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Management 4000 Test 1
Introduction to Operations
The design, operation, and improvement of the systems that create and delivery the firm's primary products and services
Operations and supply chain management (OSCM) is
A functional field of business
Clear lines management responsibilities
Concerned with the management of the entire productions/delivery system
End-to-End supply chain
Process Activities
Planning- processes needed to operate an existing supply chain
Sourcing- Selection of suppliers that will deliver the goods and services needed to create the firm's product
Making- Producing the major product or service
Delivering- Logistics processes such as selecting carriers, coordinating the movement of goods and information, and collecting payments from customers
Returning- Receiving worn out, excess and or defective products back from customers
Operations: manufacturing and service processes used to transform resources into products
Supply chain: Processes that move information and material to, through, and from the firm
Service or Good?
“If you drop it on your foot, it will hurt you”?
It can be stored as inventory…
Customer is more directly involved in the production process
Longer response time…
Quality is difficult to measure
Differences between services and goods
A service is an intangible process that cannot be weighed or measured, whereas a good is a tangible output of a process that has physical dimension
A service requires some degree of interaction with the customer for it to be a service
Services are inherently heterogeneous
With the big exception of hard technologies and information technologies
Services as a process is perishable and time dependent, and unlike goods, can’t be stored
The specifications of a service are defined and evaluated as a package of features the affect customer perceptions
Categorization of Service Businesses
Businesses impacting human bodies
Businesses that are directed at physical products
Businesses that are directed at people’s minds
Business directed at risk and money management
The goods services continuum
Pure goods -> Core goods -> Core services -> Pure services
Efficiency:
Doing something at the lowest possible cost
Effectiveness:
Doing the right things to create the most value
Value (quality divided by price)
Quality= the attractiveness of a product, considering its features and durability
Strategy
The firm’s strategy describes how it will create and sustain value for its current shareholders
Shareholders- owners
Stakeholders- influenced by the actions of the firm
Sustainability
Adding a sustainability requirement means meeting value goals without compromising the ability of future generations to meet their own needs
Operations and Supply chain strategy
OSCM Strategy: policies and plans for using the resources of a firm- must be integrated with corporate strategy
Operations effectiveness: Performing activities in a manner that best implements strategic priorities at a minimum cost
Operations Strategy - 3 C’s
Customers
Get to know- team up with next and final customer
Continual, rapid improvement in lead time, quality, cost, flexibility, and variability
Company
Achieve unified purpose via information, team involvement in planning and implementing change
Competitors
Get to know the competition and world class leaders
Operations Strategy
Strategy process: Customer needs -> corporate strategy -> operations strategy -> decisions on processes and infrastructure
Example: More product -> increased organizational size -> increase production capacity -> build new factory
Competitive dimensions
Price
Make the product or deliver the service for a fair price
Quality
Make a great product or delivery of a great service
Delivery speed
Make the product or deliver the service quickly
Delivery reliability
Deliver it when promised
Coping with changes in demand
Changes its volume
Flexibility and new product introduction speed
Change it
Trade-Offs
Management must decide which parameters of performance are critical and concentrate resources on those characteristics
For example, a firm that is focused on low cost production may not be capable of quickly introducing new products
Straddling- seeking to match a successful competitor by adding features, services, or technology to existing activities
Often a risky strategy
Order qualifiers and order winners
Order qualifiers are those dimensions that are necessary for a firm’s products to be considered for purchase by customers
Features customers will not forego
Order winners are criteria used by customers to differentiate the products and services of one firm from those of other firms
Features that customers use to determine which product to ultimately purchase
What if productivity?
A measure of the effective use of resources, usually expressed as the ratio of output to input
Productivity is a relative measure
What is a product/service?
Need-satisfying offering of an organization
Example
P&G does not sell laundry detergent
P&G sells the benefit of clean clothes
Customers buy satisfaction, not parts
Need may be supplied as a product or a service
New product opportunities
Understanding the customer
Economic change
Sociological and demographic change
Technological change
Political/legal change
Market practice, professional standards, suppliers, distributors
Six phases of the generic development process
0. Planning
Concept development
System-level design
Design detail
Testing and refinement
Production ramp-up
Human/customer behavior
Identify issues/problems
Drives innovation
Strong indication of majority of customer needs
Real feedback
House of quality
Quality function deployment:
Cross-functional teams from marketing, design engineering and manufacturing
Begins with listening to the customer- use market research
Converts the expectations and demands of customers into clear objectives- these are then translated into specifications
Customer requirements forms the basis for the house of quality
Product life cycles
May be any length from a few hours to decades
The operations function must be able to introduce a new products successfully
Provide products to the customer as the product evolves through its life cycle
Introduction: Fine tuning product
Research
Product development
Process modification and enhancement
Supplier development
Growth
Product design begins to stabilize
Effective forecasting of capacity becomes necessary
Adding or enhancing capacity may be necessary
Maturity
Competitors now established
High volume, innovative production may be needed
Improved cost control, reduction in options, paring down of product line
Decline
Unless product makes a special contribution to the organization, must plan to terminate offering
Organizing for product development
Historically- distinct departments
Duties and responsibilities are defined
Difficult to foster forward thinking
Today- team approach
Cross functional- representatives from all disciplines or functions
Concurrent engineering- cross functional team
Concurrent engineering
Concurrent engineering can be defined as the simultaneous development of project design functions, with open and interactive communication existing among all team members for the purposes of:
Reducing time to market
Decreasing cost, and
Improving quality and reliability
Dangerous if not well organized
Value Analysis/Value engineering
Purpose is to simplify products and processes
Objective is to achieve better performance at a lower cost while maintaining all functional requirements defined by the customer
Involves brainstorming such questions as:
Does the item have any design features that are not necessary?
Can two or more parts be combined into one?
How can we cut down the weight
Supply Chain
Consists of a interconnected network that includes organizations, activities, and people working together to achieve efficient flow of inventory, information, and finances to deliver products and services
Supply chain management involves overseeing and managing the flow of inventory, information and finances as products move from origin to consumer
Types of supply chains
Agile supply chain
A supply chain designed to operate efficiently while optimizing speed and adaptability
Lean supply chain
A supply chain designed to operate efficiently while focusing on eliminating waste and minimizing cost
Vertical integration strategy
Owning multiple assets within a supply chain
Backward vertical integration: own supplier
Forward vertical integration: Own distribution
Types of inventory
Raw materials: These parts and materials are obtained from suppliers are used in the production process
Work-in-process: These are partly finished parts, components, subassemblies, or modules
Finished goods: Items are ready to ship to the customer. No more work is required
Replacement parts: these are maintained to replace other parts in machinery or equipment as those parts wear out
Transportation: The portion of inventory that is in the process of being shipped through the distribution system
Strategic Sourcing
The development and management of supplier relationships to acquire goods and services in a way that aids in achieving the immediate needs of the business
In the past, sourcing was another name for purchasing
As a result of globalization, sourcing implies a more complex process suitable for products that are strategically important
Request for proposal: Used for purchasing items that are more complex or expensive and where there may be a number of potential vendors
Vendor-managed inventory: When a customer actually allows for the supplier to manage an item or group of items for them
Suppliers and procurement
Role of suppliers: suppliers are the crucial in the supply chain, delivering essential raw materials and components for production
Importance of procurement: Effective procurement strategies ensure that quality products are sourced while maintaining cost efficiency
Quality and cost-efficiency: Balancing quality and cost is essential for successful procurement, impacting the overall supply chain performance
Outsourcing/insourcing
Insourcing: Goods and services produced by the company itself
Outsourcing: Goods and services obtained from outside providers
Allows a company to create a competitive advantage while reducing cost
An entire function may be outsourced, or some elements of an activity may be outsourced, with the rest kept in house
Supplier evaluation and certification
A process to identify best and most reliable suppliers
Sourcing decisions are made on facts and not on perception
Frequent feedback can help avoid surprises and maintain good relationships
Suppliers should be allowed to provide constructive feedback to the customer
Supplier certification refers to an organization’s processes for evaluating the quality systems of key suppliers in an effort to eliminate incoming inspections
Procurement process
Material requisition/purchase requisition
Stating product, quantity, and delivery date. May originate as a planned order release from the MRP system
The request for quotation
Buyer identifies suppliers and issues a request for quotation for routine items or a request for proposal for highly technical products. Supplier development is used to develop supplier capabilities
Buyer reviews, requisition, assigns qualified suppliers to bid
Product description, closing date and conditions are given
Buyer reviews closed bids and selects a supplier
Reasons to outsource
Financial
Improvement
Organizational
Strategic Alliances
An agreement between two or more parties to pursue a set of agreed upon objectives needed while remaining independent organizations.
Green Sourcing
Being Environmentally responsible has become a business imperative
Many firms are looking to their supply chains to deliver “green” results
Financial results can be often improved through going green
A comprehensive green sourcing effort should assess how a company uses items that are purchased internally
It is also important to reduce waste
Sourcing performance measures
Inventory (inventory turns): how often inventory is replaced during the year
Cost of goods: the annual cost for a company to produce the goods or services provided to customers
Average aggregate inventory value: The total value of all items held in inventory
Weeks of supply: how many weeks worth of inventory is in the system at a particular point in time
Inventory turnover: COGS/Inventory = X turns per year
Weeks of supply: Inventory/COGS x 52 = X weeks
Logistics
The art and science of obtaining, producing and distributing material and product in the proper place and in the proper quantities
The flow of information
The flow of money
International logistics: Managing these functions when the movement is on a global scale
Third party logistics: An outside company used to manage all or part of another company’s logistic functions and warehouse fulfillment
Transportation Modes
Truck: great flexibility
Common Carrier: A company that is in the business of transporting goods for any other companies
Private: the company uses its own trucks to pick up and deliver the goods (amazon)
Ship: High capacity and low cost but slow
Primary form for imports and exports
Plane: fast but expensive
Rail: low cost but slow and variable
Pipeline: highly specialized and limited to liquids, gases, and solids in slurry form. No packaging is needed and the costs per mile are low
Hand delivery: last step in many supply chains
Distribution Facilities
Warehouse: A facility where goods are stored for future use
Distribution center: a warehouse that performs additional services for processing orders
Cross docking: an approach where large incoming shipments are broken down into small shipments for local delivery
Fulfillment center: A distribution center designed to hand small, individual orders that are prepared for shipment to individual retail customers
Distribution Facility Processes
The common processes within distribution facilities are inventory tracking, receiving, stowing, picking, packing and shipping
The distribution facility must be able to accurately receive inventory delivered at receiving and loading docks
Item storage in a distribution facility can be based on a locator system
Items may be stored in a fixed or random location
On The outbound side of the facility, picking and packing are the common functions performed
Locating Logistics Facilities
Proximity to customers: makes rapid delivery easier.
Business climate: can include presence of similar-sized businesses, businesses in the same industry, and other foreign companies
Total costs: objective is to minimize overall cost
Tariffs: a special type of tax on imports or exports of a country that is used by governments to generate revenue
Infrastructure: adequate road, rail, air, and sea transportation along with energy and telecommunications
Quality of labor: educational and skill levels must match needs
Suppliers: proximity of important suppliers supports lean production
Clustering: location of other facilities can influence a location
Political risk: risks in both the country of location and the host country influence the decision
Government barriers: barriers in many countries are being removed
Environmental regulation: these impact a certain industry in a given location and must be included in the decision
Host community: host community’s interest is part of the evaluation process
Competitive advantage: the location should be provide the company with a competitive advantage
Plant location methods:
Factor-rating system
Centroid method
Factor rating system
Is the most widely used
List of factors is developed
Range of possible points is assigned to each factor
Each site is rated against each factor
The sums of assigned points for each site are computed
The site with the most points is selected
Centroid method
Uses for locating single facilities
Considers existing facilities, the distance between them, and the volumes of goods to be shipped between them
Assumes inbound and outbound transportation costs are equal
Does not include special shipping costs for less than a full load
This methodology involves formulas used to compute the coordinates of the two dimensional point that meets the distance and volume criteria stated, above
Locating service facilities
New service facilities are far more common than new factories and warehouses
Much less expensive
Multiple sites close to customers
Location decision closely tied to the market selection decision
Decision more about maximizing profits than minimizing costs
Determining location cost
Overhead costs: all costs incurred to produce the product or service
Fixed costs: costs that remain the same regardless of utilization or production volume
Variable costs: costs that fluctuates based on utilization and production volume
Total costs: the total sum of fixed costs and variable costs based on production volume
TC = VC(x) + FC
TC= Total cost
VC= Variable Cost
X = Number of units
FC = Fixed costs
Capacity Management in operations and supply chain management
Capacity: the ability to hold, receive, store and accommodate
In business: Amount of output that a system is capable of achieving over a specific period of time
Capacity management needs to consider both inputs and outputs
Many industries measure and report capacity in terms of output
Industries whose product mix is very uncertain, like hospitals, often express capacity in terms of inputs
Strategic capacity planning
Determining the overall level of capacity-intensive resources that best supports the company’s long range competitive strategy
Facilities
Equipment
Labor force size
Capacity has a critical impact on response rate, cost, inventory policies, and management and staff support requirements
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.
Basic questions in capacity planning are:
What type of capacity is needed?
How much is needed?
When is it needed?
Planning horizons
A period of time over which a company or organization plans its production or operations. The planning horizon can vary depending on the type of plan and the organization’s goals and objectives
Long range: 5-10 years
Intermediate: Monthly or quarterly plans covering the next 6 to 18 months
Short range: Less than one month
Types of capacity
System Capacity
The measure of an organization's ability to sustainably produce quality products and or 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 at least amount of throughput
Throughput
The maximum output achievable within a system
Design capacity
The maximum designed service capacity or output rate
Effective capacity
The maximum service capacity or output rate with consideration to situations and circumstances
Measures of capacity
Capacity Utilization
A measure of the degree to which a system, process or resource is being used to its full capacity
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
Formula: Efficiency rate = actual output / effective capacity x 100
Capacity Cushion
Level of capacity in excess of the average utilization rate or level of capacity in excess of the expected demand
Cushion = (1/average utilization rate) - 1
Large capacity cushion: required to handle uncertainty in demand
Service industries
High level of uncertainty in demand
Small capacity cushion: unused capacity still incurs the fixed costs
Highly capital intensive businesses
Time perishable capacity
Capacity planning strategy
LEAD strategy
This proactive strategy involves increasing capacity ahead of anticipated demand.
LAG strategy
This reactive strategy involves increasing capacity only after demand has already exceeded current capacity
Match Strategy
This strategy aims to incrementally MATCH capacity with demand by utilizing resources in response to changes in customer demand patterns
Adjustmnent strategy
This strategy aims to ALIGN capacity with demand through a system of processes change in response to increases or decreases in demand
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
Diseconomics of scale
At some point, the plant becomes too large and average cost per unit begins to increase
Economies of Scope
Economies of scale through product line diversification
Using decision Trees
A decision tree is a schematic model of the sequence of steps in a problem – including the conditions and consequences of each step
Decision trees help analysts understand the problem and assist in identifying the best solution
Decision tree components include the following
Decision nodes- represented with squares
Chance nodes- represented with circles
Paths- links between nodes
