Operations Management Supply-Chain Management Plastics

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

Plotting the Break Even Point Problem 7.16 option A

Plotting the Break Even Point Problem 7.16 option B

Volume Based Decision Problem 7.18

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

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

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

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?

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.

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

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.

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?

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.

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.

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.

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

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.

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

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

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.

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.

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.

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.

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.

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.

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?

Daimler Chrysler’s Supplier Cost Reduction Effort

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

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)

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

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.

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)

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.

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

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.

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.

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

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

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

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.

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.

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

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?

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.)

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

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

Aggregate Planning Problems

Aggregate Planning Problems See Spreadsheet Problem 13.15