1. Chapter 1 Operations Management and Supply Chain Management

2. 2 Definition of Operations Production systemProduction system –Production system converts inputs into goods & services

3. 3 Definition of Operations Management Production systemProduction system –Production system converts inputs into goods & services © 1984-1994 T/Maker Co.

4. 4 Definition of Operations Management Production systemProduction system –Production system converts inputs into goods & services © 1995 Corel Corp.

5. 5 Definition of Operations Management Production systemProduction system –Production system converts inputs into goods & services © 1984-1994 T/Maker Co.

6. 6 OPERATIONS MANAGEMENT Operations Management is the planning, organizing, staffing, directing, and controlling of the activities relating to the creation of goods and services through the transformation of input into output.

7. 7 Supply Chain Consists of series of companies that make products or service available to consumers, including all of the functions enabling the production, delivery, and recycling of material, components, end product, and services.

8. SCM – Supply Chain Management Although the idea of Supply Chain Management (SCM) has been introduced 20 years ago, there is still a huge debate on what constitutes SCM. The understanding of the discipline as seen by the scientific community can be summarized as follows:

9. SCM – Supply Chain Management Supply Chain Management (SCM) is a strategic integrated customer and cooperation oriented management philosophy that ensures an increased sustainable performance and competitiveness for all partners within organizational arrangements called supply chain.

10. SCM – Supply Chain Management SCM refers to the establishment of long- term supplier and customer relationships between organizations within supply chain networks.

11. 11 Definition of Supply Chain Supply-Chain Council 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 customers. 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 customers.

12. 12 Definition of Supply Chain Council of Logistic Management The systematic, strategic coordination of the traditional business functions and the tactics across these business functions within a particular company and across businesses within the supply chain for the purposes of improving the long-term performance of the individual companies and the supply chain as a whole. The systematic, strategic coordination of the traditional business functions and the tactics across these business functions within a particular company and across businesses within the supply chain for the purposes of improving the long-term performance of the individual companies and the supply chain as a whole.

13. 13 La Londe and Masters (1994) Supply chain strategy includes: “... two or more firms in a supply chain entering into a long-term agreement;... the development of trust and commitment to the relationship;... The integration of logistics activities involving the sharing of demand and sales data;... the potential for a shift in the locus of control of the logistics process.”

14. The Strategic Importance of the Supply Chain Supply-chain management is the integration of the activities that materials and services, transform them into intermediate goods and the final product, and deliver them to customers Supply-chain management is the integration of the activities that procure materials and services, transform them into intermediate goods and the final product, and deliver them to customers Competition is no longer between companies; it is between supply chains

15. A Supply Chain Figure 11.1

16. Supply-Chain Management 1.Transportation vendors 2.Credit and cash transfers 3.Suppliers 4.Distributors and banks 5.Accounts payable and receivable 6.Warehousing and inventory 7.Order fulfillment 8.Sharing customer, forecasting, and production information Important activities include determining

17. Global Supply-Chain Issues  React to sudden changes in parts availability, distribution, or shipping channels, import duties, and currency rates  Use the latest computer and transmission technologies to schedule and manage the shipment of parts in and finished products out  Staff with local specialists who handle duties, freight, customs and political issues Supply chains in a global environment must be able to

18. Supply-Chain Economics Supply Chain Costs as a Percent of Sales Table 11.2 Industry% Purchased All industry52 Automobile67 Food60 Lumber61 Paper55 Petroleum79 Transportation62

19. Managing the Supply Chain  Mutual agreement on goals  Trust  Compatible organizational cultures There are significant management issues in controlling a supply chain involving many independent organizations

20. Issues in an Integrated Supply Chain  Local optimization - focusing on local profit or cost minimization based on limited knowledge  Incentives (sales incentives, quantity discounts, quotas, and promotions) - push merchandise prior to sale  Large lots - low unit cost but do not reflect sales  Bullwhip effect - stable demand becomes lumpy orders through the supply chain

21. Opportunities in an Integrated Supply Chain  Accurate “pull” data  Lot size reduction  Vendor managed inventory  Continuous replenishment program  Postponement

22. Opportunities in an Integrated Supply Chain  Channel assembly  Drop shipping and special packaging  Blanket orders  Standardization  Electronic ordering and funds transfer

26. Upstream Activities or firms that are positioned earlier in the supply chain relative to some other activity or firm. For example, wheat harvesting comes before wheat grounding. Corn harvesting is upstream activity.

27. Downstream Activities or firms that are positioned later in the supply chain relative to some other activity or firm. For example, bread making is downstream of wheat grounding or wheat harvesting.

28. SCM – Supply Chain Management SCM follows the goal of efficiency of the involved organizations. This can be realized by synchronizing business processes (e.g. procurement and logistics) as well as organizational arrangements by considering both costs as well as service structures. SCM is the realization of an inter-organizational flow orientation that helps to solve specific connection problems.

29. SCM – Supply Chain Management SCM decisions are operative and strategic. They include typically operational questions referring to procurement, transport, inventory, handling as well as strategic management decisions that aim to realize cooperative behavior of a supply chain’s part elements.

30. SCM – Supply Chain Management Management decisions are therefore of particular importance (= coordination function of SCM). SCM is a part discipline of business administration, which means that SCM helps to increase the competitiveness of the firm by lowering costs, increasing profits and customer satisfaction and certainly SCM is a competitive ‘weapon’ against competition.

31. SCM – Supply Chain Management In order to have SCM implemented, organizations need certain prerequisites that refer mainly to constructs of relationship orientation, such as independent organizations, willingness to cooperate, trust, etc. The outcome of SCM helps to increase the efficiency of a channel, as costs are minimized but services are increased. This efficiency is realized by organizing a chain according to the notions of Cooper et al. (1997) or Frazier (1999): - Outlining a supra-organizational structure that ensures a successful configuration of responsibilities of several independent players. -

32. SCM – Supply Chain Management - Identifying and setting up certain business processes, where the outcomes meet the customers’ requirements (= customer oriented inter-organizational transformation capacities) - Presenting goal oriented directives (= management components) that give directions on how the processes should be performed. - Is SCM a complex management concept or a problematic one?

33. SCM – Supply Chain Management The ongoing discussion in the field can be either summarized as that SCM is a very complex management concept (e.g. Persson 1997), or we just accept that SCM is like “a bottle of Coke, it is there and we have to accept it and make the best out of it” (Bretzke 2005). This indicates, there is no consensus on what SCM really is (see e.g. Mouritsen et al. 2003). And in fact we observe a specific paradigm discussion with an open result. A recent study by Gibson et al. (2005) showed that the majority of SCM professionals perceive SCM as a combination of strategies and activities that have very much to do with supplier and customer collaboration – and that is it!

34. 34 Other Supply Chain Members Many companies are involved indirectly in most supply chain and are critical to the success of the supply chain.Many companies are involved indirectly in most supply chain and are critical to the success of the supply chain. They are: trucking, information processing providers, warehousing firm, freight forwarders, agents, and consultants. They are: trucking, information processing providers, warehousing firm, freight forwarders, agents, and consultants.

35. 35 Supply Chain Management A process of moving goods and/or services from the source to the final consumer and back.A process of moving goods and/or services from the source to the final consumer and back. For example: For example: Forward Supply Chain Forward Supply Chain Raw material -> process -> customer Raw material -> process -> customer Reverse Supply Chain Reverse Supply Chain Customer - > distributor - > salvage or manufacturing Customer - > distributor - > salvage or manufacturing

36. SCM ACTIVITIES 1. Integrated Behavior 2. Mutually Sharing Information 3. Mutually Sharing Risks and Rewards 4. Cooperation 5. The Same Goal and the Same Focus on Serving Customers 6. Integration of Processes 7. Partners to Build and Maintain Long-Term Relationships 36

37. SUPPLY CHAIN MANAGEMENT ANTECEDENTS AND CONSEQUENCES ( SCO – supply chain optimizati on ) 37

38. SCM philosophy drives supply chain members to have a customer orientation. Based upon the literature review, it is proposed that SCM as a management philosophy has the following characteristics: 1. A systems approach to viewing the supply chain as a whole, and to managing the total flow of goods inventory from the supplier to the ultimate customer; 2. A strategic orientation toward cooperative efforts to synchronize and converge intrafirm and interfirm operational and strategic capabilities into a unified whole; and 3. A customer focus to create unique and individualized sources of customer value, leading to customer satisfaction. 38

39. 39 Consequences of Supply Chain If any member of the chain ignores the interest of the chain member, sub- optimization occurs thus leading to higher end-product prices, lower supply chain service levels, and lower demand.If any member of the chain ignores the interest of the chain member, sub- optimization occurs thus leading to higher end-product prices, lower supply chain service levels, and lower demand.

40. Supply Chain Approach To balance customers’ demands with the need for profitable growth, many company have agreed to improve supply chain management. They have adopted: Work together Enhance revenue Control Cost Utilize Asset Customer satisfaction

41. Seven Principles of Supply Chain Management Segment customer based on the service needs Customize the logistic network to the service requirements Listen to market signals and align demand accordingly Differentiate product to the customer and speed conversion across the supply chain

42. Seven Principles of Supply Chain Management Manage sources of supply strategically to reduce the total cost of owning material and service Develop a supply chain-wide technology strategy that support multiple level of decision making and gives a clear view of the flow or products, services, and information Adopt channel-spanning performance measures to gauge collective success in reaching the end- user effectively and efficiently

43. 43 Importance of Supply Chain Firms operate independently will be inefficient. However, supply chain increases value, long range profitability and satisfaction of customers.Firms operate independently will be inefficient. However, supply chain increases value, long range profitability and satisfaction of customers. Supply chain lowers Supply chain lowers - purchasing price - purchasing price - inventory cost - inventory cost - better quality - better quality - higher customer service - higher customer service The cost of inventory was $2.2 trillion and inventory carrying cost of $434 billion in 2000.

44. 44 Elements of Supply Chain Purchasing – supplier alliance, supplier management, and strategic sourcingPurchasing – supplier alliance, supplier management, and strategic sourcing Operations – Demand management, MRP, ERP, JIT, TQMOperations – Demand management, MRP, ERP, JIT, TQM Distribution – Transportation management, customer relationship management, network design, and service response logisticsDistribution – Transportation management, customer relationship management, network design, and service response logistics Integration – Coordination, integration activities, global integration problems, and performance managementIntegration – Coordination, integration activities, global integration problems, and performance management

45. 45 Supply Chain Management Purchasing is the act of obtaining:Purchasing is the act of obtaining: - Merchandise - Merchandise - capital equipment - capital equipment - raw material - raw material - services - services - Maintenance, repair, and Operating (MRO) - Maintenance, repair, and Operating (MRO)

46. 46 Merchants VS. Industrial Buyers MerchantsMerchants - Wholesalers - Wholesalers - Retailer - Retailer They buy and sell. They buy in bulk and sell to retailer or customer in small quantities They buy and sell. They buy in bulk and sell to retailer or customer in small quantities Industrial BuyerIndustrial Buyer - Buy material for conversion - Buy material for conversion It includes raw material, capital equipment, maintenance, repair, and operating supplies It includes raw material, capital equipment, maintenance, repair, and operating supplies

47. 47 Roles of Purchasing Purchasing was considered a routine activity until global competition intensified.Purchasing was considered a routine activity until global competition intensified. Companies realized the impact of large quantities of purchasing material and work-in-process on: Companies realized the impact of large quantities of purchasing material and work-in-process on: - cost - cost - quality - quality - product development - product development - lead time - lead time As a result, supply chain become a key strategy

48. 48 Role of Purchasing The goal of purchasing to ensure uninterrupted flows of raw material:The goal of purchasing to ensure uninterrupted flows of raw material: - at the lowest total cost, - at the lowest total cost, - to improve quality - to improve quality - higher customer satisfaction - higher customer satisfaction Purchasing can contribute by:Purchasing can contribute by: - quality raw material - quality raw material - reliable supplier - reliable supplier - design of new product - design of new product

49. Supply Chain Metric A verifiable measure stated in either quantitative or qualitative terms defined with respect to a reference point.

50. Metrics Give us Control by superior Reporting of data to superior and external groups Communication Learning Improvement

51. Metrics Context Metrics communicates expectation, identify problems, direct a course of action, and motivate people. Strategy Focus Strategic— Metrics - Operational Customer Standard Strategy -> Metrics -> Operational

52. Metrics context Strategy determines how it will treat its customer and what service it will supply. Metrics link strategy to operations. Focus describes the particular activity that is to be measured. Standards are the yardstick that is the basis of comparison on which performance is judged.

53. Relationship between Supply Chain Principles and Financial Outcomes Revenue Asset Cost Growth Utilization Reduction Segment customer based on need High Medium Low Customize logistics network Medium High Low Listen to market signals and plan - High Medium Difference product close to customer - Medium High Source Strategically - Medium High Develop supply chain technology Medium High Medium Adopt Performance Measure High High High

54. 54

55. 55 Technological progress is moving at a tremendous rateTechnological progress is moving at a tremendous rate There are many new products and services in addition to old onesThere are many new products and services in addition to old ones Rapid change is the normRapid change is the norm A New Business Environment

56. 56 Businesses try to break down the “silos” that used to define business functions.Businesses try to break down the “silos” that used to define business functions.

57. 57 The Resource/Profit Model serves as an organizational model to put operations in a business contextThe Resource/Profit Model serves as an organizational model to put operations in a business context Exhibit 1.3 The Resource/Profit Model Overview of the Resource/Profit Model

58. 58 Foundation for Success Profitability – main objective of any business.Profitability – main objective of any business. net income/net sales or total assets net income/net sales or total assets Strategy – Business must create value to attract customer.Strategy – Business must create value to attract customer. Methods for creating a value for the customer Methods for creating a value for the customer Process – Ability to convert input to output to create valueProcess – Ability to convert input to output to create value A set of activities to contribute to a product or service A set of activities to contribute to a product or service

59. 59 Components of Value (Competitiveness) CostCost QualityQuality TimelinessTimeliness ServiceService

60. 60 Managing Resources to Create Value Supply Chain ManagementSupply Chain Management Demand ForecastingDemand Forecasting Lean System (JIT)Lean System (JIT) Constraint ManagementConstraint Management Inventory (raw material, WIP, Finished goods)Inventory (raw material, WIP, Finished goods) Logistics (flow of goods)Logistics (flow of goods) Capacity ( resources needed to meet demand )Capacity ( resources needed to meet demand ) Facilities (location, layout)Facilities (location, layout) WorkforceWorkforce

61. 61 Environmental forces affect the businessEnvironmental forces affect the business – Globalization – The Internet and Other Technologies (Global positioning system (GPS), Radio frequency identification (RFID)) (Global positioning system (GPS), Radio frequency identification (RFID)) – The Natural Environment (Environment concerns have restricted) (Environment concerns have restricted) – Regional Pressures (resource available at certain location) Environmental Forces

62. 62 Characteristics of Goods Tangible productTangible product Durable productDurable product Response Time Required (Lead Time)Response Time Required (Lead Time) Large Size FacilitiesLarge Size Facilities Located AnywhereLocated Anywhere © 1995 Corel Corp.

63. 63 Characteristics of Goods Low customer interactionLow customer interaction Quality can be measuredQuality can be measured Uniformity of InputUniformity of Input Standardization PossibleStandardization Possible Capital IntensiveCapital Intensive High ProductivityHigh Productivity

64. 64 Characteristics of Services Intangible productIntangible product Perishable ProductPerishable Product No Lead timeNo Lead time Some Produced & consumed at same timeSome Produced & consumed at same time Localized FacilitiesLocalized Facilities Direct customer contactDirect customer contact © 1995 Corel Corp.

65. 65 Characteristics of Services Hard to measure qualityHard to measure quality Less Uniformity of inputLess Uniformity of input Standardization not PossibleStandardization not Possible Labor IntensiveLabor Intensive Productivity lowProductivity low

66. 66 Goods Contain Services & Services Contain Goods 7550250255075100% ||||||||| Automobile 100% Computer Fast-Food Restaurant Dentist Counseling GoodService

67. 67 Goods Contain Services & Services Contain Goods 0 2550 75 100 2550 75 100 Automobile Computer Installed Carpeting Fast-food Meal Restaurant Meal Auto Repair Hospital Care Advertising Agency Investment Management Consulting Service Counseling Percent of Product that is a Good Percent of Product that is a Service