OM Week 4

Effective Cycle Time Formula

Effective Cycle Time = Total Processing Time/Number of Units in Batch

Activity Rate

Measures what a stage actually produces

What is the difference between Activity Rate and Utilization?

Activity Rate measures what a stage actually produces while Utilization measures what the system needs

• Activity Rate can vary with buffers and blocking but Utilization does not

What happens to Utilization when demand drops?

Utilization drops

• Utilization uses flow rate in the numerator

• When demand becomes the binding constraint, the flow rate drops and so does utilization at every stage

When is a lower throughput a tradeoff you may consider?

When Flow Time is extremely time consuming and you have perishable goods or urgent orders

What are the three key lessons from the Milk&Honey case?

1. Batch processing changes bottleneck identification

2. Worker constraints differ from machine constraints

3. Bottleneck relief has outsized financial impact when supply constrained

4. Capacity decision carry demand risk

What are the Three Financial “Inventories”?

1. Inventory → Products sitting in our warehouse

2. Accounts receivable → Money customers owe us

3. Accounts Payable → Money we owe suppliers

Each is a “pool” of value → Little’s Law tells us how long a dollar sits in each pool

Days sales in Inventory (DSI) Formula

Avg Inventory/COGS x 365

Cash Conversion Cycle Formula

CCC = DSI + DSO - DPO

Days in Sales Inventory (DSI)

Days to sell inventory

Days Sales Outstanding (DSO)

Days to collect from customers

Days Sales Outstanding (DSO) Formula

Avg Accounts Receivable/Revenue x 365

Days Payable Outstanding (DPO)

Days to pay suppliers

Days Payable Outstanding (DPO) Formula

Avg Accounts Payable/COGS x 365

Cash Tied Up (At cost) Formula

Cash tied up = CCC/365 x Annual COGS

Always calculate [BLANK] when machines process multiple units simultaneously

Effective Cycle Time

A Lower CCC means

Less working capital is needed

If New PBIT > Old PBIT we

Pursue the new option

Why does variability matter (2 reasons)?

1. High variability → unpredictable daily capacity

2. Creates queues and delays (often from downtime and unclear ownership)

Assume sufficient input and demand strictly exceeds process capacity.

In this case, the system flow rate equals process capacity

(True/False)

True