Operations Management

Operations Management Chapter 11 – Supply Chain Management PowerPoint presentation to accompany Heizer/Render Principles of Operations Management, 7e Operations Management, 9e

Learning Objectives When you complete this chapter you should be able to: Explain the strategic importance of the supply chain Identify five supply chain strategies Explain issues and opportunities in the supply chain Describe approaches to supply chain negotiations

Learning Objectives When you complete this chapter you should be able to: • Evaluate supply chain performance • Compute percent of assets committed to inventory • Compute inventory turnover

The Supply Chain’s Strategic Importance Supply chain management is the integration of the activities that procure materials and services, transform them into intermediate goods and the final product, and deliver them to customers Competition is no longer between companies; it is between supply chains

Supply Chain Management Important activities include determining Transportation vendors Credit and cash transfers Suppliers Distributors Accounts payable and receivable Warehousing and inventory Order fulfillment Sharing customer, forecasting, and production information

How Supply Chain Decisions Impact Strategy Table 11.1

Supply Chain Economics Supply Chain Costs as a Percent of Sales Table 11.2

Reasons for Making Maintain core competence Lower production cost Unsuitable suppliers Assure adequate supply (quantity or delivery) Utilize surplus labor or facilities Obtain desired quality Remove supplier collusion Obtain unique item that would entail a prohibitive commitment for a supplier Protect personnel from a layoff Protect proprietary design or quality Increase or maintain size of company Make-or-Buy Decisions Table 11.4

Reasons for Buying Frees management to deal with its core competence Lower acquisition cost Preserve supplier commitment Obtain technical or management ability Inadequate capacity Reduce inventory costs Ensure alternative sources Inadequate managerial or technical resources Reciprocity Item is protected by a patent or trade secret Make-or-Buy Decisions Table 11.4

Outsourcing • Transfers traditional internal activities and resources of a firm to outside vendors • Utilizes the efficiency that comes with specialization • Firms outsource information technology, accounting, legal, logistics, and production

Supply Chain Strategies • Negotiating with many suppliers • Long-term partnering with few suppliers • Vertical integration • Keiretsu • Virtual companies that use suppliers on an as needed basis

Many Suppliers • Commonly used for commodity products • Purchasing is typically based on price • Suppliers compete with one another • Supplier is responsible for technology, expertise, forecasting, cost, quality, and delivery

Few Suppliers • Buyer forms longer term relationships with fewer suppliers • Create value through economies of scale and learning curve improvements • Suppliers more willing to participate in JIT programs and contribute design and technological expertise • Cost of changing suppliers is huge

Vertical Integration Examples of Vertical Integration Vertical Integration Figure 11.2

Vertical Integration • Developing the ability to produce goods or service previously purchased • Integration may be forward, towards the customer, or backward, towards suppliers • Can improve cost, quality, and inventory but requires capital, managerial skills, and demand • Risky in industries with rapid technological change

Keiretsu Networks • A middle ground between few suppliers and vertical integration • Supplier becomes part of the company coalition • Often provide financial support for suppliers through ownership or loans • Members expect long-term relationships and provide technical expertise and stable deliveries • May extend through several levels of the supply chain

Opportunities in an Integrated Supply Chain • Accurate “pull” data • Lot size reduction • Single stage control of replenishment • Vendor managed inventory • Blanket orders

Opportunities in an Integrated Supply Chain • Standardization • Postponement • Drop shipping and special packaging • Pass-through facility • Channel assembly

E-Procurement • Uses the internet to facilitate purchasing • Electronic ordering and funds transfer • Electronic data interchange (EDI) • Advanced shipping notice

Vendor Selection • Negotiations • Cost-Based Price Model - supplier opens books to purchaser • Market-Based Price Model - price based on published, auction, or indexed price • Competitive Bidding - used for infrequent purchases but may make establishing long-term relationships difficult

Logistics Management • Objective is to obtain efficient operations through the integration of all material acquisition, movement, and storage activities • Is a frequent candidate for outsourcing • Allows competitive advantage to be gained through reduced costs and improved customer service

Distribution Systems • Trucking • Moves the vast majority of manufactured goods • Chief advantage is flexibility • Railroads • Capable of carrying large loads • Little flexibility though containers and piggybacking have helped with this

Distribution Systems • Airfreight • Fast and flexible for light loads • May be expensive

Distribution Systems • Waterways • Typically used for bulky, low-value cargo • Used when shipping cost is more important than speed

Distribution Systems • Pipelines • Used for transporting oil, gas, and other chemical products

Third-Party Logistics • Outsourcing logistics can reduce costs and improve delivery reliability and speed • Coordinate supplier inventory with delivery services • May provide warehousing, assembly, testing, shipping, customs

Cost of Shipping Alternatives • Product in transit is a form of inventory and has a carrying cost • Faster shipping is generally more expensive than slower shipping • We can evaluate the two costs to better understand the trade-off

Annual holding cost Product value Daily cost of holding product = x /365 Cost of Shipping Alternatives Value of connectors = $1,750.00 Holding cost = 40% per year Second carrier is 1 day faster and $20 more expensive = (.40 x $1,750)/ 365 = $1.92 Since it costs less to hold the product one day longer than it does for the faster shipping ($1.92 < $20), we should use the cheaper, slower shipper

Total inventory investment Total assets Percent invested in inventory = x 100 Measuring Supply Chain Performance • Assets committed to inventory Investment in inventory = $11.4 billion Total assets = $44.4 billion Percent invested in inventory = (11.4/44.4) x 100 = 25.7%

Operations Management Chapter 12 – Inventory Management PowerPoint presentation to accompany Heizer/Render Principles of Operations Management, 7e Operations Management, 9e

Learning Objectives When you complete this chapter you should be able to: Conduct an ABC analysis Explain and use cycle counting Explain and use the EOQ model for independent inventory demand Compute a reorder point and safety stock

Learning Objectives When you complete this chapter you should be able to: Apply the production order quantity model Explain and use the quantity discount model Understand service levels and probabilistic inventory models

Inventory • One of the most expensive assets of many companies representing as much as 50% of total invested capital • Operations managers must balance inventory investment and customer service

Functions of Inventory To decouple or separate various parts of the production process To decouple the firm from fluctuations in demand and provide a stock of goods that will provide a selection for customers To take advantage of quantity discounts To hedge against inflation

Types of Inventory • Raw material • Purchased but not processed • Work-in-process • Undergone some change but not completed • A function of cycle time for a product • Maintenance/repair/operating (MRO) • Necessary to keep machinery and processes productive • Finished goods • Completed product awaiting shipment

Inventory Management • How inventory items can be classified • How accurate inventory records can be maintained

ABC Analysis • Divides inventory into three classes based on annual dollar volume • Class A - high annual dollar volume • Class B - medium annual dollar volume • Class C - low annual dollar volume • Used to establish policies that focus on the few critical parts and not the many trivial ones

72% 23% ABC Analysis

5% ABC Analysis

Cycle Counting • Items are counted and records updated on a periodic basis • Often used with ABC analysis to determine cycle • Has several advantages • Eliminates shutdowns and interruptions • Eliminates annual inventory adjustment • Trained personnel audit inventory accuracy • Allows causes of errors to be identified and corrected • Maintains accurate inventory records

Cycle Counting Example 5,000 items in inventory, 500 A items, 1,750 B items, 2,750 C items Policy is to count A items every month (20 working days), B items every quarter (60 days), and C items every six months (120 days)

Independent Versus Dependent Demand • Independent demand - the demand for item is independent of the demand for any other item in inventory • Dependent demand - the demand for item is dependent upon the demand for some other item in the inventory

Holding, Ordering, and Setup Costs • Holding costs - the costs of holding or “carrying” inventory over time • Ordering costs - the costs of placing an order and receiving goods • Setup costs - cost to prepare a machine or process for manufacturing an order

Inventory Models for Independent Demand Need to determine when and how much to order • Basic economic order quantity • Production order quantity • Quantity discount model

Basic EOQ Model Important assumptions Demand is known, constant, and independent Lead time is known and constant Receipt of inventory is instantaneous and complete Quantity discounts are not possible Only variable costs are setup and holding Stockouts can be completely avoided

Robust Model • The EOQ model is robust • It works even if all parameters and assumptions are not met • The total cost curve is relatively flat in the area of the EOQ

Lead time for a new order in days ROP = Demand per day D Number of working days in a year d = Reorder Points • EOQ answers the “how much” question • The reorder point (ROP) tells when to order = d x L

Production Order Quantity Model • Used when inventory builds up over a period of time after an order is placed • Used when units are produced and sold simultaneously

= (Average inventory level) x Annual inventory holding cost Annual inventory level Holding cost per unit per year = (Maximum inventory level)/2 Maximum inventory level Total produced during the production run Total used during the production run = – = pt – dt Production Order Quantity Model Q = Number of pieces per order p = Daily production rate H = Holding cost per unit per year d = Daily demand/usage rate t = Length of the production run in days

Operations Management