Process Fundamentals

This is the first session on Operations Management. OM “is about designing, managing, and improving

the set of activities that create products and services, and deliver them to customers.” 1 In this session we

want to begin a discussion on process improvement. The basic building block of creating goods and

services is the process. Most production involves multiple processes. The basic idea is that a process

takes inputs (raw materials, labor, equipment/technology, knowledge, energy) and creates output that are

of greater value to customers.

Many of you will soon find yourselves in an organization and will be involved an effort to improve some

aspect of their operation (reduce infection rate, improve throughput, more timely revenue collections,

etc). How will you start? First you have to develop a good understanding of the current operation – the

activities that take place in order to produce your “product”. One way to do this is to create a process

flow diagram

Elements of a Process

Consider a simple process – a coffee shop where customers enter in the shop. The first task would be to

take the customer’s order and collect payment. The second task would be to make the drink the customer

ordered and then hand it to them.

1
Gray, Ann E, and James Leonard. “Process Fundamentals,” Harvard Business School, September 8, 2009.

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 Take Order Make Order
Inputs:
(30 Seconds) WIP Prepared
labor, (90 Seconds)
coffee to
coffee,
customer
others

Inspection
Control/
Input Orders

More generally we can think of the system as having the following characteristics2

2
Deming, W. Edwards. Out of the Crisis, MIT Press, 2000, page 4.

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Essentially the process shows three things: Tasks, flows, and storage

Storage is where things are being held. In this example we have inputs waiting to be used, and final

goods waiting to be “shipped”. We also could have work in progress (WIP) between tasks. We also will

store information. So if the patient first sees the nurse who takes his/her vital signs and then they go to a

second waiting area to see the doctor, we could show this second waiting area as a storage stage between

task 1 and 2.

Tasks are things are being done.

The arrows show Flows. There are two types of flows: physical flows shown by solid arrows, and

information flows shown by dotted arrows.

Measuring the Performance of a Process

Task Time – the time it takes to complete a specific task within a process. In the above example they are

30 and 90 seconds, respectively.

Cycle Time (CT) – the average time between completion of successive units. “How often does a finished

unit complete the process?” In the above example, the cycle time will be 90 seconds. When continuously

running, the cycle time will be equal to the length of the longest task in the process.

Throughput time – the length of time spent in the process. How long does it take to produce a unit of

output? Note this is different from cycle time. The minimum throughput time in a linear process will be

the sum of the individual tasks. In my example throughput time is 30+90 = 120 seconds. Depending on

the arrival rate throughput time can increase due to work in process.

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Cycle time refers to how often a unit “drops off” the end of the process whereas throughput time refers to

how long that unit takes between entering and leaving the process, including any in process storage or

transport time.

Cycle time determines a process’ capacity, which limits the volume of a product that the process is able to

produce. Throughput time, however, is an important determinant of the speed of a process.

Capacity – is the maximum rate of output from the process and is measured in units of output per unit of

time. Typically this is easy to define but hard to measure

Theoretical capacity vs. effective capacity

Cycle time and capacity are related – if the cycle time of a task is 30 minutes per unit, then the capacity of

that task is 2 units per hour. In our example since cycle time is 90 seconds per unit, then capacity will be

40 per hour (60*60=3600 seconds in an hour, so 3600/90 = 40 cups per hour).

Takt time – this is German for pace or rhythm. It refers to the rate at which we need to produce our

product in order to satisfy customer demand. This is also called the Arrival Rate. Suppose that 60

customers come to our coffee shop per hour, then we need to be able to serve one patient per minute.

Thus our cycle time needs to be less than or equal to our Takt time. So in my example we have troubles,

since we need to produce 60 cups per hour, but our process is designed to only produce 40. We would

need to focus on the second task.

Note it has nothing to do with the workers – unless the reason it is taking 90 seconds is because the

worker is lazy or incompetent. Firing the barista and hiring a “more qualified” one would not change

anything. Likewise, performance incentives (either carrots or sticks) would not have much affect either.

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The only way to fix the problem would be to change the system. This is a key observation of modern

process improvement theory that we will return to.

Suppose we change task 1 so that this person takes the order and payment, but then pulls the proper type

of cup and starts the machine. So task 1 now takes 60 seconds and step 2 decreases to 60 seconds. Note

now we will still have a 120 second throughput time, but now our cycle time will be 60 seconds, and will

now have a capacity of 60 per hour and can meet our customer’s demand.

Of course, I’ve left no room for nonproductive time, or defects. This gets back to theoretical vs. effective

capacity. Part of what we have to manage is what an acceptable utilization rate is. We need to allow time

for breaks, and other downtime, but also allow for time for redesign and other training and improvement.

Much of this material is a lot easier when applied to machines and mechanical processes than when

applied to people and services.

So if the arrival rate is less than the capacity, then we have a stable process. If not, then the process is

not stable, meaning that the throughput time will increase to infinity.

Capacity Utilization – how much output was actually achieved relative to capacity, or how much could be

produced in an ideal situation. If the capacity of a process is 500 units per day and on a given day 480 are

produced, then capacity utilization is 480/500 = 96%.

Utilization – the ratio of the input the process actually used in creating the output to the amount of that

input available for use. This can be in terms of labor – the ratio of hours worked on a process to total

hours – or in machine utilization – the percentage of time a machine is used over a time period. So if it

takes a worker 5 minutes to do a task and the effective capacity of the process is 10 per hour, then the

utilization rate for this worker is 50/60=83.3%

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In the above example, theoretically we could make 40 cups of coffee in an hour, the worker at station 1

would have to work 20 minutes to make 40 cups, so the utilization rate would be 20/60=33.3%, the

second worker takes 90 seconds for each task, so 90*40=1 hour. So his/her utilization rate is 100%.

Hence this is the theoretical capacity.

Flexibility – This measures how long it takes to change the process so that it could produce a different

output, or use a different set of inputs.

Bottleneck – is the factor which limits production. Often the task with the longest cycle time is the

bottleneck. Alternatively the availability of labor (or waiting for other inputs) can determine a

bottleneck. The bottleneck affects both the process cycle time and capacity and so it is important to

identify where bottlenecks exists in a process. In my above example task 2, making the cup of coffee is

the bottle neck. We can improve the first step all we want and it will not change our cycle time or our

capacity.

Theory of Constraints – an approach to management that focuses on whatever impedes progress toward

the goal of maximizing the flow of total value added.

Idle Time – the time when useful work is not being performed.

Later we will talk about two specific types of process improvement methodologies: Six Sigma and Lean.

Here I just want to introduce you to the idea of a process and highlight the importance of having well

defined processes in place that are measurable. Our ultimate goal is process improvement, but here I

have shown the first two of several steps towards that goal:

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1) Define the process – determine the tasks and the flows of information and goods. Note this

could (and should) be done at both a macro and micro level – patient throughput through the

entire hospital vs. a particular lab test run on an ED patient.

2) Determine the capacity or range of capacities for the process. This requires an analysis of

each task and a comparison of how these tasks are balanced.