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Three Basic Truths I.Pervasiveness II.Interdependence III.Profitability and Survival.

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Presentation on theme: "Three Basic Truths I.Pervasiveness II.Interdependence III.Profitability and Survival."— Presentation transcript:

1 Three Basic Truths I.Pervasiveness II.Interdependence III.Profitability and Survival

2 Pervasiveness Every organization must make a product or provide a service that someone values…………. Manufacturer. Retailer. Design firm. University. Health services.

3 Interdependence Most organizations function as part of a larger supply chain

4 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

5 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?

6 Operations Management The planning, scheduling, and control of the activities that transform inputs into finished goods and services

7 Operations Function The collection of people, technology, and systems within a company... … that has primary responsibility... … for providing the organizations products and/or services.

8 Viewing Operations as a Transformation Process Transformation Process Manufacturing operations Service operations Inputs Outputs Materials People Equipment Intangible needs Information Tangible goods Fulfilled requests Information Satisfied Customers

9 Supply Chain Management Active management of supply chain activities and relationships to maximize customer value and achieve a sustainable competitive advantage

10 Alcoa Ball CorpAnheuser-BuschM&M Meijer First Tier Supplier DistributorRetailer Transportation companies Final customers UpstreamDownstream Alcoa Second Tier Supplier Material Flows

11 Definitions Strategies The mechanisms by which businesses coordinate their decisions regarding structual & infrastructural elements Mission Statement A statement that explains why an organization exists. It describes its core values and identifies the domain

12 Definitions Business Strategy Long-term master plan for the company; establishes the general direction Functional Strategies Further develop the business strategy in segments of the business must be aligned and coordinated Core Competencies Organizational strengths that provide focus and foundation for the companys strategies

13 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

14 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

15 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.

16 Quality Performance Quality the basic operational characteristics of a product or service Conformance Quality to what degree the product or service meets specifications Reliability Quality The 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

17 Time Delivery speed how quickly the OSC can fulfill on order or need once it has been identified. Delivery Reliability the ability to deliver goods or services when promised and the accuracy of he quantity shipped Pg 30

18 Flexibility Mix flexibility the ability to produce a wide range of products or services Changeover flexibility the ability to provide a new product with minimal delay Volume flexibility the 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 Pg 31

19 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 organizations cost. Cost is always a concern, even if a company primarily competes on a different performance dimension. Pg 31

20 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 Pg 32 Excellence in one dimension may conflict with excellence in another

21 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 Pg 48

22 Relationship Map

23 Is there room for improvement? 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

24 Productivity Measures Productivity = Outputs Inputs Single-factor, Multifactor, and Total measures of productivity Productivity is the ratio of outputs to inputs

25 Variations of Productivity Batteries Produced Machine Hours + Direct Labor Hours Total Nightly Sales ($) Total Nightly Costs ($) Batteries Produced Direct Labor Hours Single-factor productivity 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

26 Efficiency A comparison of a companys actual performance to some standard output Usually expressed as a percentage Standard is an estimate of what should be produced based on studies or historical results Efficiency = 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

27 Dimensions of Quality Performance Features Reliability Durability Conformance Aesthetics Serviceability Perceived Quality Which dimensions do you think are directly affected by Operations and Supply Chain activities?

28 Total Cost of Quality Traditional View

29 TQM Principles Customer focus Leadership involvement Continuous improvement Employee empowerment Quality assurance (including SQC or SPC) Strategic partnerships Strategic quality plan

30 Common Improvement Tools Cause and effect diagrams (aka Fishbone or Ishikawa diagrams) Check sheets Pareto analysis Run charts and scatter plots Bar graphs Histograms

31 Generic C&E Diagram

32 Pareto Analysis (sorted histogram) Late passengers Late arrivals Late baggage to aircraft Weather Other (160)

33 Run Charts and Scatter Plots Time Measure Variable Y Variable X Run Scatter

34 Histograms Frequency Measurements

35 Developing Products and Services Why bother? New product development process What is good design? –An operations and supply chain perspective

36 Why Bother? External benefits Internal benefits Exploit strengths/core competencies Block competitors

37 Operations and Supply Chain Perspectives Repeatability, testability and serviceability of the designRepeatability, testability and serviceability of the design Product volumesProduct volumes Product costsProduct costs Match with existing capabilitiesMatch with existing capabilities

38 Process Types (in order of decreasing volume) Continuous Flow Production Line Batch (High Volume) Batch (Low Volume) Job Shop Project

39 Mixing Together the Process Types Hybrid Process Spindles Arms and Legs Seats BATCH for fabricating parts... ASSEMBLY LINE for putting together final product

40 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

41 Capacity Strategies: When, How Much, and How? Leader Laggard Demand Lost Business Excess Capacity

42 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?

43 Fixed & Unit Cost Scenarios

44 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?

45 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?

46 Theory of Constraints Pipeline analogy Which piece of the pipe is restricting the flow? Would making parts A or D bigger help?

47 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)

48 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 firms product or service

49 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.

50 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

51 Time Series Components of Demand... Time Demand... randomness

52 Time Series with... Time Demand... randomness and trend

53 Time series with... Demand... randomness, trend, and seasonality May

54 Moving Average Models PeriodDemand period moving average forecast for Period 8: =( ) / 3 =10.67

55 Weighted Moving Averages Forecast for Period 8 =[( ) + (0.3 8) + (0.2 10)] / ( ) =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.

56 Exponential Smoothing I Sophisticated weight averaging model Needs only three numbers: F t = Forecast for the current period t D t = Actual demand for the current period t = Weight between 0 and 1

57 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

58 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

59 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

60 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

61 Logistics Decision Areas Transportation… –Modes –Formats –Pricing Warehousing –Consolidation –Cross-Docking and Break-Bulk –Hub-and-Spoke –Inventory

62 Types of Inventory Cycle stock Safety stock (buffer inventory) Anticipation inventory Others –Hedge inventories –Transportation inventory (pipeline) –Smoothing inventories

63 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)

64 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

65 What are the Total Relevant Annual Inventory Costs? Consider: D=Total demand for the year S=Cost to place a single order H=Cost to hold one unit in inventory for a year Q=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 isnt item cost for the year included?

66 Holding Cost $ Q Holding cost increases as Q increases... (Q/2)×H

67 Ordering Costs $ Q Ordering costs per year decrease as Q increases (why?) (Q/2)×H (D/Q)×S

68 Total Annual Costs and EOQ EOQ at minimum total cost

69 EOQ Solution When the order quantity = EOQ, the holding and setup costs are equal

70 Alphabet Soup TLA (Three Letter Acronym) Definitions ATP: Available to Promise BOM: Bill of Materials DRP: Distribution Requirements Planning MPS: Master Production Schedule MRP: Materials Requirements Planning PAC: Production Activity Control S&OP: Sales and Operations Planning

71 Master Scheduling Criteria The Master Production Schedule must: Satisfy the needs of marketing Be feasible for operations Match with supply chain capability

72 MPS Formulas:

73 Projected On-Hand Inventory On-hand inventory at end of October =100 MonthNovemberDecember Week Forecast Demand Orders Booked Projected On-Hand Inventory Master Schedule e.g., Projected on-hand inventory for week 47: = – 150 = 215

74 Available-to-Promise ATP (Week 45) = – ( ) = 65 ATP (Week 47) = 300 – ( ) = 40 ATP (Week 49) = 250 – ( ) = 120 On-hand inventory at end of October =100 MonthNovemberDecember Week Forecast Demand Orders Booked Projected On-Hand Inventory Master schedule Available-to-Promise

75 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.

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