Operations Management Prof. Tinglong Dai Our Agenda Operations Strategy Process Analysis and Design Managing Flows Managing Variability Managing Inventory Lean Global Supply Chains Operations Strategy: An Oxymoron? Operation n. power to act Random House Dictionary Strategy n. A plan of intended to accomplish a goal The American Heritage Dictionary Strategy = plan to achieve superior performance Operations = power that transform inputs into outputs Operations Strategy = the crucial link between the planned strategy and the executed reality Highlights from Syllabus • One individual assignment: House Game memo (due by Session 3) • Two group assignments Assignment #1: Two options with different due dates (Session 3 or 4) Assignment #2: Littlefield (due by Session 7) — a simulation game connecting everything • Form groups of 3-4 and sign up during today’s break • All assignments due one hour before class Carey’s Attendance Policy https://carey.jhu.edu/student-experience/school-policies/policies-procedures-on-site-remote-live-classes Operations as Part of the Value Chain Definition: Operations Management is the organization and control of the fundamental business activity of providing goods and services to customers Specs New Product Development Transformation Demand Operations Finance Logistics Marketing & Sales Distribution Accounting Management of Organizations Fundamentally, OM is about transformation processes. Cust Support Service January 13, 2020 The date on which Moderna finalized the design of its COVID-19 vaccine, 2 days after the genetic sequence of the novel coronavirus was released The Endgame of COVID-19 Pandemic is Not Vaccines; It Is Vaccination Vaccination Operations: A Process Flow View Operations Management Network of Activities and Buffers Inputs (Public health departments, hospitals, vaccination clinics, pharmacies, mega vaccination sites, mobile clinics) Outputs Flow units/Entities Vaccines, glass vials, stoppers, fill/finish, syringes, needles Vaccination (1st dose) Vaccination (2nd dose) Resources Funding, staffing, transportation, freezers, data infrastructure, sign-up portals COVID Vaccine Supply Chain Vials Antigen manufacturing Fill & Finish Excipients, Lipids, Adjuvants manufacturing Syringes Other materials for cold chain (e.g. dry ice) Adapted from a graphic in Essential Medicines Supply Chain Disruptions by Anthony McDonnell, Subramanian, Kalipso Chalkidou, and Prashant Yadav. 2020 “Our vaccine supply chain is as inequitable as it is slow-moving.” Tinglong Dai. “Making Sense of the Lagging U.S. COVID-19 Vaccination Effort.” The Hub (Johns Hopkins University). January 8, 2021. Operations through the Lens of Investors Which Company Is It? Top line Bottom line—focus of Operations Operations through the Lens of Investors Among three types of cashflow activities, operating activities are the most difficult part to analyze Now, Which Company Is This? • Total Assets: $4.8 trillion • Total debt: $31 trillion • Annual revenue: $4.9 trillion • Annual Income: $1.4 trillion loss We Are Making (A Lot of) History Think of all of human history as a pie. How much do we add to it? https://bit.ly/economist2000chart History of Operations Management 1750s-1840s 1920s–1960s 1990s-2010s First Industrial Revolution Invention of factory system Golden Era of Big Business World Wars I & II Reinvention of finance, marketing, and management Third Industrial Revolution Global supply chains Artificial intelligence and data analytics Internet and mobile technologies 1850s–1910s 1970s–1980s 2020–present Second Industrial Revolution Mass production/ transport Rise of modern manufacturing (Carnegie, Ford, Sloan) Scientific management (Taylorism) Gilded Age Reinventing Manufacturing Lean TQM (6σ) Competitive strategy Four Industrial Revolution Incorporating AI into workflow ESG Supply chain resilience Revenge of the Nerds Tim Cook Chief architect of Apple’s supply chain Jeff Williams Tim Cook’s Tim Cook Sheryl Sandberg Making Facebook profitable Joe Coulombe Champion of “Overeducated and Underpaid” Warren Buffett—Master of Operations Dempster, Pre-Buffett “As a former purchasing manager, [Lee Dimon] knew how to purchase— so he did. The warehouse bulged with windmill parts as Dempster sucked up cash. By early 1962, the company’s bank prepared to seize the inventory as security for its loan, then grew alarmed enough to make noises about shutting Dempster down. ” Warren Buffett—Master of Operations Dempster, Post-Buffett “Within days [Buffett] swept through the place like a swarm of boll weevils and slashed inventory, sold off equipment, closed five branches, raised prices for repair parts, and shut down unprofitable product lines… By year-end 1962, [Buffett and his partners] had pulled Dempster into the black.” “I would not want to put someone in charge of Berkshire with only investing experience and not any operational experience.” Warren Buffett, 2015 Berkshire Hathaway Annual Meeting The Role of Chief Operating Officers • • • “COO is now almost exclusively a ‘CEO in waiting’ temporary position.” — “Where Have All the COOs Gone?” (Directorship, Oct 15, 2009) Early 2000s: trend towards flatter organizations & active CEOs • • 2000: 48% of Fortune 500 & S&P 500 companies had a COO 2018: all-time low of 32% COOs in leading companies 2022: COOs making a comeback, 40% of leading companies have one. The role of COO has evolved to be bigger, bolder and more transformative https://mck.co/3QXGzXG The Shifting Role of Chief Operating Officers “Stepping up: What COOs will need to succeed in 2023 and beyond” • COO job description varies by industry, organization, and need • Role can include mentoring, being a partner, or heir apparent to CEO • • • • Managing day-to-day operations and executing top management strategies In uncertain postpandemic environment, COO role evolving to focus on technologydriven growth, strategic expansion, and employee empowerment COOs are key players in boosting organizational resilience and value creation 27% of CEOs in Fortune 500 and S&P 500 companies were promoted from the COO role https://mck.co/3QXGzXG A company’s operations function is either a competitive weapon or a corporate millstone. It is seldom neutral. Wickham Skinner, who coined the term “operations strategy” Strategic Alignment Business Metrics ★ ★ ★ ★ ★ ★ Operational Metrics NPV (absolute) ROI, ROA (relative) Cash flow (survival) Stock price Market share ★ ★ ★ ★ ★ ESG measures Customer Priorities (Order Winners) ★ ★ ★ ★ Price Quality Time Variety Flow time Throughput Inventory Process cost Quality Matching Capabilities to Strategy Price (Cost) P Quality Q • • Customer service Product quality Time T • • Rapid, reliable delivery New product development Variety V • “order winners” Degree of customization To deliver we need “capabilities” as measured by operational metrics Identifying Appropriate Capabilities USPS vs. UPS • Speed/traceability ➔ hub and spoke system • Price ➔ regional post office system Trader Joe’s vs. Aldi • Service experience/quality ➔ specialty grocery store • Price ➔ highly efficient discount grocery store Apple vs. Dell • Variety/customization ➔ direct business marketing • Quality/service ➔ high-end products with integrated, uniform consumer experience Anyone can give another pair? Talking about Strategy Is Easy, Execution Is Hard • Kmart & Wal-Mart Strategy: price, availability • Apparel Industry • • return on sales 1-3% markdowns: 20-25% of cost • Profit Driver: reduce markdowns by avoiding missed forecasts • But how to do it? Develop processes that support desired capabilities Wal-Mart’s Approach Corporate Strategy Gain competitive advantage by providing customers access to quality goods, when and where needed, at competitive prices Operations Structure Operations Strategy – Short flow times – Low inventory levels – – – – – Cross docking Retail Link (PoS data) Fast transportation system Focused locations Communication between retail stores Location, Location, Location What Do You Notice? Diffusion of Walmart (1962–2003) What do you observe? “Wal-Mart never jumped to some far off location to later fill in the area in between… Wal-Mart always placed new stores close to where it already had store density. “When stores are packed close together, it is easier to set up a distribution network that keeps stores close to a distribution center. “When stores are close to a distribution center, Wal-Mart can save on trucking costs. Moreover, such proximity allows Wal-Mart to respond quickly to demand shocks.” Holmes, T. J. (2011). The Diffusion of Wal‐Mart and Economies of Density. Econometrica, 79(1), 253-302. Wal-Mart - Results • Higher inventory turns compared to other industry leaders (e.g., Target) • Improved targeting of products to markets • • Famous example: increased stock of U.S. national flags on the same day of 9/11 Sales per square foot increased from $102 in 1985 to $535 in 2022 • • Industry average increased from ~$100 to ~$300 $437 for Target (2021) What Separates Wal-Mart from Target? NYSE: WMT 2022 2021 2020 Revenue 572 559 523 COGS 429 420 394 Inventory 56 45 44 Operating Income 21 26 22 NYSE: TGT 2022 2021 2020 Revenue 106 94 78 COGS 81 75 66 Inventory 14 11 9 Operating Income 5 9 6 All numbers in billion dollars. Inventory Turns = COGS Inventory Walmart: 8–9 turns a year Target: 6–7 turns a year 1976-2023: Walmart return: 2,525 times* Target return: 421 times S&P 500 return: 34 times *Berkshire Hathaway Inc. (BRK.A) return: 3,801 times You Can Do (Much) Better Than Wal-Mart • Sales per square foot • • • Walmart: $535 (2022) Whole Foods: $1,200 (2014) Costco: $1,400 (2021) • What about Trader Joe’s? • What makes Trade Joe’s so successful? • $2,000 (2018) Trader Joe’s Operational Capability • Keep things simple: offer fewer SKUs; sell mostly store brands; minimize promotions in order to reduce complexity; packing for easy checkouts Quantity discounts lower costs • Achieve flexibility by cross-training employees • Eliminate waste (muda) in everything but allow waste in staffing! • Let employees make small decisions • Err on the side of over-staffing Operations as Process Flows Operations Management Inputs Network of Activities and Buffers Flow units/Entities Outputs Goods Services (customers, data, material, cash, etc.) Resources Labor & Capital COVID-19 Vaccination: A Process Flow View Operations Management Network of Activities and Buffers Inputs (Public health departments, hospitals, vaccination clinics, pharmacies, mega vaccination sites, mobile clinics) Outputs Flow units/Entities Vaccines, glass vials, stoppers, fill/finish, syringes, needles Vaccination (1st dose) Vaccination (2nd dose) Resources Funding, staffing, transportation, freezers, data infrastructure, sign-up portals Process Architecture Project Flow Efficiency Job Shop Batch Line Flow Continuous Flow Product Flexibility Process Positioning: Product/Process Matrix Product Volume Process Flexibility Jumbled Flow (job shop) Low Volume Low Standardization Low Volume Multiple Products Higher Volume Few Products Inefficient Design company, outpatient clinic, Formula 1 race car Disconnected Line Flow (batch) High Volume High Standardization Bakery, Car repair M as sC us Connected Line Flow (assembly line) to Auto assembly, Computer assembly m iza tio n Continuous Flow Infeasible Sugar Refinery Paper mill aka Hayes-Wheelwright Matrix Product/Process Matrix – Healthcare Industry Product Process High customization High unit margin Low volume Job shop Standard medical procedures Batch Shared medical appointments* Assembly or Continuous flow Some customization Ave margin Med volume Low custom Low unit margin High volume Group testing (e.g., COVID-19) Autonomous AI screening (e.g., EyeArt) Remote patient monitoring *Ramdas, K. and Darzi, A., 2017. Adopting innovations in care delivery-the case of shared medical appointments. New England Journal of Medicine, 376, pp.1105-1107. Job Shop vs. Batch vs. Flow Shop Specialized Equipment Product Variety Machine Setup Frequency Type of Process Product Volume Job Shop low low high high high high Batch med med med med med med Flow Shop high high low low low low Labor Skills Variable Cost Customer Interface Design Options Make to Stock • • • quick response high inventory cost vulnerable to forecast Tradeoff Responsiveness High Make to Stock Make to Order • • • slower response lower inventory cost more flexibility Hybrid • • assemble to order postponement Make to Order Low Low Variety High Representation of Strategy Current position and strategic directions of movement in the competitive product space Responsiveness High B A Low High Price Low Strategy and Operational Effectiveness Strategic Focus position on efficient frontier Responsiveness High efficient frontier A B Infeasible C Inefficient Low High Price Low Operational Efficiency distance from efficient frontier Contrasts in Strategic Focus Low Infeasible High manufacturer Efficient Frontier Rolls Royce Inefficient Low Quality Low High High Infeasible Grainger Speed Low High Infeasible production line Efficient Frontier Low Inefficient Cost Cost High Efficient Frontier Low grocery Inefficient Infeasible Cost Cost Kia Low Instacart High Service High Efficient Frontier Inefficient Low prototype line Variety High Strategic Dynamics Efficient frontiers do not remain static because either: 1. Technology evolves: a technology or process improvement makes it possible to deliver higher levels of performance (e.g., faster delivery enabled by a highly integrated supply chain), or 2.Customers evolve: changing customer tastes or saturation of tastes along current dimensions of competition makes attractive a new value proposition (e.g., offering exceptional service in addition to low cost and fast delivery) Strategic Dynamics – Technology Change Responsiveness Responsiveness High High Low Low High Price Low High Price Dynamics • Technology (IS, OM practices, etc.) elevates efficient frontier • Firms must continually improve to remain competitive • Frameworks (e.g. lean, six sigma) offer guidance Low Strategic Dynamics – Market Change Responsiveness Service Experience High High Low Low High Price Low Dynamics • Technology stabilizes and becomes standardized • Surviving firms offer similar performance • Basis of competition shifts to another dimension High Price Low Implications for Competitiveness Firms can lose their competitive edges due to: • • Strategic focus out of step with customer needs • Nokia was the No. 1 phone maker for the 13th years in a row until 2011—still No. 2 by 2013 (14% market share) • Still remember what RIM is? • Kodak chose to focus on film-based business and lost in the battle in the marketplace of digital photography • What happened to taxis? Operational efficiency below efficient frontier • K-mart dominated Sears in 1980's but fell behind Wal-Mart in 1990's • Ford/GM led industry through 1960's but fell behind Toyota in 1980's • Toys “R” Us thrived in the ‘80s and ‘90s as a “concept megastore,” but then was bested by discounted like Wal-Mart and Target Summary: Operations Strategy • • • Strategy = plan to achieve superior performance • Four modes of competition: price, quality, time, variety • Differentiated position in competitive product space of (P,Q,T,V) Operations = power/processes that transform inputs into outputs • Network of activities and allocation of resources • Four process attributes: cost, process quality, cycle time, flexibility • Operational effectiveness = distance to the frontier Operations Strategy = consistency between strategy and operations • Evaluation: strategic operational audit • Competition: impact and dynamics • Capabilities must evolve to support new strategies Learning to Choose Operations Structure Corporate Strategy Performance Operations Structure 2 (Price, Quality, Time, Variety) 1 Steps 1 Learn how Operations Structure drives performance 2 Use what we learn in step 1 to choose Operations Structure Talking about Strategy Is Easy; Execution Is Hard • • • Saying we need to create capabilities that support a strategy is one thing. Doing it is another We need to understand the links between management levers and performance metrics For that, we need to understand FLOWS Introduction to Process Flow Analysis A flow consists of stations and stockpoints Flow Terminology • • • • Entity: things that flow • e.g., jobs, customers, and customer requests Resource: something that does the processing • e.g., a drill press in a factory, a teller in a bank Station: a collection of resources • e.g., drilling station made up of several drill presses in a factory; service counter staffed by several tellers in a bank Routing (aka "flow" or"line"): a series of stations through which entities flow • e.g., series of machine stations in a factory; series of service stations in a bank Performance Measures for a Flow Throughput (TH) (entities/hour) Routing Stations 1 Raw Material Inventory (RMI) 2 3 WIP (entities) Cycle Time (CT) (hours) 4 Finished Goods Inventory (FGI) Volume - TH Time - CT Inventory – Work-in-Progress (WIP), retail managed inventory (RMI), finished goods inventory (FGI) Service rate – fraction of customer orders filled within quoted lead time or from stock Key Flow Concepts Capacity, Utilization, and Bottleneck • Capacity: the capacity of a resource is the rate at which it could process entities if it was never starved for work. In practice, this should account for detractors such as downtime, setups, yield loss, etc. Rate In • Utilization = • Bottleneck = station in a routing with the highest utilization Capacity , the fraction of time a resource is busy processing entities Utilization Example • • Customers arrive at a bank every 10 minutes (i.e., at a rate of 6 per hour). A single teller processes each customer in 5 minutes (i.e., at a rate of 12 per hour). customers in 1 system 0 0 • 5 10 15 6 per hour Utilization = = = 50 % Capacity 12 per hour Rate In 20 25 30 35 40 45 Definition of Bottleneck Why do we use highest utilization instead of slowest to define the bottleneck? Example a. Station 2 Station 1 5 min rate in =18 per hour 3 min 5 min • • • • rate in u= capacity 18 per hour u(1) = = 90% 20 per hour 18 per hour = 75% u(2) = 24 per hour u(2) < u(1) Station 2 is slower than station 1, but has more machines. Station 2 can serve 2×12 = 24 units/hr. Station 1 can only serve 1×20 = 20 units per hour! The bottleneck is the station that limits how large "rate in" can be. Definition of Bottleneck Why do we use highest utilization instead of slowest to define the bottleneck? Example b. Station 1 rate in = 10/hr Station 2 75% 5 min 6 min 25% (yield loss) • • • • rate in u= capacity 10 per hour u(1) = = 83% 12 per hour 10 per hour × 0.75 u ( 2) = = 75% 10 per hour u(2) < u(1) Station 2 is slower. But Station 1 processes more work. Since Station 1 is busier, it is the bottleneck. Again, the bottleneck determines how large "rate in" can be. Practice Problem #1 Axle housings are produced in the Wriston Detroit plant on a line consisting of five stations, through which all housings flow. Axles arrive to the line at a rate of 5 per hour. Assuming that the number of machines per station and the average processing times of machines are given below (note that we assume no detractors, such as failures, setups, etc.), find the bottleneck of this line. Station 1 2 3 4 5 No. Resources (Machines) 1 2 3 1 2 Base process time (without detractors) 10 minutes 20 minutes 15 minutes 8 minutes 12 minutes 5-Step Process to Find Process Bottleneck 1. Draw the process flow diagram 2. Find the rate in to each station and write it on the diagram 3. Compute the capacity of each station (including detractors where applicable) and write it on the diagram 4. Compute utilization for each process step 5. Identify bottleneck = highest utilization process step Example 1. Capacity Calculation Evaluating the Capacity of an AI Device for Your Hospital • • • • • Brochure claims scans in 5 min Colleagues at other hospitals report that on average machine works 90 hours before needing 10 hours of downtime Specialty departments require different types of tissue scans requiring 60 min machine setup time but send patients in batches of 10 Research shows about 5% of scans need to be re-done due to patient motion during scan You have budget for 5 machines Example 1. Capacity Calculation – Single Resource Compute Base Rate: Given: base process time = 5 min Find: base rate = 1/5 per minute , or equivalently, 1/5 × 60 = 12 per hour Account for Failures: Given: mean time to failure MTTF = 90 hours mean time to repair MTTR = 10 hours Find: availability A = MTTF/(MTTF+MTTR) = 90/(90+10) = 0.9 effective rate = base rate x A = 12 × 0.9 = 10.8 per hour effective time = 1/(effective rate) = 1/10.8 = 0.0926 hours = 5.56 min Example 1. Capacity Calculation – Station Account for Setups: Given: average setup time = 1 hour average number of jobs between setups Ns = 10 Find: effective time given setups + failures = effective time with failures + (average setup time)/Ns = 0.0926 + 1/10 = 0.1926 hours = 11.56 min effective rate given setups + failures = 1/(effective time given failures + setups) = 1/0.1926 = 5.19 per hour Account for Yield Loss: Given: yield rate y = 0.95 Find: effective rate = 5.19 × y = 5.19 × 0.95 = 4.93 per hour capacity of resource effective time = 1/(effective rate)= 1/4.93 = 0.203 hours = 12.16 min time a job will spend at station (effective process time) Example 1. Capacity Calculation – Station Compute Station Rate: Given: effective resource rate = 4.93 per hour number of resources m = 5 Find: effective station rate = effective resource rate × m = 4.93 × 5 = 24.65 per hour Notes: • • Times are additive, rates are not. So we need to add up effective process times, not the process rates, to compute station rate. There isn't an effective processing time for a station (unless it consists of a single resource). Example 2. Capacity Calculation – Tandem Line Single Station Calculations 28.25/hr 24.65/hr 32.12/hr 26/hr B • • • Compute station rate for each station in line. If there is no yield loss or rework, then capacity of line is equal to minimum station capacity. This station is the bottleneck. However, if there is yield loss or rework, then bottleneck is not necessarily slowest station. For this case or any other where more than one work flow exists, we must use the "never-fail" definition of the bottleneck – highest utilization. Take-away: Only in simplest cases will bottleneck be the slowest station. To be safe, always find bottleneck via utilization! Example 3. Bottlenecks in Complex Systems Arrival rates may depend on product mix. So the bottleneck may evolve over time. Example 4. Calculating Raw Process Time for a Line te(1) = 6.37 min te(2) = 12.16 min te(3) = 1.87 min te(4) = 2.31 min 6.37 12.16 1.87 + 2.31 T0 = 22.71 min Raw Process Time 1. Compute effective process time at each station, using above calculations. Note that adding parallel resources at a station does NOT reduce the effective process time, since parts are only worked on by one resource at a time 2. Add up effective process times along the routing to get raw process time Summary of Capacity Calculations General Definition: The capacity of a resource, station, line or system is the production rate that could be achieved if there were no idling due to lack of work. Specifically, the Capacity of… • Single Resource: base rate adjusted for setups, down times, yield loss, etc. • Single Station: resource rate times number of resources in station. • • Simple Flow Line: if all entities visit all stations exactly once, then line capacity is equal to the bottleneck station capacity. General System: capacity may be complex, but is ultimately defined by the bottleneck, which is the station with the highest utilization. Looking Forward • In actual systems, throughput is less than capacity and cycle time (flow time) is greater than raw process time. • Why? • Variability!! OPS EYES The Operations Prism Proc esse s s w o l y t F i l i b a i r a V s r e f f Bu The Operations Prism Observation (Flows): Production and service systems consist of flows of goods, people and information. Principle (Variability Buffering): Systems with variability must be buffered by some combination of: 1. inventory 2. capacity 3. time. Corollary (Buffer Flexibility): Flexibility reduces the amount of variability buffering required in a flow system. Variability Buffering Examples • • • T-Shirts: • • • Can't buffer with time (who will backorder a T-shirt?) Can't buffer with capacity (too expensive, and slow) Must buffer with inventory Fire Service: • • • Can't buffer with inventory (stock of fire interventions?) Can't buffer with time (violates strategic objectives) Must buffer with capacity Organ Transplants: • • • Can't buffer with inventory (perishable) Can't buffer with capacity (ethically anyway) Must buffer with time Buffer Flexibility Examples • • • Flexible Inventory • • • Transship inventory across fulfillment centers Monogram T-shirts to order Assemble PC's to order Flexible Capacity • • • Inter-regional sharing of fire fighters Flexible machining systems Cross-trained workers Flexible Time • • Priority lead times Load dependent lead time quotes How Does Amazon Deliver Stuff So Fast? Small Group Discussions 1.Identify three key reasons why Amazon delivers things so quickly, and connect these key reasons to the operations prism 2.Discuss an industry that can learn from Amazon to increase the speed of delivery https://money.howstuffworks.com/amazon-fast-delivery.htm What’s Next • Class 2: • House Game (in-person participation required; no pre-read required) • Winston Manufacturing Case (pre-read required; see the syllabus for purchasing instructions) • Class 3: National Cranberry Case due • Textbook Chapters 2-3: read as case prep • National Cranberry is a group case Thank You!
