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Chapter 1 to 17 Notes
Operations Management (formerly LSCM 4403) (Mount Royal University)
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Operations Management- management of activities and resources that create goods/provide
services. Responsible for planning and co-ordinating use of organizations resources to convert
inputs to outputs. Companies use OM to improve efficiency and effectiveness
Why study it? OPPORTUNITY, improvements=profits, job opportunities, other areas interrelated
with OM. Operations function relates to all activities directly related to producing goods or providing
3 basic functions of an organization:
1. Operations- creation of goods and services identified by marketing (core of most orgs). Inputs
used in transformative/conversion processes to obtain finished goods/services. ESsence of
Operations is to add value (cost of inputs vs value of outputs). Organizations become more
productive by ritually examining whether activities add value
2. Finance- provision of funds necessary for operations and investments of extra funds. Cooperates with operations through provisions of funds & economic analysis of capital investment
3. Marketing- promoting/selling goods/services. Responsible for determining customer wants/
needs and communicating to operations and product design. Operations relys on marketing for
info about demand. Marketing relys on lead time (time between ordering and receiving good) to
give customer realistic estimates on time.
***all 3 interface with each other for product and design
processes, forecasting, setting realistic schedules, and
quality decisions
Other functions supporting operations: accounting, MIS,
Purchasing, HR, Manufacturing/engineering, maintenance,
product design, logistics
Scope of Operations Management:
-All activities directly relating to producing goods or providing services
-core of most organizations
-adds value during transformation process (managed by operations manager, responsible for
planning and using resources) involving designing, planning, scheduling, executing, controlling
activities/operations that make up processes
Certain decisions affect the:
1. Designing Decisions- product design, production capacity, location of facilities, equipment,
job/work design. Design determines limitations of operations
A. Strategic and long term (1-5 years)
2. Planning/Control Activities- quality planning/control, inventory planning/control, production
planning/scheduling, and product management
A. Planning- tactical medium term (1-12 months)
B. Control- (including scheduling and execution) short term (1-12 weeks)
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Difference between Goods and Services: **operations present in both
Production of Goods=TANGIBLE output
Service= and ACT
*similar in 'what' is done, different in 'how' it's done
Example of Goods Producing: Farming, Mining, construction, power generation
Ex of Services: Storage/Transport (Warehousing, trucking, mail service), Exchange (retail, wholesale,
banking, library), Entertainment, Communication
• Output
◦S- Intangible (teach a class)
◦G- Tangible (produce a car)
• Customer Contact/use of inventories/demand variability
◦Service- High. Performance occurs at point of consumption. More sensitive to demand
◦Good- Low. Separation between production and consumption. Can build up inventories and
absorb shocks by demand variability
• Uniformity of Input
◦Service- Low. Specific individual problem that must be diagnosed before remedied
◦Goods- High. Can carefully control amount of variability in inputs
• Labour content of jobs
◦S- High. Require labour
◦G- Low. Can be more capital intensive (mechanized)
• Uniformity of output
◦S- Low. Sometimes appear slow and awkward, more variable output (automated services are
an exception)
◦G-High. High mechanization= products with low variability. Production smooth and efficient
• Measurement of productivity (ratio of outputs to inputs)
◦S- Difficult- variations in demand intensity and in job requirements make measurements
difficult (ex- 2 doctors - one routine one complicated, who's more productive?)
◦G- Easy- straightforward due to high uniformity
• Quality assurance
◦S- Difficult- performance and consumption occur at same time
◦G- Easy- errors can be corrected before customer receives output
Operations Jobs:
• Production/operations planner/scheduler/controller, Demand planner (forecaster), Quality
specialist, Logistics coordinator, Purchasing agent/buyer, Supply chain manager, Production/
operations manager
4 main management processes: **Operation managers:
1. Planning- Capacity, location, product/service mix, make or buy, projects
2. Organizing- degree of centralization, specialization, subcontracting, staffing, suppliers
3. Controlling- inventory, quality, motivation, cost, productivity
4. Directing- scheduling, incentive plans, work orders, job assignments
Key aspects of Operations Management Decision Making
General Approaches to decision making:
Use of Models- abstract of reality, simplified representation of something. Ignore unimportant
details to focus on important aspects. Allow for experiments that could be very costly in real life
Quantitative Approaches- linear programming (allocation of resources), queuing technique
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(analysis of situations with lines forming), inventory techniques, project scheduling
Analysis of Trade-Offs- Factor rating approach, make pros and cons, add weights to important
items to ''net out' potential impacts of trade-off
Systems Approach- output and objectives of organization as a whole takes precedence over those
of any one subsystem
Establishing Priorities- Pareto Phenomenon (80-20 rule), 80% of problems caused by 20% of
activities . Therefore find factors with greatest impact and give them priority
Ethics- worker safety, product safety, clean environment, impact on community
Historical Evolution of Operations Management
*Evolved through Craft, Mass, and Lean Production systems
Craft- highly skilled workers using simple, flexible tools to produce small quantities of custom
Mass- lower skilled workers use specialized machinery to produce high volumes of standardized
Lean- minimal resources to produce high volume of high quality goods with some variety
Earliest days- craft production (no economies of scale), merchant ilium
Industrial Revolution
- Interchangeable parts (Eli Whitney, 1700)
-Division of Labour (Adam Smith, 1776)
-Scientific Management (1920s)- looking into improving work methods, economic incentives,
Human Relations Movement
-improve productivity (Elton Mayo 1930)
-Motivational Theories (Maslow 1940)
-Employee Problem Solving (ouchi, 1970)
Decision Models and Computer
-Management Science
-EDI (electronic data interchange)
-ERP (enterprise resource planning)
Japanese Manufacturers
-TQM revolution (Total Quality Management)- emphasize quality and continuous improvement
-lean production- fewer resources than mass production systems to produce comparable
output, use highly skilled workers and flexible equipment
-World Class Manufacturing- combo of TQM and JIT
Major Trends that Affect Operations Management
• Internet and E-commerce
• Technology- new products revolutionize way companies operate
• Globalization- global competition/markets/supply chains/operations have growing impact on
chains. GATT expanded world trade, need improved efficiency and increased quality
• Management of Supply Chains
• Sustainability- concerns for global warming and pollution affects how businesses operate
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Competitiveness- ability and performance of organization in the market compared to other
organizations that offer similar goods/services
Value= quality/timeliness/etc. (/)price
Order Qualifiers- minimum standards of acceptability for purchase, allow product to be considered
Order Winners- create perception of being better than competition, allow product to be purchased
Primary Ways Organizations Compete:
By emphasizing one or more competitive priorities (importance given to operations characteristics):
1. Cost- unit product cost to organization
2. Quality- customers quality requirements, producing free of defects
3. Flexibility - producing a variety
4. Delivery- consistently meeting due dates
From customers perspective, these competitive priorities are called Key Purchasing Criteria
1. Price- what they're willing to pay
2. Quality- characteristics determined by design, material, workmanship, performance,
3. Variety
4. Timeliness- availability when needed
5. Other (customer service, convenient location, etc.)
Strategic Planning- managerial process that determines a strategy for the organization, I.e. A longterm plan that will set a new direction for the organization, and implementing through allocation of
resources and action plans
Mission- where the organization is going now
Vision- where the organization desires to be in the future
Values- shared beliefs of organizations stakeholders
Strategies- long term plans that determine the direction an organization takes to become (or
remain) competitive
Tactics and Action Plans- specific methods and actions taken to accomplish strategy
Operations strategy- set of coordinated policies, objectives, and action plans, directly affecting
operations function aimed at securing long term sustainable advantage over competition
Strategic decision categories:
Facility, Capacity, Vertical Integration/Outsourcing, Supplier Relationship/Partnership, Product Mix
and new products, process types and technologies, HR, Quality, Operations Infrastructure and
Generic Operations Strategies:
Low Labour-Cost
Focused factories
Flexible factories
Continuous Improvement
Quality Based- maintain/improve quality, use 6sigma or re-engineering
Time Based- reduction of time needed to
complete tasks
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Productivity- a measure of how efficiently resources are being used, expressed as a ratio of input
to output. **DOES NOT equal efficiency
Used to track performance over time, determine areas for improvement, compare competitiveness
Growth= Current Period Productivity - Previous Period / Previous
Measures of Productivity
Partial Measures
labour productivity
machine prod
capital prod
energy prod
Multi factor measures
Total measure
Factors affecting Productivity
-equipment and technology
**workers are NOT the main determinant of productivity
Why measuring productivity is difficult for services:
-services are intangible
-involve intellectual activities
-have output with high degree of variability
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Uses of demand forecasts- estimate of expected demand during a specific time period
-basic inputs for many kinds of decisions in business
3 uses for deman forecasts:
1. Help managers design the system
2. Help managers plan the medium-term use of the system
3. Schedule short term use of the system
Distinguish between forecasting time frames
Describe common features of forecasts
• Assume same underlying casual system that existed in past will continue to exist in future
• Forecasts are rarely perfect, actual differs from predicted. Make allowances for inaccuracies
• Forecasts for groups of items tend to be more accurate than forecasts for individual items
• Forecast accuracy decreases the farther the forecasted time period is into the future
◦Forecasting horizon- range of periods we are forecasting for
◦Flexible businesses -those that respond quickly to change- require shorter forecasting
horizon and benefit from more accurate short term forecasts than competitors who are
less flexible
Elements of a good forecast
1. Timely
2. Accurate
3. Realizable
4. Expressed in meaningful units
5. In writing
6. Simple to understand and use
7. Cost-effective (benefits outweigh costs)
Steps of Forecasting Process
1. Determine purpose of forecast
2. Establish forecasting horizon
3. Gather and analyze relevant historical data
4. Select forecasting technique
5. Prepare forecast
6. Moniter the forecast
Contract different forecasting approaches
2 approaches- judgemental and quantitative
Judgemental- subjective inputs
Quantitative- use of time series model to extend historical platform of data or development of a
associative models that attempt to utilize casual variables to make a forecast
J techniques use soft information (human factors, personal opinions, hunches), Q techniques
often omit or downplay these factors and only consist of hard data
Describe judgemental forecasting methods
Non quantitative analysis
-consumer surveys, similar products, sales staff, managers and execs, panels of experts to
develop a forecast
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Executive opinions- small group of upper level managers
Sales force opinions- good source of info as have direct communication with customers
Consumer surveys
Historical Analogies- demand from previous product used to forecast new (ex- cranberry
apple drink used to forecast new cranberry-grape drink)
5. Expert Opinion- One method called Delphi Method (circulating series of questionnaires
among experts
Components of a time series model
-time ordered sequence of observations taken at regular intervals of time
-extend pattern of data into the future
Identifies specific patterns in the data or extrapolate those patterns into the future without trying
to identify the cause of those patterns
Analysis of time series data requires analyst to identify underlying behaviour of the series, this is
done by plotting data and visually examining it. Behaviours can be described as:
1. Level (average) constant, horizontal pattern
2. Trend- persistent upward/downward movement in the data
3. Seasonality- regular repeating wavelike variations related to calendar, weather, recurring
events, etc.
4. Cycles- wavelike variations lasting more than one year
5. Irregular Variations- unusual one time explainable circumstances not reflective of typical
behaviour (ex- sales promotions)
6. Random variations- residual variations that remain after all other behaviours have neem
accounted for. Cannot be reliably predicted, time series techniques smooth random variation
in the data
Naive Methods- for a stable series, the next forecast equals the previous periods actual value
Averaging techniques
-smooth variations in the data because high and lows are combined into an average
-forecast based on average tends to be less variable than original data
-3 techniques:
1. Moving average- averages number of recent actual values as forecast for current period.
Updated as new values become available
2. Weighted moving average- moving average but more recent values in time series given larger
3. Exponential Smoothing- weighted average based on previous forecast plus percentage of
difference between forecast and actual value. One of the most widely used techniques due to
its ease of computation and the ease to which weighting scheme can be altered (simply
changing value of a)
Trend forecasting
May be linear or non linear. Linear is appropriate for some series, but is inadequate for others
(such as demand for a new product that has faster growth or an old product that has slower
Linear trend equation- Yt= a + bT
Non linear trend
Trend adjusted exponential smoothing/ double smoothing- variation of exponential smoothing
used when a time series exhibits trend
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Trend adjusted forecast (TAF) (pg 70)
Seasonality forecasting
Seasonal variations- regularly repeating wavelike motions in series values that can be tied to
recurring events (ex- ice cream sales or rush hour traffic)
Two different models:
1. Additive-seasonality expressed as quantity which is added/subtracted from trend
2. Multiplicative- seasonality expressed as proportion of average which is then multiplied by
Seasonal relatives- proportion of average or trend for a season in the multiplicative model
Forecasting seasonal demand (time series decomposition) steps:
-compute seasonal relatives
-deseasonalize demand data
-fit model to data (moving average or trend)
-forecast using this model
-reseasonalise the deseasonalized data
Associative models (regression)
Primary method of analysis
-simplest and most widely used involves linear relationship between two variables
Least squares line- minimizes sum of squared deviations around the line
**calculator equation where you find a and b (revenue/profits question)
Correlation Coefficent- measure of the strength of relationship between two variables
Three measures of forecast accuracy
Forecast error- difference between actual value and the forecast value for a given period
3 measures:
(Pg 84- put graphic from powerpoint on cheat sheet)
Two ways of controlling forecasts
1. Control chart for forecast errors- time series plot of forecast errors that has individual limits
for individual forecast errors
2. Tracking Signal- sum of forecast errors divided by mean absolute forecast error
Major factors to consider when choosing a forecasting technique
Two most important factors- cost and accuracy
Cost- affected by preparation time and complexity
Best forecast not necessarily the most accurate or least costly, rather its a combo of accuracy
and cost
Other factors to consider- availability of historical data, forecasting horizon, and pattern of data
Some better for short term (moving average and exponential smoothing) some better long term
(regression trend models)
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Nature and Importance of Location Decisions
1. Location decisions are important because: long term committments that make mistakes
difficult to overcome,2. location decisions impact investment requirements, operating costs,
revenues 3. a poor choice of location might result in a shortage of qualified labour,
inadequate supplies of raw material, or some similar condition thats detrimental to operations
Why are organizations concerned with location decisions? Growth, Market shifts, Depletion of
raw resources, Introduction of new products.
Supplier- near source of raw materials. Middle- close to supplier or customer. Retail- accessibility
Manufacturing/distribution- cost focus, distribution modes/costs, energy availability/costs, labour
cost/availability/skills, material availability/costs. Service/Retail- revenue focus, demographics,
population, competition, traffic volumes, customer access
Factors Affecting Location Decisions
1. Country Factors. 2. Community Considerations-availability of skilled workers, liveability
(facilities and services available), attitudes, economics. 3. Regional Factors- location of raw
material (necessity, perishability, utilities), location of markets (competition/convenience,
perishability and transportation, need for closeness to customer), labour factors (availability,
skills, cost, attitudes, presence of unions), other costs (taxes and incentives, land and
building costs). 4. Site-Related Factors- site size and room for expansion, utility and sewer
capacity, parking and road access, zoning restrictions
Major Influences on location decisions: Location of raw materials, labour supply, market
considerations, and community/site-related factors
Decision Process
Identify the important factors, gather information on appropriate sites, short list, site visits and
meetings, evaluate and make selections
Major Factors that affect location decisions- political stability, attitude toward foreign
companies, language and cultural differences (eg. Corruption), exchange rates and currency
rates, labour cost, abundance of raw material, potential market for products
Why a foreign company would locate in Canada- shortened delivery time and reduced delivery
costs, access to natural resources, skilled labour, educated workers, politically very stable, tax
incentives, safe and secure, good telecommunication infrastructure, low cost for energy, health
care, lower wage and exchange rates
Evaluating Location Alternatives
• Locational BE Analysis
◦Determine fixed and variable costs, plot total costs line, determine lowest total costs
◦Assumptions: fixed costs and variable costs are constant for the range of probable output,
only one product is involved
◦Can also use profit to determine which site is preferable
• Transportation Method
◦Consider costs of moving raw material or finished goods
◦Determines shipments in order to minimize total transport costs
◦Considers demand and capacity constraints, for multi-facility conditions, a special
purpose algorithm of linear programming
• Factor Rating
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◦Decision based on quantitative and qualitative inputs
◦Includes a wide variety of factors in analysis
◦Steps: develop a list relevant factors, assign a weight to each factor, develop a scale for
each factor, score all factors for each location, multiply score by weight for each factor
and sum for each location, choose location with highest composite score
• Center of Gravity Method
◦Decision based on minimum distribution costs
◦Finds location of distribution center that minimizes total distribution costs
◦Considers location of markets, volume of goods shipped to those markets, shipping cost
• Location Analysis Software
◦Geographic Information Systems (GIS)- computer based tool for collecting, storing,
retrieving, and is playing location dependent demographics data on map, combines data
from different databases, intuitive and graphical
◦Modelling/Optimization software- many use linear programming
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Quality- ability of a good or service to consistently meet or exceed customer expectations
Evolution of Quality management- during industrial revolution, division of labour meant loss of
pride of workmanship.
Quality control (monitoring, testing, and correcting quality problems after they occur)shifted to
During 1950s, evolved into quality assurance (providing confidence in a products quality by
preventing defects before they occurmovement, operators given more responsibility for quality
during production process. Continuous Improvement was continuing effort to improve quality,
part of TQM- total quality management
Craftsmanship -> Divison of labour -> quality assurance -> quality management systems ->
TQM, continuous improvement ->Six Sigma
Quality Dimensions- for test know dimensions and examples (for a car)
• Performance- main characteristics or function of the product (everything works, ride, handling)
• Aesthetics- appearance, feel, smell, taste (interior design, soft touch)
• Special Features- extra or secondary functions (GPS, rear view camera)
• Conformance- how well a product corresponds to design specifications (matches
manufacturers specifications)
• Reliability- consistency of performance over time (no breakdowns in first 5 years)
• Durabilty- long life (resistant to rust and corrosion)
• Perceived quality- subjective evaluation of quality (top-rated)
• Serviceability- handling of complaints or repairs (warrenty)
Service Quality Dimensions:
• Tangibles
• Convenience
• Reliability
• Responsiveness
• Time
• Assurance
• Courtesy
• Consistency
Determinants of Quality
1. Product Design
-intention of designers to include or exclude features that customers require
2. Process Design
-translating product characteristics into process specifications and tolerances
3. Production
-the degree to which goods or services conform to design specifications
Benefits of good quality:
improved quality of product design -> better reputation -> premium prices and increased market
share -> higher profitability
Improved conformance to design specifications -> lower manufacturing and warrenty expenses > higher profitability
Various Costs associated with quality
Failure Costs- costs incurred by defective parts/products**increase the closer you get to the
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Internal- fixing problems during production
External- fixing problems after delivery to customer
Appraisal costs- inspection and testing
Prevention Costs- quality training, planning, customer assessment, creating SOP (standard
operating procedures)
-inspection costs, quality materials, employee training, injuries, late fees, recalls, equipment
down time, warrenty costs, overtime, accidents, time with customers, returns
Philosophies of Quality Gurus
W. Edwards Deming- management must fix system. 14 steps to quality: create constancy of
purpose towards improvement, management must adopt TQM philosophy, cease dependence
on inspection, minimize total cost, improve constantly and forever, institute training, institute
leadership to act on quality issues, drive out fear, work as a team, eliminate exhortations and fix
the system, eliminate work standards, remove barriers to pride of workmanship, institute
education and self improvement, transformation is everyone's job
Joseph M. Jura- planning control improvement
Armand Feigenbaum- total field, quality at source
Philip B Crosby- do it right the first time, quality is free
Quality Certificates
ISO 9001- set of international standards on quality management and assurance, critical to
international business. Documentatation and assessment process takes 12-18 months, reregister every 3 years. Three documents must be created: quality manual, procedures manual,
detailed work instruction and other supporting documents manual
ISO 14000- family of standards related to environmental management. Includes management
systems, operations, and environmental systems
HACCP- quality control system designed for food processors, deals with food safety. Main
steps: hazard analysis, determination of critical control points, creation of HACCP plan
NQI- framework for organizational excellence
Canada Awards for Excellence (CAE)- administered by NQI, foundation, transformation, role
model, world class
Total Quality Management (TQM)- philosophy that involves everyone in an organization in a
continual effort to improve quality and achieve customer satisfaction. Features: continuous
improvement, data driven, employee empowerment, team approach, suppliers encouraging
partnership, fail-saving. Approch: find out what the customer wants, design a product to meet/
exceed customer wants, design process that facilitates doing the job right the first time, keep
track of results, expand these concepts to suppliers
Basic Steps in Problem Solving
Define problem and establish goals, define measures and collect data, analyze the problem,
generate potential solutions, choose solution, implement solution, moniter solution to see if goals
are accomplished
Six sigma- business process for improving quality, reducing costs, and increasing customer
Statistically- having no more than 3.4 defects per million
Conceptually- program designed to reduce defects, requires use of certain tools and techniques
DMAIC circle- define, measure, analyze, improve, control
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Basic Quality Tools (possible to use all of them)
Flow chartCheck Sheets- check off boxes
Histogram- empirical frequency distribution
Pareto- highest to lowest (80% of problems cause by 20% of activities)
Scatter Diagram- shows degree and direction of relationships, visual tool to provide with
Control chart- forecast (desired level)
Cause and Effect Diagram- on test, Environment- Methods/People - Materials/Equipment - Effect
Methods for generating ideas
-brainstorming, quality circles, interviewing, benchmarking, 5W2H (asking who what where.. ?s)
Reaching Consensus
List reduction- clarify and eliminate options
Balance Sheet- list pros and cons
Paired Comparisons- select preferred item from 2 at a time
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What is a supply chain?
• Supply chain (or value chain) is the sequence of organizations- facilities and activities- that are
involved in producing and delivering a product or service
• Collaboration of companies/coordination of activities that make up a supply/value chain, starting
from raw material and ending with consumers, linking across supplier-customer companies
• Facilities- factories, warehouses, retail outlets
• Activities- forecasting, product design, scheduling, purchasing, transportation, inventory
management, production, distribution, and customer service
• 2 kind of movement- 1)physical movement of material & 2) exchange of info and money
Supply Chain Management- collaboration of supply chain companies and coordination of activites
so that market demand is met as efficiently and effectively as possible
Benefits of Supply Chain Management
1. Increasing competition- cutting out extra costs through lean and JIT
2. Increasing Outsourcing- buying instead of producing in house, allows focus on core activities
3. Increasing Globalization- extended physical length and quantity of materials and products being
4. Increasing E-Commerce- more internet purchasing which requires faster delivery services
5. The Need to Manage orders and inventories across the supply chain- inventories major role in
chain, have to coordinate throughout chain to avoid shortages and excess
Bullwhip Effect- demand/order amplification
-phenomenon in which the demand/order variability
gets progressively larger the further up in the supply
chain the company is.
-if demand at retail store is fairly stable, the orders to
the wholesaler/distributor are more variable. These
variations are magnified in the orders to the
-bullwhip effect causes inefficiencies at wholesaler/
distributor and manufacturer, such as excess inventory
holding cost and overtime, shortage cost and lower
customer service.
-major cause is slow or erratic reaction to change in demand/order due to lack of end-of-line
demand visibility, long lead times, inexperience, and lack of understanding of the impact of ones
action on supplier.
-other causes: manufacturer discounts that lead to surge in demand, gaming by retailers when there
is a shortage by inflating orders in anticipation of receiving only a portion of them
Strategic (Design) Activities- long term impact on supply chain
1. goals and competitive characteristics [such as quality, cost, variety (flexibility), timeliness (speed),
customer service and fill rate] agreed on by members of supply chain
2. Products designed/redesigned with these characteristics in mind
3. Supply chains re/designed for products, goals, and competitive characteristics [by determining
number, location, capacity, products to produce, and process types of facilities]
Tactical (Planning/Operational) Activities- relate to production planning and control [includes
forecasting, purchasing/ordering, transportation, inventory control/warehousing, scheduling of
production and distribution/deliveries, and customer service
-where in supply chain should inventory be held?
2 rules:
1)value of inventory increased as materials move down supply chain to customers, but response
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time to consumer demand decreases. Management must strike balance between additional
carrying costs and better customer service to determine where to hold inventory.
2)nature of inventory loses flexibility of use (becomes more specific) as it moves down supply chain.
This reduces risk pooling: holding safety stock in one central location rather than in multiple
locations closer to consumers. Risk pooling provides better availability to customers
**It is possible to achieve risk pooling and hold inventory closer to customers by using delayed
differentiation/postponement: waiting until late in the process to add differentiating features to
standard components and products (ex- paint. White sold to retailers who then add colour in store)
Cross Docking- loading goods arriving at warehouse from supplier directly onto outbound trucks,
thereby avoiding warehouse/DC storage
Efficient Replacement Systems (Quick response, ECR, VMI)
Quick Response- Just in time replenishment system used in retailing where orders are based on
actual sales, not periodic orders by retailers
Efficient Consumer Response (ECR)- expanded version of quick response, used in grocery
industry, which includes further collaboration
Vendor Managed Inventory (VMI)- related replenishment method where vendors sales/account
manager periodically visits buyers premise and has them replenished to agreed-upon levels (soft
drink companies supplying to convenience stores)
Discuss IT used in SCM- Software, EDI, RFID
-info used for transaction processes, planning, and collaboration
-internet used for data communication
-planning software (network design, forecasting) and execution software (order management,
warehouse management, etc)
ERP software programs are adding supply chain modules to their suite
-Electronic Data Interchange (EDI) is direct transmission of info, used for purchasing, order
confirmation and payment, and arranging shipments
-Radio Frequency Identification (RFID) is technology that uses radio waves to identify objects, for
fast identification of items
Outline requirements
1. Forming close relationships
2. Effective communication and coordination of activities
3. Supply chain visibility and info sharing
4. Event management capability- detect and respond to unplanned events
5. Performance metrics- necessary to confirm supply chain is functioning as expected
Key steps in creating an effective supply chain
1. Develop strategic objectives
2. Integrate and coordinate steps in organization
3. Coordinate activities with suppliers and customers
4. Coordinate planning and execution across supply chain
5. Consider possibility of forming strategic alliance or partnership
Explain CPFR and value of strategic partnering
Collaborative Planning, Forecasting, and Replenishment- effort to increase effectiveness and
efficiency of supply chains. Establishes a process for communicating and agreeing on forecasts and
orders between manufacturer and customer
Describe SCOR performance metrics model
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Supply Chain Operations Reference- model increasingly used for supply chain performance
perfect order fulfillment
lead time
upside flexibility/adaptability
Assets management
cash-to-cash cycle time, RFA, ROI
Describe responsibilities and activities of purchasing
Responsibilities- buying raw materials, manufacturing parts/supplies/spare parts, machines and
equipment, services neeeded to produce good or service
Purchasing selects suppliers, negotiates contracts, helps establish partnerships, and acts as liaison
between suppliers and various internal departments
Explain reasons for outsourcing
-supplier may have lower cost (due to economies of scale, etc.)
-supplier has more expertise and knowledge
-demand temporary or seasonal
-company doesnt have idle capacity
Purchasing Cycle- (pg 442)
List benefits of E-commerce
-global presence and customers have easy access to info
-improve competitiveness
-analyze products based on number of hits and requests for info
-collect detailed info about customer choices
-SC response times are shortened
-substantial price reductions and cost savings on transaction costs
-allows creation of virtual companies= reduced cost
-levels playing field for small companies (lack resources for infrastructure and marketing)
1. Value analysis- examination of function and design of a part/product in an effort to reduce cost,
used to provide basic function of a part/product at minimum cost
2. Spend Analysis- collecting, cleansing, classifying, and analyzing expenditure data with purpose
of reducing procurement costs, improving efficiency, and monitoring compliance with purchasing
Explain what is involved in order fulfilment
Processing, Scheduling, Inventory Management, Warehousing, Packaging, Billing, and Delivery
Discuss supplier management and partnership
Move to reduce number of suppliers and establish/maintain long term relationships with suppliers.
Supplier Partnership is closest form of relationship where both buyer and supplier benefit by
assisting each other. Lambert partnership model provides process for devising if partnership is
desirable and to what extent
What is logistics? Movement and warehousing of materials/products and information
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Reverse logistics? Backward flow of goods returned by customers or retailers. Returns logistics
and management. Gatekeeping (acceptance of returned goods, screening goods and refusing to
accept some returns) and returns avoidance (reduce returns by dealing with causes) are important
Outline process and factors considered when selecting a transportation mode
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Inventory- stock of items kept to meet future demand. Independent demand (uncertain exfinished goods, supplies, raw mat), dependent demand (certain ex-manufactured parts). Types of
inventory- raw mat & purchased parts, WIP, Finished goods, spare parts/tools/supplies.
Reasons for holding inventory- Functions: to wait while in transit, to protect against stock-outs,
to. Take advantage of quality discounts, to smooth production requirements, to decouple
operations, to hedge against price increases
Objectives of inventory management: to achieve satisfactory levels of customer service while
minimizing inventory costs. Inventories serve to meet seasonal demand, decouple operations,
protect against stock-out, and allow economic lot size/quantity discounts
Requirements for effective inventory management- a reliable forecast of demand, knowledge
of lead times, reasonable estimates of holding, ordering, and shortage costs, a classification
system, a system to keep track of inventory. Successful= safe keeping and handling, system to
track inventory, accurate info about demand and lead times, realistic estimates of costs, priority
system for classifying items. Warehouse management system- computer software that controls
movement and storage of materials within warehouse, and processes associated transactions.
Concerns: security, safety, obsolescence. Can use either periodic counting (physical count at
intervals) or perpetual tracking (continuously keep track). Inventory replenishment systems: Fixed
Order Quanitity/Reorder Point model- order of fixed size is placed when inventory drops below
min quantity called reorder point. Two-Bin System- two containers of inventory, reorder when first
is empty. Bar Code- unique # assigned to item or location, readable by scanner.
Inventory Costs- Holding/carrying costs (cost to carry an item in inventory), ordering (costs
determining order quantity, preparing purchase orders, and FC portion of receiveing/innspection/
material handling), setup (time spend preparing equipment for job), and shortage (when demand
> supply)
ABC classification- classifying according to measure of importance and allocating control
efforts accordingly. A-most important 70-80% value, B- 20% C- least (5%)
Basic economic order quantity- order size that minimizes total inventory cost. Simple model for
many types of inventory, trade off between carrying and ordering costs, adds purchasing costs
and compares total cost for various order sizes. Robust model, works even id all parameters and
assumptions are not met. Models dont always capture all relevant info, may be compelling
reasons to not use EOQ (ex- unusual buying opportunity). Assumptions: Only 1 product, annual
demand known, demand event through year, lead time doesn't vary, each order received in single
delivery, no quantity discounts, shortage not allowed
Economic production quantity model- production done in batches or lots where production
capacity for part > usage or demand rate for pate. Used when producing and depleting items at
same time, trade off between carrying and setup costs, consider production and usage rate.
Same assumptions except orders are received incrementally during production. May be quantity
discounts= price reductions offered as incentive to buy more, weigh benefits of reduced price
against increased holding cost
Reorder point- when inventory position drops to or below this amount, must reorder.
Determinants: rate of demand, lead time, demand/lead time variability, stockout risk (safety
stock). Service level- probability demand will not exceed supply. Lead time (prob that demand
will not > supply during lead time) and annual (% of annual demand filled)
Fixed order interval model- orders placed at fixed time intervals, determine how much is
needed to order to bring inventory up to predetermined order point, used widely for retail
Single Period Model- determines what quantity to reorder, used when cant carry goods to next
period (perishable)
Muli-echelon inventory management- uses POS data, plans based on customer demand/
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Just in Time- a highly coordinated processing system in which goods move freely through the
system and services are preformed just as they are needed
-usually small batches (ideal size 1)
-pull (demand system)
Lean Production- Big JIT- philosophy of waste reduction and continuous improvement
Elements of lean operation: smooth flow of work, elimination of waste or anything that doesnt
add value, continuous improvement, simple systems that are easy to manage, use of product
layouts that minimize time spent moving materials and parts, quality at the source, poka-yoke,
preventative maitenence, good housekeeping, setup time reduction, cross-trained workers, pull
Goals of Lean ProductionUltimate Goal- a balanced system- smooth rapid flow of materials thorughout the system
Supporting Goals- eliminate disruptions, make the system flexible, kaizen (continuous
improvement), eliminate waste
Building Blocks- Product design, process design, personnel elements, planning and control
Sources of Waste
Overproduction- excess inventory
Overprocessing- using complex instead of simple
Product defects
Unnecessary transportation
Unnecessary Inventory
Inefficient work methods
Waiting time
Employee underutilization
Continuous Improvement (Kaizen)- improvement should be done gradually and continuously,
everyone should be involved, built on a cheap strategy, can be applied anywhere, learn by doing,
rely on observation, data, and scientific thinking
Aspects of Product Design Important for Lean Production
Build in Quality (use Quality Function Deployment to create value for customers), concurrent
engineering (should be used to increase functional communications, reduce need for engineering
changes, and speed up design process). Products should be designed for easy manufacturing
and assembly (DFM and DFA). Value analysis used to identify necessary functions of the product
and cut down on features not valued by customer
Process Design
Process Design- balanced system, flexible system, small lot sizes, setup time reduction, cellular
layout, process quality, standardized processes, little inventory
Balanced System- workload distributed evenly among workstations, work assigned to each
workstation must be less than or equal to the cycle time. Cycle time set equal to takt time. Takt
Time= maximum time allowed at each workstation to complete its set of tasks on a unit, the
cycle time that matches the pace of production to the demand rate.
How to increase production flexibility- reduce changeover/set up time, cross-train workers, use
many small machines vs a few large, use safety stock, keep some idle capacity
Benefits of small lot sizes- (optimal size=1), less WIP inventory (less cost/space needed/clutter),
less rework and inspection, increased visibility of problems, better ease of balancing operations,
more system flexibility (quicker response to change)
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Setup time reduction- small lots and changing product mixes require frequent machine setups,
requires quick inexpensive setups. Multipurpose equipment or attachments can help reduce
setup time. Single Minute Exchage of Die (SMED)- a system for reducing changeover time.
Categorize into internal (activities only done when machine is stopped) and External (don't
require stopping) *try to make all setup activities external
Cellular Layout- cell is a highly specialized and efficient production center, many JIT/Lean centers
have multiple. (+) shorter lead times, less material handling, reduced space requirement, flexibility
to increase/decrease capacity. (-) machines may not be fully utilized, bringing close together=
safety/ergonomic issues. Conversion to cells requires: determining family of products, mapping
current process for family of products, determining operations required, determining capacity
requirements, rearranging the layout and bringing machines closer (usually into a U), determining
capacity of cell, upgrading if capacity is inadequate, balancing cell and determining labour
requirements, determining WIP required between machine and work stations in cell
Process Quality
How to prevent defects- SPC to control process, six sigma to reduce variability, poka-yoke for
foolproof. PokaYoke- Any mechanism that helps and equipment operator avoid mistakes.
Purpose is to eliminate product defects by preventing, correcting, or drawing attention to human
errors as they occur. Autonomation- intelligent automation, if abnormal situation arises, machine
automatically stops (prevents production of defective products). Jidoka- quality at the source,
avoid passing defective products to next station, stop and fix the problem. Andon- system of
lights used at each workstation to signal problems or slowdowns
Little Inventory- minimize inventory that hides problems, suppliers deliver directly to the
production floor, ship complete units as soon as they are ready, small production lot sizes (low
WIP inventory)
Aspects of Personnel/organization important for lean production
1. Workers as assets- educated, cross-trained, empowered, involved. Recognized and
rewarded.2. Leadership- communicate consistency of purpose, facilitate and encourage twoway communication, lead with humility and seek input from everyone in the organization. 3.
Non-manufacturing support- from many departments
Aspects of Planning/Control that are important for lean production
Level loading- achieving stable, level daily mixed-model schedule/sequence
Pull System and Kanban- Pull= move work by pulling output from preceding station as needed,
based on demand. Push= output pushed to next station when complete, based on MRP plan.
Kanban- card/device that communicates demand for work or materials from the preceding
station. Paperless production control system.
Close Supplier Relationship- frequent small deliveries, certified suppliers, often local (shorter lead
time), tiered approach with a few suppliers (integrated and EDI a must)
Preventative maintenance and housekeeping- PM- Maintaining equipment in good condition and
replacing parts that have a tendency to fail before they actually fail. HK- maintaining a workplace
that is clean and free of unnecessary things. 5 S's of housekeeping: sort, set in order, shine,
standardize, sustain
How to implement lean production
Lean services emphasize speed, consistent, high-quality, standard work methods, flexible
workers, close supplier realtionships.
1. Obtain employees cooperation and hire consultant/faciliator
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2. Train on JIT/lean tools, techniques, principles
3. Decide which parts need most effort- study product flow, identify and eliminate waste,
determine takt time, design streamlines process (re-arrange equipment into cellular layout,
cross train operators, implement performance based pay, reduce setup times/standardize
work/balance line, set up demand system/arrange kanban system, put in jidoka quality
controls/continuously improve the line
4. Expand JIT/lean production to other products and processes
Value Stream Mappingn- visual tool to systematically examine flows of material and info. Purpose
is to identify waste and opportunities for improvement. Data collected: times, distance travelled,
mistakes, inefficient work methods, waiting times, info flows
Traditional vs JIT/Lean
Inventory- T: much to offset forecast errors, late deliveries. JIT: minimal necessary to operate
Deliveries- T: few, large. JIT: many, small
Lot Sizes- T: large JIT:small
Setup/runs- T: few, long runs. JIT: many, short runs
Vendors- T: adversaries JIT: partners
Workers- T:Replaceable JIT: assets
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Job Scheduling-establishing starting and completion date/time of operations for jobs or orders
in work centers (includes assigning jobs to work centers and machines, sequencing jobs and
specifying start/processing/end times)
Staff Scheduling- determining work days and start/end times on each work day for each
employee. Forward (scheduling ahead, starting from start date of a job) Backward (scheduling by
working backwards from the due date).
Loading Jobs- assignment of jobs to work centers and to machines within each center. Assign
to minimize setup/processing costs/idle time, allow operates to run 2 machines at once, etc.
Charts- Gantt: used as visual aid for loading/scheduling/control. Load/Scedule: form of Gantt
that shows loading and timing of jobs for a resource. Infinite loading (jobs assigned without
reguard for capacity of work center) Finite loading (assigned taking into account work center
capacity and job processing times
Sequencing- determine order which jobs at work center will be processed. Two work center
sequencing- Johnsons Rule: technique for minimizing makespan for a group of jobs to be
processed on two successive work centers.machines. Minimizes total idle time, several
conditions must be satisfied. Conditions: job time must be known and constant, independent of
sequence, follow same 2-step sequence, all units must be completed at first work center before
moving to second, there is enough space for WIP
Priority Rules- simple heuristics used to select the order in which jobs will be processed, *No
one sequencing rule excels on all criteria
FCFS first come first serve (long jobs may delay others and create downstream idle time,
perceived as fair by customers and is simple), SPT shortest processing time (good for minimizing
work flow and # of jobs in system and %late, often minimizes downstream idle time, long jobs
moved to end may mean very late jobs=dissatisfied customers), EDD earliest due date (always
minimizes lateness, doesn't consider processing time- more WIP and congestion), CR critical
(easy to use and often minimizes lateness)
Performance Measures- job flow time(time job is in system), job lateness (difference between
late job's due date and completion time), make-span (time for group of jobs to be completed),
average WIP (flow time/make-span) *WIP and Average flow time are closely related, if priority rule
results in small flow time, it will also result in small WIP
Shop Floor Control- daily dispatch list, anticipated delay report, input/output report, schedule/
conntrol (gantt) chart
Input/Output Control- monitoring/managing work flow and queue lengths at each work center,
keeps queues and waiting times under control, balances input and output rates
Sceduling DIfficulties-variability in setup times (processing times, interruptions, changes in the
set of jobs), no method for identifying optimal schedule, scheduling is not an exact science,
ongoing task for a manager. Minimize by set realistic due dates, focus on bottleneck operations,
consider lot splitting of large jobs, use scheduling software and shop-floor control and rescheduling every day. In services- different becuase inability to store or inventory services,
random nature of customer requests for service.
Theory of Constraints/Bottleneck- drum-buffer-rope, D-master schedule, B-inventory just
before bottleneck, R-synchronization of non-bottleneck operations before bottleneck operations.
Theory of constraints- maximize flow through entire system, emphasize balancing flow, improve
performance of the bottleneck by: determining what is constraining, exploiting the constraint,
subordinate everything to the contraindications, determine how to overcome, then repeat for next
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Project- unique, one-time operations, specific set of objectives, limited time frame. Ex- building
construction project, research project, event. Performance Goals- Complete the project within
time, budget, and quality guidelines. Phases- Project initiation (conception, feasibility, selection),
planning and scheduling (activity breakdown, determining costs, schedule/subcontract),
execution and control (purchase, monitor, adjust), closeout (ensure completion, paperwork,
Project Manager-person responsible for planning, scheduling, executing, and controlling a
project from inception to completion. Must ensure project meets time, budget, and quality
standards. Responsible for work, HR, communication, quality, time, costs. Ethical issues to
consider such as temptation to understate costs, withhold info, falsify records
Project Planning- analyzing project into work packages and activities, estimating resources,
durations, scheduling, etc. Includes schedules, resources, communications (determination nature
of info needed by stakeholders and how to satisfy these needs), quality planning (how to assure
and control), purchase planning (what to purchase, specifications, supplier evaluation and
selection, awarding contracts)
Project Risks- occurrence of event that have undesirable consequences such as delays,
increased costs, inability to meet specifications, project termination. Risk Management: identify
risks, analyze and assess, work to minimize occurrence of risk, establish contingency plans. Risk
response: backup systems, simplify process, use stable supplier, risk transfer, risk sharing,
extending schedule, improve communication, etc.
Work Breakdown Structure- hierarchical listing (decomposition) of what must be done during a
project. Establish logical framework for identifying the required activities for the project: identify
major components, identify subcontinent, breaks down sub components into work packages,
break down each work project into list of activities needed to accomplish it
Project Scheduling- determining timing of activities of the project. Steps: list activities,
sequence, identify resources needed, identify duration, develop schedule using PERT/CRM,
modify as needed
PERT- program evaluation and review technique. CPM- critical path method. Both used to
schedule and control large projects. Provides: graphical display of activities in sequence,
estimate of project length, which activities are most critical to timely completion, how long any
activity can be delayed
Precedence Network- diagram of activites that shows sequential relationships by use of arrows
and nodes. Activity on Arrow (AOA) and Activity on Node (AON). Critical path- longest path from
start to end, determines expected project duration. Deterministic- time estimates that are fairly
certain. Probabilistic- estimates that allow for variation. Slack- slack times help planning of
allocation of scarce resources(efforts directed toward activites that might delay project,
assumption that activities will not be started as early as possible and will not exceed their
expected time. Slack is SHARED, if two activities on the same path have the same slack time=
total slack available to both
Crashing- shortening activity durations. Reduces indirect but increases direct costs. TC is
minimized at optimum amount of crashing. Motivation: avoid late penalties, monetary incentives
for early completion, free resources for other projects, reduce indirect costs. Options: add more
personnel, more (or more efficient) equipment, relax specifications. Making crash decisions
requires info on: regular time and crash time estimates for each activity, regular cost and crash
cost estimates for each activity, a list of activities on critical path.
Project Execution and Control- execution: performance of activates planned, PM manages
funds spent and resources used. Control: assessing progress against plans (taking corrective
actions as needed and trend analysis to generate forecasts of costs) and controlling changes
(scope creep= problem of uncontrolled changes to project scope). Consists of suppliers and
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contracts, costs and risks, quality, communications, and project team
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