1. MBA 8503: O PERATIONS AND S UPPLY C HAIN M ANAGEMENT Matthew J. Liberatore Spring 2011 1 Welcome!

2. I NTRODUCTION TO O PERATIONS AND S UPPLY C HAIN M ANAGEMENT 2 Class 1: 1/12/11

3. W HAT IS O PERATIONS AND S UPPLY C HAIN M ANAGEMENT ? Operations and Supply Chain Management is defined as the design, operation, and improvement of the systems that create and deliver the firm’s primary products and services 1-3

4. Operations and Supply Chain Management Supply Chain Processes Sourcing Processes Manufacturing Processes Service Processes Distribution Processes Logistics Processes Logistics Processes 1-4

5. I NTRODUCTION TO O PERATIONS M ANAGEMENT 5

6. K MART V ERSUS W AL -M ART Both chains started in 1962 In 1987, Kmart had 2,223 stores to Wal-Mart’s 1,198. Kmart’s sales were $25.63 billion to Wal-Mart’s $15.96 billion By 1991, Wal-Mart’s sales exceeded Kmarts Kmart still had more stores 6

7. K MART V ERSUS W AL -M ART CONTINUED In year ending January 1996, Wal-Mart’s sales were $93.6 billion to Kmart’s $34.6 billion. During this time Kmart emphasized marketing and merchandising (such as national TV ad campaigns). Wal-Mart was investing millions in its operations to lower cost. 7

8. K MART V ERSUS W AL -M ART CONTINUED Wal-Mart developed sophisticated distribution system that integrated its computer system with its distribution system. Kmart’s employees lacked skills needed to plan and control inventory. 8

9. I MPORTANCE OF O PERATIONS Improvements in operations can simultaneously lower costs and improve customer satisfaction. Improving operations often dependent on advances in technology. Can obtain competitive advantage by improving operations. 9

10. O PERATIONS Heart of every organization Operations are the tasks that create value Operations management uses resources to transform inputs into desired outputs 10

11. T HE P RODUCTION S YSTEM 11

12. S YSTEMS P ERSPECTIVE Inputs Transformation System Alter Transport Store Inspect Outputs Environment 12

13. Automobile Factory Primary Inputs Sheet steel, engine parts Resources Tools, equipment, workers Primary Transformation Function Fabrication and assembly of cars Desired Output High quality cars 1-13

14. Hospital Primary Inputs Patients Resources MDs, nurses, drugs, equipment Primary Transformation Function Health care (diagnosis and treatment) Primary Output Healthy individuals 1-14

15. C HARACTERISTICS OF P RODUCTS AND S ERVICES 15

16. F ACILITATING G OOD C ONCEPT Often confusion in trying to classify organization as manufacturer or service Facilitating good concept avoids this ambiguity All organizations defined as service The tangible part of the service is defined as facilitating good Pure Services 16

17. T HE R ANGE F ROM S ERVICES TO P RODUCTS 17

18. I NTRODUCTION TO S UPPLY C HAIN M ANAGEMENT 18

19. W HAT I S A S UPPLY C HAIN ? Flow of products and services from: Raw materials manufacturers Intermediate products manufacturers End product manufacturers Wholesalers and distributors and Retailers Connected by transportation and storage activities Integrated through information, planning, and integration activities Cost and service levels

20. W HAT I S S UPPLY C HAIN M ANAGEMENT ? Supply chain management is a set of approaches utilized to efficiently integrate suppliers, manufacturers, warehouses, and stores, so that merchandise is produced and distributed at the right quantities, to the right locations, and at the right time, in order to minimize system wide costs while satisfying service level requirements.

21. T WO O THER F ORMAL D EFINITIONS The design and management of seamless, value- added process across organizational boundaries to meet the real needs of the end customer Institute for Supply Management Managing supply and demand, sourcing raw materials and parts, manufacturing and assembly, warehousing and inventory tracking, order entry and order management, distribution across all channels, and delivery to the customer The Supply Chain Council

22. PC Industry Supply Chain Tracing back the screen you stare at for the bulk of your time.

23. Cisco’s Value Network

24. Source Supplier Distributo r Retailer End-User Converte r Consumers Information Flow Funds/Demand Flow Value-Added Services Material Flow Reuse/Maintenance/After Sales Service Flow SCM Definition

25. T HE SCM N ETWORK FIGURE 1 The logistics network

26. K EY O BSERVATIONS Every facility that impacts costs need to be considered Suppliers’ suppliers Customers’ customers Efficiency and cost-effectiveness throughout the system is required System level approach Multiple levels of activities Strategic – Tactical – Operational

27. O THER R ELATED O BSERVATIONS Supply chain strategy linked to the Development Chain Challenging to minimize system costs and maximize system service levels Inherent presence of uncertainty and risk

28. Set of activities and processes associated with new product introduction. Includes: product design phase associated capabilities and knowledge sourcing decisions production plans T HE D EVELOPMENT C HAIN

29. Figure 2 The enterprise development and supply chain

30. G LOBAL O PTIMIZATION Geographically dispersed complex network Conflicting objectives of different facilities Dynamic system Variations over time Matching demand-supply difficult Different levels of inventory and backorders Recent developments have increased risks Lean production/Off-shoring/Outsourcing

31. G LOBAL A PPAREL V ALUE C HAIN T RACING BACK THE DRESS YOU ARE WEARING

33. QC & Shipping [Hong Kong] QC & Shipping [Hong Kong] Product Design [Hong Kong] Product Design [Hong Kong] Zippers+… [Japan+…] Zippers+… [Japan+…] Stitching [Indonesia] Stitching [Indonesia] Weaving [Taiwan] Weaving [Taiwan] Yarn Spinning [Korea] Yarn Spinning [Korea] An Illustration: How Li & Fung Limited Might Make a Dress Globally Dispersed Manufacturing

34. M ATCHING S UPPLY AND D EMAND A M AJOR C HALLENGE REASONSEXAMPLES Raw material shortages Internal and supplier parts shortages Productivity inefficiencies Boeing Aircraft’s inventory write- down of $2.6 billion Sales and earnings shortfall Larger than anticipated inventories Sales at U.S. Surgical Corporation declined 25 percent, resulting in a loss of $22 million Stiff competition General slowdown in the PC market Intel reported a 38 percent decline in quarterly profit Higher than expected orders for new products over existing products EMC Corp. missed its revenue guidance of $2.66 billion for the second quarter of 2006 by around $100 million

35. Forecasting is not a solution Demand is not the only source of uncertainty Recent trends make things more uncertain Lean manufacturing Outsourcing Off-shoring U NCERTAINTY AND R ISK F ACTORS

36. August 2005 – Hurricane Katrina P&G coffee supplies from sites around New Orleans Six month impact 2002 West Coast port strike Losses of $1B/day Store stock-outs, factory shutdowns 1999 Taiwan earthquake Supply interruptions of HP, Dell 2001 India (Gujarat state) earthquake Supply interruptions for apparel manufacturers U NCERTAINTY AND R ISK F ACTORS

37. E VOLUTION OF S UPPLY C HAIN M ANAGEMENT 1950s 1960s 1970s 1980s 1990s 2000s Beyond Traditional Mass Manufacturing Inventory Management/Cost Optimization JIT, TQM, BPR, Alliances SCM Formation/ Extensions Further Refinement of SCM Capabilities

38. P ROGRESSION OF L OGISTICS C OSTS FIGURE 1-4: Logistics costs’ share of the U.S. economy

39. L OGISTICS C OSTS T RENDS After rising over 50 percent in the five years leading up to the recession, total logistics costs have fallen the past two years. Logistics costs in 2009 were equal to about $1.1 trillion – a drop of $244 billion (or 18.2) over 2008

40. C OMPOSITION OF L OGISTICS C OSTS Transportation costs were down more than 20 percent last year Transportation costs now account for 4.9 percent of GDP, well below the 6 percent share in 2008. Carrying costs accounted for 2.5 percent of GDP in 2009, down from 2.9 percent in 2008 and well off the 8.3 percent of GDP in 1981

41. C OMPLEXITY : T HE M AGNITUDE The grocery industry could save $30 billion (10% of operating cost) by using effective logistics strategies A typical box of cereal spends 104 days getting from factory to supermarket. A typical new car spends 15 days traveling from the factory to the dealership.

42. C OMPLEXITY : T HE M AGNITUDE Compaq computer ’ s loss of $500 million to $1 billion in sales in one year Laptops and desktops were not available when and where customers were ready to buy them Boeing ’ s forced announcement of write-downs of $2.6b Raw material shortages, internal and supplier parts shortages …. Cisco ’ s multi-billion ($2.2b) dollar write-off of inventories in 2001-2002 Customers balked on orders due to market meltdown

43. T RANSACTIONAL C OMPLEXITY National Semiconductors: Production: – Produces chips in six different locations: four in the US, one in Britain and one in Israel – Chips are shipped to seven assembly locations in Southeast Asia. Distribution – The final product is shipped to hundreds of facilities all over the world – 20,000 different routes – 12 different airlines are involved – 95% of the products are delivered within 45 days – 5% are delivered within 90 days.

44. M AGNITUDE OF S UPPLY C HAIN C OSTS C OST E LEMENTS OF A T YPICAL T RADE B OOK

45. M AGNITUDE OF S UPPLY C HAIN C OSTS E XAMPLE : T HE A PPAREL I NDUSTRY Manufacturer Distributor RetailerCustomer Cost per Percent Shirt Saving $52.72 0% $41.34 28% $20.45 62% Manufacturer Distributor RetailerCustomer ManufacturerDistributor RetailerCustomer

46. S UPPLY C HAIN : T HE P OTENTIAL P&G ’ s estimated savings to retail customers of $65 million through logistics gains Dell Computer ’ s outperforming of the competition in terms of shareholder value growth over more than two decades by over 3,000% using: Direct business model Build-to-order strategy Wal-Mart transformation into the world ’ s largest retailer by changing its logistics system: highest sales per square foot, inventory turnover and operating profit of any discount retailer

47. KAPLAN AND NORTON’S (2006) OPERATION S STRATEGY AND THE BALANCED SCORECARD

48. K APLAN AND N ORTON ’ S (2006) STRATEGY MAP TEMPLATES