MBA 8503: OPERATIONS
AND SUPPLY CHAIN
MANAGEMENT
Welcome!
Matthew J. Liberatore
Spring 2011
1
INTRODUCTION TO
OPERATIONS AND SUPPLY
CHAIN MANAGEMENT
Class 1: 1/12/11
2
1-3
WHAT IS OPERATIONS AND SUPPLY CHAIN MANAGEMENT?
Operations and Supply Chain
Management is defined as the
design, operation, and improvement
of the systems that create and
deliver the firm’s primary products
and services
1-4
Operations and Supply Chain Management
Supply Chain Processes
Sourcing
Processes
Manufacturing
Processes
Logistics
Processes
Logistics
Processes
Service
Processes
Distribution
Processes
INTRODUCTION TO
OPERATIONS
MANAGEMENT
5
KMART VERSUS WAL-MART
Both chains started in 1962
 In 1987, Kmart had 2,223 stores to Wal-Mart’s
1,198.
 Kmart’s sales were $25.63 billion to Wal-Mart’s
$15.96 billion
 By 1991, Wal-Mart’s sales exceeded Kmarts
 Kmart still had more stores

6
KMART VERSUS WAL-MART CONTINUED
In year ending January 1996, Wal-Mart’s sales
were $93.6 billion to Kmart’s $34.6 billion.
 During this time Kmart emphasized marketing
and merchandising (such as national TV ad
campaigns).
 Wal-Mart was investing millions in its operations
to lower cost.

7
KMART VERSUS WAL-MART CONTINUED
Wal-Mart developed sophisticated distribution
system that integrated its computer system with
its distribution system.
 Kmart’s employees lacked skills needed to plan
and control inventory.

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IMPORTANCE OF OPERATIONS
 Improvements
in operations can
simultaneously lower costs and
improve customer satisfaction.
 Improving operations often dependent
on advances in technology.
 Can obtain competitive advantage by
improving operations.
9
OPERATIONS
 Heart
of every organization
 Operations are the tasks that create
value
 Operations management uses
resources to transform inputs into
desired outputs
10
THE PRODUCTION SYSTEM
11
SYSTEMS PERSPECTIVE
Inputs
 Transformation System

Alter
 Transport
 Store
 Inspect

Outputs
 Environment

12
1-13
Automobile Factory
 Primary

Inputs
Sheet steel, engine parts
 Resources

Tools, equipment, workers
 Primary

Fabrication and assembly of cars
 Desired

Transformation Function
Output
High quality cars
1-14
Hospital
 Primary

Inputs
Patients
 Resources

MDs, nurses, drugs, equipment
 Primary
Transformation
Function

Health care (diagnosis and
treatment)
 Primary

Output
Healthy individuals
CHARACTERISTICS OF PRODUCTS AND
SERVICES
Products
Services
Tangible
Intangible
Minimal customer contact
Extensive customer contact
Minimal customer participation
Extensive customer participation
Delayed consumption
Immediate consumption
Equipment intensive
Labor intensive
Quality easily measured
Quality difficult to measure
15
FACILITATING GOOD CONCEPT
Often confusion in trying to classify organization as
manufacturer or service
 Facilitating good concept avoids this ambiguity
 All organizations defined as service
 The tangible part of the service is defined as
facilitating good
 Pure Services

16
THE RANGE FROM SERVICES
PRODUCTS
TO
17
INTRODUCTION TO SUPPLY
CHAIN MANAGEMENT
18
WHAT IS A SUPPLY CHAIN?
Flow of products and services from:
 Raw materials manufacturers
 Intermediate products manufacturers
 End product manufacturers
 Wholesalers and distributors and
 Retailers
• Connected by transportation and storage
activities
• Integrated through information, planning, and
integration activities
• Cost and service levels
WHAT IS SUPPLY CHAIN
MANAGEMENT?

Supply chain management is a set of approaches
utilized to efficiently integrate suppliers,
manufacturers, warehouses, and stores, so that
merchandise is produced and distributed at the
right quantities, to the right locations, and at the
right time, in order to minimize system wide
costs while satisfying service level requirements.
TWO OTHER FORMAL DEFINITIONS
The design and management of seamless, valueadded process across organizational boundaries
to meet the real needs of the end customer
Institute for Supply Management
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 the customer
The Supply Chain Council
PC Industry Supply Chain
Tracing back the screen you stare at for the bulk of your time.
Cisco’s Value Network
SCM Definition
Material Flow
Supplier
Converter
Distributor
Retailer
Source
Converter
Supplier
Distributor
Consumers
End-User
Value-Added Services
Funds/Demand Flow
Information Flow
Reuse/Maintenance/After Sales Service Flow
THE SCM NETWORK
FIGURE 1 The logistics network
KEY OBSERVATIONS
 Every
facility that impacts costs need to
be considered


Suppliers’ suppliers
Customers’ customers
 Efficiency
and cost-effectiveness
throughout the system is required

System level approach
 Multiple

levels of activities
Strategic – Tactical – Operational
OTHER RELATED OBSERVATIONS
Supply chain strategy linked to the Development
Chain
 Challenging to minimize system costs and
maximize system service levels
 Inherent presence of uncertainty and risk

THE DEVELOPMENT CHAIN

Set of activities and processes associated with
new product introduction. Includes:
product design phase
 associated capabilities and knowledge
 sourcing decisions
 production plans

THE DEVELOPMENT CHAIN
Figure 2 The enterprise development and supply chain
GLOBAL OPTIMIZATION
Geographically dispersed complex network
 Conflicting objectives of different facilities
 Dynamic system

Variations over time
 Matching demand-supply difficult
 Different levels of inventory and backorders


Recent developments have increased risks

Lean production/Off-shoring/Outsourcing
GLOBAL APPAREL VALUE CHAIN
TRACING BACK THE DRESS YOU ARE WEARING
Globally Dispersed Manufacturing
An Illustration: How Li & Fung Limited Might Make a Dress
Product Design
[Hong Kong]
Yarn Spinning
[Korea]
QC & Shipping
[Hong Kong]
Weaving
[Taiwan]
Zippers+…
[Japan+…]
Stitching
[Indonesia]
MATCHING SUPPLY AND DEMAND A
MAJOR CHALLENGE
REASONS
EXAMPLES
•Raw material shortages
•Internal and supplier parts
Boeing Aircraft’s inventory writedown of $2.6 billion
shortages
•Productivity inefficiencies
•Sales and earnings shortfall
•Larger than anticipated inventories
•Stiff competition
•General slowdown in the PC
Sales at U.S. Surgical Corporation
declined 25 percent, resulting in a
loss of $22 million
Intel reported a 38 percent decline
in quarterly profit
market
•Higher than expected orders for
new products over existing
products
EMC Corp. missed its revenue
guidance of $2.66 billion for the
second quarter of 2006 by around
$100 million
UNCERTAINTY AND RISK FACTORS
Forecasting is not a solution
 Demand is not the only source of uncertainty
 Recent trends make things more uncertain

Lean manufacturing
 Outsourcing
 Off-shoring

UNCERTAINTY AND RISK FACTORS
 August


P&G coffee supplies from sites around New
Orleans
Six month impact
 2002


Taiwan earthquake
Supply interruptions of HP, Dell
 2001

West Coast port strike
Losses of $1B/day
Store stock-outs, factory shutdowns
 1999

2005 – Hurricane Katrina
India (Gujarat state) earthquake
Supply interruptions for apparel
manufacturers
EVOLUTION OF SUPPLY CHAIN
MANAGEMENT
Further
Refinement of
SCM Capabilities
SCM
Formation/
Extensions
JIT, TQM, BPR,
Alliances
Inventory Management/Cost
Optimization
Traditional Mass Manufacturing
1950s
1960s
1970s
1980s
1990s
2000s
Beyond
PROGRESSION OF LOGISTICS COSTS
FIGURE 1-4: Logistics costs’ share of the U.S. economy
LOGISTICS COSTS TRENDS


After rising over 50 percent in the five years
leading up to the recession, total logistics costs
have fallen the past two years.
Logistics costs in 2009 were equal to about $1.1
trillion – a drop of $244 billion (or 18.2) over
2008
COMPOSITION OF LOGISTICS COSTS



Transportation costs were down more than 20
percent last year
Transportation costs now account for 4.9 percent
of GDP, well below the 6 percent share in 2008.
Carrying costs accounted for 2.5 percent of GDP
in 2009, down from 2.9 percent in 2008 and well
off the 8.3 percent of GDP in 1981
COMPLEXITY: THE MAGNITUDE
The grocery industry could save $30 billion (10% of
operating cost) by using effective logistics strategies
 A typical box of cereal spends 104 days getting from
factory to supermarket.
 A typical new car spends 15 days traveling from the
factory to the dealership.

COMPLEXITY: THE MAGNITUDE

Compaq computer’s loss of $500 million to $1 billion in
sales in one year


Boeing’s forced announcement of write-downs of $2.6b


Laptops and desktops were not available when and where
customers were ready to buy them
Raw material shortages, internal and supplier parts
shortages….
Cisco’s multi-billion ($2.2b) dollar write-off of
inventories in 2001-2002

Customers balked on orders due to market meltdown
TRANSACTIONAL COMPLEXITY
National Semiconductors:
•
•
Production:
– Produces chips in six different locations: four in the US, one
in Britain and one in Israel
– Chips are shipped to seven assembly locations in Southeast
Asia.
Distribution
– The final product is shipped to hundreds of facilities all over
the world
– 20,000 different routes
– 12 different airlines are involved
– 95% of the products are delivered within 45 days
– 5% are delivered within 90 days.
MAGNITUDE OF SUPPLY CHAIN COSTS
COST ELEMENTS OF A TYPICAL TRADE BOOK
MAGNITUDE OF SUPPLY CHAIN COSTS
EXAMPLE: THE APPAREL INDUSTRY
Cost per
Percent
Shirt
Saving
Manufacturer
Distributor
Retailer
Customer
$52.72
0%
Manufacturer
Distributor
Retailer
Customer
$41.34
28%
Manufacturer
Distributor
Retailer
Customer
$20.45
62%
SUPPLY CHAIN: THE POTENTIAL

P&G’s estimated savings to retail customers of $65 million through
logistics gains

Dell Computer’s outperforming of the competition in terms of shareholder
value growth over more than two decades by over 3,000% using:


Direct business model

Build-to-order strategy
Wal-Mart transformation into the world’s largest retailer by changing its
logistics system:

highest sales per square foot, inventory turnover and operating profit of any
discount retailer
KAPLAN AND NORTON’S (2006)
OPERATION S STRATEGY AND THE
BALANCED SCORECARD
KAPLAN AND NORTON’S (2006) STRATEGY
MAP TEMPLATES