All entries for April 2009

April 05, 2009

Operations Management Lesson 6 Exercise

Level capacity

As an example of level capacity I would like to look at the Indoor Skiing centre. Next to my house I have a Gym, or let's say sports club. It consists of many sections like: Gym, Swimming pool, Sauna, Indoor Skiing centre etc. When developer constructed this centre he created the capacity of the slope. It is 50m wide, 600m long and has difference in height of 80m. Number of air conditioning systems keeps the inside temperature of -5°C. This level of capacity can not be changed and is stable.

Management of this centre can't stop air conditioning if there is only one sportsman inside as snow will melt and it will cost the company much more money to relaunch the centre again.

www.snej.com

Chase demand

AddeccoHere as an example I would like to offer Human Resources Outsourcing companies. For example IBM is the customer of Addecco and Zander outsourcing companies. This companies can easily chase the demand of their customers for new employees. Having a good database of available workers they do not hire them until there is a request from one of their clients. As soon as demand appears HR outsourcing company can hire the employee end rent it to customer with immediate coverage of the costs. If customer does not need this employee any more HR outsourcing company fire the employee and keep him as a candidate in the database.

Yield management

From my point of view here we can review as an example theme parks. While being a student in the university I was working during the summer vocations in Six Flags over Texas theme park in Dallas, TX.

Theme parks has a number of offers like "season pass", family tickets with discounted price.


  • Capacity of theme park is relatively fixed. It has number of rides, restaurants and shows with fixed capacity.
  • Market is definitely segmented.
  • Service can't be stored. It seems to be difficult to store the ride on the roller coaster.
  • The service is sold in advance as you by the ticket before you enter the park. Sometimes long time before.
  • Marginal cost is on the medium level.

Queue design

Let's review the queue design of the roller coaster. This queue is a mix of two designs: single queue and multi queue. The queue starts with the single queue design. This allows to structure the order of people going to the ride. At the closest point to the ride there is a split of the single queue into 10 queues to one trains as it has 10 seat rows. So this multi queue allows to minimise the time and simplify the structure of load. On the other side of the train there are 10 ways out. So load and unload are splitted. This also helps to minimise the time loss.


April 04, 2009

Operations Management Lesson 8 Exercise

Here I would like to get back to IBM Global Financing (IGF) process map that I described in Lesson 3 exercise.

IGF Process Map

Let's assess each step if it adds value from the Lean thinking perspective:

  • Step 1 "PREPARATION OF CUSTOMER REQUEST". Perfect performance of this step can help to avoid many issues in next process steps and properly prepared set of information allows to pass all approval stages faster and easier.
  • Step 2 "CREDIT CHECK". From my point of view this step adds value as it helps to dcrease the risk of unpaid debts and as a result decrease the cost of financing. This leads to the lower level of "waste" and cheaper financing interest rate for our customers. This step is one of the bottle necks of the process as capacity of credit department usually lower than the existing demand. So in peak time this can create a real issue for the business.
  • Step 3 "PRICING PREPARATION". This step also adds value as we can combine all incoming data for the pricing in a way to minimise customer's costs and cover all our risk and interest. From the other perspective it is another bottle neck as the capacity also does not match the business needs, but as this bottle neck is wider than "CREDIT CHECK" usually there is no big queue for pricing.
  • Step 4 "CONTRACTS NEGOTIATION". If customer accepts the offer we move to the step of contracts negotiation. This step is the narrowest bottle neck in the process as the capacity of the legal department is really unsufficient. But this step for sure adds value as it helps to avoid most of risks in the future and ensure the smoth contract fullfilment during the financing term.
  • Step 5 "BILLING". This is easy mechanical step that does not create lots of issues.

Once again reviewing the process of IGF business flow I can determine that this is rather push mode of work flow than pull one. This means that all existing bottle necks create a number of queues that does not allow the business to flow smoothely. Main reason is the nature of business. As IGF is a captive financing company it highly depends on the demand for the main IBM products (HW, SW, Services) and due to the high fluctuation of the attachement rate the demand for IGF financing is hardly predictable. So IGF mainly use MRP system of inventory management. That means that we have and inventory of available pool of money that we have to put into the market and renew this pool when we reach some critical point.


Operations Management Lesson 7 Exercise

For this exercise I have chosen the the assembling of personal computers. Every computer is a mix of spare parts like memory, hard drive, processor, video adapter, mother board etc. Let's assume that we assemble two types of desktops: standard type, and special powerful computers for special orders.

First of all we can classify the spare parts by the type of demand. Those for standard type of PCs will have independent demand. At the same time some special powerful 3-D graphic accelerators will have dependent demand which will depend on the number of special orders for this special computers.

For the spare parts for standard type of computers we can use ROP system to reorder them when inventory level reaches some critical point. This system is sufficient enough for such kind of inventory due to the high turnover of such spare parts and low cost of it's purchase.

For the more complex and powerful specific spare parts MRP system should be used. This system should use a complex of statistical information to plan and forecast peak demand for special computers. Besides that MRP should have an access to the information systems of the suppliers to be able to minimise the costs by purchasing higher quantity and using special promotion programs of the supplier. Third dimension of the MRP should be the cost of keeping the inventory. The mixture of these three dimensions will give us the most appropiate procurement policy.

The mentioned above classification can be used in ABC analysis. Let's devide all spare parts into three classes:

Class A: The most often used spare parts like wires, memory etc. The inventory cost is not high. Inventory turnover is high. ROP system should be used.

Class B: Often used spare parts like CPUs, HDDs, Standard Video adapters. Inventory turnover is medium. Mixture of ROP and MRP can be used.

Class C: Rarely used spare parts like complex 3-D accelerators and powerful video adapters. MRP should be used due to the complex forcasting of demand and procurement planning.


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  • Hi Alexander, I don't think you need too much further feedback from me. You need to add in the theor… by Kim White on this entry
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