OPERATIONS MANAGEMENT CHAPTER 13 Inventory- a stock or store of goods - Independent demand items- items that are ready to be sold or used - Dependent Demand items- components of finished products, rather than finished products themselves - ROI = profit after taxes / total assets - Reduction in inventories = increase in ROI - The ratio of inventories to sales in the manufacturWe also discuss several other topics like How did the US get into Vietnam?
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ing, wholesale and retail sectors= used to gauge the health of the US economy Inventory decisions important for services (hospitals carry drugs and blood supplies) - The major source of revenues for retail and wholesale businesses is the sale of merchandise (like inventory) - Inventory of goods held for sale = largest assets of merchandising business Different kinds of inventories: - Raw materials and purchased parts - Partially completed goods, or work in process inventory - Finished goods inventories or merchandise - Tools and supplies - Maintenance and repairs (MRO) inventory - Goods-in-transit to warehouses, distributors or customers (pipeline inventory) Functions of inventory 1. To meet anticipated customer demand- anticipation stocks held to satisfy expected demand 2. To smooth production requirements- seasonal inventories (inventories kept for seasons) 3. To decouple operations 4. To reduce the risk of stockouts- risk of shortages reduced by holding safety stocks (stocks in excess of expected demand to compensate for variabilities in demand and lead time) 5. To take advantage of order cycles- buying in quantities to exceed immediate requirements helps. Produce in larger than smaller quantities. 6. To hedge against price increase- purchasing larger than normal amounts to beat the price increase 7. To permit operations- Little’s Law- useful in quantifying pipeline inventory- states that the average amount of inventory in a system = product of the average rate at which inventory units leave the system and the average time a unit is in the system If units are in the system for 10 day average, and demand rate is 5 units per day, the average inventory is 50 (5 X 10) 8. To take advantage of quantity discounts- suppliers give discounts on large orders Objective of Inventory Management - Inadequate control of inventories under/overstocking of items - 2 main concerns of inventory management: 1. level of customer service- to have the right goods in the right place at the right time 2. costs of ordering and carrying inventories To achieve satisfactory levels of customer service while keeping inventory costs within reasonable bounds To judge the effectiveness of inventory management: 1. judge customer satisfaction- number of quantity of backorders and customer complaints 2. inventory turnover- ratio of annual cost of goods sold to average inventory management (how many times a year the inventory is sold) - higher ratio = better (more efficient use of inventories) - Higher profit margins = lower acceptable number of inventory turns - Product that takes a long time to manufacture- lower turnover rate - Supermarkets= high turnover rate - Use inventory turnover to evaluate inventory management performance - Days of inventory on hand- expected number of days of sales that can be supplied from existing inventory (high number of days = excess inventory, low number of days = shortage) Inventory Management - Keep track of inventory on hand and on order - Forecast of demand- forecast error - Knowledge of lead times and lead time variability - Holding costs, ordering costs, shortage costs - Classification system for inventory items Inventory counting systems: - Periodic system- physical count of items in inventory is made at periodic, fixed intervals - To decide how much to order of each item - Small retailers use this - Orders for many items occur at same time- economies in processing and shipping orders - Lack of control between reviews and need to protect against shortages between review periods - Perpetual Inventory system- continuous review. Keeps track of removals from inventory on continuous basis. - current level of inventory - control providing by constant monitoring - fixed order quantity- advantage - added costs of record keeping - customer deposits and withdrawals - Perpetual systems range: - Two-Bin system- very elementary. Items withdrawn from first bin until contents exhausted. NO need to record each withdrawal from inventory. Reorder card may not be turned in for some reasons (misplaced, etc.). 2 containers of inventory- reorder when first is empty - Supermarkets, discount stores, department stores use periodic - Universal Product Code- bar code, printed on an item tag and has info about item to which is attached - 0 on left of bar code identifies object as a grocery item - first 5 numbers- manufacturer - last 5 numbers- specific item - small packages us 6 digit number Point of sale systems- electronically record actual sales. Record items at time of sale. Enhance forecasting and inventory management. UPC scanners increase speed, accuracy, continuous info, reduce need for periodic review, improve level of customer service - Bar codes help with monitoring and counting - Radio Frequency Identification Tags (RFID)- used to keep track of inventory in certain applications Lead time- time between submitting an order and receiving it - Greater potential variability of lead time = greater need for additional stock to reduce risk of shortage between deliveries Inventory Cost - Purchase cost- amount paid to a vendor or supplier to buy the inventory. Largest of all inventory costs - Holding/carrying cost- physically having item in storage. Interest, insurance, taxes, depreciation, obsolescence, deterioration, spoilage, breakage, tracking, picking, warehouse costs (heat, light, rent, workers, equipment, security). Variable portion of these costs is important!! ∙ Holding costs stated either as percentage of unit price or as dollar amount per unit ∙ Typically ranged from 20-40% or more of the value of an item ∙ Holding a $100 item in inventory for 1 year could cost from $20-$40 - Ordering costs- costs of ordering/receiving inventory. Actual placement of order. Determining how much is needed, preparing invoices, inspecting goods upon arrival, moving goods to storage. Expressed as fixed dollar amount per order regardless of order size ∙ Setup costs- when firm produces its own inventory ∙ Analogous to ordering costs ∙ Expressed as fixed charge per production run, regardless of size of the run - Shortage cost- when demand exceeds supply of inventory on hand. Opportunity cost of not making the sale, loss of customer goodwill, late charges, backorder costs, similar costs. ∙ Difficult to measure Classification System - Items held in inventory not equally important in terms of dollars invested, profit potential, sales/usage volume, stockout penalities - Allocate control efforts according to relative importance of various items in inventory - ABC approach- classifies inventory items according to some measure of importance, usually annual dollar value, and allocates control efforts accordingly - A- very important - B- moderately important - C- least important - Annual dollar value = dollar value per unit X annual usage rate - A- generally account for 10-20% of number of items in inventory, but about 60-70% of annual dollar value - C items may account for 50-60% of number of items, but only about 10-15% of dollar value - For ABC problem: ∙ For each item: Annual Volume/Demand X Unit Price/Cost = Annual Dollar Value ∙ Arrange annual dollar values in descending order ∙ The few 10-15% with highest annual dollar value = A ∙ Most (about 50%) with lowest annual dollar value = C ∙ Those in between (35%) = B - ABC concept used in customer service too (not to overemphasize minor aspects of customer service at the expense of major aspects) - Cycle counting- physical count of items in inventory ∙ Purpose: to reduce discrepancies between amounts indicated by inventory records and actual quantities of inventory on hand ∙ More frequently than once a year ∙ Reduces cost of inaccuracies ∙ Some events trigger cycle counting like out-of-stock reports, inventory report indicating low or zero balance of an item ∙ Sometimes they are done periodically ∙ Maintain full time job personnel to do counting Inventory Ordering Policy - How much to order? - When to order? - Cycle Stock- inventory intended to meet expected demand - Safety Stock- inventory held to reduce the probability of experiencing a stockout due to demand or lead time variability How much to order: - Determined by economic order quantity model - Identify optimal order quantity - Minimizing the sum of certain annual costs that vary with order size/order frequency 1. Basic economic order quantity model 2. Economic production quantity model 3. Quantity discount model Basic Economic Order Quantity Model - Simplest - Only one product involved - Annual demand requirements are known - Demand is spread evenly through year- demand rate is constant - Lead time is known and constant - Each order is received in single delivery - No quantity discounts - To identify a fixed order size - Minimize the sum of annual costs of holding inventory and ordering inventory - Inventory ordering and usage occur in cycles - Begins with receipt of order Q units - Order received at exact instant that inventory on hand falls to 0 - Orders are timed to avoid both excess stock and stockouts - Balance between carrying costs and ordering costs - One type of cost increases, the other decreases - Small order size- average inventory low, so low carrying costs, but high ordering costs - Large order size- average inventory high, so high carrying costs, low ordering costs - Ideal solution: neither a few very large orders, nor many small orders, but one that lies in between - Annual Carrying Cost= Average amount of inventory on hand X cost to carry one unit for 1 year - Average Inventory is half of the order quantity - Annual Carrying Cost = (Q/2) X H - Q = order quantity in units - H= holding/carrying cost per unit per year - Carrying cost is linear function of Q. it increases/decreases in direct proportion to changes in order quanitity - Annual ordering cost decreases = order size increases (because the larger the order size, the fewer number of orders needed) - Ordering costs are insensitive to order size , so ordering cost is treated as a constant - Annual Ordering Cost = (D/Q) X S - D= demand, usually in units per year - S= ordering cost per order - (D/Q) decreases as Q increases, so annual ordering cost is inversely related to order size - TC (total annual cost) = Annual Carrying Cost + Annual Ordering Cost = - = (Q/2) H + (D/Q) S Total-cost curve is U shaped - reaches its minimum at the quantity where carrying costs = ordering costs - Q – Square Root (2DS/H) Length of order cycle (time between orders) = Q/D Holding and ordering costs are usually estimated values Holding costs sometimes designated by management EOQ should be an approximate quantity not an exact quantity Total cost curve is relatively flat around the EOQ Economic Production Quantity (EPQ) - Batch mode is widely used in production - Always produce in batches rather than continually - Only one product is involved - Annual demand is known - Usage rate is constant - Usage orders received incrementally during production (not in single delivery like EOQ) - Production occurs periodically - Production rate constant when production is occurring - Lead time is known and constant - No quantity discounts In production phase: - Inventory builds up at rate = difference between production and usage rates - Example: if daily production rate is 20 units and daily usage rate is 5 units, inventory will build up at a rate of 20-5 = 15 units per day - As long as production occurs, inventory levels will continue to grow - When production ceases, inventory levels decrease - Inventory level will be at the maximum at the point where production ceases - Then it will decrease at constant usage rate - Setup costs = ordering costs, both are independent of lot (run) size - Larger run size = fewer number of runs needed, lower annual setup cost - Number of runs/batches per year = D/Q - Annual setup cost = number of runs per year X setup cost (or (D/Q) X S) - Total cost = carrying cost + setup cost or: - = (maximum inventory / 2) H + (D/Q)S With EOQ- entire quantity Q goes into inventory With EPQ- usage continually draws off some of the output, but what’s left goes into inventory Inventory level will never be at the run size Run Quantity= square root(2DS/H) X square root(p/(p-u) P= production/delivery rate U= usage rate Cycle Time= Q/u Run time = Q/P Maximum Inventory levels= (Q/P)(p-u) or Q-(Q/P) Average Inventory levels= Maximum inventory / 2 Quantity Discounts- price reductions for larger orders offered to customers to make them buy large quantities - goal: select the order quantity that will minimize total cost - total cost = carrying cost + ordering cost + purchasing cost - aka (Q/2)H + (D/Q)S + PD Q= order quantity H= holding cost D= demand S= ordering cost P= unit price In basic EOQ= determination of order size does not involve purchasing cost Including unit price in total-cost computation would increase total cost by P X D Smaller unit prices raise the curve less than larger unit prices Price breaks- minimum quantities needed to obtain discounts Raising total cost curve would not change the EOQ (reread page 520) - quantity discounts- separate U shaped total-cost curve for each unit price - including unit prices raises each curve by a constant amount - each unit price is raised by a different amount ∙ When carrying costs constant- single minimum point ∙ When carrying costs specified as a percentage of unit price = each curve will have a different minimum point lower costs = lower carrying cost, larger minimum points ∙ As price decreases, each curve’s minimum point will be to the right of the next higher curve’s minimum point To determine EOQ for constant carrying costs: 1. Compute common minimum point 2. Only one of the unit prices will have the minimum point in the feasible range. Identify the range a- If feasible minimum point is on lowest price range (lowest cost curve)- optimal order quantity b- If feasible minimum point is in any other range: compute total cost for feasible minimum point and price breaks of all lower unit costs. Compare total costs: the point that is the lowest total cost = optimal order quantity a- Compute common minimum: Q = square root (2DS/H) b- Carrying cost + order cost + purchase cost = total cost To determine EOQ when carrying costs are expressed as percentage of price: 1. Begin with lowest unit price. Compute minimum points for each price range until you find feasible minimum point 2. If it is feasible, it is optimal order quantity. If not feasible in lowest price range, compare total cost at price break for all lower price ranges with total cost. Lowest total cost = optimum. EOQ models answer question of how much to order Reorder Point (ROP)- when the quantity on hand of an item drops to this amount, the item is reordered - Amount includes expected demand during lead time and extra cushion of stock - Perpetual inventory monitoring is required to know when the reorder point is reached - Goal: to place an order when the amount of inventory on hand is okay to satisfy demand during the time it takes to receive the next order (lead time) 4 determinants of reorder point quantity 1. Rate of demand 2. Lead time 3. Extend of demand/lead time variability 4. Degree of stockout risk acceptable to management Demand and lead time = constant Reorder Point = d X LT D = demand rate LT= lead time in days or weeks When variability present = add safety stock- stock that is held in excess of expected demand due to variable demand or lead time Reorder point with variability: ROP= Expected demand during lead time + safety stock Stockout protection only needed during lead time When variability is present: (used when estimate of expected demand during lead time and its standard deviation are available) ROP = expected demand during lead time + (number of standard deviations X standard deviation of lead time demand) Value of z depends on the stockout risk the manager is willing to accept The smaller the risk = the greater the value of Z Can’t use this formula when data on lead time not available If only demand is variable then: ROP = (average daily/weekly demand) X LT + (standard deviation of demand in days/weeks) X square root (LT) Demand assumed to be normally distributed and has the same mean and standard deviation - Standard deviation of demand for entire lead time found by summing the variances of daily demands, and finding the square root of that number If only lead time is available: ROP = (daily/weekly demand) X (average lead time) + (standard deviation of lead time) - Standard deviation of lead time demand = constant daily demand X standard deviation of lead time If both demand and lead time are available then: (formula on page 528) 2-bin ordering system involves ROP reordering Quantity in second bin = ROP Fill Rate – the percentage of demand filled directly from inventory - If demand = 1000, and 990 units were filled directly from inventory then fill rate is 990/1000 Fixed order interval (FOI) model- used when orders must be placed at fixed time intervals - Timing is set - How much to order? - Widely used in retail businesses - Demand variable = order size will vary each cycle - EOQ/ROP approaches = order size remains fixed from cycle to cycle, while length of cycle varies - FOI = length of cycle is fixed, order size varies - Shorter length if demand is above average - Longer length if demand is below average Grouping orders from items from same supplier = save shipping costs FOI requires only periodic checking of inventory levels If both demand and lead are constant = FOI and fixed quantity model are identical Differences come when there is variability Fixed-quantity- orders triggered by demand only needs protection during lead time Fixed-Interval – orders triggered by time must have stockout protection for lead time and next order cycle Greater need for safety stock in fixed-interval rather than fixed-quantity model Both models sensitive to demand experience prior to reordering Fixed quantity- higher than normal demand = shorter time between orders Fixed interval – higher than normal demand = larger order size Fixed quantity- close monitoring of inventory levels in order to know when the amount on hand reaches reorder point Fixed interval only requires periodic review Order size in fixed-interval = expected demand during protection interval + safety stock – amount on hand at reorder time Page 531 for symbolic equation for each Risk of fixed-interval ordering- risk of stockout 2 points a stockout could happen: 1. Shortly after the order is placed while waiting to receive the current order 2. Near the end of the cycle, while waiting to receive the next order To determine initial risk of stockout: Use ROP formula, set ROP = quantity on hand when order is placed, and solve for z - Obtain service level for z value from Table B and subtract it from 1 To determine risk of stockout at end of order cycle: Use fixed interval formula and solve for z. then obtain service level for z value from Table B and subtract it from 1 Advantages of fixed interval Fixed interval system = tight control Grouping orders saves ordering, packing and shipping costs Disadvantages Necessitates larger amount of safety stock for given risk of stockout and increases carrying costs Costs for periodic reviews Single Period Model - Newsboy problem (another name for it) - Used to handle ordering of perishables and items that have limited useful life - Period for spare parts= life of the equipment - These items are not carried over to the next period (because old seafood spoils, day-old baked goods sold at a discount, etc.) - Shortage and excess = 2 costs of this - Shortage cost includes charge for loss of customer goodwill and lost sales - Shortage cost – unrealized profit per unit Shortage = revenue per unit – cost per unit Shortage cost also refers to actual cost of lost production if part of machinery Excess cost- items left over at the end of the period Excess cost = original cost per unit – salvage value per unit If there is cost with disposing of excess items, the salvage value will be negative and increase the excess cost per unit Goal of single period model- identify order quantity or stocking level that will minimize long run excess and shortage costs - 2 models: demand can be approximated through continuous distribution - or demand can be approx. with discrete distribution - kind of inventory determines which one to use - demand for liquids, petroleum and gases have continuous scale, so use continuous distribution - demand for cars, computers – expressed in number of units so use discrete distribution Continuous stocking levels - easiest to visualize when demand is uniform Service level- probability that demand will not exceed the stocking level - finding service level is essential to finding optimal stock level Service Level = shortage cost per unit / (shortage cost per unit + excess cost per unit) Demand > S = shortage, so Cs on right end of distribution Demand < S= excess, so Cs on left end of distribution C=C- optimal stocking level is halfway between end points of distribution S will always be closer to the largest costDiscrete stocking levels - when discrete rather than continuous: the formula above is not good - stock at the next higher level - choose stocking level so that desired service level is equaled or exceeded - if computed service level is exactly equal to cumulative probability, then there are 2 equal stocking levels in terms of minimizing long-run cost (cost with equal probability and the next higher one) FORMULA TABLE ON PAGE 538 GO SEE IT OPERATIONS MANAGEMENT CHAPTER 14 - Lean operation- flexible system of operation that uses considerably fewer resources than a traditional system - Achieves greater productivity, lower costs, shorter cycle times, higher quality than nonlean systems - Referred to as just in time systems - Pioneered by toyota’s founder - Focuses on eliminating waste and streamlining operations by closely coordinating all activities - 3 basic elements: 1. demand driven 2. focused on waste reduction 3. have a culture that is dedicated to excellence and continuous improvement - began as lean manufacturing in mid-1900’s - waste- anything that interfered with, or did not add value to, the process - mass production emphasized the efficiency of individual operations and lead to unbalanced systems and large inventories- needed to be changed to adopt the lean system approach - lean methods involve demand-based operations, flexible, rapidly changing, effective worker behaviors, continuous improvement efforts Characteristics of lean systems 1. waste reduction 2. continuous improvement 3. use of teams –cross functional 4. work cells 5. visual controls- simple signals 6. high quality 7. minimal inventory (excess inventory is waste) 8. output only to match demand (demand pull) 9. quick changeovers (equipment flexibility and output variety) 10. small lot sizes 11. lean culture Five principles of lean systems 1. identify customer values 2. focus on processes that create value 3. eliminate waste to create flow 4. produce only according to customer demand 5. strive for perfection Benefits/risks of lean systems 1. reduced waste 2. lower costs 3. increased quality motivated by customer focus 4. reduced cycle time 5. increased flexibility 6. increased productivity Risks: 1. increased stress on workers bc of increased responsibilities 2. fewer resources available if problems happen 3. supply chain disruptions can halt operations due to minimal inventory Lean approach terms used: - Muda- waste and inefficiency - Kanban- manual system for controlling movement of parts and materials that respond to signals for the need for delivery. Delivery of steady stream of containers of parts through workday. - Heijunka- variations in production volume lead to waste. Workload must be leveled- volume and variety must be averaged - Kaizen- continuous improvement of the system. Effort is ongoing - Jidoka- quality at the source. Autonomation. JIT/lean production- scheduling production that results in low levels of work in process and inventory - A philosophy from design to sale of product - Minimal levels of inventory, minimal waste, minimal space, minimal transactions - Quality ingrained in product and process - High reliability - Overall goal of lean system: match supply to customer demand, and a balanced system - Make process time as short as possible - Must achieve supporting goals to achieve this larger goal: 1. Eliminate disruptions 2. Make the system flexible 3. Eliminate waste and excess inventory Disruptions caused by: - Poor quality - Equipment breakdowns - Changes to the schedule - Late deliveries - Quality problems Flexible system is robust to handle a mix of products on a daily basis and changes in level of output - Long setup times and long lead times = bad - Maintain balance and speed - Must reduce setup and lead times in a lean system Waste = unproductive resources Inventory must be minimized as much as possible 8 wastes in lean philosophy: 1. Excess inventory 2. Overproduction 3. Waiting time- requires space 4. Unnecessary transporting (increase work in process inventory) 5. Processing waste 6. Inefficient work methods (increase scrap and WIP inventory, reduce productivity) 7. Product defects 8. Underused people Kaizen philosophy for eliminating waste: 1. Improvement should be gradual and continuous (not big improvements done suddenly) 2. Everyone should be involved 3. Can be applied everywhere 4. Visual system- transparency of procedures, processes, values5. Focus attention where value is created 6. Process oriented 7. New thinking and new work style 8. Learn while doing 9. Waste is the enemy Building blocks of a lean system: 1. Product design 2. Process design 3. Personnel/organizational elements 4. Manufacturing process and control Speed and simplicity = common threads Product Design - Standard parts- relates to speed and simplicity - Modular design- speed and simplicity - Highly capable production systems with quality built in - Concurrent engineering Standard parts- fewer parts to deal with, training times and costs reduced. Purchasing and checking quality are more routine. Ability to use standard processing. Modular design- extension of standard parts - Modules: clusters of parts treated as a single unit - Reduces number of parts to deal with - Simplifies assembly, purchasing, etc. - Reduces parts contained in bill of materials to simply bill of materials Lean- highly capable production systems Production must stop when problems occur and only resume when problem is fixed Lean systems produce standardized products Low cost per unit Product and process design must go hand in hand Process design for lean systems 1. Small lot sizes 2. Setup time reduction 3. Manufacturing cells 4. Quality improvement 5. Production flexibility 6. Balanced system 7. Little inventory storage 8. Fail-safe methods Small lot sizes: - Ideal lot size is 1 unit - Reduce size a lot - In process inventory is less than with large lots - Reduces carrying costs, space requirements, and clutter in workplace - Inspection and rework costs are less when problems with quality occur (bc fewer items to inspect) - Greater flexibility with scheduling - Small variety of products - Respond more quickly to changing customer demands for output - With EOQ computation- using higher carrying cost, lot sizes naturally end up being smaller Setup Time Reduction - Small lot require frequent setups - Long setup times- holding more inventory Single-Minute Exchange of Die- system for reducing change-over time. - Categorize changeover activities as internal or external activities - Internal: those that can only be done while a machine is stopped (contribute to long changeover times) - External: do not involve the stopping of the machine- can be done before or after the changeover- do not affect changeover time - To achieve quick changeovers: convert internal activites to external activities then streamline the remaining internal Setup tools and equipment and set up procedures must be standardized and simple Multipurpose equipment = reduce setup time Group technology = reduce setup time Manufacturing cells- highly specialized and efficient production centers - Reduced changeover times - High utilization of equipment - Ease of cross-training operators Quality Improvement - Finding and eliminating causes of problems - Automation: how to minimize defects. - Jidoka- automatic detection of defects during production - One for detecting defect when they occur - Human stopping production to correct cause of the defects - Halting of production forces immediate attention to the problem Work flexibility - Overall goal of lean system- achieve ability to process a mix of products in a smooth flow - Obstacle: bottlenecks when system becomes overloaded - Existence of bottlenecks- inflexibilities in system - Production flexibility- process design can increase this and reduce bottlenecks Balanced system - Time needed for work assigned to each workstation must be less than or equal to cycle time - Cycle time = takt time - Takt time- cycle time needed in a production system to match the pace of production to the demand rate - Set for work shift To obtain takt time: 1. Determine net time available per shift (subtract nonproductive time from total shift time) 2. If there is more than 1 shift per day, multiply the net time per shift by the number of shifts to obtain the net available time per day 3. Compute takt time by dividing the net available time by demand Takt time = net time available per day / daily demand Takt time minimizes work in process inventory when demand is stable and system capacity matches demand Inventory storage- lean systems are designed to minimize inventory storage - Inventories are buffers - Cover up recurring problems - If breakdowns increase, inventory as a solution can increase too - Always better to investigate the causes of machine breakdowns and eliminate them - Low inventories – result of a process of successful problem solving- One way to minimize inventory storage in lean system: have deliveries from suppliers go directly to the production floor - Low inventory = less carrying cost, less space needed, less tendency to rely on buffers, less rework if defects occur, less need to work off current inventory - Risks of low inventory = no safety net, missed opportunities if system is unable to be quick Fail-safe methods - Building safeguards into a process to reduce potential errors in a process - “baka-yoke” or foolproofing - Poka-yoke- mistake proofing 5 elements of personnel and organization important for lean systems: - Workers as assets - Cross-trained workers - Continuous improvement - Cost accounting - Leadership/project management Workers as assets - Well-trained and motivated workers are the heart of the lean system - More authority to make decisions - Expected to do more than traditional Cross-trained workers - Crosstrained to perform several parts of a process and operate a variety of machines - Adds to system flexibility - Helps line balancing Continuous Improvement - Greater responsibility of workers - Statistical process control, quality improvement and problem solving training for workers - Problem solving = important - Maybe increase inventory levels temporarily while problem is investigated, for example - Intent of problem solving- to eliminate problem or reduce the chances of it occurring again - Andon- system of lights used in Japan at each work station to signal problems or slowdowns - All levels of management must support and become involved with problem solving (like providing financial support and recognizing achievements) - Goals give workers something to strive for - Recognition helps maintain worker interest and morale - Problem solving becomes a culture that must be assimilated into the thinking of management and workers - Reduce inventory, reduce setup cost and time, improve quality, increase output rate, cut waste and inefficiency - Challenge to continuous improvement: once the easy improvements are made, it becomes difficult ot keep workers motivated to continue to look for further improvements - Lean system workers= more stress - High paced system Cost Accounting - Allocating overhead - Traditional accounting methods allocate it on the basis of direct labor hours, which distorts it - Does not accurately reflect consumption of overhead - Activity-based costing- designed to more closely reflect the actual amount of overhead consumed by a particular job or activity - It first identifies traceable costs and assigns those costs to various types of activities like machine setups, inspection, machine hours etc Leadership/Project Management - Managers must be leaders not order givers - 2 way communication between workers and managers Manufacturing Planning and Control 1. Level loading 2. Pull systems 3. Visual systems 4. Limited work in process 5. Close vendor relationships 6. Reduced transaction processing 7. Preventive maintenance and housekeeping Level loading - Achieving stable, level daily mix schedules - Provide level capacity loading - Has a rate based production schedule instead of the more familiar quantity based schedule - Schedules are fixed over a short time horizon, which provides certainty for system - Smooth demand - Smooth production required - When company produces different products, it is desirable to produce in small lots and spread production of different products throughout the day to achieve smooth production - Mixed model sequencing- begins with daily production requirements of each product - Number of cycles per day depends on the daily production quantities - High set up costs may lead managers to use fewer cycles - Divide by the smallest integer into each product’s daily quantity indicates number of cycles Another way to determine the number of units of each model in each cycle: divide each model’s daily production quantity by number of cycles (page 575) Pull Systems - Push system- used in traditional production environments: when work is finished at a station, the output is PUSHED to the next station - Pull system- control of moving the work rests with the following operation- each workstation pulls the output from the last station as it is needed - Output for final station pulled by customer demand or master schedule - Work moves on in response to demand from next stage - Push- work moves on as it is completed (which may cause work to pile up) - Communication moves backward from station to station - Each station produces just enough output to meet the demand of the next station - Or there could be a small buffer of stock between station, and when it decreases to certain point- signals for input - Buffer size depends on cycle time at preceding workstation - Small cycle time = little or no buffer - Long cycle time = lots of buffer - Pull systems not good for all manufacturing operations bc they have lots of repetitive work - Large variations in volume, product mix or product design will undermine the system Visual Systems - Work flow dictated by next step demand - Kanban card- “signal”- a card or device that communicates demand for work from the preceding station - The card is the authorization to move or work on parts 2 types of kanbans: 1. Production Kanban (P-kanban)- signals the need to produce parts 2. Conveyance Kanban (c-kanban)- signals need to deliver parts to the next work center Vendors, trip times, looseness/tightness of the system- affect the number of kanbans Longer trip times= fewer but larger containers, shorter trip times= greater number of smaller containers Ideal number of Kanban cards = DT (1 + X) / C D= planned usage rate of using work center T= average waiting time to replenishment of parts + average production time for a container of parts X = policy variable set by management that reflects possible inefficiency in the system C = capacity of a standard container (should be no more than 10% of daily usage of the part) D and T must be the same units Goals of MRP and Kanban are the same (to improve customer service, reduce inventories, increase productivity) - Neither one of these systems are stand-alone systems - MRP is computerized - Kanban is manual system that may be part of a lean system - Lean systems can exist without Kanban - Kanban- 2 bin type of inventory (supplies replenished semiautomatically when they reach a certain level) - Kanban is simple - MRP has the ability to handle complex planning and scheduling - MRP II allows management to answer what-if questions for capacity planning - Kanban doesn’t actually help manufacturers become more competitive or productive- it’s just an information system - The overall approach to manufacturing is what is important- not just MRP alone or Kanban alone You can use both MRP and Kanban together Kanban works best when there is uniform flow through the shop Kanban/MRP hybrid= successful if MRP used for planning and Kanban used for execution Limited work in process - Controlling amount of WIP - Lower carrying costs due to lower WIP inventory - Increased flexibility - Aids scheduling and saves costs of rework and scrapping if there are design changes - Low cycle-time variability - WIP determined by cycle time and arrival rate of jobs - WIP = Cycle time X arrival rate - 2 approaches to control WIP: ∙ Kanban- focus on individual work stations ∙ Constant work in process- focus on system as a whole. When job exits, new job enters. Kanban works best in stable and easily predictable environment. Upstream work is blocked and processing will stop quickly Constant WIP = works best if there is variability. Stations can continue to operate for somewhat longer time. Easier than Kanban bc Kanban focuses on specific parts and constant WIP does not Close Vendor Relationships - Inspection of incoming goods is viewed as inefficient bc it does not add value to the product - Burden of ensuring quality shifts to the vendor - Goal of buyer- to be able to certify a vendor as a producer of high quality goods, without the need for the buyer to inspect - Suppliers also willing to ship in small lots on a regular basis - Integration of facilities of buyers and suppliers is easier when supplier has dedicated only to one or a few buyers - Buyers have regarded price as a major determinant in sourcing - Use multiple-source purchasing- having a list of potential vendors and buying from several to avoid getting locked into a sole source - Under JIT purchasing, good vendor relationships are very important and price becomes secondary to other aspects of the relationship Supplier Tiers - Small number of suppliers used - Use few first-tier suppliers who work directly with the company - Responsible for dealing with second-tier suppliers who provide components for subassemblies - Suppliers encouraged to work with each other and bear full responsibility for quality of its portion of the product Reducing Transaction Processing - Logistical transactions- ordering, execution, confirmation of materials transported. Related costs cover shipping, data entry, etc - Balancing Transactions- forecasting, production planning, production control, procurement, scheduling, order processing - Quality Transactions- determining and communicating specifications, monitoring, recording, follow-up activities. Appraisal, prevention and internal failure costs - Change transactions- involve engineering changes and bills of material, scheduling, processing instructions. Engineering changes most costly Lean systems cut transaction costs by reducing number and frequency of transactions Preventive Maintenance and Housekeeping - Equipment breakdowns suck because of little inventory - Preventive maintenance- emphasize maintaining equipment in good operating condition and replacing parts that have a tendency to fail before they fail - Workers responsible for maintaining own equipment - Housekeeping- keeping workplace clean as well as free of any materials that are not needed for production, bc they may take up space Housekeeping part of the five S’s (behaviors to make workplace effective) - Sort- decide which items are needed to accomplish the work and only keep those - Straighten- organize workplace so that the needed items can be accessed quickly and easily - Sweep- keep workplace clean and ready for work- perform equipment maintenance regularly - Standardize- use standard instructions and procedures for all work - Self-discipline- make sure than employees understand the need for uncluttered workspace Benefits of five S’s: increased productivity, improved employee morale, decreased risk of accidents, improved appearance for visitors (tables on page 582 comparing between lean and traditional systems) Value Stream Mapping- Visual tool to systematically examine the flow of materials and information involved in bringing a product to a consumer - Sketch of an entire process that ranges from incoming goods from suppliers to shipment and delivery - Shows all processes in the value stream - To increase value to customer, where value is defined as quality, time, cost, flexibility - Data collected includes times, distances traveled, mistakes, inefficient work methods, waiting lines and information flows Tips for developing map stream: 1. Map the steam in person 2. Begin with quick walk through 3. Do more thorough walk through following actual pathway 4. Record elements like cycle times, scrap rates etc Value improvement embodies 5 lean principles: 1. Specify value from standpoint of end customer 2. Identify all steps in value stream 3. Eliminate steps that do not create value to create flow 4. Use next-customer-in-process demand to pull from each preceding process 5. Repeat process Data analysis uncovers improvement opportunities by asking 1. Where are process bottlenecks? 2. Where do errors occur? 3. Which processes have to deal with the most variation? 4. Where does waste occur? Office wastes include 1. Excess inventory- excess supplies and equipment 2. Overprocessing- excess paperwork and redundant approvals 3. Waiting times- orders waiting to be processed 4. Unnecessary transportation 5. Processing waste 6. Inefficient work methods- poor layout design, etc 7. Mistakes 8. Underused people Process improvement with 5W2H - 5 questions that begin with W and 2 questions that begin with H Lean and Six Sigma - lean eliminates non value added activities maximize process velocity and employs tools to analyze process flow - use both approaches in combo integrates lean principles and six sigma statistical tools for variation reduction to achieve a balanced flow and quality system JIT Deliveries and supply chain - support frequent just-in-time deliveries of small batches of parts - results in pressure for on-time deliveries to avoid production interruptions due to stockouts Page 584 for TABLE Transition to a lean system - to increase probability of successful transition: 1. make sure top management is committed to the conversion to lean and know hwat will be required 2. study operations carefully 3. obtain support and cooperation of workers and training programs 4. try to reduce setup times while maintaining current system 5. gradually convert operations beginning t the end of the process and working backward 6. convert suppliers to JIT and be prepared to work closely with them narrow list of vendors 7. be prepared to encounter obstacles to conversion Obstacles - cultures vary from organization to organization - manufacturers operating with large inventory amounts have trouble making less inventory - management not totally committed or unwilling to devote resources - workers may not be cooperative. System depends on cooperation. - Difficult ot change culture of organization to one consistent with lean philosophy - Suppliers may resist because of: 1. Buyers don’t want to commit resources to help adapt 2. They may be uneasy about long-term commitments to buyer 3. Frequent, small deliveries are difficult 4. Burden of quality control shifts to supplier 5. Frequent engineering changes - Lean systems require cooperation among workers, management and vendors - Without cooperation, lean system can’t work - Lean operations best used for repetitive operations under fairly stable demand- it is not good for every organization - Consider time and cost requirements of successful conversion to lean - Attention to the smallest of details in the design phase and respond quickly when problems arise - Conversion is usually 1-3 years Lean benefits more difficult to achieve in services - Services can still benefit from lean concepts - Just-in-time- focus on time needed to perform a service (speed!) Process improvement and problem solving helps contribute to developing a lean system Lean benefits can be achieved in services by: 1. Eliminate disruptions 2. Make the system flexible (train workers so they can handle more variety, or assign work according to specialties) 3. Reduce setup time and processing time- have frequently used tools and spare parts readily available 4. Eliminate waste- emphasize quality and uniform service 5. Minimize work-in-process- orders waiting to be processed, calls waiting to be answered, packages waiting to be delivered 6. Simplify the process JIT - Provides services when needed - Flexibility, short setup times, clear communication - There are few lean service applications that service companies can reference JIT II - Companies sometimes allow suppliers to manage restocking the inventory obtained from suppliers - This is JIT II - Aka vendor-managed inventory (VMI) Level production schedule- necessary element of lean system Decision to convert is sequential Success of lean system relies heavily on leadership commitment, involvement and support OPRE CHAPTER 15Supply chain- the sequence of organizations- their facilities, functions and activities, that are involved in producing and delivering a product - Begins with basic suppliers of raw materials - Ends at final customer - Warehouses, factories, processing centers, distribution centers, retail outlets, offices - Forecasting, purchasing, inventory management, information management, quality assurance, scheduling, production, distribution, delivery, customer service Supply chain management- the strategic coordination of business functions within a business org. and throughout its supply chain for the purpose of integrating supply and demand management - Managers are people at various levels of the org and plan and coordinate activities that include sourcing and procurement, transformation, and logistics Logistics- part of the supply chain that is involved with the forward and reverse flow of goods, services, cash and info - Inbound and outbound transportation - Material handling - Warehousing - Inventory - Order fulfillment - Distribution - Third-party logistics - Reverse logistics (return of goods from customers) Supply chains also value chains (value added as goods progress through chain) Typically comprise separate business orgs rather than just a single org 2 components for each org of a value chain: supply component and demand component supply component: starts at beginning and ends with internal operations Demand component: starts when output is delivered and ends with final customer Demand chain- sales distribution portion Length of each component depends on where the org is in the chain- the closer to the final customer, the shorter its demand component and the longer its supply component Close to final customer = long supply component, short demand Supply chain connects suppliers, producers and final customers Managing supply chain: planning, implementing and controlling supply chain operations- strategy, procurement, supply management, demand management, logistics GOAL OF SUPPLY CHAIN MANAGEMENT: TO MATCH SUPPLY TO DEMAND AS EFFECTIVELY AND EFFICIENTLY AS POSSIBLE - Determine appropriate level of outsourcing - Manage procurement - Manage suppliers - Manage customer relationships - Quickly identify problems and respond to them FLOW MANAGEMENT- IMPORTANT ASPECT OF SUPPLY CHAIN - Product service flow - Information flow – forecast and sales data, - Financial flow Technology has helped make these flows easier Decrease in cost of transmitting info and increased ease and speed of communication- ability to coordinate supply chain activities and make timely decisions Business emphasize 1. Measuring supply chain ROI- enables managers to incorporate economics into outsourcing, gives rational basis 2. Greening the supply chain- being green 3. Reevaluating outsourcing- ∙ outsource for lower prices from lower labor costs, focus on core strengths, converting fixed costs to variable costs, freeing up capital, devote to other needs, shift some risks to suppliers, take advantage of supplier expertise, ease of expansion outside home country ∙ Difficulties: inflexibility due to longer lead times for delivery of goods, increased transportation costs, language and culture differences, loss of job, loss of control, lower productivity, loss of ability to do internal work, knowledge transfer, intellectual property security concerns, increased effort needed to manage supply chain 4. Integrating IT- enhance strategic planning and help businesses control costs, measure quality and productivity, respond quickly to problems, improve supply chain operations 5. Adopting lean principles 6. Managing risks Risk Management- Identify risks - Assess likelihood of occurring and potential impact - Develop strategies for addressing the risks - Risk avoidance- not dealing with suppliers in one area - Risk reduction- replacing unreliable suppliers - Risk sharing- contractual arrangements with supply chain partners that spread the risk Resiliency- ability of a business to recover from an event that negatively impacts the supply chain - Businesses can reduce, but not eliminate, the need for resiliency by managing risks Risk management: 1. Identify potential risks ∙ Disruptions (natural disasters) ∙ Labor strife, production problems, product recalls, liability claims, etc ∙ Quality issues ∙ Potential for suppliers to divulge sensitive info to competitors Key elements of successful risk management: 1. Know your suppliers 2. Provide supply chain visibility- a major trading partner can connect to its supply chain to access data in real time on inventory levels, shipment status, etc 3. Develop event-response capability- ability to detect and respond to unplanned events like delayed shipment or warehouse running low, etc 4 capabilities: ∙ Monitoring system ∙ Notifying when certain planned/unplanned events occur ∙ Simulating potential solutions when unplanned event occurs ∙ Measuring long-term performance of supplies, transporters, etc. 4. Shorten the supply chain if needed Deal with unknown disruptions, and identify alternate sources of supply! - Global supply chains are complex - Language and culture differences, currency fluctuations, armed conflicts, increased transportation costs and lead times, increased need for trust and cooperation, political issues and local issues - These make risk management very important in global supply chain management - As a result, some firms have increased inventory Risks relate to supply, costs, demand, intellectual rights, contract compliance issues, competitive pressure, forecasting errors, inventory management Positive factor of globalization: - Technological advances in communication - Information technology ERP - Establish operating systems - Planning for demand and managing supply, inventory replenishment, production, warehousing, transportation - ERP software provides ability to coordinate, monitor and manage supply chain - ERP is integrated system that provides for system-wide variability in supplier relationships (integrate purchasing, receiving, info about vendor ratings, etc), performance management (info on costs and profits, productivity, quality performance, customer satisfaction), sales and order fulfillment (inventory and quality management, track returns, schedule production, packaging, distribution, inventory status, delivery dates, logistics performance) , customer relationships (centralizes basic contact info, payment terms, contract details, shipping preferences, purchasing patterns, service and returns) Ethics code should cover behaviors that involve: - Customers - Suppliers - Suppliers’ behaviors - Contract negotiation - Recruiting - Environmental issues How can companies reduce risk of damages due to unethical supplier behavior? - Incorporate compliance with labor standards in supplier contracts - Choose those with a reputation for good ethical behavior - Develop direct, long-term relationships with ethical suppliers - Address quickly any problems Small businesses more agile than larger companies, enables them to make decisions and changes more quickly Aspects of supply chain management that are of concern to small businesses: - Inventory management – alternative: have backup suppliers for critical items which helps overcome disruptions - Reducing risks - International trade Key to reducing risks: 1. Use only reliable suppliers 2. Determine which suppliers are critical 3. Measure supplier performance 4. Recognize warning signs of supplier issues 5. Have plans in place to manage supply chain problems Tips for importing: 1. Work with someone who has expertise to help oversee foreign suppliers 2. Describe your buying patterns and schedules to set expectations for demand and timing 3. Don’t rely on a single supplier- have a backup supplier 4. Build goodwill 5. Consider domestic suppliers- lower shipping costs and times, closer interactions, increased agility Management Responsibilities - Legal, economic, ethical aspects - Knowledge about laws and regulations, obey the laws, operate to conform to regulations= legal - Supply products to meet demand efficiently= economic - Conduct business in ways consistent with society’s moral standards = ethical Supply chain strategies - Responsive/agile- flexible, quickly respond to changes - Lean supply chain- eliminate non-value-added activities - Near-sourcing- nearby suppliers to shorten supply chain, reduce transportation time and cost, and reduce risk of disruptions and increase responsiveness Strategic Responsibilities 1. Supply chain strategy alignment 2. Network configuration- number and location of suppliers, warehouses, etc 3. Information technology- share info, forecasts, inventory status, tracking of shipments, events 4. Products and services 5. Capacity planning- when and how much is needed 6. Strategic partnerships 7. Distribution strategy- centralized or decentralized distribution? Use own facilities or third-party logistics providers? 8. Uncertainty and risk reduction Tactical responsibilities 1. Forecasting 2. Sourcing 3. Operations planning 4. Managing inventory 5. Transportation planning 6. Collaborating Operational Responsibilities 1. Scheduling 2. Receiving 3. Transforming 4. Order fulfilling 5. Managing inventory 6. Shipping 7. Information staring 8. Controlling Procurement - 60% of the cost of finished goods comes from purchased parts and materials - quality of goods and timing of deliveries = important impact on operations - identify sources of supply, negotiate contracts - maintain database of suppliers, obtain goods in timely and cost efficient manner - manage suppliers Purchasing Interfaces - purchasing- connecting link between organization and its suppliers - Operations- constitute the main source of requests for purchased material. Cancellations, etc must be communicated immediately. - Accounting- responsible for handling payments to suppliers. Must be notified promptly when goods are received. Data processing is handled by accounting department (keeps inventory records, checks invoices, vendor performance) - Design and engineering- prepare material specifications - Receiving- checks incoming shipments, moves goods to temporary storage. Must be notified when shipments are late, accounting must be notified when shipments are received, both purchasing and accounting must be told constant current info on continuing vendor evaluation - Suppliers- rate vendors on cost, reliability, etc. Purchasing Cycle 1. Purchasing receives a requisition- a description of the item desired, the quality and quantity necessary, desired delivery dates, and who is requesting the purchase 2. Purchasing selects a supplier- identify suppliers 3. Purchasing places the order with a vendor- large volume, continuous usage items may be covered by blanket purchase orders (involve annual negotiation of prices with deliveries subject to request throughout the year) Moderate volume items- have blanket purchase orders, or may be handled on individual basis. Small purchases handled directly 4. Monitoring orders- routine follow-up on orders 5. Receiving orders- receiving must check incoming shipments. Notifies purchasing, accounting and operating unit that goods came. Centralized/Decentralized - Centralized ∙ Purchasing handled by one special department ∙ Obtain lower prices than decentralized if higher volume created allows for quantity discounts offered on large orders ∙ Obtain better service and closer attention from suppliers ∙ Enables companies to assign certain categories of items to specialists - Decentralized ∙ Individual departments handle their own purchasing requirements ∙ Differing local needs ∙ Better able to respond to local needs ∙ Quicker response than centralized ∙ Save on transportation costs by buying locally Ethics in Purchasing- National Association of Purchasing Management has established a set of guidelines for ethical behavior - (Page 611) E-Business - the use of electronic technology to facilitate business transactions - interaction of different business orgs as well as individuals with business orgs - internet buying and selling, email, order and shipment tracking, electronic data interchange - demand has increased dramatically due to e-business - 2 essential features: the web site and order fulfillment (order processing, billing, inventory management, warehousing, packing, shipping, delivery) - problems with internet selling: the supply - disintermediation- the roles of intermediary and traditional retailer re reduced reduces costs, adds alternative purchasing options - E-commerce reduces costs - One way to jump start an e-commerce business- form a strategic partnership with a bricks-and-mortar company - Growing portion of e-business involves business-to-business rather than business-to-consumer - B2B exchanges improve supply chain visibility to trading partners Financial- provide financial and other resources for web-enhanced commerce Technology- provide software, applications, and expertise necessary to create B2B marketplace Supplier Management - Reliability and trust- IMPORTANT - Different factors of choosing vendors are important for different situations - Purchasing must work with operations to decide the importance of each factor and then rate the vendors accordingly - Vendor Analysis- conducted periodically, or whenever there is significant change in the weighting assigned to various factors. Evaluating the sources of supply in terms of price, quality, reputation, and service. Factor: Quality and quality assurance: what procedures does the supplier have for quality control? Are quality problems documented?Flexibility: how flexible is the supplier in handling changes in delivery schedules etc? Location: is the supplier nearby? Price: are prices reasonable given the entire package? Is the supplier willing to negotiate? Is the supplier willing to cooperate to cut costs? Product/Service changes: how much advance notification does the supplier require for product changes? Reputation and financial stability: what is the reputation of the supplier? How financially stable are they? Lead times and on time delivery: what lead times can the supplier provide? What procedures do they have for on time deliveries? For correcting and documenting problems? Other accounts: is the supplier heavily dependent on other customers, causing a risk of giving priority to those needs over ours? Periodic audits of suppliers- keeping current on suppliers’ production capabilities, quality and delivery problems and resolutions, and suppliers’ performance on other criteria Also covered on supplier audit: - Management style - Quality assurance - Materials management - Design process used - Process improvement policies - Procedures for corrective action and follow-up Supplier Certification - Detailed examination of the policies and capabilities of a supplier - “world class suppliers” - meets or exceeds requirements of the buyer - using a certified supplier: buyer can eliminate much of inspection and testing of delivered goods - much less risk than with noncertified suppliers - ISO 9000 Supplier Relationship Management - Purchasing: THE ULTIMATE RESPONSIBILITY FOR ESTABLISHING AND MAINTAINING GOOD SUPPLIER RELATIONSHIPS - Some business orgs use supplier forums to educate potential suppliers about the org’s policies and requirements or to share info, strengthen cooperation, encourage joint thinking - Supplier code of conduct- requires suppliers to maintain safe working conditions, treat workers respectfully, and have production processes that do not harm workers, customers or the environment Don’t switch suppliers on the basis of only price! Supplier Partnerships - Fewer suppliers - Longer-term relationships - Sharing of info - Cooperation in planning - Higher quality - Increased delivery speed and reliability - Lower inventories - Lower costs - Higher profits - Improved operations Strategic Partnering - Occurs when 2 or more business orgs that have complementary products that would benefit others strategically, agree to join so that each may have a strategic benefit - Ex: when a supplier agrees to hold inventory for a customer which reduces the customer’s cost of holding the inventory, in exchange for the customer’s agreeing to a long-term commitment - Collaborative Planning, Forecasting and Replenishment (CPFR)- contractual agreement used to achieve supply chain integration by cooperative management of inventory in the supply chain by major supply chain partners (involves info sharing, forecasting, joint decision making) leads to cost savings on inventory, logistics, merchandising Centralized inventories- result in lower overall inventory than decentralized Decentralized inventories- faster delivery and lower shipping costs Inventory Velocity- the rate at which material moves through a supply chain - Greater velocity = lower inventory holding costs and faster orders are filled and goods turned into cash - Bullwhip Effect- Inventory oscillations become progressively larger looking backward through the supply chain Causes of inventory variability: - Demand variability - Quality problems - Labor problems - Unusual weather conditions - Delays in shipments of goods - Communication delays - Incomplete communications - Lack of coordination of activities among orgs in the supply chain - Forecast inaccuracies - Overreaction to stockouts - Order batching to save on ordering and transportation costs - Liberal return policies How to overcome bullwhip effect: STRATEGIC BUFFERING OF INVENTORY, INFO SHARING, INVENTORY REPLENISHMENT BASED ON NEEDS Vendor-managed inventory- vendors monitor goods and replenish retail inventories when supplies are low - Common in retail - Reduces overhead - Shifts responsibility for inventory to vendors - Assets decreases - Amount of working capital needed to operate a business decreases Order Fulfillment - The processes involved in responding to customer orders Approaches: - Engineer to order (ETO)- products designed and built according to customer specifications ∙ Frequently used for large scale construction, custom homebuilding, home remodeling ∙ Lengthy fulfillment time - Made to order (MTO) ∙ Standard product design is used ∙ Production of final product is linked with final customer specifications ∙ Aircraft manufacturers ∙ Fulfillment time is long but less than ETO Assemble to order (ATO) ∙ Products assembled to customer specifications from a stock of standard and modular components ∙ Computers ∙ Short fulfillment time, a week or less - Make to stock (MTS) ∙ Production based on forecast ∙ Products sold to customers from finished goods stock ∙ Department stores and supermarkets ∙ Immediate order fulfillment ∙ Variation of this: e-commerce Logistics - Movement of materials, services, cash and info in a supply chain - Materials: all physical items in production process like raw materials, WIP, fuels, equipment, parts, tools, lubricants, office supplies, etc - Movement within a facility, overseeing incoming and outgoing shipments of goods and info flow through supply chain Movement within Facility - Part of production control Incoming and Outgoing shipments - Traffic management- overseeing the shipment of incoming and outgoing goods. - handles schedules and decisions on shipping method and times, taking into account cost of various alternatives, gov regulations, needs of org, external factors like potential shipping delays or disruptions Tracking goods: RFID - technology that uses radio waves to identify objects, such as goods in supply chains RFID tag attached to object - more info than bar codes and no line of sight for reading that bar code requires - multiple RFID can be scanned and read simultaneously - enables management to know where every object is in the supply chain - increases supply chain visibility, improves inventory management, improves quality control, enhances relationships with suppliers and customers - eliminates the need for manual counting and bar-code scanning of goods at warehouses, docks, retail shelves - could reduce employee and customer theft - increased accuracy in warehouse picking of items for shipping - enables small, agile businesses to compete with larger businesses Evaluating shipping alternatives Relevant factors: - cost - time - availability - materials being shipped - environmental considerations - time-cost trade offs are important - low-cost strategy opt for slower, lower cost options - orgs using a responsive strategy use a quicker, higher cost option - the choice between making rapid (more expensive) shipping alternatives versus slower (less expensive) alternatives - seller gets paid upon receipt of the goods by the buyer Incremental holding cost incurred by using the slower alternative: Holding cost = H(d) / 365 H = annual earning potential of shipped item D = difference in days between shipping alternatives 3-PL - third party logistics - the outsourcing of logistics management - involve part or all of the logistics function - taking advantage of specialist knowledge, their well-developed system, enabling company to focus more on its core business Effective supply chain - strategic sourcing- a systematic process for analyzing the purchase of products to reduce costs by reducing waste and non-value-added activities, increase profits, reduce risks, and improve supplier performance - emphasizes total cost rather than purchase price – this is how it differs from traditional methods - total cost includes storage costs, repair costs, disposal cost, sustainability cost in addition to purchase price - consolidates purchasing power to achieve lower costs, relies on fewer suppliers, works to eliminate redundancies, employs cross-functional teams to help overcome traditional org barriers - goal: to have a cooperative relationship among supply chain partners that will facilitate planning and coordination of activities SCOR (supply chain operations reference) model provides steps on how to create an effective supply chain: 1. Plan 2. Source – select suppliers, develop system for delivery, receiving, etc 3. Make- design processes necessary, monitor quality 4. Deliver- establish systems, develop network of warehouses, select carriers to transport goods to customers, invoicing system to receive payments, communication system 5. Manage Returns- create responsive, flexible network for receiving returns 3 important aspects of an effective supply chain: 1. Effective communication – integrated tech 2. Speed with which info moves through supply chain- information velocity (fast info flow) 3. Performance metrics- to confirm that the supply chain is functioning as intended ∙ Use late deliveries ∙ Inventory turnover ∙ Response time ∙ Quality issues ∙ Fill rate- percentage of demand filled from stock on hand Managing Returns - Defective products - Recalled products - Obsolete products - Unsold products returned - Parts replaced in field - Items for recycling - Waste Reverse Logistics- the process of physically transporting returned items Gatekeeping and avoidance – 2 ways to manage returns Gatekeeping- oversees the acceptance of returned goods with intent of reducing the cost of returns by screening returns at the point of entry in system and refusing to accept goods tht should not be returned or goods that are returned to wrong destination - Controls rate of returns without negatively impacting customer service Avoidance- finding ways to minimize the number of items that are returned - Product design and quality assurance - Monitor forecasts during promotional programs Importance of returns will grow because of shortened product life cycles, increasing returns from e-commerce sales, replacement of electronics, pressure on manufacturers to reduce costs, increasing consumer and governmental environmental concerns Closed-loop supply chain- to describe a situation where a manufacturer controls both the forward and reverse logistics Barriers to integration of separate orgs - Traditionally orgs have an inward focus - Different components of supply chain has conflicting objectives - Orgs must adopt a systems approach to both internal and external portions - To be successful, orgs in the chain must allow other orgs to access their data but people are reluctant with this bc of lack of trust, unwillingness, and fear of exposure of info to competitors Trade-Offs 1. Lot size inventory trade-off- producing or ordering large lot sizes - Benefits: quantity discounts - Lower annual setup cost - Bad: increases amount of safety stock and carrying cost - Creates bullwhip effect - Batch sizes tend to increase as you move back from customer, which increases level of safety stock carried 2. Inventory transportation cost trade-off - Combine orders to realize full truckloads, downsize truck capacity - Cross-docking- technique where goods arriving at a warehouse from supplier are unloaded from supplier’s truck and immediately loaded on one or more outbound trucks, avoiding storage at the warehouse completely 3. Lead Time- transportation cost trade-off - Suppliers prefer to ship in full loads but this is not good 4. Product variety-inventory trade-off - Higher product variety – smaller lot sizes, higher set up costs, higher transportation and inventory management costs - Delayed differentiation- producing standard components and subassemblies, then waiting until late in process to add differentiating features 5. Cost-customer service trade-off - Producing and shipping in large lots reduces costs but increases lead times- Ship directly from warehouse to customer to reduce lead time - Disintermediation- reducing one or more steps in a supply chain by cutting oiut one or more intermediaries - PAGE 630 FOR TABLE Small businesses- maybe reluctant to embrace supply chain management bc it can involve specialized, complicated software and sharing sensitive info with outside companies Increases in produce and service variety add uncertainty It is important to reduce long product lead times DEVELOPMENT OF SUPPLY CHAINS SHOULD BE ACCORDED STRATEGIC IMPORTANCE