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The Harvard Business Review article "Deep Change: How Operational Innovation Can Transform Your Company" contains the following example of operational innovation at Pro- gressive Insurance
The Harvard Business Review article "Deep Change: How Operational Innovation Can Transform Your Company" contains the following example of operational innovation at Pro- gressive Insurance. Instead of taking between 7 and 10 days to process an insurance claim, the companys new target was 9 hours. Assume that the average time to process a claim used to be 8.5 days, and assume that through operational innovation the company has reduced the average time down to 1 day. Given that Progressive processes 10,000 claims/day, and assuming that the company incurs a cost of $28 per day on each claim that is "in-process", how much money did Progressive save (per day) because of the reduced claims processing time? (Hint: Every day Progressive incurs a cost of $28 per claim "n-process".)
Expert Solution
Answer:
Flow rate (arrival rate of claims) = 10,000 per day
Flow time (time between a claim is received and its proceesing ends) = 8.5 days
From Little's law: WIP = Flow rate x Flow time = 10,000 x 8.5 = 85,000 claims (in-process)
After improvement, the flow time is 1 day
So,
again from Little's law: WIP = Flow rate x Flow time = 10,000 x 1 = 10,000 claims (in-process)
So, the cost saving per day = (85,000 - 10,000) x $28 = $2,100,000
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