ProofSmart Inc.

, a supplier of home
insulation materials, was burned down in a
recent fire. From the remains of what used
to be the accounting ledger, the following
information was recovered:

Process Analysis: Little’s Law

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 Process Analysis: Review
• Process mapping basics
– Key steps in process analysis
– Get feedback and validate maps
• Process analysis basics (3 keywords)
Flow time (or Throughput Time):
Length of time a unit spends in the system

Capacity rate:
Max rate at which units can flow through a process

Bottleneck:
Resource with the slowest capacity rate in a process
Determines the capacity rate of a process
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 More on Process Analysis
• Utilization and Utilization Profiles
• Inventory Build-Up Diagram
• Little’s Law

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Capacity Rate vs. Throughput Rate
• Both the capacity rate and the throughput
rate measure the output rate of a process
Capacity rate: Maximum possible output rate
Throughput rate or Flow rate: Actual output rate

• The throughput rate depends on both:

Capacity rate
Input rate (also called the arrival rate)
Rate at which flow units arrive at the process
e.g. Arrival of customers (demand rate), or Raw material
arrival into a factory (planned or scheduled arrivals)
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 Basic Process Characteristics
Capacity rate
[units/hr]
Input rate Throughput rate
[units/hr] Inventory [units] [units/hr]
... ... ... ... ...

Throughput rate is the

lower of two rates (input
Flow Time [hrs] rate and capacity rate)

Throughput Rate: Flow time = average time for a unit

What if Demand rate < Capacity rate? to move through the system
Throughput Rate: Cycle time = average time between
completion of units
What if Demand rate > Capacity rate?

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 The Physics of Process Flows
• Identify “flow units”
• Flow rates (input rate and capacity rate)
• Flow times (time spent in the process)
• Stocks (inventory build-up)

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 … and Process Characteristics
The Physics of Process Flows Process Characteristics
Identify “Flow Units” What is my “product”?
Flow rates What is the demand on my system?
(Input rates and capacity What is my capacity?
rates)
Flow times How long does it take me to produce
(time spent in process) one “unit”?
Stocks How much inventory (of flow units) do
(inventory build-up) I need to hold?
E.g., queue of patients at a hospital,
cars at a dealership, or a-warehouse-
full of materials.

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 Basic Process Measures
In Production and Service
Production Process Service Process
Flow Unit Materials Customers
Input Rate Raw material releasing rate Customer arrival rate
Output Rate Finished goods output rate Customers departure rate
(service completion rate)

Flow Time Time required to turn Time that a customer is

materials into a product being served
Inventory Amount of work-in-process Number of customers being
served
Capacity Maximum output rate Maximum service
completion rate

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 Utilization
Throughput Rate Actual output rate
Utilization = = £ 100%
Capacity Rate maximum output rate
• Utilization gives us information about “excess capacity”
• The utilization of each resource in a process can be presented
with a utilization profile
Resource Capacity Rate Input Rate Utilization
(units/hour) (units/hour)
1 6 4 66.67%
2 7 4 57.14%
3 8 4 50.00%
4 6 4 66.67%
5 5 4 80.00%

• What is the optimal utilization of a resource? 9

 Operational Challenge
Mismatch between demand and supply
• In any process, the input and output rates will vary
over time

• A key operational challenge is matching supply and

demand
– i.e., matching the input and output rates

• For a variety of reasons, a perfect match is not

possible
– What are some of these reasons?

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An example: Security screening at YVR
Input rate Capacity rate Excess Excess
Time (passengers/15 min slot) (passengers/15 min slot) Demand Capacity
6:15 7 15 0 8 Do we have
6:30 10 15 0 5 enough
6:45 8 15 0 7 capacity?
7:00 12 15 0 3
7:15 9 15 0 6
7:30 16 15 1 0
7:45 14 15 0 1
8:00 19 15 4 0
…but not at all
8:15 22 15 7 0
times
8:30 17 15 2 0
8:45 13 15 0 2
9:00 11 15 0 4
9:15 12 15 0 3
9:30 8 15 0 7
9:45 10 15 0 5 Enough
10:00 7 15 0 8 capacity for the
TOTAL 195 240 shift …
Data for a 4-hour shift in 15-min time slows: 7 arrive between 6:00 and 6:15 etc.
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 Short-run vs. Long-run Averages
• Since the input and output rates may vary over
time, both the short-run average and the long-
run average rates provide useful information.

• Long-run average input rate must be less

than the long-run average capacity rate
• Long-run average throughput rate
= Long-run average input rate
• Short-run average input rate can be greater
than the short-run average capacity rate

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 Implied Utilization
• To capture the idea that there may be excess
demand in the short-run, another measure of
utilization is often useful
Throughput
InputRate
Rate
Implied
Utilization = on =
Utilizati
Capacity
Capacity
RateRate

• Implied utilization also allows us to capture the

idea of overtime
– Organizations often budget for a fixed amount of
capacity, and work overtime to meet excess demand
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 Security Screening Example Revisited
• What is the capacity rate?
Note: In this example, the capacity rate is given. In practice, it
may not be obvious. Finding the capacity rate will involve
drawing a process flow map, identifying activities, times,
resources, etc, and finding the bottleneck
• What is the (average) size of the line?
• How long do passengers wait (flow time)?

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 Inventory Build-Up Diagram
Input rate Capacity rate Excess Excess INVENTORY
Time (passengers/15 min slot) (passengers/15 min slot) Demand Capacity BUILD-UP
6:15 7 15 0 8 0
6:30 10 15 0 5 0
6:45 8 15 0 7 0
7:00 12 15 0 3 0
7:15 9 15 0 6 0
7:30 16 15 1 0 1
7:45 14 15 0 1 0
8:00 19 15 4 0 4
8:15 22 15 7 0 11
8:30 17 15 2 0 13
8:45 13 15 0 2 11
9:00 11 15 0 4 7
9:15 12 15 0 3 4
9:30 8 15 0 7 0
9:45 10 15 0 5 0
10:00 7 15 0 8 0
TOTAL 195 240
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 Inventory Build-Up Diagram
Inventory Build-Up
14

12

10

0
6:15 6:30 6:45 7:00 7:15 7:30 7:45 8:00 8:15 8:30 8:45 9:00 9:15 9:30 9:45 10:00

• What is the “average inventory” in the buffer?

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 Calculating “Average Inventory”
Input rate Capacity rate
(passengers/15 (passengers Excess Excess INVENTORY
Time min slot) / 15 min slot) Demand Capacity BUILD-UP
6:15 7 15 0 8 0
6:30 10 15 0 5 0
6:45 8 15 0 7 0 Empty Buffer
7:00 12 15 0 3 0
(No Queue)
7:15 9 15 0 6 0
7:30 16 15 1 0 1
7:45 14 15 0 1 0
8:00 19 15 4 0 4
8:15 22 15 7 0 11
8:30 17 15 2 0 13
Buffer NOT
8:45 13 15 0 2 11
empty
9:00 11 15 0 4 7
9:15 12 15 0 3 4
9:30 8 15 0 7 0
9:45 10 15 0 5 0 Average
10:00 7 15 0 8 0 Inventory
195 240 3.1875 = 3.1875 17
 Consider another example …
Input rate Capacity rate
(passengers/15 (passengers Excess Excess INVENTORY Inventory Build-Up
Time min slot) / 15 min slot) Demand Capacity BUILD-UP 14
6:30 17 30 0 13 0 12
7:00 20 30 0 10 0 10
7:30 25 30 0 5 0 8
8:00 33 30 3 0 3 6
8:30 39 30 9 0 12 4
9:00 24 30 0 6 6 2
9:30 20 30 0 10 0 0
7:00 8:00 9:00 10:00 8:30 9:00 9:30 10:00
10:00 17 30 0 13 0

195 240 2.625

Average
Inventory

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 … and another …
Input rate Capacity rate
(passengers/15 (passengers Excess Excess INVENTORY Inventory Build-Up
Time min slot) / 15 min slot) Demand Capacity BUILD-UP 3.5
7:00 37 60 0 23 0 3

8:00 58 60 0 2 0 2.5

9:00 63 60 3 0 3 2
1.5
10:00 37 60 0 23 0
1
195 240 0.75 0.5
0
Average 7:00 8:00 9:00 10:00
Inventory

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 … and another
Input rate Capacity rate
(passengers/15 (passengers Excess Excess INVENTORY Inventory Build-Up
Time min slot) / 15 min slot) Demand Capacity BUILD-UP 1
8:00 95 120 0 25 0
0.8
10:00 100 120 0 0 0
0.6
195 240 0
0.4
Average 0.2
Inventory
0
7:00 8:00

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 Estimating Process Measures
• Process measures changes over time
– Depending on the mismatch between input rate and
the capacity rate the inevitably occurs over time
• We are interested in averages of these quantities
• “Average” values of process measures can be
misleading
• It is often convenient to assume continuous input
and output processes

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 Definitions
• Instantaneous Flow Rates
Ri(t) The input rate to the process at time t
Ro(t) The output rate of the process at time t
∆R(t) = Ri(t) – Ro(t) Instantaneous inventory accumulation at time t

• Inventory Level
I(t) The number of units within the process
boundaries at time t

• Flow Time
T(t) The time that a unit which enters (leaves) the
process at time t spends (has spent) within the
process 22
This can be defined in many ways
 Inventory and Flow Dynamics
I(t)
• Let (t1,t2) denote an interval of
time starting at t1 and ending at t2
I(t2)
• Suppose “instantaneous inventory ∆R *(t2-t1)
accumulation” ∆R(t) is constant
over (t1,t2) and equals ∆R. Then, I(t1)

I (t2 ) = I (t1 ) + DR × (t2 - t1 ) t1 t2 t

Ending Starting Change in
Inventory Inventory Inventory

Starting Inventory + Ending Inventory

Average Inventory =
2
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Inventory Build-Up Diagram
Input Rate Capacity rate = 100/hr
200

50

10AM 12PM 2PM 6PM

Assumes inventory
Inventory
level changes in
(or Backlog)
“discrete amounts”
200
Assumes inventory
100 level changes in
“continuous amounts”

10AM 12PM 2PM 6PM

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 Another Inventory Build-Up Example
Week Input Rate Capacity Rate Inventory
0 400
1 900 800 500
2 900 1200 200
3 900 1000 100

I(t)
Inventory in week t
400

200

Week
0 1 2 3
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 Average Inventory
Average inventory depends on
whether inventory is assumed Under the discrete
to change in discrete steps, or assumption:
continuously The average inventory over
weeks 0 to 3 is 300
I(t)

400
Under the continuous
assumption:
200 The average inventory?
“Area under
??????
the curve”

0 1 2 3 Week
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 Little’s Law
• Establishes a relationship between average
inventory, average throughput rate, and
average flow time
Average
Average Inventory I throughput rate R
[units] [units/hr]
... ... ... ... ...

Average Flow Time T [hrs]

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 Little’s Law
• Throughput rate: 1 car/min
• 900 cars in the system
• Flow time?

900 cars inventory

Flow Time = (900 cars)(1 min/car ) =
1 car/min
throughput rate

I=R*T
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 Little’s Law: Example 1
• Patients waiting for an organ transplant are
placed on a list until a suitable organ is available.
We can think of this as a process. Why?

OUTPUTS
INPUT
Patients matched to
Patients leaving the
Patients in need donated organs list hopefully with a
of a transplant
successful transplant

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 Little’s Law: Example 1
Question (a)
• On average, there are 300 patients ?? / year
300 people waiting for
an organ transplant 3 years in system
• On average, patients
wait on the list for 3
years
I=R*T
• Assume that no patients Inventory I = 300 patients
die during the wait Flow Time T = 3 years
• How many transplants Throughput Rate
are performed per year? R = I/T = 100 patients / year

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 Little’s Law: Example 1
Question (b)
300 patients 100/year
• On average, there are
300 people waiting for
??? years in system an organ transplant
• On average, 100
I=R*T transplants are
performed per year
Inventory I = 300 patients
• Assume that no patients
Throughput R= 100 patients/year die during the wait
Flow Time • How long do patients
T = I/R = 3 years stay on the list?

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 Little’s Law: Example 2
• You are managing the construction of a new
container terminal at the Port of Vancouver. You
expect to “process” 1000 contains/day, and you
have promised customers that containers will
spend no more than 1 day waiting to be shipped.
INPUT
OUTPUT
Containers to be
Containers shipped
shipped

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 Little’s Law: Example 2
Question (a)
• On average, your container storage yard can
hold 500 containers.
• Is your yard big enough?

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 Little’s Law: Example 2
Question (b)
• Suppose the yard is expanded to hold 2000
containers
• Since container traffic is growing rapidly, you are
soon processing 2000 containers/day
• You are asked to make improvement to the terminal
to handle 4000 containers/day
• But there is no more room to expand the yard
• What changes can you make in order to process
4000 containers/day?

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 Insights from Little’s Law
• Throughput rate, flow time, and inventory are
related
• Depending on the situation, a manager can
influence any one of these measures by
controlling the other two
– You cannot independently choose flow time,
throughput and inventory levels!
– Once two are chosen, the third is determined
– For example, if the flow time is fixed, the only way to
reduce inventory is to reduce throughput

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 Insights from Little’s Law
• How would you reduce wait time for patients
on the transplant waiting list?
– Increase throughput rate
– Decrease number of people on the list (inventory)
• How would you increase throughput rate of
containers at the port
– Decrease flow time
– Increase “inventory”

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 Inventory Turnover
• Inventory Turnover (or turns)
= [Cost of goods sold] / [Average inventory investment]
= [$ value of cost of output] / [$ value of average inventory]
= R/I
= 1/T
• Why are higher inventory turns good?
• How to increase inventory turns, i.e., how to turn
“stock” into “flow”?
• The flow time (i.e., T) when expressed in days is also
referred to days in inventory

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Days of Inventory & Inventory Turnover
Inventory [$]

Cost of goods sold [$/year]

(Throughput)
Days of Inventory [days]
(Flow time)
By Little’s Law,
365 ´ Inventory
Days of Inventory =
Cost of goods sold (Throughput)

Cost of goods sold (Throughput)

Inventory Turnover = Inventory

This measures the velocity of moving inventory.

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The Importance of Inventory Turnover
and Increasing Inventory Turns
Inventory Turnover Increasing Inventory Turns
(Velocity)

Dell 5-8 times more than Dell’s business model

competitors

Toyota Spare parts inventory 10 Just-in-time

times faster than
competitors
Wal-Mart Year 2002: 7.5 Turns Cross docking
(Kmart was slightly less
than 5)
Progressive Claims processed in hours Immediate response claims
Insurance instead of days handling

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 Lessons
• Capacity rate versus throughput rate (Utilization)
• “Short-run” versus “long-run” averages
• Input and output rates vary over time resulting in
– Excess capacity
– Inventory build-ups
• Inventory build-up diagrams are useful tools, but
– Average can be misleading; need to be carefully
calculated
• Little’s Law helps make the connection between
average flow measures

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