Operations Management in the Supply Chain

This is a short topic just 3-5 pages shouldn’t take much time

Operations Management in the
Supply Chain
Decisions and Cases
Seventh Edition
Chapter 1
The Operations
Function © McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill Education. © McGraw-Hill Education. 1-2
Learning Objectives
1.1 Define operations management.
1.2 Describe the five main decisions made by
operations and supply chain managers.
1.3 Explain the nature of cross-functional
decision making with operations.
1.4 Define typical inputs and outputs of an
operations transformation system.
1.5 Identify contemporary challenges facing
operations and supply chain managers. © McGraw-Hill Education. 1-3
Why Study Operations Management?
• Cross-functional nature of decisions
• Operations is a major function in every
organization
• Principles of process thinking can be applied
across the organization
• Operations Management is an interesting and
challenging field of study © McGraw-Hill Education. 1-4
Definition of Operations Management
• Operations management focuses on decisions
for the production and delivery of the firm’s
products and services. © McGraw-Hill Education. 1-5
Three Aspects of Operations
mManagement
• Decisions:
– The operations manager must decide:
 Process, quality, capacity, inventory, and supply
chain
• Function:
– Major functional areas in organizations:
 Operations, marketing, finance
• Process:
– Planning and controlling the transformation
process and its interfaces (internal/external) © McGraw-Hill Education. 1-6
Definition of Supply Chain
• Network of manufacturing and service
operations that supply one another
• From raw materials through production to the
end consumer
• Flows of materials, money, and information
• Links operations across organizations © McGraw-Hill Education. 1-7
Major Decisions at Pizza USA
• Process
– How should we produce pizzas?
• Quality
– How do we meet quality standards and ensure a
good customer experience?
• Capacity
– How much output do we need at various times?
• Inventory
– Which ingredients, when & how much?
• Supply Chain
– How to source inputs and manage logistics? © McGraw-Hill Education. 1-8
Contingencies (1 of 2)
• Decisions related to process, quality, capacity,
inventory and supply chain must account for:
– upstream suppliers
– downstream customers
– other functions (marketing, finance)
– support functions (HR, Info systems, accounting)
– situations (supply disruption, seasonal demand
peaks)
– conditions (economy, changing customer
preferences)
many other contingencies © McGraw-Hill Education. 1-9
Contingencies (2 of 2)
In other words, there is no single set of
“best” practices. The best decision-making
will depend on the situation. © McGraw-Hill Education. 1-10
Cross-Functional Decision Making
• Operations as the primary production
function.
• Other primary functions:
– Marketing
– Finance
• Supporting functions: all others
• Major cross-functional decision making
relationships (See Table 1.2) © McGraw-Hill Education. 1-11
Operations as a Process
 Inputs  → ( )  Outputs  →
Process
Conversion
Transformation
 Inputs  → →  Outputs  →
Assembly
Transformation
Fabrication
Transformation
Fabrication: making the parts
Assembly: putting the parts together © McGraw-Hill Education. 1-12
Operations as a Process (Figure 1.2) © McGraw-Hill Education. 1-13
Contemporary Operations Challenges
• Service and Manufacturing (differences and
implications)
• Customer-Directed Operations (“voice of the
customer”)
• Integration of Decisions Internally and
Externally
• Environmental Sustainability
• Globalization of Operations and the Supply
Chain © McGraw-Hill Education. 1-14
Summary
1.1 Define operations management.
1.2 Describe the five main decisions made by
operations and supply chain managers.
1.3 Explain the nature of cross-functional
decision making with operations.
1.4 Define typical inputs and outputs of an
operations transformation system.
1.5 Identify contemporary challenges facing
operations and supply chain managers. © McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill Education. 1-15
End of Presentation
Operations Management in the
Supply Chain
Decisions and Cases
Seventh Edition
Chapter 2
Operations and
Supply Chain
Strategy © McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill Education. © McGraw-Hill Education. 2-2
Learning Objectives (1 of 2)
2.1 Define operations strategy.
2.2 Describe the elements of operations
strategy and alignment with business and
other functional strategies.
2.3 Differentiate the ways to compete with
operations objectives.
2.4 Compare product imitator and innovator
strategies. © McGraw-Hill Education. 2-3
Learning Objectives (2 of 2)
2.5 Provide examples of a distinctive
competence for operations
2.6 Explain the nature of global operations
and supply chains.
2.7 Describe two types of supply chain
strategies.
2.8 Illustrate how operations can become
more environmentally sustainable. © McGraw-Hill Education. 2-4
Operations Strategy
A consistent pattern of business decisions
for operations and the associated supply chain…
… that are linked to the business strategy
and other functional strategies, leading to a
competitive advantage for the firm.” © McGraw-Hill Education. 2-5
Operations Strategy Process
(Figure 2.1) © McGraw-Hill Education. 2-6
Operations Strategic Objectives
• Cost – resources used
• Quality – conformance to customer
expectations
• Delivery – quickly and on time
• Flexibility – ability to rapidly change
operations
How does a firm use these objectives to gain a
competitive advantage?
What trade-offs exist among the objectives? © McGraw-Hill Education. 2-7
Examples of Important Strategic
Decisions in Operations (Table 2.2)
Strategic Decision Decision Type Strategic Choice
Process
Span of process
Automation
Process flow
Job specialization
Make or buy
Hand/machine-made
Project, batch, line or continuous
High or low specialization
Quality
Approach
Training
Suppliers
Prevention or inspection
Technical or managerial training
Selected on quality or cost
Capacity
Facility size
Location
Investment
One large or several small facilities
Near markets, low cost or foreign
Permanent or temporary
Inventory
Amount
Distribution
Control Systems
High or low levels of inventory
Centralized or decentralized warehouse
Control in greater or less detail
Supply Chain Sourcing
Logistics
Insource or outsource products
National or global distribution © McGraw-Hill Education. 2-8
Distinctive Competence
This operations capability is something an
organization does better than any competing
organization that adds value for the
customer.
Examples: patents, proprietary technology,
operations innovations © McGraw-Hill Education. 2-9
Linking Operations to Business
Strategies (1 of 2)
• Business strategy alternatives
– Product Imitator
 Operations must focus on keeping costs low.
– Product Innovator
 Operations must maintain flexibility in processes,
labor and suppliers.
• Customer perspective
– Order Qualifiers: objectives customers consider in
the product/service
– Order Winners: objectives that cause customer to
choose a particular product/service © McGraw-Hill Education. 2-10
Linking Operations to Business
Strategies (2 of 2)
• Business strategy alternatives
– Product Imitator
 Order Winner = price (low cost)
 Order Qualifiers = flexibility, quality, delivery
– Product Innovator
 Order Winner = flexibility (rapid introduction of new
products)
 Order Qualifiers = cost, delivery, quality © McGraw-Hill Education. 2-11
Example: McDonald’s Operations
Strategy
• Mission: fast product/service, consistent
quality, low cost, clean/friendly environment
• Operations Objectives: cost, quality,
service
• Strategic Decisions: process, quality,
capacity, inventory, supply chain
• Distinctive Competence: today: continuous
improvement of the transformation system,
and brand (originally: unique service/supply
chain) © McGraw-Hill Education. 2-12
Global Operations and Supply Chains
• Traditional” (multi-country, multi-strategy)
versus “Global” (single-strategy) firm.
• Characteristics of the “Global Corporation
differ from the traditional company.
• Rethink the supply chain (product design,
process design, location, workforce policies). © McGraw-Hill Education. 2-13
Characteristics of “Global
Corporations”
• Facilities located worldwide, not country by
country.
• Products & services can be shifted among
countries.
• Sourcing on a global basis.
• Supply chain is global in nature.
• Product design & process technology are global.
• Products/service fit global tastes.
• Demand is considered on worldwide basis.
• Logistics & inventory control is on worldwide
basis. © McGraw-Hill Education. 2-14
Supply Chain Strategy
• To achieve competitive advantage for entire
supply chain, rather than individual entities.
• Two supply chain strategies:
– Imitative Products (e.g. commodities)
 Predictable demand
 Efficient, low-cost supply chain
– Innovative Products (e.g. new technologies)
 Unpredictable demand
 Flexible, fast supply chain
• Firms design supply chain for each
product/service or group of products/services
– Avoid “one size fits all” strategy © McGraw-Hill Education. 2-15
Environment & Sustainable
Operations (1 of 2)
• Operations Sustainability:
– minimizing or eliminating environmental
impact of operations
– social and financial viability of the firm for
future generations © McGraw-Hill Education. 2-16
Environment & Sustainable
Operations (2 of 2)
• Operations ‘greening’ may include:
– Eliminating air, water, landfill pollution
– Reducing energy consumption
– Minimizing transportation and total carbon
footprint
– Working with suppliers to use recyclable and
biodegradable packaging
– Incorporating product reuse, end-of-life
return, recycling © McGraw-Hill Education. 2-17
Summary (1 of 2)
2.1 Define operations strategy.
2.2 Describe the elements of operations strategy
and alignment with business and other
functional strategies.
2.3 Differentiate the ways to compete with
operations objectives.
2.4 Compare product imitator and innovator
strategies.
2.5 Provide examples of a distinctive competence
for operations. © McGraw-Hill Education. 2-18
Summary (2 of 2)
2.6 Explain the nature of global operations and
supply chains.
2.7 Describe two types of supply chain strategies.
2.8 Illustrate how operations can become more
environmentally sustainable. © McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill Education. 2-19
End of Presentation
Operations Management in the
Supply Chain
Decisions and Cases
Seventh Edition
Chapter 3
Product Design © McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill Education. © McGraw-Hill Education. 3-2
Learning Objectives
3.1 Compare the three strategies for new product
introduction.
3.2 Describe the three phases of new-product
development.
3.3 Evaluate how concurrent engineering deals
with misalignment.
3.4 Describe the criteria that should be used for
supplier selection.
3.5 Evaluate an example of Quality Function
Deployment.
3.6 Explain the benefits of modular design. © McGraw-Hill Education. 3-3
Product Design: Why Does
Operations Care?
• Traditionally: throw design “over the wall”
• Today:
– must be able to make the product (process)
 technology
 availability of resources
– must have the right type and amount of
capacity
– must deliver a quality product or service
– must have right inventory at right time © McGraw-Hill Education. 3-4
Strategies for New-Product
Introduction
• Market Pull: “Make what we can sell”
– Organize resources to fulfill customer demand
– Food industry
• Technology Push: “Sell what we can make”
– Develop superior technologies and products
– Electronics
• Interfunctional View: most difficult
– Cross-functional design team – marketing,
engineering, operations, finance
– Challenge to gain cooperation of all functions
– Consider existing and new markets © McGraw-Hill Education. 3-5
Figure 3.1 Lack of cooperation in
designing a swing © McGraw-Hill Education. 3-6
New Product Development Process
• Concept Development
– Idea generation and evaluation of alternative ideas
• Product Design
– Design of the physical product
– Design of the production process
• Pilot Production/Testing
– Testing production prototypes (e.g., 3D printing)
– Finalizing production process
– Finalizing ‘information package’ specifying product
and process design details © McGraw-Hill Education. 3-7
New Product Design Process
(Figure 3.2) © McGraw-Hill Education. 3-8
Cross-Functional Product Design
(1 of 2)
• Sequential approach
– Functions (marketing, engineering,
operations) work independently before passing
work to next step. This is the ‘over the wall’
approach.
– Often results in misalignment of market
needs, design, and production process. © McGraw-Hill Education. 3-9
Cross-Functional Product Design
(2 of 2)
• Concurrent approach
– Also called concurrent engineering.
– Functions cooperate, work together over the
same time frame.
– Cross-functional teams.
– Not always “best” approach (e.g. high
uncertainty of market or technology). © McGraw-Hill Education. 3-10
Cross-Functional Product Design
FIGURE 3.3 Sequential and concurrent
approaches. © McGraw-Hill Education. 3-11
Supply Chain Collaboration
• Relationships with Customers
– Ask right questions
– Align incentives to share knowledge
– Create collaborative technology platform
– Include as advisors to design team
• Criteria for Relationships with Suppliers
– Technical expertise
– Capabilities – cost, time, quality targets
– Capacity availability
– Low risk © McGraw-Hill Education. 3-12
Quality Function Deployment (QFD)
• “House of Quality”
• Tool for interfunctional cooperation
• Customer Attributes
– “Voice of the Customer”
• Engineering Characteristics
– “Voice of the Engineer”
• Helps identify tradeoffs
• Can include target values and competitive
comparison © McGraw-Hill Education. 3-13
House of Quality (QFD) (1 of 2)
FIGURE 3.4 Relationship matrix. © McGraw-Hill Education. 3-14
House of Quality (QFD) (2 of 2)
FIGURE 3.5 House of quality. © McGraw-Hill Education. 3-15
Modular Design (1 of 2)
• Allows greater variety through ‘mixing and
matching’ modules
• Design, develop, and manage basic product
components (modules) to use in multiple
products
• Controls costs while maintaining customer
choice
• Small number of components enables large
number of combinations, e.g., Dell
notebooks, IKEA cabinets © McGraw-Hill Education. 3-16
Modular Design (2 of 2)
• Volkswagen A5/A5+ Platform
– Audi A1
– Skoda Rapid
– VW Santana
– VW Jetta
– VW Vento
– VW Polo
• Chrysler LX Platform
– Chrysler 300
– Dodge Charger
– Dodge Magnum wagon
– Lancia Thema (Italian) © McGraw-Hill Education. 3-17
Summary
3.1 Compare the three strategies for new
product introduction.
3.2 Describe the three phases of new-product
development.
3.3 Evaluate how concurrent engineering deals
with misalignment.
3.4 Describe the criteria that should be used for
supplier selection.
3.5 Evaluate an example of Quality Function
Deployment.
3.6 Explain the benefits of modular design. © McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill Education. 3-18
End of Presentation
Operations Management in the
Supply Chain
Decisions and Cases
Seventh Edition
Chapter 4
Process Selection © McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill Education. © McGraw-Hill Education. 4-2
Learning Objectives
4.1 Contrast and compare the five types of productflow processes.
4.2 Describe the differences among order fulfillment
processes.
4.3 Explain how companies should make process
selection decisions.
4.4 Correctly place examples of products on the
diagonal of the product-process matrix.
4.5 Describe the features of focused operations.
4.6 Discuss the advantages and disadvantages of
mass customization and 3D Printing.
4.7 Contrast pollution prevention, control and
practices. © McGraw-Hill Education. 4-3
Product-Flow Characteristics
• Types of Product Flow
– Continuous process
– Assembly line
– Batch flow
– Job shop
– Project © McGraw-Hill Education. 4-4
Product-Flow Characteristics:
Continuous Process
• Highly standardized and automated
• Flexibility limited
• High volumes of production
• Commodity products
• Low cost is the ‘Order Winner’
• Process industries (sugar, paper, oil,
electricity, etc.) © McGraw-Hill Education. 4-5
Product-Flow Characteristics:
Assembly Line
• Linear sequence of operations (often paced)
• Large capital investment, use of automation
• Very efficient
• High-volume, standardized products
• Low flexibility to product and volume changes
• Discrete products (autos, appliances,
computers, etc.) © McGraw-Hill Education. 4-6
Assembly Line: Metal Bracket
(Figure 4.1) © McGraw-Hill Education. 4-7
Product-Flow Characteristics: Batch
Flow
• Production of batches or lots
• Batches flow as a unit (set) from one work center
to another
• Process layout of work centers (by tasks)
• Flow is jumbled and intermittent
• Flexible labor and equipment (general purpose)
• Low to high volume, variety of products
• Many types of products (furniture, dishes, boats) © McGraw-Hill Education. 4-8
Batch Flow: Three Metal Brackets
(Figure 4.2) © McGraw-Hill Education. 4-9
Product-Flow Characteristics: Job
Shop
• Customized to customer order
• Production of small batches or lots
• Layout/flow similar to Batch Flow
• Flexible labor and equipment (general
purpose)
• Many types of made-to-order products
(plastic parts, machine components, sheet
metal parts, custom signs, artificial limbs,
etc.) © McGraw-Hill Education. 4-10
Product-Flow Characteristics: Project
• Production of customized single products
• Labor and materials brought to site
• Planning, scheduling challenges
• Little automation, general purpose equipment
• Highly skilled and flexible labor
• Unique, one of a kind products (bridges,
building construction, large aircraft, etc.) © McGraw-Hill Education. 4-11
Throughput Ratio: Process efficiency
100%
Total time in operations
Totalprocessing time for the job
TR = ×
Typically:
90-100% in Continuous Process and Assembly
Line
10-20% in Batch Flow and Job Shop © McGraw-Hill Education. 4-12
Order Fulfillment
• Make-to-Stock (MTS)
• Make-to-Order (MTO)
• Assemble-to-Order (ATO) © McGraw-Hill Education. 4-13
Make-to-Stock (MTS)
• Produce finished goods according to
production schedule
• Customer buys from inventory
• Advantage: faster fulfillment of customer
demand, lower cost, smooth production rate
• Disadvantage: inventory holding costs, slower
to respond to changes in customer
preferences © McGraw-Hill Education. 4-14
Make-to-Stock (Figure 4.3) © McGraw-Hill Education. 4-15
MTS Performance Measures
• Service level (orders filled when requested)
• Inventory replenishment time
• Inventory turnover (sales/avg. inventory)
• Capacity utilization
• Time to fill back order
• Others, such as shrinkage rate © McGraw-Hill Education. 4-16
Make-to-Order (MTO)
• Start production after customer orders
• No finished goods inventory
• Advantage: higher flexibility to customize
order; no finished goods inventory costs
• Disadvantage: intermittent production (i.e.,
lumpy demand pattern), slower response to
customer demand © McGraw-Hill Education. 4-17
Make-to-Order (Figure 4.3) © McGraw-Hill Education. 4-18
MTO Performance Measures
• Lead time
• Orders completed on time (%)
– Customer request date
– Promise date © McGraw-Hill Education. 4-19
Assemble-to-Order (ATO)
• Produce parts and subassemblies (modules);
complete production when customer places
order
• Advantage: less finished goods inventory,
faster fulfillment of customer order
• Disadvantage: work-in-process inventory © McGraw-Hill Education. 4-20
Assemble-to-Order (Figure 4.3) © McGraw-Hill Education. 4-21
MTS and MTO Comparison
Characteristics Make-to-Stock Make-to-Order
Product
Producer-specified
Low variety
Inexpensive
Customer-specified
High variety
Expensive
Objectives Balance inventory,
capacity, and service
Manage delivery lead
times and capacity
Main operations
challenges
Forecasting
Planning production
Control of inventory
Delivery promises
Delivery time © McGraw-Hill Education. 4-22
Order Penetration Point (Figure 4.4) © McGraw-Hill Education. 4-23
Process Selection Decisions
• Process characteristics (produce when?
produce how?)
– When: MTS, MTO, ATO
– How: Continuous process, Assembly line,
Batch flow, Job shop, Project
• Factors affecting process choice
– Market conditions
– Capital requirements
– Availability and cost of labor
– Technology options © McGraw-Hill Education. 4-24
Process Characteristics Matrix
(Table 4.2)
Characteristics Make-to-Stock Make-to-Order or
ATO
Continuous and
Assembly Line Flow
Automobile assembly
Oil refinery
Cannery
Cafeteria
Automobile assembly
Dell computers
Electronic components
Fast food
Batch and Job Shop
Machine shop
Wine
Glassware factory
Costume jewelry
Machine shop
Restaurant
Hospital
Custom jewelry
Project
Speculation homes
Commercial paintings
Noncommissioned art
Buildings
Movies
Ships © McGraw-Hill Education. 4-25
Product-Process Strategy
• Strategy must consider product
characteristics and process capabilities.
• Product life cycle:
– Often begins in Job Shop, then Batch Flow,
then Continuous/Assembly Line.
• Example: Bread was first produced by hand in
individual units in traditional bakeries, and is
now produced in very large batches in
modern automated bakeries. © McGraw-Hill Education. 4-26
Product-Process Matrix (Figure 4.5) © McGraw-Hill Education. 4-27
Focused Operations
• Lack of focus means attempting to accomplish
too many goals at one plant or one facility.
• Examples of declining focus: Product/service
proliferation, requiring different volumes and
different levels of standardization.
• Focused facility: Meeting one set of goals.
• Plant-within-a-plant (PWP): Separate
products/services with differing goals by
production lines/areas within the same facility. © McGraw-Hill Education. 4-28
Mass Customization
• Strategy to produce products in lot sizes = 1,
in high volume.
• Made possible by flexible manufacturing.
• Traditional mass production provides
economies of scale.
• Mass Customization means using a high
volume process (economies of scale = low
unit cost) to produce relatively custom
products (economies of scope = high variety). © McGraw-Hill Education. 4-29
Forms of Mass Customization
• Modular production & assemble-to-order
(ATO)
– e.g., assembling modules for Dell computers
• Fast changeover
– e.g., zero set-up time at Motorola
• Postponement of options
– e.g. power supply for Hewlett-Packard printers © McGraw-Hill Education. 4-30
3D Printing & Additive Manufacturing
(1 of 2)
• Based on digital design model (stored in cloud,
not warehouse!)
• Layer plastic, metal, ceramic to build object
– Normal (real) size
– Complex shapes and spaces
• Uses: medical implants, aerospace, spare parts,
etc.
– Complements manufacturing for special needs,
rather than replacing production facilities
– Can shorten global supply chain; reduce inventory © McGraw-Hill Education. 4-31
3D Printing & Additive Manufacturing
(2 of 2) © McGraw-Hill Education. 4-32
Environmental Concerns
• Technologies for pollution prevention.
• Technologies for pollution control.
• Infrastructure Systems for pollution practices.
• Other concerns
– Recycling outputs
– Recycled inputs
– Remanufacturing © McGraw-Hill Education. 4-33
Cross-Functional Decision Making:
Who has a stake in process choice?
• Marketing wants fast response to customer
demand
• Finance provides funds to configure the
process
• HR finds/creates the properly skilled workers
• IT serves various data requirements
• Accounting evolves in setting performance
measures © McGraw-Hill Education. 4-34
Summary
4.1 Contrast and compare the five types of productflow processes.
4.2 Describe the differences among order fulfillment
processes.
4.3 Explain how companies should make process
selection decisions.
4.4 Correctly place examples of products on the
diagonal of the product-process matrix.
4.5 Describe the features of focused operations.
4.6 Discuss the advantages and disadvantages of
mass customization and 3D Printing.
4.7 Contrast pollution prevention, control and
practices. © McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill Education. 4-35
End of Presentation
Operations Management in the
Supply Chain
Decisions and Cases
Seventh Edition
Chapter 5
Service Process
Design © McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill Education. © McGraw-Hill Education. 5-2
Learning Objectives
5.1 Differentiate the characteristics of a service
organization from a manufacturing
organization.
5.2 Explain the elements of a service-product
bundle.
5.3 Organize a variety of service offerings into the
service delivery system matrix.
5.5 Explain service recovery and service
guarantees.
5.6 Evaluate the role of technology and
globalization in service management.
5.7 Define the attributes of the service profit chain © McGraw-Hill Education. 5-3
The Service Economy
Largest 15 U.S. employers
1960
– 12 manufacturers
– 3 services
2010
– 3 manufacturers
– 12 services © McGraw-Hill Education. 5-4
Defining Service
• Intangibility of the offering
• Simultaneous production and consumption
• No finished goods inventory
• Front office vs. back office
• Cannot be stored/resold © McGraw-Hill Education. 5-5
Service-Product Bundle
• Service – explicit service
– what the provider does for customer
• Psychological benefits – implicit service
– how customer feels after service
• Physical goods – facilitating goods
– used during service or received by customer
• Pizza delivery
– Enjoyment
– Pizza
– Delivery vehicle
– Speed/ convenience © McGraw-Hill Education. 5-6
Goods and Services Packages
(Figure 5.1) © McGraw-Hill Education. 5-7
Service Delivery System Matrix
(Figure 5.2) © McGraw-Hill Education. 5-8
Customer Contact
• Definition: Extent of interaction between
service provider and customer
• Lower contact = provider routed
(standardized)
• Higher contact = customer routed
(customized)
• Potential inefficiency = f (degree of customer
contact) © McGraw-Hill Education. 5-9
Customer Contact (see Fig. 5.3)
(1 of 2)
• Low customer contact
– Higher production efficiency
– Lower sales opportunity
– Workers with technical skills
– Focus on paper handling
– Office automation © McGraw-Hill Education. 5-10
Customer Contact (see Fig. 5.3)
(2 of 2)
• High customer contact
– Lower production efficiency
– Higher sales opportunity
– Workers with diagnostic skills, more flexible
and personable
– Focus on client mix
– Client/worker teams © McGraw-Hill Education. 5-11
Customer-Introduced Variability
(1 of 2)
• Arrival
– Uncertainty in when customers will arrive to
consume a service
• Request
– Uncertainty in what customers ask for in the
service-product bundle
• Capability
– Uncertainty in the ability of customers to
participate in a service © McGraw-Hill Education. 5-12
Customer-Introduced Variability
(2 of 2)
• Effort
– Uncertainty in the willingness of customers to
perform appropriate actions
• Subjective preference
– Uncertainty in the intangible preferences of
customers in how service is carried out © McGraw-Hill Education. 5-13
Service Failure / Service Recovery
• Failing right before the customer’s eyes!
– Taking swift and appropriate action to
compensate customer for a failed service.
– Fly in customer’s soup → New bowl of soup
plus free dessert! © McGraw-Hill Education. 5-14
Manager’s Tool: Service Guarantee
• Benefits to the customer
– Promise of service to be delivered
– Payout to customer if promise not delivered
– FedEx package delivery → On time, or it is
free!
• Benefits to the organization
– Focuses on customer (service promise)
– Clearly defines payout
– Improves customer loyalty © McGraw-Hill Education. 5-15
Technology and Globalization
(1 of 2)
• Production-line approach (Levitt, 1972)
– Standardize to minimize errors or deviations
from standards
– Automate to keep costs low
– Example: McDonald’s © McGraw-Hill Education. 5-16
Technology and Globalization
(2 of 2)
• Employees are the center of service
delivery (Schlesinger & Heskett, 1991)
– Use technology to support front-line
employees
– Value investments in both employees &
technology
– Focus on recruiting and training front-line
employees
– Example: Ritz-Carlton Hotel © McGraw-Hill Education. 5-17
Outsourcing & Offshoring Services
• Outsourcing:
– An outside firm performs service activities
such as workforce recruiting, payroll
management, accounting services, and call
center functions.
• Offshoring:
– Export of these service activities to other
countries. © McGraw-Hill Education. 5-18
Study of Offshoring (Duke and Booz
& Co. 2008)
• Transaction-intensive services (simple, standard,
limited differentiation) are becoming
commoditized (call centers, etc.) – competing on
cost.
• Professional services (engineering, data analysis,
legal work) are more commonly offshored.
• Firms are moving fast to scoop up global talent.
• Collaboration and maintaining quality are
challenging with globally dispersed providers. © McGraw-Hill Education. 5-19
Service Profit Chain (Figure 5.4)
• Internal service quality, leads to…
• Employee satisfaction, leads to…
• Employee retention & productivity, lead to…
• External service value (to customer), leads to…
• Customer satisfaction, leads to…
• Customer loyalty, leads to…
• Revenue growth & profitability (the goal)
– feed investment back into internal service
quality
The process is repeated from the beginning
(Internal service quality, leads to…) © McGraw-Hill Education. 5-20
Summary
5.1 Differentiate the characteristics of a service
organization from a manufacturing
organization.
5.2 Explain the elements of a service-product
bundle.
5.3 Organize a variety of service offerings into the
service delivery system matrix.
5.5 Explain service recovery and service
guarantees.
5.6 Evaluate the role of technology and
globalization in service management.
5.7 Define the attributes of the service profit chain © McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill Education. 5-21
End of Presentation
Operations Management in the
Supply Chain
Decisions and Cases
Seventh Edition
Chapter 6
Process-Flow
Analysis © McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill Education. © McGraw-Hill Education. 6-2
Learning Objectives
6.1 Describe process thinking and system
boundaries.
6.2 Explain how the process view of business
includes various functions.
6.3 Construct a process flowchart for a given
process.
6.4 Analyze a process by asking a wide variety
of questions informed by the process
flowchart.
6.5 Determine process capabilities from analysis.
6.6 Explain the principles of process redesign. © McGraw-Hill Education. 6-3
Process Thinking
• Process thinking: All work is a process.
• System: Collection of interrelated elements
where…
Whole > Sum of parts
• Apply systems thinking to businesses
– Defining system boundaries
• Use cross-functional teams for systems
analysis
– Include all affected functions © McGraw-Hill Education. 6-4
Process View of Business © McGraw-Hill Education. 6-5
Process Flowcharting (1 of 3)
• Process flowcharting: Creating a visual
diagram to describe (represent) a
transformation process
• Also called (or similar to):
– Process mapping
– Flow-process charting
– Service blueprinting
– Systems flowchart © McGraw-Hill Education. 6-6
Process Flowcharting (2 of 3)
• Purpose: To visually describe and then find
ways of improving the current process.
– Find repetitive operations
– Identify bottlenecks
– Describe directions and distances of flows
– (people, material and information)
– Reduce waste
• Required for certifications such as ISO9000. © McGraw-Hill Education. 6-7
Process Flowcharting (3 of 3)
1. Select a transformation process to study.
2. Form a team to develop flowchart & for
analysis (to improve the system).
3. Specify the boundaries of transformation
process.
4. Identify and sequence the operational steps.
5. Identify the performance metrics for the steps.
– e.g., time to complete each step
6. Draw the flowchart, using consistent symbols. © McGraw-Hill Education. 6-8
Common Flowcharting Symbols
Terminator: “START” and “END”
Process: operation, activity, or task
Decision: evaluation or “IF-THEN”
Flow: materials, information, customer © McGraw-Hill Education. 6-9
Flowchart Example: Selecting a
Supplier (Figure 6.2) © McGraw-Hill Education. 6-10
Symbols for Flow-Process Chart
Operation: task or work activity
Inspection: checking product quantity
or quality
Transportation: movement of material
from point to point
Storage: inventory of materials
awaiting next operation
Delay: delay in sequence of operations © McGraw-Hill Education. 6-11
Flow-Process Chart Example:
Picking Operations at Grocery Store Distribution Center
(Figure 6.5) © McGraw-Hill Education. 6-12
Questions to Ask in Process-Flow
Analysis
• Flow: Is it balanced? Where is the bottleneck? Are
all steps necessary? How jumbled is the flow?
• Time: How long to produce one unit? Can it be
reduced? Is set-up time excessive? Is waiting time
excessive?
• Quantity: Theoretical production amount? How easy
to change? How many units actually produced?
• Quality: Historical defect rate? Which steps
contribute to defects? Where do errors occur?
• Cost: How much to produce one unit? What are cost
buckets for one unit? Can some cost buckets be
reduced or eliminated? © McGraw-Hill Education. 6-13
Measuring Process Flows (1 of 2)
• Capacity of a system = capacity of the most
constraining resource
– The single resource with the least capacity is
called the bottleneck
• Flow rate = minimum (Supply, Demand,
Capacity)
• Throughput time = from when processing
begins until product or service is completed © McGraw-Hill Education. 6-14
Measuring Process Flows (2 of 2)
• Little’s Law
– Calculation: I = T × R
– I = average number of things in the system
– T = average throughput time
– R = average flow rate into the process
– Relates number of items in the system (I) to
arrival rate (R) and throughput time (T).
• Assumes system is in a ‘steady state.’ © McGraw-Hill Education. 6-15
Little’s Law Example (1 of 2)
• People are in a line to get through security
checks at a music festival. An average of 10
people per minute are processed. People
spend 24 minutes in line, on average.
• What is the average number of people in line?
• I = T × R
• I = 24 × 10 → I = 240 people in line, on
average © McGraw-Hill Education. 6-16
Little’s Law Example (2 of 2)
• Same problem, but an average of 4 people
per minute are processed, and the average
number of people in line is 240.
• What is the average time spent in line?
• T = I / R
• T = 240 / 4 → T = 60 minutes in line, on
average © McGraw-Hill Education. 6-17
Pizza U.S.A. Book Example
Activity Minutes Who/What
Take the order 1 Assistant
Make the crust 3 Chef
Prepare and add ingredients 2 Chef
Bake the pizza 24 Oven
Cut pizza and box the order 1 Assistant
Take payment 1 Assistant
Details:
Assume all toppings added to every pizza
Two employees working at a time
Oven can bake up to 4 pizzas at a time © McGraw-Hill Education. 6-18
Map the Process © McGraw-Hill Education. 6-19
What is the Throughput Time?
Throughput time = time to complete one
product or service
Pizza throughput time?
1 + 3 + 2 + 24 + 1 + 1 = 32 min. © McGraw-Hill Education. 6-20
What is Process Capacity?
3 resources:
Assistant: 1+1+1=3 min. per pizza, 20 pizzas
per hr.
Chef: 3+2=5 min. per pizza, 12 pizzas per hr.
Oven: 24/4=6 min. per pizza, 10 pizzas per hr.
Therefore, process capacity (flow rate) = 10
pizzas/hour © McGraw-Hill Education. 6-21
What is the Process Bottleneck?
At an average process time of 6 min. per pizza…
the OVEN is the slowest activity…..
which determines process capacity….
and is, therefore, the bottleneck.
The process cannot produce more than the
slowest activity (flow rate = 10 pizzas/hr). © McGraw-Hill Education. 6-22
Process Redesign
• Identify, analyze, improve critical processes
(may cross organizational boundaries).
• Extreme cases: Complete process
reconfiguration (eliminating many steps).
• Business Process Reengineering (BPR) © McGraw-Hill Education. 6-23
Principles of Process Redesign
• Organize around outcomes, not tasks.
• Have the people who do the work process
their own information.
– Avoid handoffs, whenever possible.
• Put the decision point where work is
performed, and build control into the process.
– Make decisions at lowest possible level.
• Eliminate unnecessary steps in the process.
– Simplify, eliminate non-value-added activities. © McGraw-Hill Education. 6-24
Summary
6.1 Describe process thinking and system
boundaries.
6.2 Explain how the process view of business
includes various functions.
6.3 Construct a process flowchart for a given
process.
6.4 Analyze a process by asking a wide variety
of questions informed by the process
flowchart.
6.5 Determine process capabilities from analysis.
6.6 Explain the principles of process redesign. © McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill Education. 6-25
End of Presentation
Operations Management in the
Supply Chain
Decisions and Cases
Seventh Edition
Chapter 7
Lean Thinking and
Lean Systems © McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill Education. © McGraw-Hill Education. 7-2
Learning Objectives
7.1 Describe the origins and evolution of lean
thinking.
7.2 Describe the five tenets of lean thinking and
the seven forms of waste in a lean system.
7.3 Explain how a stabilized master schedule is
achieved for repetitive manufacturing.
7.4 Design a kanban system for a lean system.
7.5 Explain how setup time, lot size, layout and
maintenance are related to lean thinking.
7.6 Differentiate how employees, quality, and
suppliers are unique in lean systems.
7.7 Explain how to implement a lean system. © McGraw-Hill Education. 7-3
Evolution of Lean
• Toyota Production System (TPS)
– Developed in Japan following WWII (limited
resources)
– Also known as Just-in-Time (JIT)
manufacturing
• Came to U.S.- 1981 at Kawasaki motorcycle
plant in Lincoln, Nebraska
• Lean Production
– Term coined in late 1980s
– Popularized in 1990s by Womack, Jones &
Roos’ “The Machine That Changed the World” © McGraw-Hill Education. 7-4
Lean Tenets
• Create product/service value from customer
perspective
– Reduce waste – muda
• Identify, study, improve the value stream
– Observe the process – gemba
• Ensure simple, smooth, error-free flow
– Determine takt time
• Produce only what is pulled by customer
– Use kanbans
• Strive for perfection
– Hold kaizen events, 5S, 5 Whys © McGraw-Hill Education. 7-5
The Seven Forms of Waste (1 of 2)
• Overproduction: Producing more than the
demand for customers, resulting in unnecessary
inventory, handling, paperwork, and warehouse
space.
• Waiting time: Operators and machines waiting
for parts or work to arrive from suppliers or other
operations. Customers waiting in line.
• Unnecessary transportation: Double or triple
movement of materials due to poor layouts, lack
of coordination, and poor workplace organization. © McGraw-Hill Education. 7-6
The Seven Forms of Waste (2 of 2)
• Excess processing: Poor design or inadequate
maintenance or processes, requiring additional
labor or machine time.
• Too much inventory: Excess inventory due to
large lot sizes, obsolete items, poor forecasts, or
improper production planning.
• Unnecessary motion: Wasted movements of
people or extra walking to get materials.
• Defects: Use of material, labor, and capacity for
production of defects, sorting out bad parts, or
warranty costs with customers. © McGraw-Hill Education. 7-7
Value Stream Mapping (1 of 2)
• Value stream is all processing steps to
complete product/service
• Extension of process flowcharting
• Includes value-adding/non-value-adding
activities
• Requires direct observation of process –
gemba
• “Is this step or task necessary in creating
value to the customer?”
• Change and improve process © McGraw-Hill Education. 7-8
Value Stream Mapping (2 of 2) © McGraw-Hill Education. 7-9
Inventory Covers Problems
(Figure 7.2)
Water level indicates level of inventory in the system © McGraw-Hill Education. 7-10
Water Level Lowered To Expose
Problems
Water level indicates level of inventory in the system © McGraw-Hill Education. 7-11
Water Flows Smoothly, Once
Problems are Resolved
Water level indicates level of inventory in the system © McGraw-Hill Education. 7-12
5 Whys Technique
• Explores cause-and-effect relationships that
underlie problems (root causes)
• Enables root causes to be identified/resolved
• Example: Truck won’t start.
– Why? Battery is dead.
– Why? Alternator not functioning.
– Why? Alternator belt is broken.
– Why? Truck was not maintained as recommended.
– Why? Truck is old; no replacement parts available.
– Solution? Find source for parts, or purchase new
truck. © McGraw-Hill Education. 7-13
5S Technique
• Organize workspace to improve employee
morale, safety, process efficiency.
• Reduces time looking for “things.”
• Seiri to Sort (keep, toss)
• Seiton to Straighten or set in order
• Seiso to Shine, sweep, or clean
• Seiketsu to Standardize
• Shitsuke to Sustain (maintain) © McGraw-Hill Education. 7-14
5S Technique Example
Storage of chemicals in production area
Before After © McGraw-Hill Education. 7-15
Elements of Lean System
• Stabilizing the master schedule
• Controlling flow with kanban system
• Reducing setup time (quick changeover)
• Small lot sizes (goal lot size of single unit)
• Efficient layout (linear flow, low inventories)
• Preventive maintenance
• Cross-training, rewarding workers
• Quality and continuous improvement
• Close relationships with suppliers (frequent
deliveries) © McGraw-Hill Education. 7-16
Stabilizing the Master Schedule
• Production horizon set according to demand
• Production schedule repeated each day
• Uniform load: level work load across
workers/machines
• Takt time: match supply (production rate) to
demand rate
• Produce planned quantity each day, and no
more
• Desirable, but not essential, to a lean system © McGraw-Hill Education. 7-17
The Kanban System (1 of 2)
• Kanban: “marker” (card, sign)
• “Pull” production system
• Visual control system of cards and containers,
or other type of signal
• Number of containers:
C
DT
n =
• D = Demand rate (at work center)
• T = Time for container to complete circuit
• C = Container size (# units) © McGraw-Hill Education. 7-18
The Kanban System (2 of 2)
• Signals the need for more parts
• Uses simple cards or signals to control
production/inventory
• Each work center receives production order
(card) from succeeding work center
• Prevents the buildup of inventory
• Reduces lead time
• Extends to receiving orders from suppliers © McGraw-Hill Education. 7-19
Kanban System (Figure 7.3) © McGraw-Hill Education. 7-20
Reducing Setup Time and Lot Sizes
• Reducing setup time:
– increases available capacity
– increases flexibility to meet schedule changes
– reduces inventory
• Setup types
– Single (single digit minutes)
– One-touch (less then 1 min; 2-step process)
 Internal (while machine stopped)
 External (while machine operating)
• Lot size reduction
– Goal: single unit production © McGraw-Hill Education. 7-21
Non-Lean Layout (Figure 7.4) © McGraw-Hill Education. 7-22
Lean Layout © McGraw-Hill Education. 7-23
Lean Layout with Group Technology
(Cellular Manufacturing) © McGraw-Hill Education. 7-24
Engaging Workers
• Multifunction, cross-trained workers
– Flexibility to move to busy work centers
• New pay system to reflect skills variety
• Workers contribute individually and
collaboratively
– Perform own maintenance and inspection
– Teamwork, problem solving
– Suggestion systems © McGraw-Hill Education. 7-25
Quality in a Lean System
• Quality is essential input into lean system
• Defects are waste
• No inventory to cover up mistakes
• System designed to expose errors; correct
them at their source (so not repeated in the
future)
• Continuous improvement of the process © McGraw-Hill Education. 7-26
Supplier Relationships
• Viewed as the ‘external factory’
• Co-location, frequent deliveries
• Fewer suppliers
• No inspection—high quality is assumed
(required)
• Integrated supplier programs
– Early supplier selection
– Family-of-parts sourcing
– Long-term strategic relationship
– Reduce paperwork and inspection © McGraw-Hill Education. 7-27
Implementation of Lean Systems
• Establish a cross-functional team
• Determine what customers value
• Construct value stream map
– Eliminate waste (non-value-adding activities)
• Use customer demand to pull work thru
process
• Implement team ideas
• Repeat the cycle on another process © McGraw-Hill Education. 7-28
Summary
7.1 Describe the origins and evolution of lean
thinking.
7.2 Describe the five tenets of lean thinking and
the seven forms of waste in a lean system.
7.3 Explain how a stabilized master schedule is
achieved for repetitive manufacturing.
7.4 Design a kanban system for a lean system.
7.5 Explain how setup time, lot size, layout and
maintenance are related to lean thinking.
7.6 Differentiate how employees, quality, and
suppliers are unique in lean systems.
7.7 Explain how to implement a lean system. © McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill Education. 7-29
End of Presentation
Operations Management in the
Supply Chain
Decisions and Cases
Seventh Edition
Chapter 8
Managing Quality © McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill Education. © McGraw-Hill Education. 8-2
Learning Objectives (1 of 2)
8.1 Explain quality, from a customer perspective.
8.2 Characterize product quality based on four
dimensions.
8.3 Distinguish service quality from product
quality based on its distinct measurement.
8.4 Apply the quality cycle to a product or
service.
8.5 Explain how mistake-proofing and the supply
chain are integrated with quality
management planning. © McGraw-Hill Education. 8-3
Learning Objectives (2 of 2)
8.6 Attribute how cost of quality is related to
financial performance.
8.7 Recall the two key quality pioneers and their
main ideas.
8.8 Compare and contrast ISO 9000 standards
and the Baldrige Award criteria.
8.9 Articulate some key barriers to successful
quality improvement efforts. © McGraw-Hill Education. 8-4
Introduction
• Quality is one of the four key objectives of
operations (cost, quality, delivery, flexibility)
• Historical development of quality concepts
– Inspection (early 1900s)
– Statistics quality control (Shewhart – 1940s)
– Quality management (1960s)
• Quality is responsibility of everyone in the
organization © McGraw-Hill Education. 8-5
Comair Flight 5191, Lexington, KY
The Comair Flight 5191 crew began the day by
powering up the wrong plane. They took off down
the wrong runway. The air traffic controller, working
alone in violation of FAA policy, had turned his back
to do other duties. Investigators are uncovering a
series of mistakes before the plane crashed, killing
49 people.”
Source: www.cnn.com, 2006
Quality involves the entire organization and
the supply chain. © McGraw-Hill Education. 8-6
Definition of Quality
Meeting, or exceeding, customer
requirements now and in the future.
i.e., The product or service is fit for the
customer’s use.
Only the customer can determine quality. © McGraw-Hill Education. 8-7
Dimensions of Product Quality
• Quality
– Availability
– Field Service
– Quality of Design
– Quality of Conformance © McGraw-Hill Education. 8-8
Quality of Design
• Determined before the product is produced
• Responsibility of cross-functional product
design team
• Translates the “wishes” of customers into
specifications
• Depends on market research, design concept,
product specifications © McGraw-Hill Education. 8-9
Quality of Conformance
• Producing a product (or service) that meets
specifications
• Even ‘cheap’ products can have high
conformance quality
– May not be durable, but conformance quality
is achieved if they match their design © McGraw-Hill Education. 8-10
The “Abilities”
• Availability
– Continuity of usefulness to customers (operational)
• Reliability
– Useful product/service time until failure
– Mean time before failure (MTBF)
• Maintainability
– Restoration of product/service after failure
– Mean time to repair (MTTR)
M MTTR
MTBF
Availability
Uptime Downtime
Uptime
Availability
+
=
+
=
TBF © McGraw-Hill Education. 8-11
Availability Example
• A piece of medical testing equipment is typically
used for 3 hours and then requires one hour of
maintenance.
• → Calculate the machine’s availability.
M MTTR
MTBF
Availability
Uptime Downtime
Uptime
Availability
+
=
+
=
TBF
• MTBF = 3 hours
• MTTR = 1 hour
• Availability = 3 / (3 + 1) = .75
• The machine’s average availability is 75%. © McGraw-Hill Education. 8-12
Field Service
• Warranty and repair/replacement of the
product after it has been sold
• Also called customer service, sales service, or
just “service”
• Dimensions
– Promptness
– Competence
– Integrity © McGraw-Hill Education. 8-13
Different Types of Quality
(Figure 8.1) (1 of 2)
• Customer satisfaction (Fitness for use)
– Quality of design
 Quality of market research
 Quality of concept
 Quality of specification
– Quality of conformance
 Technology
 Employees
 Management © McGraw-Hill Education. 8-14
Different Types of Quality
(Figure 8.1) (2 of 2)
– Availability
 Reliability
 Maintainability
 Logistical support
– Field service
 Promptness
 Competence
 Integrity © McGraw-Hill Education. 8-15
Service Quality
• Includes explicit and implicit service
characteristics
• Measures are perceptual/subjective
• SERVQUAL is most popular measure
– Tangibles: appearance
– Reliability: promised service
– Responsiveness: prompt, helpful
– Assurance: knowledge, courtesy
– Empathy: caring, individualized © McGraw-Hill Education. 8-16
The Quality Cycle (Figure 8.2) © McGraw-Hill Education. 8-17
Quality Cycle in Mass Transit System
(Figure 8.3) © McGraw-Hill Education. 8-18
Quality Improvement Through the
Quality Cycle
1. Define quality attributes on the basis of
customer needs
2. Decide how to measure each attribute
3. Set quality standards
4. Establish appropriate tests for each standard
5. Find and correct causes of poor quality
6. Continue to make improvements © McGraw-Hill Education. 8-19
Poka-Yoke (poh-kah yoh-kay)
(1 of 2)
• Developed at Toyota in the 1960s
• Means ‘mistake proofing’
• Design the product and process so that mistakes
cannot occur or are immediately detectable
• Examples
– In manufacturing, 2 parts are notched to only fit
together one way
– For consumers, snow blower requires that two
hand levers be held during operation (so no hands
can be in the dangerous moving parts!) © McGraw-Hill Education. 8-20
Poka-Yoke (poh-kah yoh-kay)
(2 of 2) © McGraw-Hill Education. 8-21
Suppliers Role in Quality
• Involve in product design
– Prevent design defects; help select materials
• Supplier certification
– Planning and control system for quality
• Manage rolled yield (cumulative defect rate)
– 10 parts (1% defects in each)
– Rolled yield = (.99)10 = .90
– 90% quality yield for final product © McGraw-Hill Education. 8-22
Cost of Quality
• Control costs
– Prevention
 Training, data management, planning
– Appraisal
 Incoming materials inspection, final good
inspection
• Failure costs
– Internal failure
 Scrap, rework, downtime
– External failure
 Warranty, returns, complaints © McGraw-Hill Education. 8-23
Cost of Quality Trade-offs
(Figure 8.5) © McGraw-Hill Education. 8-24
Quality Pioneer: W. Edwards Deming
• 14 Management Principles
• Do not sacrifice quality for short-term profit
• Emphasis on continuous improvement
• PDCA Wheel
– Plan, do, check, act
http://www.deming.org/ © McGraw-Hill Education. 8-25
Quality Pioneer: Joseph Juran
• Quality “Trilogy”—planning, control and
improvement
• Solve “the vital few” quality problems
• Stressed quality control methods
• “Quality Handbook
http://www.juran.com © McGraw-Hill Education. 8-26
ISO 9000 Standards (1 of 2)
• Guidelines for designing, manufacturing,
selling, and servicing products. Est. 1987.
• Selecting an ISO 9000 certified supplier
provides some assurance that supplier follows
accepted quality practices.
• Required of suppliers by many
manufacturers, especially in Europe.
www.iso.org © McGraw-Hill Education. 8-27
ISO 9000 Standards (2 of 2)
Airports can be ISO 9000 certified
Hotels can be ISO 9000 certified © McGraw-Hill Education. 8-28
ISO 14000 Standards
• Standards covering environmental
management systems, environmental auditing,
evaluation of environmental performance,
environmental labeling, and life-cycle
assessment.
• Intent is to help organizations improve their
environmental performance through
documentation control, operational control,
control of records, training, statistical techniques,
and corrective and preventive actions.
ISO 26000 – social responsibility
ISO 31000 – risk management © McGraw-Hill Education. 8-29
Malcolm Baldrige Award
• Est. 1987 to promote better quality
management practices and
improved quality results by U.S.
industry.
• Award criteria have become
standard for “best quality practice”
in U.S.
• Given to at most 3 organizations in
each of 6 categories:
manufacturing, service small
business, health care, education,
nonprofit.
www.baldrige.gov © McGraw-Hill Education. 8-30
Baldrige Criteria Categories
1. Leadership
2. Strategy
3. Customers
4. Measurement, Analysis, and Knowledge
Management
5. Workforce
6. Operations
7. Results © McGraw-Hill Education. 8-31
Why Some Quality Improvement
Efforts Fail
• Requires change in values and management
philosophy
• Focus on short-term financial results
• “Blame the employee” syndrome
• Belief in “trade-offs” (quality vs. cost)
• Management interference with teamwork
• Reward systems
• Supplier quality problems © McGraw-Hill Education. 8-32
Summary (1 of 2)
8.1 Explain quality, from a customer perspective.
8.2 Characterize product quality based on four
dimensions.
8.3 Distinguish service quality from product
quality based on its distinct measurement.
8.4 Apply the quality cycle to a product or
service.
8.5 Explain how mistake-proofing and the supply
chain are integrated with quality
management planning. © McGraw-Hill Education. 8-33
Summary (2 of 2)
8.6 Attribute how cost of quality is related to
financial performance.
8.7 Recall the two key quality pioneers and their
main ideas.
8.8 Compare and contrast ISO 9000 standards
and the Baldrige Award criteria.
8.9 Articulate some key barriers to successful
quality improvement efforts. © McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill Education. 8-34
End of Presentation
Operations Management in the
Supply Chain
Decisions and Cases
Seventh Edition
Chapter 9
Quality Control
and Improvement © McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill Education. © McGraw-Hill Education. 9-2
Learning Objectives
9.1 Describe the steps in designing a quality
control system.
9.2 Design a process control system using
control charts.
9.3 Define and calculate process capability.
9.4 Apply continuous improvement concepts
using the seven quality tools.
9.5 Explain Six Sigma and the DMAIC process.
9.6 Differentiate lean and Six Sigma. © McGraw-Hill Education. 9-3
Design of Quality Control Systems
• Break down production process into
subprocesses and identify internal
customers.
• Identify critical control points where
inspection or measurement should take place.
• Use operator inspection when possible,
placing responsibility for quality on workers. © McGraw-Hill Education. 9-4
Designing Quality Control Systems
1. Identify critical points for inspection and testing
– Incoming materials & services
– Work in process
– Finished product or service
2. Decide on the type of measurement
– Variables: continuous scale
– Attributes: discrete count, or good/bad
3. Decide on the amount of inspection to be used
4. Decide who should do the inspection © McGraw-Hill Education. 9-5
Types Of Measurement
• Variables measurement
– Product/service characteristic that can be
measured on a continuous scale
 Length, size, weight, height, time, velocity,
temperature
• Attributes measurement
– Product/service characteristic evaluated with a
discrete choice:
 Good/bad, pass/fail, count of defects © McGraw-Hill Education. 9-6
Process Quality Control (1 of 2)
• Principles of Process Control:
– Every process has random variation.
– Production processes are not usually in a state
of control.
• “State of Control” – What does it mean?
– Unnecessary variation has been eliminated.
– Remaining variation is due to random causes. © McGraw-Hill Education. 9-7
Process Quality Control (2 of 2)
• Assignable (special) cause variation
– Can be identified and corrected
– Could be due to machine, worker, materials,
etc.
• Common (random) cause variation
– Reasonable, acceptable variation
– Within 3 standard deviations (± 3σ) of mean
– Cannot be changed unless process is
redesigned © McGraw-Hill Education. 9-8
Quality Control Chart © McGraw-Hill Education. 9-9
Normal Distribution on Control Chart © McGraw-Hill Education. 9-10
Control Limits – Application
Temperature & Humidity Control in a Museum
Monitor for unexpected readings © McGraw-Hill Education. 9-11
Attribute Control [3σ]
p-chart ( )
n
p p
p

±
1
3
• Calculate center line = mean proportion defective
across many samples
• Calculate upper and lower control limits © McGraw-Hill Education. 9-12
Variables Control [3σ]
x-chart
• Calculate center line = mean of sample means
• Calculate upper and lower control limits
x A R
± 2
R-chart
• Calculate center line = mean of sample ranges
• Calculate upper and lower control limits
LCL D R
UCL D R
4 3
= = © McGraw-Hill Education. 9-13
Using Quality Control Charts (1 of 2)
• If an observation (data point) is outside ± 3σ
and/or a pattern is detected, the process is
NOT in a state of control.
• Very likely something is wrong.
• Conclude an assignable cause of variation
may exist.
• Signal to take action to eliminate assignable
cause:
– Find it, understand its cause, fix it so it does
not occur again! © McGraw-Hill Education. 9-14
Using Quality Control Charts (2 of 2)
• How large should sample be?
– Large enough to detect defects
– Variables can use smaller sample sizes
• How frequently to sample?
– Depends upon cost, production rate
• Process control vs. Process capability
– Is the process capable of producing to
specification?
– Are the specifications appropriate? © McGraw-Hill Education. 9-15
Process Capability Index Examples
(Figure 9.3) © McGraw-Hill Education. 9-16
Figure 9.4
Computation of
Cpk © McGraw-Hill Education. 9-17
Continuous Improvement
• When process is not meeting customer
specifications.
• Work on processes with strategic importance
and low process capability first!
• Use seven tools of quality control. © McGraw-Hill Education. 9-18
Seven Tools of Quality Control
(1 of 2)
(see Figure 9.5)
• Flowchart
• Check Sheet
• Histogram
• Pareto Chart
• Cause-and- Effect (fishbone, Ishikawa)
Diagram
• Scatter Diagram
• Control Chart © McGraw-Hill Education. 9-19
Seven Tools of Quality Control
(2 of 2)
A battery manufacturer in NW Ohio in 6 weeks,
using only the 7 tools of quality, decreased
defectives from 7.2 per 100 to 2.6 per 100. © McGraw-Hill Education. 9-20
Pareto Analysis
Table 9.4
Defect Items # of Defectives Percent
Defective
Cumulative
Percentage
Loose connections 193 46.8% 46.8%
Cracked connectors 131 31.8% 78.6%
Fitting burrs 47 11.4% 90.0%
Improper torque 25 6.1% 96.1%
O-rings missing 16 3.9% 100%
Total 412 100.0%
Note: 40% (2) of the sources cause 78.6% of the
defects © McGraw-Hill Education. 9-21
Pareto Diagram (Figure 9.6) © McGraw-Hill Education. 9-22
Cause-and-Effect (Fishbone,
Ishikawa) Diagram (Figure 9.7) © McGraw-Hill Education. 9-23
Six-Sigma Quality
• Pioneered by Motorola in 1980s
• Philosophy of 3.4 defects per million
• Most process are 4 sigma (4σ): e.g., payroll
records, prescriptions, baggage handling,
restaurant bills
• Airline fatalities are 6.4 sigma
• IRS tax advice is less than 2 sigma © McGraw-Hill Education. 9-24
Six Sigma Process
Process Improvement steps (DMAIC):
1. Define – select process
2. Measure – measure relevant variables
3. Analyze – determine root causes and
alternatives
4. Improve – change process
5. Control – ensure improvements not lost over
time © McGraw-Hill Education. 9-25
Six Sigma Quality
• Uses project/team approach
• Strategic process is selected for improvement
• Cross-functional team is formed
• ‘Black belt’ leader is chosen
• The team uses the DMAIC method (and
quality tools) to find root causes and improve
the process © McGraw-Hill Education. 9-26
Lean and Six Sigma
• Complementary approaches to improvement
Lean seeks to eliminate waste (non-value-added)
Six Sigma seeks to eliminate defects
Lean uses part-time leaders and all employees
Six Sigma uses full-time leaders and selected
employees
Lean requires limited training
Six Sigma requires extensive training and experts
Lean focuses on simpler projects
Six Sigma takes on complex projects
Lean projects may last a week or less
Six Sigma projects may last for months © McGraw-Hill Education. 9-27
Summary
9.1 Describe the steps in designing a quality
control system.
9.2 Design a process control system using
control charts.
9.3 Define and calculate process capability.
9.4 Apply continuous improvement concepts
using the seven quality tools.
9.5 Explain Six Sigma and the DMAIC process.
9.6 Differentiate lean and Six Sigma. © McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill Education. 9-28
End of Presentation
Operations Management in the
Supply Chain
Decisions and Cases
Seventh Edition
Chapter 10
Forecasting © McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill Education. © McGraw-Hill Education. 10-2
Learning Objectives
10.1 Describe why forecasting is important.
10.2 Describe the four common methods of qualitative
forecasting.
10.3 Calculate a moving average and exponential
smoothing forecast, and explain when they
should be used.
10.4 Evaluate forecast accuracy using a variety of
methods.
10.5 Carry out causal forecasting.
10.6 Evaluate factors that impact forecasting method
selection.
10.7 Explain the benefits and costs of CPFR © McGraw-Hill Education. 10-3
Forecasting for Decision Making
• Forecasting demand for operations output
– Forecasting: what we think demand will be
– Planning: what we think demand should be
– Demand: may differ from sales
• Forecasts are used in all functional areas:
marketing, finance, human resources, etc.
• Forecasts are necessary for operations
decision areas: process design, capacity
planning, inventory management, scheduling © McGraw-Hill Education. 10-4
Use of Forecasting: Operations
Decisions
Time
Horizon
Accuracy
Required
Number of
Forecasts
Management
Level
Forecasting
Method
Process design Long Medium Single or
few Top Qualitative or causal
Capacity
planning,
facilities
Long Medium Single or
few Top Qualitative or causal
Aggregate
planning Medium High Few Middle Causal and time series
Scheduling Short Highest Many Lower Time series
Inventory
management Short Highest Many Lower Time series © McGraw-Hill Education. 10-5
Use of Forecasting: Marketing,
Finance, & HR
Time
Horizon
Accuracy
Required
Number of
Forecasts
Management
Level
Forecasting
Method
Long-range
marketing
programs
Long Medium Single or
few Top Qualitative
Pricing decisions Short High Many Middle Time series
New product
introduction Medium Medium Single Top Qualitative and causal
Cost estimating Short High Many Lower Time series
Capital budgeting Medium Highest Few Top Causal and
time series
Labor planning Medium Medium Few Lower
Qualitative
and time
series © McGraw-Hill Education. 10-6
‘Qualitative’ Forecasting Methods
• Based on managerial judgment when there is
a lack of data available. No specific model.
• Major methods:
– Delphi technique
– Market surveys
– Life-cycles analogy
– Informed judgment (naïve models) © McGraw-Hill Education. 10-7
Time-Series Forecasting
• Components of data:
– Level – average
– Trend – general direction (increasing/descreasing)
– Seasonality – short term recurring cycles
– Cycle – long term business cycle
– Error – random or irregular component © McGraw-Hill Education. 10-8
Moving Average
• Assumes no trend, seasonality, or cycle
• Simple moving average:
t t
t t t N
t
F A
N
D D D
A
=
+ + +
=
+
− − +
1
1 …… 1
• Weighted moving average:
Ft +1 = At = W1Dt + W2Dt −1 + ……WNDt N +1 © McGraw-Hill Education. 10-9
Moving Average Example
Period Actual Demand Forecast
1 10
2 18
3 29
4 – 19
• Compute three period moving average for
Period 4 (number of periods is forecaster’s
decision)
( )
F ( 4 29 18) 3
F A 29 18 10 3 19
5
4 3
= + +
= = + + =
actual demand for period © McGraw-Hill Education. 10-10
Time-Series Data (Figure 10.2)
Note: The forecast is smoother as the number of periods
in the moving average increases. © McGraw-Hill Education. 10-11
Exponential Smoothing
• The new average is computed from the old
average:
At = αDt + (1 − α )At-1
• The value of the smoothing constant (α) is a
choice. It determines the extent to which the
new forecast weights recent demand (smooths
random variation).
Alpha (α)ranges between 0 and1, and is usually 0.1 – 0.2. © McGraw-Hill Education. 10-12
Simple Exponential Smoothing
• Forecast:
Ft +1 = Ft + α (Dt − Ft )
F = forecast of demand
D = actual demand
t = time period
• Assumes no trend, seasonality, or cycle
• Note: we are adjusting Ft to get Ft+1 © McGraw-Hill Education. 10-13
Exponential Smoothing Example
• The Sept. forecast was 15, but Sept. actual
sales were 13.Use alpha (α) of 0.2.
– What is the October forecast?
( )
( )
14.6
October forecast
= − =
= + −
α −
+
=
15 0.4
15 0.2 13 15
Sept. actual Sept. forecast
Sept. forecast © McGraw-Hill Education. 10-14
Time-Series Data (Figure 10.3)
value of alpha ( )is reduced.
The forecast is smoother as the
Note :
α © McGraw-Hill Education. 10-15
Forecast Accuracy
In addition to the forecast, firms should
estimate forecast accuracy:
• To monitor erratic demand observations or
“outliers”
• To determine when the forecasting method is
no longer tracking actual demand
• To determine the parameter values that
provide the forecast with the least error © McGraw-Hill Education. 10-16
Measures of Forecast Accuracy
• Cumulative sum of forecast errors (CFE)
• Mean square error (MSE)
• Mean absolute deviation (MAD)
• Mean absolute percentage errors (MAPE)
• Tracking Signal (TS) © McGraw-Hill Education. 10-17
Forecast Accuracy: Formulas
t
n
t t
t
n
t
t
n
t
t
n
t
t
n
eD
e n
e n
e
MAD
CFE
Tracking signal TS
100
Mean absolute percentage errors MAPE
Mean absolute deviation MAD
Mean square error MSE
Cumulative sum of forecast errors CFE 1 1 1 2 1
=
=
=
=
=



∑ =
=
=
= © McGraw-Hill Education. 10-18
Advanced Time-Series Forecasting
• Adaptive exponential smoothing
– Smoothing coefficient (α)is varied
• Mathematical models
– Linear or nonlinear
• Box-Jenkins method
– Requires about 60 periods of past data © McGraw-Hill Education. 10-19
Causal Forecasting Methods
• Cause-and-effect model, using a data set of
other variables to predict demand (forecast).
• Examples:
– Use population and location characteristics to
forecast restaurant sales.
– Use supply chain data on inventory levels to
forecast sales of new generation products such
as cell phones. © McGraw-Hill Education. 10-20
Causal Forecasting Models
• The general regression model:
y = a + bx

• Other forms of causal model:
– Econometric
– Input-output
– Simulation models © McGraw-Hill Education. 10-21
Example of Causal Model
( )
( )
( )
( )
F 38.23 2.397(7) 128.34 forecast for Period 7
I median family income 000’s
F forecasted sales
D actual sales in year t
Slope b 2.3965142
Intercept a 38.230937
37.6 128.34
36.4 130 125.464
35.7 125 123.786
35.2 124 122.588
36.3 119 125.224
35.7 124 123.786
34.6 120 121.15
Y a b t
t t t t 7
= + = =
= = =
= +
It Dt Ft © McGraw-Hill Education. 10-22
Selecting a Forecasting Method
• Use or decision characteristics
– Scheduling decision? Facility expansion?
– Short range? Long range?
• Data availability
– Quantity and quality
• Data pattern
– Level? Unstable? © McGraw-Hill Education. 10-23
Collaborative Planning, Forecasting,
and Replenishment (CPFR)
• Aim is to achieve more accurate forecasts
• Share information across supply chain with
customers and suppliers
• Compare forecasts
– If discrepancy, look for reason
– Reach a consensus forecast
• Works best in B2B with few customers (e.g., a
small number of large retailers) © McGraw-Hill Education. 10-24
Summary
10.1 Describe why forecasting is important.
10.2 Describe the four common methods of qualitative
forecasting.
10.3 Calculate a moving average and exponential
smoothing forecast, and explain when they
should be used.
10.4 Evaluate forecast accuracy using a variety of
methods.
10.5 Carry out causal forecasting.
10.6 Evaluate factors that impact forecasting method
selection.
10.7 Explain the benefits and costs of CPFR © McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill Education. 10-25
End of Presentation
Operations Management in the
Supply Chain
Decisions and Cases
Seventh Edition
Chapter 11
Capacity Planning © McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill Education. © McGraw-Hill Education. 11-2
Learning Objectives
11.1 Define capacity and utilization
11.2 Illustrate with an example a facilities strategy that
considers: amount, size, timing, location and
type.
11.3 Explain how S&OP is done.
11.4 Identify the demand and supply options that are
available for S&OP
11.5 Contrast and compare the chase and level
strategies
11.6 Define the various costs associated with
aggregate planning
11.7 Create an alternative strategy for the Hefty Beer
Company example © McGraw-Hill Education. 11-3
Hierarchy of Capacity Decisions
Months Planning Horizon © McGraw-Hill Education. 11-4
Definition of Capacity
Maximum output that can be produced
over a given period of time.
• Theoretical capacity
– Labor availability and overtime
– Physical assets, delayed maintenance, etc.
– Can be used for short-term demand spikes
• Effective capacity
– Used for planning
– Subtracts maintenance downtime, shift breaks,
absenteeism, etc. © McGraw-Hill Education. 11-5
Capacity Utilization
100%
Capacity
Actual output
Utilization = ×
→ Utilization is seldom 100%.
→ Estimates capacity usage and ‘busyness.’
A production facility that builds 1000 cars during
the time it can actually produce 1200 cars has
utilization = 1000/1200 = 83%
A doctor who is busy working for 6 hours during
an 8 hour shift has utilization = 6/8 = 75% © McGraw-Hill Education. 11-6
Facilities Decisions
• How much capacity is needed?
• How large should each facility be?
• When is the capacity needed?
• Where should the facilities be located?
• What type of facilities/capacity are needed? © McGraw-Hill Education. 11-7
Facilities Strategy
• How much? Amount of capacity
– Size of capacity cushion
• How large? Size of facilities
– Economies/diseconomies of scale
• When? Timing of facility decisions
– Preemptive, wait-and-see
• Where? Location of facilities
– Variety of factors to consider
• What type? Types of facilities
– Product-focused, market-focused, processfocused, general-purpose © McGraw-Hill Education. 11-8
Factors Affecting Facilities Strategy
• Predicted demand
• Cost of facilities
• Likely behavior of competitors
• Business strategy
• Global considerations © McGraw-Hill Education. 11-9
How Much? Strategies for Capacity
Cushion
• Capacity cushion = 100% – utilization
• Three strategies:
Large cushion (e.g., make-to-order)
Moderate cushion (cost of running out
balanced with cost of excess capacity)
Small cushion (e.g., make-to-stock) © McGraw-Hill Education. 11-10
How Large? Selecting Facility Size
• Economies of scale
– Production costs are not linear
– Overhead costs spread over more units
• Diseconomies of scale
– Increased transportation costs
– Cost of more bureaucracy
– Increased organizational complexity © McGraw-Hill Education. 11-11
When? Timing of Facility Additions
• Preemptive Strategy
– Build capacity ahead of need
– Positive capacity cushion
• Wait-and-see Strategy
– Small or negative capacity cushion
– Lower-risk strategy © McGraw-Hill Education. 11-12
Where? Facility Location
• Quantitative Factors
– ROI, NPV
– Transportation, Taxes
– Lead times
• Qualitative Factors
– Language, norms
– Worker and customer attitudes
– Proximity to customers, suppliers, competitors © McGraw-Hill Education. 11-13
What Type? Types of Facilities
• Product-focused (55%)
– One family of products/services (e.g.,
computers)
• Market-focused (30%)
– Located near sales (e.g., electricity, bakeries)
• Process-focused (10%)
– Few technologies (e.g., computer chips, MRI
center)
• General purpose (5%)
– Several products/services (e.g., furniture,
banking) © McGraw-Hill Education. 11-14
Sales & Operations Planning (S&OP)
• Matching supply & demand over a medium
time range
• Time horizon of about 12 months
Aggregated demand for one or few categories
of product. Demand may fluctuate or be
uncertain.
• Possible to change both supply and demand
• Variety of management objectives
• Facilities are fixed (cannot be expanded or
reduced) during this timeframe © McGraw-Hill Education. 11-15
Cross-Functional Nature of S&OP
• Budgeting: closely tied to aggregate plan
• HR: workforce availability
• Operations: capacity/inventory planning
• Accounting: cost analysis
• Finance: capital investments
• Marketing: sales plan © McGraw-Hill Education. 11-16
Demand Management
• Influence demand through:
– Pricing
– Advertising and promotion
– Backlogs or reservations (shift demand)
– Development of complementary offerings
 Seasonal products/service spread demand
o Lawn mower, snow blower
o Ski resort, mountain biking © McGraw-Hill Education. 11-17
Supply Management
• Influence (control) supply through:
– Hiring and layoff of employees
– Using overtime and undertime
– Using part-time or temporary labor
– Carrying inventory
– Outsourcing/subcontracting
– Cooperative arrangements
 Share capacity during demand peaks
 e.g., airlines, hotels, utilities © McGraw-Hill Education. 11-18
Aggregate Planning Strategies
• Level Strategy
– Constant workforce size
– Inventory as buffer
• Chase Strategy
– Vary workforce size
– Produce to meet demand
– Typical for services © McGraw-Hill Education. 11-19
Aggregate Planning Costs
• Hiring and firing costs (Chase Strategy)
• Overtime and undertime costs (Chase)
• Subcontracting costs (Chase)
• Part-time labor costs (Chase)
• Inventory-carrying costs (Level Strategy)
• Cost of stockout or back order (Level) © McGraw-Hill Education. 11-20
Aggregate Planning – Level Strategy
Aggregate Planning Costs:
Level Workforce
Jan Feb Mar Apr May June July Aug Sept Oct Nov Dec Total
Resources Regular workers 45 45 45 45 45 45 45 45 45 45 45 45 Overtime (%) 0 0 0 0 0 0 0 0 0 0 0 0 Units Produced 450 450 450 450 450 450 450 450 450 450 450 450 5400 Sales Forecast 300 300 350 400 450 500 650 600 475 475 450 450 5400 Inventory (end of month) 200 350 450 500 500 450 250 100 75 50 50 50
Costs Regular time $180 ### ### ### ### ### ### ### ### ### ### ### $2,160 Overtime 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Hire/Layoff 25 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 25 Inventory carrying 24 42 54 60 60 54 30 12 9 6 6 6 363 Total Cost $229 ### ### ### ### ### ### ### ### ### ### ### $2,548 © McGraw-Hill Education. 11-21
Aggregate Planning – Chase Strategy
Aggregate Planning Costs:
Chase Demand
Jan Feb Mar Apr May June July Aug Sept Oct Nov Dec Total
Resources Regular workers 30 30 35 40 45 50 65 60 48 47 45 45 Overtime (%) 0 0 0 0 0 0 0 0 0 0 0 0 Units Produced 300 300 350 400 450 500 650 600 480 470 450 450 5400 Sales Forecast 300 300 350 400 450 500 650 600 475 475 450 450 5400 Inventory (end of month) 50 50 50 50 50 50 50 50 55 50 50 50
Costs Regular time $120 ### ### ### ### ### ### ### ### ### ### ### $2,160 Overtime 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Hire/Layoff 40.0 0.0 25.0 25.0 25.0 25.0 75.0 20.0 48.0 4.0 8.0 0.0 295 Inventory carrying 6.0 6.0 6.0 6.0 6.0 6.0 6.0 6.0 6.6 6.0 6.0 6.0 72.60 Total Cost $166 ### ### ### ### ### ### ### ### ### ### ### $2,527.60 © McGraw-Hill Education. 11-22
Summary
11.1 Define capacity and utilization
11.2 Illustrate with an example a facilities strategy that
considers: amount, size, timing, location and
type.
11.3 Explain how S&OP is done.
11.4 Identify the demand and supply options that are
available for S&OP
11.5 Contrast and compare the chase and level
strategies
11.6 Define the various costs associated with
aggregate planning
11.7 Create an alternative strategy for the Hefty Beer
Company example © McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill Education. 11-23
End of Presentation
Operations Management in the
Supply Chain
Decisions and Cases
Seventh Edition
Chapter 12
Scheduling
Operations © McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill Education. © McGraw-Hill Education. 12-2
Learning Objectives
12.1 Describe the concept of batch scheduling.
12.2 Construct a Gantt chart.
12.3 Create work schedules using forward and
backward scheduling.
12.4 Explain the implications of the theory of
constraints for scheduling.
12.5 Compare various dispatching rules.
12.6 Describe the important factors to consider
when designing a scheduling system. © McGraw-Hill Education. 12-3
Scheduling Operations
• Most detailed and most constrained decisions
in capacity planning hierarchy
• Results in a time-phased plan (by hour, week)
• Allocation of resources (workers, machines)
to tasks
• Trade-offs (conflicting objectives)
– High efficiency
– Low inventories
– Good customer service © McGraw-Hill Education. 12-4
Batch Scheduling
• Network of queues, as job moves from work
station to work station
– job = manufacturing parts, customer,
paperwork
– work station = machine, room, facility, worker
• Customers or jobs spend most of their time at
work stations waiting to be processed
• Typical for actual work to be 5-20% of total
throughput time © McGraw-Hill Education. 12-5
Batch Processing
move  queue  process  wait  move…
WS = work station
“move” = movement of work: parts, customers,
paperwork, etc. © McGraw-Hill Education. 12-6
Challenges of Batch/Job Shop
Scheduling
• Variety of jobs processed
• Different routing and processing requirements
of each job
• Number of different job orders in the facility
at any one time
• Competition for common (constrained)
resources © McGraw-Hill Education. 12-7
Gantt Charting
• Scheduling multiple jobs thru a set of work
centers, minimizing completion time
• Machine performance measures:
– Makespan = total time to complete a set of
jobs
– Machine utilization = percent of makespan
time machine (or person) is used.
• Used to monitor progress of jobs
• Optimal schedule can be computationally
intensive for multiple jobs/multiple machines © McGraw-Hill Education. 12-8
Job Data for Scheduling Example
Job Work center / Machine hours Due date
1 A/2, B/3, C/4 3
2 C/6, A/4 2
3 B/3, C/2, A/1 4
4 C/4, B/3, A/3 4
5 A/5, B/3 2 © McGraw-Hill Education. 12-9
Scheduling Example
In what sequence should the jobs be done? © McGraw-Hill Education. 12-10
Gantt Chart for Example (1 of 2) © McGraw-Hill Education. 12-11
Gantt Chart for Example (2 of 2)
Machine idle (hr)
A 5
B 8
C 4
17
Makespan = 20 hr
Job Job waiting time (hr) Delivery time (hr)
1 0 9
2 9 19
3 14 20
4 1 11
5 3 11 © McGraw-Hill Education. 12-12
Shop Performance Measures
• Machine Efficiency: Makespan or machine
utilization
• Customer: Delivery times of the jobs (minimizing
job waiting time is complementary measure)
Change the job sequence from 1, 4, 5, 2, 3 to
improve efficiency and/or delivery times to the
customer.
Machine(s) could be added to improve both
efficiency and delivery times. © McGraw-Hill Education. 12-13
Conclusions About Batch Scheduling
• Performance is highly sequence dependent.
• Waiting time depends upon job interference
in the schedule and available capacity.
• Finding optimal schedules is challenging, but
good heuristics are available. © McGraw-Hill Education. 12-14
Finite Capacity Scheduling
• Scheduling jobs onto work stations, but not
exceeding the capacity of any given resource.
• Used to identify bottlenecks.
• Forward scheduling
– To determine completion date for all orders.
• Backward scheduling
– Work backward from due date to determine
start dates for orders. © McGraw-Hill Education. 12-15
Theory of Constraints (TOC) (1 of 3)
• Proposed by Goldratt in The Goal (1983)
• Goal is to make money from operations
• Production does not have value until it is sold!
• Key elements:
– Throughput = sales minus cost of raw
materials
– Inventory = raw materials value
– Operating expenses = cost of labor and
overhead © McGraw-Hill Education. 12-16
Theory of Constraints (TOC) (2 of 3)
• Constraint is anything slowing down production …
a bottleneck.
– Machine or workstation
– Market
– Procurement system
• The bottleneck determines the capacity of the
system.
• Implication: Operations manager should focus on
bottleneck to increase capacity and throughput
(and make more money). © McGraw-Hill Education. 12-17
Theory of Constraints (TOC) (3 of 3)
• The bottleneck should be scheduled to
achieve maximum throughput.
• Non-bottlenecks should be scheduled to keep
the bottleneck busy.
• A work-in-process queue should always be in
front of the bottleneck.
• Non-bottleneck resources may be idle.
• Find ways to relieve or reduce the
bottleneck. © McGraw-Hill Education. 12-18
Priority Dispatching Rules
• Which job should be processed next?
– Rule for selecting the next job from the queue
• Common in services:
– First come, first served
– Priority rule (first-class customers first)
– Preemptive rule (most severe patient treated next)
• Common in manufacturing:
remaining processing time
remaining time until due date
Critical ratio =
– Shortest processing time (quickest job) © McGraw-Hill Education. 12-19
Planning and Control Systems
• What delivery date should be promised?
• Where is the bottleneck?
• When should each activity or task be started?
• How is on-time job completion ensured?
• Sometimes referred to as:
Advanced Planning & Scheduling (APS) © McGraw-Hill Education. 12-20
Summary
12.1 Describe the concept of batch scheduling.
12.2 Construct a Gantt chart.
12.3 Create work schedules using forward and
backward scheduling.
12.4 Explain the implications of the theory of
constraints for scheduling.
12.5 Compare various dispatching rules.
12.6 Describe the important factors to consider
when designing a scheduling system. © McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill Education. 12-21
End of Presentation
Operations Management in the
Supply Chain
Decisions and Cases
Seventh Edition
Chapter 13
Project Planning
and Scheduling © McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill Education. © McGraw-Hill Education. 13-2
Learning Objectives (1 of 2)
13.1 Explain the nature of tradeoffs among the
three objectives of project management
13.2 Describe the four activities included in project
management
13.3 Distinguish the advantages and
disadvantages of a network over a Gantt
chart for project scheduling
13.4 Calculate the ES,EF, LS, LF for an example
network © McGraw-Hill Education. 13-3
Learning Objectives (2 of 2)
13.5 Explain the significance of the critical path
and slack.
13.6 Calculate the cost of crashing a network by
one or two days.
13.7 Contrast and compare the use of constanttime and CPM networks. © McGraw-Hill Education. 13-4
What is a Project?
• “A temporary endeavor undertaken to create
a unique product/service/result.” – Project
Mgmt Institute (PMI)
• Unique item or event; often a single unit.
• Begins and ends; not ongoing activity.
• Work often done on-site.
• Resources (materials, labor) are brought to
the project. © McGraw-Hill Education. 13-5
Examples of Projects
• Building construction
• Bridge construction
• Aircraft carrier
• R&D project
• Audit
• Equipment installation
• New product introduction
• Opening/closing a facility
• Making a movie
• Fund-raising campaign
• Ad campaign
• Software installation © McGraw-Hill Education. 13-6
Objectives and Tradeoffs © McGraw-Hill Education. 13-7
Project Management Activities &
Decisions
• Control
– Planning
– Scheduling
– Closing © McGraw-Hill Education. 13-8
Planning Activities & Decisions
• Identify the project customer
• Establish the end product/service
• Set project objectives
• Estimate total resources and time required
• Decide on the form of project organization
• Make key personnel appointments
• Define major tasks required
• Establish a budget © McGraw-Hill Education. 13-9
Scheduling Activities & Decisions
• Develop a detailed work-breakdown
structure
• Estimated time required for each task
• Sequence tasks in proper order
• Develop a start/stop time for each task
• Develop detailed budget for each task
• Assign tasks to people, subcontractors, etc. © McGraw-Hill Education. 13-10
Control Activities and Decisions
• Monitor actual time, cost, and performance
• Compare planned to actual figures
• Determine whether corrective action is
needed
• Evaluate alternative corrective actions
• Take appropriate corrective actions © McGraw-Hill Education. 13-11
Closing Activities and Decisions
• Finish all work
• Close contracts
• Pay all accounts payable
• Turn the project over to the owners
• Reassign personnel and equipment © McGraw-Hill Education. 13-12
PMI Body of Knowledge
• Integration
• Scope
• Time management
• Costs
• Quality management
• Human resources
• Communications
• Risk
• Procurement
Project Management Institute’s required areas of
knowledge for certification as a Project Manager. © McGraw-Hill Education. 13-13
Scheduling Methods
• Gantt Chart
– Bar charts
– Does not show interdependencies of activities
– Visual & easy to understand
• Network Method
– Graphs or networks
– Shows precedence relations
– More complex, difficult to understand, and
costly than Gantt charts © McGraw-Hill Education. 13-14
Gantt Chart Project Example
(Figure 13.2) © McGraw-Hill Education. 13-15
Constant-Time Networks
• Activity times assumed to be constant
• Activities represented by nodes
• Arrows show precedence relationships
• Notation used to calculate start and finish times:
– ES(a) = early start of activity A (constrained by
predecessors)
– EF(a) = early finish of activity A (constrained by
early start time)
– LS(a) = late start of activity A (constrained by late
finish time)
– LF(a) = late finish of activity A (without delaying
successors) © McGraw-Hill Education. 13-16
Example: Write a Business Report
(Table 13.4)
Activity Description Immediate
Predecessors Duration in Days
A Decide on topic None 1
B Collect data A 2
C Search the Internet A 3
D Write the report B and C 5 © McGraw-Hill Education. 13-17
Network Diagram: Write a Business
Plan (Figure 13.3) © McGraw-Hill Education. 13-18
Forward Pass: Write a Business Plan
(Figure 13.4) © McGraw-Hill Education. 13-19
Calculating ES, EF, LS, LF,
Completion Time
• Forward Pass:
• ES (a) = 0 for the starting activities
• EF (a) = ES(a) + t(a)*
• ES (a) = Max [EF(all predecessors of a)]
• Project completion time = Max [EF(all ending
activities)]
• Backward pass:
• LF (a) = Min [LS(all successors of a)]
• LS (a) = LF(a) – t(a)*
* t(a) denotes the duration of activity a © McGraw-Hill Education. 13-20
Forward and Backward Pass: Write a
Business Plan (Figure 13.5) © McGraw-Hill Education. 13-21
Critical Path
• Critical Path = longest path in the network
– All activities for which ES = LS and EF = LF
– Length of critical path is equal to the project
completion time
– Any delay on critical path delays the project
(unless ‘corrective actions’ are taken)
– Critical path in example (above) is A-C-D © McGraw-Hill Education. 13-22
Slack
• Slack time is the time a path may be delayed
without delaying the project.
• Paths not on the critical path have slack.
• Slack = LS – ES = LF – EF © McGraw-Hill Education. 13-23
Precedence and Times for Opening a
New Office (Table 13.5)
Activity Description Immediate
Predecessors
Activity
Time
Computed
Slack
1 Lease the site None 1 0
2 Hire the workers 1 5 0
3 Arrange the furnishings 1 1 1
4 Install the furnishings 3 2 1
5 Arrange for phones 1 1 3
6 Install the phones 4, 5 1 1
7 Move into the office 2, 6, 4 2 0 © McGraw-Hill Education. 13-24
Network: Open a New Office
(Figure 13.6) © McGraw-Hill Education. 13-25
Critical Path Method
• Critical Path Method (CPM)
• Developed to start-up/shutdown plants
• Activity times can be compressed by spending
more $
• Requires single time estimate for each activity
• Looks at time/cost trade-offs
– Normal activity time
– Normal cost
– Crash time
– Crash cost © McGraw-Hill Education. 13-26
Time-Cost Relationship in CPM
(Fig. 13.8) © McGraw-Hill Education. 13-27
Use of Project Management Concepts
• Scheduling is only part of a complete
approach to project management
• Trade-off between sophistication and cost of
methods
• Choice between constant-time, CPM or more
advanced techniques
• Choice of project management software
packages
e.g., Microsoft Project © McGraw-Hill Education. 13-28
Summary (1 of 2)
13.1 Explain the nature of tradeoffs among the
three objectives of project management
13.2 Describe the four activities included in project
management
13.3 Distinguish the advantages and
disadvantages of a network over a Gantt
chart for project scheduling
13.4 Calculate the ES,EF, LS, LF for an example
network © McGraw-Hill Education. 13-29
Summary (2 of 2)
13.5 Explain the significance of the critical path
and slack.
13.6 Calculate the cost of crashing a network by
one or two days.
13.7 Contrast and compare the use of constanttime and CPM networks. © McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill Education. 13-30
End of Presentation
Operations Management in the
Supply Chain
Decisions and Cases
Seventh Edition
Chapter 14
Independent
Demand
Inventory © McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill Education. © McGraw-Hill Education. 14-2
Learning Objectives
14.1 Define inventory types and the purpose of
inventory.
14.2 Explain the costs incurred by inventory.
14.3 Differentiate between independent and
dependent demand.
14.4 Calculate the economic order quantity and
identify the underlying assumptions.
14.6 Recall the uses of periodic and continuous review
systems.
14.7 Describe how inventory and service level are
related.
14.8 Define Vendor Managed Inventory and the ABC
system. © McGraw-Hill Education. 14-3
Definitions
• Inventory: A stock of materials used to
facilitate production or satisfy customer
demands.
• Types of inventory
– Raw materials, purchased parts (RM)
– Work in process (WIP)
– Finished goods (FG) © McGraw-Hill Education. 14-4
Inventory Management Technologies
• Bar coding
• Point of sale (POS) data
• Radio-frequency identification (RFID) © McGraw-Hill Education. 14-5
Materials-Flow Process (Figure 14.1) © McGraw-Hill Education. 14-6
Water Tank Analogy for Inventory
(Figure 14.2) © McGraw-Hill Education. 14-7
Purpose of Inventories
• To protect against uncertainties – demand,
supply, lead times, schedule changes
– Safety stock
• To allow economic production and purchase
– Cycle inventory
• To cover anticipated changes in
demand/supply
– Anticipation inventory
• To provide for transit
– Pipeline inventory © McGraw-Hill Education. 14-8
Costs of Inventory (1 of 3)
• Item cost
– Expressed as cost per unit or SKU
– Quantity discounts possible
• Ordering (or setup) cost
– Paperwork, electronic entry, worker time for
ordering
– Worker time for setup, downtime
– Transportation costs
– Typically a fixed cost per order (or setup) © McGraw-Hill Education. 14-9
Costs of Inventory (2 of 3)
• Carrying (or holding) cost
– Cost of capital (market rate or internal rate of
return)
– Cost of storage (space, insurance, taxes)
– Cost of obsolescence, deterioration, and loss
(shrinkage)
– Estimated U.S. average is 35% of SKU cost
per year.
– Businesses often use cost of capital
(understated). © McGraw-Hill Education. 14-10
Costs of Inventory (3 of 3)
• Stockout cost
– Back order costs (expressed as a fixed cost
per backorder or as a function of aging of
backorders)
– Lost income
– Customer dissatisfaction; loss of future sales © McGraw-Hill Education. 14-11
Distribution of 35% Carrying Cost:
• Cost of capital: 9-20%
• Obsolescence: 2-5%
• Storage: 2-5 percent
• Material handling: 1-3%
• Shrinkage: 1-3%
• Taxes & insurance: 1-3% © McGraw-Hill Education. 14-12
Types of Demand
• Independent demand (this chapter)
– Finished goods, spare parts
– Based on market demand, independent of other
items
– Requires forecasting
• Dependent demand
– Components/parts of the finished (parent)
products
– Demand is a known function of (parent)
independent demand items
– Calculate instead of forecast © McGraw-Hill Education. 14-13
Demand Patterns (Figure 14.4)
• The first graph – A pattern plus random
influences
• The second graph – ‘Lumpy’ due to production
lots © McGraw-Hill Education. 14-14
Economic Order Quantity (EOQ)
• Answers question: “How much should we
order?”
• Used for independent demand items.
• Objective is to find order quantity (Q) that
minimizes total cost (TC) of managing
inventory.
• Must calculate for each SKU.
Widely used and very robust (i.e., works well
in a variety of situations, even when its
assumptions do not perfectly hold). © McGraw-Hill Education. 14-15
EOQ Assumptions
1. Demand rate is constant, recurring, and known.
2. Lead time is constant and known.
3. No stockouts allowed.
4. Items are ordered or produced in a lot or batch,
and the lot is received all at once.
5. Costs are constant:
– Unit cost (no quantity discounts).
– Carrying cost is constant per unit.
– Ordering (setup) cost per order.
6. Item is a single product or SKU; demand not
influenced by other items. © McGraw-Hill Education. 14-16
EOQ Lot Size Intuition
• Trade-off between ordering frequency (i.e.,
order size) and inventory level.
– Frequent orders (small lot sizes) lead to lower
average inventory level, i.e., higher total
ordering costs and lower total holding
costs.
– Less frequent orders (large lot sizes) lead to
higher average inventory level, i.e., lower
total ordering costs and higher total
holding costs. © McGraw-Hill Education. 14-17
EOQ Inventory Levels (Figure 14.5) © McGraw-Hill Education. 14-18
Notation in EOQ Calculation
D = Demand rate, units per year
S = Cost per order placed or setup cost,
dollars per order
C = Unit cost, dollars per unit
i = Carrying rate, percent of dollar value per
year
Q = Lot size, units
TC = Total of ordering cost plus carrying cost,
dollars per year © McGraw-Hill Education. 14-19
Cost Equations in EOQ
• Ordering cost per year = (cost per order) ×
(orders per year) = SD/Q
• Carrying cost per year = (annual carrying rate)
× (unit cost) × (average inventory level) =
iCQ/2
• Total annual cost (TC) = ordering cost per year
+ carrying cost per year = SD/Q + iCQ/2 © McGraw-Hill Education. 14-20
Total Cost of Inventory (Figure 14.6) © McGraw-Hill Education. 14-21
EOQ Formula
At the EOQ,
ordering costs = holding costs
S*(D/Q) = iC* (Q/2)
iC
2SD
EOQ = Q =
Note: Although we use annual costs, any time
period can be used. Just be consistent throughout
equation! The same is true for currencies. © McGraw-Hill Education. 14-22
EOQ Example (1 of 2)
Demand = 10 cases/week
S = $12/order
i = 30% per year
C = $80/case
( ) ( ) ( )
= 22.8 cases order
EOQ = 2SD iC = 2 *12 *10 *52 .3 * 80
TC = ordering cost + holding cost
= SD/Q + iCQ/2 = 12*520/22.8 + .3*80*22.8/2
= 273.68 + 273.60 = $547.28/year
If ordering 22 cases, TC = $547.64
If ordering 23 cases, TC = $547.30 © McGraw-Hill Education. 14-23
EOQ Example (2 of 2)
Total cost curve is quite flat near the optimal
EOQ. Order size need not be exactly the EOQ to
get cost advantages. © McGraw-Hill Education. 14-24
Continuous Review (Q) System
(1 of 3)
• Relax assumption of constant demand.
Demand is assumed to be random.
• Check inventory position each time there is
demand (i.e., continuously).
• If inventory position drops below reorder
point, place an order for the EOQ.
• Also called fixed-order-quantity or Q system
(the fixed order size is EOQ). © McGraw-Hill Education. 14-25
Continuous Review (Q) System
(2 of 3)
(Figure 14.7)
R = Reorder point
Q = Order quantity
L = Lead time © McGraw-Hill Education. 14-26
Continuous Review (Q) System
(3 of 3)
Amount to order = EOQ
Order when inventory position = Reorder point
R = m + s
R = Reorder point
m = mean demand during lead time
s = safety stock
Reorder point is independent of EOQ!
EOQ tells how much to order.
Reorder point tells when to order © McGraw-Hill Education. 14-27
Service Level
• When demand is random, reorder point must
account for desired service level (fill rate).
• s = z σ
– s = safety stock
– z = safety factor
– σ = standard deviation in demand during lead time
• Service level can be defined several ways:
– Probability all customer orders will be filled while
waiting for supply order to arrive.
– Percentage of demand filled from stock.
– Percentage of time item is on hand. © McGraw-Hill Education. 14-28
Probability Distribution of Demand
over Lead Time (Fig. 14.8)
m = mean demand
R = Reorder point
s = safety stock © McGraw-Hill Education. 14-29
Periodic Review (P) System (1 of 2)
• Review inventory position at fixed interval
(P). For example, bread delivery truck visits
grocery stores on same days each week.
• Inventory brought up to a target level.
• Order quantity varies according to demand.
• Also called fixed-order-interval system or
P system. © McGraw-Hill Education. 14-30
Periodic Review (P) System (2 of 2)
(Figure 14.9)
T = target level
Q = order quantities
L = lead time
P = time between orders(period) © McGraw-Hill Education. 14-31
Periodic Review (P) System
P = time between orders
iCD
S
iC
SD
D D
Q
P = = 1 2 = 2
T = m’ + s
where
T = target inventory level
m’ = average demand over P + L
s’ = safety stock to cover P + L © McGraw-Hill Education. 14-32
P System Service Level
Safety stock must cover a longer interval (P + L).
s’ = zσ’
where
z = safety factor
σ’ = the standard deviation of demand over P + L © McGraw-Hill Education. 14-33
Service Level versus Inventory Level
(Fig. 14.10) © McGraw-Hill Education. 14-34
Using P and Q System in Practice
• Use P system when orders must be placed at
specified intervals.
• Use P systems when multiple items ordered from
the same supplier (joint-replenishment).
• Use Q system for expensive items; P for
inexpensive.
• P requires more safety stock (and is more likely
to stockout) since the system cannot respond
quickly to increased demand.
• Either may be more costly:
– P in safety stock, Q in monitoring costs © McGraw-Hill Education. 14-35
P and Q Systems at Home
• P system: You go to the grocery store on the
same day every week.
“What will we need for the next week?”
– P carries more inventory and is more likely to
run out since it cannot respond quickly to
increases in demand.
• Q system: You go to the grocery store each time
you need something.
“What do we need?”
– Q may require more unplanned trips to the
store. © McGraw-Hill Education. 14-36
Vendor Managed Inventory (VMI)
• Supply chain management initiative passing
responsibility for managing inventory stocks
to vendors (suppliers).
• Vendor must have access to buyer’s demand
forecast and inventory records.
• Managed through contractual arrangement.
• Supply chain partners share cost savings of
collaboration. © McGraw-Hill Education. 14-37
ABC Inventory Management
• Based on Pareto concept (80/20 rule) and
total usage in dollars of each item.
• Classification of A, B, and C items based on
usage.
• Purpose is to set effort priorities to manage
different SKUs, i.e., to allocate scarce
management resources. © McGraw-Hill Education. 14-38
ABC Inventory Classification
• A items: 20% of SKUs, 80% of dollars
• B items: 30% of SKUs, 15% of dollars
• C items: 50% of SKUs, 5% of dollars
• Three classes is arbitrary; could be any number.
• Percentages are approximate.
• Danger:
– Dollar use may not reflect importance of a
particular SKU! Some critical but low value items
may be classified as A. © McGraw-Hill Education. 14-39
Annual Usage of Items by Dollar
Value (Table 14.4)
Item Annual Usage in
Units Unit Cost Dollar Usage Dollar Usage % of Total
1 5,000 $ 1.50 $ 7,500 2.9%
2 1,500 8.00 12,000 4.7%
3 10,000 10.50 105,000 41.2%
4 6,000 2.00 12,000 4.7%
5 7,500 0.50 3,750 1.5%
6 6,000 13.60 81,600 32.0%
7 5,000 0.75 3,750 1.5%
8 4,500 1.25 5,625 2.2%
9 7,000 2.50 17,500 6.9%
10 3,000 2.00 6,000 2.4%
Total $ 254,725 100.0% © McGraw-Hill Education. 14-40
ABC Chart for Table 14.4 © McGraw-Hill Education. 14-41
Summary
14.1 Define inventory types and the purpose of
inventory.
14.2 Explain the costs incurred by inventory.
14.3 Differentiate between independent and
dependent demand.
14.4 Calculate the economic order quantity and
identify the underlying assumptions.
14.6 Recall the uses of periodic and continuous review
systems.
14.7 Describe how inventory and service level are
related.
14.8 Define Vendor Managed Inventory and the ABC
system. © McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill Education. 14-42
End of Presentation
Operations Management in the
Supply Chain
Decisions and Cases
Seventh Edition
Chapter 15
Material
Requirements
Planning and ERP © McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill Education. © McGraw-Hill Education. 15-2
Learning Objectives
15.1 Recall the elements, inputs and outputs of an MRP
system.
15.2 Contrast and compare MRP versus order-point
systems.
15.3 Construct a materials plan given the gross
requirements.
15.4 Describe in detail each element of an MRP system.
15.5 Discuss DRP and different ways to deal with
uncertain demand.
15.6 Explain the five requirements for a successful MRP
system.
15.7 Describe what an ERP system does. © McGraw-Hill Education. 15-3
Materials Requirements Planning
(MRP)
• Used to manage dependent demand items
– Raw materials, WIP parts
– Parts used to make higher-level components
• Driven by the master schedule (which is driven
by S&OP)
• Parts explosion breaks end items into all
requirements for components/parts using bill of
materials (BOM)
• Schedule is offset based on lead times
• Push system used because master schedule is
constantly changing © McGraw-Hill Education. 15-4
Closed Loop MRP System
(Figure 15.1) © McGraw-Hill Education. 15-5
Comparison of MRP & Order-Point
Systems
Attribute MRP Order Point
Demand Dependent Independent
Order philosophy Requirements Replenishment
Forecast Based on master schedule Based on past demand
Control concept Control all items ABC
Objectives Meet manufacturing needs Meet customer needs
Lot sizing Discrete EOQ
Demand pattern Lumpy but predictable Random
Types of inventory Work in process and raw materials Finished goods and spare parts © McGraw-Hill Education. 15-6
MRP Elements
• Inputs
– Master schedule
– Bill of materials (BOM)
– Inventory records
• Outputs
– Capacity planning
– Purchasing
– Shop-floor control © McGraw-Hill Education. 15-7
MRP Example © McGraw-Hill Education. 15-8
BOM (Product Structure)
• Table (end item) 1 week
– Leg assembly (1) 1 week
 Short rails (2) 1 week
 Long rails (2) 1 week
 Legs (4) 1 week
– Top (1) 2 weeks © McGraw-Hill Education. 15-9
Indented BOM
Level Code Component
0 Table (end-item)
1 Leg assembly (1)
2 Short rails (1)
2 Long rails (2)
2 Legs (4)
1 Top (1) © McGraw-Hill Education. 15-10
Materials Plan for BOM Levels
0 and 1 (1 of 2)
Week:
1
Week:
2
Week:
3
Week:
4
Week:
5
Week:
6
Tables On hand = 50 Gross Requirement 200 150 100 LT = 1 wk Scheduled Receipts Lot size: L4L Projected Ending Inventory 50 50 50 Saftey Stock = 0 Net Requirement 150 150 100 Planned order receipts 150 150 100 Planned order releases 150 150 100
Tops On hand = 50 Gross Requirement 150 150 100 LT = 2 wk Scheduled Receipts 50 Lot size: L4L Projected Ending Inventory 50 100 Saftey Stock = 0 Net Requirement 50 150 100 Planned order receipts 50 150 100 Planned order releases 50 150 100 © McGraw-Hill Education. 15-11
Materials Plan for BOM Levels
0 and 1 (2 of 2)
Week:
1
Week:
2
Week:
3
Week:
4
Week:
5
Week:
6
Leg Assembly On hand = 100 Gross Requirement 150 150 100 LT = 1 wk Scheduled Receipts Lot size: L4L Projected Ending Inventory 100 100 Saftey Stock = 0 Net Requirement 50 150 100 Planned order receipts 50 150 100 Planned order releases 50 150 100 © McGraw-Hill Education. 15-12
Materials Plan
On previous slide, note the following:
• Gross requirements in level 0 (Tables) come from the
master schedule.
• Gross requirements in level 1 (Tops, Leg assemblies)
come from the planned order releases in level 0.
• Planned order releases are offset by the lead times.
• Planned order releases are planned! Actual order
releases must take available capacity into account.
• Net requirements are the gross requirements minus
the projected ending inventory. © McGraw-Hill Education. 15-13
Master Schedule
• Quantities derived from aggregate production
plan (product families).
• Frozen within production lead time (so all
parts can be obtained).
• Quantities reflect “build” schedule rather than
demand forecasts.
• Quantities represent what needs to be
produced (infinite capacity assumed) © McGraw-Hill Education. 15-14
Bill of Materials [BOM]
• Structured list of all parts and materials
• Must be 100 percent accurate
• Should be one BOM per product per company
• Engineering-change-order (ECO) system used
to update BOM as product redesigned © McGraw-Hill Education. 15-15
Inventory Records
• Item master data segment
– Constant info (part number, cost, etc.)
• Inventory status segment
– Materials plan for each item
• Subsidiary data segment
– Info on outstanding orders, demand history, etc.
• Records must be accurate
– Cycle counting: physical count of a few items
each day, so that all items are counted on a
regular cycle © McGraw-Hill Education. 15-16
Capacity Planning
• Purpose is to aid management in checking
validity of master schedule
– Is there enough capacity to produce as
scheduled?
• Two methods
– Shop loading: assign work to work centers
– Finite capacity scheduling: considers resource
limitations © McGraw-Hill Education. 15-17
Purchasing
• Greatly enhanced by use of MRP
• Past due orders mostly eliminated
• Order expediting mostly eliminated
• Can provide suppliers with reports of planned
future orders
• Can use electronic data interchange (EDI) to
communicate directly with suppliers © McGraw-Hill Education. 15-18
Shop Floor Control
• Purposes
– Release orders to the shop floor
– Manage the orders for on-time completion
 Can use manufacturing execution system (MES)
• Set job priorities (dispatching rules)
• Manage lead times on basis of priority
– Expedite and de-expedite orders
• Minimize inventory while meeting completion
dates © McGraw-Hill Education. 15-19
Operating an MRP System
• Should MRP carry safety stock?
• How much safety stock should be carried?
• Safety lead time, safety capacity
• Couple its use downstream with distribution
requirements planning (DRP)
• Use upstream to give suppliers visibility into
schedule © McGraw-Hill Education. 15-20
Required Elements for a Successful
MRP System
1. Implementation planning
2. Appropriate and adequate IT support
3. Accurate data
4. Management support
5. User knowledge (all levels of firm) © McGraw-Hill Education. 15-21
Enterprise Resource Planning (ERP)
Systems
• Extension and integration of all functions through
a common database –
Forces standardized systems throughout firm
– Accounting controls systems
– Marketing and sales transactions
– Human resource planning and payroll transactions
• Coordinate decisions along the supply chain
• Major software vendors
– SAP
– Oracle © McGraw-Hill Education. 15-22
Summary
15.1 Recall the elements, inputs and outputs of an MRP
system.
15.2 Contrast and compare MRP versus order-point
systems.
15.3 Construct a materials plan given the gross
requirements.
15.4 Describe in detail each element of an MRP system.
15.5 Discuss DRP and different ways to deal with
uncertain demand.
15.6 Explain the five requirements for a successful MRP
system.
15.7 Describe what an ERP system does. © McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill Education. 15-23
End of Presentation
Operations Management in the
Supply Chain
Decisions and Cases
Seventh Edition
Chapter 16
Supply Chain
Management © McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill Education. © McGraw-Hill Education. 16-2
Learning Objectives
16.1 Define supply chain and supply chain
management.
16.2 List five key measures of supply chain
performance.
16.3 Explain the bullwhip effect and how it can be
reduced.
16.4 Contrast structural and systems improvements.
16.5 Explain the effect of technology on the supply
chain.
16.6 Define supply chain risk, resilience and how risk
can be managed.
16.7 Describe supply chain sustainability. © McGraw-Hill Education. 16-3
Supply Chain and Supply Chain
Management
A SUPPLY CHAIN is the set of entities and
relationships that cumulatively define materials
and information flows both downstream toward
the customer and upstream toward the very first
supplier.
“Supply chain management is the design and
management of seamless, value-added processes
across organizational boundaries to meet the real
needs of the end customer.”
–Institute for Supply Management © McGraw-Hill Education. 16-4
Typical Supply Chain (Figure 16.1) © McGraw-Hill Education. 16-5
Supply Chain from Manufacturer’s
Perspective © McGraw-Hill Education. 16-6
SCOR
SCOR = Supply Chain Operations Reference model
SCOR is founded on five distinct management
processes © McGraw-Hill Education. 16-7
The Five SCOR Functions
• Plan. Coordinate the other functions.
• Source. The sourcing function brings inputs into
the transformation process from other
organizations.
• Make. The operations function is responsible for
making the product or service.
• Deliver. The logistics function is responsible for
the movement and storage of goods across
organizations in a supply chain.
• Return. Return and recycle inputs or products in
the supply chain. © McGraw-Hill Education. 16-8
Measuring Supply Chain Performance
(1 of 3)
• Delivery
– On time delivery
– Fill rate
• Quality
– Product or service performance
– Conformance to specifications
– Customer satisfaction © McGraw-Hill Education. 16-9
Measuring Supply Chain Performance
(2 of 3)
• Flexibility
– Time to change volume of output by a fixed
amount
– Time to change the mix of products or
services
• Time
– Total supply chain throughput time
– Cash-to-cash cycle time = Days in inventory
+ days in accounts receivable – days in
accounts payable © McGraw-Hill Education. 16-10
Measuring Supply Chain Performance
(3 of 3)
• Cost
– Unit cost = (materials + labor + overhead) /
# units
– Distribution, inventory carrying, accounts
receivable
– Total supply chain cost =
 Suppliers (materials and components) +
 Producer (fabrication and assembly) +
 Logistics (shipping and WIP between firms) © McGraw-Hill Education. 16-11
Dynamics: Bullwhip Effect
• Supply chain is a highly interactive system.
Decisions in each part of the chain affect the
other entities.
• There is an accelerator (bullwhip) effect:
Increased variability in upstream orders,
resulting in more inventory upstream.
• Even with perfect information, replenishment
lead times lead to an accelerator effect.
• Improve supply chain by reducing total
replenishment time, share real demand
information with all levels. © McGraw-Hill Education. 16-12
Improving Supply Chain Performance
• Decisions to improve performance
– Change structure
 Decisions that involve investments in bricks and
mortar (facilities, new products, technology,
etc.)
– Change systems within a given structure
 Decisions that involve people, process flow and
information systems © McGraw-Hill Education. 16-13
Supply Chain Structural
Improvements
• Forward and backward integration
• Major process simplification
• Change configuration of factories,
warehouses, or retail locations (e.g. fewer
plants or locations)
– Can include supply base reduction,
outsourcing, off-shoring
• Major product redesign
– Postponement, modularity © McGraw-Hill Education. 16-14
Supply Chain System Improvements
• Cross-functional teams and partnerships with
suppliers and customers to increase
coordination.
• Lean Systems for producers, suppliers and
distribution
• Integrated information systems downstream
and upstream © McGraw-Hill Education. 16-15
Technology and Supply Chain
Management
• Growth of e-commerce
– B2B (business-to-business)
– B2C (business-to-consumer)
• Fundamental processes in supply chains:
– Order placement process
 Information before order (Is product available in
stock?)
 Actual order entry
– Order fulfillment process
 Direct link to internal operations & suppliers
• Use of analytics to improve supply chains © McGraw-Hill Education. 16-16
Supply Chain Risk and Resilience
• Resilience: Ability to quickly respond to
unexpected disruptions in supply or demand,
either natural or manmade.
– Examples: strike, recession, price change, natural
disaster, manufacturing failure, unexpected
demand.
• Risk mitigation*
– Stage 1: Proactive plan
– Stage 2: Minimize damage during disruption
– Stage 3: Post-disruption recovery
* Each stage requires strategic and operational
planning. © McGraw-Hill Education. 16-17
Analysis of Supply Chain Risk
(1 of 2)
• Supply chain risk: the probability of supply
chain disruption.
• Risk can be reduced at each node in the network.
– Add inventory at the supplier node or firm itself.
– Use two dispersed suppliers.
– For a sole source, have quick recovery or second
supplier.
• Do not solely focus on the highest spend
suppliers. Even small suppliers can add risk. © McGraw-Hill Education. 16-18
Analysis of Supply Chain Risk
(2 of 2)
• For a given damage scenario and each supplier
calculate
R S
R S
Insure that T T
during a disruption, using inventory or alternate supply sources.
maximum time supplier can match supply and demand
T
PI performance impact of disruption
T time to recover
<
= = =
• Costs of a resilient network can be higher or
sometimes lower, depending on the network
configuration.
• Some supply chains can be too lean. © McGraw-Hill Education. 16-19
Sustainability of the Supply Chain
• Sustainability: meeting present needs without
sacrificing the needs of future generations.
• Triple bottom line: environmental, social,
financial
• Rests on the concept that all stakeholders are
important
• Sustainable supply chains, beyond firm to all
parties in supply chain
• Goals, plans and implementation needed to
improve sustainability © McGraw-Hill Education. 16-20
Summary
16.1 Define supply chain and supply chain
management.
16.2 List five key measures of supply chain
performance.
16.3 Explain the bullwhip effect and how it can be
reduced.
16.4 Contrast structural and systems improvements.
16.5 Explain the effect of technology on the supply
chain.
16.6 Define supply chain risk, resilience and how risk
can be managed.
16.7 Describe supply chain sustainability. © McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill Education. 16-21
End of Presentation

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