Three Basic Truths

I. Pervasiveness

II. Interdependence

III. Profitability and Survival

PervasivenessEvery organization must make a product or

provide a service that someone values………….

Manufacturer.Retailer.Design firm.University.Health services.

Interdependence

Most organizations function as part of a larger supply chain

Supply Chains

• Networks of manufacturers and service providers that work together to move goods from the raw material stage through to the end user

• Linked through physical, information, and monetary flows

Profitability and Survival

Organizations must carefully manage their operations and supply chains to prosper, and indeed, survive!

Shoe manufacturer:How many shoes should we make? What mix?What resources do we need? What will we outsource?Location?Key performance criteria -- Cost? Quality? Speed?

Operations Management

The planning, scheduling, and control of the activities that transform inputs

into finished goods and services

Operations Function

The collection of people, technology, and systems within a company ...

… that has primary responsibility ...

… for providing the organization’s products and/or services.

Viewing Operations as a Transformation Process

TransformationProcess

Manufacturing operations

Service operations

Inputs Outputs

MaterialsPeopleEquipmentIntangible needsInformation

Tangible goodsFulfilled requestsInformationSatisfied Customers

Supply Chain Management

Active management of supply chain activities and relationships to maximize customer value and achieve a sustainable competitive advantage

Alcoa Ball Corp Anheuser-Busch M&M Meijer

First TierSupplier Distributo

rRetailer

Transportation companies

Finalcustomers

Upstream Downstream

Alcoa

Second TierSupplier

Material Flows

Definitions• Strategies

The mechanisms by which businesses coordinate their decisions regarding structual & infrastructural elements

• Mission StatementA statement that explains why an organization exists.

It describes it’s core values and identifies the domain

Definitions• Business Strategy

Long-term master plan for the company; establishes the general direction

• Functional StrategiesFurther develop the business strategy

in segments of the business — must be aligned and coordinated

• Core CompetenciesOrganizational strengths that provide

focus and foundation for the company’s strategies

Business Strategy must

• Identify target customers & markets

• Set time frames and performance objectives

• Define the role of supply chain partners

• Identify & support development of core competencies

Operations and Supply Chain Strategies

The three primary objectives

– Choose mix of structure and infrastructure based upon dimensions valued by customer

– Ensure the mix aligned with the overall business strategy

– Does it support the development of core competencies?

Definition: how structural & infrastructural elements within Operations & Supply Chain will be aquired & developed to support the overall business strategy

Functional Strategy• Translates the business strategy into

functional terms for other departments or functions.

• Assures coordination with other departments or functions.

• Provides direction and guidance for operations and supply chain decisions.

Quality

• Performance Qualitythe basic operational characteristics of a product or service

• Conformance Qualityto what degree the product or service meets specifications

• Reliability QualityThe length of time a product will perform correctly without failing or requiring maintenance

The characteristics of a product or service which bear on its ability to satisfy stated or implied needs

To remain competitive, operations and supply chain must consistently meet or exceed customer expectations on quality dimensions

Time• Delivery speed

how quickly the OSC can fulfill on order or need once it has been identified.

• Delivery Reliabilitythe ability to deliver goods or services when promised and the accuracy of he quantity shipped

Pg 30

Flexibility

• Mix flexibilitythe ability to produce a wide range of products or services

• Changeover flexibilitythe ability to provide a new product with minimal delay

• Volume flexibilitythe ability to produce whatever volume the customer needs

How quickly OSC can respond to the unique needs of different customers

Flexibility is of particular importance in Research and Development

Pg 31

Cost

• Cost covers a wide range of activities, most common categories are

• Labor Costs• Material Costs• Engineering Costs• Quality-related costs

There are many cost categories, many are specific to the issues facing a particular firm. OSC are targets for cost management because they account for much of an organization’s cost.

Cost is always a concern, even if a company primarily competes on a different performance dimension.

Pg 31

Trade-offs between Performance Dimensions

No organization can sustain a competitive advantage on all performance dimensions indefinitely….

All organizations must make trade-offs or decisions among dimensions to emphasize some at the expense of others.

• Most OSC decisions will require trade-offs• To optimize this decision making, OSC managers must know which dimensions are valued most by their customers

Pg 32

Excellence in one dimension may conflict with excellence in another

Mapping Business Processes

• Creates common understanding of the activities, results and who performs the steps

• Defines the boundaries of the process• Can be a training tool• Provides baseline to measure improvement

An effective, simple way to improve understanding of the business process is by developing a graphic representation of all the activities and relationships with thin the process

Pg 48

Relationship Map

Family 1Supplier

Family 2Supplier

Family 3Supplier

Family 10Supplier

Supplier of“Cockpits”

AssemblyPlant

Tier 1

Tier 2

AutomotiveOEM

Physical andInformation

Flows

Is there room for improvement?

DealerFaxesOrder

PaperOrder

Created

Order SitsIn FaxIn Box

Internal MailDelivers Fax

Order SitsIn Clerk’s

In Box

ClerkProcesses

Order

Is ItemIn Stock?

WorkerPicksOrder

Clerk NotifiesDealer and

Passes OrderOn to Plant

InspectorChecksOrder

Transport FirmDelivers Order

DealerReceives

Order

2 minutes0.5% of orders incorrect1 to 3 hours

2 hours on averageNo history of lost,damaged, or incorrectdeliveries

YES

NO

10 to 45 minutes20 minutes on average

0 to 2 hours1 hour on average0.5 to 1.5 hours

1 hour on average1% of orders lost

0 to 4 hours2 hours on average

4% oforders lost

5 minutes

• Order spends 6.45 hrs in process

• 3 hrs is waiting

• 5% of orders are lost before picking

• 1 out of 200 will be shipped with wrong items or amounts

Productivity Measures

Productivity = OutputsInputs

Single-factor, Multifactor, and Total measures of productivity

Productivity is the ratio of outputs to inputs

Variations of Productivity

Batteries ProducedMachine Hours + Direct Labor Hours

Total Nightly Sales ($)Total Nightly Costs ($)

Batteries ProducedDirect Labor Hours

Single-factorproductivity ratio:

Multifactor:

Total multifactor:

Measures output levels relative to a single input

Measures output levels relative to more than one input

Ratio of a total output factor to total input factor

EfficiencyA comparison of a company’s actualperformance to some standard output

Usually expressed as a percentageStandard is an estimate of what should be produced

based on studies or historical resultsEfficiency = 100%(actual rate / standard rate)

OR: Efficiency = 100%(standard time/actual time) for one unit

Standard output – an estimate of what should be produced, given a certain level of resources

Dimensions of Quality

• Performance• Features• Reliability• Durability• Conformance• Aesthetics• Serviceability• Perceived Quality

Which dimensions doyou think are directlyaffected by Operationsand Supply Chain activities?

Total Cost of Quality — Traditional View

Q* = Optimal Quality

($)

Cost per defect-free unit of product

Appraisal Costs

100% Defects 0% Defects

Internal/ExternalFailure Costs

PreventionCosts

Total Costof Quality

Minimum TotalCost

TQM Principles

• Customer focus• Leadership involvement• Continuous improvement• Employee empowerment• Quality assurance (including SQC or SPC)• Strategic partnerships• Strategic quality plan

Common Improvement Tools

Cause and effect diagrams (aka “Fishbone” or Ishikawa diagrams)

Check sheets

Pareto analysis

Run charts and scatter plots

Bar graphs

Histograms

Generic C&E Diagram

Effect

MethodsManpower

MeasurementsMachinesMaterials

Pareto Analysis(sorted histogram)

Late passengers

Late arrivals

Late baggage to aircraft

Weather

Other (160)

100

85

7065

Run Charts and Scatter Plots

Time

Measure

Variable Y

Variable X

Run

Scatter

Histograms

Frequency

Measurements

Developing Products and Services

• Why bother?

• New product development process

• What is good design?

– An operations and supply chain perspective

Why Bother?

External benefits

Internal benefits

Exploit strengths/core competencies

Block competitors

Operations and Supply Chain Operations and Supply Chain PerspectivesPerspectives

• Repeatability, testability and Repeatability, testability and serviceability of the designserviceability of the design

• Product volumesProduct volumes

• Product costsProduct costs

• Match with existing capabilitiesMatch with existing capabilities

Process Types(in order of decreasing volume)

• Continuous Flow

• Production Line

• Batch (High Volume)

• Batch (Low Volume)

• Job Shop

• Project

Mixing Together the Process Types Hybrid Process

Spindles

Arms andLegs

SeatsBATCH forfabricatingparts ...

ASSEMBLYLINE forputting togetherfinal product

Product – Process Matrix

One of a Kind Low Volume

Multiple Products Moderate Volumes

Few Major Products

High Volume

Commodity Products

Job Shop

Batch

Line Very Poor Fit

Very Poor Fit

Capacity Strategies: When, How Much, and How?

Leader

Laggard

Demand

Lost Business

ExcessCapacity

Economies of Scale

Total Cost for Fictional Line:

Fixed cost + (Variable unit cost)×(X)= $200,000 + $4X

Cost per unit for X=1? X=10,000?

$0$5,000

$10,000$15,000$20,000$25,000$30,000$35,000$40,000

5 15 25 35 45 55 65 75

Number of shipments

Sh

ipp

ing

co

sts

Common Contract Private

Fixed & Unit Cost Scenarios

Indifference Point

Compares capacity alternatives — at what volume level do they cost the same?

• Suppose one option has zero fixed cost and $750 per unit cost; the other option has $5,000 fixed cost, but only $300 per unit cost.

$0 + $750X = $5,000 + $300X

What is the volume, X, at the indifference point?

Theory of Constraints

Concept that the throughput of a supply chain is limited (constrained) by the process step with the

lowest capacity.

Sounds logical, but what does this mean for managing the other process steps?

Theory of Constraints

• Pipeline analogy

• Which piece of the pipe is restricting the flow?

• Would making parts A or D bigger help?

Why Forecast?

• Assess long-term capacity needs

• Develop budgets, hiring plans, etc.

• Plan production or order materials

• Get agreement within firm and across supply chain partners (CPFR, discussed later)

Types of Forecasts

• Demand– Firm-level– Market-level

• Supply– Materials– Labor supply

• Price– Cost of supplies and services– Cost of money — interest rates, currency rates– Market price for firm’s product or service

Forecast Laws

Almost always wrong by some amount

More accurate for shorter time periods

More accurate for groups or families

No substitute for calculated values.

Quantitative Methods • Used when situation is

‘stable’ and historical data exists– Existing products– Current technology

• Heavy use of mathematical techniques

*******************************• E.g., forecasting sales of

a mature product

Qualitative Methods• Used when situation is

vague and little data exists– New products– New technology

• Involves intuition, experience

*****************************• E.g., forecasting sales

to a new market

Forecasting Approaches

Time Series Components of Demand . . .

Time

Demand

. . . randomness

Time Series with . . .

Time

Demand

. . . randomness and trend

Time series with . . .

Demand

. . . randomness, trend, and seasonality

May May May May

Moving Average Models

Period Demand1 122 153 114 95 106 87 148 12

3-period moving averageforecast for Period 8:

= (14 + 8 + 10) / 3= 10.67

n

DF

n

iit

t

11

1

Weighted Moving Averages

Forecast for Period 8= [(0.5 14) + (0.3 8) + (0.2 10)] / (0.5 + 0.3 + 0.2)= 11.4

What are the advantages?What do the weights add up to?Could we use different weights?Compare with a simple 3-period moving average.

n

iit

n

iitit

tW

DWF

11

111

1

Exponential Smoothing I

• Sophisticated weight averaging model

• Needs only three numbers:

Ft = Forecast for the current period t

Dt = Actual demand for the current period t

= Weight between 0 and 1

• Insourcing – The use of resources within the firm to provide products or services

• Outsourcing – The use of supply chain partners to provide products or services

Sourcing decisions are high-level, often strategic decisions that address:What will use resources within the firm

What will be provided by supply chain partners

The Sourcing Decision

Make-or-Buy Decision

Advantages and Disadvantages of Insourcing

Advantages• High degree of control• Ability to oversee the

entire program• Economies of scale

and/or scope

Disadvantages• Required strategic

flexibility• Required high

investment• Loss of access to

superior products and services offered by potential suppliers

Advantages and Disadvantages of Outsourcing

Advantages• High strategic flexibility• Low investment risk• Improved cash flow• Access to state-of-the-art

products and services

Disadvantages• Possibility of choosing a

bad supplier• Loss of control over the

process and core technologies

• Communication and coordination challenges

• “Hollowing out” of the corporation

Logistics

Planning, implementing, and controlling the efficient, effective flow and storage of goods and materials between the point of origin and

the point of consumption

Logistics Decision Areas

Transportation…– Modes– Formats– Pricing

Warehousing– Consolidation– Cross-Docking and Break-Bulk– Hub-and-Spoke– Inventory

Types of Inventory

• Cycle stock• Safety stock (buffer inventory)• Anticipation inventory• Others

– Hedge inventories– Transportation inventory (pipeline)– Smoothing inventories

Two “Classic” Systems for Independent Demand Items

• Periodic review systems

• Continuous (perpetual) review systems

Factors– Order quantity (Q) – Restocking level (R)– Inventory level when reviewed (I)

Comparison of Periodic and Continuous Review Systems

Periodic Review• Fixed order intervals• Variable order sizes• Convenient to administer• Orders may be combined• Inventory position only

required at review

Continuous Review• Varying order intervals• Fixed order sizes (Q)• Allows individual review

frequencies• Possible quantity discounts• Lower, less-expensive safety

stocks

What are the Total Relevant Annual Inventory Costs?

Consider:D = Total demand for the yearS = Cost to place a single orderH = Cost to hold one unit in inventory for a yearQ = Order quantity

Then:

Total Cost = Annual Holding Cost + Annual Ordering Cost

= [(Q/2) × H] + [(D/Q) × S]

How do these costs vary as Q varies?Why isn’t item cost for the year included?

Holding Cost

$

Q

Holding cost increasesas Q increases . . .

(Q/2)×H

Ordering Costs

$

Q

Ordering costs per yeardecrease as Q increases

(why?)

(Q/2)×H

(D/Q)×S

Total Annual Costs and EOQ

0

500

1000

1500

2000

10 50 90 130

170

210

250

290

330

370

410

Order Quantity Q

Inve

nto

ry C

ost

($)

Holding Cost Ordering Cost Total Cost

EOQ at minimum total cost

EOQ Solution

HDS

QEOQ2*

When the order quantity = EOQ, the holding and setup costs are equal

Alphabet Soup

TLA (Three Letter Acronym) Definitions

ATP: Available to PromiseBOM: Bill of MaterialsDRP: Distribution Requirements PlanningMPS: Master Production ScheduleMRP: Materials Requirements PlanningPAC: Production Activity ControlS&OP: Sales and Operations Planning

Master Scheduling Criteria

The Master Production Schedule must:

Satisfy the needs of marketing

Be feasible for operations

Match with supply chain capability

MPS Formulas:

dueisMPSpositivenextwhenperiodzwhere

OBMPSEIATP

OBFMPSEIEI

t

z

tiittt

ttttt

1

1

1 ),max(

Projected On-Hand Inventory

On-hand inventory at end of October = 100

Month November December

Week 45 46 47 48 49 50 51 52

Forecast Demand 150 150 150 150 125 125 125 125

Orders Booked 170 165 140 120 85 45 20 0

Projected On-Hand Inventory 230 65 215 65 190 65 190 65

Master Schedule 300 0 300 0 250 0 250 0

e.g., Projected on-hand inventory for week 47: = 65 + 300 – 150 = 215

Available-to-Promise

ATP (Week 45) = 100 + 300 – (170 + 165) = 65ATP (Week 47) = 300 – (140+120) = 40ATP (Week 49) = 250 – (85 + 45) = 120

On-hand inventory at end of October = 100

Month November December

Week 45 46 47 48 49 50 51 52

Forecast Demand 150 150 150 150 125 125 125 125

Orders Booked 170 165 140 120 85 45 20 0

Projected On-Hand Inventory 230 65 215 65 190 65 190 65

Master schedule 300 0 300 0 250 0 250 0

Available-to-Promise 65   40   120   230  

Material Requirements Planning (MRP)

Requires:

1. Bill-of-Materials (BOM)

2. Inventory record

3. Master schedule

to determine what should be ordered when, and how much to order.