

2. A process’ capacity may be slower than demand rate, but
our process has a head-start, either because we could
begin with some inventory or we start producing before
demand comes in. Since process capacity is slower than
the demand rate, eventually demand catches up. When is
that time when customers have to start waiting?
3. How long does it take to clear the back-log?
4. How many waiting customers are there at 4 pm?
5. How much does it cost to hold the back-log?
6. Suppose, to keep customers’ goodwill when they have to
wait, we give them a $10 discount for every hour they wait.
 PROCESS ARITHMETIC Ver 2.0

What is the total cost of keeping customers waiting?

8.2 Step-by-Step
Let us consider a numerical example and show how to analyze it
step-by-step; see Figure 13.

A pastry shop makes pastries at a process capacity of 20

61 units/hour, starting at 6 am. Demand starts at 9 am and ends at 5
pm, during which 30 units/hour is needed. Demand that is not
satisfied is back-logged. The shop continues making pastries into
the night until all demand—back-logged or otherwise—is fulfilled.

Figure 13. Step-by-step: stop analysis.

Step 1: Draw an inventory-time graph, dividing it into

periods in the question. It may be helpful to write the times
using the 24-hour clock, to facilitate arithmetic on them.
Inventory

0600 0900 1700

Ver 2.0 PROCESS ARITHMETIC

Step 2: Compute the rates at which inventory goes up or down.

Inventory
20 u/hr 20-30 =-10 u/hr 20 u/hr if
needed
to fulfil
back-
logged
demand

62

0600 0900 1700

Step 3: Draw how inventory goes or down using the rates.

Inventory

60

-20

0600 0900 1500 1700 1800

8.3 Answers
We are now in a position to answer the questions we posed at the
beginning of this chapter:

1. How many customers are back-logged every day?

The units back-logged is the 20 units. If every customer

demands one unit, then there are 20 customers back-
logged.

2. A process’ capacity may be slower than demand rate, but

our process has a head-start, either because we could
begin with some inventory or we start producing before
 PROCESS ARITHMETIC Ver 2.0

demand comes in. Since process capacity is slower than

the demand rate, eventually demand catches up. When is
that time when customers have to start waiting?

Figure 13 shows that there is customers start waiting at

1500 hours, when inventory is zero.

3. How long does it take to clear the back-log?

63
Figure 13 shows that it takes one hour.

4. How many waiting customers are there at 4 pm?

In Figure 13, step 3, we see that at 1600 hours, there are

10 units back-logged. Assuming one unit per customer,
that is 10 customers.

5. How much does it cost to hold the back-log?

The cost depends on how many units are held for how long.
This is represented in Figure 13, step 4, as the area of the
triangle between 0600 and 1500 hours. The area of a
triangle is given by:

½×base×height = ½×9hours×60units = 270 unit-hours.

Suppose the holding cost is $1 per unit-hour, then the cost

of holding the inventory is 270×$1=$270.

7. Suppose, to keep customers’ goodwill when they have to

wait, we give them a $10 discount for every hour they wait.
What is the total cost of keeping customers waiting?

If we assume that every customer buys one unit, then the

cost of discount is based on the unit-hours in waiting. This
is represented by the area between 1500 and 1800 hours,
which is = ½×3hours×20units = 20 unit-hours. Therefore,
the cost is $10×20=$200.
Ver 2.0 PROCESS ARITHMETIC

9 Set-up and Down 64

Times, and Batching

M
any processes have set-up times. Therefore, it is
efficient to make units in batches to amortize set-up
times over many units.

Many processes also have down times, say for

preventive maintenance.

With set-up times, the batch size could be a managerial decision.

With down times, the “batch size” is specified by technology. For
example, a machine needs to “go down” every 1000 units.

It should be noted that we generally do not analyze multi-tasking

resources—such as a machine that can be used to make two
products. This chapter is an exception when we analyze set-up
times. For example, we allow a resource to alternate between
incurring a set-up time so as to make a batch of one product, and
then incurring another set-up time so as to make a batch of another
product.

9.1 Questions
The following types of questions would be amenable to batching
analysis:
 PROCESS ARITHMETIC Ver 2.0

1. At an activity, how do set-up time, activity time, and

batch size affect capacity?
2. What is the batch size to maximize flow rate?
3. How long does it take to make 45 units at steady state?
4. How long does it make the first 5 units starting from an
empty system?

65 9.2 Batching Concepts

We introduce two concepts:

1. The relationship between set-up time, activity time, batch

size, and activity capacity, and
2. The representation of activities with set-up times.

9.2.1 How Set-Up Time, Activity Time, and Batch Size Affect
Capacity
An activity’s capacity depends on how many units we make divided
by the time to make them:

Batch size
Capacity = .
Set-up Time+batch size × activity time

Using this relationship, we see how activity capacity changes with

setup time, activity time, and batch size, assuming only one of the
latter changes and the other two are fixed; see Figure 14.

Figure 14. How Set-Up Time, Activity Time, and Batch Size
Affect Capacity
Capacity
1 . Batch size . Zero activity
activity time Set-up time time is
undefined 1 .
activity time

0
Set-up time Activity time Batch size

A convenient way to see these relationships is to divided the

numerator and denominator of the capacity formula by batch size:
 Ver 2.0 PROCESS ARITHMETIC

Capacity = 1� Set-up Time .

� + activity time�
Batch size

For example, when batch size is zero (we make no units), the
Set-up Time
term goes to infinity so capacity is zero. When batch size
Batch size
Set-up Time
is enormous, the term becomes very small, so capacity
Batch size
tends toward 1/activity time, which is the capacity if there were no 66
set-up times and batching.

9.2.2 Representing an Activity With Set-up Time

Let us do the simple example first, in which an activity with activity
time of 2 minutes per unit needs to be serviced for 30 minutes after
making every 1000 units; see Figure 15.

Figure 15. An activity with set-up, producing one product.

Make
A:1000@2 min/u Product A

30 min

In this example, capacity—using the formula in the previous

section—is 1000/(30+2×1000)= 0.493 units per minute.

Now, let us represent a much more general activity, with more than
one product (say product A and B), each with its own:

• Activity times:
o Product A: 2 minutes/unit
o Product B: 3 minutes/unit
• Set-up times:
o Product A: 30 minutes to start making A’s
o Product B: 20 minutes to start making B’s.
• Batch sizes (or desired capacities, since batch sizes affect
capacities, given activity and set-up times):
o Product A: 60 units.
o Product B: 50 units.
 PROCESS ARITHMETIC Ver 2.0

Figure 16 shows how we represent this activity.

Figure 16. An activity with set-up, producing multiple

products.
Make
A: 20@2 min/u
Products A, B
30 min 20 min
67
B: 20@3min/u

In some cases, we need A and B in the same batch sizes. For

example, this occurs when A and B are two parts to assemble a unit,
such as a shoe making activity that makes the left shoe (A) and
right (B) in batches.

9.3 Step-by-Step
As usual, we use a numerical example to illustrate the steps in a
typical analysis involving set-up and down times, and batching.

Suppose we have three steps to make pairs of shoes. A “make” step

makes left shoes (product A), then right ones (B), with set-up times.
Then these are assembled, and packed; see Figure 17.

In step 3, the key is to determine what is our unit of analysis. Here,

it is pairs of shoes. So A and B should be produced in the same
batch sizes. In this example, we first set the batch size to 20 pairs
of shoes. Therefore, we obtain the capacity of the make step by
dividing 20 pairs of shoes by the time to make 20 A’s and 60 B’s.
Ver 2.0 PROCESS ARITHMETIC

Figure 17. Step-by-step: batch analysis.

Step 1: Draw process map.

Make Assemble Pack
A A+B

B
68
Step 2: Put activity times into activity squares.
Make Assemble Pack
A: 20@2 min/u A+B: 20@5 min 6 min
A, B A+B
30 min 20 min 10 min

B: 20@3min/u

Step 3: Put activity capacities above squares.

20/(30+40+20+60)=0.133 u/min 20/(10+5×20)=0.18 u/min 0.167 u/min
Make Assemble Pack
A: 20@2 min/u A+B: 20@5 min 6 min
A, B A+B
30 min 20 min 10 min

B: 20@3min/u

Step 4: Put demand rate below the out-arrow, and implied

utilizations below squares. Activity with highest implied
utilization is bottleneck.
This is not given, so we assume that demand rate is very high and
the process is supply-constrained.
 PROCESS ARITHMETIC Ver 2.0

Step 5: Put process capacity above the out-arrow and flow

rate and cycle time at the out-arrow.
20/(30+40+20+60)=0.133 u/min 20/(10+5×20)=0.18 u/min 0.167 u/min
Make Assemble Pack
A: 20@2 min/u A+B: 20@5 min 6 min
A, B A+B
0.133 u/min
30 min 20 min 10 min
0.133 u/min
B: 20@3min/u

69 Bottleneck

9.4 Answers
Now we can answer the questions at the beginning of the chapter.

1. At an activity, how do batch size, set-up time, activity

time affect capacity?

This one is now straightforward; see section 9.2.1, “How

Set-Up Time, Activity Time, and Batch Size Affect Capacity,”
page 65.

2. What is the batch size to maximize flow rate?

Let the bottleneck batch size be B. From Figure 14, we

know that increasing B can increase activity capacity. But
we do not want B and activity capacity to increase
infinitely, because that will cost us inventory cost (we
would be holding B units).

This means that we want to increase B at “make” until it

reaches 0.167 units per minute, the capacity at “pack.”
What about the capacity at “assemble?” It goes up still
further as we increase B, which does increase inventory.

But our goal is to maximize flow rate (without unduly

increasing inventory), so we will increase B until “make”
reaches 0.167 units per minute:
B
= 0.167 so B = 50.6 units.
30+2B+20+3B
Ver 2.0 PROCESS ARITHMETIC

So we use a batch size of 51 units (at 50 units, we can still

improve flow rate a little).

Figure 18. Increasing batch size increases process capacity,

up to a point.
Activity
capacity
• Assemble

0.18
° Make
70
0.16
• Pack

…increases
0.14
process
Increasing capacity
° batch size..
0.12

20 40 60 80 100
Batch size

Figure 18 shows the dynamics. It also shows our earlier

point that capacity at “assemble” also increases
unnecessarily, in the sense that it does not improve
process capacity. But given our goal to improve process
capacity, we can live with that.

3. How long does it take to make 45 units at steady state?

4. How long does it make the first 5 units starting from an
empty system?

The answer to these two questions differs by case, so we

first describe these cases:

a. Transfer by batch. Units do not leave the batching

activity for the next activity until the batch is
completed. This is representative of the case of set-up
times. A batch is usually completed before it moves to
the next activity. If the next activity has set-up time,
there are two sub-cases:
i. The next activity can set up only when previous
activity finishes and transfers the entire batch.
 PROCESS ARITHMETIC Ver 2.0

This is illustrated in Figure 19, panel (a). This is

akin to the cumulative in’s and out’s diagram
when we discussed Little’s Law (Figure 9, page
41). The full black line indicates the set-up and
activity at “make,” and the full gray line indicates
the same for “assemble.”
The broken lines (black is for “make” and gray” for
“assemble”) shows that units can be transferred
71
only batch by batch.
Also, note that the gray full line for “assemble”
cannot start setting up until the black “make”
batch is transferred.
Despite this delay,
“assemble” still has
some spare time in the [In determining
form of waiting, when it
completes its work. This
how long it
is because its effective takes to produce
capacity (set up and units with set-
activity on the batch) is
up times, we
still better than that of
the bottleneck “make” need to consider
activity. three cases.]
What is the point of this
diagram? Not only does
it clarify the dynamics of
“make” and “assemble,”
it also shows the flow time for the “assemble”
activity. This is the horizontal distance between
black and gray dashed lines—that is, the set-up
and activity time on a batch, without the wait time.
We are, of course, assuming a worker-paced line
here.
ii. This next activity can set up while the previous
activity is working to fill its batch. This is shown
in Figure 19, panel (b). The difference from panel
(a) is that the set-up for the gray “assemble” line is
Ver 2.0 PROCESS ARITHMETIC

now moved into the cycle time of “make,” so that

when “make” is building its batch, “assemble” can
begin setting up.
Importantly, the flow time at “assemble”—
horizontal distance between black and gray
dashed lines—is now reduced by the set-up time
for “assemble.”
b. Transfer by unit. Here, units leave the batching
72
activity unit by unit. This is representative of the case
of preventive maintenance. After maintenance, the
units produced leave the activity one by one. Figure
19, panel (c) shows this. Notice there are no more
dashed batch transfer lines. The flow time is reduced
even more.

We now return to questions 3 and 4.

Figure 19. Flow time in batched activities.

Panel (a). Transfer by batch; next activity cannot set up

until batch is transferred.
Cumulative
units
to “pack”
Transfer

produced
by each
activity

Set-
“assemble”

Wait for next

Transfer to

Set-up up batch from

“make”

Time
Cycle time
of a batch
 PROCESS ARITHMETIC Ver 2.0

Panel (b). Transfer by batch; next activity can set up while

waiting for batch to transfer.
Cumulative
units

to “pack”
Transfer
produced
by each
activity

73

“assemble”
Set-

Transfer to
Set-up Wait for next
up batch from
“make”

Time
Cycle time
of a batch

Panel (c). Transfer by unit.

Cumulative
units
produced
by each
activity

Set-up Set up and

wait for next
batch from
“make”

Time
Cycle time
of a batch

For question 3, the answer depends on whether the last

activity releases its units by batch or unit. If it releases
them by unit—as in our numerical example in Figure 17—
the answer is typical: it is the number of units × cycle time.

If the last activity releases its units by batch, then we need

to wait for the entire batch to finish the requisite number
Ver 2.0 PROCESS ARITHMETIC

of batches. For example, if we want 45 units when the

process makes units in batches of 20, then we have to wait
for 3 batches, the third batch for the last 5 units.

For question 4, we are running through an empty process,

so the answer is along the lines of chapter 7, “Start
Analyses,” page 56. Consider the cases above:

c. Transfer by batch. In this case, we analyze at the 74

batch level. Use our Figure 17 as an example, with a
batch size of 51 units.
i. The next activity can set up only when previous
activity finishes and transfers the entire batch. So
the first batch goes through these times:
• Make: set-up + activity = 30 + 51×2 + 20 +
51×3=305 minutes;
• Assemble: set-up + activity = 10 + 51×5 = 265
minutes;
• Pack: now this activity can release by unit, not
by batch. So we can add the activity times for
5 units, or 5×6 = 30 minutes.
So the answer is the sum of the above.
ii. This next activity can set up while the previous
activity is working to fill its batch. The difference
is that we now undertake the 10-minute set-up at
“assemble” while “make” is working.
d. Transfer by unit. Now, this is even more similar to
chapter 7, “Start Analyses,” page 56. We consider the
first unit, which takes:
• Make: set-up + activity = 30 + 51×2 + 20 + 3 =
155 minutes;
• Assemble: set-up + activity =10+5=15 minutes;
• Pack: 6 minutes.
So the first unit takes the sum of the above=155+15+6
= 176 minutes.
Each of the remaining 4 units takes the cycle time,
which is 6 minutes, so that is 4×6 = 24 minutes.
 PROCESS ARITHMETIC Ver 2.0

Therefore, it takes 176+24=200 minutes.

Still, in the above, the details matter. For example, if in
“make,” we start with making B units rather than A
units, it would take longer for the first unit to appear.

9.5 Self-Check Questions

75 Because this chapter is fairly dense, here are some self-check
questions to ensure you grasp the material.

As usual, try answering these questions without first looking at the

questions at the end of the questions.

1. Is it possible for an activity without set-up time to never be

a bottleneck when other activities have set-up times?
2. Does set-up time and batch size reduce activity capacity
more for activities with longer or shorter activity times?
3. For Figure 18, draw the line of the process—not activity—
capacity.
4. Suppose in Figure 17, step 5, pack can only be done on
freshly assembled shoes (don’t ask why!), so there is no
inventory between assemble and pack. How does pack’s
activity capacity suffer as a result?

And here are the answers:

1. Is it possible for an activity without set-up time to never be

a bottleneck when other activities have set-up times?

Yes. An example is in Figure 20. The activity time in

“make” is longer than for “wrap” even without make’s set-
up time.
Ver 2.0 PROCESS ARITHMETIC

Figure 20. Can the make activity ever be a bottleneck?

Make
Wrap
 2 min/u Product 
1 min/u
30 min

2. Does set-up time and batch size reduce activity capacity 76

more for activities with longer or shorter activity times?

We can re-write capacity as follows

Capacity = 1� Set-up Time

� + activity time�
Batch size

Without set-up time and batching, capacity is just:

Capacity = 1�activity time.

Set-up Time
So this question basically asks whether the
Batch size
distortion affects capacity more when activity time is big
or small. The answer is when activity time is small,
Set-up Time
because, in the denominator, the distortion
Batch size
figures more prominently relatively activity time.

You can also answer this question precisely using

differentiation, but we don’t have to go there to see the
answer.

3. The process capacity is the minimum of the three activity

capacity lines.
 PROCESS ARITHMETIC Ver 2.0

Figure 21. Process capacity as a function of batch size.

Activity
capacity
Make
Pack

77

Batch size

4. Since there can be no inventory between assemble and

pack, we can assume that assembled units are sent straight
away to pack, unit by unit.

But here is the rub: during the 10 minutes while assemble

is being set up after every batch size (say of 20 units), pack
is idle. That is, for every 10+20×5 = 110 minutes, pack has
to stop for 10 minutes.

Put another way, during the 110 minutes, pack makes

100/6 = 16.67 units, so pack’s effective activity capacity is
reduced from 1/6=0.167 units per minute to 16.67/110 =
0.151 units per minute.
 Ver 2.0 PROCESS ARITHMETIC

10 Load Balancing 78

S
o far, we mostly assume that a process’ sequence of activities
is given. From both practical and academic perspectives, we
might ask whether we can re-balance the activities in a
process to achieve higher capacity.

Further, there are now well-established algorithms for re-

balancing. We use an example from Johnson and Montgomery 1,
which is one of the more effective ones.

Before we proceed, we should mention that: it might be easier to

balance a process manually if it is simple, and the following
algorithm works for many, but not all, configurations.

10.1 Questions
The type of questions line balancing seeks to answer might be of
these forms:

1. If a worker leaves, how should we re-balance the activities

in the process among the remaining workers?
2. What is the maximum number of workers to achieve

1Johnson, L.A. and Montgomery, D.C., Operations research in production planning

scheduling & inventory control, New York: John Wiley, 1974.
 PROCESS ARITHMETIC Ver 2.0

optimal balancing? That is, having more workers would

not increase process capacity.
3. How should we combine activities to achieve optimal
capacity?

10.2 Step-by-Step
79 As usual, we illustrate these with a numerical example.

Suppose we are given the following network of activity

primitives—we cannot break these activities any further—as
shown in Figure 22, step 1. The arrows indicate precedence
relationships. Buffers are not shown. We are to re-group the
primitives using any number of groups. To keep the terminology
clear, we call the original activity primitives just “primitives” and
the newly grouped activities “groups.”

Figure 22. Step-by-step: load balancing.

Step 1: Draw process map of activity primitives.

 Ver 2.0 PROCESS ARITHMETIC

Step 2: Determine maximum number of activity groups, the

resources available, and the resulting number of groups to
construct.
Total activity times 48 𝑚𝑖𝑛
Maximum of groups = 𝑓𝑙𝑜𝑜𝑟 � = = 4.8� = 4.
Max activity time 10 𝑚𝑖𝑛

Number of resources = 3 (given).

Number of groups to construct = min of above = 3.

80
Step 3: Construct a table and put the minutes for that group
into “Remaining time.”
Group 1

Remaining time (min) Candidates Selected

primitives primitives

Ceiling(Total activity time ÷

groups to construct = 48/3) = 16

Step 4: Mark candidate primitives for current group and

indicate their number of successor primitives. Candidates
must: (1) have all predecessors scheduled and (2) activity
times < remaining time.

3
6 min
7 successors
5
1 8
10
5 min 5 min
min

4 7
8 min 1 min

6 successors
2 6 9
3 min 7 min 3 min
 PROCESS ARITHMETIC Ver 2.0

Step 5: Put candidate primitives into table, select the

primitive with the most successors (if there are ties, pick the
primitive with the longest activity time), enter new
remaining time: previous remaining time less the selected
primitive’s activity time
Group 1

Remaining time (min) Candidates Selected

primitives primitives
81
Ceiling(Total activity time ÷ 1,2 1
groups to construct = 48/3) = 16

16 – 5 = 11

Step 6: Re-iterate with steps 4 and 5 till remaining time is

zero. We darken the selected primitive 1. Note that 4 is not
a candidate because it has an unscheduled predecessor (2).
4 successors
3
6 min

5
1 8
10
5 min 5 min
min

4 7
8 min 1 min

6 successors
2 6 9
3 min 7 min 3 min
 Ver 2.0 PROCESS ARITHMETIC

Group 1

Remaining time (min) Candidates Selected

primitives primitives

Ceiling(Total activity time ÷ 1,2 1

groups to construct = 48/3) = 16

16 – 5 = 11 2,3 1,2

11-3 = 8
82
Another iteration
4 successors
3
6 min

5
1 8
10
5 min 5 min
5 successors min

4 7
8 min 1 min

2 6 9
3 min 7 min 3 min

Group 1

Remaining time (min) Candidates Selected

primitives primitives

Ceiling(Total activity time ÷ 1,2 1

groups to construct = 48/3) = 16

16 – 5 = 11 2,3 1,2

11-3 = 8 3,4 1,2,4

8-8 = 0
 PROCESS ARITHMETIC Ver 2.0

Step 7: Start a new group and repeat 4 and 5 until the

remaining time is zero.
Group 2

Remaining time (min) Candidates Selected

primitives primitives

16 again 3,6 3

83 16-6 = 10 5,6 3,5

Step 8: Start a new group. Since we decided in step 2 to have

3 groups, this is the end and we just put all primitives here.
Group 3

Remaining time (min) Candidates Selected

primitives primitives

16 again 6,7,8,9

Step 9: Draw the balanced process.

Group Group Group

1 2 3
16min 16 min 16 min

10.3 Answers
Once again, we are now in a position to answer the questions at the
start of this chapter:

1. If a worker leaves, how should we re-balance the activities

in the process among the remaining workers?

We just follow the above steps. It is in step 2 that we

specify the number of groups we want.

2. What is the maximum number of workers to achieve

optimal balancing? That is, having more workers would
not increase process capacity.
Ver 2.0 PROCESS ARITHMETIC

The answer is in step 2, in which we determined the

maximum of groups.

3. How should we combine activities to achieve optimal

capacity?

Again, we follow the steps above.

84
 PROCESS ARITHMETIC Ver 2.0

85
11 Managing
Variability:
Queueing Analysis

T
hus far, we managed to avoid discussing what happens in
the buffers between activities. This issue is not important
when activity times and units’ inter-arrival times do not
vary.

In this and the next chapter, we see what happens when these two
times vary:

• Here, we focus on queueing analysis. We analyze units

that always wait until they are treated.
• In the next chapter, we focus on loss analysis. We see
what happens when units drop out when they arrive but
cannot be immediately treated because the activity
resource is busy.

These two chapters deal with variability, so let us first say how we
measure that. One way is to use standard deviation: a measure
such as processing time may have a mean of 16 minutes per unit,
but actual processing time may vary with a standard deviation of 6
minutes per unit. Usually, we scale standard deviation by mean,
which we call coefficient of variation or cv:
Ver 2.0 PROCESS ARITHMETIC

standard deviation
Coefficient of variation (cv) =
mean

11.1 Questions
The moment you see any measure of variability—such as standard
deviation or coefficient of variation—you should think of either
this chapter or the next. Sometimes, the hint may be more subtle,
and you are told that processing times have some average. With 86
an average, it also implies that processing times are varying, so you
again should think about this chapter and
the next.

More specifically, queueing analysis is

useful to answer questions like: [The moment
1. What is the average time to check in
you see any
at an airport check-in area which has measure of
3 counters, if the check-in time has a variability—
mean of 3 minutes per passenger and
such as standard
a coefficient of variation of 2?
Assume that customers arrive deviation or
randomly, and on average, every 4 coefficient of
minutes.
variation—you
2. And how many people will be in the
line? should think of
3. How many counters are free on the queueing or
average? throughput loss
4. What is the average number of
people being served at the 3
analyses.]
counters?
5. How does have three separate
queues, each with 1/3 of the
previous arrival rates, affect the
utilization of the counters?
6. How does separation affect wait times?
7. [Tricky] How do priority rules to determine which passenger
in a queue gets served first (such as first-in-first-out or
 PROCESS ARITHMETIC Ver 2.0

shortest-processing-time-first) affect average waiting time?

11.2 Step-by-Step
As usual, we illustrate these with a numerical example. Let us say
we are given the data below, where:

• m is the number of resources

87
• Processing time. It is variable, with a mean and a cv:
o Mean = p min/unit
o CV = cvp . Notice this is just a ratio, since it is the
ratio of standard deviation (in min/u) and mean
(also in min/u)
• Inter-arrival time. This is the time between the arrival of
two units. It is also variable, so it
has a mean and a cv:
o Mean = a min/unit
o CV = cva . [Processing time
is another term
We need to clarify some points in
queueing analysis: for activity time.
Since we assume
1. 1/a < m/p. You will figure that
1/a is the demand rate and m/p
no throughput
is the activity capacity. That is, loss in queueing
the process is demand- analysis, inter-
constrained. Otherwise, the
queue will eventually be
arrival time is
infinitely big. another term for
2. cv=1 when the distribution is cycle time.]
“exponential.” As you might
recall, a distribution has a mean
and standard deviation.
Whenever you are given say, the
inter-arrival times are exponential, you should think: cva =
1.
3. There is no throughput loss. Or put another way, this
means that the average arrival rate (1/a units per min) is
Ver 2.0 PROCESS ARITHMETIC

the same as the average output rate (also 1/a units per
min). Think of this as a process in which units may have to
wait, but eventually, all are processed (recall p<a and the
queue has to be finite on the average).

You should also be aware that the Cachon-Terwiesch text switches

terminology here. Just to follow their language, bear in mind these:

• Processing time = activity time 88

• Queue = buffer
• Server = resource
• Inter-arrival time = cycle time, but this is because in this
chapter (unlike the next), we assume no throughput loss:
what goes in is what comes out.

Now, let’s see a step-by-step queueing analysis, in Figure 23.

Figure 23. Step-by-step: queueing analysis.

Step 1: Draw process map.

m resources

Step 2: Put down processing and inter-arrival times: we now

not just means, but also coefficients of variation (cv’s).

Inter-arrival m resources
Mean = a min/u
CV = cva Processing
Mean = p min/u
CV = cvp

It is usually good to lay out the numbers like so (using the given
figures from the first question in the previous section):
 PROCESS ARITHMETIC Ver 2.0

m=3
a = 4 minutes/unit
cva = 1 (“randomly”)
p = 3 minutes/unit
cvp = 2

Step 3: Write the activity capacity above the activity box.

89 Capacity = m/p

Inter-arrival m resources
Mean = a min/u
CV = cva Processing
Mean = p min/u
CV = cvp

Step 4: Write the implied utilization below the activity box.

Capacity = m/p

Inter-arrival m resources
Mean = a min/u
CV = cva Processing
Mean = p min/u
CV = cvp

Implied utilization
u = (1/a)/(m/p) =
p/ma

Step 5: Create the table below and fill in R, the rate through
the process.
m resources

Processing
Mean = p min/u
CV = cvp

R 1/a
T
I
Ver 2.0 PROCESS ARITHMETIC

Step 6: Fill in T, the average time a unit spends in the queue

and activity. Note the formula for Tq, the waiting time in the
queue.
m resources

Processing
Mean = p min/u
CV = cvp

R 1/a
T 2 +𝑐𝑣 2
𝑝 𝑢�2(𝑚+1)−1 𝑐𝑣𝑎 𝑝 Tp = p
Tq ≈ ,
𝑚 1−𝑢 2
exact if inter-arrival is 90
exponential (� 𝑐𝑣𝑎2 =1)
or m=1
I

Step 7: Fill in I, the average inventory (number of units),

using Little’s Law, I=R×T.
m resources

Processing
Mean = p min/u
CV = cvp

R 1/a
T 𝑝 𝑢�2(𝑚+1)−1 𝑐𝑣2 2
𝑎 +𝑐𝑣𝑝 Tp = p
Tq ≈ ,
𝑚 1−𝑢 2
exact if inter-arrival is
exponential (� 𝑐𝑣𝑎2 =1)
or m=1, approximate
otherwise
I R.Tq R.T=p/a (=m.u)

Recall that we assume a demand-constrained process. So in step 7,

the implied utilization is also the utilization.

We also emphasize that the wait time formula in step 5 is:

• Exact when cva= 1 and m=1,

• Approximately right otherwise.

11.3 Answers
Now we’re in good shape to answer the questions posed earlier.
 PROCESS ARITHMETIC Ver 2.0

1. What is the average time to check in at an airport check-in

area which has 3 counters, if the check-in time has a mean of 3
minutes per passenger and a coefficient of variation of 2?
Assume that customers arrive randomly, and on average, every
4 minutes.

We need to add both the waiting time Tq and the processing time p.
To start, recall in steps 2 that we wrote down these:
91
m=3
a = 4 minutes/unit
cva = 1 (“randomly”)
p = 3 minutes/unit
cvp = 2
u = p/(ma) = 3/(3×4) = 25%
(from step 6).
[When
The wait time is just Tq =
2 2
calculating wait
𝑝 𝑢�2(𝑚+1)−1 𝑐𝑣2 2
𝑎 +𝑐𝑣𝑝 3 0.25�2(3+1)−1 1 +2
= = time Tq, it is
𝑚 1−𝑢 2 3 1−0.25 2
0.26 minutes/unit.
good to do a
The processing time is p=3 minutes/unit. reality check: Tq
So the total time to check in is the sum of
should be of the
these: 3.26 minutes/unit. same order of
magnitude as
When calculating wait time Tq, it is
always good to do a reality check. Tq p/m.]
should be of the same order of magnitude
as p/m minutes—because the arriving
unit needs to wait for the processing time
p, but that is divided by m resources. It
could be smaller, as in this case, because utilization is low; and it
could be higher—but seldom more than 10 times higher—if
utilization is high.

2. And how many people will be in the line?

Ver 2.0 PROCESS ARITHMETIC

This is the I—inventory—in the queue. From step 6, we see from

Little’s Law that I= R.Tq. R is 1/a = ¼ units per minute and we just
calculated Tq above. So the “line” will be just:

0.26 × ¼ = 0.065 persons deep!

3. How many counters are free on the average?

This basically asks how under-utilized are the counters. We just 92

calculated u=25%. So with 3 counters, the average number of free
counters is (1-25%)×3=9/4 counters.

4. What is the average number of people being served at the 3

counters?

This is utilization times the number of resources, or 25%×3=0.75

passengers.

5. How does have three separate queues, each with 1/3 of the
previous arrival rates, affect the utilization of the counters?

Now, we have three separate queues, instead of a pooled queue.

Each separate queue goes to separate activities, each of which has

one resource.

Remember that u=p/(ma). For each activity, p remains at 3

minutes per unit, but m is now 1. Since the new arrival rate is 1/3
of the old, a is three times the previous inter-arrival time, or 3×4 =
12 minutes per unit.

So while the old u is 25%, the new u is 3/(1×12)=25%.

Utilization has not changed. Intuitively, because our process is

demand-constrained and with no throughput loss, our resources
work just as hard as they had been before.

6. How does separation affect wait times?

On separation, what is the individual servers’ cvp and the individual

 PROCESS ARITHMETIC Ver 2.0

arrivals’ cva? It turns out that these are still 1.

2 +𝑐𝑣 2 2 2
𝑝 𝑢�2(𝑚+1)−1 𝑐𝑣𝑎 𝑝 3 0.25�2(1+1)−1 1 +2
Now, at each counter, Tq = =
𝑚 1−𝑢 2 1 1−0.25 2
= 2.5 minutes. Notice how wait time shot up from just 0.26
minutes in question 1 to almost ten times more now.

7. [Tricky] How do priority rules to determine which passenger

93 in a queue gets served first (such as first-in-first-out or
shortest-processing-time-first) affect average waiting time?

The average wait time Tq does not depend on priority rules. This
does not mean that these rules are irrelevant. To an individual
customer—such as the customer who “first comes”—this can
matter—to be “first served.” Then there are also issues of
perceived fairness, which are not considered in Tq.
Ver 2.0 PROCESS ARITHMETIC

12 Managing 94
Variability:
Throughput Losses

I
n the previous chapter, we see that variability introduces new
issues in buffers (called queues) and activities. That assumed
there is no throughput loss—i.e., units just wait in the queue,
and do not drop out. So what arrives is also what goes out.

In this chapter, we take the opposite view: units do not wait at all,
and drop out if all resources are busy. Of course, there are
intermediate positions, but in this course, let’s keep things simple.

12.1 Questions
As with the previous chapter, if you see any reference to
variability—such as standard deviation or coefficient of
variation—you should think of either queueing analysis or
throughput loss analysis. But the key here is that units drop out
when servers are busy.

Throughput loss analysis is an appropriate to address questions

like these:

1. What average fraction of patients being transported by

 PROCESS ARITHMETIC Ver 2.0

ambulance to a hospital has to suffer ambulance diversion

because that hospital is busy?
2. How much does revenue improve if we were to add a gas
pump, so as not to lose customers who drive past when
they see that all our current 6 pumps are busy?
3. Continuing the previous question, how would utilization
improve if we replace all our 6 pumps with high-speed
pumps instead?
95
4. [Tricky] Cascading servers. Suppose a primary Google
server can process 1 query every 9 nanoseconds. Internet
users sends a query to the server every 6 nanoseconds,
which has cv=1. If the server is busy, Internet users
consider the query a failure. To reduce the number of
failures, we can channel queries to a secondary server
when the primary one is busy. How many queries fail at
the secondary server every nanosecond?
5. Continuing from the above, how many queries does the
secondary server process every nanosecond?

The key part of the analysis now is how much of the arriving units
drop out because all our servers is busy.

12.2 Step-by-Step
Our set up is similar to that in the previous chapter, with a crucial
difference: we now have no queue (buffer), and arriving units drop
out if our servers are all busy.

But we can still recycle the notation from the previous chapter:

• m is the number of resources

• Processing time, with mean p. One crucial difference is
that the coefficient of variation cvp is now irrelevant. As
we will see, the fraction of arriving units that drop out
does not depend on cvp.
• Inter-arrival time, with mean a and coefficient of
variation cva = 1. This last is another crucial assumption
when using our formulas.
Ver 2.0 PROCESS ARITHMETIC

As in queueing analysis, we need to clarify some points in

throughput loss analysis:

• p<a no longer necessary. Recall that when we have units

queueing, we cannot have p smaller than a, since the
process would eventually explode with an infinitely large
queue. This is not a problem here, since units simply drop
out when all servers are busy.
• cva = 1 and cvp is irrelevant. Given how important this is, 96
we re-iterate this.

Now, let’s see a step-by-step throughput loss analysis, in Figure 24.

Figure 24. Step-by-step: throughput loss analysis.

Step 1: Draw process map. Note that there is no buffer.

m resources

Step 2: Put down processing and inter-arrival times: we re-

iterate: cva needs to be 1 for our formulation to work.

Inter-arrival m resources
Mean = a min/u
CV = 1 Processing
Mean = p min/u
CV = irrelevant
 PROCESS ARITHMETIC Ver 2.0

Step 3: Write the activity capacity above the activity box.

Capacity = m/p

Inter-arrival m resources
Mean = a min/u
CV = 1
Processing
Mean = p min/u
97 CV = irrelevant

Step 4: Calculate Pm, the Erlang loss fraction of arriving

units that find all servers busy, using an Erlang table.
Example for p/a = 0.3 and m=3 , so Pm=0.0033.

m=1 2 3 ...
p/a = 0.1
0.2
0.3 0.0033
...

Step 5: Write down the starting throughput, lost throughput,

and ending throughput.
Capacity = m/p

Inter-arrival m resources
Mean = a min/u
Starting CV = 1 Ending
Processing
throughput Mean = p min/u throughput
= CV = irrelevant =
1/a (1/a) (1- Pm)
u/min Lost u/min
throughput
=
(1/a) Pm
u/min
Ver 2.0 PROCESS ARITHMETIC

Step 6: (If needed) Write the implied utilization below the

activity box.
Capacity = m/p

Inter-arrival m resources
Mean = a min/u
Starting CV = 1 Ending
throughput
Processing
throughput
98
Mean = p min/u
= CV = irrelevant =
1/a (1/a) (1- Pm)
u/min Lost u/min
throughput Implied utilization u =
= (1/a) (1-Pm)/(m/p) =
(1/a) Pm p/ma (1-Pm)
u/min

12.3 Answers
We can now answer our questions posed in the beginning.

1. What average fraction of patients being transported by

ambulance to a hospital has to suffer ambulance diversion
because that hospital is busy?

This is just Pm , which we obtain in step 4.

2. How much does revenue improve if we were to add a gas

pump, so as not to lose customers who drive past when
they see that all our current 6 pumps are busy?

The original revenue is given by the ending throughput in step 6,

multiplied by the revenue per customer.

It is straightforward then to find the improved revenue when we

increase m, the number of gas pumps, by 1. The answer is the
difference between the two revenues.

3. Continuing the previous question, how would utilization

change if we replace all our 6 pumps with high-speed
 PROCESS ARITHMETIC Ver 2.0

pumps instead?

Utilization is calculated in step 6. Therefore, this can be answered

by finding the new utilization that goes with a shorter p, when we
use high-speed pumps.

4. [Tricky] Cascading servers. Suppose a primary Google

server can process 1 query every 9 nanoseconds. Internet
99 users sends a query to the server every 6 nanoseconds,
which has cv=1. If the server is busy, Internet users
consider the query a failure. To reduce the number of
failures, we can channel queries to a secondary server
when the primary one is busy. How many queries fail at
the secondary server every nanosecond?

This one is tricky because the inter-arrival times from the main
server to the secondary one may not have
cv=1, even though the inter-arrival times
from Internet users to the main server
has cv=1. Figure 25, panel (a), illustrates [A crucial
this issue. assumption is
So we cannot easily analyze throughput that the cv of the
loss at the second sever. inter-arrival
What we can do, however, is to treat both time is 1.]
servers as a combined activity. As panel
(b) shows, we now have inter-arrival
times that have cv=1. We can determine
the combined throughput loss, which is
also the throughput loss of the second server.

Of course, this calculation works only when the two servers have
the same processing time p, since we use that information in
determining Pm.
Ver 2.0 PROCESS ARITHMETIC

Figure 25. Cascading servers.

(a) Starting throughput into the secondary server may not

have cv=1, so our throughput loss analysis does not apply
there.
p/a = 1.5 and m=1 , so Pm=0.6

Starting a=6 ns/u Ending

thru’put p = 9 ns/u thru’put 100
= 1/6 u/ns = (1/6)(1-0.6)
CV=1 u/ns
Lost thru’put
= (1/6)0.6 u/ns
CV =?

p = 9 ns/u

Lost thru’put
=?

(b) Treating the cascade as one activity with two servers.

p/a = 1.5 and m=2 , so Pm=0.3103

Starting a=6 ns/u

p = 9 ns/u
thru’put
= 1/6 u/ns Ending
CV=1 ‘ thru’put
= (1/6) (1-0. 3103)
u/ns

p = 9 ns/u

Lost thru’put
= (1/6)0.3103 u/ns

5. Continuing from the above, how many queries does the

secondary server process every nanosecond?
 PROCESS ARITHMETIC Ver 2.0

This is the ending throughput in panel (b) minus that from just
the main server, in panel (a).

101
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A Glossary 102

This lists key terms used in the notes. Please refer to the index to
the pages where you find these terms.

Term Definition Examples or intuition

Activity Work step that adds Nursing station that
value to making a unit. It treats patients
is also called a station,
step, or task
Activity How fast an activity can 4 patients/hour may
capacity treat units = 1/activity be how fast a nursing
time × number of station can treat
resources patients
Activity How long it takes one 30 minutes/patient;
time resource to treat a unit. that is, time it takes
This excludes any waiting to treat a patient
time.
Batch size, Number of units made Make 20 cars of the
denoted B together after every set model T after setting
up. For an activity with up the line for the
set-up time S, the optimal model
B is that which gets the
activity to reach flow rate
R in this formula: R =
B/(S + B.activity time)
Bottleneck Activity with highest Some more intuition:
utilization, which is also When demand rate is
the activity with the the same across all
 PROCESS ARITHMETIC Ver 2.0

highest implied activities (such as in

utilization. By this a process with a
definition, an activity is a simple line of
bottleneck even if it has activities), the
spare capacity that is bottleneck is that
unused, as in a demand- activity with the
constrained process. slowest capacity.
And if further, all
activities have just
103 one resource, we
simplify even
further: a bottleneck
is that activity with
the longest activity
time.
Buffer Holding area in which Any waiting area in
units wait to be treated hospital, as long as
the patient is not
being treated
Coefficient Measure of variability. 2 (notice this is a
of variation We scale this by the ratio)
mean. So this is standard
deviation ÷ mean
Cost of Labor wages paid during $200 per patient
direct labor the time it takes to
produce a unit. So this
includes payment for idle
time, since we’ve to pay
wages for that time, too.
Formula is total
wages/hr ÷ flow rate in
units/hr. Remember that
unless otherwise stated,
this is cost of direct labor
per unit.
cva Coefficient of variation
for the inter-arrival time
a. Measures how
variable is a: do units
come in regular intervals,
or in lumps?
cvp Coefficient of variation
Ver 2.0 PROCESS ARITHMETIC

for the processing time p.

Measures how variable is
a: do units come in
regular intervals, or in
lumps?
Cycle time, Time it takes for a unit to 20 minutes a patient.
denoted CT be produced by a For example, this is
process. So this is 1/flow from the view of a
rate. hospital’s CEO,
standing outside the
104
hospital’s exit and
counting how long it
takes for patients to
emerge.
Demand How fast we want the 200 patients a day,
rate process to make units. In what a hospital
this course, we take this needs to process
as given.
Erlang loss Fraction of throughput 40% of patients are
fraction, lost because arriving diverted to another
denoted units drop out when hospital when a
Pm(p/a) servers are busy. This is hospital is busy.
obtained by looking up
an Erlang loss table,
using p/a, the ratio of
processing to inter-
arrival times, and m the
number of servers.
Flow rate, How fast a process 200 patients a day,
denoted R actually produces units. what a hospital is
This is the smaller of actually processing
process capacity and
demand rate. Also called
throughput. This is
1/cycle time.
Flow time, The elapsed time it takes 23 hours, from the
denoted T for a unit to move from patient (not the
the first activity to the hospital’s)
last, including waits in perspective
between
Idle time Time paid to resources 4 person-hour per
but not spent on treating patient (to be clear,
 PROCESS ARITHMETIC Ver 2.0

units. Remember that this could be 2

unless otherwise stated, persons idle over 2
this is idle time per unit. hours, or 1 person
To make one unit, the idle over 4 hours, etc.
elapsed time is cycle It depends on how
time. During this time, the process is
the number of person- configured).
minutes we pay to
resources is number of
105
resources × cycle time.
During this time, the unit
gets treated over activity
time (by one
resource...remember, no
multi-tasking).
Implied The portion of an When demand rate
utilization activity’s capacity used to exceeds activity
meet demand rate, or if capacity, this is more
the capacity is below than 100%
demand rate, the portion
that needs to be added to
meet demand rate.
Inter- Time between units Mean a = 3 minutes
arrival time, arriving at a server. This per unit (notice we
denoted by is a variable with a usually refer to the
variable a distribution that has a mean a, not a specific
mean and a cv (see value of a for a
coefficient of variation). specific unit)
If there is no throughput
loss, the average a is also
the average cycle time
CT.
Inventory This is analogous to an 6% a year (note: the
cost per interest charge, so it has dimension here is
period (%), a time period. just percent per year,
also called Remember this is a no per dollar, etc.)
inventory charge on units held as
percent inventory, not units sold.
charge per
period
Inventory Converts inventory cost If the COGS of a unit
cost per per unit sold in % term to sold is $100 and the
Ver 2.0 PROCESS ARITHMETIC

unit sold ($) $ term, but multiply by inventory cost per

the value of a unit sold at unit sold is 2% of
cost (i.e., COGS) each unit sold, then
the inventory cost in
$ term is $2.
Inventory Inventory percent charge 2% of each unit sold
cost per for each unit sold. So this
unit sold is inventory cost per
(%) period ÷ inventory turn.
106
Recall that the numerator
is for units held, and the
denominator converts
units held to units sold.
Inventory How many units sold per 3 times per year
turn period by holding a unit (make sure you are
of inventory during the aware of the period
period. For a company, used; in this case, it is
this is COGS/inventory “a year”)
(for the denominator, we
often simply and just use
end-of-period inventory)
Inventory, Number of units within a Average number of
denoted I boundary (activity, patients in a hospital.
buffer, process, company, Could be measured
etc.). Unless otherwise in dollar terms, like
stated, we think of this as $46 million at end of
average inventory 2004, or days of
inventory, as in
inventory/COGS,
where COGS is in
days—e.g., 26 days of
inventory
Labor Number of person-hours 16 person-hours per
content spent treating a unit to patient. Since it is
produce it (could be at an always one person
activity or process level). acting on the patient
So this is activity time (or at any one time, this
for a process, the sum of is the patient literally
all activity times). It is receiving 16 hours of
understood that the activity time (not, for
activity time is expended example, 2 resources
by one resource at any treating the patient
 PROCESS ARITHMETIC Ver 2.0

one time (recall “no for 8 hours).

multi-tasking”). Also,
remember that unless
otherwise stated, this is
labor content per unit.
Labor Portion of an activity’s Up to 100%
utilization person-hours available
(per hour) that is being
used to make units (per
107
hour). So this is flow rate
× activity time ÷ number
of resources. This can
also be done for a
process, in which case we
use activity times and
number of resources
across all activities in the
formula. The formula is
equivalent to labor
content ÷ (labor content
+ idle time). See those
terms.
Little’s Law Within a boundary (a As a mnemonic, use I
process, activity, = Remember × That!
company, etc.), inventory
= flow rate × flow time.
These are for averages.
Process Sequence of activities and Series of activities
buffers that a patient goes
through in a hospital
Process How fast a process can 300 patients a day,
capacity make units. This speed is what a hospital is
determined by the capable of processing
capacity of the bottleneck
activity
Processing Same as activity time, but
time, is the term used in
denoted by queuing and throughput
p loss analysis
Queue Same as buffer, but is the Waiting area in
term used in queuing and hospital
throughput loss analysis
Ver 2.0 PROCESS ARITHMETIC

Queue wait How long the average

time Tq unit waits before being
treated by a server. The
formula is
2 +𝑐𝑣 2
𝑝 𝑢�2(𝑚+1)−1 𝑐𝑣𝑎 𝑝
where
𝑚 1−𝑢 2
p is processing time, m
the number of servers, u
the server utilization, cva
and cvp the coefficients of 108
variation for inter-arrival
and processing times.
Resource Workers or machines at Nurse; we assume
an activity, each of which the nurse has all the
either works on one unit accompanying tools
or is idle (no multiple to treat a patient (we
resources on one unit or do not count the
multiple units by one tools as resources)
resource simultaneously)
Server How much of the servers’ In queueing analysis,
utilization capacity m/p is used, on we assume that the
the average. In queueing utilization is 100% or
analysis with no less. Otherwise, the
throughput loss, this is queue can get
1/a ÷m/p = p/(ma). infinitely big.
Server, Same as resource, but is Check-in counter
number of the term used in queuing
servers and throughput loss
denoted m analysis
Set-up time, Down time during which Preventive
denoted S the process produces no maintenance time.
unit Or down time at a
production line, to
switch from making
one car model to
another.
Steady state A running process that is A process that runs
not starting from an 24/7/365
empty process, nor is it
ending its run.
Throughput This happens when units Ambulance
loss that cannot be diversion, in which a
 PROCESS ARITHMETIC Ver 2.0

immediately served drop patient is sent

out, instead of queueing elsewhere when a
to be served. hospital (server) is
busy.
Unit Item to which an activity Patient
adds value
Utilization The portion of an Up to 100%
activity’s capacity used to
109 make units. So this is
flow rate ÷ activity
capacity.
Utilization, See implied utilization
implied
Utilization, See labor utilization
labor
Utilization, See server utiization
server
 Ver 2.0 PROCESS ARITHMETIC

B Index 110

A
C
activity, 10
activity capacity. See capacity Cachon & Terwiesch, 40, 41
activity time, 12, 66, 87, 95 candy, 27
ambulance diversion, 95 capacity
average, 53 activity capacity, 12
average labor utilization process capacity, 14, 32, 60
time approach, 53 resource capacity, 12
utilization approach, 53 cascading servers, 95
averages, 14 Cisco, 40
coefficient of variation, 85, 96
COGS. See cost of goods sold
B converging process, 32, 38
back-log, 60 cost of direct labor, 50
balance. See load balancing cost of goods sold, 42
balance sheet, 42 Costco, 40
bank, 29 cumulative in’s and out’s, 40
batch, 64, 66 cycle time, 15, 28
transfer, 70
Best Buy, 40 D
bottleneck, 16, 29, 69
breaks, taking, 12 days of inventory, 43
Broadway, 40 demand constrained, 14
buffer, 13, 88 demand rate, 14, 16, 33, 60
storage, 13 discount, 60
 PROCESS ARITHMETIC Ver 2.0

diverging process, 31 inventory dollar cost per unit sold,

down time, 64 43
inventory percent charge, 43
E inventory turn, 43

empty process, 14
J
Erlang loss, 97
exponential distribution, 87 Johnson and Montgomery, 78
111
F L
flow rate, 14, 70 labor content, 50
flow rate approach, 51 labor cost, 47
flow time, 15 labor utilization, 47
flow time approach, 51 level of analysis, 10
fried dough, 31 Little's Law, 39
fungible, 11, 13 load balancing, 78

G M
goodwill, 63 machine-paced process, 51, 58
maintenance, 64, 72
H map
question-analysis map, 21
hospital, 40 MBTA, 40
milk, 40
I mortgage, 29
multi-product process analysis, 31
idle, 12, 52 multi-tasking, 32, 36, 64
implied utilization, 16, 37
income statement, 42
input rate, 18
N
inter-arrival time, 88, 95 New York City, 40
inventory, 39, 42, 60 Nike, 50
inventory cost per unit sold, 43
inventory dollar cost per unit
O
sold, 43
inventory percent charge, 43 obsolescence, 11
inventory turn, 43 oil, 29
inventory cost per unit sold, 43 optimize, 10
 Ver 2.0 PROCESS ARITHMETIC

P capacity, 65
combine activities, 78
pace cost of direct labor, 47
machine-paced process, 51, 58 cost of keeping customers
worker-paced process, 51, 57 waiting, 60
pastry, 58 cost to hold back-log, 60
patient, 40 customers not served, 26
pizza, 31 down time, 65
price, 43 drop out, 40 112
priority rules, 86, 93 first unit, 56, 65
process, 13 how long, 26, 40, 56, 65
converging, 32, 38 how much profits, 26
diverging, 31 how much revenues, 26
empty, 14 idle time, 48
process capacity, 14 inventory cost, 40
process map, 13 inventory turn, 40
process analysis labor content, 47
multi-product process analysis, Little's Law, 40
31 load balancing, 78
single-product process analysis, maximum number of workers,
26 78
start analysis, 56 number of resources, 48
stop analysis, 60 set-up time, 65
process capacity, 32, 60, See start-of-day inventory, 56
capacity waiting customers, 60
process map, 13 work cells, 48
processing time. See activity time, yield loss, 40
See activity time queue, 85
productivity. See flow rate
profits, 29 R
Q representation, 10
resource, 12
question-analysis map, 21 resource capacity. See capacity
questions resources
activity time, 65 multi-tasking, 36
average labor utilization, 48 revenue, 42
back-log, 60 revenues, 29
batch size, 65
bottleneck, 26
 PROCESS ARITHMETIC Ver 2.0

S throughput loss, 94
tourist, 29
Samsung, 40 transfer by batch, 70
sequence, 13 transfer by unit, 72
server. See buffer turn. See inventory turn
set-up time, 64, 66
shoe, 50, 67 U
single-product process analysis,
113 26 unit, 11
slow down, 12 utilization, 15
sojourn time. See flow time implied utilization, 16
standard deviation, 85 labor utilization, 47
start analysis, 56
station, 10 V
step, 10
stop analysis, 60 value, 10
supply constrained, 14 variability, 29, 85

T W
table, 48 waiting time, 13, 60, 91
takt time. See cycle time West End, 29
task, 10 wheel, 38
theatre ticket, 29 work cell, 53
throughput. See flow rate worker-paced process, 51, 57