MBA 8503: OPERATIONS AND SUPPLY CHAIN MANAGEMENT

Matthew J. LiberatoreSpring 2011

1

Welcome!

INTRODUCTION TO OPERATIONS AND SUPPLY CHAIN MANAGEMENT

2

Class 1: 1/12/11

WHAT IS OPERATIONS AND SUPPLY CHAIN MANAGEMENT?

Operations and Supply Chain Management is defined as the design, operation, and improvement of the systems that create and deliver the firm’s primary products and services

1-3

Operations and Supply Chain ManagementSupply Chain Processes

SourcingProcesses

ManufacturingProcesses

ServiceProcesses

DistributionProcessesLogistics

ProcessesLogisticsProcesses

1-4

INTRODUCTION TO OPERATIONS MANAGEMENT

5

KMART VERSUS WAL-MART Both chains started in 1962 In 1987, Kmart had 2,223 stores to Wal-Mart’s

1,198. Kmart’s sales were $25.63 billion to Wal-Mart’s

$15.96 billion By 1991, Wal-Mart’s sales exceeded Kmarts Kmart still had more stores

6

KMART VERSUS WAL-MART CONTINUED In year ending January 1996, Wal-Mart’s

sales were $93.6 billion to Kmart’s $34.6 billion.

During this time Kmart emphasized marketing and merchandising (such as national TV ad campaigns).

Wal-Mart was investing millions in its operations to lower cost.

7

KMART VERSUS WAL-MART CONTINUED Wal-Mart developed sophisticated

distribution system that integrated its computer system with its distribution system.

Kmart’s employees lacked skills needed to plan and control inventory.

8

IMPORTANCE OF OPERATIONSImprovements in operations can

simultaneously lower costs and improve customer satisfaction.

Improving operations often dependent on advances in technology.

Can obtain competitive advantage by improving operations.

9

OPERATIONSHeart of every organizationOperations are the tasks that

create valueOperations management uses

resources to transform inputs into desired outputs

10

THE PRODUCTION SYSTEM

11

SYSTEMS PERSPECTIVE Inputs Transformation System

Alter Transport Store Inspect

Outputs Environment

12

Automobile FactoryPrimary Inputs

Sheet steel, engine partsResources

Tools, equipment, workersPrimary Transformation Function

Fabrication and assembly of carsDesired Output

High quality cars

1-13

HospitalPrimary Inputs

PatientsResources

MDs, nurses, drugs, equipmentPrimary Transformation

FunctionHealth care (diagnosis and

treatment)Primary Output

Healthy individuals

1-14

CHARACTERISTICS OF PRODUCTS AND SERVICES

Products ServicesTangible Intangible

Minimal customer contact Extensive customer contact

Minimal customer participation Extensive customer participation

Delayed consumption Immediate consumption

Equipment intensive Labor intensive

Quality easily measured Quality difficult to measure

15

FACILITATING GOOD CONCEPT Often confusion in trying to classify

organization as manufacturer or service Facilitating good concept avoids this ambiguity All organizations defined as service The tangible part of the service is defined as

facilitating good Pure Services

16

THE RANGE FROM SERVICES TO PRODUCTS

17

INTRODUCTION TO SUPPLY CHAIN MANAGEMENT

18

WHAT IS A SUPPLY CHAIN?Flow of products and services from:

Raw materials manufacturers Intermediate products manufacturersEnd product manufacturersWholesalers and distributors andRetailers

• Connected by transportation and storage activities

• Integrated through information, planning, and integration activities

• Cost and service levels

WHAT IS SUPPLY CHAIN MANAGEMENT? Supply chain management is a set of

approaches utilized to efficiently integrate suppliers, manufacturers, warehouses, and stores, so that merchandise is produced and distributed at the right quantities, to the right locations, and at the right time, in order to minimize system wide costs while satisfying service level requirements.

TWO OTHER FORMAL DEFINITIONSThe design and management of seamless, value-added process across organizational boundaries to meet the real needs of the end customer

Institute for Supply ManagementManaging supply and demand, sourcing raw materials and parts, manufacturing and assembly, warehousing and inventory tracking, order entry and order management, distribution across all channels, and delivery to the customer

The Supply Chain Council

PC Industry Supply ChainTracing back the screen you stare at for the bulk of your time.

Cisco’s Value Network

Source

Supplier

Supplier

Distributor

Distributor

Retailer

End-User

Converter

Converter Consumers

Information Flow

Funds/Demand Flow

Value-Added Services

Material Flow

Reuse/Maintenance/After Sales Service Flow

SCM Definition

THE SCM NETWORK

FIGURE 1 The logistics network

KEY OBSERVATIONS Every facility that impacts costs need

to be consideredSuppliers’ suppliersCustomers’ customers

Efficiency and cost-effectiveness throughout the system is requiredSystem level approach

Multiple levels of activitiesStrategic – Tactical – Operational

OTHER RELATED OBSERVATIONS Supply chain strategy linked to the

Development Chain Challenging to minimize system costs and

maximize system service levels Inherent presence of uncertainty and risk

Set of activities and processes associated with new product introduction. Includes: product design phase associated capabilities and knowledge sourcing decisions production plans

THE DEVELOPMENT CHAIN

THE DEVELOPMENT CHAIN

Figure 2 The enterprise development and supply chain

GLOBAL OPTIMIZATION Geographically dispersed complex network Conflicting objectives of different facilities Dynamic system

Variations over time Matching demand-supply difficult Different levels of inventory and backorders

Recent developments have increased risks Lean production/Off-shoring/Outsourcing

GLOBAL APPAREL VALUE CHAINTRACING BACK THE DRESS YOU ARE WEARING

QC & Shipping[Hong Kong]

Product Design[Hong Kong]

Zippers+…[Japan+…]

Stitching[Indonesia]

Weaving[Taiwan]

Yarn Spinning[Korea]

An Illustration: How Li & Fung Limited Might Make a Dress

Globally Dispersed Manufacturing

MATCHING SUPPLY AND DEMAND A MAJOR CHALLENGEREASONS EXAMPLES•Raw material shortages•Internal and supplier parts shortages•Productivity inefficiencies

Boeing Aircraft’s inventory write-down of $2.6 billion

•Sales and earnings shortfall •Larger than anticipated inventories

Sales at U.S. Surgical Corporation declined 25 percent, resulting in a loss of $22 million

•Stiff competition •General slowdown in the PC market

Intel reported a 38 percent decline in quarterly profit

•Higher than expected orders for new products over existing products

EMC Corp. missed its revenue guidance of $2.66 billion for the second quarter of 2006 by around $100 million

Forecasting is not a solution Demand is not the only source of uncertainty Recent trends make things more uncertain

Lean manufacturing Outsourcing Off-shoring

UNCERTAINTY AND RISK FACTORS

August 2005 – Hurricane KatrinaP&G coffee supplies from sites around New

OrleansSix month impact

2002 West Coast port strike Losses of $1B/dayStore stock-outs, factory shutdowns

1999 Taiwan earthquake Supply interruptions of HP, Dell

2001 India (Gujarat state) earthquakeSupply interruptions for apparel

manufacturers

UNCERTAINTY AND RISK FACTORS

EVOLUTION OF SUPPLY CHAIN MANAGEMENT

1950s 1960s 1970s 1980s 1990s 2000s Beyond

Traditional Mass Manufacturing

Inventory Management/Cost Optimization

JIT, TQM, BPR, Alliances

SCM Formation/Extensions

Further Refinement of

SCM Capabilities

PROGRESSION OF LOGISTICS COSTS

FIGURE 1-4: Logistics costs’ share of the U.S. economy

LOGISTICS COSTS TRENDS After rising over 50 percent in the five years

leading up to the recession, total logistics costs have fallen the past two years.

Logistics costs in 2009 were equal to about $1.1 trillion – a drop of $244 billion (or 18.2) over 2008

COMPOSITION OF LOGISTICS COSTS Transportation costs were down more than

20 percent last year

Transportation costs now account for 4.9 percent of GDP, well below the 6 percent share in 2008.

Carrying costs accounted for 2.5 percent of GDP in 2009, down from 2.9 percent in 2008 and well off the 8.3 percent of GDP in 1981

COMPLEXITY: THE MAGNITUDE

The grocery industry could save $30 billion (10% of operating cost) by using effective logistics strategies

A typical box of cereal spends 104 days getting from factory to supermarket.

A typical new car spends 15 days traveling from the factory to the dealership.

COMPLEXITY: THE MAGNITUDE Compaq computer’s loss of $500 million to $1

billion in sales in one year Laptops and desktops were not available when and where

customers were ready to buy them Boeing’s forced announcement of write-downs of

$2.6b Raw material shortages, internal and supplier parts

shortages….

Cisco’s multi-billion ($2.2b) dollar write-off of inventories in 2001-2002 Customers balked on orders due to market meltdown

TRANSACTIONAL COMPLEXITYNational Semiconductors:

• Production:– Produces chips in six different locations: four in the US,

one in Britain and one in Israel– Chips are shipped to seven assembly locations in

Southeast Asia.• Distribution

– The final product is shipped to hundreds of facilities all over the world

– 20,000 different routes– 12 different airlines are involved– 95% of the products are delivered within 45 days– 5% are delivered within 90 days.

MAGNITUDE OF SUPPLY CHAIN COSTSCOST ELEMENTS OF A TYPICAL TRADE BOOK

MAGNITUDE OF SUPPLY CHAIN COSTSEXAMPLE: THE APPAREL INDUSTRY

Manufacturer Distributor Retailer Customer

Cost per Percent

Shirt Saving

$52.72 0%

$41.34 28%

$20.45 62%

Manufacturer Distributor Retailer Customer

Manufacturer Distributor Retailer Customer

SUPPLY CHAIN: THE POTENTIAL P&G’s estimated savings to retail customers of $65 million through logistics gains Dell Computer’s outperforming of the competition in terms of shareholder value growth over more than two decades by over 3,000% using:

Direct business model Build-to-order strategy

Wal-Mart transformation into the world’s largest retailer by changing its logistics system: highest sales per square foot, inventory turnover and operating profit of any discount retailer

KAPLAN AND NORTON’S (2006) OPERATION S STRATEGY AND THE BALANCED SCORECARD

KAPLAN AND NORTON’S (2006) STRATEGY MAP TEMPLATES