1. Operations Management Supply-Chain Management
Plastics

2. Class Agenda 1. Review of Break Even Analysis (Math problems) - 30 Min
2. Supply Chain Management and the Bull Whip Effect - 30 Min
3. Selecting the Right Supply Chain for your company - 10 Min
Break - 20 Min
4. Aggregate Planning - (Math Problems) - 30 Min
5. David Roussain - VP Fed Express E-Commerce

3. Plotting the Break Even Point
Problem 7.16 option A

4. Plotting the Break Even Point
Problem 7.16 option B

5. Volume Based Decision
Problem 7.18

6. Dimensions of Operations Strategy & Competitive Advantage
Time
Price
Quality
Variety
Goal of this course: How can you structure/change an operation so that these operational capabilities are best achieved?
Means to best satisfy
the customer
Profit

7. Typical Supply Chain
A supply chain involves a sequence of information flows, decisions, and physical flows,
in order to meet a dynamic set of customer needs.
Part
Suppliers
Assembly
Sites
Distribution
Centers
Raw Material
Components
Finished Goods
Orders on
the Factory
Part Orders
Cycle Time
Sales
Channel
Finished Goods
Demand Information
Information Flow
Physical Flow

8. Supply Chain Response
Supply chain responsiveness refers to your system’s ability to respond to, and recover from, a demand surprise.

9. Supply Chain Response
Responsiveness of a supply chain is manifest in the height and duration of inventory excursions.
Shorter supply chains are more robust to demand surprises.
How much is this robustness worth?

10. Inventory’s Financial Impact
Financial impact: Inventory excursions create incremental cost and lost opportunity.
Inventory Profile over Product Life Cycle A
Very high inventory.
High carrying costs (component depreciation, capital cost).
Very high inventory risk (time-to-consumption is high).
Excess inventory at end-of-life creates clearance discounts, price protection.
Impacts pricing of next product.
Impacts time-to-market of next product. C
Inventory Level - W.O.S.
Initial Desired Inventory Level (ex: 4 WOS) B
time
Product Life Cycle
Stockouts begin to occur before inventory hits zero. Lost sales occur until SC adjusts.
Channel dries up, marketing momentum is lost.

11. Cumulative Contribution
Business goal: maximize total contribution margin over the life-cycle of a product.

12. Profit Impact of Supply Chain Length
The greater the lead time and forecast error or variability, the lower the cumulative contribution margin over the product life-cycle.

13. The Bullwhip Effect
Bullwhip Effect: As demand is passed through the supply chain, the variability is amplified. What impact does this have? What causes this phenomenon?
Part
Suppliers
Assembly
Sites
Distribution
Centers
Raw Material
Components
Finished Goods
Orders on
the Factory
Part Orders
Cycle Time
Sales
Channel/
End Customer
Finished Goods
Demand Information
Information Flow
Physical Flow
What costs? What causes?

14. Capacity misalignment leading to stock-outs or excess inventory.
Bull Whip Costs
Higher Inventory Levels to protect against variability and forecast error.
Capacity misalignment leading to stock-outs or excess inventory.
High cost of correction - air freight.

15. Bull Whip Causes Order Batching - MRP timing, Cost to order
Price Manipulation for Volume - End of Quarter Financial Results
Transportation “Savings” - FTL versus LTL
Rationing - Allocate relative to the quantities requested.

16. What can be done? Order Batching - VMI, EDI Programs to reduce Cost
Price Manipulation for Volume - Every Day Low Price
Transportation “Savings” - 3rd Party, Combined Products Shipment
Rationing - Base allocation on prior business not forecasts.

17. What Supply Chain is Right for your business?
Palm Tops
Milk

18. Supply-Chain Support for Overall Strategy
Supply demand at lowest possible cost
Select primarily for cost
Low Cost
Respond quickly to changing requirements and demand to minimize stockouts
Select primarily for capacity, speed, and flexibility
Response
Share market research; jointly develop products and options
Select primarily for product development skills
Differentiation
Supplier
Characteristics
Primary Selection Criteria
This and the following two slides look at how supply-chain strategy can support overall strategy.

19. Supply-Chain Support for Overall Strategy - continued
Process
Characteristics
Maintain high average utilization
Low Cost
Invest in excess capacity and flexible processes
Response
Modular processes to lend themselves to mass customization
Inventory Characteristics
Minimize inventory throughout the chain to hold down costs
Develop responsive system, with buffer stocks positioned to ensure supply
Minimize inventory in the chain to avoid obsolescence
Differentiation

20. Supply-Chain Support for Overall Strategy - continued
Lead-time
Characteristics
Shorten lead-time as long as it does not increase costs
Low Cost
Invest aggressively to reduce production lead-time
Response
Invest aggressively to reduce development lead-time
Differentiation
Product-design Characteristics
Maximize performance and minimize cost
Use product designs that lead to low set-up time and rapid production ramp-up
Use modular design to postpone product differentiation for as long as possible

21. Purchasing Acquisition of goods & services Activities Importance
Help decide whether to make or buy
Identify sources of supply
Select suppliers & negotiate contracts
Control vendor performance
Importance
Major cost center
Affects quality of final product
Students might be asked how they believe the role of purchasing is changing given the increased use of information technology and strategies such as JIT.

22. Purchasing Costs as a Percent of Sales
Industry
Percent of Sales
All industry
Automobile
Food
Lumber
Paper
Petroleum
Transportation
52%
61%
60%
55%
74%
63%
This slide should further impress upon students the importance of the purchasing function.

23. Objectives of the Purchasing Function
Help identify the products and services that can be best obtained externally; and
Develop, evaluate, and determine the best supplier, price, and delivery for those products and services
While these are the main functions of purchasing, one would also expect the purchasing department to participate in make-buy decisions.

24. Purchasing Strategies
Plans to help achieve company mission
Affect long-term competitive position
Strategic options
Many suppliers
Few suppliers
Keiretsu network
Vertical integration
Virtual company
The strategic options listed are expanded upon in later slides.
Plan
© 1995 Corel Corp.

25. Supply-Chain Strategies
Negotiate with many suppliers; play one supplier against another
Develop long-term “partnering” arrangements with a few suppliers who will work with you to satisfy the end customer
Vertically integrate; buy the actual supplier
Subsequent slides expand upon these strategies.

26. Many Suppliers Strategy
Many sources per item
Adversarial relationship
Short-term
Little openness
Negotiated, sporadic PO’s
High prices
Infrequent, large lots
Delivery to receiving dock
We read in the management literature more and more about “managing relationships.” If you use the “many supplier” strategy, how do you develop useful relationships?
© 1995 Corel Corp.

27. Few Suppliers Strategy
1 or few sources per item
Partnership (JIT)
Long-term, stable
On-site audits & visits
Exclusive contracts
Low prices (large orders)
Frequent, small lots
Delivery to point of use
© 1995 Corel Corp.
The risk of having only a single supplier will probably be obvious to most students. What nature of relationship must you have with your supplier to reduce this risk?

28. Daimler Chrysler’s Supplier Cost Reduction Effort

29. Purchasers Ties Themselves to Suppliers
Tactic
1. Reduce total number of suppliers
Certify suppliers
Ask for JIT delivery from key suppliers
Involve key suppliers in new product design
Develop software linkages to suppliers
Results
Average 20% reduction in 5 years
Almost 40% of all companies surveyed were themselves currently certified
About 60% ask for this
About 54% do this
Almost 80% claim to do this
About 50% claim this; about 15% more than have EDI links to suppliers

30. Vertical Integration Strategy
Ability to produce goods previously purchased
Setup operations
Buy supplier
Make-buy issue
Major financial commitment
Hard to do all things well
Raw Material
(Suppliers)
Backward
Integration
Current
Transformation
Forward
Integration
Under what conditions is vertical integration an appropriate strategy? Would we choose it simply if the item production/purchase cost would be less?
Finished Goods
(Customers)

31. Forms of Vertical Integration
Iron Ore
Silicon
Farming
Raw Material
(Suppliers)
Steel
Flour Milling
Backward
Integration
Integrated
Circuits
Current
Transformation
Automobiles
Distribution
System
Forward
Integration
Circuit Boards
Students should be asked to consider why, other than on a “cost” basis, a company might want to consider vertical integration.
Computers
Watches
Calculators
Finished Goods
(Customers)
Dealers
Baked Goods

32. Vendor Selection Steps
Vendor evaluation
Identifying & selecting potential vendors
Vendor development
Integrating buyer & supplier
Example: Electronic data exchange
Negotiations
Results in contract
Specifies period of agreement, price, delivery terms etc.
Students should be asked to consider the problems which might be encountered at each step in this process.

33. Supplier Selection Criteria
Company
Financial stability
Management
Location
Product
Quality
Price
Service
Delivery on time
Condition on arrival
Technical support
Training
Students might be asked if they perceive one or another of these criteria to be especially important. Also, are there other criteria they would prefer to use or think should be added? (One such criteria might be the ability to communicate using EDT)

34. Negotiation Strategies
Three types:
cost-based price model - supplier opens its books to purchaser; price based upon fixed cost plus escalation clause for materials and labor
market-based price model - published price or index
competitive bidding - potential suppliers bid for contract
Ask students under what conditions each of these models might be appropriate.

35. Supply-Chain Performance Compared
Benchmark Firms
Typical Firms
This slide summarizes some of the benefits of effective supply-chain management.

36. Aggregate Planning Goals
Meet demand
Use capacity efficiently
Meet inventory policy
Minimize cost
Labor
Inventory
Plant & equipment
Subcontract
At this point, we are making the decisions as to “how” we will meet the aggregate schedules, and “when” each major task with be performed.

37. Aggregate Planning Strategies Pure Strategies
Capacity Options — change capacity:
changing inventory levels
varying work force size by hiring or layoffs
varying production capacity through overtime or idle time
subcontracting
using part-time workers
This slide and the next list various scheduling strategies. The four slides following provide a framework for discussing the advantages and disadvantages of the pure strategies.

38. Aggregate Planning Strategies Pure Strategies
Demand Options — change demand:
influencing demand
backordering during high demand periods
counterseasonal product mixing

39. Aggregate Scheduling Options - Advantages and Disadvantages
Some
Comments
Changing
inventory levels
Changes in
human resources
are gradual, not
abrupt
production
changes
Inventory
holding costs;
Shortages may
result in lost
sales
Applies mainly
to production,
not service
operations
Varying
workforce size
by hiring or
layoffs
Avoids use of
other alternatives
Hiring, layoff,
and training
costs
Used where size
of labor pool is
large

40. Advantages/Disadvantages - continued
Option
Advantage
Disadvantage
Some
Comments
Varying
production rates
through overtime
or idle time
Matches seasonal
fluctuations
without
hiring/training
costs
Overtime
premiums, tired
workers, may not
meet demand
Allows
flexibility within
the aggregate
plan
Subcontracting
Permits
flexibility and
smoothing of the
firm's output
Loss of quality
control; reduced
profits; loss of
future business
Applies mainly
in production
settings

41. Advantages/Disadvantages - continued
Option
Advantage
Disadvantage
Some
Comments
Using part-time
workers
Less costly and
more flexible
than full-time
High
turnover/training
costs; quality
suffers;
scheduling
difficult
Good for
unskilled jobs in
areas with large
temporary labor
pools
Influencing
demand
Tries to use
excess capacity.
Discounts draw
new customers.
Uncertainty in
demand. Hard to
match demand to
supply exactly.
Creates
marketing ideas.
Overbooking
used in some
businesses.

42. Advantage/Disadvantage - continued
Option
Advantage
Disadvantage
Some
Comments
Back ordering
during high-
demand periods
May avoid
overtime. Keeps
capacity constant
Customer must
be willing to
wait, but
goodwill is lost.
Many companies
backlog.
Counterseasonal
products and
service mixing
Fully utilizes
resources; allows
stable workforce.
May require
skills or
equipment
outside a firm's
areas of
expertise.
Risky finding
products or
services with
opposite demand
patterns.

43. The Extremes Level Strategy Chase Strategy Production equals demand
Production rate is constant

44. Aggregate Planning Strategies
Mixed strategy
Combines 2 or more aggregate scheduling options
Level scheduling strategy
Produce same amount every day
Keep work force level constant
Vary non-work force capacity or demand options
Often results in lowest production costs
Students might be asked to suggest what problem level-scheduling enables one to avoid. Why would level-scheduling result in the lowest production costs?

45. Aggregate Planning Methods
Graphical & charting techniques
Popular & easy-to-understand
Trial & error approach
Mathematical approaches
Transportation method
Linear decision rule
Under what conditions would one probably wish to use the mathematical approaches?
Does use of the graphical approach result in a greater understanding of “why” a particular schedule is better or worse than another?
Is it necessary that we develop and use the “optimal” schedule? (This question might be linked to a discussion of the robustness of the EOQ model.)

46. The Graphical Approach to Aggregate Planning
Forecast the demand for each period
Determine the capacity for regular time, overtime, and subcontracting, for each period
Determine the labor costs, hiring and firing costs, and inventory holding costs
Consider company policies which may apply to the workers or to stock levels
Develop alternative plans, and examine their total costs

47. Comparison of Aggregate Planning Methods
Techniques Approaches Aspects
Charting/graphical methods
Transportation method
Trial and error
Optimization
Simple to understand, easy to use. Many solutions; one chosen may not be optimal
LP software available;permits sensitivity analysis and constraints. Linear function may not be realistic

48. Aggregate Planning Problems

49. Aggregate Planning Problems
See Spreadsheet
Problem 13.15