Littles

Law Holding Cost

Inventory (I) = Flow Rate (R) x Flow Time (T) Annual inventory holding cost %/Yearly turns =
I in (units), R in (units/time), T in (time) Annual inventory holding cost as a % of COGS
R = COGS NOT sales Holding cost/time period: h * I (I=avg inventory)
Days of supply = T = I/R = (Annual I/COGS) * 365 E.g. if it costs $12 to hold an item for one year, then h
= $1/month and if average inventory, I = 100 units,
Turns then holding cost per month is $1 X 100 = $100
Turns = 1/Flow Time = R/I Holding cost/unit: h * cost of a unit * T
Make sure if you want weekly turns, flow time is in weeks E.g. Cost of holding inventory of electronic
Capacity and Flow Rate components is 40% a year so if a component costs
Capacity = (# units produced by one machine or $120 it costs 04*120 = $48 to hold it one year

Utilization and Implied Utilization
worker/time taken to produce units) * (# of
machines or workers if applicable) Note: These can be calculated at the level of a resource of the
o Should only add capacity when the process is process
supply constrained (otherwise no effect on flow Utilization = flow rate/capacity
rate) Implied utilization = demand/capacity
Bottleneck = Resource that constrains the entire Resource with highest IU is bottleneck
process (lowest capacity) = capacity of process
o Should only add capacity to bottleneck Cycle Time and Producing Nth Unit
Flow rate = min {Demand, Capacity (i.e. Cycle time = 1/R = longest processing time (among
bottleneck)} the resources)
Time between production of units
Supply constrained: Process capacity <
When system starts empty, time to produce Nth unit
demand
= Sum of the processing times + (N-1) * Cycle time
Demand constrained: Demand < process
When system starts full, time to produce Nth unit =
capacity
Minutes of work
N * Cycle time

Blocking and Starving
For demand: Units/hr * PT (min/unit) Blocking: Resource prevented from completing its
For capacity: 60min/hr * # of machines
work
Use when processing time varies for different
Starving: Resource could work b ut it lacks inputs to
types of units in the process
work on
E.g. Demand is 14 applications/hour. Each
Blocking and starving at bottleneck reduces R
application requires 15 minutes of work.

Demand on the resource each hour is 14 * 15 =
EOQ model
210 minutes of work. Capacity will be 60min/hr
* # of workers Q=amount ordered, K = fixed cost/order, h=

annual % x $ value of good you are buying,
Batching & Setups Avg inventory (AI) holding and order costs:

B = batch size, p = processing time, R = flow rate,

ST = setup time, C = capacity () = +
Capacity = # units/time to produce B = B/(ST + B
= /
x p)
Average inventory holding cost per unit time= h x

Batch size can b e component pairs (add setup
Q / 2
times and processing times)
Setup cost/ordering cost per unit time = K*R/Q
Utilization = R x p
Q/R = time between orders
Batch size = (C x ST)/(1 C x p)
Setup and inventory holding costs per unit
Average I = Maximum I = x B x (1 R x p) ()/
Maximum inventory = Production time x Rate of If Q = Q* =EOQ then you can use
increase = B x (1 R x p)
Key takeaway: Product variety added to a process ( )
=!
with setup times increases inventory (i.e. long setup
times are not compatible w ith large product variety)
Amount that minimizes average (setup and
Larger batch = more inventory = more utilization =
holding) cost per unit time is the EOQ (Q*) which
more capacity
If theres no inventory buffer, p = slowest processing time. May
is given by the formula
have to add p of m achine to the setup time if it's not the first in
the process (first unit takes longer to produce) = !




Evaluating Quantity Discount Evaluating Decisions

1. Evaluate Q* that minimizes ordering and holding 1. Maximax
costs For each action evaluate the maximum payoff that
2. If Q* is greater than the quantity discount threshold, could occur.
order Q* Choose the action that yields the maximum
3. Otherwise: maximum payoff.
a) Evaluate purchasing + ordering + holding costs 2. Maximin
with Q* For each action evaluate the minimum payoff that
b) Evaluate purchasing + ordering + holding costs could occur
with minimum threshold for quantity discount Choose the action that yields the maximum
c) Choose whichever quantity minimizes total minimum payoff
costs 3. Expected value

Evaluate the expected value at each node (payoff x
Queuing probability)
Stable when IU < 1 Choose the action with the highest expected
68% Utilization means at any given moment: value
o there is a 68% chance a server is busy The expected value of a decision tree is the
serving a customer (34% chance the server expected value of the first node
is idle)
o on average 68% of the servers are b usy (and EVPI and EVSI
34% are idle) EVPI: Expected value of decision with PI Original
a=interarrival time (time/cust), m=# of servers, decision tree
cva = sa/a, cvp = sp/p Draw tree starting with outcome and then with
Utilization (U) = p/(m*a) action
To find number of machines to meet a utilization EVSI: Expected value of decision with SI Original
target set p/(m*a) < target (as a decimal) decision tree
Average time in queue (Tq):
Draw tree starting with decision to do test/not
!(!)! + o Test signal decision market outcome
= o Dont test = original decision tree

Higher U = Higher Tq (exponential increase) If EVSI = 0 subsequent actions dont depend on it
Average time in system/Flow time: T = Tq + p EVSI = EVPI if the test is perfectly diagnostic
Average inventory in queue: Iq = Tq/a Probability Types and Equations Ideal Test
Average inventory in process: Ip = p/a Prior probability (a.k.a marginal 1. Quick to
probability): e.g. Pr(A) implement
Inventory in system: I = Iq + Ip
Joint probability: e.g. Pr(A and B) 2. Cheap
Capacity: Ip = m * (1/p) Posterior probability (a.k.a conditional 3. Diagnostic
Demand: D = m * (1/a) probability): e.g. Pr(A|B) (high
To get a new interarrival times sum demands (CANT Joint = Posterior x Prior P(Pass|Good)
sum interarrival times) Pr(A) = Pr(A|B) x Pr(B) + Pr(A|B ) x Pr(B )
c c and P(Fail|Bad)
P(A|B) = P(A and B)/P(B)


Pooling
Variability Greatly reduced Tq or same Tq with less servers
Variability will decrease R, increase I, and increase T Can never have an idle server and w aiting customer at
Variability can reduce capacity considerably without the same time in a pooled system
sufficient buffers (blocked/starved)
Solutions: 1. Add buffers or 2. Get rid of variability Quality
Dont send rework through the bottleneck (reduce
Shortest Processing Time (shortest job first)
capacity)
Average =Total w aiting time/ # of jobs
Dont feed the bottleneck a poor quality product
Shorter average waiting time
Harder to d etect quality problems in a large batch
Same total p, total amount of work, but Tq less
Go for quality at the source


Gross M argin
NO CALCULATIONS IN HEAD! CONSISTENT Gross margin = (Revenue cost)/Revenue * 100
UNITS! FINISH QUESTION (DONT STOP With slower/lower inventory turns you need a higher
HALFWAY). YOU GOT THIS J gross margin