Three Basic Truths I.Pervasiveness II.Interdependence III.Profitability and Survival.
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Transcript of Three Basic Truths I.Pervasiveness II.Interdependence III.Profitability and Survival.
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Three Basic Truths
I. Pervasiveness
II. Interdependence
III. Profitability and Survival
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PervasivenessEvery organization must make a product or
provide a service that someone values………….
Manufacturer.Retailer.Design firm.University.Health services.
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Interdependence
Most organizations function as part of a larger supply chain
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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
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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?
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Operations Management
The planning, scheduling, and control of the activities that transform inputs
into finished goods and services
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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.
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Viewing Operations as a Transformation Process
TransformationProcess
Manufacturing operations
Service operations
Inputs Outputs
MaterialsPeopleEquipmentIntangible needsInformation
Tangible goodsFulfilled requestsInformationSatisfied Customers
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Supply Chain Management
Active management of supply chain activities and relationships to maximize customer value and achieve a sustainable competitive advantage
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Alcoa Ball Corp Anheuser-Busch M&M Meijer
First TierSupplier Distributo
rRetailer
Transportation companies
Finalcustomers
Upstream Downstream
Alcoa
Second TierSupplier
Material Flows
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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
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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
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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
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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
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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.
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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
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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
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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
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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.
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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
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Excellence in one dimension may conflict with excellence in another
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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
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Relationship Map
Family 1Supplier
Family 2Supplier
Family 3Supplier
Family 10Supplier
Supplier of“Cockpits”
AssemblyPlant
Tier 1
Tier 2
AutomotiveOEM
Physical andInformation
Flows
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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
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Productivity Measures
Productivity = OutputsInputs
Single-factor, Multifactor, and Total measures of productivity
Productivity is the ratio of outputs to inputs
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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
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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
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Dimensions of Quality
• Performance• Features• Reliability• Durability• Conformance• Aesthetics• Serviceability• Perceived Quality
Which dimensions doyou think are directlyaffected by Operationsand Supply Chain activities?
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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
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TQM Principles
• Customer focus• Leadership involvement• Continuous improvement• Employee empowerment• Quality assurance (including SQC or SPC)• Strategic partnerships• Strategic quality plan
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Common Improvement Tools
Cause and effect diagrams (aka “Fishbone” or Ishikawa diagrams)
Check sheets
Pareto analysis
Run charts and scatter plots
Bar graphs
Histograms
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Generic C&E Diagram
Effect
MethodsManpower
MeasurementsMachinesMaterials
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Pareto Analysis(sorted histogram)
Late passengers
Late arrivals
Late baggage to aircraft
Weather
Other (160)
100
85
7065
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Run Charts and Scatter Plots
Time
Measure
Variable Y
Variable X
Run
Scatter
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Histograms
Frequency
Measurements
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Developing Products and Services
• Why bother?
• New product development process
• What is good design?
– An operations and supply chain perspective
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Why Bother?
External benefits
Internal benefits
Exploit strengths/core competencies
Block competitors
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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
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Process Types(in order of decreasing volume)
• Continuous Flow
• Production Line
• Batch (High Volume)
• Batch (Low Volume)
• Job Shop
• Project
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Mixing Together the Process Types Hybrid Process
Spindles
Arms andLegs
SeatsBATCH forfabricatingparts ...
ASSEMBLYLINE forputting togetherfinal product
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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
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Capacity Strategies: When, How Much, and How?
Leader
Laggard
Demand
Lost Business
ExcessCapacity
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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?
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$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
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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?
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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?
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Theory of Constraints
• Pipeline analogy
• Which piece of the pipe is restricting the flow?
• Would making parts A or D bigger help?
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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)
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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
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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.
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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
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Time Series Components of Demand . . .
Time
Demand
. . . randomness
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Time Series with . . .
Time
Demand
. . . randomness and trend
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Time series with . . .
Demand
. . . randomness, trend, and seasonality
May May May May
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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
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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
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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
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• 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
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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
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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
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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
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Logistics Decision Areas
Transportation…– Modes– Formats– Pricing
Warehousing– Consolidation– Cross-Docking and Break-Bulk– Hub-and-Spoke– Inventory
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Types of Inventory
• Cycle stock• Safety stock (buffer inventory)• Anticipation inventory• Others
– Hedge inventories– Transportation inventory (pipeline)– Smoothing inventories
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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)
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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
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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?
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Holding Cost
$
Q
Holding cost increasesas Q increases . . .
(Q/2)×H
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Ordering Costs
$
Q
Ordering costs per yeardecrease as Q increases
(why?)
(Q/2)×H
(D/Q)×S
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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
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EOQ Solution
HDS
QEOQ2*
When the order quantity = EOQ, the holding and setup costs are equal
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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
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Master Scheduling Criteria
The Master Production Schedule must:
Satisfy the needs of marketing
Be feasible for operations
Match with supply chain capability
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MPS Formulas:
dueisMPSpositivenextwhenperiodzwhere
OBMPSEIATP
OBFMPSEIEI
t
z
tiittt
ttttt
1
1
1 ),max(
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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
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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
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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.