KEY PERFORMANCE INDICATORS

LEAN MANUFACTURING

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BASIC PROCESS VOCABULARY

• Inventory (WIP): the number of flow units in the system.

• Bottleneck: process step with the lowest capacity (highest utilization, highest CycleTime).
• Process capacity: capacity of the bottleneck.
• Flow rate (Throughput) = Minimum of (Demand rate (1/takt) , Process Capacity).
• Utilization = Flow Rate / Capacity (Cycle time / Takt Time).
• Flow Time (Lead Time): The amount of time it takes a flow unit to go through the process.
• Cycle Time: How often a part is completed by a process (effective processing time in case of
multiple parallel stations)

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 WIP and Throughput can be easily observed over time.

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FLOW OF GOODS OVER TIME

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FUNNEL REPRESENTATION

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FLOW(LEAD) TIME / INVENTORY / FLOW RATE(THROUGHPUT)

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OPERATIONAL PERFORMANCE MEASURES

 Flow (Lead) time : LT

 Throughput or (Flow rate) : TH
 Takt Time = 1/TH
 Inventory (WIP) : WIP

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WHAT IS TOYOTA DOING NOW?
Taiichi Ohno’s answer was very simple:

“All we are doing is looking at the time line from the moment the customer gives us an order to
the point when we collect the cash. And we are reducing that time line by removing the non-
value-added wastes.”
Simple but brilliant.

(Taiichi Ohno. Toyota Production System: Beyond Large-Scale Production. p. ix.)

LINKING OPERATIONAL MEASURES:
LITTLE’S LAW
Flow rate/Throughput TH
Inventory WIP [units/hr]
... ... ... [units] ... ...

Flow (Lead)Time LT [hrs]

 Inventory = Throughput x Flow Time

WIP = TH x LT

 Inventory Turnover = Throughput / WIP

= 1/ LT

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LITTLE’S LAW

• Little’s Law (named after John D. C. Little): Average inventory = Average flow rate × Average flow
time.
• Little’s Law is useful in finding the third performance measure when the other two are known.
• Little’s Law always holds. For example, Little’s Law does not depend on the sequence in which the
flow units are served.
• Little’s Law does not depend on randomness: It does not matter if there is variability in the number
of people or in how long treatment takes for each person; all that matters is the average flow rate
and the average flow time.
• Little’s Law is also underlying the computation of inventory costs as well as a concept known as
inventory turns.

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INVENTORY TURNS AND INVENTORY COSTS

• Using physical units as flow units is probably the most intuitive way to measure inventory.

• Working with physical units is not necessarily the best method for obtaining an aggregate measure of inventory
across different products. In such applications, inventory is often measured in some monetary unit.

• Measuring inventory in a common monetary unit facilitates the aggregation of inventory across different products.

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TAKT VS CYCLETIME VS BOTTLENECK THROUGHPUT
Cycle times (sec) Throughput (pcs/hr)
20.5 220

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TAKT 210
19.5 TAKT rate

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200
18.5 Designed Throughput
Rate
18 Designed C/T 190

17.5 Theoretical bottleneck

180 rate
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16.5 Theoretical minimum C/T

170
16

15.5 160
Station 1 Station2 Station 3 Station 4 Station 1 Station2 Station 3 Station 4

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THE PENNY FAB

 Characteristics:
 Four operations in series: 1-Head stamping 2- Tail stamping 3- Rimming 4-Deburring
 Each takes 2 hours per piece (penny) i.e. 0.5 pennies/hr

 Parameters:

TH = 0.5 pennies/hour
LT = 8 hours
WIP = 0.5  8 = 4 pennies
Inventory Turns = 1/LT = 1/8 x 8 hours/day x 5 days/week x 50 weeks = 250

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THE PENNY FAB (WIP=4)

Time = 0 hours

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THE PENNY FAB (WIP=4)

Time = 2 hours

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THE PENNY FAB (WIP=4)

Time = 4 hours

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THE PENNY FAB (WIP=4)

Time = 6 hours

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THE PENNY FAB (WIP=4)

Time = 8 hours

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THE PENNY FAB (WIP=4)

Time = 10 hours

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THE PENNY FAB (WIP=4)

Time = 12 hours

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THE PENNY FAB (WIP=4)

Time = 14 hours

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THE PENNY FAB (WIP=4)

Time = 16 hours

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WORST CASE

 Observation: The
Best Case yields the minimum cycle time and maximum throughput at
minimum WIP level.

 Question: What conditions would cause the maximum cycle time and minimum throughput?

 Experiment:
 set average process times same as Best Case (so rb and T0 unchanged)
 follow a marked job through system
 imagine marked job experiences maximum queueing

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WORST CASE PENNY FAB

Time = 0 hours

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WORST CASE PENNY FAB

Time = 8 hours

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WORST CASE PENNY FAB

Time = 16 hours

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WORST CASE PENNY FAB

Time = 24 hours

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WORST CASE PENNY FAB

Note:
Time = 32 hours LT = 32 hours
= 4 8 = WIP x CT
TH = 4/32 =1/8=0.125pcs/hr
Inv Turns = 1/32
= 1/32 x 8 x 5 x 50
= 62.5
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HOW REDUCE FLOW(LEAD) TIME?
THERE ARE ONLY TWO AVAILABLE LEVERS

 WIP = TH x LT

 Annual demand = 500 / yr

 Available Work time 8hrs/day 5 days/week 50 weeks/year

 Determine TAKT for PennyFab and corresponding WIP

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EXAMPLE
Demand: 8 units / hr  TAKT:

1 2 3
WIP WIP WIP

10 min/unit 6 min/unit 10 min/unit

2 workers 1 worker 2 workers

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 Total time available “The rhythm of the
conductor to keep the
TAKT TIME Customer demand
orchestra in time”
metronome
 Takt time =

 Takt time yields the rate at which customers demand product

 and the production rate to stay synchronized with demand

 Example:
 Demand = 150,000 cars per year
 Total available production time = 2 x 8 hrs/day x 250 days/yr = 4,000 hrs/year
 Takt = 4,000 hrs/150,000 cars = 1hr/37.5 cars = 96 sec / car

 What does Little’s Law say about takt time? What does 1/Takt time represent

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EBD INC. ANALYSIS OF FINANCIAL FLOWS

 EBD inc manufactures prefabricated garages. Facility purchases sheet metal and it is formed, assembled to
finished products. Each garage needs a roof and a base and both components are punched out of a separate metal
sheets prior to assembly

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MBPF INC.: DETAILED MATERIAL FLOWS
Labor & OH Labor & OH

Raw Materials Fabrication

(roofs) (roofs) $175.8/yr

Assembly Finished Goods

Purchased Parts (bases)

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EBD BALANCE SHEET
CURRENT ASSETS
Cash 2.1
Short-term investments at cost (approximate mkt.) 3.0
Receivables, less allowances of $0.7 mil 27.9
Inventories 50.6
Other current assets 4.1
TOTAL CURRENT ASSETS 87.7
PROPERTY, PLANT AND EQUIPMENT (at cost)
Land 2.1
Buildings 15.3
Machinery and equipment 50.1
Construction in progress 6.7
Subtotal 74.2
Less accumulated depreciation 25.0
NET PROPERTY, PLANT AND EQUIPMENT 49.2
Investments 4.1
Prepaid expenses and other deferred charges 1.9
Other assets 4.0
TOTAL ASSETS 146.9
(Selected) CURRENT LIABILITIES
Payables 11.9 34
EBD INCOME STATEMENT
Net Sales 250.0

Costs and expenses

Cost of Goods Sold 175.8
Selling, general and administrative expenses 47.2
Interest expense 4.0
Depreciation 5.6
Other (income) expenses 2.1
TOTAL COSTS AND EXPENSES 234.7

INCOME BEFORE INCOME TAXES 15.3

PROVISION FOR INCOME TAXES 7.0
NET INCOME 8.3

RETAINED EARNINGS, BEGINNING OF YEAR 31.0

LESS CASH DIVIDENDS DECLARED 2.1
RETAINED EARNINGS AT END OF YEAR 37.2

NET INCOME PER COMMON SHARE 0.83

DIVIDEND PER COMMON SHARE 0.21
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EBD INC.: INVENTORY AND COST OF GOODS

INVENTORY
Raw materials (roof) 6.5
Fabrication WIP (roof) 15.1
Purchased parts (base) 8.6
Assembly WIP 10.6
Finished goods 9.8
TOTAL 50.6

COST OF GOODS SOLD

Raw materials 50.1
Fabrication (L&OH) 60.2
Purchased parts 40.2
Assembly(L&OH) 25.3
TOTAL 175.8

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FINANCIAL FLOWS
Labor&OH Assembly
Labor&OH fabrication [$50.1/year]
[$50.1/year]

Raw Mat Flow rate/Throughput

[$50.1/year] Inventory TH=COGS
... ... ... [$50.6] ... ...
[$175.8/yr]
... ... ...
Purchased Parts
[$40.2/yr]

Financial Flow (Lead)Time LT [yr] =

Inventory / Throughput = 50.6/175.8 =
0.288 years

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MBPF INC.: DETAILED FINANCIAL FLOWS
$60.2/yr $25.3/yr
Labor & OH Labor & OH

$50.1/yr $110.3/yr
$6.5 $15.1
Raw Materials Fabrication
(roofs) (roofs) $175.8/yr $175.8/yr
$10.6 $9.8

$40.2/yr Assembly Finished Goods

$8.6
$40.2/yr
Purchased Parts (bases)

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EBD INC.: DETAILED FLOW TIMES

Raw Fabrication Purchased Assembly Finished

Materials Parts Goods
Throughput
TH
$/Year 50.1 110.3 40.2 175.8 175.8
$/Week 0.96 2.12 0.77 3.38 3.38
Inventory I ($) 6.5 15.1 8.6 10.6 9.8
Flow Time T = 6.75 7.12 11.12 3.14 2.90
I/R (weeks)

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