Operations Management Midterm

OSCM

Operations and Supply Chain Management

• design, operation, and improvement of the systems that create and deliver the firm’s primary products and services

• creating value

Operations vs. Supply Chain

• Operations: process firms use to transform resources (labor, materials, equipment, information) into products and services customers want

  • focus on making

• Supply Chain: process of moving materials, products, and information into, through, and out of a firm

  • focus on moving

Service vs. Goods

• Service: intangible, cannot be stored, customer participates, quality varies and can't really be measured (bias survey)

• Good: physical, can be stored, no customer participation, can objectively measure quality

Upstream vs. Downstream

• Upstream: happen before production

  • closer to sourcing, where they come from

• Downstream: happen after production

  • closer to customer, where they are going

5 Processes

1. Planning: anticipate demand

2. Sourcing: receiving from suppliers

3. Making: major product is produced

4. Delivering (Logistics Processes): move products from warehouse to customer

5. Returning: receiving worn-out, defective, and excess products

Order Qualifiers and Winners

Customer view of how operations are used to "win" customers and compete

• Order Qualifiers: dimensions used to screen a product or service as a candidate for purchase

• Order Winner: one or more specific marketing-oriented dimensions that clearly differentiate a product from competing products **not same for everyone

Competitive Priorities/Dimensions

Firm view of how operations are used to "win" customers and compete

• Cost: low cost

  • Ex: Walmart, Costco, Dollar General

• Quality:  top quality, consistent

  • Ex: Luxury BMW, McDonalds

• Time: delivery speed, on-time delivery, development speed

  • Ex: Amazon, Dry-Cleaners, Apple

• Flexibility: customization, variety, volume flexibility

  • Ex: Chipotle, Target, Spirit Halloween/USPS/Utilities (won't limit you, can't run out of water/electric)

• Other: specific to products or situations

  • Ex: environment impact, after-sale support, etc.

Triple Bottom Line

evaluating the firm against people, profit, and planet

• Changes over time as company and society changes

• Sustainable operations

“SMART” Operational Goals

Specific, Measurable, Achievable, Relevant, Time-bound

How is Operational performance measured?

• Efficiency: doing things at the lowest cost

• Effectiveness: doing things to meet requirements (quality)

• Value: highest quality relative to cost

• Productivity: highest outputs relative to inputs

Productivity Ratios

want to be >1 (aka output higher than input)

• output: $, revenue

• input: labor, capital, materials

Capital Intensity vs. Labor intensity

• Capital Intensity: equipment relative to labor

• Labor Intensity: employees relative to equipment

Capacity Change Cost

how much it would cost to adjust production capacity

• ex: new equipment, hiring, facility changes

Lead time

time needed to respond to a customer order

Customer Order Decoupling Point

where inventory is positioned in supply chain

Made-to-Stock

the customer is served "on-demand" from finished goods inventory

• paper towel, diet coke, iphone charger

• closest to customer/shortest lead time

Assemble-to-Order

preassembled components pre-made, put together in response to a specific customer order

• Chipotle, Nike By You custom shoes, Dell Computer

Make-to-Order

product is built directly from raw materials and components in response to specific customer order

• custom furniture, tailored suits

Engineer-to-Order

work with customer to design product, which is then made from purchased material

• construction products, custom prosthetic

• furthest from customer/longest lead time

Fixed vs. Variable Costs

• Fixed: capital equipment/automation

• Variable: people/labor

How are manufacturing processes organized?

Product-Process Matrix

**practice the chart of examples

How does process choice impact break-even volume?

determines cost structure

• Capital‑intensive = high fixed costs → higher break‑even volume

• Labor‑intensive = low fixed costs → lower break‑even volume

How are service processes organized?

Customer-Contact Matrix

• Front-office: high customer involvement, low volume

  • Restaurant server, hairdresser

• Hybrid: some customer contact, some parts involve customer and some behind the scenes

  • Restaurant - order and talk to server, kitchen prepares food in the back

• Back Office: low/no customer involvement, high volume

  • Payroll processing, data entry

Decoupling the Service

separating front-office from back-office

• less face-to-face

• McDonalds using ipads to order

Capacity

the output that a system is capable of achieving over a period of time

• 2 big questions!

  • How much?

  • When to add?

How is Capacity Measured?

• Output Capacity: measured in units per time

  • bakery can make 300 loaves per day, call center can handle 200 calls per hour

• Input Capacity: measured by resources available

  • hospital has 820 beds, McDonalds has 3 checkout lanes

• Storage Capacity: measured in inventory space

  • warehouse can hold 10,000 pallets, freezer can store 500 gallons of ice cream

• Time-based capacity: measured in available hours

  • doctor can see patients for 8 hours per day, machine can run 20 hours per day

How much and when to add capacity for 2 capacity strategies

• Expansionist: ahead of demand, high risk, large market share

• Wait-and-See: lags demand, low risk, lose market share

Capacity Decision Considerations “Is Bigger Better?”

Economies of Scale: as a plant gets larger and volume increases, the average cost per unit drops

• GOOD!

Diseconomies of Scale: size of plant becomes too large, the average cost per unit increases

• BAD!

Economies of Scope

when multiple products can be produced at a lower cost in combination than they can be separately

How do I address uncertainty?

Capacity Cushion!: capacity in excess of expected demand

• Demand Forecasts are ALWAYS WRONG

Capacity Utilization Rate

**practice on lecture slides

Capacity Planning in Services vs. Manufacturing

• Time: services cannot be store for later, so you might consider time in service

• Location: services must be where the customer is when they need it

• Volatility of Demand: services delivery has much higher volatility

Theory of Constraints (TOC)

overall process capacity is governed by constraints in the system

1. Identify the constraint/bottleneck

2. Decide how to exploit the system constraint (keep bottleneck running)

3. Subordinate everything else to that decision (run at rate of bottleneck)

4. Elevate the system constraint (increase Bottleneck)

5. Repeat the process

Bottleneck

if capacity is less than demand, a constraint is considered a “bottleneck”

• often indicated by a build-up of work in process inventory or by the process steps with higher utilization rates

How to identify bottleneck

• buildup of WIP

• utilization > 100%

• longest PT

Optimal Product Mix

choosing the combination of products that maximizes total profit given limited resources

Operational Measurements

• Throughput: rate at which the money is generated by the system through sales

• Inventory: all the money that the system has invested in purchasing things its intends to sell

• Operating Expenses: all the money that the system spends to turn inventory into throughput

When to Order Inventory?

R = reorder point = dL

• lowercase d usually means days/weeks/months

Inventory Position

IP = on-hand + scheduled receipts - back order

IP = OH + SR - BO

• when you place an order IP = R + Q

Safety Stock

what you have on hand just in case, so you don’t run out

• ex: toilet paper

Q and P Systems Compared

• Q System: Continuous review - always know where you stand + how much data you have

  • medicine in hospital

• P System: Periodic Review - not constantly monitoring

  • paperclips in closet

BIGGEST DIFFERENCE → different amount of data and resources used to analyze

• time of review based on importance of inventory

ABC Analysis

prioritizes inventory based on dollar usage (cost * volume)

• remember disproportionate impact from certain SKUs

  • 20% of SKUs represent 80% of dollar inventory usage

What is Inventory?

a “buffer” between supply and demand

• EOQ balances having too much or too little

EOQ

Economic Order Quantity

• optimal order quantity that minimizes total cost

• Q only tells you when to order at a fixed quantity

Inventory Types

• Cycle Inventory

• Safety Stock

• Anticipation Inventory

• Pipeline Inventory

2 Supply Chain Design Strategies

• Efficient Supply Chains

• Responsive Supply Chains

Innovative vs. Functional Products

Outsourcing

moving some of a firm’s internal activities and decision responsibility to outside providers

• #1 reason → COST

Outsourcing Decisions

• Financial: save $, make less volume dependent

• Organizational: focus on what you’re good at

• Improvement: quality, expertise

**this is all not guaranteed and could increase complications

AAIV

Average Aggregate Inventory Value: how much inventory are we holding

WoS

Weeks of Supply: how long will inventory support sales volume?

Inventory Turnover

how much sales volume can we get from inventory