Chapter 1
Operations Management
and
Supply Chain Management
Definition of
Operations
• Production system
– Production system converts inputs into goods
& services
2
Definition of
Operations Management
• Production system
– Production system converts inputs into goods
& services
© 1984-1994 T/Maker Co.
3
Definition of
Operations Management
• Production system
– Production system converts inputs into goods
& services
© 1995 Corel Corp.
4
Definition of
Operations Management
• Production system
– Production system converts inputs into goods
& services
© 1984-1994 T/Maker Co.
5
OPERATIONS MANAGEMENT
Operations Management is the
planning, organizing, staffing,
directing, and controlling of the
activities relating to the creation of
goods and services through the
transformation of input into output.
6
Supply Chain
Consists of series of companies that make
products or service available to
consumers, including all of the functions
enabling the production, delivery, and
recycling of material, components, end
product, and services.
7
SCM – Supply Chain Management
Although the idea of Supply Chain
Management (SCM) has been introduced
20 years ago, there is still a huge debate
on what constitutes SCM. The
understanding of the discipline as seen
by the scientific community can be
summarized as follows:
SCM – Supply Chain Management
Supply Chain Management (SCM) is a
strategic integrated customer and
cooperation oriented management
philosophy that ensures an increased
sustainable performance and
competitiveness for all partners within
organizational arrangements called supply
chain.
SCM – Supply Chain Management
SCM refers to the establishment of longterm supplier and customer relationships
between organizations within supply chain
networks.
Definition of Supply Chain
Supply-Chain Council
Managing supply and demand, sourcing
raw materials and parts, manufacturing
and assembly, warehousing and inventory
tracking, order entry and order
management, distribution across all
channels, and delivery to customers.
11
Definition of Supply Chain
Council of Logistic Management
The systematic, strategic coordination of
the traditional business functions and the
tactics across these business functions
within a particular company and across
businesses within the supply chain for the
purposes of improving the long-term
performance of the individual companies
and the supply chain as a whole.
12
La Londe and Masters (1994)
Supply chain strategy includes: “... two or
more firms in a supply chain entering into
a long-term agreement; ... the
development of trust and commitment to
the relationship; ... The integration of
logistics activities involving the sharing of
demand and sales data; ... the potential for
a shift in the locus of control of the
logistics process.”
13
The Strategic Importance
of the Supply Chain
Supply-chain management is the
integration of the activities that
procure materials and services,
transform them into intermediate
goods and the final product, and
deliver them to customers
Competition is no longer between
companies; it is between supply chains
A Supply Chain
Figure 11.1
Supply-Chain Management
Important activities include determining
1. Transportation vendors
2. Credit and cash transfers
3. Suppliers
4. Distributors and banks
5. Accounts payable and receivable
6. Warehousing and inventory
7. Order fulfillment
8. Sharing customer, forecasting, and
production information
Global Supply-Chain Issues
Supply chains in a global environment
must be able to
 React to sudden changes in parts
availability, distribution, or shipping
channels, import duties, and currency rates
 Use the latest computer and transmission
technologies to schedule and manage the
shipment of parts in and finished products
out
 Staff with local specialists who handle
duties, freight, customs and political issues
Supply-Chain Economics
Supply Chain Costs as a Percent of Sales
Industry
All industry
Automobile
% Purchased
52
67
Food
Lumber
Paper
60
61
55
Petroleum
Transportation
79
62
Table 11.2
Managing the Supply Chain
There are significant management issues in
controlling a supply chain involving many
independent organizations
 Mutual agreement on goals
 Trust
 Compatible organizational cultures
Issues in an Integrated Supply
Chain
 Local optimization - focusing on local
profit or cost minimization based on
limited knowledge
 Incentives (sales incentives, quantity
discounts, quotas, and promotions) push merchandise prior to sale
 Large lots - low unit cost but do not
reflect sales
 Bullwhip effect - stable demand becomes
lumpy orders through the supply chain
Opportunities in an Integrated
Supply Chain
 Accurate “pull” data
 Lot size reduction
 Vendor managed inventory
 Continuous replenishment
program
 Postponement
Opportunities in an Integrated
Supply Chain
 Channel assembly
 Drop shipping and special
packaging
 Blanket orders
 Standardization
 Electronic ordering and
funds transfer
Upstream
Activities or firms that are positioned earlier
in the supply chain relative to some other
activity or firm.
For example, wheat harvesting comes
before wheat grounding. Corn harvesting
is upstream activity.
Downstream
Activities or firms that are positioned later in
the supply chain relative to some other
activity or firm.
For example, bread making is downstream
of wheat grounding or wheat harvesting.
SCM – Supply Chain Management
• SCM follows the goal of efficiency of the
involved organizations. This can be realized by
synchronizing business processes (e.g.
procurement and logistics) as well as
organizational arrangements by considering
both costs as well as service structures.
• SCM is the realization of an inter-organizational
flow orientation that helps to solve specific
connection problems.
SCM – Supply Chain Management
SCM decisions are operative and
strategic. They include typically
operational questions referring to
procurement, transport, inventory,
handling as well as strategic
management decisions that aim to
realize cooperative behavior of a supply
chain’s part elements.
SCM – Supply Chain Management
• Management decisions are therefore of
particular importance (= coordination function
of SCM).
• SCM is a part discipline of business
administration, which means that SCM helps to
increase the competitiveness of the firm by
lowering costs, increasing profits and customer
satisfaction and certainly SCM is a competitive
‘weapon’ against competition.
SCM – Supply Chain Management
In order to have SCM implemented, organizations
need certain prerequisites that refer mainly to
constructs of relationship orientation, such as
independent organizations, willingness to cooperate,
trust, etc. The outcome of SCM helps to increase the
efficiency of a channel, as costs are minimized but
services are increased. This efficiency is realized by
organizing a chain according to the notions of Cooper
et al. (1997) or Frazier (1999):
- Outlining a supra-organizational structure that
ensures a successful configuration of
responsibilities of several independent players.
SCM – Supply Chain Management
- Identifying
and setting up certain business
processes, where the outcomes meet the
customers’ requirements (= customer oriented
inter-organizational transformation capacities)
- Presenting
goal oriented directives (=
management components) that give directions
on how the processes should be performed.
- Is SCM a complex management concept or a
problematic one?
SCM – Supply Chain Management
• The ongoing discussion in the field can be either
summarized as that SCM is a very complex
management concept (e.g. Persson 1997), or we just
accept that SCM is like “a bottle of Coke, it is there and
we have to accept it and make the best out of it” (Bretzke
2005). This indicates, there is no consensus on what
SCM really is (see e.g. Mouritsen et al. 2003). And in
fact we observe a specific paradigm discussion with an
open result. A recent study by Gibson et al. (2005)
showed that the majority of SCM professionals perceive
SCM as a combination of strategies and activities that
have very much to do with supplier and customer
collaboration – and that is it!
Other Supply Chain Members
• Many companies are involved indirectly in
most supply chain and are critical to the
success of the supply chain.
They are: trucking, information
processing providers, warehousing
firm, freight forwarders, agents, and
consultants.
34
Supply Chain Management
• A process of moving goods and/or services
from the source to the final consumer and
back.
For example:
Forward Supply Chain
Raw material -> process -> customer
Reverse Supply Chain
Customer - > distributor - > salvage or
manufacturing
35
SCM ACTIVITIES
1. Integrated Behavior
2. Mutually Sharing Information
3. Mutually Sharing Risks and Rewards
4. Cooperation
5. The Same Goal and the Same Focus on Serving
Customers
6. Integration of Processes
7. Partners to Build and Maintain Long-Term Relationships
36
SUPPLY CHAIN MANAGEMENT ANTECEDENTS AND
CONSEQUENCES (SCO – supply chain optimization)
37
SCM philosophy drives supply chain members
to have a customer orientation.
Based upon the literature review, it is proposed that SCM as a
management philosophy has the following characteristics:
1. A systems approach to viewing the supply chain as a whole, and to
managing the total flow of goods inventory from the supplier to the
ultimate customer;
2. A strategic orientation toward cooperative efforts to synchronize and
converge intrafirm and interfirm operational and strategic capabilities
into a unified whole; and
3. A customer focus to create unique and individualized sources of
customer value, leading to customer satisfaction.
38
Consequences of Supply Chain
• If any member of the chain ignores the
interest of the chain member, suboptimization occurs thus leading to higher
end-product prices, lower supply chain
service levels, and lower demand.
39
Supply Chain Approach
To balance customers’ demands with the
need for profitable growth, many company
have agreed to improve supply chain
management. They have adopted:
• Work together
• Enhance revenue
• Control Cost
• Utilize Asset
• Customer satisfaction
Seven Principles of Supply Chain
Management
• Segment customer based on the service
needs
• Customize the logistic network to the
service requirements
• Listen to market signals and align demand
accordingly
• Differentiate product to the customer and
speed conversion across the supply chain
Seven Principles of Supply Chain
Management
• Manage sources of supply strategically to
reduce the total cost of owning material and
service
• Develop a supply chain-wide technology
strategy that support multiple level of decision
making and gives a clear view of the flow or
products, services, and information
• Adopt channel-spanning performance measures
to gauge collective success in reaching the enduser effectively and efficiently
Importance of Supply Chain
• Firms operate independently will be inefficient.
However, supply chain increases value, long range
profitability and satisfaction of customers.
• Supply chain lowers
- purchasing price
- inventory cost
- better quality
- higher customer service
The cost of inventory was $2.2 trillion and inventory
carrying cost of $434 billion in 2000.
43
Elements of Supply Chain
• Purchasing – supplier alliance, supplier
management, and strategic sourcing
• Operations – Demand management, MRP,
ERP, JIT, TQM
• Distribution – Transportation management,
customer relationship management, network
design, and service response logistics
• Integration – Coordination, integration
activities, global integration problems, and
performance management
44
Supply Chain Management
• Purchasing is the act of obtaining:
- Merchandise
- capital equipment
- raw material
- services
- Maintenance, repair, and Operating
(MRO)
45
Merchants VS. Industrial Buyers
• Merchants
- Wholesalers
- Retailer
They buy and sell. They buy in bulk and sell to
retailer or customer in small quantities
• Industrial Buyer
- Buy material for conversion
It includes raw material, capital equipment,
maintenance, repair, and operating supplies
46
Roles of Purchasing
• Purchasing was considered a routine activity until
global competition intensified.
Companies realized the impact of large quantities
of purchasing material and work-in-process on:
- cost
- quality
- product development
- lead time
As a result, supply chain become a key strategy
47
Role of Purchasing
• The goal of purchasing to ensure uninterrupted
flows of raw material:
- at the lowest total cost,
- to improve quality
- higher customer satisfaction
• Purchasing can contribute by:
- quality raw material
- reliable supplier
- design of new product
48
Supply Chain Metric
• A verifiable measure stated in either
quantitative or qualitative terms defined
with respect to a reference point.
Metrics Give us
• Control by superior
• Reporting of data to superior and external
groups
• Communication
• Learning
• Improvement
Metrics Context
Metrics communicates expectation, identify
problems, direct a course of action, and
motivate people.
• Strategy Focus
• Strategic— Metrics - Operational
• Customer Standard
Strategy -> Metrics -> Operational
Metrics context
• Strategy determines how it will treat its
customer and what service it will supply.
• Metrics link strategy to operations.
• Focus describes the particular activity that
is to be measured.
• Standards are the yardstick that is the
basis of comparison on which
performance is judged.
Relationship between Supply Chain
Principles and Financial Outcomes
Revenue Asset
Cost
Growth Utilization Reduction
• Segment customer based on need
•
•
•
•
•
•
High
Customize logistics network
Medium
Listen to market signals and plan
Difference product close to customer Source Strategically
Develop supply chain technology
Medium
Adopt Performance Measure
High
Medium
Low
High
High
Medium
Medium
High
High
Low
Medium
High
High
Medium
High
54
A New Business Environment
• Technological progress is moving at a
tremendous rate
• There are many new products and
services in addition to old ones
• Rapid change is the norm
55
A New Business Environment
• Businesses try to
break down the “silos”
that used to define
business functions.
56
Overview of the Resource/Profit
Model
• The Resource/Profit
Model serves as an
organizational
model to put
operations in a
business context
Exhibit 1.3 The Resource/Profit Model
57
Foundation for Success
• Profitability – main objective of any business.
net income/net sales or total assets
• Strategy – Business must create value to attract
customer.
Methods for creating a value for the customer
• Process – Ability to convert input to output to
create value
A set of activities to contribute to a product
or service
58
Components of Value
(Competitiveness)
•
•
•
•
Cost
Quality
Timeliness
Service
59
Managing Resources to Create
Value
•
•
•
•
•
•
•
•
•
Supply Chain Management
Demand Forecasting
Lean System (JIT)
Constraint Management
Inventory (raw material, WIP, Finished goods)
Logistics (flow of goods)
Capacity (resources needed to meet demand)
Facilities (location, layout)
Workforce
60
Environmental Forces
• Environmental forces affect the business
– Globalization
– The Internet and Other Technologies
(Global positioning system (GPS), Radio
frequency identification (RFID))
– The Natural Environment
(Environment concerns have restricted)
– Regional Pressures (resource available at
certain location)
61
Characteristics of Goods
• Tangible product
• Durable product
• Response Time
Required (Lead
Time)
• Large Size Facilities
• Located Anywhere
© 1995 Corel Corp.
62
Characteristics of Goods
• Low customer
interaction
• Quality can be
measured
• Uniformity of Input
• Standardization
Possible
• Capital Intensive
• High Productivity
63
Characteristics of Services
•
•
•
•
Intangible product
Perishable Product
No Lead time
Some Produced &
consumed at same time
• Localized Facilities
• Direct customer contact
© 1995 Corel Corp.
64
Characteristics of Services
• Hard to measure
quality
• Less Uniformity of
input
• Standardization not
Possible
• Labor Intensive
• Productivity low
65
Goods Contain Services & Services
Contain Goods
Good
100% 75
50
25
|
|
|
|
Automobile
0
|
Service
25
50
75
|
|
|
100%
|
Computer
Fast-Food Restaurant
Dentist
Counseling
66
Goods Contain Services &
Services Contain Goods
Automobile
Computer
Installed Carpeting
Fast-food Meal
Restaurant Meal
Auto Repair
Hospital Care
Advertising Agency
Investment Management
Consulting Service
Counseling
100
75
50
25
Percent of Product that is a Good
0
25
50
75
100
Percent of Product that is a Service
67