Introduction to Operations and Supply Chain Management

Introduction to Operations and Supply Chain Management

Chapter Objectives Be able to:
Describe what the operations function is and why it is critical to an organization’s survival. Describe what a supply chain is and how it relates to a particular organization’s operations function. Discuss what is meant by operations management and supply chain management. Identify some of the major operations and supply chain activities, as well as career opportunities in these areas. Make a case for studying both operations management and supply chain management. ©2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Introduction Why study Operations and Supply Chain Management?
Operations Management Supply Chain Management Important trends LeapFrog case study ©2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Focus Key issues surrounding the design and ongoing management of these areas Common tools and techniques Introduction to the SCOR model Analytical skills (both qualitative and quantitative) ©2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Why Study Operations and Supply Chain Management?

Three Basic Truths Pervasiveness Interdependence
Profitability and Survival ©2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Pervasiveness Every organization must make a product or provide a service that someone values…………. Manufacturer. Retailer. Design firm. University. Health services. ©2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Interdependence Most organizations function as part of a larger supply chain Discussion with class about what kinds of operations and suppliers are required to realize a basic product idea like a running shoe, beginning with the initial design concept. ©2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

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 ©2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

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? ©2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

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

Operations Function The collection of people, technology, and systems within a company ... … that has primary responsibility ... … for providing the organization’s products and/or services. ©2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Viewing Operations as a Transformation Process
Manufacturing operations Inputs Outputs Materials People Equipment Intangible needs Information Tangible goods Fulfilled requests Information Satisfied Customers Service operations ©2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Manufacturing Tangible product
Key decisions driven by physical characteristics of the product: How is the product made? How do we store it? How do we move it? Etc. ©2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Services Intangible “Product” or Service Key decisions:
Location, Exchange, Storage, Physiological, Information Key decisions: How much customer involvement? How much customization? ©2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Cross-Functional Linkages
MIS What IT solutions to make it all work together? Finance Budgeting. Analysis. Funds. Human Resources Skills? Training? # of Employees? Design Sustainability. Quality. Manufacturability. Operations and Supply Chain Marketing What products? What volumes? Costs? Quality? Delivery? Accounting Performance measurement systems. Planning and control. ©2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Supply Chain Management
Active management of supply chain activities and relationships to maximize customer value and achieve a sustainable competitive advantage Example: Buying co-ops for independent hardware dealers

Material Flows First Tier Supplier Distributor Retailer
Alcoa Ball Corp Anheuser-Busch M&M Meijer First Tier Supplier Distributor Retailer Transportation companies Final customers Upstream Downstream Second Tier Supplier ©2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Supply Chain Issues Length of the chain Complexity Stability
Physical, informational, and monetary flows Use Dell Computer as an example for a class discussion of the possible issues. ©2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Supply-Chain Operations Reference (SCOR)* Model
Consists of: Planning activities Sourcing activities “Make” or production activities Delivery activities Return activities * Supply-Chain Council, Discussed in more detail in Chapter 3 ©2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

SCOR Model © Supply-Chain Council, 2007
©2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Wal-Mart — Early 1990s Individual stores sent sales data daily to Wal-Mart’s suppliers via satellite Suppliers plan production and ship based on this sales data Wal-Mart used its own dedicated fleet to ship from its warehouses to stores ©2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Panera Bread — 2006 4th quarter revenues and profits up 25% and 8%, respectively, over th quarter* >200 million pounds of dough delivered by 110 trucks traveling 9.7 million miles annually *Panera Bread, 4th Quarter 2006 Earnings Report, ©2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Important Trends Electronic commerce
Reduces the costs and time associated with supply chain relationships Increasing competition and globalization Fewer industries protected by geography Relationship management Competition between chains, not individual firms Trust and coordination Use Boeing, as an example for reducing supply chain costs and time. ©2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Operations and Supply Chain Management and You
Some of the many career positions Analyst Commodity Manager Customer Service Manager International Logistics Manager Logistics Services Salesperson Production Manager Sourcing Analyst Logistics and Material Planner Systems Support Manager (MIS) Transportation Manager Process Analyst Scheduler Purchasing Agent ©2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Operations and Supply Chain Activities
Process selection, design, and improvement Forecasting for decision making Capacity planning for capital investment and resource levels Inventory management for amount and location Planning and control for work scheduling and meeting demand Purchasing, managing supplier relationships Logistics or acquisition and distribution ©2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Case Study Introducing Operations and Supply Chain Management
LeapFrog

Operations and Supply Chain Strategies

Explain the relationship between business and functional strategies and the difference between structural and infrastructural elements. Describe some of the main operations and supply chain decision categories. Explain the customer-value concept and calculate a value-index score. Differentiate between order winners and qualifiers. Explain why this difference is important to developing operations and supply chain strategy. Discuss the concept of trade-offs and give an example. Define core competencies and give an example of how they can be used in the operations and supply chain areas for competitive advantage. Explain the importance of strategic alignment and describe the four stages of alignment between the operations and supply chain strategy and the business strategy. © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Business Elements Structural Difficult to change: Infrastructural
Buildings Equipment Computer systems Other capital assets Infrastructural Relatively easy to change: People Policies Decision rules Organizational structure © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

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 company’s strategies © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

A Top-Down Model of Strategy
Business Strategy Marketing Financial Operations Operations and Supply Chain Decisions ... Goals Mission Statement Supply Chain R&D © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Operations and Supply Chain Strategies
Design, operation, and improvement of the operations and supply chain systems and processes What mix of structure and infrastructure? Is the mix aligned with the business strategy? Does it support the development of core competencies? © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Functional Strategy Translates the business strategy into functional terms. Assures coordination with other areas. Provides direction and guidance for operations and supply chain decisions. © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Supply Chain and Operations
Key Interactions MIS What IT solutions to make it all work together? Finance Budgeting. Analysis. Funds. Human Resources Skills? Training? # of Employees? Design Sustainability. Quality. Manufacturability. Supply Chain and Operations Marketing What products? What volumes? Costs? Quality? Delivery? Accounting Performance measurement systems. Planning and control. © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Decisions Guided by the Structural Strategy
Capacity Size? Timing? Type? Facilities Location? Technology Equipment? Processes? Information systems? Vertical Integration Direction? Extent? © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Decisions Guided by the Infrastructural Strategy
Organization Control/reward systems? Centralization/decentralization? Workforce – skilled/semi-skilled? Sourcing and Purchasing Supplier selection/performance metrics? Procurement systems? Sourcing strategy? Planning and Control Forecasting? Inventory management? Production planning/control? Process and Quality Continuous improvement processes? Business process management SPC/Six Sigma Product and Service Design Development process? Organization/supplier roles? © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Value Analysis A process for determining the best choice when there are no unambiguous formulas for doing so. Helps maintain focus in gathering and assessing relevant data. (also called a preference matrix). Some examples are: Choosing which home to buy or apartment to rent Picking a location for a new factory Selecting the best person for a new position Deciding which supplier to use other than for lowest price Deciding which features to include in a new product © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Value Index Determination
Where: In = Importance of value dimension (criteria) n Pn = Performance of candidate with regard to dimension n N = total number of value dimensions evaluated (Higher values represent higher importance or performance) © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Value Analysis – Thoughts
Requires definition of criteria and their importance beforehand to avoid bias It is useful if the importance or weighting values add up to 100% A threshold score can set by evaluating the current situation, if it exists, using the selected analysis criteria Requires careful definition of scoring values for performance assessment (highest value represents most desirable result) People may not be comfortable with this… but, that may be exactly what’s required! Encourages identification of less important factors. A higher score to reflect the more desirable outcome and to avoid biasing a choice. A potential problem that can be solved by eliminating any alternative that fails to meet the minimum acceptable score for that criterion. © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Value Analysis: Introduce new product?
Performance Importance Score Value Criteria (A) (B) (A x B) Market potential 30 Unit profit margin 20 Operations compatibility 20 Competitive advantage 15 Investment requirement 10 Project risk % Threshold score = 720 Threshold score is value determined by existing product to these criteria. © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Threshold score of current product = 720 Performance Importance Score Value Criterion (A) (B) (A x B) Market potential 30 6 Unit profit margin 20 10 Operations compatibility 20 6 Competitive advantage 15 10 Investment requirement 10 3 Project risk 5 4 © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Performance Importance Score Value Criterion (A) (B) (A x B) Market potential Unit profit margin Operations compatibility Competitive advantage Investment requirement Project risk Value Index = 700 Threshold score = 720 Not at this time! © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Prioritizing: Where Must We Excel?
Potential dimensions of distinct competence Quality (performance, conformance, reliability) Time (delivery speed and reliability, development speed) Flexibility (mix, changeover, volume) Cost (labor, material, engineering, quality-related) © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Order Winners and Qualifiers
Differentiators — performance not yet duplicated by competitors Competitive advantage — performance better than all or most of the competitors Qualifiers Minimum acceptable level of performance Over time, Differentiators   Winners   Qualifiers as competition intensifies. Discussion about how today’s exceptional performance becomes tomorrow’s standard customer expectation. © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

The Idea Behind Prioritizing:
“Best in Class” Minimum Needs Cost Design Quality Speed Flexibility © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Comparing Two Software Development Firms
“Best in Class” Minimum Needs Cost Design Quality Speed Flexibility © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Measurements Performance against: Comparisons to competitors
Customer needs Business objectives or standards Comparisons to competitors Comparisons to “best in class.” © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Priority Trade-Offs Generally very difficult to excel at all four performance dimensions. Some common conflicts Low cost versus high quality Low cost versus flexibility Delivery reliability versus flexibility Conformance quality versus product flexibility © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Stages of Alignment between Supply Chain and Operations Strategies
Neutral Supportive Stage 2 Industry Practice Stage 4 Actively Engaged Stage 1 Not linked Stage 3 Participation (Closing the loop) External Internal © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Operations and Supply Chain Strategies Case Study
Catherine’s Confectionaries

Business Processes

Explain what a business process is and how the business perspective differs from a traditional functional perspective. Create process maps for a business process and use these to understand and diagnose a process. Calculate and interpret some common measures of process performance. Discuss the importance of benchmarking and distinguish between competitive benchmarking and process benchmarking. Describe the Six Sigma methodology, including the steps of the DMAIC process. Use and interpret some common continuous improvement tools. Explain what the Supply-Chain Operations Reference (SCOR) model is and why it is important to businesses. © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Business Processes Business processes defined
Mapping business processes Managing and improving business processes Measuring process performance The SCOR Model © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Business Processes Defined
Logically related sets of tasks or activities geared toward some business outcome Primary Support Development What is the distinction? Examples of each? Are the dividing lines always clear? Primary: Value-added work directly related to what the customer pays for. Support: Purchasing, maintenance, transportation to point-of-sale, moving and tracking material between value-added steps, administration, etc. Developmental: Design, assessment, and marketing efforts to provide new services or products, training new job skills. © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Versus the “functional” Perspective
Developing new products/services (Chapter 6) Evaluating suppliers (Chapter 10) Developing sales & operations plans (Chapter 13) Suppliers Purchasing Engineering Operations Finance Marketing Customers What are some of the challenges in managing such processes? © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Mapping Business Processes
Relationship maps What are they? What level of detail? When are they most valuable? Detailed process maps ‘Swim Lane’ process maps © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Example Automotive OEM wanted to understand how the company’s needs were communicated to suppliers First-tier supplier responsible for entire cockpit (all interior pieces) Second-tier suppliers provide “families” of parts to first-tier supplier (e.g., plastic trim, gauges and wiring, etc.) Comment on the flow of information as a separate process. How could it be done differently? © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Findings OEM provided first-tier supplier with weekly demand forecast for next 10 weeks First-tier supplier sent its ‘own’ demand forecasts to 10 second-tier suppliers Second-tier suppliers delivered the requirements to first-tier supplier Follow up on the flow of information process. What inefficiencies are exhibited here? What is required for second tier suppliers to see the OEM needs directly? © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Detailed Process Map Identifies the specific activities that make up the process. Basic steps are: Identify the entity that will serve as your focal point: Customer? Order? Item? 2. Identify clear boundaries, starting and ending points Keep it simple Does this detail add any insight? Do we need to map every exception condition? Comment on how exceptions might be handled – separate process? What about having a set of processes represented by a single step that can be expanded if that step is the one that appears to need the most improvement? © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Mapping Symbols Start or finishing point
Step or activity in the process Decision point (typically requires a “yes” or “no”) Input or output (typically data or materials) Document created Delay Inspection Move activity Typical, but others may be used as appropriate © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Process mapping at a San Diego distribution center (DC)
Example* Process mapping at a San Diego distribution center (DC) *Textbook, pages © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Facts of the Case I Process
Dealer faxes order to DC. One out of 25 orders lost because of paper jams. Fax sits in “In Box” around 2 hours (up to 4) until internal mail picks it up. Internal mail takes about one hour (up to 1.5 hours) to deliver to the picking area. One out of 100 faxes are delivered to the wrong place. Order sits in clerk’s in-box until it is processed (0 to 2 hours). Processing time takes 5 minutes. Pages 50 through 52 in the text. © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Facts of the Case II If item is in stock, worker picks and packs order (average = 20 minutes, but up to 45 minutes). Inspector takes 2 minutes to check order. Still, one out of 200 orders are completed incorrectly. Transport firm delivers order (1 to 3 hours). Pages 50 through 52 in the text. © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

(No looking in chapter!)
Let’s Map the Process (No looking in chapter!) What is the focal point of the mapping effort? What are the boundaries of the process map? What detail is missing from this simple example? © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Improving Business Processes: Guidelines
Attack each delay What causes it? How long is it? How could we reduce its impact? Examine each decision point Is this a real decision or just a checking activity? If the latter, can we automate or eliminate it? Dematerialize documentation. Can we do it electronically? Eliminate multiple copies? Share a common database? Review differences between value-added and other activities. Good place to point out that unnecessary movement between value-added steps often requires tracking, counting, and storing of inventories. Decision points do not add value, take time © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

More Guidelines Look for loops Process steps Why is this loop here?
Would we need to loop if we didn’t have any failures in quality, planning, etc? Process steps What is the value of this activity, relative to its cost? Is this a necessary activity (support or developmental?), or something else? Loops take time, do not add value. Work to eliminate them, particularly if they occur frequently. © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Taking It Further ... All activities add costs and time
Not all value-added activities provide “net” value “Underperformers” Not all support and developmental activities are necessary Necessary versus “symptomatic” “Underperformers” that have poor yields, take too long, use unnecessary resources, etc. © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Symptomatic Activities ...
Inspecting or reworking goods Expediting shipments or “fighting fires” Overproducing, holding excessive inventories Standard backorder process Symptomatic – exist because of problems that shouldn’t be there. © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

…and Typical Causes Poor quality “Flying blind,” poor planning
Poor controls, training, etc. Excessive demand variability Mismatches between an organization’s capabilities and market requirements © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Process Improvement Value Cost Description Action
Net Value-Added Activity ++ + Adds net value Find ways to increase value and lower costs further Underperformer Potential value-adding activity Change to value-adding activity or eliminate Necessary Necessary business activity Reduce cost of performing activity Symptomatic Activity caused by poor business practices Eliminate practices that cause the activity © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Swim Lane Process Map* * Adapted from map by John Grout, Campbell School of Business, Berry College, Mount Berry, Georgia © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Swim Lane Process Map Shows functional relationships versus time
Can help in measuring loading on various functional areas Illustrates cross-function communication processes Other names: cross-functional flowchart, Rummler-Brache diagram. Useful for mapping MIS support for processes © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Process Measures Productivity Efficiency Cycle Time Benchmarking
© 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Productivity Measures
Outputs Inputs Productivity = Single-factor, Multifactor, and Total measures of productivity © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Examples Single-factor productivity ratio: Multifactor:
Batteries Produced Machine Hours + Direct Labor Hours Total Nightly Sales ($) Total Nightly Costs ($) Direct Labor Hours Single-factor productivity ratio: Multifactor: Total multifactor: © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Consider the following data . . .
Quantity $/Unit Car X 4000 cars $8,000/car Car Y 6000 cars $9,500/car Total labor for building X 20,000 hours $12/hour Total labor for building Y 30,000 hours $14/hour © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

What is the Labor Productivity in hours for Each Car?
Car X: (4,000 cars / 20,000 hrs) = ? Car Y: (6,000 cars / 30,000 hrs) = ? Car X: 0.2 cars/hour Car Y: 0.2 cars/hour How might these measures be affected by capital substitution? © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

What is the Labor Productivity in dollars for Each Car?
Car X: (4,000 × $8,000) = ? (20,000 × $12) Car Y: (6,000 × $9,500) = ? (30,000 × $14) Car X: Car Y: Impact of wage, price changes? © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Results (What are the Benefits? Caveats?)
Car X: (4,000 × $8,000) = (20,000 × $12) Car X: (4,000 units / 20,000 hrs.) = 0.2 units / hr Productivity (hours) Productivity ($) Values for Car Y? © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Efficiency A comparison of a company’s actual performance to some standard 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 Here the actual and standard values represent output or output rate. © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Cycle Time Total time required to complete a process from start to finish. The percent of cycle time spent on value-added activities is a measure of process effectiveness. Called “takt” time in Germany. Can be considered as the “pulse” or “heartbeat” of the process. Throughput is controlled by the cycle time, but is also affected by how many units can be processed together. © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Cycle Time Drivers Causes that increase cycle time are: Waiting times
Unneeded steps Rework Unnecessary controls or testing Outmoded technology Lack of information or training © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Benchmarking A comparison of a company’s performance to the performance of: Other firms in its industry (strategic) Firms identified as “world-class” (process) © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Benchmarking Data from “The Machine That Changed The World”
Number of assembly defects per 100 vehicles (1989): Average Japanese plant: 34.0 Average US plant: Average European plant: 76.8 J. Womack, D. Jones, and D. Roos, The Machine That Changed the World: How Japan’s Secret Weapon in the Global Auto Wars Will Revolutionize Western Industry, New York, HarperPerennial, 1991. Is this strategic or process benchmarking? © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

More Benchmarking Data ...
Labor and machine hours per vehicle (1989): Average Japanese plant: 16.9 Average US plant: Average European plant: 57 What is the benefit of having both sets of figures? © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

So what’s happened since?
Some new productivity figures.

From “The Harbour Report”, July 1998
“Labor hours needed for stamping, power train, and assembly operations”: (100%) Nissan hours (168%) GM hours (126%) Ford hours "If GM could operate at Nissan's level of productivity, they'd save themselves about $4.4 billion a year," Measured another way, the report shows GM has about 55,000 more workers than it needs. Harbour Report North America 1999, Note changes since 1998 discussed in the text on page 61. © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Other Measures I Costs Quality Materials Labor Shipping etc.
Defects per million (ppm) Number of returns Time between failures (MTBF, reliability) Costs Quality © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Other Measures II Speed Flexibility Lead time to customer
Percent orders late Changeover time Volume to meet changes in demand Speed Flexibility © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Measurement Key Points
Can be situation-specific Should be relative to past performance and future goals Potential for conflicts. Consider: # of Students Taught Professor hours % of Satisfied Students versus © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Six Sigma Methodology Core value is having less than 3.4 defects per million opportunities (DPMO). Key elements are: Understanding and managing customer requirements Aligning key business processes to achieve those requirements Using rigorous data analysis to understand and ultimately minimize variation in those processes Driving rapid and sustainable improvement to business processes. The core value defect level is based on allowing the mean of a process to drift to within about 4.5 standard deviations of either specification limit. A true six sigma variation around a mean centered within specifications would correspond to a defect level of 2 parts per billion. © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Six Sigma Methodology Two basic Six Sigma processes are:
DMAIC (Define-Measure-Analyze-Improve-Control) — an updated version of the PDCA process promoted by Deming. DMADV (Define-Measure-Analyze-Design-Verify) DMAIC is an updated version of the PDSA (Plan-Do-Study-Act) process developed by Walter Shewhart and later promoted by W. Edwards Deming as the PDCA (Plan-Do-Check-Act) process for improvement © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Do Plan Check Act The PDCA Cycle

Common Improvement Tools
Cause and effect diagrams (aka “Fishbone” or Ishikawa diagrams) Check sheets Pareto analysis Run charts and scatter plots Bar graphs Histograms © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Flight delays at Midway
A Services Example Flight delays at Midway Cause and Effect Diagrams Check Sheets Pareto Analysis © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Problem: Delayed Flights
No one is sure why, but plenty of opinions “Management by Fact” CI Tools we will use: Fishbone diagram Check sheets Pareto analysis © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Cause and Effect Diagram
ASKS: What are the possible causes? Root cause analysis — open and narrow phases © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Check Sheets Event: Day 1 Day 2 Day 3 Late arrival II I Gate occupied
Too few agents Accepting late passengers III (root cause analysis -- closed phase) © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Pareto Analysis (sorted histogram)
Late passengers 100 Late arrivals Late baggage to aircraft 85 70 Weather 65 Other (160) © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Percent of each out of 480 total incidents ...
Late passengers 21% Late arrivals 18% Late baggage to aircraft 15% Weather 14% Other 33% © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Run Charts and Scatter Plots
Measure Run Time Variable Y Scatter Variable X © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Histograms Frequency Measurements

Supply-Chain Operations Reference (SCOR) Model
Five core processes for Level 1 Source Make Deliver Return Plan Three expanded processes for Level 2 Planning Execution Enable © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

SCOR Model www.supply-chain.org
Source: Supply-Chain Council, © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Business Processes Case Study
Zephtrex Fabric

Managing Quality

Discuss the various definitions and dimensions of quality and why quality is important to operations and supply chains. Describe the different costs of quality, including internal and external failure, appraisal, and prevention costs. Know what TQM is, along with its seven core principles. Calculate process capability ratios and indices and set up control charts for monitoring continuous variables and attributes. Describe the key issues associated with acceptance sampling, as well as the use of OC curves. Distinguish between Taguchi’s quality loss function and the traditional view of quality. © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Managing Quality Quality defined Total cost of quality
Total quality management (TQM) Statistical quality control Managing quality across the supply chain. © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Definitions of Quality
ASQ: The characteristics of a product or service that bear on its ability to satisfy stated or implied needs Fitness for use (value perspective) Free from defects (conformance perspective) How would you evaluate the quality of the following? Software package Hand-held vacuum cleaner No-frills air flight © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Quality as a Competitive Advantage
Strategic Quality Quality as a Competitive Advantage

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? © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Quality Dimension Examples
New Car Tax Preparation Performance Tow capability; gas mileage Cost and time to prepare taxes Features Accessories; extended warranty Advance on refund check; E- filing Reliability Miles between required service Not applicable Durability Expected useful life of the engine, transmission, body Conformance Number of defects in the car Number of mistakes on the tax return Aesthetics Styling, interior appearance Neatness of the return Serviceability Qualified mechanics in the area? Maintenance time and cost? Will the tax preparation firm talk with the IRS in case of an audit? Perceived Quality How do prices for used vehicles hold up? What is the reputation of the firm? © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Defensive Quality Quality analyzed in economic terms
Total Cost of Quality: Failure Costs Appraisal Costs Prevention Costs © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Total Cost of Quality — Traditional View
Note: Horizontal axis is reversed from that used in the text to reflect that the goal is zero defects. © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

The total costs of quality fall as defect levels decrease
Zero Defects View The total costs of quality fall as defect levels decrease Note: Horizontal axis is reversed from that used in the text to reflect that the goal is zero defects. © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Total Quality Management (TQM)
Managing the entire organization so that it excels in all dimensions important to the customer  Product development  Marketing  Operations  Supply chain  Support services © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

TQM Principles Customer focus Leadership involvement
Continuous improvement Employee empowerment Quality assurance (including SQC or SPC) Strategic partnerships Strategic quality plan SQC = Statistical Quality Control SPC = Statistical Process Control © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

TQM Principles Expanded
Customer focus Each employee has a customer whether internal or external to the company Leadership involvement Must be ‘top’ down, throughout the company If not, major cause of TQM failures Continuous improvement Supports other core principles © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Continuous Improvement (CI) versus “Leaps” Forward
Performance Time © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Employee empowerment Key to success Lack of empowerment major cause of TQM/SPC failures Quality assurance Quality Function Deployment (QFD) discussed in Chapter 6 Statistical quality control (SQC), also called statistical process control (SPC) Acceptance sampling (OC curve) SQC = Statistical Quality Control SPC = Statistical Process Control © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

TQM to Quality Assurance “Did we do it right?”
Switching Focus . . . TQM to Quality Assurance “Did we do it right?” © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

We Noted That Organizations Must ...
Understand which quality dimensions are important Develop products and services that will meet users’ quality needs Put in place business processes capable of meeting these needs Verify that business processes are meeting the specifications © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Process Capability Answers the Question: Can the process provide acceptable quality consistently? © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Process Capability Ratio (Cp)
Upper Tolerance Limit – Lower Tolerance Limit 6σ Where σ is the estimated standard deviation for the individual observations Upper and lower tolerance limits are also called the upper and lower specification limits (USL and LSL). © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Process Capability ratio of 1 (99.7% within tolerance range)
Shown Graphically: Process Capability ratio of 1 (99.7% within tolerance range) © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

“Six Sigma Quality” When a process operates with 6σ variation centered between the tolerance limits, only 2 parts out of a billion will be unacceptable. © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Process Capability Index (Cpk)
Used when the process is not precisely centered between the tolerance limits. © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Discovering “problems”
Inspect every item Expensive to do Testing can be destructive, should be simply unnecessary Statistical techniques Statistical process control (SPC) Acceptance Sampling © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Statistical Process Control
“Representative” samples are measured good, but not perfect, picture of process Sampling by Variable (continuous values — length, weight, area, volume, etc.) Sampling by Attribute (good, bad, # defects/unit, %) Variable: a continuous range of possible values (length, width, weight, temperature, pressure…..) Attribute: Limited range of discrete values (defects per unit, yield per lot, failures per sample group, errors per order…) © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Example: Fabric Dyeing
Rolls of fabric go through dyeing process Target temperature of 140 degrees Too low ? Too high ? Temperature must be “monitored” and action taken when something is “unusual” Is temperature a “variable” or an “attribute”? © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Step 1: Sampling the Process
Observation Sample 1 2 3 4 5 136 137 144 141 138 143 140 139 135 6 142 7 8 9 10 Things should be working OK when we do this . . . Table 4.5 on page 100 in the text. Note: There is an error in Table 4.6 for observation 5 on day 9, should be 139. Emphasize that when data is collected to determine possible control limits for the process, the process should be executed as consistently as possible to eliminate all but the natural variations (i.e., no intentional adjustments to improve results!) Discuss importance of doing everything as consistently as possible during the collection of data to establish control limits so that only natural causes of variation are present. © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Step 2: Calculate the Mean and Range for Each Sample
X R 1 139.2 8 2 140 5 3 139.4 9 4 6 7 141.4 139 140.2 10 139.6 X = 139.8° R = 5.3° © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Step 3A: Use These Values to Set Up X and R charts
Upper control limit for X chart: UCLX = X + A2 × R = 142.9 Lower control limit for X chart: LCLX = X – A2 × R = 136.7 Since there are five observations (n) in each sample, the value for A2 from Table 4.5 in the text is 0.58 © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Step 3B: Use These Values to Set Up X and R charts (cont’d)
Upper control limit for R chart: UCLR = D4 × R = 11.2 Lower control limit for R chart: LCLR = D3 × R = 0 D3 and D4 values taken from Table 4.5 on page 94 of the text where the sample size n = 5. © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Use the Charts to Plot the Following Data . . .
Sample X R 11 141.2 8 12 142 9 13 144 14 140 5 15 139.6 4 16 140.8 Out of Control Sample © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

What is the process capability ratio for our dyeing example?
What conclusions can you draw? σ = 2.41 from sample data © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

What would need to be for us to have “” quality ?
12σ = UTL – LTL = 148 – 132 σ = 16/12 = 1.33 © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Sampling by Attribute p = (8 late)/(50 deliveries) = 0.16
Gonzo Pizza is interested in tracking the proportion (%) of late deliveries Like before, you take several samples of say, 50 observations each when things are “typical” For each sample, you calculate the proportion of late deliveries and call this value p. For example: Example 4.9 in text on pages Discuss difference between “typical” (natural causes presents) and abnormal (assignable causes present in addition to natural causes). p = (8 late)/(50 deliveries) = 0.16 © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Gonzo Pizza (cont’d) Calculate standard deviation for the p-chart as follows: Where n = size of each sample = 50 © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Gonzo Pizza (cont’d) And the control limits are: UCLp = p + z × Sp = LCLp = p – z × Sp = – 0.026, or zero Here z is 3, but can be chosen as other values to increase the sensitivity of the chart to changes in the process. © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Gonzo Pizza Although text says to go ahead with control charts, consider that it is probably too early to develop them since the process is not yet in control (i.e., late deliveries are too high a percentage at present). A more practical approach would be: First, fix the more obvious problem(s) Then take new samples Then put in place control charts © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Acceptance Sampling Some definitions Acceptable quality level (AQL)
Maximum defect level for 100% customer acceptance Lot tolerance percent defective (LTPD) Highest defect level customer will tolerate Consumer’s risk,  Probability of accepting a bad lot Producer’s risk,  Probability of rejecting a good lot Operating characteristics (OC) curve Probability of accepting a lot given the actual fraction defective in the entire lot and the sampling plan being used. © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Putting the terms together
OC Curve Figure 4.10, page 106 in the text. © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

The Big Picture So how do TQM, continuous improvement, and all these statistical techniques “fit” together? © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

3 Lines of Defense PREVENT defects from occurring
TQM and continuous improvement DISCOVER problems early Process control charts CATCH DEFECTS before used or shipped inspection / acceptance sampling © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Traditional View of the Cost of Variability
$ Low Spec High Target Cost of Bad Quality © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Taguchi’s Quality Loss Function
An alternative perspective on the cost of quality © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Consider Big Bob’s Axles ...
Axles have slightly larger or smaller diameter than target value ( Wheels have slightly larger or smaller holes than target value What are the possible outcomes? © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Taguchi’s view of the cost of variability
$ Low Spec High Target Cost of Bad Quality What are the managerial implications? (HINT: think continuous improvement) © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Strategic partnerships Value of good suppliers and distributors i.e., GIGO (garbage in, garbage out) Quality consistent throughout supply chain Strategic quality plan ISO 9000 family of quality standards, American Society for Quality, © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Managing Quality Case Study
Dittenhoefer’s Fine China

Managing Projects

Explain the difference between routine business activities and projects. Describe the five major phases of a project. Construct a Gantt chart and interpret the results. Construct a project network diagram and calculate the earliest and latest start and finish times for all activities. Identify the critical activities and paths in a network. Crash a project. © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Project Management: Why Do It?
Building Mega Refineries in Record Time (India, 2006): Demand for gasoline is increasing in USA No new refineries in USA Need to process heavy crude Current capacity is not enough © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Reliance Industries, Ltd:
Mobilized initial workforce of 20,000, will grow to 150,000 to complete project by December 2008 Built residential complex for 2500 families to attract skilled workers needed and an irrigated 2000-acre farm nearby Expansion will add capacity of 582,000 barrels a day Each welder will have six helpers to keep him supplied with necessary materials © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

What Is a Project? A series of related tasks directed toward some major output or goal Often driven by a completion deadline © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Project Phases I Concept Phase Project definition Phase
Broad definition and feasibility analysis Budget estimates within  30% Project definition Phase Tentative schedules, budgets, organization Budget estimates refined within  5% to 10% © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Project Phases II Planning phase Performance phase
Detailed tasks, timing, budgets and resources Milestones Project management tools Performance phase Execution and control Postcompletion phase “Wrap-up” Reassignment of project resources © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Statement of Work (SOW)
A written description of the project objectives to be achieved, with a brief statement of the work to be done a proposed schedule specifying the start and completion dates budget and completion steps (milestones) written reports to be supplied. © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Breaking Down the Work Allows independent operation
Improves manageability Decentralizes authority Enables monitoring and measurement Provides assessment of required resources © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Work Breakdown Structure (WBS)
Level 1 Program 2 Project 3 Task (group or organization) 4 Subtask 5 Work Assignment (organizational unit) The work breakdown structure (WBDS) is the heart of project management. This subdivision of the objective into smaller and smaller pieces clearly defines the system and contributes to its understanding and success. A task is a further subdivision of a project. It is usually not longer than several months in duration and is performed by one group or organization. A subtask may be used if needed to further subdivide the project into more meaningful pieces. A work package is a group of activities combined to be assignable to a single organizational unit. It still falls into the format of all project management—that the package provides a description of what is to be done, when it is to be started and completed, the budget, measures of performance, and specific events to be reached at points in time (called milestones). Typical milestones might be the completion of the design, the production of a prototype, the completed testing of the prototype, and the approval of a pilot run. © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Work Breakdown Structure Example
Level 1 Custom Home Builder 2 Custom Home 3 Foundation (group or organization) 4 Concrete work 5 Set-up forms (organizational unit) © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Tools for Project Control: Gantt Charts
Comment: Gantt chart formats in modern software programs for managing projects do show relationships in graphical form using interconnecting arrows. ...But there is no detailed information about interrelationships © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Tools for Project Control: Network Diagrams
Network techniques Consider precedence relationships Capture interdependency of activities Determine critical path(s) Sequence(s) of activities that determines overall duration of the project Comment on the possibility that there may be more than one critical path, particularly in more complex project networks. © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Critical Path Method (CPM) Consider the following consulting project:
Activity Designation Immediate Predecessor(s) Duration (weeks) Assess customer’s needs A None 2 Write and submit proposal B 1 Obtain approval C Develop service vision and goals D Train employees E 4 Quality improvement pilot groups F D, E 5 Write assessment report G Develop a network diagram and determine the duration of the critical path(s) and slack times for all activities © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

This activity-on-node (AON) diagram shows the precedence relationships ...
. . .as well as the length of each activity. Do you see the two paths through the network? © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Some Definitions Earliest Start Time (ES) Earliest Finish Time (EF)
= Latest EF for all immediate predecessors Earliest Finish Time (EF) = ES + activity’s duration Latest Start Time (LS) = LF – activity’s duration Latest Finish Time (LF) = Earliest LS for all immediate successors Slack = amount of allowable delay in an activity = Equal to LS – ES or LF – EF for an activity © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Insights A ‘hit’ to a critical activity will make project late
Rational time estimates needed Slack activities can start later Difference between effort-driven and time-driven activities Useful to have ‘Start’ and ‘Finish’ boxes on network diagram, particularly when there are two or more independent activities at the beginning and/or end of a project. Effort-driven activities can be shortened by adding more resources Time-driven activities (paint drying, concrete curing, etc.) very difficult to shorten without innovative alternatives. © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Some Assumptions Project activities can be identified as entities. (There is a clear beginning and ending point for each activity.) Project activity sequence relationships can be specified and networked Project control should focus on the critical path (activities with no slack) © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

In First Example ... Network-based scheduling techniques to:  Show precedence  Determine project duration  Identify critical paths and activities Setting EF = LF for last activity implies that current length of project is OK © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

However, there are often ...
Deadlines for finishing projects (Olympic stadium, dormitories, etc.) Penalty or overhead costs if project is late Competitive pressures Competitors, slowing demand (Reliance Industries, Ltd.) © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Ways to Shorten (Crash) a Project
BORROW resources from non-critical activities (ones with greatest slack) Add MORE resources Work MORE hours Spend MORE $$$$ Consider why some time-driven activities cannot be crashed. © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Idea behind “CRASHING”
Duration of individual effort-driven activities can be shortened, but at a cost Example: Following project must be completed by Week 26 © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Project Data Activity Duration Predecessors Crashable Weeks
Crash Cost/Week A 6 None B 11 4 $700 C 14 3 $2,000 D 2 E 1 F 5 $1,000 G H 7 I J K F, G $1,500 L H, I $2,500 Each step has a limit on how many weeks, hours, days, etc. that it can be crashed. The cost per week for doing this is considered to be a linear function. © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Network Diagram for Project

1. Write Down All Possible Paths and Lengths of Time for Each
Path Length ABEJ 25 ABFK 26 ACGK 30 ACHL 30 ADIL 14 Path lengths are sum of activity durations along the chosen path from project start to project finish without consideration for effects of other paths intersecting the chosen path. © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

2. Identify All Paths to be Shortened
Path Length ABEJ 25 ABFK 26 ACGK 30 Critical Path ACHL 30 Critical Path ADIL 14 © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

3. Find Lowest-Cost Way to Shorten Critical Path(s)
Path Length ABEJ 25 ABFK 26 ACGK 30 ACHL 30 ADIL 14 To CRASH, either: 1. Shorten C or 2. Shorten {G or K} and {H or L} Shorten C by 3 weeks Cost = 3×$2,000 = $6,000 © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Update Lengths in Table
Path Length ABEJ 25 ABFK 26 ACGK 3027 ACHL 3027 ADIL 14 Are we done? What are our next cheapest alternatives? © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

To Crash Further 1. Shorten C some more, or
2. Shorten {G or K} and {H or L} Shorten Both G and H by 1 Week: Cost = $1,000 + $2,000 = $3,000 © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Update Lengths in Table
Path Length ABEJ 25 ABFK 26 ACGK 302726 ACHL 302726 ADIL 14 Total Cost to Crash = $6, $3,000 = $9,000 © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

If the reduction in overhead per week is $4000
How many more weeks should the company try to crash the project?

Observations Cost of crashing becomes more and more expensive as cheapest options are used up There is a limit to how far a project can be crashed. Crashing non-critical activities is pointless © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Controlling Projects CPM used primarily to Plan and Schedule, BUT ...
Things rarely go as planned The need for additional activities arises Better time and resource estimates are made as project progresses  use of PERT (Program evaluation and review technique) where probabilistic time estimates are used © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Computer-Based Package Advantages
Regular updates Change analysis, tracking, and exception reports High level of detail Scheduling around resource constraints Text examples using Microsoft Project™ on pages Discussion of resource constraints: available working hours, vacations, illnesses, jury duty, overtime limitations, money…. © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Project Management Institute (PMI) www.pmi.org
Sponsors education and certification Sponsors conferences, research, user groups Publishes Guide to the Project Management Body of Knowledge (PMBOK®) PMBOK® Part I: Various business processes for projects Part II: Nine project knowledge areas © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Managing Projects Case Study
Viva Roma!

Developing Products and Services

Explain why product design is important to a business’s success. Describe the six dimensions of product design that are of particular interest to operations and supply chain managers. Describe the five phases of product and service development and explain the difference between sequential development and concurrent engineering. Discuss the different roles played by such areas as engineering and accounting during the development process. Describe some of the more common approaches to improving product and service designs, including the Define-Measure-Analyze-Design-Verify (DMADV) process, quality function deployment (QFD), design for manufacturability (DFM), and target costing. © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Developing Products and Services
Why bother? New product development process What is good design? An operations and supply chain perspective © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Why Bother? External benefits Internal benefits
Exploit strengths/core competencies Block competitors © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Competitive Advantage
External Benefits Competitive Advantage © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Internal Benefits Shorter cycle time, less cost, less waste, … For example: NCR 2760: Only 15 “components” 85% fewer parts / 65% fewer vendors Snaps together Lifetime cost for a SINGLE fastener: $12,500 © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Exploit Strengths and Core Competencies
Honda Motorcycles  Automobiles John Deere Farm equipment  Lawn equipment Hewlett-Packard Color printers  Digital photography © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Block Competitors Gillette
“made a point of designing its Sensor razor so that it … would be difficult for competitors to copy” Microsoft bundling Windows and Explorer © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Finally ... 30% of revenues and profits come from products introduced in the last 5 years Development time decreasing: Typically 31 months in 1992 Less than 24 months now Less than 18 months for many high-tech products High-tech examples are cell phones, DVD players, wide-screen TVs, computers, software © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Operations and Supply Chain Perspectives
Repeatability, testability and serviceability of the design Product volumes Product costs Match with existing capabilities © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Repeatability, Testability and Serviceability
Consistent production Tolerance to manufacturing variations (robustness) Testability Non-value added activity, so should be easy and inexpensive to do Serviceability Ease of repair, critical for products expected to be serviced or repaired (autos) © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Product Volumes and Cost
Determines process strategies Types of equipment Level of automation Staffing required Determines level of customization Determines level of after-sales support © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

‘Hidden’ Costs Number of parts in a product Engineering changes
Increased handling, tracking, and other inventory costs More procedures required Engineering changes Affect entire supply chain Transportation costs Logistics becoming a significant cost Size, shape, weight, packaging are concerns © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Match with Existing Capabilities
Product design flexibility Easy to add features? Easy to upgrade? Examples: PCs, home theater systems Process flexibility Share processes / parts? Will upgrades make current operations obsolete? © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

The Development Process

Model of Development Process
Planning Design and Development Preparation and Launch Concept Survival rate of an idea $ spent on idea Time © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Engineering Functional Activities
Concept Development Planning Design and Development Commercial Preparation Launch Propose new technologies Develop product or service ideas Identify general performance characteristics Identify underlying technologies Develop detailed specifications Build and test prototypes Resolve remaining technical problems Evaluate field experience Analyze warranty returns © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Marketing Functional Activities
Concept Development Planning Design and Development Commercial Preparation Launch Provide market input Propose and investigate product or service concepts Define target customer needs Estimate sales and margins Include customer in development effort Conduct customer tests Evaluate prototypes Plan marketing rollout Train sales force Prepare sales procedures Select distribution channels Fill downstream supply chain Sell and promote © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Operations and Supply Chain Functional Activities
Concept Development Planning Design and Development Commercial Preparation Launch Scan suppliers for promising technologies and capabilities Develop initial cost estimates Identify key supply chain partners Develop detailed process maps of operations and supply chain flows Test new processes Build pilot units using new operations Train personnel Verify supply chain flows Ramp up volumes Meet cost targets Meet quality and other performance target goals © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Concurrent Engineering
Overlapping development phases requires tight coordination, but shrinks overall development time © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Design Players Engineering Marketing Accounting Finance Designers
Purchasing — presourcing Suppliers — gray and black box design participation © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Design Approaches DMADV (Define-Measure-Analyze-Design-Verify)
QFD (Quality Function Deployment) CAD (Computer-Aided Design) CAD/CAM (Computer-Aided Design / Computer-Aided Manufacturing) DFM (Design for Manufacturability) DFMt (Design for Maintainability) DFSS (Design for Six Sigma) DFE (Design for the Environment) © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

DMADV Steps Define goals and deliverables
Measure and determine needs and specifications Analyze product or process options Design product or process Verify results © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Quality Function Deployment
Synergies © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

 process characteristics  process specifications
QFD Linkages Customer requirements  product characteristics  product specifications  process characteristics  process specifications PRODUCT CHARACTERISTICS CUSTOMER REQUIREMENTS PRODUCT SPECIFICATIONS PROCESS CHARACTERISTICS PROCESS SPECIFICATIONS © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Design for Manufacturing (DFM)

Modular Design Allows higher level of customization
Retains lower-cost advantage of higher volumes for core components Easier assembly Facilitates servicing and repairs Allows for upgrades © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Modular Design Examples
Balley Engineered Structures 7 different kinds of panels “Customized” walk-in coolers From these, assembles almost endless variety of finished products Personal Computer Manufacturers Manufactured Home Builders © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

DFMt, DFSS, DFE DFMt — focuses on long-term serviceability of the product or service DFSS — focuses on achieving Six Sigma quality levels  less than 3.4 defects per one million opportunities DFE — focuses on reducing environmental effects of product or process (Hewlett-Packard design guidelines, page 166) © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Target Costing: Value Analysis
Goals: Maximize function / cost How can we increase this ratio? Focus on secondary functions Packaging Shipping Custom parts and tooling Use of standard parts Make versus buy © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

“A good cookie, a great razor” Case Studies
Nabisco and Gillette: Two contrasting approaches to product design

Process Choice and Layout Decisions in Manufacturing and Services

Describe the five classic types of manufacturing processes. Discuss how different manufacturing and service process choices support different market requirements. Explain how different processes can be linked together via the supply chain. Describe the critical role of customization in manufacturing, including the degree and point of customization, and upstream versus downstream activities. Discuss the three dimensions that differentiate services from one another and explain the different managerial challenges driven by these dimensions. Create and interpret a service blueprint. Position a service on a conceptual model and explain the underlying managerial challenges. Develop a product-based layout using line balancing and calculate basic performance measures for the line. Develop a functional layout based on total distance traveled. © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Manufacturing Processes
Engineering and business perspectives Classic manufacturing processes Choosing between classic types The role of customization © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Engineering and Business Perspectives

Solid Wood Seat for a Kitchen Chair:
Process A Saddle Machine Shaper Machine Sander A Sander B Inspection Setup Time: 6 hours Time/Seat min. Yield Rate: 92% Process B 5-Axis Router ---- Sander A Sander B Inspection Setup Time: 10 min. Time / Seat: 3.5 min. Yield Rate: 99% Bliven Furniture Company example in textbook © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Classic Engineering Viewpoint
Four Transformation Processes Conversion  Fabrication  Assembly Testing “Advances in Engineering increase and improve the alternatives available” © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Example: Making Windows
Conversion Fabrication Assembly Raw lumber Molten glass Frame wood Window panes Assembled Windows © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Business View What conversion steps must be done?
What are the production volumes like? How similar are the various products we make (can we standardize)? If the product is customized, how late in the process does it occur? © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Classic Manufacturing Processes

Process Types (in order of decreasing volume)
Continuous Flow Production Line Batch (High Volume) Batch (Low Volume) Job Shop Project © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Continuous Flow Large production volumes High level of automation
Basic material passed along, converted as it moves Usually cannot be broken into discrete units Usually very high fixed costs, inflexible Oil refinery, fiber formation, public utilities, automotive manufacturing © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Production Line High-volume production of standard products or “design window” Processes arranged by product flow Often “paced” (‘takt’ time discussed later) Highly efficient, but not too flexible © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Batch I Somewhere in between job shop and line processes
Moderate volumes, multiple products Production occurs in “batches” Can manufacturing, carton makers, advertising mailers, etc. © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Batch II Layout is a cross between that found in a line and that found in a job shop: Group Technology © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Some Examples of Batch Manufacturing
Numerical control (NC) machines Automated processing of entire batch Machining center - multiple NC machines Flexible manufacturing systems (FMS) Dedicated to families of parts NC and automated handling Group technology Similar in concept to FMS, but not as much automation © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Job Shop Low volume, one-of-a-kind products
Job shops sell their capability Highly flexible equipment, skilled workers Equipment arranged by function © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Project Used when a product is: Resources moved to where needed
one-of-a-kind too large to be moved Resources moved to where needed Equipment, people, etc. are highly flexible Finite duration, often with deadline Construction projects, equipment installation © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Mixing Together the Process Types  Hybrid Process
Spindles ASSEMBLY LINE for putting together final product Arms and Legs Chair manufacturing process BATCH for fabricating parts ... Seats © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Choosing Between Classic Types
The product-process matrix Product and process life cycles

Comparing Process Types...
Job Shop Batch Line Volume Very Low High Variety Very High Low Skills Broad Limited Advantage Flexibility Price and Delivery © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

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 Very Poor Fit © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Life-Cycle Planning Framework

Introduction Stage Availability key to market success but:
No reliable movement history Unreliable forecasts Small shipments Erratic orders © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Growth Stage Sales somewhat more predictable Higher volumes
Performance emphasis?... Capacity planning and timing Growth management More accurate forecasting Selection of long-term supply chain partners © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Availability Achieve breakeven volumes as soon as possible Less need for flexibility © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Maturity Stage Intense competition around more standardized products
Frequent price and service adjustments Implications . . . Emphasis on managing, reducing costs More careful attention to inventory strategy Accurate forecasting © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Decline Stage (Obsolescence)
Product close-out or restricted distribution Lowest cost / differentiated performance not as critical anymore Priorities? Careful management of inventory Closing on remaining product versions with highest demand Conversion of unused capacity to other, newer products where practical Retraining of personnel for other work, if available © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Implications What happens to process choices as companies follow products through their life cycles? What happens to process choices when companies support products at various stages of the life cycle? © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

The Role of Customization

What is “Customization”?
An operations-centric view: “Customization occurs when a customer’s unique requirements directly affect the timing and nature of operations and supply chain activities” © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Customization Point Model I
Definitions: ETO – engineer to order MTO – make to order ATO – assemble-to-order MTS – make to stock Upstream: before the customization point, “off-line” activities Downstream: after the customization point, “on-line” activities © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Make-to-Order Windows
Off-line Activities Design Buy Materials Fabricate parts Assemble Ship windows On-Line Activities Lead times? Customizability? Price? What type of manufacturing? Sell windows © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Customization Point Model II
Manufacturing Systems Design Upstream Downstream Performance objectives Technology Investment Organization structure Job differentiation Integration Discretion Efficiency Productivity, consistency Mechanistic High Formal Low Responsiveness Flexibility Organic Informal © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Difficulty versus Customization

An Operations-Centric View
Customization becomes relevant to operations and supply chain managers when a customer’s unique requirements directly affect the timing and nature of operations and supply chain activities Job Difficulty Job Routineness Operations and Supply Chain Design Customization © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

“Mass customization” at Japan’s National Bicycle Co.
2-WEEK LEAD TIME © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Law of Variability The earlier customization is introduced in the supply chain, the greater the random variability of the process and the lower its productivity

Services What makes them distinctive? High-contact versus low-contact
Front room versus back room Service Blueprinting © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Services . . . Process and “product” are inseparable
Marketing and sales often tightly integrated Customer often part of the process Performance metrics can be harder to define Nevertheless: Focus and process choices / trade-offs still apply © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Degree of Customer Contact
Low Contact “off-line” Can locate for efficiency Can smooth out the workload Check clearing, mail sorting High Contact “on-line” Can locate for easy access Flexibility to respond to customers Harder to manage Hospitals, food service © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Classifying Services “Front Room” versus “Back Room”
Front room – what the customer can see Managed for flexibility and customer service Customer lobbies, bank teller, receptionist Back room – what the customer does not see Managed for efficiency and productivity Package sorting, car repair, blood test analysis, accounting department © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

What is it? What is the performance objective?
Restaurant kitchen Software help desk Kinko’s copy center Airline reservations Jet maintenance Class discussion exercise © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Designing Services Selecting a service focus
Like manufacturing processes, different services have strengths and weaknesses Key is to design a service process that meets the needs of targeted customers The “service package” © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Service Blueprinting Processes Customer actions Onstage activities
Backstage activities Support Separations Line of interaction Line of visibility Line of internal interaction © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Service Blueprint Template (Note similarity to ‘swim lane’ in Chapter 3?)

A Cubical Model of Services (Three Dimensions)
Nature of the Service Package Primarily Physical Activities (Airline, trucking firm) Primarily Intangible Activities (Law firm, software developer) Degree of Customization Lower Customization (Quick-change oil shop) Higher Customization (Full-service car repair shop) Degree of Customer Contact Lower Contact (Mail sorting) Higher Contact (Physical therapist) Table 7.3 in textbook Primarily physical: Greater emphasis on managing physical assets Primarily intangible: Greater emphasis on managing people and knowledge assets Lower customization: Greater emphasis on closely controlling the process and improving productivity Higher customization: Greater emphasis on being flexible and responsive to customer needs Lower contact: Service layout, location, and hours will be based more on cost and productivity concerns Higher contact: Service layout, location, and hours must be designed with customer convenience in mind. © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Community Hospital Public Hospital

Birthing Center Public Hospital

Layout Decision Models
Product-based layout Usually best for a line operation Cycle time a primary measure Functional layout Usually best for a job shop Distance between steps a measure Cellular layout Usually best for batch processes © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Product-Based Layout Line Balancing Improve ‘Takt’ time:
Use minimum number of workstations Reduce idle time Reduce setup time Reduce unnecessary movement Identify ‘bottlenecks’ © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Process Layout Steps Identify all steps, their relationships, and times required. Draw a precedence diagram Determine takt time (time available divided by desired output rate) Determine minimum number of workstations required (total process time divided by takt time) Assign tasks to workstations according to precedence and total time for each to not exceed takt time. Evaluate solution for times per workstation, % idle time, and efficiency delay (100% - % idle time) © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Precedence Diagram Example (with workstation task assignments)
From text, page 198 © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Functional Layout Improvement
Minimize the total distance traveled Determine distances between functional units Determine numbers of interactions between units Multiply distances times respective number of interactions Revise original layout for minimum total distance after first locating functions best for process material flows Minimize information flow for decisions Use electronic data interchange (EDI) to allow more flexibility for accomplishing A and B © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Case Study in Manufacturing and Service Processes
Loganville Window Treatments

Managing Capacity

Explain what capacity is, how firms measure capacity, and the difference between theoretical and rated capacity, Describe the pros and cons associated with three different capacity strategies: lead, lag, and match. Apply a wide variety of analytical tools to capacity decisions, including expected value and break-even analysis, decision trees, waiting line theory, and learning curves. © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Capacity Decisions Defining and measuring capacity
Strategic versus tactical capacity Evaluating capacity alternatives Advanced perspectives Theory of Constraints Waiting lines Learning curves © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Defining and Measuring Capacity
Measure of an organization’s ability to provide goods or services Jiffy Lube  Oil changes per hour Law firm  Billable hours College  Student hours per semester © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Consider: Capacity for a PC Assembly Plant: Controllable Factors
(800 units/shift/line)×(% Good)×(# of lines)×(# of Shifts) Controllable Factors 1 or 2 shifts? 2 or 3 lines? Employee training? Uncontrollable Factors Supplier problems? 98% or 100% good? Late or on time? © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Strategic versus Tactical Capacity
One or more years out “Bricks & Mortar” Future technologies Tactical: One year or sooner Workforce level, schedules, inventory, etc. © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Capacity versus Time Capacity Time Days or weeks out Months out
Planning & Control Limited ability to adjust capacity Detailed planning Lowest risk Tactical Planning Workforce, inventory, subcontracting decisions Intermediate-level planning Moderate risk Strategic Capacity Planning “Bricks & mortar” decisions High-level planning High risk Capacity Time Days or weeks out Months out Years out © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Capacity Strategies: When, How Much, and How?
Demand Leader Excess Capacity Lost Business Laggard © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

How? Make or Buy (e.g., subcontracting)
One extreme: “Virtual” Business Walden Paddlers (Marketing) Hardigg Industries (Manufacturing) Independent Dealers (Direct Sales) General Composites (Design) © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Evaluating Capacity Alternatives
Economies of scale (EOS) Expected value analysis (EVA) Decision Trees Break-even points (BEP) © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

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? X = 1: $200,004 X= 10,000: $24 © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Fixed & Unit Cost Scenarios
Page 214 in text. Common Carrier: Fixed cost = 0, unit cost = $750 Contract Carrier: Fixed cost = $5,000, unit cost = $300 Private Carrier: Fixed cost = $21,000, unit cost = $50 © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

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? X = or about 11 © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Expected Value Analysis
Forecasted demand or volume is uncertain, allows consideration of the variability in the data

Capacity cost structure
Data Requirements Capacity cost structure (alternatives?) Expected demand (multiple scenarios?) EVA Product and service requirements (e.g. time standards) © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Expected Value Analysis
Pennington Cabinet Company jobs per year (20% likelihood) 5000 jobs per year (50%) jobs per year (30%) Each job = $1,200 revenue © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

We Know: Average job requires: hours of machine time /3 hours of assembly team time Machines and teams work 2000 hours per year Each machine and team has yearly fixed cost = $200K 3 different capacity scenarios (see next slide!) © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Number of Machines and Teams Number of Hours Available Each Year
Effective Capacity Number of Machines and Teams Number of Hours Available Each Year Maximum Jobs per Year Machines Teams Current 3 5 6,000 10,000 3,000 Expanded 9 18,000 5,000 5,400 New Site 7 12 14,000 24,000 7,000 7,200 Effective capacity is limited by machine capacity What is the effective capacity of each capacity alternative? © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Alternate Demand Scenarios
Current Level Expanded New Site Demand Revenue Fixed Expenses 2,000 $2,400,000 $1,600,000 $2,800,000 $3,800,000 5,000 $3,600,000 $6,000,000 7,000 $8,400,000 What is the expected contribution if demand = 5000 AND we decide to move to a new site? Why does revenue for current capacity max out at $3.6 million? $2,200,000 Cannot handle a demand greater than 3,000 © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Net Revenue Table Demand Current Expanded New Site 3,000 $800,000
($400,000) ($1,400,000) 5,000 $2,000,000 $3,200,000 $2,200,000 7,000 $4,600,000 © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Expected Value of Each Capacity Alternative:
Current capacity level (20%) × $800K +(50%) × $2000K +(30%) × $2000K = $1,760,000 © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Expanded capacity level (20%) × – $400K + (50%) × $3200K + (30%) × $3200K = $2,480,000 © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

New Site capacity level (20%) × – $1400K + (50%) × $2200K + (30%) × $4600K = $2,200,000 © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Conclusions for Pennington
Which alternative would you choose if you wanted to minimize the worst possible outcome (Maximin)? Maximize the best possible outcome (Maximax)? Why is it important to know effective capacity? How could this help future capacity decisions? Maximin: Current site at $800,000 Maximax: New site at $4,600,000 © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Visual tool for evaluating choices using expected value analysis
Decision Trees Visual tool for evaluating choices using expected value analysis Allows use of different outcomes and different probabilities of success for each

Decision Tree Requirements
Decision points represented by Choose the best input — the highest EVA, lowest cost, least risk, etc. Outcome points represented by Summation of all inputs (outcomes) weighted by their respective probabilities. No choice can be made at these points Trees drawn from final decision to the outcomes affecting that decision, then on to lower level decisions that might affect the those outcomes, then the lower level outcomes affecting those lower level decisions, and so on © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Ellison Seafood Example
Here the probabilities affecting the demand level are the same for the three options considered. But the decision tree does allow them to be different, can you think of situations where this might be true? Refer students to the text, Example 8.3, Figures 8.4 and 8.5, for this discussion Different probabilities because of location differences, market size differences, product mix differences, technology differences, etc. © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Decision Tree Criteria
Book example illustrates selecting highest revenue option. Other option choices can be on basis of: Using total cost for outcomes (useful when selling price is not known) Using estimated risk for outcomes Outcomes reflecting a desired result (choose highest EVA) Can you think of an example? Outcomes reflecting undesirable results (choose lowest EVA) Can you think of an example? Desirable examples: Market share, potential market size, product volume times price, projected reliability, project completion time… Undesirable examples: yield loss, projected failure rate, holding costs, quality costs, time-to-market, etc. © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Break-Even Point (BEP)
Considers revenue and costs, at what volume level are they equal? Suppose each unit sells for $100, the fixed cost is $200,000 and the variable cost is $ BEP  $100X = $200,000 + $4X What is the breakeven volume, X? BEP: X = 2,084 © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Self Test EBB Industries must decide whether to invest in a new machine which has a yearly fixed cost of $40,000 and a variable cost of $50 per unit. What is the break even point (BEP) if each unit sells for $200? What is the expected value, given the following demand probabilities: units (25%), 300 units (50%), 350 units (25%) BEP at ($200 - $50)X = $40,000, that is, X = = 267 Net for 250 units = <$2,500> Net for 300 units = $5,000 Net for 350 units = $12,500 EMV = 0.25 x (-$2,500) x $5, x $12,500 = $5,000 © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Advanced Perspectives
Theory of Constraints Waiting lines Learning curves

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?

Theory of Constraints Pipeline analogy
Which piece of the pipe is restricting the flow? Would making parts A or D bigger help? © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Dealing with a Constraint
Identify the constraint Exploit the constraint Keep it busy! Subordinate everything to the constraint Make supporting it the overall priority Elevate the constraint Try to increase its capacity — more hours, screen out defective parts from previous step, … Find the new constraint and repeat As one step is removed as a constraint, a new one will emerge. Which piece of the pipe on the previous slide would be the new constraint if Part C was increased in diameter? © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Waiting Lines Waiting lines and services Waiting Line Theory
Waiting and customer satisfaction Factors affecting satisfaction Waiting Line Theory Terminology and assumptions Illustrative example © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Waiting at Outback Steakhouse...
Waiting outside or in bar Waiting to get food... Leaving restaurant Waiting to pay bill ... © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Key Points Waiting time DECREASES value-added experience
On the other hand, adding serving capacity INCREASES costs Businesses must have a way to analyze the impact of capacity decisions in environments where waiting occurs © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Waiting and Customer Satisfaction
Cost of service Cost of waiting Lost customers COST Waiting time © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Cost of Waiting = f(Satisfaction)
Factors Affecting Satisfaction Firm-related factors Customer-related factors © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Firm-Related Factors “Unfair” versus “fair” waits
Uncomfortable versus comfortable waits Initial versus subsequent waits Capacity decisions © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Waiting Line (Queuing) Theory
Application of statistics to allow us to perform a detailed analysis of system Utilization levels, line lengths, etc. Terminology and assumptions © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Terminology and Assumptions I

Terminology and Assumptions II
Single-Channel Single-Phase Multiple-Channel Single-Phase © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Terminology and Assumptions III
Complex service environment ... How would you describe this? © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Terminology and Assumptions IV
Population: Infinite or Finite Arrival rates: Random or constant rate Random rates typically defined by Poisson distribution for infinite population Service Rates: Random or constant Random service rates typically described by exponential distribution Priority rules (aka “Queue Discipline”) Permissible queue length © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Example A single drive-in window for Bank Arrival rate Service rate
15 per hour, on average Service rate 20 per hour, on average How many channels? Phases? What kinds of questions might we have? © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

 = arrival rate = 15 cars per hour
Drive-In Bank  = arrival rate = 15 cars per hour  = service rate = 20 cars per hour Average utilization of the system:  =  = 0.75 © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Drive-In Bank Probability of n arrivals during period T is:
e.g., probability of only 4 arrivals during a 45-minute period is: Note: Discuss with students about need to keep time references to the same period. Here, since l is in cars per hour, 45 minutes must be converted to 0.75 hours. © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Drive-In Bank Average number of cars in the system: (waiting plus being served) © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Drive-In Bank Average number of cars waiting:

Drive-In Bank Average time spent in the system: (waiting plus being served) (How do we know the answer is in hours?) © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Drive-In Bank Average time spent in the line:
(How do we know the answer is in hours?) © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Suppose l is now 19 cars per hour
Question? What happens as the arrival rate approaches the service rate? Suppose l is now 19 cars per hour

One Answer: Average number of cars waiting:
Implications? What are we assuming here? © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Other Types of Systems (Discussed in the supplement to Chapter 8)
Single-channel, single-phase with constant service time Example: Automatic car wash Multiple-channel, multiple-phase (hospital) Usually best handled using simulation analysis © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Self Test I Look back at the drive-in window example. How can we have an average line length > 1 while the average number of cars being served is < 1? Similarly, what happens as the arrival rate approaches the service rate? Suppose the teller at the drive-in window is given training and can now handle 25 cars an hour (a 25% increase in service rate). What happens to the average length of the line? Length of the line for a service rate of 25 cars per hour is 225/[25(25-15)] =0.9 cars, a decrease from 2.25 cars © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Self Test II Look back at the Outback Steakhouse example. What kind of queuing system is it? © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Question? How can capacity change, even when we do not hire new people or put in new equipment?

Learning Curves Recognize that people (and often equipment) become more productive over time due to learning. First observed in aircraft production during World War II Getting more emphasis as companies outsource more activities © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

A Formal Definition 80% learning curve -
For every doubling of cumulative output, there will be a set percentage improvement in time per unit or some other measure of input Output Time per unit 10 hrs. 8 hrs. 6.4 hrs. 5.12 hrs. 4.096 hrs. 80% learning curve - Where does the name come from? © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

A Formal Definition (cont’d)
Where: Tn = time for the nth unit T1 = time for the first unit b = ln(learning percent) / ln2 Explain to students that ln represents the natural logarithm © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Example Reservation clerk at Delta Airlines
First call (while training) takes 8 minutes Second call takes 6 minutes What is the learning rate? How long would you expect the 4th call to take? The 16th? The 32nd? Learning rate = 6min/8min = 75% Using Table 8.6 in textbook: Learning rate = 6/8 = 75% 4th call is x 8 min = minutes 16th call is x 8 min = minutes 32nd call is x 8 min = min or 0.75 of 16th call time = x 0.75 = min © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Key Points Quick improvements early on, followed by more and more gradual improvements The lower the percentage, the steeper the learning curve Practically speaking, there is a floor Estimates of effective capacity must consider learning effects! © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

How could learning curves be used in long-term purchasing contracts?
Another Question . . . How could learning curves be used in long-term purchasing contracts?

Johnston Controls I Johnston Controls won a contract to produce 2 prototype units for a new type of computer. First unit took 5,000 hrs. to produce and $250K of materials Second unit took 3,500 hrs. to produce and $200K of materials Labor costs are $30/hour © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Johnston Controls II The customer has asked Johnston Controls to prepare a bid for an additional 10 units. What are Johnston’s expected costs? © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Johnston Controls III Labor learning rate: hours / 5000 hours = 70% Materials learning rate: $200K / $250K = 80% © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Johnston Controls IV “Additional 10 units” means the third through twelfth units. Total labor for units 3 through 12: = 5,000 hours × (5.501 – 1.7) = 19,005 hrs 5.501 is sum of nb for 12 units 1.7 is the sum of nb for the first two units Refer to Table 8.6 in textbook for 70% learning curve data © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Johnston Controls V Total material for units 3 through 12: = $250,000 × (7.227 – 1.8) = $1,356,750 Refer to Table 8.6 in textbook for 80% learning curve data © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Johnston Controls VI Total cost for “additional 10 units”: = $30 × (19,005 hours) + $1,356, = $1,926,900 What if there is a significant delay before the second contract? © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Self-Test Assume that there WILL BE a significant delay before Johnston Controls makes the next 10 units. Assuming that Johnston has to “start over” with regard to learning, estimate total cost for these additional 10 units. Assume same learning curve percentages, but start anew. Hence, using sum of nb for first 10 units, hours will be 5,000 x = 24,660 and hours cost will be $30 x 24,660 = $739,800 Materials cost will be $250,000 x = $1,578,750 Total cost will $2,318,550 compared to cost of $1,926,200 if we order right away, a savings of $392,350! © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Case Study in Managing Capacity
Forster’s Market

Forecasting

Discuss the importance of forecasting and identify the most appropriate type of forecasting approach, given different forecasting situations. Apply a variety of time series forecasting models, including moving average, exponential smoothing, and linear regression models. Develop causal forecasting models using linear regression and multiple regression. Calculate measures of forecasting accuracy and interpret the results. © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

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) © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Types of Forecasts Demand Supply Price Firm-level Market-level
Materials Labor supply Price Cost of supplies and services Cost of money — interest rates, currency rates Market price for firm’s product or service © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

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. © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Qualitative Forecasting
Executive opinions Sales force composite Consumer surveys Outside opinions Delphi method Life cycle analogy* The various phases of the life cycle are discussed in detail in the presentation for Chapter 7. These can be used if needed to expand on this forecasting consideration. *See accompanying notes © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Forecasting Approaches
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 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 © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Quantitative, then qualitative factors to “filter” the answer
“Q2” Forecasting Quantitative, then qualitative factors to “filter” the answer

Demand Forecasting Uses historical data Basic time series models
Linear regression For time series or causal modeling Measuring forecast accuracy © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Time Series Models What assumptions must we make to use this data to
Period Demand 1 12 2 15 3 11 4 9 5 10 6 8 7 14 8 12 What assumptions must we make to use this data to forecast? © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Time Series Components of Demand . . .
. . . randomness Time © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

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

Time series with . . . . . . randomness, trend, and seasonality Demand
Class discussion: what could account for this? Lawnmower sales? Camping trailer sales? Vacation package sales? May May May May © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Idea Behind Time Series Models
Distinguish between random fluctuations and true changes in underlying demand patterns.

 Moving Average Models Period Demand 1 12 2 15 3 11 4 9 5 10 6 8 7 14
1 12 2 15 3 11 4 9 5 10 6 8 7 14 8 12  3-period moving average forecast for Period 8: = ( ) / 3 = 10.67 © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Weighted Moving Averages
Forecast for Period 8 = [(0.5  14) + (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. The heaviest weight is typically applied to the most recent data. If weights add up to 1.0, the denominator disappears as shown in the text. However, arbitrary weighting values like 4,3, and 1 can be used as long as the weighted demand sum is divided by the sum of the weights. © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Table of Forecasts and Demand Values . . .
Period Actual Demand Two-Period Moving Average Forecast Three-Period Weighted Moving Average Forecast Weights = 0.5, 0.3, 0.2 1 12 2 15 3 11 13.5 4 9 13 12.4 5 10 10.8 6 8 9.5 9.9 7 14 8.8 11.4 11.8 © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

. . . and Resulting Graph Note how the forecasts smooth out demand variations © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Exponential Smoothing I
Sophisticated weight averaging model Needs only three numbers: Ft = Forecast for the current period t Dt = Actual demand for the current period t a = Weight between 0 and 1 © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Exponential Smoothing II
Formula Ft+1 = Ft + a (Dt – Ft) = a × Dt + (1 – a) × Ft Where did the current forecast come from? What happens as a gets closer to 0 or 1? Where does the very first forecast come from? Very first forecast is often set equal to the actual demand to start the process. An alternate approach is to set the first forecast to the moving average of the previous two or three months. Alpha should be large if the demand data is relatively stable, small if the demand data varies quite a bit. Otherwise it takes a long time for the forecast to converge on relatively smooth demand (overdamped correction) and the forecast overshoots the variations for fluctuating demand (underdamped correction) © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Exponential Smoothing Forecast with a = 0.3
Period Actual Demand Exponential Smoothing Forecast 1 12 11.00 2 15 11.30 3 11 12.41 4 9 11.99 5 10 11.09 6 8 10.76 7 14 9.93 11.15 11.41 F2 = 0.3× ×11 = = 11.3 F3 = 0.3× ×11.3 = © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Trends What do you think will happen to a moving average or exponential smoothing model when there is a trend in the data?

Same Exponential Smoothing Model as Before:
Period Actual Demand Exponential Smoothing Forecast 1 11 11.00 2 12 3 13 11.30 4 14 11.81 5 15 12.47 6 16 13.23 7 17 14.06 8 18 14.94 9 15.86 Since the model is based on historical demand, it always lags the obvious upward trend © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Adjusting Exponential Smoothing for Trend
Add trend factor and adjust using exponential smoothing Needs only two more numbers: Tt = Trend factor for the current period t  = Weight between 0 and 1 Then: Tt+1 =  × (Ft+1 – Ft) + (1 – ) × Tt And the Ft+1 adjusted for trend is = Ft+1 + Tt+1 © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Simple Linear Regression
Time series OR causal model Assumes a linear relationship: y = a + b(x) y x © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Definitions Y = a + b(X) Y = predicted variable (i.e., demand) X = predictor variable “X” can be the time period or some other type of variable (examples?) © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

The Trick is Determining a and b:

Example: Regression Used for Time Series
Period (X) Demand (Y) X2 XY 1 110 2 190 4 380 3 320 9 960 410 16 1640 5 490 25 2450 15 1520 55 5540 Column Sums © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Resulting Regression Model: Forecast = 10 + 98×Period

Example: Simplified Regression I
If we redefine the X values so that their sum adds up to zero, regression becomes much simpler a now equals the average of the y values b simplifies to the sum of the xy products divided by the sum of the x2 values © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Example: Simplified Regression II
Period (X) Period (X)' Demand (Y) X2 XY 1 -2 110 4 -220 2 -1 190 -190 3 320 410 5 490 980 1520 10 © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Dealing with Seasonality
Quarter Period Demand Winter Spring Summer Fall Winter Spring Summer Fall © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

What Do You Notice? Forecasted Demand = –18.57 + 108.57 x Period
Actual Demand Regression Forecast Forecast Error Winter 02 1 80 90 -10 Spring 2 240 198.6 41.4 Summer 3 300 307.1 -7.1 Fall 4 440 415.7 24.3 Winter 03 5 400 524.3 -124.3 6 720 632.9 87.2 7 700 741.4 -41.4 8 880 850 30 © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Regression picks up trend, but not seasonality effect

Calculating Seasonal Index: Winter Quarter
(Actual / Forecast) for Winter Quarters: Winter ‘02: (80 / 90) = Winter ‘03: (400 / 524.3) = 0.76 Average of these two = 0.83 Interpret! The normal trend line prediction needs to be adjusted downward for Winter quarters. © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Seasonally adjusted forecast model
For Winter Quarter [ – ×Period ] × 0.83 Or more generally: [ – × Period ] × Seasonal Index © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Seasonally adjusted forecasts
Forecasted Demand = – x Period Period Actual Demand Regression Forecast Demand/Forecast Seasonal Index Seasonally Adjusted Forecast Forecast Error Winter 02 1 80 90 0.89 0.83 74.33 5.67 Spring 2 240 198.6 1.21 1.17 232.97 7.03 Summer 3 300 307.1 0.98 0.96 294.98 5.02 Fall 4 440 415.7 1.06 1.05 435.19 4.81 Winter 03 5 400 524.3 0.76 433.02 -33.02 6 720 632.9 1.14 742.42 -22.42 7 700 741.4 0.94 712.13 -12.13 8 880 850 1.04 889.84 -9.84 © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Would You Expect the Forecast Model to Perform This Well With Future Data?

More Regression Models I
Non-linear models Example: y = a + b × ln(x) © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

More Regression Models II
Multiple regression More than one independent variable y y = a + b1 × x + b2 × z x z © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Causal Models Time series models assume that demand is a function of time. This is not always true. 1. Pounds of BBQ eaten at party. 2. Dollars spent on drought relief. 3. Lumber sales. Linear regression can be used in these situations as well. © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Measuring Forecast Accuracy
How do we know: If a forecast model is “best”? If a forecast model is still working? What types of errors a particular forecasting model is prone to make? Need measures of forecast accuracy © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Measures of Forecast Accuracy
Error = Actual demand – Forecast or Et = Dt – Ft © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Mean Forecast Error (MFE)
For n time periods where we have actual demand and forecast values: © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Mean Absolute Deviation (MAD)
For n time periods where we have actual demand and forecast values: Comments about how negative errors cancel positive errors in MFE, showing bias. MAD, on the other hand shows the average offset of the error. What does this tell us that MFE doesn’t? © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Example What is the MFE? The MAD? Interpret!

MFE and MAD: A Dartboard Analogy
Low MFE and MAD: The forecast errors are small and unbiased © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

An Analogy (continued)
Low MFE, but high MAD: On average, the darts hit the bulls eye (so much for averages!) © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

An Analogy (concluded)
High MFE and MAD: The forecasts are inaccurate and biased © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Collaborative Planning, Forecasting, and Replenishment (CPFR)
Supply chain partners, supported by information technology, working together

CPFR Elements Mutual business objectives & measures
Joint sales and operations plans Collaboration on sales forecasts & replenishment plans Electronic interchange of information © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Case Study in Forecasting
Top-Slice Drivers

Sourcing Decisions

Discuss the various strategic issues surrounding sourcing decisions and identify some of the key factors favoring one approach over the other. Perform a simple total cost analysis. Explain what a sourcing strategy is, and show how portfolio analysis can be used to identify the appropriate sourcing strategy for a particular good or service. Show how multicriteria decision models can be used to evaluate suppliers, and interpret the results. Discuss some of the longer-term trends in supply management and why they are important. © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Introduction The sourcing decision Sourcing strategies
Supplier evaluation Trends in supply management © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Focus Sourcing decisions and purchasing activities serve to link a company with its supply chain partners Sourcing decisions – High level, often strategic decisions regarding which products or services will be provided internally and which will be provided by external supply-chain partners Purchasing – discussed in Chapter 11 The activities associated with identifying needs, locating and selecting suppliers, negotiating terms, and following up to ensure supplier performance © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

The Sourcing Decision 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 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 The sourcing decision defines responsibilities of operations and supply chain managers: Insourcing – determine required capacity and resources – determine appropriate manufacturing or service processes to use – determine information systems required – manage and coordinate operations Outsourcing – identify the most qualified suppliers – manage the buyer-supplier relationship Make-or-Buy Decision © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Advantages and Disadvantages of Insourcing
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 © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Advantages and Disadvantages of Outsourcing
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 © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Factors Affecting the Decision to Insource or Outsource
Favors Insourcing Favors Outsourcing Factor Environmental uncertainty low high Competition in the supplier market low high Ability to monitor supplier performance low high Relationship of product/service to high low buying firm’s core competencies © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Total Cost Analysis A process by which a firm seeks to identify and quantify all of the major costs associated with various sourcing options Direct costs – Costs that are tied directly to the level of operations or supply chain activities Indirect costs – Costs that are not tied directly to the level of operations or supply chain activity © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Insourcing and Outsourcing Costs
Insourcing Outsourcing Direct material Direct labor Freight costs Variable overhead Price (from invoice) Supervision Administrative support Supplies Maintenance costs Equipment depreciation Utilities Building lease Fixed overhead Purchasing Receiving Quality control Direct costs Indirect costs Determining the actual cost of a product or service is a complicated task requiring both good judgment and the application of sound quantitative techniques. For example, how should design cost be assigned among current products and future products? Also, what is the impact of the expected time frame of the purchasing decision? © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Complexity or Risk Impact
Portfolio Analysis High Bottleneck Critical Routine Leverage Complexity or Risk Impact Low Low High Value Potential © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Critical Quadrant Critical to profitability and operations
Few qualified sources of supply Large expenditures Design and quality critical Complex and/or rigid specification Strategy Form partnerships with suppliers Tactics Increase role of selected suppliers Actions Heavy negotiation Supplier process management Prepare contingency plans Analyze market/competitions Use functional specifications © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Bottleneck Quadrant Complex specifications requiring complex manufacturing or service process Few alternate productions/sources of supply Big impact on operations/maintenance New technology or untested processes Strategy Ensure supply continuity Tactics Decrease uniqueness of suppliers Manage supply Actions Widen specification Increase competition Develop new suppliers Medium-term contracts Attempt competitive bidding © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Leverage Quadrant High expenditures, commodity items
Large marketplace capacity, ample inventories Many alternate products and services Many qualified sources of supply Market/price sensitive Strategy Maximize commercial advantage Tactics Concentrate business Maintain competition Actions Promote competitive bidding Exploit market cycles/trends Procurement coordination Use industry standards Active sourcing © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Routine Quadrant Many alternative products and services
Many sources of supply Low value, small individual transactions Everyday use, unspecified items Anyone could buy it Strategy Simplify acquisition process Tactics Increase role of systems Reduce buying effort Actions Rationalize supplier base Automate requisitioning, e.g., EDI, credit cards Stockless procurement Minimize administration costs Little negotiating © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Sourcing Strategies Single sourcing – The buying firm depends on a single company for all or nearly all of an item or service Multiple sourcing – The buying firm shares its business across multiple suppliers Cross sourcing – Using a single supplier for a certain part or service and another supplier with the same capabilities for a similar part Dual sourcing – Using two suppliers for the same purchased product or service Cross sourcing has the advantage of providing for a backup supplier in case the primary supplier cannot provide the required volume. Dual sourcing is typically split 70% – 30% so that the dominant supplier will lose business if performance suffers. © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Multicriteria Decision Models in Sourcing and Purchasing
How do we evaluate alternatives when criteria include both quantitative measures (such as costs and on-time delivery performance) and qualitative factors (such as management stability and trustworthiness)?

Weighted-Point Evaluation System - I
Purpose: Evaluating potential suppliers Tracking suppliers’ performance over time Ranking current suppliers The Process: Assign weights to performance dimensions Rate the performance of each supplier with regard to each dimension Calculate the total score © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Weighted-Point Evaluation System - II
Summary Data for Alternative Suppliers Performance Dimension Aardvark Beverly Conan the Electronics Hills Inc Electrician $4/unit $5/unit $2/unit 5% defects 1% defects 10% defects 95% on time 80% on time 60% on time Price Quality Delivery reliability © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Weighted-Point Evaluation System - III
Criteria Weights WPrice = 0.3 WQuality = 0.4 WDelivery = 0.3 5 = excellent 4 = good 3 = average 2 = fair 1 = poor Scoring Scheme © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Weighted-Point Evaluation System - IV
Performance Values for Alternative Suppliers Performance Dimension Price Quality Delivery reliability Aardvark Beverly Conan the Electronics Hills Inc Electrician 4 3 5 1 2 © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Weighted-Point Evaluation System - V
Total Scores for Alternative Suppliers Score Aardvark = (4 x 0.3) + (3 x 0.4) + (4 x 0.3) = 3.6 Score Beverly = (3 x 0.3) + (5 x 0.4) + (2 x 0.3) = 3.5 Score Conan = (5 x 0.3) + (1 x 0.4) + (1 x 0.3) = 2.2 Aardvark should improve their quality Beverly Hills should improve their delivery and price Conan is out of the running as a potential supplier © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Trends in Supply Management
Sustainable Supply* Supply Base Reduction Global Sourcing Supply Chain Disruptions Supply Chain Capacity Transportation Costs *Referred to as Environmentalism in the text. © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Case Study in Sourcing Decisions
Pagoda.Com

Purchasing

Make a strong case for why purchasing is a critical part of a firm’s supply chain strategy. Identify and describe the various steps of the purchasing process, and discuss how this process will vary according to the type of good or service being purchased. Explain why spend analysis is important and perform a simple spend analysis. © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Introduction Why Purchasing is Critical The Purchasing Process
Spend Analysis © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Focus Sourcing decisions and purchasing activities serve to link a company with its supply chain partners Sourcing decisions – (discussed in Chapter 10) High level, often strategic decisions regarding which products or services will be provided internally and which will be provided by external supply-chain partners Purchasing – The activities associated with identifying needs, locating and selecting suppliers, negotiating terms, and following up to ensure supplier performance © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Why Purchasing is Critical – I
The Changing Global Competitive Landscape To compete globally, you need to purchase globally Global purchasing efforts are supported by advances in information systems © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Why Purchasing is Critical – II
Financial Impact For the average manufacturer, 52.5% of the value of shipments comes from materials Purchasing represents a major opportunity to increase profitability © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Why Purchasing is Critical Financial Impact - I
Lowe’s Company Every dollar saved in purchasing for increases pretax profit by one dollar Earnings and Expenses Sales $26,491 COGS $18,465 Pretax earnings $2,359 Selected Balance Sheet Items Merchandise inventory $3,968 Total assets $16,109 Every dollar saved in purchasing inventory lowers total assets by one dollar © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Why Purchasing is Critical Financial Impact - II
3% purchasing reduction in COGS Earnings and Expenses Current With 3% saving Sales $26,491 $26,491 COGS $18,465 $17,911 Pretax earnings $2,359 $2,913 Selected Balance Sheet Items Merchandise inventory $3,968 $3,849 Total assets $16, $15,990 Pretax earnings increase by $554 (23.4%) ROA increases from 14.6% to 18.2% © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Why Purchasing is Critical – III
Performance Impact Quality Delivery Ability to exploit new technologies © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Why Purchasing is Critical Performance Impact - I
Sourcing dialysis machine valves Supplier A Supplier B Cost per valve % good Delivery lead time $10 $2 99.8% 95% Overnight delivery 1 day to 3 weeks © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Why Purchasing is Critical Performance Impact - II
Effect of defective dialysis machine valves Interruption in patient treatment Rescheduling difficulties Reduction in the effective capacity for dialysis Possible medical emergencies Estimated cost of a failed valve = $1,000 © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Why Purchasing is Critical Performance Impact - III
Sourcing 50 dialysis machine valves (Total Costs) Supplier A Supplier B Valve costs Failure costs Backup inventory Total costs 50 x $10 = $500 50 x $2 = $100 0.2% x 50 valves x $1,000 = $100 5% x 50 valves x $1,000 = $2,500 1 valve x $10 = $10 3 valves x $2 = $6 $610 $2,606 © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

The Purchasing Process
Needs identification Description No Is there a preferred supplier? Supplier identification and evaluation Yes Supplier selection & contracting Purchase order preparation Follow up and expediting Order cycle Receipt and inspection Settlement & payments Records maintenance © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

The Purchasing Process Needs Identification
Purchase requisition – An internal document completed by a user that informs purchasing of a specific need Reorder point system – A method used to initiate the purchase of routine items. Typically, each item has a predetermined order point and order quantity Statement of Work/Scope of Work (SOW) – Terms and conditions for a purchased service. Includes how supplier will be evaluated Needs identification © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

The Purchasing Process Description
The communication of a user’s needs to potential suppliers in the most efficient and accurate way possible Description Description by market grade/industry standard Description by brand Description by specification Description by performance characteristics Description by prototypes or samples © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Supplier identification and evaluation
The Purchasing Process Supplier Identification and Evaluation - I Supplier identification and evaluation The amount of effort increases as: The complexity of the product or service increases The amount of money that is committed increases The length of the proposed buyer-supplier relationship increases © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Supplier identification and evaluation
The Purchasing Process Supplier Identification and Evaluation - II Criteria for supplier assessment: Supplier identification and evaluation Process and design capabilities Management capability Financial condition and cost structures Planning and control systems Environmental regulation compliance Longer-term relationship potential © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Supplier selection & contracting
The Purchasing Process Supplier Selection - I Competitive bidding Negotiation Fixed-price contracts Cost-based contracts Supplier selection & contracting © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

The Purchasing Process Supplier Selection - II Preferred supplier A supplier that has demonstrated its performance capabilities through previous purchase contracts and therefore receives preference during the supplier selection process Supplier selection & contracting © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

The Purchasing Process Supplier Selection - III Competitive bidding is most effective when: The buying firm can provide qualified suppliers with clear descriptions of the items or services Volume is high enough to justify the cost and effort The firm does not have a preferred supplier Supplier selection & contracting © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

The Purchasing Process Supplier Selection - IV Negotiation is most effective when: The item is new or technically complex with only vague specifications The purchase requires agreement about a wide range of performance factors The supplier must participate in the development effort The supplier cannot determine risks and costs without input from the buyer Supplier selection & contracting © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

The Purchasing Process Supplier Selection - V Contracting is most effective when: There is a large amount of money involved The business needs specific requirements that need to be put into writing such as quality levels, delivery times Two basic types of contracts: Fixed-price – price does not change for life of contract Cost-based – price tied to cost of selected key input or economic factor Supplier selection & contracting © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

The Purchasing Process The Order Cycle
Purchase order preparation Records maintenance Settlement and payment Receipt and inspection Follow-up and expediting Purchase order preparation 74% of firms currently have electronic data interchange (EDI) with some part of their supply base Follow-up and expediting Receipt and inspection Invoice clearance and payment Records maintenance © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Spend Analysis Answers the questions:
What are the top 10 commodities by annual spend? (provides priority)* Which commodities have the most suppliers? (helps reduce purchasing load) Which commodities have the lowest spend per supplier? (if also among top 10, potential for savings) * Similar to ABC analysis to identify critical inventory items based on cost and quantity © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Typical Answer to First Question

Case Study in Purchasing
The ABCs of Spend Analysis

Logistics

Describe why logistics is important and discuss the major decision areas that make up logistics. List the strengths and weaknesses of the various modes of transportation and discuss the role of multimodal solutions. Identify the major types of warehousing solutions and their benefits. Discuss the purpose of a logistics strategy and give examples of how logistics can support the overall business strategy. Calculate the percentage of perfect orders. Calculate landed costs. Explain what reverse logistics systems are, and some of the unique challenges they create for firms. Use the weighted center of gravity method to identify a potential location for a business. Develop and then solve, using Microsoft Excel’s Solver function, an assignment problem. © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

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

Why the Increasing Interest?
Deregulation Globalization Technological breakthroughs Environmental concerns Performance impact © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Deregulation Transportation providers Buyers have greater freedom BUT…
Elimination of artificial barriers Unrestricted markets Multimodal solutions Price, schedule, and terms flexibility Buyers have greater freedom Negotiate prices, terms, and conditions Ownership issues BUT… © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Deregulation (continued)
… with greater freedom comes new responsibilities Key point Logistics has evolved from being a “tactical” area to a “strategic” one © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Globalization (Worldwide Statistics)
Year Expenditures % GDP 1997 $5,095 Billion 13.4% 2002 $6,732 Billion 13.8% Change +32% +3% What is driving this activity? © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Environmental Concerns
Even while certain aspects of logistics have been deregulated, other areas are being controlled more stringently Fuel efficiency Pollution Recovery, recycling, and reuse of packaging, containers, and products © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Management Areas Transportation
Warehousing (and more generally, location) Material handling Packaging Inventory management Logistics information systems (And some would put logistics service providers here as well!) © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Logistics Decision Areas
Transportation… Modes Formats Pricing Warehousing Consolidation Cross-Docking and Break-Bulk Hub-and-Spoke Inventory © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Major Transportation Modes
Highway (truck) Water Rail Air Pipeline © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Modal Shares of Shipments (within US, 1999/2002)
Mode Value (%) Tons (%) Ton Miles (%) Highway (trucking, parcel, postal, courier) 80.3/86.0 58.5/67.4 28.4/28.7 Water 2.5/1.1 11.1/11.1 20.4/13.6 Rail 4.8/3.7 11.2/16.1 26.7/36.8 Air 2.7/3.2 0.2/0.4 Pipeline 4.2/1.8 13.7/5.9 17.6/20.5 Multimodal/Unknown 5.6/5.6 5.5/5.5 6.8/6.8 Lots of other data from the US Department of Transportation at © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Highway Mode Strengths Weaknesses
Flexibility to pick up and deliver where and when needed Often the best balance between cost/flexibility and delivery reliability/speed Can deliver straight to the customer (increasing) Can be available 24/7 Weaknesses Not the fastest Not the cheapest © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Water Mode Strengths Weaknesses Highly cost effective for bulky items
Works best for high weight-to-value items Most effective when linked into multimodal system Weaknesses Limited locations Relatively poor delivery reliability/speed Often limited operating hours at docks © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Air Mode Strengths Weaknesses Quickest delivery over longer distances
Can be very flexible when linked to highway mode Works best for low weight-to-value items Weaknesses Often the most expensive, particularly on a per pound basis Grew 90.5% in value of goods shipped from 1993 to 2002 © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Rail Mode Strengths Weaknesses
Highly cost effective for bulky items Can be most effective when linked into multimodal system Weaknesses Limited locations, but better than for water. Better delivery reliability/speed than water Increasing part of multimodal solutions, dual tracks on major routes © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Question How can businesses design solutions that exploit the strengths of each mode? Lecturer can discuss trucking solutions like direct shipment, less than truckload (LTL), etc.

Technological Breakthroughs
Standardized containers for ease of transfer “Roadrailers,” etc. Multimodal solutions Ship  Truck  Train  Truck  ? © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Multi-Modal Solutions (An example)
North Carolina’s Global TransPark © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Global TransPark 15,700 acres at full development with two parallel runways of 11,500 feet and 13,000 feet Integrated air, rail, road, and nearby sea transportation capabilities Free trade zone status © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Justification for Such a Facility
Shift from domestic to global economies Emergence of just-in-time, flexible and agile manufacturing practices requiring sophisticated logistics solutions The rapid growth of distribution via air freighters (roughly four times the growth rate of passenger service by the airlines) The need to use air cargo, shipment by sea, and delivery by trucks and trains in an overall distribution system The need for a commercial distribution hub in the Eastern United States that can reach more than 60 percent of the nation’s population overnight and also provide a gateway to global markets. © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Warehousing Any operation that stores, repackages, stages, sorts, or centralizes goods or materials

New View Warehousing a key piece of logistics strategy
J. B. Hunt Lowe’s More than just storage “Warehousing”  “Distribution Centers” © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Warehousing Benefits Economic benefits: Service benefits:
Accrue directly to company Must consider total system costs Service benefits: Support customer service needs May or may not reduce costs © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Example 1 Customer Shipment Weight Venetian Artist Supply
100 boxes, artist supplies 3,000 lbs. Kaniko 100 PC printers Ardent Furniture 10 dining room sets 4,000 lbs. Dedicated truck from Los Angeles to Atlanta: $2,000 Cost to run consolidation warehouse: $9 per hundred-weight Local delivery in Atlanta: $200 per customer © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Cost Benefits of Consolidated Warehousing
Warehousing costs 10,000 lbs × $9/100 lbs = $900 Cost of one truck to Atlanta $2,000 Delivery to final customer 3 customers × $200 = $600 Total: $3,500 How does this compare to the cost of separate dedicated shipments? What about truck utilization (assume 3 trucks hold 60,000 lbs.) © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

What about supply / demand mismatches?
Cross-Docking Tend to be close to customers or source of products What about supply / demand mismatches? © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Break-Bulk Like cross-docking, but usually refers to a single source
Tend to be close to customers © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Example 2 Manufacturer  Customers 500 lb. average order size
Direct shipments: $7.28 per hundred-wt. $7.28 × 5 = $36.40 > 20,000 lbs: $2.40 per hundred-wt. Local delivery: $1.35 per hundred-wt. © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Insight: If we can run a warehouse for less than: we should do it.
5 × ($7.28 – $2.40 – $1.35) = $17.65/500 lbs. Or $17.65 / 5 = $3.53 per hundred-weight we should do it. © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Hub-and-Spoke Systems

Postponement Coca Cola syrup Bulk food products, paints, etc.
 high volumes  containers Customer A Customer B Customer C Postponement Assembly, Packaging, Labeling, etc. Minimizes risk Minimizes inventory (how?) © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Warehousing Service Benefits:
Spot stock Assortment

Spot Stock Region 1 Region 2 Region 3 Time sensitive, seasonal items
Often temporary, public storage © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Assortment Broad product line and good inventory control key to success Customer A Supplier E Supplier F Customer B Assortment Warehouse Supplier G Customer C Supplier H Customer D © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Information Systems Decision support tools
Real-time simulation and optimization Location selection Cost estimations Precise coordination of multimodal solutions Execution systems Global positioning systems Bar-coding applications RFID on the horizon as replacement (NYK Logistics) © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Material Handling and Packaging
What are the typical marketing criteria?

Unitization Unit loads Non-rigid containers Rigid containers
Transport and handling efficiencies Non-rigid containers pallets and unit load platforms ropes, steel, shrink and stretch wrap Rigid containers Maximum protection (Viper windshield frame) Standard sizes? Recycling? © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Packaging Implications
Transportation Class segmentation Damage protection Material handling and warehousing Storage requirements Unitization Container recycling Ease of handling © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Questions What are the strengths and weaknesses of each? How does the choice of format tie into the business strategy?

The Evolution of Logistics Strategy
From functional silos to strategic positioning

Logistics Strategy Choices
Performance Dimension Transportation Mode Warehousing System Delivery Reliability Highway, Air Direct Ship, Assortment, Spot Stock Delivery Speed Air, Highway Mix Flexibility Highway, Air, Rail Assortment, Spot Stock Design Flexibility Postponement Volume Flexibility Cost Rail, Water, Pipeline, Highway Consolidation, Cross-Docking, Hub-and-Spoke © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Owning Versus Outsourcing
Does the firm’s volume justify a private system? Would ownership limit firm’s ability to respond to marketplace changes? Is logistics a core competency? Are outsource capabilities are available? Kellogg logistics strategy example in text © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Transportation “Outsources”
Common (public) carriers Published rates and schedules “Nondiscriminatory” pricing Increased flexibility to partner Contract carriers Service for select customers Unlimited number of customers Third-Party Logistics Providers (3PLs) Service firms specializing in logistics for other companies © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Warehouse Ownership Issues
Public Contract Private EOS EOS ??? High Moderate Low High Moderate Low Less Varies Highest High High ??? Cost structure Financial flexibility Location flexibility Managerial control Expertise EOS = Economy of scale © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

When would it make sense to combine private and public ownership?
Question: When would it make sense to combine private and public ownership?

Measuring Performance
Perfect Order Delivered on time Shipped complete Invoiced correctly Undamaged in transit Landed Costs Packing Insurance Customs, other fees Warehousing Transportation Documentation (Redwing Automotive Example) © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Reverse Logistics Systems
Customer returns Warranty failures Incorrect or damaged orders Repair and remanufacture process support Recycling (increasing importance!) Generally independent systems because of low volume and mix complexity © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Logistics Decision Models
Weighted Center of Gravity Method Optimization Assignment Problem © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Weighted Center of Gravity
A method to determine best location for central warehouse from n demand points. Requires position of each demand point (Xi, Yi) Requires weight of each demand point (Wi), based on importance, demand volume, market strategy, etc. © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Optimization Requires an objective function to be maximized or minimized. Decision variables — values to be manipulated to affect outcome of objective function Constraints — limits set on range of decision variables to be used or on other aspects of the solution possible For Example: © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Assignment Problem Specialized optimization model.
Decision variables are the shipment quantities Known values are demand, capacity, and shipping cost between warehouses Constraints: Sum of shipments from a warehouse cannot exceed its capacity Sum of shipments to meet demand must be greater than or equal to the demand Sum of shipments from each warehouse must be greater than or equal to zero (Flynn Boot Company Excel example in text) © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Case Study in Logistics
Just-In-Time Shipping

Supplemental Slides on Transportation Costs and Factors
Pricing, Distance, Economic Factors

Pricing Transportation Services
Economic factors Pricing versus distance Price/pound versus density Stowability, handling, and liability Market factors Ratings Goods classification Class index © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Economic Factors I Price … why the “tapering principle”? Distance
Density Price/pound Discuss effects of unloading and loading costs being similar to fixed costs with distance as a variable cost Discuss effect of density in being able to pack more in a load – but what about energy requirements? © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Economic Factors II Stowability, handling, and liability versus

Economic Factors III Market factors What might this include? West
Coast, USA East Coast, USA © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Translating economic factors into actual prices
Ratings Translating economic factors into actual prices

Ratings (a simplified view)
Goods classification Perishability, stowability, handling, etc. Class index? From “average product” = 100 Based on expected transportation costs © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Determining Transportation Rates
Rate Determination By weight (Less-than-truckload shipment) By distance (truckload shipments) Minimum charges and surcharges Exceptions to the rule Seasonal commodities FAK (freight of all kinds) © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Example 1 Shipping 800 lbs of glass slides from Atlanta, GA to Lansing, MI … Looking at a rate classification guide Item Articles Class - LTL Shipment Class – TL Shipment Minimum TL Weight 86770 Glass, microscopical slide or cover, in boxes 70 40 3,600 lbs. © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Specific Rates for Shipments FROM Atlanta TO Lansing
Rates express $ charged per hundred-weight Rates fall as rate class falls and volume increases Rate Class < 500 lbs 500 to 1,000 lbs 1,000 to 30,000 lbs 200 $98.37 $61.97 $17.00 100 $52.62 $43.68 $9.22 70 $40.48 $33.59 $8.10 © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Result $33.59 × 8 = $268.72 shipping cost Key points
Classification tables standardized, BUT Rate tables vary by transportation provider Real-time updating of provider tables © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Example 2 3 Shipments of Class 100 to Lansing:
5,000 lbs., 10,000 lbs., 7,000 lbs. Different stops in Lansing Can consolidate, but extra $100 for two additional stops What to do? © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

What to Do? Separate shipments at costs below: 50×$18.94 = $947
50×$ = $947 100×$ = $1,474 70×$ = $1,326 $3,747 Consolidated shipments at costs below: 220×$9.22 = $2,028 Additional drop-off charges: $100 $2,128 © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Key Points Choosing a mode Choosing a format
Five choices Speed? Cost? Flexibility? Choosing a format Flexibility versus control Controllable factors affecting cost Density, stowability, packaging, and containerization © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Sales and Operations Planning (Aggregate Planning)

Distinguish among strategic planning, tactical planning, and detailed planning and control. Describe why sales and operations planning (S&OP) is important to an organization and its supply chain partners. Generate multiple alternative sales and operations plans. Describe the differences between top-down and bottom-up S&OP and discuss the strengths and weaknesses of level, chase, and mixed production strategies. Discuss the organizational issues that arise when firms decide to incorporate S&OP into their efforts. Examine how S&OP can be used to coordinate activities up and down the supply chain. Apply optimization modeling techniques to the S&OP process. © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Sales and Operations Planning
Involves: Strategic and tactical considerations Top-down planning Bottom-up planning Optimization techniques © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Sales and Operations Planning (S&OP)
Purpose: Select capacity options over the intermediate time horizon Capacity options: Workforces Shifts Overtime Subcontracting Inventories etc. © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Short-Range Plan (days, weeks out) Long-Range Plan (years out)
Time Horizon View . . . Short-Range Plan (days, weeks out) S&OP (months out) Long-Range Plan (years out) Capacity levels considered “frozen” in the short-term Changes in adjustable capacity possible fixed © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

S&OP continued (2 - 18 months out) “Big Picture” approach to planning
Outside of time frame  strategic planning Inside of time frame  tactical planning “Big Picture” approach to planning Families or groups (aggregation) of: Products Resources Technologies or skills Provide “rough” estimates © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Position in the Overall Business Planning Cycle
Decisions Time Frame Product and process “Bricks and Mortar” 18+ months Employment and overall inventory levels What demand to meet? 2 to 18 months Specific products and times Scheduling of people and equipment Less than 2 months Long-Range Plans S&OP Short-Range © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Inputs to the Process S&OPs Demand Management
Forecasts of customer demand Need for spares, etc. Pricing Strategic Capacity Levels Existing buildings Processes S&OPs External Capacities Suppliers Subcontractors © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Advantages of S&OP Negotiated process Functional coordination
“Agreed” demand Functional coordination Budgets and cash flow analyses Reduces operations and supply chain tasks to “meeting the plan” © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

S&OP Approaches Top-Down Bottom-Up Similar products OR stable mix
Standards available for planning time, cost requirements from history and/or planning documentation Can “Average” product Bottom-Up Different products AND unstable mix Requires forecasts and production data for individual products Can be extremely data- intensive © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Planning Values Translate forecast into: Resources required Costs
Labor hours per unit Material quantities Equipment hours Subcontractors? Costs Materials Labor Hiring/firing costs Inventory holding costs © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Top-Down Planning Develop the aggregate sales forecast and planning values. Translate the sales forecast into resource requirements. Personnel, equipment, materials Generate alternative production plans. Chase, level, mixed Select the best of the plans. Lowest cost, best fit to capability © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Top-Down Example I (Pennington Cabinet Product Data)
% of Total Labor/Unit A100 10% 40 hours B200 50% 20 hours C300 20% 15 hours D400 5% 10 hours E500 F600 © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Top-Down Example II (“Average” Products)
% of Total Labor/Unit A100 10% 40 hours B200 50% 20 hours C300 20% 15 hours D400 5% 10 hours E500 F600 10%(40) + 60%(20) + 20%(15) + 10%(10) = 20 hours © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Top-Down Example III (Conditions or Constraints)
Agreed upon demand to be met for upcoming 12 month period Can vary workforce and inventory levels No backordering “Average” unit requires 20 worker hours Each worker works 160 hours per month Class discussion about where these conditions or constraints can come from: Top management, company culture, general policy, desired service level for customers, etc. © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Top-Down Example IV (Demand Forecast for 12 months)
January 750 July 910 February 760 August March 800 September April October 880 May 820 November 860 June 840 December © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Top-Down Example V (Other tidbits of data …)
Start and end with 100 workers (goal) Start and end with about 100 units in inventory (goal) The above conditions allow fair cost comparisons of various aggregate plans. © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Pennington Cabinet Strategic Capacity Level: 848 jobs per month
Company produces make-to-stock cabinets for sale at Lowe’s, etc. Planning values: Average hours of labor per cabinet = 20 hours Regular production cost = $2000 per cabinet set Overtime production cost = $2062 per cabinet set Average monthly holding cost = $40 per cabinet set Hours per month per employee = 160 hours Hiring cost = $1750 per employee Layoff cost = $1500 per employee Allowable overtime = 16 hours per employee © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Pennington (continued)
Raw Demand for next 7 months: January jobs February March April May June July What are our options ? Class discussion before proceeding, what would the students do? © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Pennington (again) . . . Raw Demand 1000 Monthly capacity = 848 500
Need 910 July © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Detail of First Seven Months from Level Strategy
Demand Demand in Employee Hours Employees to Meet Production Plan Actual Employees Actual Production Hirings Layoffs Ending Inventory January 750 15000 94 105 840 5 190 February 760 15200 95 270 March 800 16000 100 310 April 350 May 820 16400 103 370 June 16800 July 910 18200 114 300 (840 cabinets x 20 hours)/(160 hours per employee) Note: We develop a level strategy by setting “Actual Employees” equal to the average required for the 12 month planning period © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Level Plan Cost Details for the Full Year from the Text

Detail of First Seven Months from Chase Strategy
Demand Demand in Employee Hours Employees to Meet Production Plan Actual Employees Actual Production Hirings Layoffs Ending Inventory January 750 15000 94 752 6 102 February 760 15200 95 105 1 March 800 16000 100 5 April May 820 16400 103 824 3 106 June 840 16800 2 July 910 18200 848 Note: We develop a chase strategy by setting “Actual Employees” equal to the number needed in each period subject to maximum capacity constraint of 848 (see July, here remaining demand of 62 units is done by using overtime). © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Chase Plan Cost Details for the Full Year from the Text

Mixed Strategy A compromise between level and chase plan extremes to reduce total cost. For the Pennington example, we Keep 100 employees at beginning, which builds up inventory slowly Reduces hiring/layoff costs by only changing workforce gradually Use overtime only toward the end of the year. © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Mixed Plan Cost Details for the Full Year from the Text

Top-Down Example (Other Issues …)
Are complete costs shown? Expand out for budget and cash flow analysis “Input” (suppliers) and “output” (logistics and warehousing) considerations Lead time, materials availability, storage space? Variations in actual production Scrap, rework, equipment breakdowns © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Top-Down Option (We could subcontract production)
Maximum subcontract of ??? units/month.. Cost is more per unit than internal production cost Will this option: 1) increase costs? 2) decrease costs? 3) have no effect on costs? Issues: Quality? Source of materials (separate supplier allowed?) Loss of proprietary information © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Bottom-Up Iterative Approach (Similar to Top Down)

Detail from Philips Toys Bottom Up Plan
From Table 13.9 in text © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

… and Load Profile for Production

Cash Flow Analysis Net cash flow = cash inflows – cash outflows
Different sales scenarios can have significant effect on cash flow as shown for the Pennington example in the text. © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Advanced Topic: Optimization Modeling
What is optimization modeling? Essential conditions Application to operations problems © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Optimization Modeling
Family of mathematical techniques used to allocate limited resources among competing demands in an optimal way What is our financial objective? What are our constraints? © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Optimization Example 1 Product mix: Find the product mix that will maximize revenue, given limits on materials, labor hours, and machine hours available © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Optimization Example 2 S&OP: Find the workforce and inventory levels which will minimize hiring, layoff, and inventory costs while still meeting demand. © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Choosing Between Plans
Effect on supply chain partners? What are the cash flows like? Is there space for the inventory? Effects on the workforce morale? Is staffing available when needed? How flexible is the plan? © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Options for Services Smooth out demand: Yield management
Appointments Discounts and promotions Seasonal complements Yield management Tiered workforce: Full-time and part-time Customer involvement (offloading) © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Linking S&OP Throughout the Supply Chain
Good information systems (EDI) are necessary for success, flexibility, and reducing uncertainty © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

S&OP Optimization Two major types of problems
Maximize profit or revenues subject to resource constraints Minimize costs subject to demand requirements © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Optimization Essential Conditions I
Explicit objective function Maximize revenue or profit Minimize costs 2. Some constraint(s) Resource limits Demand requirements © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Optimization Essential Conditions II
Conditions can be expressed mathematically Revenue = $1000X Variable cost = $310X Assembly hours needed = 15X Divisibility OK to make half a unit or hire two thirds of an individual © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Optimization Example 1 Transportation Problem: Minimize the cost of shipping items from different plants to different stores © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Optimization Example 2 Material Yield: Minimize the amount of scrap generated by cutting steel, fabric, wood, etc. Scrap Material © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Minimization Problem S&OP: “Meet the production plan with the minimum total hiring, firing, and inventory cost” Can you figure out how the problem would be defined? © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

What to Take Away from this ...
Essential conditions: Explicit objective function Constraints Linearity Divisibility Write out an objective function or constraint for simple problem Can use Excel Solver © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Covolo Diving Gear, Part 2
Case Study in S&OP Covolo Diving Gear, Part 2

Managing Inventory throughout the Supply Chain

Describe the various roles of inventory, including the different types of inventory and inventory drivers. Distinguish between independent demand and dependent demand inventory. Calculate the restocking level for a periodic review system. Calculate the economic order quantity (EOQ) and reorder point (ROP) for a continuous review system. Determine the best order quantity when volume discounts are available. Calculate the target service level and target stocking point for a single-period inventory system. Describe how inventory decisions affect other areas of the supply chain. In particular, be able to describe the bullwhip effect, inventory positioning issues, and the impact of transportation, packaging, and material handling considerations. © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Inventory Management Functions, forms, and drivers of inventory
Inventory cost issues Tools: Economic order quantity (EOQ) Reorder point (ROP) and safety stock Dealing with quantity discounts © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Types of Inventory Cycle stock Safety stock (buffer inventory)
Anticipation inventory Others Hedge inventories Transportation inventory (pipeline) Smoothing inventories © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Four Inventory Drivers
Demand and Supply Uncertainties Safety stock, hedge inventory Demand and Process Volume Mismatches Cycle stock Demand and Capacity Mismatches Smoothing inventory Demand and Supply Lead-Time Mismatches Anticipation inventory, transportation inventory © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Independent Demand Demand from outside the organization
Unpredictable  usually forecasted Demand for tables . . . © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Dependent Demand Tied to the production of another item
Relevant mostly to manufacturers Once we decide how many tables we want to make, how many legs do we need? © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

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) © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Restocking Levels Periodic Review Continuous Review
Here RP+L represents the reorder period plus the order lead time, mu is the average demand during that time and sigma is the standard deviation of the demand during that time. Z or zeta is the number of standard deviations chosen to achieve a desired service level. Continuous Review: Here d is the demand rate and L is the lead time for an order to come in. Obviously, variations in the demand and lead time are not accounted for since continuous review allows adjustment for some variation in these values. © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Periodic Review System (Orders at regular intervals)
Inventory level 2 4 6 Time © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Continuous Review System (Orders when inventory drops to R)
How is the reorder point ROP established? Q Inventory level R Time L-T lead time to get a new order in © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

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 © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Order Quantity Q and Average Inventory Level
As the order quantity doubles so does the average inventory (= Q/2) Q2 Q2 2 Q1 Q1 2 © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

What is the “Best” Order Size Q?
Determined by: Inventory related costs Order preparation costs and setup costs Inventory carrying costs Shortage and customer service costs Other considerations Out of pocket or opportunity cost? Fixed, variable, or some mix of the two? © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Economic Order Quantity (EOQ) Model
Cost Minimizing “Q” Assumptions: Uniform and known demand rate Fixed item cost Fixed ordering cost Constant lead time © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

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] Comment: Can explain to students that item cost is considered when evaluating volume discounts How do these costs vary as Q varies? Why isn’t item cost for the year included? © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

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

Ordering costs per year decrease as Q increases
$ Ordering costs per year decrease as Q increases (why?) (Q/2)×H (D/Q)×S Q © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Total Annual Costs and EOQ
EOQ at minimum total cost © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

EOQ Solution When the order quantity = EOQ, the holding and setup costs are equal © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Sample Problems Pam runs a mail-order business for gym equipment. Annual demand for the TricoFlexers is 16,000. The annual holding cost per unit is $2.50 and the cost to place an order is $50. What is the economic order quantity? Using the same holding and ordering costs as above, suppose demand for TricoFlexers doubles to 32,000. Does the EOQ also double? Explain what happens. Answers: EOQ = 800; 1,131 (goes up by the square root of 2) © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

EOQ tells us how much to order...
…but when should we order? Reorder point and safety stock analysis

Safety Stock When both lead time and demand are constant, you know exactly when your reorder point is ... Q R L © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Safety Stock II Under these assumptions:
Reorder point = total demand during the lead time between placement of the order and its receipt. ROP = d × L, where d = demand per unit time, and L = lead time in the same time units © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Safety Stock III (Uncertainties)
But what happens when either demand or lead time varies? Q R L1 L2 © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Safety Stock IV What causes this variance? Average demand
during lead time © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Uncertainty Drivers The variability of demand
The variability of lead time The average length of lead time The desired service level 2) and 3) are determined by a company’s choice of supply chain partners © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Safety Stock Additional inventory beyond amount needed to meet “average” demand during lead time Protects against uncertainties in demand or lead time Balances the costs of stockouts against the cost of holding extra inventory © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Shown Graphically … Now, what is the chance of a stockout? 93% 7%

Recalculating the Reorder Point to include Safety Stock

Determining “z” z = number of standard deviations above the average demand during lead time The higher z is: The lower the risk of stocking out The higher the average inventory level What is the average inventory level when we include safety stock? Average inventory plus safety stock level © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Determining “z” Typical choices for z: z =  90% service level z =  95% service level z =  99% service level What do we mean by “service level”? © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Reorder Point + Safety Stock Formula:
What happens if lead time is constant? What happens if the demand rate is constant? What happens if both are constant? If you wanted to reduce the amount of safety stock you hold, what is your best option? © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Problems I One of the products stocked by Sam’s Club is SamsCola.
During the slow season, the demand rate is approximately 650 cases a month, which is the same as a yearly demand rate of 650×12 = 7,800 cases. During the busy season, the demand rate is approximately 1,300 cases a month, or 15,600 cases a year. The cost to place an order is $5, and the yearly holding cost for a case of SamsCola is $12. © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Problems II According to the EOQ formula:
How many cases of SamsCola should be ordered at a time during the slow season? How many cases of SamsCola should be ordered during the busy season? Slow season: 81 cases Busy season: 114 cases © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Problems III During the busy season, the store manager has decided that 98 percent of the time, he does not want to run out of SamsCola before the next order arrives. Use the following data to calculate the reorder point for SamsCola. Weekly demand during the busy season: 325 cases per week Lead-time: 0.5 weeks Standard deviation of weekly demand: 5.25 Standard deviation of lead-time: 0 (lead-time is constant) Number of standard deviations above the mean needed to provide a 98% service level (z): 2.05 Answer: 170 cases © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Quantity Discounts I What effect will quantity discounts have on EOQ?
D = 1,200 units (100×12 months) H = $10 per unit per year S = $30.00 ordering cost Order Size Price $35.00 90 and up $32.50 Note: When H is a cost based on a percent of the value of the item, these calculations become more complicated, but are done in the same way. © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Quantity Discounts II 1. Calculate the EOQ for the non discount price:
2. If we can order this quantity AND get the lowest price, we’re done. Otherwise ... © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Quantity Discounts III
Compare total holding, carrying, AND item cost for the year at:  Each price break  The first feasible EOQ quantity Do you understand why we must now look at item cost for the year? © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Quantity Discounts IV Total costs at an order quantity of 85:
(85/2)×$10 + (1200/85)×$ ×$35.00 = $ $ $42,000 = ?? Total costs at an order quantity of 90: (90/2)×$10 + (1200/90)×$ ×$32.50 = $ $ $39,000 = ?? Quantity 85: $42,848.53 Quantity 90: $39,850 © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Conclusions: When all costs are considered, it is cheaper to order 90 at a time and take the price discount. When there are volume discounts, the EOQ calculation might be infeasible or might not result in lowest total cost. If holding cost is a percentage of the item value (a common practice for more expensive items), analysis is more complex, but done the same way © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Single-Period Inventory (When safety stock is not an option)
Inventory is perishable Newspapers, periodicals Fresh food, Christmas trees Must balance costs of Being short = profit lost Having excess = item cost + disposal cost – salvage value Requires a target service level that best balances shortage and excess costs © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Target Service Level Sets expected shortage cost = expected excess cost Or (1–p) × Cshortage = p × Cexcess Where p = probability of enough units to meet demand, (1–p) = probability of shortage Hence solving for p where the top equation is true provides the target service level SLT = Cshortage / (Cshortage + Cexcess) © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Target Stocking Point Must know how demand is distributed
Is it roughly the same every day? Are there different demand distributions? In all cases, develop the cumulative probability distribution for the demand levels in order of increasing demand and select demand level whose corresponding cumulative probability is nearest to the target service level. © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Inventory in the Supply Chain
Bullwhip Effect Small demand changes  large order variations Inventory Positioning Cost and value increases, flexibility decreases down the supply chain  where do we hold inventory? Transportation, Packaging, Material Handling Physical size and quantity of lot, how it is packaged, handling equipment needed,and disposal of packaging are all factors in choosing appropriate supplier and distribution process © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Demand versus Order Size (Bullwhip Effect)

Case Study in Inventory Management
Northcutt Bikes: The Service Department

Supplement ABC Classification Method
IDEA Companies have thousands of items to track Methods like EOQ only justifiable for most important items. © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

ABC Method Determine annual $ usage for each item
Rank the items according to their annual $ usage Let: Top 20%  “A” items  roughly 80% of total $ Middle 30%  “B” items  roughly 15% of total $ Bottom “50%  “C” item  roughly 5% of total $ © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

ABC Analysis Example Total $ Usage = $98,500 Item Cost Demand $ Usage
$46 200 $9,200 B2 $40 10 $400 C3 $5 6680 $33,400 D4 $81 100 $8,100 E5 $22 50 $1,100 F6 $6 $600 G7 $176 250 $44,000 H8 150 $900 I9 $10 $100 J10 $14 $700 Total $ Usage = $98,500 © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Ranking by Annual $ Usage
Item $ Usage Cumulative $ Usage % of Total $ Usage Class G7 $44,000 44.67% A C3 $33,400 $77,400 78.58% A1 $9,200 $86,600 87.92% B D4 $8,100 $94,700 96.14% E5 $1,100 $95,800 97.26% H8 $900 $96,700 98.17% C J10 $700 $97,400 98.88% F6 $600 $98,000 99.49% B2 $400 $98,400 99.90% I9 $100 $98,500 100.00% © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Managing Production across the Supply Chain

Explain the activities that make up planning and control in a typical manufacturing environment. Explain the linkage between sales and operations planning (S&OP) and master scheduling. Complete the calculations for the master schedule record and interpret the results. Explain the linkage between master scheduling and material requirements planning (MRP). Complete the calculations for the MRP record and interpret the results. Discuss the role of production activity control and vendor order management and how these functions differ from the higher-level planning activities. Explain how distribution requirements planning (DRP) helps synchronize the supply chain, and complete the calculations for a simple example. © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Outline Master scheduling defined Basic MPS record Planning horizon
MRP defined Basic MRP record MRP special considerations Special topics: Job Sequencing DRP © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

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 © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Master Scheduling I Controls the timing and quantity of production for products or product families Primary interface point for actual customer orders Coordinates forecasted demand and actual orders with production activity Serves as tool for agreement between marketing and operations (but at a different level than S&OP) © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Master Scheduling II Feeds data to more detailed material planning
Indicates the quantity and timing (i.e., delivery times) for a product or group of products More detailed than S&OP weekly versus monthly specific products versus “average” © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Link between S&OP and MPS
Month: January February March Output: S&OP January (weeks) Push Mowers Self-propelled Riding MPS © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Master Scheduling Criteria
The Master Production Schedule must: Satisfy the needs of marketing Be feasible for operations Match with supply chain capability © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

MPS Formulas: Definitions
ATPt = Available to promise in period t EIt = Ending Inventory for period t (same as projected on-hand inventory for next period) Ft = Forecasted demand for period t MPSt = MPS quantity available in period t OBt = orders booked for period t © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Detailed MPS for a Product
On-hand inventory at end of October = 100 Month November December Week 45 46 47 48 49 50 51 52 Forecast Demand 150 125 Orders Booked 170 165 140 120 85 20 Master Schedule 300 250 Notes: Planning time fence  cumulative lead time for product What seems to be the lot-sizing rule here? © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Projected On-Hand Inventory
On-hand inventory at end of October = 100 Month November December Week 45 46 47 48 49 50 51 52 Forecast Demand 150 125 Orders Booked 170 165 140 120 85 20 Projected On-Hand Inventory 230 65 215 190 Master Schedule 300 250 e.g., Projected on-hand inventory for week 47: = – 150 = 215 © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Available-to-Promise
On-hand inventory at end of October = 100 Month November December Week 45 46 47 48 49 50 51 52 Forecast Demand 150 125 Orders Booked 170 165 140 120 85 20 Projected On-Hand Inventory 230 65 215 190 Master schedule 300 250 Available-to-Promise 40 ATP (Week 45) = – ( ) = 65 ATP (Week 47) = 300 – ( ) = 40 ATP (Week 49) = 250 – ( ) = 120 © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Change in Forecast Demand
On-hand inventory at end of October = 100 Month November December Week 45 46 47 48 49 50 51 52 Forecast Demand 150 Orders Booked 170 165 140 120 85 20 Projected On-Hand Inventory 230 65 215 190 Master schedule 300 250 Available-to-Promise 40 Are we in trouble yet? © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Change in Orders Booked
On-hand inventory at end of October = 100 Month November December Week 45 46 47 48 49 50 51 52 Forecast Demand 150 125 Orders Booked 170 230 140 120 85 20 Projected On-Hand Inventory Master schedule 300 250 Available-to-Promise 40 70 Note impact on ATP ( Week 45) and on-hand inventory projections © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Planning Horizon How far an MPS looks into the future depends on
Variability in demand and market conditions Variability in supplier deliveries and lead times Length of the production process. © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Key Points about MPS Provides more detail than S&OP
Tracks the following information: Actual versus forecasted demand Available-to-Promise This gives sales information for accepting or not accepting new orders for delivery in a given week © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

A Final View of Master Scheduling
S&OP Operations & Supply Chain Marketing MPS Rough-Cut Capacity Plan © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Material Requirements Planning
MRP in the planning cycle The logic of MRP an extended example Considerations of MRP © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

So Far ... But we haven’t ordered the materials!
We have only considered labor, overall inventory levels, and equipment:  S&OP  Master scheduling  Rough-Cut Capacity Planning But we haven’t ordered the materials! © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

We’ve scheduled 500 chairs to be ready five weeks from now . . .
what? © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Material Needed for a Chair
Back supports (3) Side rails (2) Front legs (2) Cross bars (2) Seat © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Chair Structure Tree (aka “Bill of Materials” or BOM)
Leg Assembly Seat Back Assembly Legs (2) Cross bar Side rails (2) Back Supports (3) © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Lead-Time I If final assembly takes one week, then we must start
the assembly at the beginning of Week Chair Assembly (1 week) © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Lead-Time II Which means that the major subassemblies and seats
Week 2 Week 3 Week 4 Week 5 Which means that the major subassemblies and seats must be done by the beginning of Week 4 ... Back Assembly (1 week) Chair Assembly Seats (2 weeks) (1 week) Leg Assembly (1 week) © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Lead-Time III Week 1 Week 2 Week 3 Week 4 Week 5
Back Support (2 weeks) Side Rails (2 weeks) Back Assembly Cross Bar (2 weeks) (1 week) Chair Assembly Seats (2 weeks) (1 week) Leg Assembly Legs (2 weeks) Cross Bar (2 weeks) (1 week) © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Lead-Time Key Points To have finished chairs at the beginning of Week 5 with no work in progress or finished inventory, we must begin production and order materials in Week 1. “Exploding” the bill of materials tells us when to order things. Not much we can do to adjust output of chairs for the next 4 weeks. Why? © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Material Requirements Planning (MRP)
Requires: Bill-of-Materials (BOM) Inventory record Master schedule to determine what should be ordered when, and how much to order. © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

The MRP Process Starts with the MPS
End items are also known as “Level 0” items © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

The “Parent / Child” Relationship
Refer back to bill of materials on slide 24, or insert duplicate after this slide for ready reference Where do the gross requirements come from? Do you understand the MRP logic? © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Moving from “Level 1” items to “Level 2” items . . .
Where do the gross requirements for LEGS come from? © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Combining Requirements: “Cross Bars”
Note effect of differences in lead times and order sizes on the gross requirements for each component © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Impact of Longer Lead Times
We cannot do this since the planned order would be in the past…. Thus the 250 crossbars will be delivered late one week to back assembly. What does this do to our chair schedule? © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Do You Understand ... Why it is important to have an accurate BOM and accurate inventory information? Why we need to “freeze” production schedules? Where gross requirements come from? The difference between planned and scheduled receipts? © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Other Considerations I
MRP Feedback Feedback Planned Orders Production Suppliers © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Other Considerations II
When do we update the system? Capacity requirements planning using MRP output MRP ‘nervousness’ Increasing order chaos, the lower in the BOM structure of materials Lot sizing issues © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Recall ... Look at the “lumpiness” of demand for legs

If we order “lot-for-lot”
Much smoother demand for legs, lower average inventory © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Job Sequencing Rules: Performance measure:
FCFS — first come, first served EDD — earliest due date Critical ratio — work time remaining divided by days left before due date Performance measure: Average lateness — sum of days late for each job divided by total number of jobs © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Example Data Job Estimated Time Days Until Due Critical Ratio Weldco 8
32 0.250 MetroArt 10 20 0.500 MMCC 9 1.000 Jones 6 15 0.400 © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Example FCFS Job Estimated Time Days Until Due Start End Days Late
Weldco 8 32 MetroArt 10 20 18 MMCC 9 27 Jones 6 15 33 Average lateness = 36/4 = 9 days © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Example EDD Job Estimated Time Days Until Due Start End Days Late MMCC
9 Jones 6 15 MetroArt 10 20 25 5 Weldco 8 32 33 1 Average lateness = 6/4 = 1.5 days © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Example Critical Ratio (largest ratio first)
Job Estimated Time Days Until Due Start End Days Late MMCC 9 MetroArt 10 20 19 Jones 6 15 25 Weldco 8 32 33 1 Average lateness = 11/4 = 2.75 days © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Interpretation Here the EDD rule gives better average lateness. Compare with FCFS results. Note that the critical ratio does not do as well as EDD compared to the text example for Carlos Restoration. Why? © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Distribution Requirements Planning (DRP)
Anticipates downstream demand Uses this information, not predetermined reorder points or periodic reviews, to determine when to order Computer-based software systems needed to deal with the added complexity The key difference between DRP and the other methods is that DRP uses demand forecasts and knowledge about the supply chain partner’s inventory policies to determine when to place an order. DRP is more complex and usually requires a computer-based system, but is far better when demand levels are unpredictable. © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

DRP Example I Suppose we forecast demand for Wholesaler A for the next 8 days (the best time horizon to use will depend on many factors) Based on this, we anticipate that Wholesaler A will order on Day 3 As before, Wholesaler A has a reorder point of 50, and orders in quantities of The DRP record shows the forecasted demand for the next 8 days, the expected ending inventory level, and when Wholesaler A will expect to receive an order. For example, the wholesaler starts Day 1 with 85 units and expects to sell 20, leaving it with 65 at the end of the day. Wholesaler A falls below its order point some time on Day 2. As a result, Wholesaler A places an order which it expects to receive on Day 3. Based on the expected demand rate of 20 per day, Wholesaler A shouldn’t expect to receive another order over the remaining days showing in the record. © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

DRP Example II Combined, we expect to see orders on Days 3 and 4
Here, we have completed a similar DRP record for Wholesaler B, and added its expected orders to those of Wholesaler A to get a line titled “Total expected orders” for the next 8 days. We extend the analysis to include Wholesaler B Combined, we expect to see orders on Days 3 and 4 © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

DRP Example III Special notes: Even though the orders cause the demand to look “lumpy”, DRP allows the distributor to anticipate when the orders are required, and to plan accordingly. In this case, the distributor will need to plan on receiving 400 units in Day 3 (Q = 400 for the distributor). If it takes 2 days to get units to the distributor from the factory, this means the distributor should plan on releasing the order on Day 1. The distributor then uses this information to plan its own orders. In this case, suppose it takes two days for the supplier to replenish; based on the information, the distributor would order on Day 1 © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

DRP Benefits Helps improve customer service
Provides a better and faster understanding of the impact of shortages and/or promotions Helps reduce costs Inventory Freight Production Provides integration between the stages in the supply chain “Reduced costs” deserves some more explanation. To the extent that the distributor could “see” when the wholesalers would require more product, the distributor could use that information to combine orders, plan production, or even combine freight shipments. The point is, with better information, the Distributor will have more choices on how to run its business. © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

DRP Constraints Accurate forecasts and inventory levels
Necessary to anticipate correctly when orders will be placed Consistent and reliable lead times To ensure that orders can be placed and arrive by the time they are needed “Nervousness” Even light changes in demand for downstream partners can have a significant impact on order volumes, especially when order sizes are relatively high © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Case Study in Managing Production
The Realco Breadmaster

JIT/Lean Production

Describe what JIT/Lean is and differentiate between the Lean philosophy and kanban systems. Discuss the Lean perspective on waste and describe the eight major forms of waste, or muda, in an organization. Discuss the Lean perspective on inventory and describe how a kanban system helps control inventory levels and synchronize the flow of goods and materials across a supply chain. Describe how the concepts of the Lean supply chain and Lean Six Sigma represent natural extensions of the Lean philosophy. Explain how a two-card kanban system works. Calculate the number of kanban cards needed in a simple production environment. Show how MRP and kanban can be linked together and illustrate the process using a numerical example. © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Some Statistics from 1986 ... A comparison of: assembly hours
defects per 100 cars average inventory levels Framingham (GM) 40.7 hours 130 defects 2 weeks Toyota Takaoka 16 hours 45 defects 2 hours © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Post World War II Growing and rebuilding world economy
Demand > Supply US Manufacturing: Higher volumes Capital substitution “Breakthrough” improvements “The production problem has been solved” © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

View from Japan Very little capital War-ravaged workforce Little space
Poor or no raw materials Lower demand levels Little access to latest technologies  U.S. methods would not work © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Japanese Approach to Operations
Maximize use of people Simplify first, add technology second Gradual, but continuous improvement Minimize waste (including poor quality)  Led to the development of the approach known as Just-in-Time © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Repetitive production system
Just-in-Time Repetitive production system in which processing and movement of materials and goods occur just as they are needed

Pre-JIT: Traditional Mass Production

Post-JIT: “Lean Production”
Tighter coordination along the supply chain Goods are pulled along  only make and ship what is needed © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

JIT Goals (throughout the supply chain)
Eliminate disruptions Make the system flexible Reduce setup times and lead times Minimize inventory Eliminate waste © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Waste Definition: Waste is ‘anything other than the minimum amount of equipment, materials, parts, space, and workers’ time, which are absolutely essential to add value to the product.’ — Shoichiro Toyoda President, Toyota © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Forms of Waste: (‘muda’ in Japanese)
Overproduction Waiting Unnecessary movement Wrong process Unnecessary inventory Excess motion Defects Underutilization of employees © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Inventory as a Waste Requires more storage space
Requires tracking and counting Increases movement activity Hides yield, scrap, and rework problems Increases risk of loss from theft, damage, obsolescence © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Lean Perspective Process of reducing inventory leads to reduction of the other “wastes” and exposes problems in order of severity (‘water and rocks’ analogy) © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Lean Six Sigma & Supply Chain in Lean Environment
Six Sigma methodology combines well with Lean goals, helps address the ‘rocks’ as they become exposed when reducing inventory. Supply chain choices affect many of the ‘wastes’. Supplier variances such as lead time and quality create need for safety stock — a direction opposite reduction of inventory goals © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Examples of Eliminating “Wastes”
Big Bob’s Automotive Axles: Wheels bought from outside supplier Axles made and assembled in house © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

BEFORE: Shipping in Wheels
Truck Cost: $500 (from Peoria) Maximum load of wheels: 10,000 Weekly demand of wheels: 500 © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

AFTER: Shipping in Wheels
Truck Cost: $50 (from Burlington) Maximum load of wheels: 500 Weekly demand of wheels: 500 What wastes have been reduced? © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

BEFORE: Making Axles (Different lengths)

BEFORE: Making Axles (Oops!)
What is the outcome of detecting defective axles at the end? © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

After: Making Axles I (Different lengths)

After: Making Axles II (More improvements)
What wastes have been reduced? © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Building Blocks of JIT Product design Process design
Standard parts Modular design Quality Process design Personnel and organizational elements Manufacturing planning and control © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Process Design “Focused Factories” Group Technology
Simplified layouts with little storage space Jidoka and Poka-Yoke Minimum setups Jidoka is Japanese for “Stop everything when something goes wrong”, a form of stopping quality problems at their source. Poka-Yoke is Japanese for failproofing: Examples are gasoline nozzles, VCR cassettes (they are ejected if inserted incorrectly), inkjet cartridges, etc. © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Multi-Task Work Cells 500 chairs per hour Seats Packing
Assembly Packing Legs Slats Backposts Planning takes place for one area: What does the BOM look like? What about lead times? © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Personnel and Organizational Elements
Workers as assets Cross-trained workers Greater responsibility at lower levels Leaders as facilitators, not order givers © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Classic Organizational View

Planning and Control Systems
“Small” JIT Stable and level schedules Mixed Model Scheduling “Pull” versus “Push” Kanban Systems © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Kanban Uses simple visual signals to control production  “pull” processing Examples: empty slot in hamburger chute empty space on floor kanban card © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Kanban Example Workcenter B uses parts produced by Workcenter A
How can we control the flow of materials so that B always has parts and A doesn’t overproduce? © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Kanban card: Signal to produce
When a container is opened by Workcenter B, its kanban card is removed and sent back to Workcenter A. This is a signal to Workcenter A to produce another box of parts. © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Empty Box: Signal to pull
Empty box sent back. Signal to pull another full box into Workcenter B. Question: How many kanban cards here? Why? © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

How Many Kanbans? y = number of kanban cards
D = demand per unit of time T = lead time C = container capacity X = safety factor © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Example Hourly demand = 300 units Lead time = 3 hours
Each container holds 300 units Assuming no variation in lead-time or demand (x = 0): y = (300  3) / 300 = 3 kanban cards © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Note: For a kanban system to work, we NEED CONSISTENT demand across the work centers Example - think “McDonald’s” How do we ensure this? © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Mixed Model Sequencing
Product Monthly Demand Daily Requirement A 800 40 B C 200 10 Largest integer that divides evenly into daily requirement is 10: A: 40 / 10 = 4 B: 40 / 10 = 4 C: 10 / 10 = 1 Mixed model sequence: A-B-A-B-A-B-A-B-C © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Mini-Quiz: Mixed Model Scheduling and Establishing Kanbans
Product Monthly Demand Daily Requirement D 1200 60 E 400 20 F 600 30 What would sequence be if NO minimum job size? © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Sequence with Minimum of 5:
60 / 4 = 15 D’s 20 / 4 = 5 E’s 30 / 4 = 7.5 F’s 5D - 7F - 5D - 5D - 5E - 5D - 8F - 5D - 5D - 5E Sequence of 55 (27.5×2) © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Kanbans Required: Product D
Hourly Requirements = 60/8 = 7.5 Lead time = 2 hours Container size = 2 units Safety factor = 10% © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Kanban Cards Required:
Implications? Impact of container size? © 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chain Management, 2/e --- Bozarth and Handfield, ISBN:

Implementing JIT What about automation?

Putting the Squeeze on Resources . . .

Case Study in JIT/Lean Production
A Bumpy Road for Toyota

Introduction to Operations and Supply Chain Management

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