Chapter 3: Supply Chain Foundations - McGraw

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Supply Chain Foundations
Chapter 3
System Slack and
Related Concepts
McGraw-Hill/Irwin
Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved.
Key questions
1.
What is system slack?
2.
Why does it exist, & should it be eliminated?
3.
What do Little’s law & the trumpet of doom mean, & how are these
principles relevant for system slack?
4.
What are the origins, principles, & practices of TQM & JIT?
5.
How does a pull approach answer when & how much to order?
6.
How does a push approach answer when & how much to order?
7.
What are the advantages & disadvantages of each approach?
8.
How is industry changing to make pull more attractive?
9.
How is industry changing to make push more attractive?
3-2
Road map
• System Slack
• TQM and JIT
• Pull versus Push
• Summary
3-3
System Slack
What is system slack?
• Idle, underutilized, or non-value adding resources
 Inventory (e.g., material, cash)
 Building space
 People
 Equipment
 Rework
Highly relevant for managing flows (transformation,
usage, movement) of resources, i.e., SCM
3-4
System Slack
Why does it exist?
Quantity uncertainty
• Inputs
 e.g., raw material quality, quantity, & delivery timing,
absenteeism
• Outputs
 e.g., varying yield rates
• Demand
3-5
System Slack
Why does it exist?
Time lags
 About 30 days to cross Atlantic & get through customs
 about 30 days worth of inventory in transit
• PON: Little’s law – time is proportional to inventory,
e.g., 2 gallons of milk in your refrigerator generally last twice
as long as 1 gallon
 Often made worse by the trumpet of doom (picture on next
slide)
• less certainty in demand 30 days from now than
tomorrow
 time lags increase demand uncertainty  more safety stock
3-6
System Slack
PON: The trumpet of doom
Forecast Error Range over Time
Percentage
Forecast 0
Error
0
Time Until Forecast Event
3-7
System Slack
Why does it exist?
Scale economies
 E.g., unit price/cost gets smaller as volume increases
Changing supply & demand (e.g., seasonality)
 E.g., restaurant kitchen or dining space underutilized during
lunch
Conflicting objectives across departments or firms
 E.g., shift more volume to slow, low cost transportation
mode to hit budget to the detriment of system performance
High market standards
 Opportunity to enter niche market?
3-8
System Slack
How can slack be reduced?
Quick examples – to help illuminate the causes
Input uncertainty
 penalties (e.g., K-Mart), supplier partnering or
certification
Output uncertainty
 preventative maintenance, training, ownership
Demand uncertainty
 topic of Chapter 4
3-9
System Slack
How can slack be reduced?
Quick examples – to help illuminate the causes
Time lags
 EDI, air express, closer suppliers, AI to
reduce training time
 Hot area for investment due to IT advances,
i.e., reduce information delays
3-10
System Slack
Time lag reduction at Calvin Klein
Now Calvin’s three-button, $550 crepe suit is blowing out
of stores more than twice as fast as the rest of his cK
suits. . . . Retailers love the suit too, because it always
sells at full price, which keeps margins up. In fact, they’ve
asked Calvin to resupply them via what’s known as ‘quick
response,’ an electronic inventory system that
automatically replenishes stock weekly—a common
method of ordering staples like white dress shirts, but one
that’s still relatively new for suits. Quick-response orders
now make more than half of cK’s total suit business.
Goldstein, L., “Clever Calvin Sells Suits Like Socks,”
Fortune
3-11
System Slack
How can slack be reduced?
Quick examples – to help illuminate the causes
Scale economies
 Online purchasing (e.g., via EDI), quick changeover techniques
 Another hot area for investment due to IT advances
• Cost to process a purchase order (Mary Meeker of Morgan
Stanley Dean Witter)
Manually:
Online:
$125 to $175
$10 to
$15
Changing supply & demand
 Incentives, e.g., matinee discounts, off season discounts
3-12
Road map
• System Slack
• TQM and JIT
• Pull versus Push
• Summary
3-13
TQM & JIT
A little history
Industrial Revolution: late 1700’s – early 1900’s
• Interchangeable parts
 Beginning of shift from artisan economy to mass production
• Low education & literacy levels
• Management approach that reflected the times
 Hierarchical command & control
 Expanded role of low skill labor – “interchangeable labor”
• Tasks mastered with little education or training
3-14
TQM & JIT
A little history
Formative years of TQM & JIT
• Post WWII Japan – almost a clean slate
 Limited resources, low volumes  new approach
• Influences
 TWI – employees involved in process improvement
 Deming & Juran
• Poor quality is responsibility of management
• Tools for process improvement
3-15
TQM & JIT
Total quality management
In brief…
TQM is an organization-wide effort
directed towards the continuous
improvement of quality
• One simple definition of high quality is:
“exceeds customers’ expectations”
 Key point—quality is tied to view of customer
(e.g., not specifications)
3-16
TQM & JIT
Putting TQM principles into practice
Continuous improvement in quality – how?
Customer focus
Employee empowerment
Data-based decision making –
“management by fact”
3-17
TQM & JIT
Guiding principle of just-in-time
Produce & deliver just when needed
 Requires high & consistent reliability
 Production & delivery synchronized with
market
• E.g., producing some of everything every day in
quantities that match average demand
3-18
TQM & JIT
Putting JIT into practice
Produce & deliver just when needed – how?
• Employee empowerment & data-based decision
making – high overlap with TQM
• Jidoka – designing processes to help sense &
correct problems
 Identify instantly & change to eliminate the root cause
 E.g., “andon” board on assembly line
 a.k.a. autonomation - automatically and
autonomously sense and correct problems
3-19
TQM & JIT
Putting JIT into practice
Produce & deliver just when needed – how?
• Setup reduction
 Stamping machine: 1 day to 3 minutes
 High cost setups mean large batches  market demand
• Kanban
 Signaling device in a pull production system
 What is pull? A question we’re about to consider
• More on kanban in Chapter 9
3-20
Key questions
1.
What is system slack?
2.
Why does it exist, & should it be eliminated?
3.
What do Little’s law & the trumpet of doom mean, & how are these
principles relevant for system slack?
4.
What are the origins, principles, & practices of TQM & JIT?
5.
How does a pull approach answer when & how much to order?
6.
How does a push approach answer when & how much to order?
7.
What are the advantages & disadvantages of each approach?
8.
How is industry changing to make pull more attractive?
9.
How is industry changing to make push more attractive?
3-21
Road map
• System Slack
• TQM and JIT
• Pull versus Push
• Summary
3-22
Pull versus Push
Two approaches for answering...
1. When to order or begin work at a stage
in the supply chain
2. How much to order or make
• Differences between pull & push center
on the answer to when
3-23
Pull versus Push
Pull approach
• Pull approach: actual inventory level
(or equivalently, actual demand) is used
to answer when
• Example: whenever inventory gets down
to 2 or fewer bins of material, request 3
new bins of material
 “bin reserve”
• Some signaling devices: kanban, golf
balls, voice, . . .
3-24
Pull versus Push
Pros & cons of pull
• Pro
 Simple
• Con
 Reactive
• Need stable environment or
• lots of flexibility (e.g., excess capacity) or
• lots of inventory to achieve high service
3-25
Pull versus Push
Push approach
• Push approach: projected inventory
level (or equivalently, projected
demand) is used to answer when
• Pros/Cons
+ Proactive
- Complex & only as good as quality of
projections
3-26
Pull versus Push
Examples for comparison
Example 1
• McDonalds versus caterer
Example 2
• Kanban system versus material requirements
planning
Many organizations combine elements of pull & push
E.g., reorder points set proactively, reactive to answer
when
3-27
Pull versus Push
Some trends
•
Lead times shortening, faster setups 

improved responsiveness 
pull becoming more viable
•
Increasing product variety, shorter product life-cycles,
IT advances 

demand ramps up & tails off 

benefits from planned build-up or draw-down of inventory
while data & planning IT tools improving 
push becoming more viable
3-28
Road map
• System Slack
• TQM and JIT
• Pull versus Push
• Summary
3-29
Back to key questions
1.
What is system slack?
2.
Why does it exist, & should it be eliminated?
3.
What do Little’s law & the trumpet of doom mean, & how are these principles
relevant for system slack?
4.
What are the origins, principles, & practices of TQM & JIT?
5.
How does a pull approach answer when & how much to order?
6.
How does a push approach answer when & how much to order?
7.
What are the advantages & disadvantages of each approach?
8.
How is industry changing to make pull more attractive?
9.
How is industry changing to make push more attractive?
3-30
Where to next?
Done with part I – foundations . . . on to
principles & tools
Chapter 8
Chapter 9
Chapter 10
Chapter 10S-A
Chapter 10S-B
Chapter 6
Chapter 7
Make
Store
Sell
Buy Move
Buy Move Make
Sell Buy Make
Sell
Move
Move
Store
Chapter 5
Chapter 4
Chapter 11
Chapter 11S
Chapter 12
3-31
Course road map-overview
Part I – Foundation
Scope, Information Technology, Core Supply Chain Concepts: Introduction to themes
that will be present throughout the course
Part II – Principles & Tools
Demand Management (sell): Nearly all decisions are based to some degree on future
expectations. A natural place to begin is to consider how to influence, process, & predict
demand.
Supply Management (buy): Sourcing concerns the management of inputs to an organization.
Purchased materials & services often make up the majority of a firm’s total expenses.
Inventory Management (store): A highly relevant issue for retailers & wholesalers where most
inventory is held.
Capacity Management (make): What influences how much capacity is appropriate, what tools
can be used for analysis, & how does psychology play a role?
Production Management (make): An opportunity area in a number of industries due to
increasing demands for variety/customization, increasing emphasis on timely & accurate
response to market, & favorable developments in technology.
Transportation Management (move): A wide array of resources, tactics, & strategies are
available for getting product to market & for receiving raw materials.
Quality Management (buy, move, make, store, sell): Tools & creative problem solving
principles useful for process improvement.
Part III – Synthesis
Supply Chain Strategy (buy, move, make, store, sell): How can supply chain strategy be
aligned with the overall business strategy & with the market & competitive environment, &
how should supply chains be designed to improve performance? This topic draws on all of
the earlier topics.
3-32
Course road map-specifics
Foundation
Scope & motivation
Information technology
System slack
TQM & JIT
Pull vs. push
Topics
Demand Management
Supply Management
Inventory Management
Capacity Management
Production Management
Transportation Management
Quality Management
Supply Chain Strategy
Fundamental Problems
Balance scale economies
Number guessing
Sequencing
Tools
Moving average
Winters method
Focus forecasting
Pareto analysis
EOQ
Single period model
Base stock
(Q, R) & (I, S) policies
DCA
Queueing theory
Simulation
Kanban
MRP
POLCA
Scheduling rules
GOMA
SPC
CPS
Process-product matrix
Supply chain-product
matrix
SCOR model
Principles
· Benford’s Law
· Bullwhip Effect
· Central Limit Theorem
· Curse of Utilization
· Curse of Variability
· Fat Head Effect
· Hockey Stick Effect
· It’s Hard to Play Catch Up Ball
· Khintchine’s Limit Theorem
· Law of Large Numbers
· Little’s Law 
· Obligation to Reciprocate
· Pareto Phenomenon
· Recency Effect
· Satisfaction = Perception Expectation
· Time Distortion
· Trumpet of Doom 
· Winner’s Curse
3-33
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