supply chain
What is operations management
Operations management focuses on decisions for the internal production of the firm’s products or services
An example would be the Amazon warehouse
Five key operational decisions:
Process: what is the optimal layout/flow? Labor or capital intensive?
Capacity: size of workforce? Availability of equipment?
Quality: quality level? How to monitor quality?
Inventory: when and how much to order
Supply chain: which supplier? Make vs buy? Partner or alliances?
Supply chain management deals with managing the flow of materials, information, and money across multiple organizations from the suppliers to operations to distribution to the final customers, along with the reverse flows
Operations and supply chain management deals with the sourcing, production, and distribution of the product or service along with managing the relationship with supply chain partners
Manufacturing (product management)
Produce tangible output
Can be produced in separation from the customers
It can be stored for some time
Homogeneity…products should be the same as others
Service
Produce intangible process
Require interaction with the customer
Perishable and time-dependent
Heterogeneous
OM is needed in what types of organizations: All of the above
Inventory management tends to play a more significant role in: manufacturing companies
Operations management is an important function in any organization
Cross-functional decision making
Looking at a car- the steering wheel serves as the strategy. The overall car serves as marketing. The Driver serves as HR. The gas serves as finance. The engine serves as an operation.
OM in an organization
Why should you care about OM?
Powerful tools
Manage unexpected events
To achieve reliance to guarantee supplies of necessary merchandise, the well-functioning of our society relies on many supply chain and operational decisions
Supply management
Demand management
product/service designs
Supply chain design
E-commerce and Omni-channels are disrupting conventional business models
To compete in an omnichannel world, companies have to reconfigure and rethink their supply chains drastically
KPMG Global top of the Mind Survey for consumer and Retail Executives
As e-commerce and omnichannel disrupt conventional business models, this is what roughly 500 executives said:
38% of executives said supply chain management is their top challenge
42% placed supply chain management at the tip of their list for increased investment over the next 12 months
Followed by international expansion (32%), data analytics (28%), and digital strategy (28%)
Environmental and social responsibility considerations are becoming increasingly important
Sustainability = planet, profit, and people
Triple bottom line, co-production
Understanding where and how products and services are created is the key to becoming more environmentally and socially responsible
Eco friendly product management
Ethical and sustainable sourcing
Green manufacturing, packaging distribution, end-of-life product management (e.g, recycling)
Social impacts of business (e.g., labor practices)
Operations management activities are at the core of all business organizations
50% or more of the jobs in the industry are operations management-related:
Customer service, quality assurance, production planning, scheduling, inventory management, logistics,
All other functional areas are interrelated with operations management
Ceo’s from many successful companies with an operations background…gap, revlon, apple, p&g
Supply chain operations are in a wide range of industries….hospitals, army, retail, restaurants, etc.
How to make operations strategies and decisions
Operations strategy- a consistent pattern of decisions for operations and the associated supply chain that is linked to the business strategy and other functional strategies, leading to a competitive advantage for the firm
Business strategy
OM Decisions, other functions
Competitive advantage
Operations strategy model
Corporate strategy: what business
Examples: tesla: accelerates the worlds’ transmission to sustainable energy, Walt Disney: making people happy
Business strategy: how to compete in the market
3 generic business strategies (Porter 1980)
Differentiation. E.g, apple iPad, Tesla
Low cost. E.g, store brand products
Focus (geographical or product portfolio). E.g, Sweet Martha’s, Dyson
Operations strategy
Mission: connected to the business strategy and coordinated with other functional strategies
Operations objectives (competitive priorities): need to be quantifiable
Four common objectives
Cost: resources sued. E.g., as % of sales revenue
Quality: conformance to customer expectations. E.g., % of scrap, warranty cost
Delivery (quickly and on time): e.g., % of orders fulfilled from stock, lead-time
Flexibility (ability to rapidly change operations): e.g., time to product market
Other may also be added, e.g., innovation, sustainability, etc.
Strategic decisions
Process, quality, capacity, inventory, supply chain
Distinctive competence: the operations capability of a firm that outperforms its competitors, should match the mission of operations
Order winners bs order qualifies
Order winner: operations objective that differentiates one firm from another
Examples: quality (american express), price (IKEA), innovation (dyson)
Order qualifier: operations objective that must have acceptable level to get customer orders
Examples: responsiveness level necessary to be considered as a fast delivery service (FedEx Ground)
Cross functional strategic decisions
No one size fits all
Supply chain strategies
Cross functional strategic decisions
Environment and sustainable operations
Cross-functional efforts
All opportunities, including product development, sourcing, manufacturing, packaging, distribution, transportation, services, and end-of-life management
Cross functional strategic decisions
New Product Design: why
NPD realizes the business strategy
NPD strengths the distinctive competence
NPD affects operations
Process: technology and availability of resources
Quality
Capacity
Inventory
Helps in marketing, engineering, resource (finance), manufacturing, etc.
New product design: how–Strategies for NPD
Technology push…we can make it
Market pull…we can sell it
Quiz
The technology push strategy relies heavily on cross-functional collaboration for new product development…TRUE
Technology push or market pull
Cocoa cola classic–technology push
Coca-cola zero–market pull
Strategies for NPD
Technology push (sell what we can make)
Develop superior technologies and products
Example: electronics
Market pull (make what we can sell)
Organize resources to fulfill customer demand
Examples: electronics
inter-functional view (a balanced approach)
most appealing, most difficult, cross-functional team involvement
NPD process
Well-defined procedures in company documents
Concept development
Idea generation and evaluation of alternative ideas
Evaluation of alternative ideas
Product design
Design of physical products
Design of the production process
Pilot production/testing
Testing production prototypes
Finalizing production process
Finalizing the ‘information’ package specifying details
Traditional (sequential) and concurrent approaches
Supply chain collaboration
Collaboration with customers
Obtain information
Provide motivation and facilitator
Include customers as advisors
Collaboration with supplier
Technical expertise
Capability
Capacity
Low risk
Modular design
High product variety + low component variety
Design basic product components or modules for assembling into multiple products
Reduce complexity and costs associated with a large number of product variations
Example: Volkswagen MQB platform
Quality function deployment (QFD)
Quality functional deployment (QFD): tool for linking customer requirements to technical specifications
House of quality
Customer attributes (CAs): from market research to define important product attributes
Engineering characteristics (ECs): measurable technical specifications, match customer needs
Relationship between the ECs: trade-off, lightweight/durable, features/low price
Competitive evaluation: how are the competitors doing?
Target values of design
Forecasting
Why
What
Quantitative and qualitative methods
How
Quantitative methods
Time-series, casual
Forecasting errors
Qualitative methods
Forecasting: why
demand forecasting:
What we think demand will be
Forecasts are used in all functional areas
Finance: budget planning and control
Marketing: sales forecasting
Operations: planning for capacity, inventory, labor scheduling, etc.
Poor forecasting costs money
To much: excess inventory
Too little: loss of sales
For very long-term forecasting, it is better to use qualitative forecasting
Quantitative methods
Time series models
Past data history is best predictor of the future
Look for patterns in the data
Forecast based on the time series (previously observed values”) of the variable to be forecasted
Moving average, exponential smoothing
Casual models
Forecast on the basis of relationships to other variables
Regression approaches
Quantitate method: time series
Component of data:
Level - average
Trend - general direction (increasing/decreasing)
Seasonality - short term recurring cycles
Cycle - long term business cycle
Error - random or irregular component
Notations
Time series
(simple) moving average
Weighted moving average
Exponential smoothing
(Simple) moving average
N-period (Simple) moving average:
A forecast based on the simple average of the past N periods
Managerial decision: N
Weighted moving average
A forecast based on the weighted average of the past N periods
Managerial decision: N & Wi
Exponential smoothing
Weights past values
More weight given to the most recent period
Basic logic
New forecast = old forecast + error judgment
The cumulative sum of forecast errors—the answer should be on the smaller side…as small as possible
Smaller n equals more responsiveness
Choices of parameters
Responsiveness (sensitive to a demand change)
Stability (remain smooth to ignore random fluctuations)
Assessing forecast Accuracy: Forecast Error
forecast are almost always wrong – How accurate?
Estimate forecast error to:
Monitor erratic demand observations or ‘outliers’
Determine when the forecasting method must be improved
Determine the parameter values that provide the forecast with the least error
Advanced time series forecasting
Adaptive exponential smoothing
The smoothing coefficient () is varied
Mathematical models
Linear or nonlinear
Box jerkins method
Requires about 60 periods of past data
Casual forecasting models
Cause and effect model
Examples
Use population to forecast newspaper sales
Use supply chain data on inventory level to forecast flat-screen TV sales
The general regression model:
^y = a+bx
Other forms of casual model
Econometric, input-output, simulation models
Selecting a forecasting method
User and system sophistication
People are reluctant to use what they don’t understand
Time and resources available
When is a forecast needed?
Use or decision characteristics
Scheduling decision? Facility expansion?
Data availability
Data patter
Level? Unstable?
Qualitative forecasting methods
Based on managerial judgment when there is a lack of data
Major methods:
Delphi method
1. Summarize answers (anonymous)
2. share
Market surveys
Life-cycles analogies
Informed judgment (naive models)
Collaborative planning forecasting, and replenishment (CPFR)
Aims to achieve more accurate forecasts
Share information in the supply chain with customers and suppliers
Compare forecasts
If there is a discrepancy, look for a reason
Agree on the consensus forecast
Works best in B2B with few customers (e.g., a small number of large retailers)
Why hold inventory: benefits and costs
How to manage inventory: EOQ…how much?, when?
Why hold inventory
Inventory: stock of materials used to facilitate production or satisfy customer demands
Purpose of inventory:
To protect against uncertainty (safety stocks)
Demand may be higher than your forecast
Supply may be disrupted
To allow economic production and purchase (cycle inventory)
Quality discount
Fixed cost
To cover anticipated changes in demand or supply (anticipated inventory)
Upcoming surge in demand
To avoid large investments in capacity
To provide for transit (pipeline inventory)
Items in the transportation process
Why not hold inventory?
Holding inventory can be costly
Tangible costs: storage space costs, spoilage/breakage, pilferage, insurance, taxes
Intangible costs: opportunity cost, devaluation, obsolescence
Procurement can also be costly
Administrative costs
Transportation costs
Manufacturing set-up costs
How to manage inventory
Inventoried decision:
How much to order (order size)
Fixed order quantity (Q)
When to order (order frequency)
Reorder point (R)
EOQ model
Two basic types of costs
ordering/set up costs: logistics, handlings, contracting, inspections, setup costs (for production)
A fixed payment per order
holding/carrying cost: warehouse, interest and taxes, insurance, obsolescence
A variable payment depending on the holding volume
The cost of shipping per order is ordering cost
The cost of drafting a purchasing contract is ordering cost
The cost of capital to finance the inventory (e.g., interest payments) is holding cost
The cost associated with inventory obsolescence is holding cost
When ordering cost increases, we should increase the size of each order
When the holding cost increases, we should decrease the size of each order
When the size of each order increases:
Holding cost: increase
Average unit ordering cost: decrease
How much to order/produce?
EOQ model
Assumptions
Demand rate is constant, recurring, and known
D: demand rate (e.g., units per year)
Lead time is constant and known
Items or materials re-ordered in a lot or batch
S: ordering/setup cost per order place (e.g., dollars per order)
Stock-outs are not allowed
Unit cost stays constant
C: unit cost (e.g., dollars per unit)
Only one type of items is considered
Goal:
How much to order (ordering size): Q
When to order (reorder point): R
EOQ model: Cycle Inventory
EOQ: Total cost
EOQ: a simple exercise
Demand = 200 units/year
Cost of product A
S = $100/order, H=$2/unit/year
Strategies
Q = 10
Total annual cost of inventory?
Economic Order Quantity (EOQ)
Q = optimal ordering size
D = demand rate
S = set up/ordering cost (i.e., cost per order placed)
H = holding/carrying cost
When to place a new order?
Meal management kit
D = 1 box/day
Lead time = 2 days
You should reorder when the remaining stock = 2 boxes
Reorder point
Quantity (how much to order): EOQ
Timing (when to order)?
Reorder point: the inventory level at which a new order should be placed to avoid future shortage
To account for the lead time of delivery
Reorder point (R)
= demand during ordering lead time
=lead time (L) X demand rate (D)
EOQ: example
The 3001 company sells some textbooks with an average demand of 500 units per year. The ordering cost is $30 per order placed. The company has to pay a holding cost of $12.5 for each book
What is the optimal ordering size for the company?
If the company is able to negotiate and bring down the ordering cost to just $25, how does this change the ordering size?
The replenishment lead time is typically 2 weeks (assume the bookstore opens 50 weeks a year). What is the reorder point?
Whenever inventory drops to 20 units, a new order is placed
Capability planning is important
Capital intensive
Hierarchy of capacity planning
Scheduling: short-term planning, 0-12 months
Aggregate planning: medium-term planning, 6-18 months
Facilities decision: long-term planning, 12-24 months
Capacity: definition
Maximum output that can be produced over a given period of time
Theoretical peak capacity
Outputs
Physical assets available
Effective capacity
Downtimes, shift breaks, interruptions
Should be used for planning
Capacity: utilization
Actual output/capacity x 100%
Capacity is seldom at 100% utilization
Utilization can > 100%: overtime, additional shifts, rush order
Capacity cushion = 100% - Utilization
Long-term capacity planning” facilities decision
Strategic perspectives
Cross-functional coordination
Considerations
Predicted demand
Cost of facilities
Competition Landscape
Business strategy
International considerations
Five crucial questions in facilities decisions
How much capacity is needed?
Large cushion
Moderate cushion
Small cushion
How large should each facility be?...economies of scale
When is capacity needed?
Preemptive strategy
Wait and see strategy
Where should the facilities be located?
Quantitative factors
ROI, NPV, Transportation, Taxes, Lead times
Qualitative
Language and norms, attitudes among workers and customers, proximity to customers, suppliers & competitors
Why types of facilities
Product based facilities
Facilities for one family or types of product or service
(economies of scale, transportation costs)
Processes-focused facilities
Use a few technologies, frequently used to produce components or subassemblies
Market-focused facilities
Facilities located near markets
(transportation cost, service, international trade)
General purpose facilities
flexible
For low-margin products (printer paper), it is better to keep _______ for production
Large cushion
small cushion
Medium-term capacity planning: aggregate planning
Supply
Capacity: size of workforce, over/under time, part-time/temporary, outsource, subcontracting, cooperative arrangements
inventory
Demand
Volume of demand
Pricing, advertising and promotion, backlogs and reservations
pattern/timing of demand
Pricing schemes, development of complementary products/services
Sales and operations planning
S&OP planning
Accounting: cost analysis
Finance: Investment
Operations: forecast, inventory, capacity, current orders
Marketing: forecast, sales plan
Human resources: personnel planning
Aggregate planning strategies: level vs. chase strategy
EOQ model
The demand rate is constant, recurring, and known
Lead time is constant and known
Items or materials re-ordered in a lot or batch
Stockouts are not allowed
Unit cost stays constant