Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin CHAPTER 13: Operation Analysis

13-2 Planning methodology Phase 1: Problem definition and planning Phase 2: Data collection and analysis Phase 3: Recommendations and implementation Supply chain analysis methods and techniques Overview of network and operational planning

13-3 Decisions often require complex and data-intensive analysis –Complexity is due to Large no. of factors impacting total cost Range of alternative solutions available –Data-intensiveness is due to Large amount of information required to evaluate each alternative –E.g. range of service alternatives, range of cost assumptions, range of operating technologies Planning methodologies enable evaluation of options in response to customer behavior

13-4 Generalized planning methodology showing major phases of work Problem definition and planning Data collection and analysis Recommendations and implementation Figure 13.1 Research Process

13-5 Problem definition and planning provides the foundation for the overall analysis Feasibility assessment Analyze the current situation Develop supporting logic Estimate the cost-benefit to proceed Project planning State objectives of proposed changes State constraints to scope of study Establish measurement standards Select analysis techniques Create a project work plan

13-6 Requires an –Internal operational review –Market assessment –Technology assessment Tables in text illustrate topics of inquiry for this work –See Tables 13.1, 13.2 and 13.3 Situational analysis should determine existing capabilities and help define improvement potential Feasibility assessment begins with analysis of the current situation

13-7 Identify the value proposition to justify investment in detailed research and analysis Critical fact-based evaluation of current procedures and practices –What is working well? –What areas can we improve? Identify potential alternatives –Define current operations –Identify likely design alternatives –Suggest innovative approaches Develop a supporting logic to integrate the findings from the current state analysis

13-8 Benefits should be estimated for –Service improvements –Cost reductions –Cost prevention –“Low hanging fruit” opportunities Estimate the project’s potential benefits and risks Illustration of sample risks defined for each alternative

13-9 State objectives of proposed changes State constraints to scope of study Establish measurement standards Select analysis techniques Create a project work plan Project planning involves these specific tasks

13-10 Should define market segment, the time frame for change and specific performance expectations Example objectives –Provide 100 most profitable customers with perfect order performance on all orders –All other customers receive 99% inventory availability for category A products 95% inventory availability for category B products Delivery of 98% of all orders within 48 hours of placement Statement of objectives should be stated specifically and in measurable terms

13-11 Defines the specific organizational elements to be retained in current system –Facility, alliance, resource, system, procedural or channel constraints Common examples –Hold existing manufacturing facilities and product mix constant –Omit some divisions from a centralized logistics system “Why study things we don’t plan to do anything about?” Statement of constraints should identify restrictions placed by senior management

13-12 Standards should adequately reflect a total system performance view –Avoid a suboptimal focus on logistics functions List assumptions that support standards How is each cost component to be quantified? Measurement standards direct the analysis by listing assumptions about cost and performance

13-13 Develop a project work plan for the remaining phases of the study Schedule of tasks Resource requirements –Personnel –Data collection and analysis –Analysis tools Meeting schedules –Updates to share progress with executives Illustration of sample project work plan with meeting schedule

13-14 Data collection and analysis activities Assumptions and data collection Define analysis approach and select techniques Define and review assumptions Identify data sources Collect data Validate data Analysis Develop questions for analysis Validate the baseline analysis Analyze each alternative Complete sensitivity analysis

13-15 Spreadsheet and statistical software availability have increased use of these techniques Examples –Determine the inventory/service trade-offs using safety stock and fill rate formulae –Determine the order cycle time that required to deliver 95% of customer orders –Determine the transportation dollar benefits for consolidating LTL orders into TL orders Analytical approach uses numerical tools to evaluate each alternative

13-16 Conduct experiments using a physical or numerical model of the real system –Understand overall system behavior over time –Use to evaluate operations under different strategies Appropriate when –Limited number of variables are evaluated –Need a more realistic representation of the process –Need customer order or SKU level of detail Simulation is widely used, particularly when significant uncertainty is involved

13-17 Appropriate for –Problems where objectives and constraints can be expressed in mathematical terms –Alternatives involving sweeping changes to the logistics systems Limitations include –Demand on computing resources –Models are smaller in scope than simulations Example –Determine the best location for distribution facilities subject to meeting supply, demand, and delivery time constraints Optimization uses linear programming to evaluate and select best alternative

13-18 Business –E.g. relevant market, consumer and product trends, resource availability, and competitive actions Management –E.g. alternative warehouse locations, transport modes, ownership arrangements, logistics processes, fixed and variable costs Analysis –Define constraints and limitations to fit the problem to the technique selected Define and review assumptions

13-19 Detailed description of assumptions by category Table 13.4 Assumption Categories Elements

13-20 What are the sources for –Sales and customer orders? –Specific customer data that includes a spatial dimension? –Manufacturing and purchasing costs? –Transportation data? –Benchmarking data on competitive capabilities and flow? Identify data sources to fit the analytical technique

13-21 First, develop questions about alternatives and the range of acceptable uncertainty Second, validate the technique and model using validation data Third, repeat the analysis for each alternative to be evaluated Finally, the best-performing alternatives can be evaluated for sensitivity to other factors or scenarios Analysis involves use of technique and data to evaluate logistics alternatives

13-22 Recommendations and implementation Development of recommendations Identify best alternative Estimate costs and benefits Develop risk appraisal Develop presentation Implementation Define implementation plan Schedule implementation Define acceptance criteria Implement

13-23 Identify best alternative Estimate costs and benefits Develop risk appraisal Develop presentation Recommendations to management are developed through critical review of the analysis results Sample presentation visual showing best alternative

13-24 Define implementation plan –Events, activities and decisions with dependent relationships Schedule implementation –Timeline of plan details –E.g. acquire facilities, negotiate agreements, mobilize teams, and conduct training Define acceptance criteria –How will we measure success? Implement the recommendation –Establish controls to monitor plan and acceptance criteria Implementation is necessary to realize any business benefits from the recommendations

13-25 Design decisions Design logic Inventory decisions Transportation decisions Freight lane analysis Inventory analysis Methods and techniques of analysis for supply chain decisions

13-26 Design decisions focus on selecting number and location of plants, warehouses and other nodes Determine total costs and trade-offs for alternative channel strategies, activity outsourcing or offshoring decisions Typical questions include –Where should plants and distribution centers be located? –Which market areas should be served by each distribution center? –Which product line should be stocked at each warehouse? –What marketing channels should be used to serve international markets? –Which service providers should be used for long-term contracts?

13-27 Optimization models consider a range of complex data to evaluate alternatives –Aggregate customer demand –Aggregate supply availability –Product and information flows at each stage –Transportation alternatives and costs –Other variable costs Major problems with linear programming –Need explicit functional relationships for full range of design options –Only as valid as the design problem definition –Often limited by number of stages in the supply chain and problem size Design logic defines the method used to select from a number of available options

13-28 Illustration of scope of typical supply chain analysis Figure 13.2 Total Cost Analysis Approach

13-29 Markets defined by geographic segments Products defined by the number of stock keeping units required Network defines channel members and locations including current and proposed Customer demand as shipment volume by market geography Transportation rates for inbound and outbound volume –For each shipment size –For each potential transportation link Variable and fixed costs Tax incentives Data requirements for supply chain analysis include the following key elements

13-30 Illustration of how the US might be segmented in market areas Figure 13.3 Supply Chain Network

13-31 Illustration of a network definition for channel of industrial and retail customers Figure 13.4 Channel Network Example

13-32 Baseline analysis is done first to validate cost and establish credibility of the analysis Other alternatives are modeled and analyzed Results can be compared to baseline to identify performance improvements Evaluation of alternatives Baseline Model Alternative Models

13-33 Illustration of baseline network with two plants and two warehouses Figure 13.5 Base Supply Chain Network

13-34 Illustrates an alternative supply chain with 3 plants and 4 warehouses Figure 13.6 Alternative Supply Chain Network

13-35 Treatment of inventory carrying cost Assumptions of shipment sizes over range of alternatives –Constant or varies with change in number of warehouses Focus of analyses –Expanding boundaries of supply chain members –Minimize total cost vs. maximize profit –Periodic vs. ongoing Concerns of supply chain design tools

13-36 Illustration of the analytic inventory concept to make inventory decisions Figure 13.7 Analytic Inventory Overview Results of analysis

13-37 Illustration of the simulation approach to inventory analysis Figure 13.8 Inventory Simulation Overview Results of analysis

13-38 Strategic routing decisions –Identify long-term fixed transport modes Monthly or yearly routes Tactical routing decisions –Allocate resources for the short- term Daily or weekly routes Objective is to minimize the combination of vehicles, hours and miles required to deliver product Transportation decisions range from strategic to tactical in scope

13-39 Illustration of typical transportation problem Figure 13.9 Typical Routing or Delivery Problem

13-40 Transportation analysis techniques Heuristic approaches –Use rule-of-thumb techniques to sequentially add and delete stops Exact approaches –Use linear programming to identify best routes Interactive approaches –Use simulation, cost calculator or graphics capability to support interactive decision process Combination approaches –Blend of the three approaches is very effective Criteria for evaluating approaches –How general is the approach? E.g. special situations, multiple depots, time windows, vehicle capacities –How accurate is the approach? Is it a close approximation of performance characteristics?

13-41 Network defines all possible routes Demand data defines periodic customer pickup and delivery requirements Operating characteristics define –Number of vehicles –Vehicle limitations –Driver constraints –Operating costs Data requirements for transportation analysis

13-42 Freight lane analysis seeks to balance volume between origin and destination points Figure Example of Triangular Freight Lane Table 13.6 Freight Lane Analysis of Monthly Movements Results of analysis Develop additional volume between Cincinnati and Chicago –Move product sources to Chicago –Alliance with shipper with no back- haul Results of analysis Develop additional volume between Cincinnati and Chicago –Move product sources to Chicago –Alliance with shipper with no back- haul

13-43 Illustration of inventory analysis showing key results for management review Table 13.7 Typical Inventory Analysis Report