Operations Management Terminology

Operations Basics
Welcome to the Operations Basics Self-Instructional Workbook. The purpose of this
workbook is to provide a brief introduction to the basic concepts found in operations. It is
intended for use in connection with the first-year Technology and Operations Management
course by students with no or minimal background in operations. The workbook will cover
such terms as cycle time, process flow, work in process and manufacturing lead-time. Finally,
it will illustrate how a complex operation can be broken down into its components, described
and mapped in a way that makes it easier to understand and improve.
What is an Operation?
Although for many of us the word 'operations' evokes images of a large factory, an operation
is any process through which a set of inputs go through one or more steps resulting in a
(hopefully) more valuable set of outputs. Thus, a car manufacturing plant is certainly an
operation, but so is a hospital, the claim-processing department of an insurance company or a
person doing his or her laundry. Each of these operations can be described using a common
set of terminology and mapping tools. We will be explaining the definitions and providing
simple examples of the following concepts and terms:

Cycle Time (CT)

Bottleneck
Idle Time
Work-in-Process (WIP)
Buffers
Manufacturing Lead Time (MLT)
Mapping an operation using Process Flow Diagramming
Managing operations for optimal efficiency

Cycle Time (CT)

Cycle Time is the length of time, on average, that it takes to complete a step or set of steps
within an operation. In our laundry example, the cycle time for the washer is thirty minutes
and the cycle time for the dryer might be anywhere from forty-five minutes to an hour. Note,
however, that cycle time refers to the average time.

WASHER
Cycle Time
30 MIN

DRYER
Cycle Time
40 60 MIN

In a large laundry operation with ten washers, the cycle time for a single load would be three
minutes (thirty minutes divided by ten washers).

It is also important to be careful what units we are talking about. If the dryer is large enough
to run two loads of laundry (and our operation is set up in such a way that it does) the cycle
time per washer-load will be half of the cycle time per dryer-load. Later on we will also talk
about the cycle time for the entire laundry process.

Dependent steps. Many operations have dependent steps, i.e. steps that can only be done when
a previous step has been completed. You could put your laundry into the dryer before the
washing machine, or you could fold it before putting it into the dryer, but neither is likely to
be productive. The interaction of dependent steps creates much of the need for operations
management.

Bottleneck
Within a set of dependent steps, there is generally one step that defines the speed at which the
entire operation can run. This step is called the bottleneck because, just like liquid coming out
of a bottle, it limits the speed of the entire operation. Let us assume that the washer and dryer
can each handle one "load" of laundry and that the cycle times for each step are as follows:

Now imagine that we have a lot of laundry to do, such that as soon as we have put our first
load into the dryer we plan to start our second load in the washer, and so on. Once our 'line' is
full, which operation will decide (i.e., limit) the speed at which we can do our laundry? The
dryer will, because it will still be drying the first load when the washer finishes its cycle on
the second load. Generally, the step with the longest cycle time will be the bottleneck.

The bottleneck is often an important area of focus for improving the capacity of an operation,
since if the bottleneck's capacity can be increased it will often increase overall capacity, while
increasing the output of a non-bottleneck step may have no effect. In our laundry example, if
we can dry one load of laundry per day by hanging it outside that will let us do an extra load
of laundry per day. If, however, we could wash a load by hand that won't let us get any more
laundry done since our washer is already capable of more laundry than our dryer can handle.
Idle Time
Sometimes you only need to do one load of laundry, but because the steps in the process are
dependent, two machines (including you the folder) will be idle part of the time.

Since many operations are capable of completing their tasks faster than the bottleneck
operation, it will often not make sense to run them at full capacity. If you ran the washer and
dryer non-stop all day, you would accumulate extra loads of wet laundry waiting to be dried.
Eventually you would have to stop running the washer in order to let the dryer catch up.
Whether the washer is not running for a short period for each load (while we wait for the
dryer to finish), or has a longer period of downtime later in the day, that downtime is called
idle time.

Work in Process (WIP)

Work-in-process, or WIP, refers to inputs that are still in the operation. Laundry still in the
washer, the dryer or being folded would count as WIP in our example (as would laundry in
transit to either the washer or the dryer). WIP is sometimes discussed in dollar terms, but will
generally be considered in whatever units (such as loads of laundry) are moving through the
operation. In our example, once the 'line' is full, we would always have a load either in the
washer or waiting to be put into the dryer and another load in the dryer. We would also have a
load that is being folded, but since that load doesn't have to wait for anything, that step will be
empty some of the time. Ignoring the possibility that folding is delayed by our loading and
unloading the machines, we would expect to have a load of laundry in-process at the folding
step for thirty minutes (folding time) out of every forty-five (cycle time of the laundry
operation). We would therefore say that there is two thirds of a load in that step in describing
the WIP of the operation, or 2 2/3 loads of WIP in total.

Buffer
Sometimes an operation will have storage space where WIP from one step can accumulate
before being worked on by the next step. There can be a large number of reasons for having a
buffer. Suppose we don't want the washer to run in the afternoon. We might want to run it
non-stop in the morning to get as many loads finished as possible, but we would need space to
put them in while they waited for the dryer to catch up. In larger operations, a buffer may be
important in order to make sure that the bottleneck is never starved for inputs. Since the
bottleneck sets the pace, loss of production there may imply lost production for the entire
operation.

Manufacturing lead-time
Manufacturing lead-time, or MLT, is the average length of time it will take a new set of inputs
to move all the way through the operation, assuming no unusual measures are taken. A load of
laundry, for example, would spend one cycle (45 minutes) in the washer, including idle time,
another cycle in the dryer (90 minutes total), and then two-thirds of a cycle being folded (120
minutes). From laundry bag to clean and folded will take an average of two hours. Note that
because folding took place after our bottleneck (drying), the load didn't have to stay there for
a full cycle.

The laundry example is fairly simple, but in a more complex operation it might be difficult to
estimate MLT at a glance. There is a simple formula, known as Little's Law, which can help.
Little's Law states that:
Manufacturing Lead Time = Cycle Time * Work-in-Process
This simple rule makes sense if you imagine the path a new set of inputs (like a load of
laundry) must follow in order to pass through the operation. As each unit of WIP moves
forward, the new set of inputs takes its place. Each move occurs once per cycle, so
multiplying cycle time times WIP will give us our total lead-time.
In our laundry example, we had 2 2/3 loads of WIP. Multiplying 2 2/3 times our cycle time of
45 minutes gives us 120 minutes.

Mapping an Operation
One of the ways a manager can use to understand and improve an operation is by mapping it.
By convention, we map processes (such as the washing machine) with rectangles, places
where WIP or raw materials reside with triangles, and indicate flows with lines, using arrows
to indicate direction. Capacity of each process can be added, if desired.

A starting map for our laundry room would be as follows:

Information flows are also important in understanding how an operation works. Here, the
information flow is very simple; the washer and dryer each probably have a buzzer that goes
off when they are done, or perhaps we are simply close enough that we can hear them stop
running. In a more complex operation, however, information flows would not be so
straightforward. Information flows are generally recorded with a dotted line, so that they are
easily distinguished from physical flows.

Using Operations Management Tools

Let's assume for a moment that we're not doing our own laundry. Instead, we're living at our
parent's house and doing laundry for our neighbours on the weekends to make some extra
money. We charge $15 per load, including folding. We currently do six loads per day before
meeting up with our friends, who get up somewhat later than we do. Suppose we are
considering buying a better washer or a better dryer to help us make more money. Our parents
are willing to help out, since it will be their new washer or dryer, but it will still cost us $100
for either upgrade. The new washer will take just 20 minutes to do a load of laundry, while
the new dryer will take just 30 minutes. Which, if either, should we do?
Well, our understanding of bottlenecks makes it clear that buying the washer is unlikely to
make sense. The pace at which we can wash, dry and fold laundry is set by the slowest step,
drying. So let us consider the new dryer. What would our map look like?

Now each process has a cycle time of 30 minutes, suggesting a cycle time of 30 minutes for
the entire line as well. In practice our cycle time will almost certainly be longer, since we
were probably using our idle time in the folding process for moving laundry in and out of the
machines, resting or whatever. But as an approximation, we can estimate our new capacity as
being about 50% higher than it was before, or nine loads per day. Thus, we would expect to
earn an extra $45 per day, and would be able nearly to pay for the dryer upgrade in a single
weekend. We might want to check some assumptions, like our ability to attract three extra
loads of new business per day, but from the operations point of view the new dryer looks like
a good bet.
This concludes the Operations Basics Self-Instructional Workbook. You may want to
continue to the glossary to review some of the terms we have used.

Glossary of Operations Terms

Bottleneck: The production resource that limits the capacity of the overall process. This is
usually the production equipment at the step with the lowest overall capacity, i.e., the longest
cycle time. In some situations, the bottleneck resources may be labor available at a particular
step or steps.
Buffer: Interim storage where Work-in-process can be stored between steps in a process. In
our laundry example, a laundry basket between the wash and dry cycles could be considered a
buffer.

Capacity: The maximum rate of output of a process, measured in units of output per unit of
time. The unit of time may be of any length, a day, a shift, or a minute.
Cycle Time (CT): Average time between completion of successive units. It is directly related
to the output rate. A process with an output rate of 4 units per hour has a cycle time of 15
minutes.
Idle Time: The time when useful work is not being performed.
Lot Size (also called Batch Size): Number of units of a particular product type that are
produced before beginning production of another product type.
Manufacturing Lead Time (MLT): The amount of time each unit spends in the
manufacturing process (sometimes called Throughput Time). This includes time spent
actively being worked upon at each step of the process as well as any time spends waiting
between steps. The concept of a lead-time applies to the total time spent in any process in
which the start and finish are well-defined events. We can talk about lead times, for example,
in service operations, or in the entire order-to-delivery process.
Operation, Operating System, (also Process): Any part of an organization that takes inputs
and transforms them into outputs of greater value to the organization than the original inputs.
Process: For purposes of this workbook and these definitions, a "Process" may refer to the
complete production process, such as doing a load of laundry or making bread from start to
finish, or to a segment of the complete process, such as the wash cycle or the baking process.
Process Flow Diagram: Breaking a process into its discrete components and diagramming it
as a series of small rectangles (processes), arrows (information and material flows), and
inverted triangles (storage of goods).
Utilization: Ratio of the input actually used over the amount of the input available. Labor
utilization is the ratio of the actual labor time spent processing to the total amount of labor
time available. Differences between the two can be due to inefficiencies in the process that
lead to lost working time, as well as to imbalances in the cycle times at each step of the
process that lead to idle time of workers at some steps while those at others are working.
Capacity utilization is the ratio of the capacity actually used (i.e., the output of the process) to
the total capacity available.
Work-in-Process: Number of units in the process at any point in time. If the process includes
buffer inventories between steps, they the work-in-process is the total number of units being
worked upon as well as waiting in the inventory between steps. The units in inventory are
usually referred to as Work-in-process inventory, to distinguish them from raw materials
inventory or finished goods inventory.