Supply Chain Strategy

What is a Supply Chain?


Supply-chain is a term that describes how organizations (suppliers, manufacturers, distributors, and customers) are linked together.

What is Supply Chain Management?

Supply-chain management is a total system approach to managing the entire flow of information, materials, and services from raw-material suppliers through factories and warehouses to the end customer.

Formulas for Measuring Supply-Chain Performance

One of the most commonly used measures in all of operations management is “Inventory Turnover”

In situations where distribution inventory is dominant, “Weeks of Supply” is preferred and measures how many weeks’ worth of inventory is in the system at a particular time.

Example of Measuring Supply-Chain Performance

Suppose a company’s new annual report claims their costs of goods sold for the year is $160 million and their total average inventory (production materials + work-in-process) is worth $35 million.  This company normally has an inventory turn ratio of 10.  What is this year’s  Inventory Turnover ratio?  What does it mean?

= $160/$35

 = 4.57

Since the company’s normal inventory turnover ration is 10, a drop to 4.57 means that the inventory is not turning over as quickly as it had in the past.  Without knowing the industry average of turns for this company it is not possible to comment on how they are competitively doing in the industry, but they now have more inventory relative to their cost of goods sold than before.

Hau Lee’s Concepts of Supply Chain Management

• Hau Lee’s approach to supply chain (SC) is one of aligning SC’s with the uncertainties revolving around the supply process side of the SC
• A stable supply process has mature technologies and an evolving supply process has rapidly changing technologies
• Types of SC’s

           -Efficient SC’s

           -Risk-Hedging SC’s

           -Responsive SC’s

           -Agile SC’s

Hau Lee’s SC Uncertainty Framework

 What is Outsourcing?

Outsourcing is defined as the act of moving a firm’s internal activities and decision responsibility to outside providers. 

Reasons to Outsource

• Organizationally-driven
• Improvement-driven
• Financially-driven
• Revenue-driven
• Cost-driven
• Employee-driven

Value Density

• Value density is defined as the value of an item per pound of weight.
• It is used as an important measure when deciding where items should be stocked geographically and how they should be shipped.

Mass Customization

• Mass customization is a term used to describe the ability of a company to deliver highly customized products and services to different customers.
• The key to mass customization is effectively postponing the tasks of differentiating a product for a specific customer until the latest possible point in the supply-chain network.

Quality Management

Total Quality Management (TQM) definition: 
Total quality management is defined as managing the entire organization so that it excels on all dimensions of products and services that are important to the customer.

Quality Specifications

• Design quality: Inherent value of the product in the marketplace

Dimensions include: Performance, Features, Reliability/Durability, Serviceability, Aesthetics,  and Perceived Quality.

• Conformance quality: Degree to which the product or service design specifications are met 

Costs of Quality

Six Sigma Quality 

• A philosophy and set of methods companies use to eliminate defects in their products and processes
• Seeks to reduce variation in the processes that lead to product defects
• Six Sigma allows managers to readily describe process performance using a common metric: Defects Per Million Opportunities (DPMO)

Example of Defects Per Million Opportunities (DPMO) calculation.  Suppose we observe 200 letters delivered incorrectly to the wrong addresses in a small city during a single day when a total of 200,000 letters were delivered.  What is the DPMO in this situation?

So, for every one million letters delivered this city’s postal managers can expect to have 1,000 letters incorrectly sent to the wrong address.

Cost of Quality: What might that DPMO mean in terms of over-time employment to correct the errors?

Six Sigma Quality: DMAIC Cycle

• Define, Measure, Analyze, Improve, and Control (DMAIC) 
• Developed by General Electric as a means of focusing effort on quality using a methodological approach
• Overall focus of the methodology is to understand and achieve what the customer wants
• A 6-sigma program seeks to reduce the variation in the processes that lead to these defects
• DMAIC consists of five steps.

Example to illustrate the process…

• We are the maker of this cereal.  Consumer reports has just published an article that shows that we frequently have less than 16 ounces of cereal in a box.
• What should we do?

Step 1 - Define

• What is the critical-to-quality characteristic?
• The CTQ (critical-to-quality) characteristic in this case is the weight of the cereal in the box.

Step 2 - Measure

• How would we measure to evaluate the extent of the problem?
• What are acceptable limits on this measure?
• Let’s assume that the government says that we must be within ± 5 percent of the weight advertised on the box.
• Upper Tolerance Limit = 16 + .05(16) = 16.8 ounces
• Lower Tolerance Limit = 16 – .05(16) = 15.2 ounces.
• We go out and buy 1,000 boxes of cereal and find that they weight an average of 15.875 ounces with a standard deviation of .529 ounces.
• What percentage of boxes are outside the tolerance limits?  
     
  

What percentage of boxes are defective (i.e. less than 15.2 oz)?

Z = (x – Mean)/Std. Dev. = (15.2 – 15.875)/.529 = -1.276

NORMSDIST(Z) = NORMSDIST(-1.276) = .100978

Approximately, 10 percent of the boxes have less than 15.2 

Ounces of cereal in them!

Step 3 - Analyze - How can we improve the capability of our cereal box filling process?

• Decrease Variation
• Center Process
• Increase Specifications

Step 4 – Improve – How good is good enough? Motorola’s “Six Sigma”

-6s minimum from process center to nearest spec

Motorola’s “Six Sigma”

Implies 2 ppB “bad” with no process shift

With 1.5s shift in either direction from center (process will move), implies 3.4 ppm “bad”.

Step 5 – Control

• Statistical Process Control (SPC)

1. Use data from the actual process
2. Estimate distributions
3. Look at capability - is good quality possible
4. Statistically monitor the process over time

Analytical Tools for Six Sigma and Continuous Improvement: Flow Chart 

Analytical Tools for Six Sigma and Continuous Improvement: Run Chart

Analytical Tools for Six Sigma and Continuous Improvement: Pareto Analysis

Analytical Tools for Six Sigma and Continuous Improvement: Checksheet

Analytical Tools for Six Sigma and Continuous Improvement: Histogram

Analytical Tools for Six Sigma and Continuous Improvement: Cause & Effect Diagram

Analytical Tools for Six Sigma and Continuous Improvement: Control Charts

Other Six Sigma Tools

• Failure Mode and Effect Analysis (DMEA) is a structured approach to identify, estimate, prioritize, and evaluate risk of possible failures at each stage in the process.
• Design of Experiments (DOE) a statistical test to determine cause-and-effect relationships between process variables and output.

Six Sigma Roles and Responsibilities

1. Executive leaders must champion the process of improvement
2. Corporation-wide training in Six Sigma concepts and tools
3. Setting stretch objectives for improvement
4. Continuous reinforcement and rewards

The Shingo System: Fail-Safe Design

• Shingo’s argument:

SQC methods do not prevent defects

Defects arise when people make errors

Defects can be prevented by providing workers with feedback on errors

• Poka-Yoke includes:

Checklists

Special tooling that prevents workers from making errors

ISO 9000 and ISO 14000

• Series of standards agreed upon by the International Organization for Standardization (ISO)
• Adopted in 1987
• More than 160 countries
• A prerequisite for global competition?
• ISO 9000 an international reference for quality, ISO 14000 is primarily concerned with environmental management      

Three Forms of ISO Certification

1.First party: A firm audits itself against ISO 9000 standards

2. Second party: A customer audits its supplier

3. Third party: A "qualified" national or international standards or certifying agency serves as auditor

External Benchmarking Steps

1. Identify those processes needing improvement 

2. Identify a firm that is the world leader in performing the process

3. Contact the managers of that company and make a personal visit to interview managers and workers

4. Analyze data

Strategic Capacity Management

Strategic Capacity Planning

• Capacity can be defined as the ability to hold, receive, store, or accommodate
• Strategic capacity planning is an approach for determining the overall capacity level of capital intensive resources, including facilities, equipment, and overall labor force size

Capacity Utilization

Where

Capacity used

rate of output actually achieved 

Best operating level

capacity for which the process was designed

Best Operating Level

Example: Engineers design engines and assembly lines to operate at an ideal or “best operating level” to maximize output and minimize ware.

Example of Capacity Utilization

During one week of production, a plant produced 83 units of a product.  Its historic highest or best utilization recorded was 120 units per week.  What is this plant’s capacity utilization rate?

Answer: 

Capacity utilization rate =      Capacity used    .    = 83/120

                        Best operating level      =0.69 or 69%

Economies & Diseconomies of Scale

     

  

The Learning Curve

Capacity Focus

• The concept of the focused factory holds that production facilities work best when they focus on a fairly limited set of production objectives
• Plants Within Plants (PWP) 

       -Extend focus concept to operating level   

Capacity Flexibility

• Flexible plants 
• Flexible processes
• Flexible workers  

Capacity Planning: Balance

Capacity Planning

• Frequency of Capacity Additions
• External Sources of Capacity 

Determining Capacity Requirements

1. Forecast sales within each individual product line

2. Calculate equipment and labor requirements to meet the forecasts

3. Project equipment and labor availability over the planning horizon 

Example of Capacity Requirements

     

A manufacturer produces two lines of mustard, FancyFine and Generic line.  Each is sold in small and family-size plastic bottles. 

The following table shows forecast demand for the next four years.

Example of Capacity Requirements (Continued): Product from a Capacity Viewpoint

Question: Are we really producing two different types of mustards from the standpoint of capacity requirements?

Answer: No, it’s the same product just packaged differently.  

Example of Capacity Requirements (Continued) : Equipment and Labor Requirements

• Three 100,000 units-per-year machines are available for small-bottle production.  Two operators required per machine.
• Two 120,000 units-per-year machines are available for family-sized-bottle production.  Three operators required per machine.

Question: What are the Year 1 values for capacity, machine, and labor?

Question: What are the values for columns 2, 3 and 4 in the table below?

Example of a Decision Tree Problem

A glass factory specializing in crystal is experiencing a substantial backlog, and the firm's management is considering three courses of action:

A)  Arrange for subcontracting

B)  Construct new facilities

C)  Do nothing (no change)

The correct choice depends largely upon demand, which may be low, medium, or high.   By consensus, management estimates the respective demand probabilities as 0.1, 0.5, and 0.4.    

The management also estimates the profits when choosing from the three alternatives (A, B, and C) under the differing probable levels of demand.  These profits, in thousands of dollars are presented in the table below: 

Step 1. We start by drawing the three decisions

Step 2. Add our possible states of nature, probabilities, and payoffs

Step 3. Determine the expected value of each decision

Step 4. Make decision

Alternative B generates the greatest expected profit, so our choice is B or to construct a new facility.

Planning Service Capacity vs. Manufacturing Capacity

• Time: Goods can not be stored for later use and capacity must be available to provide a service when it is needed 
• Location: Service goods must be at the customer demand point and capacity must be located near the customer
• Volatility of Demand: Much greater than in manufacturing . 

Product Design

Typical Phases of Product Development

• Planning
• Concept Development
• System-Level design
• Design Detail
• Testing and Refinement
• Production Ramp-up

Economic Analysis of Project Development Costs

• Using measurable factors to help determine:

           -Operational design and development decisions

           -Go/no-go milestones

• Building a Base-Case Financial Model

          -A financial model consisting of major cash flows

          -Sensitivity Analysis for “what if” questions

Designing for the Customer 

Designing for the Customer: Quality Function Deployment

• Interfunctional teams from marketing, design engineering, and manufacturing
• Voice of the customer
• House of Quality 

Designing for the Customer: Value Analysis/Value Engineering 

• Achieve equivalent or better performance at a lower cost while maintaining all functional requirements defined by the customer

1. Does the item have any design features that are not necessary?
2. Can two or more parts be combined into one?
3. How can we cut down the weight?
4. Are there nonstandard parts that can be eliminated?

Design for Manufacturability

• Traditional Approach

      -“We design it, you build it” or “Over the wall”

• Concurrent Engineering

     -“Let’s work together simultaneously”

Design for Manufacturing and Assembly

• Greatest improvements related to DFMA arise from simplification of the product by reducing the number of separate parts:

1. During the operation of the product, does the part move relative to all other parts already assembled?
2. Must the part be of a different material or be isolated from other parts already assembled?
3. Must the part be separate from all other parts to allow the disassembly of the product for adjustment or maintenance?

Measuring Product Development Performance

Project Management

Project Management definition:
A Project is a series of related jobs usually directed toward some major output and requiring a significant period of time to perform.
Project Management is the management activities of planning, directing, and controlling resources (people, equipment, material) to meet the technical, cost, and time constraints of a project.

Pure Project definition:
A pure project is where a self-contained team works full-time on the project.

Pure Project: Advantages

• The project manager has full authority over the project
• Team members report to one boss
• Shortened communication lines
• Team pride, motivation, and commitment are high 

Pure Project: Disadvantages

• Duplication of resources
• Organizational goals and policies are ignored
• Lack of technology transfer
• Team members have no functional area "home"    

Functional Project definition:

A functional project is housed within a functional division.

Functional Project: Advantages

• A team member can work on several projects
• Technical expertise is maintained within the functional area
• The functional area is a “home” after the project is completed
• Critical mass of specialized knowledge 

Functional Project: Disadvantages

• Aspects of the project that are not directly related to the functional area get short-changed
• Motivation of team members is often weak
• Needs of the client are secondary and are responded to slowly 

Matrix Project Organization Structure

Matrix: Advantages

• Enhanced communications between functional areas
• Pinpointed responsibility
• Duplication of resources is minimized
• Functional “home” for team members
• Policies of the parent organization are followed  

Matrix: Disadvantages

• Too many bosses
• Depends on project manager’s negotiating skills
• Potential for sub-optimization 

Work Breakdown Structure definition:

A work breakdown structure defines the hierarchy of project tasks, subtasks, and work packages.

Network-Planning Models

• A project is made up of a sequence of activities that form a network representing a project 
• The path taking longest time through this network of activities is called the “critical path” 
• The critical path provides a wide range of scheduling information useful in managing a project
• Critical Path Method (CPM) helps to identify the critical path(s) in the project networks

Prerequisites for Critical Path Methodology

A project must have:

•    well-defined jobs or tasks whose completion marks the end of the project;
•    independent jobs or tasks;
•    and tasks that follow a given sequence.

Types of Critical Path Methods

• CPM with a Single Time Estimate

     -Used when activity times are known with certainty

     -Used to determine timing estimates for the project, each activity in the project, and slack time for activities  

• CPM with Three Activity Time Estimates

     -Used when activity times are uncertain 

     -Used to obtain the same information as the Single Time Estimate model and probability information

• Time-Cost Models

     -Used when cost trade-off information is a major consideration in planning

     -Used to determine the least cost in reducing total project time 

Steps in the CPM with Single Time Estimate 

1. Activity Identification

2. Activity Sequencing and Network Construction

3. Determine the critical path

-From the critical path all of the project and activity timing information can be obtained

CPM with Single Time Estimate

Consider the following consulting project:

First draw the network

Determine early starts and early finish times.

Critical Path & Slack

Operations and Supply Strategy

What is Operations and Supply Strategy?

Operations and supply strategy is concerned with setting broad policies and plan for using the resources of a firm to best support its long-term competitive strategy.

Competitive Dimensions

•Cost or Price

–Make the Product or Deliver the Service Cheap

•Quality

–Make a Great Product or Deliver a Great Service

•Delivery Speed

–Make the Product or Deliver the Service Quickly

•Delivery Reliability

–Deliver It When Promised

•Coping with Changes in Demand

–Change Its Volume

•Flexibility and New Product Introduction Speed

            --Change it

•Other Product-Specific Criteria

            --Support it.

Dealing with Trade-offs

For example, if we reduce costs by reducing product quality inspections, we might 

         reduce product quality.

If we improve customer service problem solving by cross-training personnel to deal  with a wider-range of problems, they may become less efficient at dealing with  commonly occurring problems. 

                                      

                       

Order Qualifiers and Winners Defined

Order qualifiers are the basic criteria that permit the firms products to be considered as candidates for purchase by customers

Order winners are the criteria that differentiates the products and services of one firm from another 

What is Productivity? Defined

Productivity is a common measure on how well resources are being used. In  the broadest sense, it can be defined as the following ratio: 

Outputs

  Inputs

Total Measure Productivity

Total Measure Productivity = Goods and services produced

                                                              All resources used

Partial measures of productivity =

Output or   Output or Output    or    Output

Labor         Capital      Materials        Energy   

  

Operation Management

1. Introduction to the Field
2. Operations and Supply Strategy
3. Project Management
4. Product Design
5. Strategic Capacity Management
6. Quality Management
7. Supply Chain Strategy