chapter 1 operations management and supply chain management

Chapter 1Chapter 1

Operations ManagementOperations Management

andand

Supply Chain ManagementSupply Chain Management

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Definition of Definition of OperationsOperations

Definition of Definition of OperationsOperations

• Production systemProduction system– Production system converts inputs into goods Production system converts inputs into goods

& services& services

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Definition of Definition of Operations Operations ManagementManagement




© 1984-1994 T/Maker Co.

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© 1995 Corel Corp.

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© 1984-1994 T/Maker Co.

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OPERATIONS MANAGEMENT

Operations Management is the planning, organizing, staffing, directing, and controlling of the activities relating to the creation of goods and services through the transformation of input into output.

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Supply ChainSupply Chain

Consists of series of companies that make Consists of series of companies that make products or service available to products or service available to consumers, including all of the functions consumers, including all of the functions enabling the production, delivery, and enabling the production, delivery, and recycling of material, components, end recycling of material, components, end product, and services.product, and services.

SCM – Supply Chain Management

Although the idea of Supply Chain Management (SCM) has been introduced 20 years ago, there is still a huge debate on what constitutes SCM. The understanding of the discipline as seen by the scientific community can be summarized as follows:


Supply Chain Management (SCM) is a strategic integrated customer and cooperation oriented management philosophy that ensures an increased sustainable performance and competitiveness for all partners within organizational arrangements called supply chain.


SCM refers to the establishment of long-term supplier and customer relationships between organizations within supply chain

networks.

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Definition of Supply ChainDefinition of Supply Chain

Supply-Chain CouncilSupply-Chain Council

Managing supply and demand, sourcing Managing supply and demand, sourcing raw materials and parts, manufacturing raw materials and parts, manufacturing and assembly, warehousing and inventory and assembly, warehousing and inventory tracking, order entry and order tracking, order entry and order management, distribution across all management, distribution across all channels, and delivery to customers.channels, and delivery to customers.

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Definition of Supply ChainDefinition of Supply Chain

Council of Logistic ManagementCouncil of Logistic Management The The systematic, strategicsystematic, strategic coordination of coordination of

the traditional business functions and the the traditional business functions and the tactics across these business functions tactics across these business functions within a particular company and across within a particular company and across businesses within the supply chain for the businesses within the supply chain for the purposes of purposes of improving the long-term improving the long-term performanceperformance of the individual companies of the individual companies and the supply chain as a whole.and the supply chain as a whole.

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La Londe and Masters (1994)

Supply chain strategy includes: “... two or more firms in a supply chain entering into a long-term agreement; ... the development of trust and commitment to the relationship; ... The integration of logistics activities involving the sharing of demand and sales data; ... the potential for a shift in the locus of control of the logistics process.”

The Strategic Importance of the Supply Chain

Supply-chain management is the Supply-chain management is the integration of the activities that integration of the activities that procure materials and services, materials and services,

transform them into intermediate transform them into intermediate goods and the final product, and goods and the final product, and

deliver them to customersdeliver them to customers

Competition is no longer between Competition is no longer between companies; it is between supply chainscompanies; it is between supply chains

A Supply Chain

Figure 11.1Figure 11.1

Supply-Chain Management

1.1. Transportation vendorsTransportation vendors

2.2. Credit and cash transfersCredit and cash transfers

3.3. SuppliersSuppliers

4.4. Distributors and banksDistributors and banks

5.5. Accounts payable and receivableAccounts payable and receivable

6.6. Warehousing and inventoryWarehousing and inventory

7.7. Order fulfillmentOrder fulfillment

8.8. Sharing customer, forecasting, and Sharing customer, forecasting, and production informationproduction information

Important activities include determiningImportant activities include determining

Global Supply-Chain Issues

React to sudden changes in parts React to sudden changes in parts availability, distribution, or shipping availability, distribution, or shipping channels, import duties, and currency rateschannels, import duties, and currency rates

Use the latest computer and transmission Use the latest computer and transmission technologies to schedule and manage the technologies to schedule and manage the shipment of parts in and finished products shipment of parts in and finished products outout

Staff with local specialists who handle Staff with local specialists who handle duties, freight, customs and political issuesduties, freight, customs and political issues

Supply chains in a global environment Supply chains in a global environment must be able tomust be able to

Supply-Chain Economics

Supply Chain Costs as a Percent of SalesSupply Chain Costs as a Percent of Sales

Table 11.2Table 11.2

Industry % Purchased

All industry 52

Automobile 67

Food 60

Lumber 61

Paper 55

Petroleum 79

Transportation 62

Managing the Supply Chain

Mutual agreement on goalsMutual agreement on goals

TrustTrust

Compatible organizational culturesCompatible organizational cultures

There are significant management issues in There are significant management issues in controlling a supply chain involving many controlling a supply chain involving many independent organizationsindependent organizations

Issues in an Integrated Supply Chain

Local optimization - focusing on local Local optimization - focusing on local profit or cost minimization based on profit or cost minimization based on limited knowledgelimited knowledge

Incentives (sales incentives, quantity Incentives (sales incentives, quantity discounts, quotas, and promotions) - discounts, quotas, and promotions) - push merchandise prior to salepush merchandise prior to sale

Large lots - low unit cost but do not Large lots - low unit cost but do not reflect salesreflect sales

Bullwhip effect - stable demand becomes Bullwhip effect - stable demand becomes lumpy orders through the supply chainlumpy orders through the supply chain

Opportunities in an Integrated Supply Chain

Accurate “pull” dataAccurate “pull” data

Lot size reductionLot size reduction

VendorVendor managed inventory managed inventory

Continuous replenishment Continuous replenishment programprogram

PostponementPostponement

Opportunities in an Integrated Supply Chain

Channel assemblyChannel assembly

Drop shipping and special Drop shipping and special packagingpackaging

Blanket ordersBlanket orders

StandardizationStandardization

Electronic ordering and Electronic ordering and funds transferfunds transfer

Upstream

Activities or firms that are positioned earlier in the supply chain relative to some other activity or firm.

For example, wheat harvesting comes before wheat grounding. Corn harvesting is upstream activity.

Downstream

Activities or firms that are positioned later in the supply chain relative to some other activity or firm.

For example, bread making is downstream of wheat grounding or wheat harvesting.


• SCM follows the goal of efficiency of the involved organizations. This can be realized by synchronizing business processes (e.g. procurement and logistics) as well as organizational arrangements by considering both costs as well as service structures.

• SCM is the realization of an inter-organizational flow orientation that helps to solve specific connection problems.


SCM decisions are operative and strategic. They include typically operational questions referring to procurement, transport, inventory, handling as well as strategic management decisions that aim to realize cooperative behavior of a supply chain’s part elements.


• Management decisions are therefore of particular importance (= coordination function of SCM).

• SCM is a part discipline of business administration, which means that SCM helps to increase the competitiveness of the firm by lowering costs, increasing profits and customer satisfaction and certainly SCM is a competitive ‘weapon’ against competition.

SCM – Supply Chain Management In order to have SCM implemented, organizations need

certain prerequisites that refer mainly to constructs of relationship orientation, such as independent organizations, willingness to cooperate, trust, etc. The outcome of SCM helps to increase the efficiency of a channel, as costs are minimized but services are increased. This efficiency is realized by organizing a chain according to the notions of Cooper et al. (1997) or Frazier (1999):

- Outlining a supra-organizational structure that ensures a successful configuration of responsibilities of several independent players.

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- Identifying and setting up certain business processes, where the outcomes meet the customers’ requirements (= customer oriented inter-organizational transformation capacities)

- Presenting goal oriented directives (= management components) that give directions on how the processes should be performed.

- Is SCM a complex management concept or a problematic one?


• The ongoing discussion in the field can be either summarized as that SCM is a very complex management concept (e.g. Persson 1997), or we just accept that SCM is like “a bottle of Coke, it is there and we have to accept it and make the best out of it” (Bretzke 2005). This indicates, there is no consensus on what SCM really is (see e.g. Mouritsen et al. 2003). And in fact we observe a specific paradigm discussion with an open result. A recent study by Gibson et al. (2005) showed that the majority of SCM professionals perceive SCM as a combination of strategies and activities that have very much to do with supplier and customer collaboration – and that is it!

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Other Supply Chain MembersOther Supply Chain Members

• Many companies are involved indirectly in Many companies are involved indirectly in most supply chain and are critical to the most supply chain and are critical to the success of the supply chain.success of the supply chain.

They are: trucking, information They are: trucking, information processing providers, warehousing processing providers, warehousing firm, firm, freight forwarders, agents, and freight forwarders, agents, and consultants.consultants.

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• A process of moving goods and/or services A process of moving goods and/or services from the source to the final consumer and from the source to the final consumer and back.back.

For example:For example:

Forward Supply ChainForward Supply Chain

Raw material -> process -> customerRaw material -> process -> customer

Reverse Supply ChainReverse Supply Chain

Customer - > distributor - > salvage or Customer - > distributor - > salvage or manufacturing manufacturing

SCM ACTIVITIESSCM ACTIVITIES

1. Integrated Behavior1. Integrated Behavior

2. Mutually Sharing Information2. Mutually Sharing Information

3. Mutually Sharing Risks and Rewards3. Mutually Sharing Risks and Rewards

4. Cooperation4. Cooperation

5. The Same Goal and the Same Focus on Serving 5. The Same Goal and the Same Focus on Serving CustomersCustomers

6. Integration of Processes6. Integration of Processes

7. Partners to Build and Maintain Long-Term Relationships7. Partners to Build and Maintain Long-Term Relationships

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SUPPLY CHAIN MANAGEMENT ANTECEDENTS AND SUPPLY CHAIN MANAGEMENT ANTECEDENTS AND CONSEQUENCES (CONSEQUENCES (SCO – supply chain optimizatiSCO – supply chain optimizationon))

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SCM philosophy drives supply chain membersSCM philosophy drives supply chain membersto have a customer orientation.to have a customer orientation.

Based upon the literature review, it is proposed that SCM as a Based upon the literature review, it is proposed that SCM as a management philosophy has the following characteristics:management philosophy has the following characteristics:

1. A systems approach to viewing the supply chain as a whole, and to 1. A systems approach to viewing the supply chain as a whole, and to managing the total flow of goods inventory from the supplier to the managing the total flow of goods inventory from the supplier to the ultimate customer;ultimate customer;

2. A strategic orientation toward cooperative efforts to synchronize and 2. A strategic orientation toward cooperative efforts to synchronize and converge intrafirm and interfirm operational and strategic converge intrafirm and interfirm operational and strategic capabilities into a unified whole; andcapabilities into a unified whole; and

3. A customer focus to create unique and individualized sources of 3. A customer focus to create unique and individualized sources of customer value, leading to customer satisfaction.customer value, leading to customer satisfaction.

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Consequences of Supply ChainConsequences of Supply Chain

• If any member of the chain ignores the If any member of the chain ignores the interest of the chain member, sub-interest of the chain member, sub-optimization occurs thus leading to higher optimization occurs thus leading to higher end-product prices, lower supply chain end-product prices, lower supply chain service levels, and lower demand.service levels, and lower demand.

Supply Chain Approach

To balance customers’ demands with the need for profitable growth, many company have agreed to improve supply chain management. They have adopted:

• Work together• Enhance revenue• Control Cost• Utilize Asset• Customer satisfaction

Seven Principles of Supply Chain Management

• Segment customer based on the service needs

• Customize the logistic network to the service requirements

• Listen to market signals and align demand accordingly

• Differentiate product to the customer and speed conversion across the supply chain

Seven Principles of Supply Chain Management

• Manage sources of supply strategically to reduce the total cost of owning material and service

• Develop a supply chain-wide technology strategy that support multiple level of decision making and gives a clear view of the flow or products, services, and information

• Adopt channel-spanning performance measures to gauge collective success in reaching the end-user effectively and efficiently

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Importance of Supply ChainImportance of Supply Chain

• Firms operate independently will be inefficient. Firms operate independently will be inefficient. However, supply chain increases value, long range However, supply chain increases value, long range profitability and satisfaction of customers.profitability and satisfaction of customers.

• Supply chain lowersSupply chain lowers - purchasing price- purchasing price - inventory cost- inventory cost - better quality- better quality - higher customer service- higher customer service

The cost of inventory was $2.2 trillion and inventory The cost of inventory was $2.2 trillion and inventory carrying cost of $434 billion in 2000.carrying cost of $434 billion in 2000.

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Elements of Supply ChainElements of Supply Chain• Purchasing – supplier alliance, supplier Purchasing – supplier alliance, supplier

management, and strategic sourcingmanagement, and strategic sourcing

• Operations – Demand management, MRP, Operations – Demand management, MRP, ERP, JIT, TQMERP, JIT, TQM

• Distribution – Transportation management, Distribution – Transportation management, customer relationship management, network customer relationship management, network design, and service response logisticsdesign, and service response logistics

• Integration – Coordination, integration Integration – Coordination, integration activities, global integration problems, and activities, global integration problems, and performance managementperformance management

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• Purchasing is the act of obtaining:Purchasing is the act of obtaining:

- Merchandise- Merchandise

- capital equipment- capital equipment

- raw material- raw material

- services- services

- Maintenance, repair, and Operating - Maintenance, repair, and Operating (MRO)(MRO)

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Merchants VS. Industrial BuyersMerchants VS. Industrial Buyers• Merchants Merchants

- Wholesalers- Wholesalers

- Retailer- Retailer

They buy and sell. They buy in bulk and sell to They buy and sell. They buy in bulk and sell to retailer or customer in small quantitiesretailer or customer in small quantities

• Industrial BuyerIndustrial Buyer

- Buy material for conversion- Buy material for conversion

It includes raw material, capital equipment, It includes raw material, capital equipment, maintenance, repair, and operating suppliesmaintenance, repair, and operating supplies

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Roles of PurchasingRoles of Purchasing• Purchasing was considered a routine activity until Purchasing was considered a routine activity until

global competition intensified.global competition intensified.

Companies realized the impact of large quantities Companies realized the impact of large quantities of purchasing material and work-in-process on:of purchasing material and work-in-process on:

- costcost

- qualityquality

- product development- product development

- lead time- lead time

As a result, supply chain become a key strategyAs a result, supply chain become a key strategy

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Role of PurchasingRole of Purchasing

• The goal of purchasing to ensure uninterrupted The goal of purchasing to ensure uninterrupted flows of raw material:flows of raw material:

- at the lowest total cost,- at the lowest total cost, - to improve quality- to improve quality - higher customer satisfaction- higher customer satisfaction

• Purchasing can contribute by:Purchasing can contribute by: - quality raw material - quality raw material - reliable supplier- reliable supplier - design of new product- design of new product

Supply Chain Metric

• A verifiable measure stated in either quantitative or qualitative terms defined with respect to a reference point.

Metrics Give us

• Control by superior

• Reporting of data to superior and external groups

• Communication

• Learning

• Improvement

Metrics Context

Metrics communicates expectation, identify problems, direct a course of action, and motivate people.

• Strategy Focus

• Strategic— Metrics - Operational

• Customer Standard

Strategy -> Metrics -> Operational

Metrics context

• Strategy determines how it will treat its customer and what service it will supply.

• Metrics link strategy to operations.

• Focus describes the particular activity that is to be measured.

• Standards are the yardstick that is the basis of comparison on which performance is judged.

Relationship between Supply Chain Principles and Financial Outcomes

Revenue Asset Cost

Growth Utilization Reduction

• Segment customer based on need High Medium Low

• Customize logistics network Medium High Low• Listen to market signals and plan - High Medium• Difference product close to customer - Medium High• Source Strategically - Medium High• Develop supply chain technology Medium High Medium• Adopt Performance Measure High High High

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• Technological progress is moving at a Technological progress is moving at a tremendous ratetremendous rate

• There are many new products and There are many new products and services in addition to old onesservices in addition to old ones

• Rapid change is the normRapid change is the norm

A New Business EnvironmentA New Business Environment

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A New Business EnvironmentA New Business Environment

• Businesses try to Businesses try to break down the “silos” break down the “silos” that used to define that used to define business functions.business functions.

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• The Resource/Profit The Resource/Profit Model serves as an Model serves as an organizational model organizational model to put operations in to put operations in a business contexta business context

Exhibit 1.3 The Resource/Profit Model

Overview of the Resource/Profit Overview of the Resource/Profit ModelModel

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Foundation for SuccessFoundation for Success

• Profitability – main objective of any business.Profitability – main objective of any business.

net income/net sales or total assetsnet income/net sales or total assets• Strategy – Business must create value to attract Strategy – Business must create value to attract

customer.customer.

Methods for creating a value for the customerMethods for creating a value for the customer• Process – Ability to convert input to output to Process – Ability to convert input to output to

create valuecreate value

A set of activities to contribute to a product A set of activities to contribute to a product or serviceor service

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Components of Value Components of Value (Competitiveness)(Competitiveness)

• CostCost

• QualityQuality

• TimelinessTimeliness

• ServiceService

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Managing Resources to Create ValueManaging Resources to Create Value

• Supply Chain ManagementSupply Chain Management• Demand ForecastingDemand Forecasting• Lean System (JIT)Lean System (JIT)• Constraint ManagementConstraint Management• Inventory Inventory (raw material, WIP, Finished goods)(raw material, WIP, Finished goods)

• Logistics (flow of goods)Logistics (flow of goods)• Capacity (Capacity (resources needed to meet demandresources needed to meet demand))• Facilities (location, layout)Facilities (location, layout)• WorkforceWorkforce

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• Environmental forces affect the businessEnvironmental forces affect the business– GlobalizationGlobalization– The Internet and Other TechnologiesThe Internet and Other Technologies

(Global positioning system (GPS), Radio (Global positioning system (GPS), Radio frequency identification (RFID))frequency identification (RFID))

– The Natural EnvironmentThe Natural Environment

(Environment concerns have restricted)(Environment concerns have restricted)– Regional Pressures (resource available at Regional Pressures (resource available at

certain location)certain location)

Environmental ForcesEnvironmental Forces

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Characteristics of GoodsCharacteristics of GoodsCharacteristics of GoodsCharacteristics of Goods

• Tangible productTangible product• Durable productDurable product• Response Time Response Time

Required (Lead Required (Lead Time)Time)

• Large Size FacilitiesLarge Size Facilities• Located AnywhereLocated Anywhere

© 1995 Corel Corp.

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Characteristics of GoodsCharacteristics of Goods

• Low customer Low customer interactioninteraction

• Quality can be Quality can be measuredmeasured

• Uniformity of InputUniformity of Input• Standardization Standardization

PossiblePossible• Capital IntensiveCapital Intensive• High ProductivityHigh Productivity

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Characteristics of ServicesCharacteristics of ServicesCharacteristics of ServicesCharacteristics of Services

• Intangible productIntangible product• Perishable ProductPerishable Product• No Lead timeNo Lead time• Some Produced & Some Produced &

consumed at same timeconsumed at same time• Localized FacilitiesLocalized Facilities• Direct customer contactDirect customer contact

© 1995 Corel Corp.

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Characteristics of ServicesCharacteristics of Services

• Hard to measure Hard to measure qualityquality

• Less Uniformity of Less Uniformity of inputinput

• Standardization not Standardization not PossiblePossible

• Labor IntensiveLabor Intensive• Productivity lowProductivity low

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Goods Contain Services & Services Goods Contain Services & Services Contain Goods Contain Goods

Goods Contain Services & Services Goods Contain Services & Services Contain Goods Contain Goods

7575 5050 2525 00 2525 5050 7575 100%100%|| || || || || || || || ||

AutomobileAutomobile

100%100%

ComputerComputer

Fast-Food RestaurantFast-Food Restaurant

DentistDentist

CounselingCounseling

GoodGood ServiceService

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Goods Contain Services & Goods Contain Services & Services Contain GoodsServices Contain Goods

0 25 50 75 100255075100

AutomobileComputerInstalled Carpeting

Fast-food MealRestaurant Meal

Auto RepairHospital Care

Advertising AgencyInvestment Management

Consulting ServiceCounseling

Percent of Product that is a Good Percent of Product that is a Service

chapter 1 operations management and supply chain management

Documents

supply chain strategy

supply chain networks

supply chainconsists

goods services

order management

intermediate goods

creation of goods

strategic integrated