1 Operations Strategy 2 Process Analysis 3 Lean Operations 4 Supply Chain Management Class 5a: Inventories & Economi

1. Operations Management & Performance Modeling 1 OperationsStrategy 2 Process Analysis 3 Lean Operations 4 Supply Chain Management • Class 5a: Inventories & Economies of Scale • Class 5b: Dealing with Uncertainty & role of Centralization • Class 6a: Supply Chain Design • Multi-product Pooling: Postponement & Commonalities • Benetton • Accurate Response • 5 Capacity Management in Services 6 Total Quality Management 7 Business Process Reengineering OM&PM/Class 6a

2. Generic Power Production Unique Power Production Transportation Europe Process I: Unique Power Supply N. America Europe Process II: Universal Power Supply N. America Make-to-Stock Push-Pull Boundary Make-to-Order Postponement & Commonality: HP Laserjet OM&PM/Class 6a

3. HP LaserJet: European DC Safety Stocks(2 month Lead time) OM&PM/Class 6a

4. HP LaserJet: The Effect of Aggregation • Total European safety stock with 2 month lead time = 26,409 units. • Total European safety stock with 2 month lead time on aggregation = 17,661 units. • Reduction = 8,749 units (33%). OM&PM/Class 6a

5. United Colors of Benetton Production Process OM&PM/Class 6a

6. BenettonExtra Cost of Postponement • factory shipments woolen items • $311M x 60% = $186.6M • Labor and O/H costs woolen items • 6.6% + 21.8% (assuming half of O/H from Exh. 1) = 28.4% • $186.6M x 28.4% = $53.0M • If 10% of items are dyed to order at 10% extra cost • $53.0M x 10% x 10% = $0.53M OM&PM/Class 6a

7. BenettonInventory Benefits of its Strategy • Inv. Turns = Avg. Throughput (COGS)/Avg. Inventory • Inventory Reduction = ($67.9-$38.875)M = $29.025M • Savings in inventory carrying costs (@25%) = $7.256M OM&PM/Class 6a

8. BenettonProfitability of Agents (FY 81) • Commissions (4% on shipments) • $311M * 4% / 70 agents = $178K / agent • Earnings on Shop Sales (10% ownership) • Sales = $311M * 180% (markup) * 37/44 (realized markup) = $471M • NIBT = $471M*19% = $89M • 10% ownership = $8.9M/70 agents = $128K / agent • Total = $306K / agent OM&PM/Class 6a

9. BenettonProfitability of Retailers/Franchisees (FY 81) • Store Sales = $305K • NIBT = 19% * $305K = $58K • Less agent’s share ($5.8K) = $52K OM&PM/Class 6a

10. 4000 4000 4000 3500 3500 3500 3000 3000 3000 2500 2500 2500 2000 2000 2000 1500 1500 1500 1000 1000 1000 500 500 500 0 0 0 0 500 1000 1500 2000 2500 3000 3500 4000 0 500 1000 1500 2000 2500 3000 3500 4000 0 500 1000 1500 2000 2500 3000 3500 4000 Postponement and Re-assortment: The Advantage to Forecasting Actual total sales Initial Forecast Updated Forecast after observing 20% of sales after 80% Each data point represents the forecast and the actual season sales for a particular item (at the style-color level). OM&PM/Class 6a

11. Take-Away’s: Benetton is an example of how to manage an entire supply chain and • make it profitable for all entities in the chain (suppliers, Benetton, agents, retailers) • by tailoring its operational response very carefully: • Step 1. Reduce S, L, variability: • the basics: implement everywhere in supply chain: highest pay-back • Step 2. Centralization • intermediate: trick is in the implementation: medium pay-back • Step 3. Partial postponement flexibility • last step: need this on only a small set of products & processes • and meshing it with financial and marketing response. OM&PM/Class 6a

12. Accurate Response to Demand Uncertainty when you can order only once: L.L. Bean • L.L. Bean is planning the order size for winter parkas. Each parka costs the company $70 and sells for $140. Any unsold parkas at the end of the season are disposed off by a sale at $40. Using historical data and a feel for the market, L.L. Bean forecasts the winter season demand: Demand: 21 22 23 24 25 26 27 28 Probability: 3% 4% 5% 8% 10% 15% 12% 10% Demand: 29 30 31 32 33 34 35 Probability: 9% 6% 5% 4% 4% 3% 2% • How many parkas should L.L. Bean plan (make/order)? OM&PM/Class 6a

13. Accurate Response: Find optimal order level Q with Excel OM&PM/Class 6a

14. Accurate response: Find optimal Q from formula • Cost of overstocking by one unit = Co • the out-of-pocket cost per unit stocked but not demanded • “Say demand is one unit below my stock level. How much did the one unit overstocking cost me?” E.g.: purchase price - salvage price. • Cost of understocking by one unit = Cu • The opportunity cost per unit demanded in excess of the stock level provided • “Say demand is one unit above my stock level. How much could I have saved (or gained) if I had stocked one unit more?” E.g.: retail price - purchase price. Given an order quantity Q, increase it by one unit if and only if the expected benefit of being able to sell it exceeds the expected cost of having that unit left over. • At optimal Q, do not order more if Prob( Demand > Q ) <Co/(Co + Cu ). OM&PM/Class 6a

15. Strategic goals Provide customers access to quality good, when and where needed at competitive prices Operations strategy Short cycle times Low inventory levels Logistics strategy Accurate information availability Rapid transportation Logistics structure Electronic data interchange Communication between retail stores Bar coding Cross docking Fast responsive transportation system Long lead time items Stored at DC and shipped as needed Stable demand items Continuous replenishment programs Short lead time items Made to order and cross-docked at DC Wal-Mart OM&PM/Class 6a

16. Class 6a: Learning Objectives • Pooling of stock reduces the amount of inventory • physical • information • specialization • substitution • commonality/postponement • Benetton: Tailored response (e.g., partial postponement) can be used to better match supply and demand • Accurate Response in one-shot inventory management under uncertainty • trade-off cost of over and understocking Single product Multi product OM&PM/Class 6a