1. Principle of Inventory and Material Management
LSM736

2. Lecture 1 Course Introduction

3. What Will We Do Today? How is this course organized?
What is Inventory and Material Management Management?
A Historical Perspective

4. What is Operations Management?
Business strategy
selecting market(s) to compete
level of investment
allocation of resources
functional area strategy
marketing
finance
production and operations

5. What is Operations Management?
Operations Management = Strategy Execution
Time
Quality
Flexibility
Cost
OM = Designing, operating, and improving
the systems that deliver
the firm’s primary products and services

6. Strategy Execution 1. What is our strategy?
2. How do we design our operations to support it?
Product / Service Development
Process Design and Management
Supply Chain Management

7. What types of problems does OM address ?
Example #1: Manufacturing - Supply Chain Management T3 T2 T1
OEM W C R
.com

8. What types of problems does OM address ?
Example #2: Bank Services
Loans
Deposits
Credit
Cards

9. What types of problems does OM address ?
Example #3: R&D – New Product Development
Phase 0
Phase 1
Phase 2
Phase 3
Phase 4
Phase 5
Planning
Concept Development
System-level Design
Detail Design
Testing and Refinement
Production Ramp-Up
Adapted from U&E 2002

10. Types of Decisions in OM …
Strategic decisions (long-term impact)
Tactical decisions (mid-term impact)
Operational decisions (short-term impact)

11. Strategic Decisions …
Strategic questions that operations managers ask and respond to …
How much capacity do we need?
How should our staff be trained?
Which projects should we invest in?
Manufacturing
Services
Prod. Development

12. Tactical Decisions …
Tactical questions that operations managers ask and respond to …
Should we have finished goods inventory or should we make-to-order?
What types of queues should we employ in Hartsfield?
Do we need to exchange preliminary information with mfg?
Manufacturing
Services
Prod. Development

13. Operational Decisions …
Operational questions that operations managers ask and respond to …
Which product gets priority in front of machine A?
Should the service system be FCFS or something else?
What is the critical path of the project?
Manufacturing
Services
Prod. Development

14. Goal of Operations Management
What is the goal of OM with respect to production/service systems?
Efficiency is doing something at the lowest possible cost
Improving efficiency
Improving effectiveness
Increasing value
Effectiveness is doing appropriate things to create value for the organization
Value = “quality” / “price”
Usually, these things require a tradeoff.

15. Value Added of Operations Management
Adverse Financial Impact of Supply Chain Disruptions
Study of 800 publicly traded firms over a 10-year period
In the year leading up to disruption
• 107 percent drop in operating income • 114 percent drop in return on sales • 93 percent drop in return on assets • 7 percent lower sales growth • 11 percent growth in cost • 14 percent growth in inventories
33 – 40% lower stock returns relative to industry benchmark in period starting 1 year before and 2 years after the disruption
Share price volatility is 13.5% higher in the year after the disruption
Hendricks and Singhal, “The Effect of Supply Chain Disruptions on
Long-term Shareholder Value, Profitability, and Share Price Volatility

16. Value Added of Operations Management
Reasons:
31% internal (equipment breakdown, manufacturing problems, quality problems, inaccurate inventory records, poor forecasting, capacity or labor shortages)
14.5% supplier failures
12.8% customers
Part shortages:
Underperformance by 25%
Median decrease in operating income of 31%
Hendricks and Singhal, “The Effect of Supply Chain Disruptions on
Long-term Shareholder Value, Profitability, and Share Price Volatility

17. What are Operations Management Jobs Like?
You can get an interesting job!!
Supply Chain Manager
Quality Manager
Project Manager
Operations Consultant
Plant Manager
Procurement Manager
The OM Area at Tech is ranked in the top 10 in the US and employers take it seriously!

18. A Historical Perspective

19. The First Industrial Revolution (c. 1850)
Textile manufacturing innovations
“Flying shuttle” and “Spinning Jenny”
J. Watt: The steam engine
Substituting labor with machines
A. Smith: Free markets – division of labor
Free markets would enhance “quest” for profit
Specialization could increase productivity
small scale production

20. The American System of Manufacturing
Vertical Integration
Consolidating different operations under one roof
Interchangeable parts
Mass-produce parts to tight tolerance & assemble
1801 contract for 10,000 muskets for the government
Unskilled workers

21. The Second Industrial Revolution (c. 1910)
1832: 36 enterprises in 10 states with > 250 workers
Reliance on water power & local distribution system
Transportation innovations
Railroads are built in western world
Communication innovations
The telegraph is established
Big retailers come to power
Sears & Roebuck’s sales soar to $38M in 10 years
Mass Production: the first vehicles arrive…
Henry Ford starts producing Model T
large scale production

22. 1910-1920: The Scientific Method (Taylorism)
Principles of Scientific Management
Book published in 1911 by Fredrick Taylor
Time and Motion studies
How much time do workers need to do a task?
Incentive systems
What is the best payment scheme?
Study how systems can be efficient
Developed a set of principles that serve efficiency.
Planning versus doing.
Efficiency is the key!

23. 1920’s - 1930’s: Taylorism Spreads
Application of Taylor’s methods
The DuPont Powder company
More importance to the human element
Studies at the Western Electric Hawthorne plant to understand ergonomics: the human element in manufacturing
Investment in management education
Between 1914 and 1940 B-schools grew a lot

24. 1940’s - 1960’s: The Golden Era in the U.S.
Operations Research tools are “born”
G.B. Dantzig devises simplex algorithm
Effort to study complex systems
The importance of teamwork is introduced
Mathematical analysis becomes the norm
Scientific methods are applied throughout the organization
Mathematics solidify the scientific method
Simulation based models, computer usage, scheduling

25. 1970’s: Computers and MRP take over
Production
Schedule
Forecasted
Demand
Bill of
materials
Inventory
status
MRP
(Materials
Requirement
Planning)
MRP automated production…
But, someone has to tell the computers what to analyze!

26. 1980’s: The Japanese Challenge
American manufacturing led until the late 70’s, but then…
TQC: Total Quality Control
Higher quality
Less cost
JIT: Just-In-Time
The methods introduced by
Japanese manufacturing firms
outperformed the US …

27. 1990’s: The U.S. rises to the challenge
Entrepreneurship and the ability to change and re-invent themselves allowed American firms to move into new areas.
U.S. firms improve productivity and quality.
U.S. firms focus on emerging technologies, R&D.
Growth of the service industry.
Examples in OM….

28. Conclusion and Summary …
Operations Management is about executing the firm’s strategy.
Operations is a core function in every business – manufacturing or service oriented.
Key Components of OM: Products, Processes, SCM.
OM is important to everybody in the organization.
OM involves strategic, tactical, and operational decisions.
The efficiency–effectiveness–value tradeoff.

29. Flow of the Course Efficiency (managing internal processes well)
Quality management &
Statistical process control
Efficiency
(managing internal
processes well)
Process management
process analysis
(no variability)
waiting line mgt
(variability)
Lean operations
Product design
Aggregate
planning
Forecasting
& inventory
management
Material
requirements
Supply chain
Effectiveness
(meeting the
demand)
Setting the
direction
Corporate
strategy
Operations strategy

30. End of Lecture 1