Process Flow Analysis

Part A: Process Measures

1
(A1) The Essence of Process Flow
• Three measures
– Flow time
– Flow rate
– inventory
• Three questions
– On average, how much time does a typical flow unit
spend within the process boundaries?
– On average, how many flow units pass through the
process per unit of time?
– On average, how many flow units are within the
process boundaries at any point in time?

2
(A2) flow time, (A3) Throughput
(A1) essence of
flow rate & in a stable (A4) Little’s Law Exercises
process flow
inventory dyn. process

Flow Time
• Status of a flow unit within process
– Undergoes an activity
– Waits in a buffer to undergo an activity
• The total time spent by a flow unit within
process boundaries
• May change over time
• Flow time = throughput time + setup time +
queue time
3
(A2) flow time, (A3) Throughput
(A1) essence of
flow rate & in a stable (A4) Little’s Law Exercises
process flow
inventory dyn. process

Flow Rate
• The number of flow units that flow through a
specific point in the process per unit of time
• May change over time
• Multiple points of input and output
• Instantaneous flow rate
– Flow rate at a specific point of time t
– e.g., Ri(t), Ro(t) Ri, 2(t) Total inflow rate
Ri, 1(t) + Ri, 2(t)

Process
Ri, 1(t) Ro(t)
4
(A2) flow time, (A3) Throughput
(A1) essence of
flow rate & in a stable (A4) Little’s Law Exercises
process flow
inventory dyn. process

Inventory
• When inflow > outflow
• people, cash, materials, products, orders, etc.
• Process inventory at time t: I(t)
– Total number of flow units within process
boundaries at time t
–  Ij(t), where Ij(t) is the inventory at jth stage in the
process]

5
(A2) flow time, (A3) Throughput
(A1) essence of
flow rate & in a stable (A4) Little’s Law Exercises
process flow
inventory dyn. process

(A2) Flow Time, Flow Rate &

Inventory Dynamics
• Both inflow and outflow fluctuate over time
• Inflow rate > outflow rate, inventory 
• Inflow rate < outflow rate, inventory 
• Instantaneous inventory buildup rate
– R(t) = Ri(t) - Ro(t)
– Ri(t) > Ro(t), I(t)  at a rate of R(t) > 0
– Ri(t) < Ro(t), I(t)  at a rate of R(t) < 0
– Ri(t) = Ro(t), I(t) = constant
• Inventory change between t1 and t2
– I(t2) – I(t1) = R x (t1 – t2) [R(t) = constant between t1 - t2] 6
(A2) flow time, (A3) Throughput
(A1) essence of
flow rate & in a stable (A4) Little’s Law Exercises
process flow
inventory dyn. process

Stable process Ri(t) = Ro(t), I(t) = constant

7
(A2) flow time, (A3) Throughput
(A1) essence of
flow rate & in a stable (A4) Little’s Law Exercises
process flow
inventory dyn. process

(A3) Throughput in a Stable Process

• A stable process
– the average inflow rate = the average outflow rate
• Throughput (average flow rate)
– Average number of flow units that flow through
the process per unit of time
• Average flow time
– The average of the flow times across all flow units
that exit the process during a specific span of time
8
(A2) flow time, (A3) Throughput
(A1) essence of
flow rate & in a stable (A4) Little’s Law Exercises
process flow
inventory dyn. process

(A4) Little’s Law

• Little’s Law
–I=RxT
• Three variables:
– Average flow time (T)
– Throughput (R)
– Average inventory (I)

9
(A2) flow time, (A3) Throughput
(A1) essence of
flow rate & in a stable (A4) Little’s Law Exercises
process flow
inventory dyn. process

Little’s Law
Flow rate/Throughput R
Inventory I [units/hr]
... ... ... [units] ... ...

Flow Time T [hrs]

• Average Inventory (I) = Throughput x Flow Time

= RxT
• Inventory Turnover = Throughput / Inventory
= 1/ T

10
(A2) flow time, (A3) Throughput
(A1) essence of
flow rate & in a stable (A4) Little’s Law Exercises
process flow
inventory dyn. process

Application of Little’s Law

Linking flow time, flow rate and inventory

11
(A2) flow time, (A3) Throughput
(A1) essence of
flow rate & in a stable (A4) Little’s Law Exercises
process flow
inventory dyn. process

Material flow
• A fast-food restaurant processes an average of
5,000 kg of hamburgers per week. Typical
inventory of raw meat in cold storage is 2,500 kg.
The process in this case is the restaurant and the
flow unit is a kg of meat. We know, therefore,
that
• R = 5,000kg/week and I = 2,500kg
• By Little Law, T = I/R = 2,500/5,000 = 0.5 weeks
• In other words, on average 1 kg of meat spends
half a week in cold storage.
12
(A2) flow time, (A3) Throughput
(A1) essence of
flow rate & in a stable (A4) Little’s Law Exercises
process flow
inventory dyn. process

Customer flow
• The café Dan Drippel serves on average 60 customers
per night. A typical night is about 10 hours. At any point
in time, there are on average 18 customers in the café.
These customers are either enjoying their food and
drinks, waiting to order, or waiting for their order to
arrive. What is the average flow time for each customer?
• The flow unit is customer
• R = 60 customers/night or 6 customers/hour
• I = 18 customers
• T = I/R = 18/6 = 3 hours
• In other words, on average, each customer spends
three hours at Dan Drippel 13
(A2) flow time, (A3) Throughput
(A1) essence of
flow rate & in a stable (A4) Little’s Law Exercises
process flow
inventory dyn. process

Job Flow
• A branch office of an insurance company
processes 10,000 claims per year. Average
processing time is three weeks.
• Flow unit is a claim
• R = 10,000 claims/year
• T = 3/50 year
• I = R x T = 600 claims
• In other words, on average 600 claims scatter
in various phases of processing

14
(A2) flow time, (A3) Throughput
(A1) essence of
flow rate & in a stable (A4) Little’s Law Exercises
process flow
inventory dyn. process

Cash Flow
• A steel company processes $400 million of iron
per year. The cost of processing ore is $200
million per year. The average inventory is $100
million.
• R = $600 million/year
• I = $100 million
• T = I/R = 2 months
• In other words, on average, a dollar spends two
months in the process. That is, each dollar is tied
up in working capital at the factory for an average
of two months
15
(A2) flow time, (A3) Throughput
(A1) essence of
flow rate & in a stable (A4) Little’s Law Exercises
process flow
inventory dyn. process

Your Turn!
Monetary Flow: For the new euro introduction in 2002, Wim Duisenberg had
to decide how many new Euro coins to stamp by 2002. Euroland’s central
banks’ cash-in-coins handling was estimated at €300 billion per year. The
average cash-in-coins holding time by consumers and businesses was
estimated at 2 months. How many Euro coins were to be made?

Customer Flow: Taco Bell processes on average 1,500 customers per day (15
hours). On average there are 75 customers in the restaurant (waiting to
place the order, waiting for the order to arrive, eating etc.). How long
does an average customer spend at Taco Bell and what is the average
customer turnover?

Job Flow: The Travelers Insurance Company processes 10,000 claims per year.
The average processing time is 3 weeks. Assuming 50 weeks in a year,
what is the average number of claims “in process”.

16
(A2) flow time, (A3) Throughput
(A1) essence of
flow rate & in a stable (A4) Little’s Law Exercises
process flow
inventory dyn. process

Your Turn!
Material Flow: Wendy’s processes an average of 5,000 lb. of hamburgers per
week. The typical inventory of raw meat is 2,500 lb. What is the average
hamburger’s cycle time and Wendy’s turnover?

Cash Flow: Motorola sells $300 million worth of cellular equipment per year.
The average accounts receivable in the cellular group is $45 million.
What is the average billing to collection process cycle time?

Inventory Flow: A general manager at Baxter states that her inventory turns
three times a year. She also states that everything that Baxter buys gets
processed and leaves the docks within six weeks. Are these statements
consistent?

17
(A2) flow time, (A3) Throughput
(A1) essence of
flow rate & in a stable (A4) Little’s Law Exercises
process flow
inventory dyn. process

Analysis of Service Process

18
(A2) flow time, (A3) Throughput
(A1) essence of
flow rate & in a stable (A4) Little’s Law Exercises
process flow
inventory dyn. process

Exercise I
• A hospital emergency room (ER) is currently organized so that all
patients register through an initial check-in process. At his or her turn,
each patient is seen by a doctor and then exists the process, either with
a prescription or with admission to the hospital.
• Currently, 50 people per hour arrive at the ER, 20% of who are admitted
to the hospital.
• On average, 5 people are waiting to the registered and 30 are registered
and waiting to see a doctor.
• The registration process takes, on average, 2 minutes per patient.
• Among patients who receive prescriptions, average time spent with a
doctor is 5 minutes.
• Among those admitted to the hospital, average time is 30 minutes.
• Assume the process to be stable; that is, average inflow rate equals
average outflow rate.
19
(A2) flow time, (A3) Throughput
(A1) essence of
flow rate & in a stable (A4) Little’s Law Exercises
process flow
inventory dyn. process

Process Definition

R2 =
Potential
admits
Registration Doctor 20%
R = 50/hr

80%
Buffer 1 TR = 2 min Buffer 2 T1 = 5 min
I=5 I = 30 T2 = 30 min Simple
prescription
Tb1 = IR = Tb2 =

R1 =

20
(A2) flow time, (A3) Throughput
(A1) essence of
flow rate & in a stable (A4) Little’s Law Exercises
process flow
inventory dyn. process

Exercise I
• On average, how long does a patient spend in the ER?

• On average, how many patients are being examined by doctors?

• On average, how many patients are there in the ER?

21
(A2) flow time, (A3) Throughput
(A1) essence of
flow rate & in a stable (A4) Little’s Law Exercises
process flow
inventory dyn. process
R2 = 50 x 20% = 10/hr
Solution Potential
admits
Registration Doctor 20%
R = 50/hr

80%
Buffer 1 TR = 2 min Buffer 2 T1 = 5 min
I=5 I = 30 T2 = 30 min Simple
prescription
Tb1 = 5/50 x 60 = IR = 50 x 2/60 = Tb2 = 30/50 x 60 =
6.0 min 1.67 patients 36.0 min
R1 = 50 x 80% = 40/hr
Average flow time for simple prescription = 6.0 + 2 + 36.0 + 5 = 49mins
Average flow time for potential admit = 74 min

Average inventory for potential admit at Doctor = 10/60 x 30 = 5 patients

Average inventory for simple prescription at Doctor = 40/60 x 5 = 3.33 patients

22
(A2) flow time, (A3) Throughput
(A1) essence of
flow rate & in a stable (A4) Little’s Law Exercises
process flow
inventory dyn. process

Solution
• On average, how long does a patient spend in the ER?
Average flow time for simple prescription = 6.0 + 2 + 36.0 + 5 = 49mins
Average flow time for potential admit = 74 min
Average flow time a patient spends in ER = 0.8 x 49.0 + 0.2 x 74.0 = 54.0 min

• On average, how many patients are being examined by doctors?

Average inventory for potential admit at Doctor = 10/60 x 30 = 5 patients
Average inventory for simple prescription at Doctor = 40/60 x 5 = 3.33 patients
Average inventory (patients examined by doctors) = 5+3.33 = 8.33 patients

• On average, how many patients are there in the ER?

Average inventory in ER = 50/60 x 54.0 = 45 patients

23
(A2) flow time, (A3) Throughput
(A1) essence of
flow rate & in a stable (A4) Little’s Law Exercises
process flow
inventory dyn. process

Exercise II
Auto-Moto – Financial Application Process
• Provides financing to qualified buyers of new cars and
motorcycles.
• Receives 1,000 loan applications per month (30 days/month).
• Process each application individually.
• On average, 20% of applications received approval.
• On average, 500 applications at various stage of the
approval/rejection process.

• Problem:
– although most applications could be processed fairly quickly, some-
because of insufficient and/or unclear documentation took a
disproportionate amount of time
24
(A2) flow time, (A3) Throughput
(A1) essence of
flow rate & in a stable (A4) Little’s Law Exercises
process flow
inventory dyn. process

Process I (As IS)

200/
Approved month
20%

1000/m
onth
Review
I=500
80%
800/
Rejected month

30 days/month

Assume the process is stable, and all the figures in the above are given.
25
(A2) flow time, (A3) Throughput
(A1) essence of
flow rate & in a stable (A4) Little’s Law Exercises
process flow
inventory dyn. process

Process I (As IS)

Average flow time (as is) =
X1 days 200/
Approved month
20%

1000/m
onth
Review
I=500
80%
800/
Rejected month

30 days/month

Assume the process is stable, and all the figures in the above are given.
What is the average flow time of Process I? 26
(A2) flow time, (A3) Throughput
(A1) essence of
flow rate & in a stable (A4) Little’s Law Exercises
process flow
inventory dyn. process

Improvement Suggestions
• Because the % of approved application is fairly low,
an Initial Review Team should be set up to
preprocess all applications according to strict but
fairly mechanical guidelines.

• Each application would fall into one of the three

categories
– A (looks excellent)
– B (needs more detailed evaluation)
– C (reject summarily)
– A & B applications would be forwarded to different specialist subgroups.

• Each subgroup would then evaluate the applications

in its domain and make accept/reject decisions.
27
(A2) flow time, (A3) Throughput
(A1) essence of
flow rate & in a stable (A4) Little’s Law Exercises
process flow
inventory dyn. process

Process II (newly designed)

Subgroup A 70% 200/
Review Approved month
IA=25 30%

Subgroup B
25% 10%
Review
25%
IB=150
90%
Initial
1000/m 50% 800/
Review Rejected
onth month
IIR = 200

Assume the process is stable, and all the figures in the above are given.
28
(A2) flow time, (A3) Throughput
(A1) essence of
flow rate & in a stable (A4) Little’s Law Exercises
process flow
inventory dyn. process

Process II (Newly designed)

Subgroup A RA_App = 175/month
70% 200/
Review Approved month
IA=25 30%

Subgroup B
25% 10%
Review
25%
IB=150
90%
Initial
1000/m 50% 800/
Review Rejected
onth RC = 500/month
month
IIR = 200

Assume the process is stable, and all the figures in the above are given.
29
We can further calculate the throughput as above.
(A2) flow time, (A3) Throughput
(A1) essence of
flow rate & in a stable (A4) Little’s Law Exercises
process flow
inventory dyn. process

Does Process II perform

better than Process I ?

30
(A2) flow time, (A3) Throughput
(A1) essence of
flow rate & in a stable (A4) Little’s Law Exercises
process flow
inventory dyn. process

Process II (Newly designed)

Average flow time
(newly designed) Subgroup A 70% 200/
=X2 days Review Approved month
IA=25 30%
Average follow time of review subgroup A = X4 days Average flow time of
approval = X6 days
Subgroup B
25% 10%
Review
25%
IB=150
90%
Initial Average follow time of review subgroup B = X5 days
1000/m 50% 800/
Review Rejected
onth month
IIR = 200
Average flow time of
Average flow time of rejection = X7 days
initial review =
X3 days 31
(A2) flow time, (A3) Throughput
(A1) essence of
flow rate & in a stable (A4) Little’s Law Exercises
process flow
inventory dyn. process

Process II (Newly designed)

X2 =
200+25+150
=0.375 month Subgroup A
1000/𝑚𝑜𝑛𝑡ℎ
70% 200/
Review Approved month
= (0.375) x 30= 11.25 days IA=25 30%

Subgroup B
25% 10%
Review
25%
IB=150
90%
Initial
1000/m 50% 800/
Review Rejected
onth month
IIR = 200

32
(A2) flow time, (A3) Throughput
(A1) essence of
flow rate & in a stable (A4) Little’s Law Exercises
process flow
inventory dyn. process

Process II (Newly designed)

Subgroup A 70% 200/
Review Approved month
IA=25 30%

Subgroup B
25% 10%
Review
25%
IB=150
90%
Initial
1000/m 50% 800/
Review Rejected
onth month
IIR = 200
200
X3 =
1000/𝑚𝑜𝑛𝑡ℎ

=0.2 month
33
= (0.2) x 30= 6 days
(A2) flow time, (A3) Throughput
(A1) essence of
flow rate & in a stable (A4) Little’s Law Exercises
process flow
inventory dyn. process
25
X4 = =0.1 month
250/𝑚𝑜𝑛𝑡ℎ

= (0.1) x 30= 3 days

Subgroup A 70% 200/
Review Approved month
IA=25 30%

Subgroup B
25% 10%
Review
25%
IB=150
90%
Initial
1000/month 50% 800/
Review Rejected
RC = 500/month
month
IIR = 200
150
200 X5 = =0.6 month
X3 = 250/𝑚𝑜𝑛𝑡ℎ
1000/𝑚𝑜𝑛𝑡ℎ
= (0.6) x 30= 18 days
=0.2 month
34
= (0.2) x 30= 6 days
(A2) flow time, (A3) Throughput
(A1) essence of
flow rate & in a stable (A4) Little’s Law Exercises
process flow
inventory dyn. process
The average flow time (IR & Review A) = 9 days
The average flow time (IR & Review B) = 24 days

Subgroup A 70% 200/

Review Approved month
IA=25 30%

Subgroup B
25% 10%
Review
25%
IB=150
90%
Initial
1000/month 50% 800/
Review Rejected
RC = 500/month
month
IIR = 200

35
(A2) flow time, (A3) Throughput
(A1) essence of
flow rate & in a stable (A4) Little’s Law Exercises
process flow
inventory dyn. process
Average flow time of approval:
The average flow time (IR & Review A) = 9 days 175 25
X6 = x9+ x 24
The average flow time (IR & Review B)= 24 days 200 200

RA_App = 175/month = 10.88 days

Subgroup A 70% 200/
Review Approved month
IA=25 30%

3 days
Subgroup B
25% 10%
Review
25%
IB=150
90%
Initial 18 days
1000/m 50% 800/
Review Rejected
onth month
IIR = 200

6 days

36
(A2) flow time, (A3) Throughput
(A1) essence of
flow rate & in a stable (A4) Little’s Law Exercises
process flow
inventory dyn. process
The average flow time (IR & Review A) = 9 days
The average flow time (IR & Review B)= 24 days

Subgroup A 70% 200/

Review Approved month
IA=25 30%

3 days
Subgroup B
25% 10%
Review
25%
IB=150
90%
Initial 18 days
1000/m 50% 800/
Review Rejected
onth RC = 500/month
month
IIR = 200

6 days Average flow time of rejection:

75 225 500
X7 = x9+ x 24 + x6
800 800 800

= 11.34 days
(A2) flow time, (A3) Throughput
(A1) essence of
flow rate & in a stable (A4) Little’s Law Exercises
process flow
inventory dyn. process

Exercise II
Auto-Moto – Financial Application Process
1. Considering the average flow time of the whole process, does Process II performs
better than Process I ?

2. Considering the average flow time of approval, does Process II perform better than
Process I ?

38
Process Flow Analysis

Part B: Flow Time Analysis

39
(B1) Flow Time (B2) Flow Time & (B3) Theoretical Flow (B4) Levers for
Measurement Critical Path Time (TFT) & Waiting managing TFT

(B1) Flow Time Measurement

• Observe the process over a specified,
extended period of time
• Select a random sample of flow units over the
specified period
• Measure the flow time from entry to exit, of
each flow unit in the sample
• Compute the average of the flow times
measured.
40
(B1) Flow Time (B2) Flow Time & (B3) Theoretical Flow (B4) Levers for
Measurement Critical Path Time (TFT) & Waiting managing TFT

(B2) Flow Time & Critical Path

• Flow time of process
– The amount of time required by an average flow unit
to flow through the process from entry to exit
• Flow time of a given activity
– The time required by an average flow unit to flow
through the activity
• Critical path
– The path with longest flow time in the process
– It is the flow time of the process
– Activities of the path are critical activities
41
(B1) Flow Time (B2) Flow Time & (B3) Theoretical Flow (B4) Levers for
Measurement Critical Path Time (TFT) & Waiting managing TFT

Example – Wonder Shed Inc.

Activity of constructing a storage shed Flow time (minutes)
1 Separate the roof and base materials 20
2 Punch the base 35
3 Punch the roof 25
4 Form the base 10
5 Form the roof 20
6 Sub-assemble the base 30
7 Assemble 15
8 Inspect 40

3 5
Input Start 1 7 8 End Output
2 4 6

42
(B1) Flow Time (B2) Flow Time & (B3) Theoretical Flow (B4) Levers for
Measurement Critical Path Time (TFT) & Waiting managing TFT

(B3) Theoretical Flow Time & Waiting

• Flow time
– Activity times + Waiting times
• Theoretical flow time (TFT)
– The min amount of time required for a flow unit
to flow through the process from entry to exit,
w/o waiting or interruptions
– Activity times =
Value-adding flow time + Non-value-adding flow
time
43
(B1) Flow Time (B2) Flow Time & (B3) Theoretical Flow (B4) Levers for
Measurement Critical Path Time (TFT) & Waiting managing TFT

Example – Wonder Shed Inc.

Activity of constructing a storage shed Flow time (mins) Activity Time (mins)
1 Separate the roof and base materials 20 5
2 Punch the base 35 15
3 Punch the roof 25 10
4 Form the base 10 5
5 Form the roof 20 5
6 Sub-assemble the base 30 10
7 Assemble 15 10
8 Inspect 40 15

3 5
Input Start 1 7 8 End Output
2 4 6

44
(B1) Flow Time (B2) Flow Time & (B3) Theoretical Flow (B4) Levers for
Measurement Critical Path Time (TFT) & Waiting managing TFT

Flow-time Efficiency
• Flow-time efficiency =
Theoretical _ flow _ time
=
 Activity _ time
Average _ flow _ time  Activity _ time + Waiting _ time
Industry Process Flow Theoretical Flow –time
time flow time efficiency
1 Life New policy 72 hrs 7 mins 0.16%
insurance application
2 Consumer New graphic 18 days 2 hrs 0.14%
packaging design
3 Commercial Consumer 24 hrs 34 mins 2.35%
bank loan
4 Hospital Patient 10 days 3 hrs 3.75%
billing
5 Auto Financial 11 days 5 hrs 5.68%
manufacture cloasing 45
(B1) Flow Time (B2) Flow Time & (B3) Theoretical Flow (B4) Levers for
Measurement Critical Path Time (TFT) & Waiting managing TFT

(B4) Levers for Managing TFT

• Work in parallel
– Move work content off the critical path
• Work smarter
– Eliminate non-value-adding activities
• Work quality
– Reduce the amount of rework
• Work with priority
– Modify the product mix
• Work faster
– Increase the speed of operation
46
Process Flow Analysis

Part C: Flow Rate & Capacity

Analysis

47
(C2) Resources & (C4) Capacity
(C1) Flow Rate (C3) Effect of
Effective Waste &
Measurement Product Mix
Capacity Theoretical Cap.

(C1) Flow Rate Measurement

• Capacity is the maximum throughput
• Throughput = no. of flow units/unit of time
– Customers/day
– Tons/shift
– Cars/hour
– Dollars/month
– Patients/year
• Throughput = 1/cycle time (takt time)
48
(C4) Capacity
(C1) Flow Rate (C2) Resources & (C3) Effect of
Waste &
Measurement Effective Capacity Product Mix
Theoretical Cap.

(C2) Resources & Effective Capacity

• Resources and resource pools

• Effective capacity

• Capacity utilization

• Other factors affecting effective capacity

49
(C4) Capacity
(C1) Flow Rate (C2) Resources & (C3) Effect of
Waste &
Measurement Effective Capacity Product Mix
Theoretical Cap.

Resources and resource pools

• A given resource may used by > 1 activity
• A given activity may require > 1 resource
• Resource pool = Σresource uniti [i: 1…n]
– A collection of interchangeable resources that can
perform an identical set of activities
– Each unit in a resource pool is a resource unit
• Resource pooling
– Combining separate resource pools into a single, more
flexible, pool able to perform activities

50
(C4) Capacity
(C1) Flow Rate (C2) Resources & (C3) Effect of
Waste &
Measurement Effective Capacity Product Mix
Theoretical Cap.

Effective capacity
• Unit load of a resource uniti (Ti)
– Average amount of time required by the resource unit to process one flow
unit, given the way the resource is utilized by the process

• Effective capacity of a resource uniti

– The inverse of unit load = 1/Ti
– The maximum sustainable flow rate through the resource unit, if it were to be
observed in isolation

• Effective capacity of a resource pooli

– Sum of the effective capacities of all the resource units in that pool (assume
the number of resource uniti is ci)
– ci/Ti

• Effective capacity of a process

– The effective capacity of the bottleneck
– Bottleneck → the slowest resource pool of the process
– Min of {c1/T1, c2/T2,…,Cn/Tn}
51
(C2) Resources & (C4) Capacity
(C1) Flow Rate (C3) Effect of
Effective Waste &
Measurement Product Mix
Capacity Theoretical Cap.

Exercise
• Health maintenance organizations (HMOs) provide
their customers with all-inclusive medical service for a
fixed monthly fee.
• To secure services, they contract with physicians and
hospitals that provide their services on a fee/service
basis.
• When members of an HMO receive medical service,
the providing physician or hospital submits a claim to
the HMO for reimbursement.
• Newlife Finance is a service provider to HMOs. For a
small fee, it performs the entire claims processing
operation on behalf of HMO.

52
(C4) Capacity
(C1) Flow Rate (C2) Resources & (C3) Effect of
Waste &
Measurement Effective Capacity Product Mix
Theoretical Cap.

The HMOs’ medical claim process

Process Activities
1 Claims billed by physicians arrive by mail and are opened and data-stamped by
the mailroom clerk. They are then placed into a data-entry bin.
2 Data-entry clerks enter date-stamped applications – first in, first out – into
NewLife’s claims processing system. Data-entry clerks must check claims for
proper formatting and completeness of data fields before they input claims
into the system. If a claim is not legible, fully completed, or properly formatted,
it must be sent back to the physician for resubmission. Once entered, claims
are stored in a processing inventory called “suspended claims”.
3 Claims are assigned to a claim processor for initial processing.
4 Processed claims are transferred by the system to a claim supervisor for
inspection and possible alternations.
5 Claims are returned to their original claim processors who complete the
transaction and issue instructions to accounts payable for settlement.

53
(C4) Capacity
(C1) Flow Rate (C2) Resources & (C3) Effect of
Waste &
Measurement Effective Capacity Product Mix
Theoretical Cap.

Given the four types of resources, their unit load and no. of units:
Resource Pooli Unit Load No. of units
(mins/claim, in the
Ti) Resource
Pool (ci)
Mailroom clerk 1.00 1
Data-entry clerk 5.00 8
Claims processor 8.00 12
Claims supervisor 2.50 5

54
(C4) Capacity
(C1) Flow Rate (C2) Resources & (C3) Effect of
Waste &
Measurement Effective Capacity Product Mix
Theoretical Cap.

Effective Capacity for HMOs

Given the four types of resources, their unit load and no. of units:
Resource Pooli Unit Load Effective No. of units Effective
(mins/claim, Capacity of a in the Capacity of a
Ti) resource unit Resource Resource Pool
(claims/min Pool (ci) (claims/min
1/Ti) ci/Ti)
Mailroom clerk 1.00 1/1 = 1.00 1 1.00
Data-entry clerk 5.00 1/5 = 0.20 8 1.60
Claims processor 8.00 1/8 = 0.125 12 1.50
Claims supervisor 2.50 1/2.5 = 0.40 5 2.00
What is the process capacity for HMOs?

55
(C4) Capacity
(C1) Flow Rate (C2) Resources & (C3) Effect of
Waste &
Measurement Effective Capacity Product Mix
Theoretical Cap.

Effective Capacity for HMOs

Given the four types of resources, their unit load and no. of units:
Resource Pooli Unit Load Effective No. of units Effective
(mins/claim, Capacity of a in the Capacity of a
Ti) resource unit Resource Resource Pool
(claims/min Pool (ci) (claims/min
1/Ti) ci/Ti)
Mailroom clerk 1.00 1/1 = 1.00 1 1.00
Data-entry clerk 5.00 1/5 = 0.20 8 1.60
Claims processor 8.00 1/8 = 0.125 12 1.50
Claims supervisor 2.50 1/2.5 = 0.40 5 2.00
How many professionals are required to achieve process capacity of 80 claims/hr?

56
(C4) Capacity
(C1) Flow Rate (C2) Resources & (C3) Effect of
Waste &
Measurement Effective Capacity Product Mix
Theoretical Cap.

Capacity Utilization
• Capacity utilization (μi) of Resource Pooli (RPi)
– μi =Throughput/effective capacity of RPi
– Throughputs of all resources are given:
Resource Pool (RP) Throughput (claims/day)

Mailroom clerk 400

Data-entry clerk 400
Claims Processor 400
Claims Supervisor 480

• Capacity utilization (μ) of Process

– Defined by the bottleneck resource pool
57
(C4) Capacity
(C1) Flow Rate (C2) Resources & (C3) Effect of
Waste &
Measurement Effective Capacity Product Mix
Theoretical Cap.

Exercise
Assume 8-hrs per day in the HMO operation.
Resource Pool (RP) Effective Capacity of RPi Capacity Utilization (μi)
(claims/day)
Mailroom clerk 1.00 x 480 = 480 400/480 = 83%
Data-entry clerk 1.60 x 480 = 768 400/768 = 52%
Claims Processor 1.50 x 480 = 720 400/720 = 56%
Claims Supervisor 2.00 x 480 = 960 480/960 = 50%

What is the process capacity and its capacity utilization μ?

58
(C4) Capacity
(C1) Flow Rate (C2) Resources & (C3) Effect of
Waste &
Measurement Effective Capacity Product Mix
Theoretical Cap.

(C3) Effect of Product Mix

• Firms produce several products simultaneously
– Different resources are utilized at different rates.
• Assume: 60% claims go through contracts with physician and
40% claims hospital.
• The no. of units in resource pools (RPi) is the same.
• No. of Units in the RP (ci)
Resource Pool Unit Load (Physician) Unit Load (Hospital)
(mins/claim) (mins/claim)
Mailroom clerk 1.00 1.50
Data-entry clerk 5.00 6.00
Claims processor 8.00 8.00
Claims supervisor 2.50 4.00 59
(C4) Capacity
(C1) Flow Rate (C2) Resources & (C3) Effect of
Waste &
Measurement Effective Capacity Product Mix
Theoretical Cap.

Example – Hospital Claims

• Given:
Resource Pooli Unit Load (mins/claim, Ti) No. of units in the RP (ci)
Mailroom clerk 1.50 1
Data-entry clerk 6.00 8
Claims processor 8.00 12
Claims supervisor 4.00 5
• The bottleneck is mailroom clerk, whose capacity is 0.66 claims/min, and
the process capacity for hospital claims is approximately 40 claims/hr.
Unit Load Effective Capacity of a No. of Units in Effective Capacity of a
(Hospital) Resource Unit the RP (ci) RP (claims/min, ci/Ti)
(mins/claim, Ti) (claims/min, 1/Ti)

Mailroom clerk 1.50 1/1.50 = 0.66 1 0.66

Data-entry clerk 6.00 1/6.00 = 0.17 8 1.33
Claims processor 8.00 1/8.00 = 0.125 12 1.50
60
Claims supervisor 4.00 1/4.00 = 0.25 5 1.25
(C4) Capacity
(C1) Flow Rate (C2) Resources & (C3) Effect of
Waste &
Measurement Effective Capacity Product Mix
Theoretical Cap.

Example – Mix (Unit Load)

• The unit load of the mixed product:
Resource Pool Unit Load (Physician) Unit Load (Hospital) Unit Load (60%-40% mix)
(mins/claim) (mins/claim) (mins/claim)
Mailroom clerk 1.00 1.50 1.20
Data-entry clerk 5.00 6.00 5.40
Claims processor 8.00 8.00 8.00
Claims supervisor 2.50 4.00 3.10
• The bottleneck is mailroom clerk, whose capacity is 0.83 claims/min. The
process capacity for the mixed product is approximately 50 claims/hr.
Unit Load Effective Capacity of a No. of Units in Effective Capacity of a
(mins/claim, Ti) Resource Unit the RP (ci) RP (claims/min, ci/Ti)
(claims/min, 1/Ti)
Mailroom clerk 1.20 1/1.20 = 0.83 1 0.83
Data-entry clerk 5.40 1/5.40 = 0.185 8 1.48
Claims processor 8.00 1/8.00 = 0.125 12 1.50
Claims supervisor 3.10 1/3.10 = 0.32 5 1.61 61
(C4) Capacity
(C1) Flow Rate (C2) Resources & (C3) Effect of
Waste &
Measurement Effective Capacity Product Mix
Theoretical Cap.

Optimizing Profitability
Physician claim Hospital claim
Effective Capacity (units/hr) 60 40
Contribution margin ($/unit) $5.00 $6.00

Which claims will be more profitable considering the following?

•Not contribution/unit
•But contribution/time

62
(C4) Capacity
(C1) Flow Rate (C2) Resources & (C3) Effect of
Waste &
Measurement Effective Capacity Product Mix
Theoretical Cap.

(C4) Capacity Waste &

Theoretical Capacity
• Factors that create capacity waste
– Resource breakdown
– Maintenance
– Quality rejects
– Rework and repetitions
– Setups
– Non-value-adding activities

63
(C4) Capacity
(C1) Flow Rate (C2) Resources & (C3) Effect of
Waste &
Measurement Effective Capacity Product Mix
Theoretical Cap.

Theoretical Capacity
• Theoretical unit load of a resource unit
– The minimal amount of time required to process a
flow unit, if all waste were eliminated
– 1/theoretical unit load
• Theoretical capacity of a resource unit
– 1/theoretical unit load
– The maximum sustainable flow rate through the
resource unit, if it were to be utilized w/o any
waste
(C4) Capacity
(C1) Flow Rate (C2) Resources & (C3) Effect of
Waste &
Measurement Effective Capacity Product Mix
Theoretical Cap.

Capacity Waste Factor

• When theoretical unit load (TUL) cannot be
estimated directly
• Compute TUL based on capacity waste factor
(CWF)
• Theoretical capacity
– Effective capacity/(1-CWF)

65
(C4) Capacity
(C1) Flow Rate (C2) Resources & (C3) Effect of
Waste &
Measurement Effective Capacity Product Mix
Theoretical Cap.

Exercise
• The operating room (a resource unit) of a hospital
specializes in cataract surgery.
• On average, the hospital manages to perform a
surgery every 30 minutes (unit load)
• It is estimated that 33% of the operating room is
scheduled for cleaning, restocking, changeover of
nursing staff, fixing of malfunctioning equipment
and so forth.
What is the theoretical capacity of the room?

66
(C4) Capacity
(C1) Flow Rate (C2) Resources & (C3) Effect of
Waste &
Measurement Effective Capacity Product Mix
Theoretical Cap.

Theoretical Capacity Utilization

• Theoretical capacity utilization rate of a resource pool
- Utilization rate = Actual _ throughput
Theoretical _ capacity _ of _ resource _ pooli

• Capacity Cushion = 100% - Utilization Rate (%)

• Capacity requirement
– Estimated by the capacity cushion
Capacity Processing hours required for year’s demand
requirement =
Hours available from a single capacity unit per year,
after deducting desired cushion 67
(C4) Capacity
(C1) Flow Rate (C2) Resources & (C3) Effect of
Waste &
Measurement Effective Capacity Product Mix
Theoretical Cap.

Estimating Capacity
Requirements
Capacity requirements planning has both long- and short-term implications for
a firm's success. In the short term, annual sales numbers are heavily affected by
whether the company is prepared for the regular ups and downs of customer
demand.
Assume each machine can operate 250days/year, 8hrs/day. Given the capacity
cushion C = 15%, estimate the capacity requirement.

Item Client X Client Y

Annual demand forecast (copies) 2000.00 6000.00
Standard processing time (hour/copy) 0.50 0.70

Dp D = demand forecast for the year

p = processing time
M= N = total number of hours per year when the process operates
N[1 –C)]
C = desired capacity cushion
(C4) Capacity
(C1) Flow Rate (C2) Resources & (C3) Effect of
Waste &
Measurement Effective Capacity Product Mix
Theoretical Cap.

Estimating Capacity
Requirements
Assume each machine can operate 250days/year, 8hrs/day.
The annual processing time: N = 250 x 8 = 2000 hrs

Item Client X Client Y

Annual demand forecast (copies) 2000.00 6000.00
Standard processing time (hour/copy) 0.50 0.70

[(2000)(0.5) + (6000)(0.7)] hrs/machine

Capacity requirement M =
(2000 hrs)(1.0 – 0.15)
= 3.06  4 machines
THANK YOU
Assignment of Process Analysis
(Exercise on Moodle)

70