Principle of Inventory and Material Management

LSM736

Lecture 1Course Introduction

What Will We Do Today?

• How is this course organized?• What is Inventory and Material Management

Management?• A Historical Perspective

What is Operations Management?

• Business strategy– selecting market(s) to compete– level of investment– allocation of resources– functional area strategy

• marketing• finance• production and operations

What is Operations Management?

OM = Designing, operating, and improving

the systems that deliver

the firm’s primary products and services

Operations Management = Strategy Execution

Time

FlexibilityQuality

Cost

Strategy Execution

1. What is our strategy?

2. How do we design our operations to support it?

Product / Service Development

Supply Chain Management

Process Design and Management

What types of problems does OM address ?

Example #1: Manufacturing - Supply Chain Management

T3

T3

T3

T3

T3

T2

T2

T2

T1

T1

OEM

W

C

C

C

C

C

R

RW

.com

What types of problems does OM address ?

Example #2: Bank Services

Loans

Deposits

Credit Cards

What types of problems does OM address ?

Example #3: R&D – New Product Development

Phase 0 Phase 1 Phase 2 Phase 3 Phase 4 Phase 5

PlanningConcept Development

System-level Design

Detail Design Testing and Refinement

Production Ramp-Up

Adapted from U&E 2002

Types of Decisions in OM …

• Strategic decisions (long-term impact)

• Tactical decisions (mid-term impact)

• Operational decisions (short-term impact)

Strategic Decisions …

1. How much capacity do we need?

2. How should our staff be trained?

3. Which projects should we invest in?

Manufacturing

Services

Prod. Development

Strategic questions that operations managers ask and respond to …

Tactical Decisions …

Manufacturing

Services

Prod. Development

Tactical questions that operations managers ask and respond to …

1. Should we have finished goods inventory or should we make-to-order?

2. What types of queues should we employ in Hartsfield?

3. Do we need to exchange preliminary information with mfg?

Operational Decisions …

Manufacturing

Services

Prod. Development

Operational questions that operations managers ask and respond to …

1. Which product gets priority in front of machine A?

2. Should the service system be FCFS or something else?

3. What is the critical path of the project?

Goal of Operations Management

What is the goal of OM with respect to production/service systems?

1. Improving efficiency

2. Improving effectiveness

3. Increasing valueValue = “quality” / “price”

Efficiency is doing something at the lowest possible cost

Effectiveness is doing appropriate things to create value for the organization

Usually, these things require a tradeoff.

Value Added of Operations Management

• Adverse Financial Impact of Supply Chain Disruptions• Study of 800 publicly traded firms over a 10-year period• In the year leading up to disruption

• 107 percent drop in operating income • 114 percent drop in return on sales • 93 percent drop in return on assets • 7 percent lower sales growth • 11 percent growth in cost • 14 percent growth in inventories

• 33 – 40% lower stock returns relative to industry benchmark in period starting 1 year before and 2 years after the disruption

• Share price volatility is 13.5% higher in the year after the disruption

Hendricks and Singhal, “The Effect of Supply Chain Disruptions on Long-term Shareholder Value, Profitability, and Share Price Volatility

Value Added of Operations Management

• Reasons:– 31% internal (equipment breakdown, manufacturing problems,

quality problems, inaccurate inventory records, poor forecasting, capacity or labor shortages)

– 14.5% supplier failures– 12.8% customers

• Part shortages:• Underperformance by 25%• Median decrease in operating income of 31%

Hendricks and Singhal, “The Effect of Supply Chain Disruptions on Long-term Shareholder Value, Profitability, and Share Price Volatility

What are Operations Management Jobs Like?

You can get an interesting job!!

Supply Chain Manager

Quality Manager

Project Manager

Operations Consultant

Plant Manager

Procurement Manager

The OM Area at Tech is ranked in the top 10 in the US and employers take it seriously!

A Historical Perspective

The First Industrial Revolution (c. 1850)

• Textile manufacturing innovations“Flying shuttle” and “Spinning Jenny”

• J. Watt: The steam engine Substituting labor with machines

• A. Smith: Free markets – division of laborFree markets would enhance “quest” for profit Specialization could increase productivity

small scale production

small scale production

The American System of Manufacturing

• Vertical Integration

Consolidating different operations under one roof

• Interchangeable parts

Mass-produce parts to tight tolerance & assemble

1801 contract for 10,000 muskets for the government

• Unskilled workers

• 1832: 36 enterprises in 10 states with > 250 workersReliance on water power & local distribution system

• Transportation innovationsRailroads are built in western world

• Communication innovationsThe telegraph is established

• Big retailers come to powerSears & Roebuck’s sales soar to $38M in 10 years

• Mass Production: the first vehicles arrive… Henry Ford starts producing Model T

The Second Industrial Revolution (c. 1910)

large scale production

large scale production

• Principles of Scientific ManagementBook published in 1911 by Fredrick Taylor

• Time and Motion studiesHow much time do workers need to do a task?

• Incentive systemsWhat is the best payment scheme?

• Study how systems can be efficientDeveloped a set of principles that serve efficiency.Planning versus doing.

1910-1920: The Scientific Method (Taylorism)

Efficiency is the key!

Efficiency is the key!

• Application of Taylor’s methodsThe DuPont Powder company

• More importance to the human elementStudies at the Western Electric Hawthorne plant to understand ergonomics: the human element in manufacturing

• Investment in management educationBetween 1914 and 1940 B-schools grew a lot

1920’s - 1930’s: Taylorism Spreads

• Operations Research tools are “born”G.B. Dantzig devises simplex algorithm

• Effort to study complex systemsThe importance of teamwork is introduced

• Mathematical analysis becomes the normScientific methods are applied throughout the organization

• Mathematics solidify the scientific methodSimulation based models, computer usage, scheduling

1940’s - 1960’s: The Golden Era in the U.S.

1970’s: Computers and MRP take over

ProductionSchedule

ForecastedDemand

Bill of materials

Inventorystatus

MRP (Materials

RequirementPlanning)

MRP automated production…

But, someone has to tell the computers what to analyze!

1980’s: The Japanese Challenge

American manufacturing led until the late 70’s, but then…

The methods introduced byJapanese manufacturing firms

outperformed the US …

TQC: Total Quality Control

JIT: Just-In-Time

Higher quality

Less cost

1990’s: The U.S. rises to the challenge

Entrepreneurship and the ability to change and re-invent themselves allowed American

firms to move into new areas.

• U.S. firms improve productivity and quality.

• U.S. firms focus on emerging technologies, R&D.

• Growth of the service industry.

• Examples in OM….

Conclusion and Summary …

1. Operations Management is about executing the firm’s strategy.

2. Operations is a core function in every business – manufacturing or service oriented.

3. Key Components of OM: Products, Processes, SCM.

4. OM is important to everybody in the organization.

5. OM involves strategic, tactical, and operational decisions.

6. The efficiency–effectiveness–value tradeoff.

Flow of the Course

Aggregateplanning

Forecasting& inventorymanagement

Materialrequirementsplanning

Supply chainmanagement

Effectiveness(meeting the

demand)

Setting the direction

Corporate strategy

Operations strategy

Quality management &Statistical process control

Efficiency(managing internalprocesses well)

Process management• process analysis (no variability)• waiting line mgt (variability)

Lean operations

Product design

End of Lecture 1