C720 - Operations of Supply Chain & Management

Three key principles should form the foundation of a corporate sustainability initiative:

• Transparency

• Employee development

• Resource efficiency

  • Companies must adapt to a rapidly changing environment by being prepared to change and implement new creative ideas related to sustainability

Periodic Inventory System

• Requires physical count to know inventory balances 

• Designed for small businesses with little inventory 

• Not expensive and low maintenance 

• Small volume, low value items

Open Window

Time in which you can place an order

Perpetual Inventory System

• Designed for large businesses with lots of inventory 

• High volume, high value items 

• Very expensive and high maintenance

• Best for accurate financial statement

Inventory

• A list of items a company owns that will be sold or used in the production process

  • Ex.: finished goods, raw materials, or products that they sell to consumer or business

Types of Inventories

• Raw Materials

• Transportation (Pipeline)

• Work In Process (WIP)

• Finished Goods

• Replacement Parts

• Supplies

• Safety Stock

Raw Materials

Inventory purchased to be used in production

Transportation (Pipeline)

Inventory that is in transit or moving through the pipeline

Work In Process (WIP)

Materials that are scheduled or currently in production

Finished Goods

Inventory that no longer requires production and is ready to be sold to the customer

Replacement Parts

• Inventory used to maintain machinery

• Also called Maintenance and Repairs (MRO) Inventory

Supplies

• Items used in production but not considered part of final product

• Ex.: lubricants, adhesives, nails, etc.

Safety Stock

Extra inventory to prevent a stock out

Stockout

When inventory is depleted or completely out

Order Cost

• All costs incurred to acquire the product or materials

• Ex.: labor, shipping, etc

Carrying Cost (Storage/Holding Cost)

All costs incurred to store or hold inventory

Inventory Control Strategies

Economic Order Quantity and Economic Production Quantity are inventory models used to balance ordering cost and holding cost

Economic Order Quantity (EOQ)

• Model used for finished goods

• Assumptions:

  • Only one product is involved

  • Annual demand requirements are known

  • Demand is reasonably constant

  • Lead time does not vary

  • Each order is received in a single delivery

  • There are no quantity discounts

Lead Time

The amount of time it takes for the customer to receive the product from the initial time of order

Quantity Discount Model

Price reduction for large orders offered to customers to induce them to buy in larger quantities. The more you buy, the more you save

Economic Production Quantity (EPQ)

• Model used for raw materials or production

• Assumptions to use this model:

  • Only one item is involved

  • Annual demand is known

  • Has a constant usage rate

  • The production rate is constant

  • Lead time does not vary

  • There are not quantity discounts

Re-Order Point (ROP)

The level of inventory that triggers a replenishment order for a specific item or group of items based on average usage

ABC Analysis

• It is an inventory categorization technique often used in material management wherein accuracy and control decreases from A to C

  • A Items: very tight control and accurate records

    • Money movers & the most important

    • Items that bring the most revenue

    • Items that most of the money is spent on 

  • B Items: less tight controlled and good records

  • C Items: simplest controls possible and minimal records

    • Biggest category

    • Less control

    • Less importance

Pareto Principle

80% of revenue is driven by 20% of inventory items

Vendor Managed Inventory (VMI)

• An inventory management approach in which the supplier (vendor) manages the inventory for the customer or distributor

• B2B relationship

• Employee delivers the goods and takes note of how much inventory is in each retail store

Just in Time (JIT)

• It is a manufacturing and production strategy that aims to reduce flow times, response times, optimize efficiency and minimize waste by delivering the right parts, materials, or components to the production line at precisely the moment they are needed. It strives to reduce in-process inventory and carrying costs

• A benefit you never have a ton of inventory tied up on the shelves

• A-list items would benefit from this approach (ABC Analysis)

• It is a lean system

Just in Time II (JIT II)

• A strengthened relationship between the supplier (vendor) and the customer in which the supplier dedicates an employee(s) to work onsite at the customer’s warehouse or distribution center to manage their inventory

• Employee manages inventory at distribution center

Process Selection

• Determining the most appropriate method for completion a task or producing a product

  • Things to consider:

    • Volume

    • Variation

Process Selection - Continuous Flow

A process that is most appropriate for producing products with high volume and no variation

Process Selection - Assembly Line

A process that is most appropriate for producing products with high volume and minimal variation

Process Selection - Batch Flow

A process that is most appropriate for producing products with high volume and some variation (with equipment changes)

Process Selection - Job Shop

A process that is most appropriate for producing products with low volume and high variation

Total Cost Equation

• Used to try to determine if we are making a profit based on the number of units we are producing

• TC = VC(x) + FC

  • TC = Total Cost

  • VC = Variable Cost

  • x = Number of units

  • FC = Fixed Cost

Economies of Scale

• Cost advantages that a business or organization can achieve by increasing the number of units produced to decrease the cost per unit by utilizing the same fixed costs

• The ability to produce more goods at a lower cost by better utilizing the same fixed cost

Economies of Scope

• Economies of scale through product line diversification (producing a variety of similar items on the same equipment to cover fixed cost)

  • We are building a variety of products on the same equipment still using that same fixed cost

Facility Layout

A facility layout refers to the arrangement and organization of physical resources, such as workstations, machinery, equipment, storage areas, and support facilities within a facility or workspace. It involves determining the optimal spatial configuration to achieve efficient and effective operations

Product Oriented Layout

Sequential layout. A type of facility layout in which workstations and equipment are arranged in a sequential order to support high volume production with low variety

• Producing the exact same thing over and over again

• Product ex.: assembly plant

• Service ex.: bank teller processing checks

Process Oriented Layout

Also known as a functional layout, is a type of facility layout in which workstations and equipment are grouped together based on the type of process or function performed rather than the specific product or product line to support low volume production with high variety

• Producing many different products on the same equipment

• Product ex.: Job shop (high customization)

• Service ex.: hospital

Fixed Position Layout

A type of facility layout where the product or project remains stationary, and the resources and workers are brought to the product or project location. It is commonly used in industries or projects where the size, complexity, or immobility of the product makes it impractical to move it through different workstations

• You build a large item, so you need a large space

• Product ex.: airplane assembly

Capacity Planning

The process of determining the appropriate level of capacity that a company needs to meet customer demand while maintaining an optimal balance between production costs, inventory levels, and customer service levels

Capacity

The measure of an organization’s ability to sustainably produce quality products and/or provide services to meet customer demand

Throughput

The maximum amount of output achievable

System Capacity

The measure of an organization's ability to sustainably produce quality products and/or provide services to meet customer demand with consideration of efficiency for each aspect within the system

• Your maximum output is determined by the department with the slowest time or least amount of output

Design Capacity

The maximum designed service capacity or output rate

• The maximum amount achievable

• Design Capacity vs Actual Output

Effective Capacity

The maximum service capacity or output rate with consideration to situations and circumstances

• The maximum amount you can produce under a given set of circumstances (sweet spot without causing any problems)

Actual Output & Effective Capacity vs Design Capacity

Actual Output and Effective Capacity can NEVER exceed Design Capacity

Capacity Utilization

A measure of the degree to which a system, process, or resource is being used to its full capacity

Capacity Utilization Formula

Capacity Utilization = [(Actual Output) / (Design Capacity)] x 100%

Efficiency Rate

A measure of how effectively a system, process, or resource is being used to produce output

Efficiency Rate Formula

Efficiency Rate = [(Actual Output) / (Effective Capacity] x 100%

Constraint

Any resource whose capacity is less than or equal to demand for that resource

Three Types of Constraints

• Demand

• Supply

• Process (Throughput)

Demand Constraint

• Unable to produce an item fast enough to meet demand

• Ex.: demand for face masks increase in 2020 due to the pandemic

Supply Constraint

Supply is low, and therefore, manufacturers are unable to produce items

Process (Throughput) Constraint

• Anything that prevents a company from producing throughput

• Throughput: the maximum amount of output achievable

Bottleneck

The most limiting constraint on the system

Process Bottleneck

Occurs at the point in the process that requires the longest time or has the slowest rate of production

How to Identify a Bottleneck

• What task or department takes the longest time to complete?

• What task or department has the least amount of production?

• What could possibly be outside of my control?

Regulatory Bottleneck

Government or legal regulations that cause system constraints

Technology Bottleneck

Constraints caused by company’s technology, software, and/or hardware

Labor Bottleneck

Constraints due to a lack of talent or a necessary number of employees to complete a task

Financial Bottleneck

Constraints due to limited budgets and/or credit availability

Physical Bottleneck

Constraints caused by weather, construction, geographical location, etc

• Usually outside of company or individual control

Decision-Making Bottleneck

Constraints caused by indecision

• Holding up a process because of the inability to decide

Theory of Constraints

It is a five-step process that companies use to overcome bottlenecks

Theory of Constraints Steps

• Step 1: Identify the constraint

• Step 2: Exploit the constraint

  • Ensure we're producing at 100% capacity

• Step 3: Subordinate everything to be constraint

  • Determine what resource we have available to support this bottleneck or this constraint

• Step 4: Elevate the constraint

  • Determine how we can increase capacity and overcome that bottleneck

• Step 5: Don't allow inertia to become a constraint

  • Continuous process

• Repeat

Chase Demand

Varying the workforce based on fluctuations in customer demand

Capacity Planning

Process of determining the appropriate level of capacity that a company needs to meet customer demands

Capacity Planning Strategies

• Lead Strategy = Proactively produce

• Lag Strategy = Reactively produce

• Match Energy = Produce to match customer demand

• Adjustment Strategy = Adjusts system or process to meet demand

Capacity Planning - Lead Strategy

• PROACTIVE strategy that involves increasing capacity ahead of anticipated demand

• Produce aggressively

• Requires forecasting future demands accurately and making strategic investments in resources

Capacity Planning - Lag Strategy

• REACTIVE strategy involves increasing capacity only after demand has already exceeded current capacity

• We produce a little bit at a time and see how the market responds

• Allows organizations to avoid unnecessary investments and minimize the risk of overcapacity

• May result in temporary periods of high demand and potential customer dissatisfaction

Capacity Planning - Match Strategy

• Aims to incrementally MATCH capacity with demand by utilizing resources in response to changes in customer demand patterns

• Maintain a balance between supply and demand by adjusting workforce, inventory levels, and production schedules in real-time

• We want to produce at the rate of demand

Capacity Planning - Adjustment Strategy

• Adjustment Strategy: this strategy aims to ALIGN capacity with demand through a system or process change in response to increases or decreases in demand

• Adjusts system or process to meet customer demand

• Ex: a company expands the facility to fit more equipment that will lead to more products

Location Analysis

Site selection or location planning. Involves analyzing various factors and criteria to determine the most suitable location that aligns with the company’s objectives and requirements

Regional Facility

A physical location, typically a building or a complex, that is strategically established in a specific region to serve the needs of that geographic area. It is a type of facility that is designed to support and enhance operations within a specific region or locality

• Facility that serves a specific region

Product Facility

A physical location, typically a building or a complex, that is strategically established to produce one product or product line to serve the needs of the country or world

• Facility that serves the entire world

Location Factors - Quantitative

• Labor costs

• Material costs

• Transportation costs

• Taxes

• Real estate costs

• Construction costs

• Government incentives

Location Factors - Qualitative Factors

• Labor climate

  • Is there talent in this area or will it be hard for people to do the work?

• Quality of life

• Proximity to customers

• Proximity to markets (competitors)

  • Clustering

• Proximity to suppliers

Agile Supply Chain

• Focuses on speed and adaptability to get products to the market quickly

• Most suitable for industries that are rapidly changing

• Focus: speed and flexibility

• For products with short life cycles and unpredictable demand

Lean Supply Chain

• Focuses on streamlined processes to reduce cost and minimize waste

• Most suitable for traditional products with minimal innovation

• Focus: eliminate waste and reduce costs

• For products with long life cycles and stable demand

Vertical Integration

The process of taking ownership of assets within a supply chain

Focal Firm

The company that manages and has authority over the supply chain. Usually owns the end product

Backward Vertical Integration

When a company or focal firm owns the supplier

Forward Vertical Integration

When a company or focal firm owns the distribution or retail

Lean Systems

• An approach to operations and management that aims to maximize efficiency, minimize cost and minimize waste in the production or service delivery process

• Focuses on creating more value for customers with fewer resources, thereby increasing productivity and improving overall quality

Just In Time (JIT) Techniques

• Materials Flow in a Continuous Process

  • The flow of materials is in an assembly that flows continuously

• Uses General Purpose Machinery

  • Machines used in production are designed to do multiple jobs

  • Does NOT use specialized machinery

• Uses Small Lots or Batches

  • Items are produced in small amounts to prevent overproduction and too much inventory

• Uses a PULL SYSTEM

  • In a pull system, production is initiated in response to actual customer demand. Products are produced or materials are replenished only when there is a specific order or need from the customer, downstream process, or production line

• Uses a Process Facility Layout

  • A type of facility layout in which workstations and equipment are grouped together based on the type of process or function

How JIT simplifies the reduction process

• Reduces Set-Up Time

  • Setting up and breakdown of production equipment is completed during non-production time

• Workers are in Close Proximity

  • Employees work close enough to one another to share tools and equipment in an effort to minimize unnecessary movement

• Uses Total Preventive Maintenance

  • Machines are proactively treated and maintained to prevent breakdowns during production time

• Short Planning Horizon

  • The JIT planning horizon is 2-3 months opposed to the medium range planning horizon of 6-18 months

• Uses a KANBAN System

  • The system relies on visual cues to control and manage the flow of work, tasks, or items within a process

Kanban

Signals the need for more materials

JIT Planning Horizon

It is 2-3 months instead of the standard medium range planning horizon of 6-18 months

JIT Master Schedule

• Uses weekly time buckets and is used to prepare final assembly schedule

• How much, when, and what is going to be produced

JIT Final Assembly Schedule

• It is a daily schedule that reflects exactly what should be assembled or produced that day

• Goes 1 week into the future

• It is level scheduled

JIT Level Scheduling

• It is producing items in an order based on the greatest need and customer demand (inventory levels) for that time period

• The product with the lower inventory level will be produced first

JIT Group Technology Production System

It is grouping and producing similar items that use the same processing to reduce setup time and improve efficiency

Total Quality Management (TQM)

A strategic approach to management aimed at embedding awareness of quality in all organizational processes

• Quality is everyone’s responsibility since everyone is involved in one way or another

• One of the benefits is fewer warranty repairs

9 Philosophies of Total Quality Management

• 1. Continuous Improvement

  • TQM advocates for ongoing improvement in all aspects of the organization

• 2. Benchmarking

  • Comparing performance metrics with leaders of various industries

• 3. Employee Empowerment

  • Delegating responsibility to employees to make quality decisions

• 4. Focus on the Customer

  • Consider positive and negative feedback from customers to improve quality

• 5. Responsibility of Quality

  • Quality is everyone’s responsibility regardless of the role within the organization

• 6. Team Problem-Solving

  • Working together as a team to identify, address, and solve quality problems

• 7. Single Source Supplier

  • Having one supplier to provide materials to ensure quality is consistent

• 8. Cross Training & Standardization

  • Developing employees so that they have the skills to perform multiple jobs and documenting processes

• 9. Fact-Based Management

  • Accurately determine customer needs and expectations based on facts, not opinions

Non-value-added activities

Processes or steps that take time, resources, or space but do not increase the product’s value

Value-added activities

Enhances the product or service

Forecasting

Prediction of the future based on mathematical models, past experiences, and current trends

Forecasting Questions

• Historical Data

  • Do we have relevant data?

• Customer Demand

  • How much are customers asking for?

• Planning

  • How much can we produce?

• Scheduling

  • How soon can we deliver?

Forecasting Process

• The step of forecasting process that involves assessing the accuracy level of the initial method is “developing and testing”

• The step of forecasting process that involves accounting for real-world limitation is “considering constraints”