Discussed so far • Overview of OSCM • Whats Ops, SCM,Logistics • Dependency within and Across organizations • What are some OSCM processes • Possible Careers in OSCM • Current issues in SCM Time Line Depicting When Major OSCM Concepts Became Popular The Major Concepts that Define the OSCM Field • Manufacturing strategy paradigm • Lean manufacturing, JIT, and TQC • Service quality and productivity • Total quality management and quality certification • Business process reengineering • Six sigma quality • Supply chain management • Electronic commerce • Sustainability and the triple bottom line • Business strategy that includes social, economic and environmental criteria • Business analytics Current Issues in Operations and Supply Chain Management 1. Coordinating the relationships between mutually 2. 3. 4. 5. supportive but separate organizations Optimizing global supplier, production, and distribution networks Managing customer touch points Raising senior management awareness of OSCM as a significant competitive weapon Sustainability and the triple bottom line Efficiency, Effectiveness, and Value • Efficiency - doing something at the lowest possible cost • Effectiveness - doing the right things to create the most value for the company • Value - quality divided by price • Quality - the attractiveness of the product, considering its features and durability Management Efficiency Ratios • π πππππ£ππππ ππ’ππππ£ππ = • πΌππ£πππ‘πππ¦ ππ’ππππ£ππ = • π΄π π ππ‘ ππ’ππππ£ππ = π΄πππ’ππ πΆπππππ‘ πππππ π΄π£πππππ π΄ππππ’ππ‘ π πππππ£ππππ πΆππ π‘ ππ πΊππππ ππππ π΄π£πππππ πΌππ£πππ‘πππ¦ ππππ’π π ππ£πππ’π ππ πππππ πππ‘ππ π΄π π ππ‘ Strategy McGraw-Hill/Irwin Copyright © 2014 by The McGraw-Hill Companies, Inc. All rights reserved. Sustainable Strategy • The firm’s strategy describes how it will create and sustain value for its current shareholders • Shareholders – individuals or companies that legally own one or more shares of stock in the company • Stakeholders – individuals or organizations who are directly or indirectly influenced by the actions of the firm • Adding a sustainability requirement means meeting value goals without compromising the ability of future generations to meet their own needs • Triple bottom line – evaluating the firm against social, economic, and environmental criteria Triple Bottom Line Triple Bottom Line Continued • Social responsibility: this pertains to fair and beneficial business practices toward labor, the community, and the region in which a firm conducts its business • Economic prosperity: the firm is obligated to compensate shareholders who provide capital • Environmental stewardship: this refers to the firm’s impact on the environment What is Operations and Supply Chain Strategy? • Operations and supply chain strategy: setting broad policies and plans for using the resources of a firm – must be integrated with corporate strategy • Corporate strategy provides overall direction and coordinates operational goals with those of the larger organization • Can be viewed as part of a planning process that coordinates operational goals with those of the larger organization • Operations effectiveness: performing activities in a manner that best implements strategic priorities at a minimum cost Competitive Dimensions Price • Make the product or deliver the service cheap Quality • Make a great product or delivery a great service Delivery Speed • Make the product or deliver the service quickly Delivery Reliability • Deliver it when promised Coping with Changes in Demand • Change its volume Flexibility and New-Product Introduction Speed • Change it Other Product-Specific Criteria: “Support It” Technical liaison and support • A supplier may be expected to provide technical assistance for product development Meeting a launch date • A firm may be required to coordinate with other firms on a complex project Supplier after-sale support • An important competitive dimension may be the ability of a firm to support its product after the sale Environmental impact • This dimension is related to environmental/green criteria Other dimensions • These typically include such factors as colors available, size, weight, location of the fabrication site, customization available, and product mix options Trade-Offs • Management must decide which parameters of performance are critical and concentrate resources on those characteristics • For example, a firm that is focused on low-cost production may not be capable of quickly introducing new products • Straddling: seeking to match a successful competitor while maintaining its existing position • It adds features, services, or technology to existing activities • Often a risky strategy Order Winners and Order Qualifiers • Order qualifiers: those dimensions that are necessary for a firm’s products to be considered for purchase by customers • Features customers will not forego • Order winners: criteria used by customers to differentiate the products and services of one firm from those of other firms • Features that customers use to determine which product to ultimately purchase Strategies are Implemented Using Operations and Supply Chain Activities • All operations activities relate to one another • To be efficient, the firm must minimize total cost without compromising customers’ needs • Consider IKEA • Targets young, low cost buyers • Uses a self-service model showing furniture in familiar settings • Designs its own low-cost, modular, ready-to-assemble furniture • Stores stock the products in boxes • Customers pick their own boxes from inventory • Offers in-store child care and extended hours Supply Chain Risk Examples • Japanese Tsunami (March 2011) • In 1996 General Motors experienced an 18-day labor strike at a brake supplier factory • This strike idled workers at 26 assembly plants and led to an estimated $900 million reduction in earnings • In 1997 a Boeing supplier’s failure to deliver two critical parts led to a loss of $2.6 billion • In 2000, a 10-minute fire at a Phillips plant that supplied integrated circuits led to a $400 million loss Assessing Risk Associated with OSCM Strategy • All strategies have an inherent level of risk • Uncertainty in the environment causes supply chain planners to evaluate the relative riskiness of their strategies • Supply chain risk: the likelihood of a disruption that would impact the ability of a company to continuously supply products or services 1. 2. Supply chain coordination risks are associated with the day-today management of the supply chain Disruption risks are caused by natural or manmade disasters Risk Mitigation Framework 1. Identify the sources of potential disruptions • Focus on highly unlikely events that would cause a significant disruption to normal operations 2. Assess the potential impact of the risk • Here the goal is to quantify the probability and the potential impact of the risk • Could be based on financial impact, environmental impact, ongoing business viability brand image/reputation, potential human lives, and so on 3. Develop plans to mitigate the risk • A detailed strategy for minimizing the impact of the risk could take many different forms, depending on the nature of the problem Risk Mitigation Strategies Risk Risk Mitigation Strategy Natural disaster Contingency planning (alternate sites, etc.) insurance Country risks Hedge currency, produce/source locally Supplier failure Use multiple suppliers Network provider failure Support redundant digital networks Regulatory risk Up-front and continuing research; good legal advice, compliance Commodity price risks Multisource, commodity hedging Risk Mitigation Strategies Continued Risk Risk Mitigation Strategy Logistics failure Safety stock, detailed tracking and alternate suppliers Inventory risks Pool inventory, safety stock Major quality failure Carefully select and monitor suppliers Loss of customers Service/product innovation Theft and vandalism Insurance, security precautions, knowledge of likely risks, patent protection, etc. Risk Assessment Matrix Productivity Measurement • Productivity is a measure of how well resources are used • πππππ’ππ‘ππ£ππ‘π¦ = ππ’π‘ππ’π‘π πΌπππ’π‘π • Productivity is a relative measure • Must be compared to something else to be meaningful • Operations can be compared to each other • Firms can be compared to other firms or themselves over time • Partial productivity measures compare output to a single input • Multifactor productivity measures compare output to a group of inputs • Total productivity measures compare output to all inputs Productivity Calculation Partial Measures of Productivity Business Productivity Measure Restaurant Customers (meals) per labor hour Retail store Sales per square foot Chicken farm Pounds of meat per pound of feed Utility plant Kilowatt hours per ton of coal Paper mill Tons of paper per cord of wood Summary • A strategy that is sustainable needs to create value • Shareholders are equity owners in the company • Stakeholders are individuals and organizations that are influenced by the firm • Operations and supply chain strategy involves setting the broad policies for using a firm’s resources • Coordinates operational goals with those of the larger organization • Strategies are implemented through a set of activities designed to deliver products and services in a manner consistent with the firm's overall business strategy • Operations and supply chain strategies need to be evaluated relative to their riskiness • Supply chain disruptions are unplanned and unanticipated events that disrupt the normal flow of goods and materials • Supply chain coordination risks and disruption risks • Productivity measures are used to ensure that the firm makes the best use of its resources Practice Exam 1. A strategy that is designed to meet current needs without compromising the ability of future generations to meet their needs 2. The three criteria included in a triple bottom line 3. The seven operations and supply chain competitive dimensions 4. This occurs when a company seeks to match what a competitor is doing while maintaining its existing competitive position Practice Exam Continued 5. A criterion that differentiates the products or services of one firm from those of another 6. A screening criterion that permits a firm’s products to be considered as possible candidates for purchase 7. A measure calculated by taking the ratio of output to input Akshaya Patra Foundation Case • For-profit Vs Not-for-profit organization • Vision & Mission • Startup issues • Scaling the Operation • Supply chain, Operation, Logistics • Supply Chain Strategy • Segmentation • Centralized Vs Decentralized distribution strategy • Automation • Supply chain risks • Diversification in product portfolios • Performance KPIs Economies of Scale Made of Steel • The Economics of Very Big Ships • Economy of Container Ships • Allows a T-shirt made in China to be sent to the Netherlands for just 2.5 cents • The Eleonora Maersk and the other seven ships in her class are among the largest ever built • Almost 400 m long, or the length of four soccer fields, and another half-field across • The ships can carry 7,500 or so 40-foot containers, each of which can hold 70,000 T-shirts • On this voyage, the Eleonora was carrying supplies for Europe’s New Year celebrations: 1,850 tons of fireworks, including 30 tons of gunpowder STRATEGIC CAPACITY MANAGEMENT McGraw-Hill/Irwin Capacity Management in Operations and Supply Chain Management • Capacity: the ability to hold, receive, store, or • • • • accommodate In business, viewed as the amount of output that a system is capable of achieving over a specific period of time Capacity management needs to consider both inputs and outputs Many industries measure and report capacity in terms of output Industries whose product mix is very uncertain, like hospitals, often express capacity in terms of inputs Capacity Planning Time Durations Long range • Greater than one year Intermediate range • Monthly or quarterly plans covering the next 6 to 18 months Short range • Less than one month Short-term and long-term decisions 9/3/2021 Strategic Capacity Planning • Determining the overall level of capacity-intensive resources that best supports the company’s long-range competitive strategy • Facilities • Equipment • Labor force size • Capacity level selected has a critical impact on response rate, it cost structure, is inventory policies, and management and staff support requirements • Too low and the firm will lose customers and encourage competitors • Too high and firm may have to cut costs or underutilize its capacity Capacity Planning Concepts • Capacity utilization rate: a measure of how close the firm is to its best possible operating level • πΆππππππ‘π¦ ππ‘ππππ§ππ‘πππ πππ‘π = πΆππππππ‘π¦ π’π ππ π΅ππ π‘ ππππππ‘πππ πππ£ππ • Economies of scale: the idea that as a planet gets larger and volume increases, the average cost per unit tends to drop • Diseconomies of scale: at some point, the plant becomes too large and average cost per unit begins to increase Capacity Planning Concepts • Capacity focus – the idea that a production facility works best when it is concentrated on a limited set of production objectives • Focused factory or plant within a plant (PWP) concept • Capacity flexibility – the ability to rapidly increase or decrease product levels or the ability to shift rapidly from one product or service to another • Comes from the plant, processes, and workers or from strategies that use the capacity of other organizations Capacity Flexibility Flexible Plants • Ability to quickly adapt to change • Zero-changeover time Flexible Processes • Flexible manufacturing systems • Simple, easily set up equipment Flexible Workers • Ability to switch from one kind of task to another quickly • Multiple skills (cross training) Considerations in Changing Capacity Maintaining System Balance • Similar capacities desired at each operation • Manage bottleneck operations Frequency of Capacity Additions • Cost of upgrading too frequently • Cost of upgrading too infrequently External Sources of Capacity • Outsourcing • Sharing capacity Decreasing Capacity • Temporary reductions • Permanent reductions Frequent versus Infrequent Capacity Expansions Determining Capacity Requirements Use forecasting to predict sales for individual products Calculate labor and equipment requirements to meet forecasts Project labor and equipment availability over the planning horizon Determining Capacity Requirements • Stewart Company produces two flavors of salad dressing • Paul’s and Newman’s • Each is available in bottles and single-serving bags • Have three machines that can package 150,000 bottles each year • Each machine requires two operators • Have five machines that can package 250,000 plastic bags per year • Each machine requires three operators • What are the capacity and labor requirements for the next five years? Step 1: Use Forecast to Predict Sales for Individual Products Step 2: Calculate Equipment and Labor Requirements Bottling Operation • Capacity: 450,000 Bagging Operation • Capacity: 1,250,000 • 150,000 x 3 • 250,000 x 5 • Operators: 6 • Operators: 15 • 2x3 • 3x5 • Year 1 • Year 1 • πΆππππππ‘π¦ π’π‘ππππ§ππ‘πππ = 135 450 = 0.3 • πΆππππππ‘π¦ π’π‘ππππ§ππ‘πππ = 300 1,250 = 0.24 • πππβπππ ππππ’πππππππ‘ = 0.3 × 3 = 0.9 • πππβπππ ππππ’πππππππ‘ = 0.24 × 5 = 1.2 • πΏππππ ππππ’πππππππ‘ = 0.9 × 2 = 1.8 • πΏππππ ππππ’πππππππ‘ = 1.2 × 3 = 3.6 Step 3: Project Equipment and Labor Availabilities over the Planning Horizon Using Decision Trees to Evaluate Capacity Alternatives • A decision tree is a schematic model of the sequence of steps in a problem – including the conditions and consequences of each step • Decision trees help analysts understand the problem and assist in identifying the best solution • Decision tree components include the following: • Decision nodes – represented with squares • Chance nodes – represented with circles • Paths – links between nodes • Work from the end of the tree backwards to the start of the tree • Calculate expected values at each step Example : Decision Trees • The owner of Hackers Computer Store is evaluating three options – expand at current site, expand to a new site, do nothing • The decision process includes the following assumptions and conditions • Strong growth has a 55% probability • New site cost is $210,000 • Payoffs: strong growth = $195,000; weak growth = $115,000 • Expanding current site cost is $87,000 (in either year 1 or 2) • Payoffs: strong growth = $190,000; weak growth = $100,000 • Do nothing • Payoffs: strong growth = $170,000; weak growth = $105,000 Calculate the value of each alternative Diagram the Problem Chronologically Calculate Value of Each Branch Decision Tree Analysis with Net Present Value Calculations Planning Service Capacity Manufacturing Capacity Service Capacity Goods can be stored for later use Capacity must be available when service is needed – cannot be stored Goods can be shipped to other locations Service must be available at customer demand point Volatility of demand is relatively low Much higher volatility is typical Capacity Utilization and Service Quality • The relationship between service capacity utilization and service quality is critical • Arrival rate: the average number of customers that come to a facility during a specific period of time • Service rate: the average number of customers that can be processed over the same period of time • Best operating point is near 70 percent • Optimal levels of utilization are context specific • Low rates are appropriate when the degree of uncertainty (in demand) is high and/or the stakes are high (e.g., emergency rooms, fire departments) • Higher rates are possible for predictable services or those without extensive customer contact (e.g., commuter trains, postal sorting) Relationship Between the Rate of Service Utilization and Service Quality Exhibit 5.6 Case Presentation Summary • An operations and supply chain management view of capacity emphasizes the time dimension of capacity • Long range, intermediate range, and short range • Best operating level is the rate that is sustainable by the system • With economies of scale, as volume increases, average cost per unit drops • Focused manufacturing plants are designed to produce multiple products using a concept called plant within a plant • From a strategic, long-term view, capacity additions or reductions come in chunks Summary Continued • A useful technique for analyzing capacity problems is the decision tree • With this format, the sequences of decisions are organized like branches in a tree • The potential consequences of the decisions are enumerated based on their probability of occurrence and corresponding expected value • Often, services require that capacity be available immediately and that it be near where the customer resides • Firms that offer services often need to deal with dramatic changes in customer demand over time CHAPTER 7: MANUFACTURING PROCESSES McGraw-Hill/Irwin What Are Production Processes? • Production processes are used to make any manufactured item • High level view can be divided into three steps • Step 1 – Source the parts needed • Step 2 – Make the product • Step 3 – Deliver the product 63 Production Process Terms Lead time • The time needed to respond to a customer order Customer order decoupling point • Where inventory is positioned to allow entities in the supply chain to operate independently Lean manufacturing • A means of achieving high levels of customer service with minimal inventory investment 64 Types of Firms Make-to-Stock • Serve customers from finished goods inventory Assemble-to-Order • Combine a number of preassembled modules to meet a customer’s specifications Make-to-Order • Make the customer’s product from raw materials, parts, and components Engineer-to-Order • Work with the customer to design and then make the product 65 Make-to-Stock • Examples of products include the following: • Televisions • Clothing • Packaged food products • Essential issue in satisfying customers is to balance the level of inventory against the level of customer service • Easy with unlimited inventory, but inventory costs money • Trade-off between the costs of inventory and level of customer service must be made • Use lean manufacturing to achieve higher service levels for a given inventory investment 66 Assemble-to-Order • A primary task is to define a customer’s order in terms of alternative components because these are carried in inventory • An example is the way Dell Computer makes their desktop computers • One capability required is a design that enables as much flexibility as possible in combining components • There are significant advantages from moving the customer order decoupling point from finished goods to components 67 Make-to-Order/Engineer-to-Order • Boeing’s process for making commercial aircraft is an example • Customer order decoupling point could be in either raw materials at the manufacturing site or the supplier inventory • Depending on how similar the products are, it might not even be possible to preorder parts 68 How Production Processes Are Organized Project • The product remains in a fixed location • Manufacturing equipment is moved to the product Workcenter (job shop) • Similar equipment or functions are grouped together Manufacturing cell • A dedicated area where products that are similar in processing requirements are produced Assembly line • Work processes are arranged according to the progressive steps by which the product is made Continuous process • Assembly line only the flow is continuous such as with liquids 69 Product–Process Matrix: Framework Describing Layout Strategies 70 Production System Design Project Layout • The product remains in a fixed location • A high degree of task ordering is common • A project layout may be developed by arranging materials according to their assembly priority Workcenter • Similar Machines at one place • Most common approach to developing this type of layout is to arrange workcenters in a way that optimizes the movement of material • Optimal placement often means placing workcenters with large interdepartmental traffic adjacent to each other • Sometimes is referred to as a department and is focused on a particular type of operation 71 Production System Design Manufacturing Cell • Formed by allocating dissimilar machines to cells that are designed to work on similar products (shape, processing, etc.) Assembly Line and Continuous Layout • Designed for the special purpose of building a product by going through a series of progressive steps 72 Break-Even Analysis • Defined as standard approach to choosing among alternative processes or equipment • Model seeks to determine the point in units produced where a company will start making profit on the process • Model seeks to determine the point in units produced where total revenue and total cost are equal • π΅ππππππ£ππ ππππππ = ππ’ππβππ π πππ π‘ ππ ππππππ π ππ πππ’ππππππ‘ πππππ πππ π’πππ‘ − πΆππ π‘ πππ π’πππ‘ or • π΅ππππππ£ππ ππππππ = πππ‘ππ πππ₯ππ πππ π‘π ππ ππππππ π ππ πππ’ππππππ‘ ππππ‘ πππππ π‘π ππ’π π‘ππππ −ππππππππ πππ π‘ πππ π’πππ‘ 73 Example 7.1: Break-Even Analysis • Buy for $200 • Make on lathe for $75 • Make on machining center for $15 • Buy has no fixed costs • Lathe has $80,000 fixed costs • Machining center has $200,000 fixed costs 74 Example 7.1: Total Cost for Each Option Purchase • Cost = $200 x Demand Produce Using Lathe • Cost = $80,000 + $75 x Demand Produce Using Machining Center • Cost = $200,000 + $15 x Demand 75 Example 7.1: Costs Shown Graphically 76 Example 7.1:Finding Points A and B Point A $80,000 + $75 ο Demand = $200,000 + $15 ο Demand $80,000 + $60 ο Demand = $200,000 $60 ο Demand = $120,000 Demand = $120,000 $60 = 2,000 Point B $200 ο Demand = $80,000 + $75 ο Demand $125 ο Demand = $80,000 Demand = $80,000 $125 = 640 77 The Charts Assembly drawing • An exploded view of the product showing its component parts Assembly chart • Defines how parts go together, their order of assembly, and overall flow pattern Operation and route sheet • Specifies operations and process routing Process flowchart • Denotes what happens to the product as it progresses through the production facility 78 Summary • Manufacturing processes are used to make tangible items • Sourcing parts, making the item, sending it to the customer • To allow parts of the process to operate independently, • • • • • inventory is strategically positioned in the process Positioning the decoupling points has an impact on speed, flexibility, and many other trade-offs Manufacturing layouts are designed based on the nature of the product, the volume needed to meet demand, and the cost of equipment Break-even analysis is useful for understanding the cost tradeoffs between alternative equipment choices Visual charts can be used to document manufacturing process flows Flowcharts provide a simple but insightful analysis of capacity and variable cost 79
