OM Teaching Slides - Operations Management Term 1 2024-2025 PDF

Chapter 1 Introduction to Operations Management 1-1  Operations Management Operations Management is: The management of systems or processes that create goods and/or provide services Operations Management affects: – Companies’ ability to compete...

Chapter 1 Introduction to Operations Management 1-1  Operations Management Operations Management is: The management of systems or processes that create goods and/or provide services Operations Management affects: – Companies’ ability to compete – Nation’s ability to compete internationally 1-2  Examples Retail Stores (e.g., Wal-Mart) – Inventory Management (e.g., When to order? How many to order?) – Location (e.g., Where to open?) Manufacturers (e.g., Lenovo) – Product Design (e.g., Which to produce?) – Quality Management (e.g., How to control?) Banking Systems (e.g., HSBC) – Facility Layout (e.g., How to provide the best banking service?) – Service Quality (e.g., How to achieve customer satisfaction?) 1-3  Business Organizations Three Basic Functional Areas Finance: Securing and Allocating Financial Resources; Investment Budget and Analysis Marketing: Assessing Customer Needs (Wants); Selling and Promoting the Goods/Services Operations: Producing the Goods/Providing the Services — CORE of what the organization does Organization Finance Operations Marketing 1-4  Value-Added Process The operations function involves the conversion of inputs into outputs Value added Inputs Land Transformation/ Outputs Labor Conversion Goods process Services Capital Feedback Control Feedback Feedback 1-5  Goods-Service Continuum Goods Service Surgery, teaching Song writing, software development Computer repair, restaurant meal Automobile Repair, fast food Home remodeling, retail sales Automobile assembly, steel making 1-6 Production of Goods vs. Delivery of Services Production of goods – tangible output Delivery of services – an act Service job categories – Government – Wholesale/retail – Financial services – Healthcare – Personal services – Business services – Education – Logistics, etc. 1-7  Goods vs. Service Characteristic Goods Service Customer contact Low High Uniformity of input High Low Labor content Low High Uniformity of output High Low Output Tangible Intangible Measurement of productivity Easy Difficult Opportunity to correct problems High Low Inventory Much Little Evaluation Easy Difficult Patentable Usually Not usual 1-8  Scope of Operations Management Planning Organizing – Capacity – Degree of centralization – Location – Process selection – Products & services – Supply chain management – Make or buy Staffing – Layout – Hiring/laying off – Projects – Use of Overtime – Scheduling Directing Controlling/Improving – Incentive plans – Inventory – Issuance of work orders – Quality – Job assignments – Costs – Productivity 1-9  General Approaches to Decision Making Model A Simplified Representation of the Real Thing, e.g., Toy; Car Crash Test Quantitative Approaches Mathematical Methods of Obtaining Optimal/Feasible Decision, e.g., LP Analysis of Trade-Offs Balancing Opposite Effects, e.g., Amount of Inventory A System’s Approach A Set of Interrelated Parts that Must Work Together The whole is greater than the sum of its individual parts. 1-10  Trends in Business The Internet, e-commerce, e-business Management of technology Globalization Management of supply chains Outsourcing Agility Ethical behavior 1-11  Chapter 2 Competitiveness, Strategy, and Productivity 2-1  Competitiveness, Strategy, and Productivity Effectiveness of the organization in Plans determining the direction the marketplace compared with other taken by the organization in similar organizations pursuing its goals Business Organization Competitiveness Strategy Productivity Efficient use of resources 2-2  Competitiveness How effectively an organization meets the wants and needs of customers relative to others that offer similar goods or services. It Means Prospers, Survives, or Fails 2-3  Business Competes Using Marketing Identifying consumer wants and/or needs Basic input in an organization’s decision-making process Central to competitiveness Pricing Key factor in consumer buying decisions Advertising & Promotion Enticing potential customer to purchase goods/services 2-4  Business Competes Using Operations  Product and service design  Cost  Location  Quality  Time/Speed/Quick response Operations  Flexibility Organization  Inventory management  Supply chain management  Service and service quality  Managers and workers 2-5  Mission/Goal/Strategy/Tactics  Mission  The reason for existence for an organization  Mission Statement  States the purpose of an organization  Goals  Provide detail and scope of mission  Strategies Plans for achieving organizational goals  Tactics  The methods and actions taken to accomplish strategies 2-6  Mission, Goal, and Strategy Example A Hong Kong-based car audio equipment supplier (manufacturer)  Mission: Be a leading supplier of car audio equipment  Goal: Take a large market share worldwide in lower to medium price car market  Strategy: Supply low cost and reliable equipment promptly to customer specification by setting up corporate control, R&D, and planning in Hong Kong, marketing offices in all major markets, and all manufacturing facilities in Pearl River Delta 2-7  Strategy Example Rita is a high school student. She would like to have a career in business, have a good job, and earn enough income to live comfortably Mission: Live a good life Goal: Successful career, good income Strategy: Obtain a college education Tactics: Select a college and a major Operations: Register, buy books, take courses, study, graduate, get job 2-8  Operations Strategies  Operations strategy – The approach, consistent with organization strategy, that is used to guide the operations function. 2-9  Distinctive Competencies The special attributes or abilities that give an organization a competitive edge. Price Low Cost Wal-Mart Quality High-performance design or high Lexus, BMW quality Sony TV, Apple Phone Consistent quality Coca-Cola Time Rapid delivery Fedex, UPS On-time delivery Pizza Hut Flexibility Variety Toyota, McDonald’s, Volume ParkNShop Service Superior customer service Four Season Hotels Location Convenience 7-Eleven 2-10  Strategy Formulation Environmental scanning i.e., What are competitors doing/planning to do? SWOT: External and Internal? Strengths, Weakness, Opportunities, and Threats. Order Qualifiers Characteristics that customers perceive as minimum standards of acceptability to be considered as a potential purchase. (e.g., price, quality, etc.) Order Winners Characteristics of an organization’s goods or services that cause it to be perceived as better than the competitor (e.g., price, quality, etc.) 2-11  Productivity A measure of the effective/efficient use of resources, usually expressed as the ratio of output to input Formula Outputs Productivity= Inputs Productivity Ratios Planning workforce requirements Scheduling equipment Financial analysis 2-12  Measures of Productivity Partial Measures: Output/(Single Input) Output Output Output Output Labor Machine Capital Energy Multifactor Measures: Output/(Multiple Inputs) Output Output Labor+Machine Labor + Capital + Energy Total Measure: Output/(Total Inputs) Goods/Services Produced All inputs used to produce them 2-13 Examples of Partial Productivity Measures Labor Units of output per labor hour Productivity Units of output per shift Value-added per labor hour Machine Units of output per machine hour Productivity Dollar value of output per machine hour Capital Units of output per dollar input Productivity Dollar value of output per dollar input Energy Units of output per kilowatt-hour Productivity Dollar value of output per kilowatt-hour 2-14  Productivity Example ABC Company produced 7,040 units. The unit sale price is $1.10. Some Cost components are given as follows: (1) Labor: $1,000; (2) Materials: $520; (3) Overhead: $2,000. Question: What is the multifactor productivity? Answers: Output MFP = Labor + Materials + Overhead ( 7040 units ) × ( $ 1.10 ) MFP = 2.20 $ 1000 + $ 520 + $ 2000 2-15  Productivity Growth The increase in productivity from one period to the next relative to the productivity in the preceding period Formula Productivity Growth = Current Period Productivity – Previous Period Productivity Previous Period Productivity Example Productivity increased from 80 to 84. Productivity growth? 84 − 80 Productivity Growth = × 100% = 5% 80 2-16  Chapter 6 Process Selection and Facility Layout 6-1  Process Selection and System Design Process Selection Deciding on the way production of goods or services will be organized. Facilities and Forecasting Capacity Equipment Planning Product and Layout Service Design Process Technological Selection Work Change Design 6-2  Process Selection  Variety Batch How much  Flexibility Job Shop Repetitive What degree  Volume Expected Continuous output 6-3  Process Types Job shop o Small scale Batch o Moderate volume Repetitive/assembly line o High volumes of standardized goods or services Continuous o Very high volumes of non-discrete goods 6-4  Product – Process Matrix Process Type Low Volume High Volume Appliance repair Job Shop Emergency room Ineffective Commercial baking Batch Classroom Lecture Automotive assembly Repetitive Automatic carwash Continuous Steel Production Ineffective (flow) Water purification 6-5  Comparison of Four Processes Attributes\Process Job Shop Batch Repetitive Continuous flow Job variety Very High Moderate Low Very low Process flexibility Very High Moderate Low Very low Unit cost Very High Moderate Low Very low Volume of output Very low Low High Very High 6-6  Facility Layout Layout The configuration of departments, work centers, and equipment, with particular emphasis on movement of work (customers or materials) through the system Importance of Layout Decisions ―Requires substantial investments of money and effort Money-consuming ―Involves long term commitments Difficult to overcome the mistakes ―Has significant impact on cost and efficiency of short-term operations 6-7  Objectives of Layout Design 1. Facilitate attainment of product or service quality 2. Use workers and space efficiently 3. Avoid bottlenecks 4. Minimize unnecessary material handling costs 5. Eliminate unnecessary movement of workers or materials 6. Minimize production time or customer service time 7. Design for safety 6-8  Basic Layout Types Product Layout Layout that uses standardized processing operations to achieve smooth, rapid, high-volume flow Process Layout Layout that can handle varied processing requirements Fixed Position Layout Layout in which the product or project remains stationary, and workers, materials, and equipment are moved as needed Nature of the product dictates this type of layout: Weight, Size, Bulk; Large construction projects. 6-9  Product Layout Raw Station Station Station Station Finished materials 1 2 3 4 item or customer Material Material Material Material and/or and/or and/or and/or labor labor labor labor Used for Repetitive or Continuous Processing 6-10  A U-Shaped Production Line In 1 2 3 4 5 Workers 6 Out 10 9 8 7 6-11  Design Product Layouts: Line Balancing Line Balancing is the process of assigning tasks to workstations in such a way that the workstations have approximately equal time requirements. Goal: minimizing the idle time along the line and resulting in a high utilization of labor and equipment. 6-12  Precedence Diagram Precedence diagram: Tool used in line balancing to display elemental tasks and sequence requirements 0.1 min. 1.0 min. A Simple a b Precedence Diagram c d e 0.7 min. 0.5 0.2 min. min. 6-13 Design Product Layouts: Line Balancing Cycle time is the maximum time allowed at each workstation to complete its set of tasks on a unit. OT Output capacity = CT OT = operating time per day OT CT = cycle time = D D = Desired output rate 6-14  Design Product Layouts: Line Balancing Determine the Minimum Number of Workstations Required (D)( ∑ t ) ∑ t =N min = OT CT N min : min. number of stations ∑ t = sum of task times Evaluation of Product Design—Calculate Percent Idle Time Idle time per cycle Percent idle time = (N)(CT) N=Actual Efficiency = 1 – Percent idle time number of stations 6-15 Designing Product Layout: Line Balancing Line Balancing Procedure Cycle time & min number of workstations Assignments to workstations in order Time remaining at the current workstation Break ties (longest task time/greatest number of followers/arbitrary selection) Continue until all tasks assigned Compute measures (e.g., percent idle time, efficiency) 6-16  Design Product Layouts: Line Balancing Example: Task Immediate Follower Task Time (in minutes) a b 0.2 b e 0.2 c d 0.8 d f 0.6 e f 0.3 f g 1.0 g h 0.4 h End 0.3 ∑t = 3.8 6-17  Process Layout Process Layout (functional) Dept. A Dept. C Dept. E Dept. B Dept. D Dept. F Used for Intermittent processing Job Shop or Batch Processes 6-18  Designing Process Layouts Information Requirements: 1. List of departments 2. Projection of work flows 3. Distance between locations 4. Amount of money to be invested 5. List of special considerations 6. Location of key utilities 6-19  Process Layout Example Objective: Assign departments to locations, to minimize transportation costs or distances Distance between locations Interdepartmental work flow 40 A C Question: How shall we assign 20 B 30 departments 1, 2 and 3 to locations A, B and C? 6-20  Chapter 9 Management of Quality 9-1  Quality Management Quality The ability of a product or service to consistently meet or exceed customer expectations Quality Assurance vs. Strategic Approach Quality Assurance  Emphasis on finding and correcting defects before reaching market Strategic Approach  Proactive, focusing on preventing mistakes from occurring  Greater emphasis on customer satisfaction 9-2  Dimensions of Product Quality  Performance - main characteristics of the product/service  Aesthetics - appearance, feel, smell, taste  Special Features - extra characteristics  Conformance - how well product/service conforms to customer’s expectations  Reliability - consistency of performance  Durability - useful life of the product/service  Perceived Quality - indirect evaluation of quality (e.g. reputation)  Serviceability - service after sale 9-3  Dimensions of Service Quality Dimension Examples 1. Convenience Was the service center conveniently located? 2. Reliability Was the problem fixed? Were customer service personnel willing and able 3. Responsiveness to answer questions? 4. Time How long did the customer wait? Did the customer service personnel seem 5. Assurance knowledgeable about the repair? Were customer service personnel and the cashier 6. Courtesy friendly and courteous? 7. Tangibles Were the facilities clean, personnel neat? 9-4  Primary Determinants of Quality Easily visible, easily understood Ease of Design Service after Intention of use sales/delivery designers to include/exclude features in a product/service Conforms Service to design The degree to which goods/services conform to the intent of the designers 9-5  The Consequences of Poor Quality Loss of Business  Profit-oriented firms: Decreased market share  Nonprofit/Government: Increased criticism/control Liability  Responsibility for damages/injures Productivity  Manufacturing process: Re-worked/Re-assembled  Service process: to be re-done Costs  Costly to remedy a problem  Earlier to identify, cheaper to fix 9-6  Quality Certification  ISO 9000  A set of international standards on quality management and quality assurance, critical to international business  ISO 14000  A set of international standards for assessing a company’s environmental performance 9-7  ISO 9000 Quality Management Principles  Customer focus  Leadership  People involvement  Process approach  A system’s approach to management  Continual improvement  Factual approach to decision making  Mutually beneficial supplier relationships 9-8  ISO 14000  Management systems  Systems development and integration of environmental responsibilities into business planning  Operations  Consumption of natural resources and energy  Environmental systems  Measuring, assessing and managing emissions, effluents, and other waste 9-9  Total Quality Management (TQM) TQM A philosophy that involves everyone in an organization in a continual effort to improve quality and achieve customer satisfaction. TQM Approach 1. Find out what the customer wants 2. Design product/service meeting/exceeding needs 3. Design processes that facilitates doing the job right the first time 4. Keep track of results 5. Extend these concepts to suppliers and distributors 9-10  Plan-Do-Study-Act Cycle in TQM The Plan-Do-Study-Act (PDSA) Cycle Plan Act Do Study 9-11  Elements of TQM  Continual improvement – Never-ending job  Competitive benchmarking – Learning  Employee empowerment – Motivation  Team approach – Group synergy, cooperation, and shared values  Decision based on facts rather than opinions 9-12  Elements of TQM (continued)  Knowledge of tools – Training for quality tools  Supplier quality – Assurance of input quality  Champion – Promotion throughout a firm  Quality at the source – Individual responsibility  Suppliers – Supply chain partnerships 9-13  Basic Quality Tools 1. Flow charts A diagram of the steps in a process; A visual representation of a process 2 3 4 6 1 5 9-14  Basic Quality Tools 2. Check sheet A tool of recording & organizing data to identify a problem 9-15  Basic Quality Tools 3. Histograms A chart of an empirical frequency distribution 9-16  Basic Quality Tools 4. Pareto analysis Technique for classifying problem areas according to degree of importance, and focusing on most important 80% of the Number of defects problems may be attributed to 20% of the causes. Off Smeared Missing Loose Other center print label 9-17  Basic Quality Tools 5. Scatter plot A graph that shows the degree and direction of relationship between two variables 9-18  Basic Quality Tools 6. Control chart (To be specified in Ch. 10) A statistical chart of time-ordered values of a sample statistic 1020 UCL 1010 1000 990 980 LCL 970 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 9-19  Basic Quality Tools 7. Cause-and-effect diagram (also fishbone diagram) A diagram used to search for the cause(s) of a problem Methods Materials Cause Cause Cause Cause Cause Cause Environment Cause Cause Effect Cause Cause Cause Cause People Equipment 9-20  Chapter 10 Quality Control 10-1  Quality Control Quality Control A process that evaluates output relative to a standard, and takes corrective action when output doesn’t meet standards Phases of Quality Assurance Inspection and Inspection corrective Quality built before/after action during into the production production process Acceptance Process Continuous sampling control improvement The least The most progressive progressive 10-2  Inspection Inspection An appraisal activity that compares goods/services to a standard Basic Issues for Inspection 1. How much to inspect and How often Cost Total Cost Cost of inspection Cost of passing defectives Optimal Amount of Inspection 10-3  Inspection (Cont’d) Basic Issues for Inspection 2. Where to inspect in the process (Inspection Point)  Raw materials and purchased parts  Finished products  Before a costly operation  Before an irreversible process (irremediable)  Before a covering process (Don’t mask defects) 3. Centralized vs. On-site Inspection  Centralized inspection (lab test) Sample Goods, e.g., medical test, food sample  On-site inspection Irremovable Goods/Services, e.g., ship, banking service 10-4  Acceptance Sampling Acceptance sampling: A form of inspection applied to lots or batches of items before or after a process, to judge conformance with predetermined standards Acceptance sampling most useful when – A large number of items must be processed in a short time – The cost consequences of passing defects are low – Destructive testing is required – Fatigue or boredom leads to inspection errors 10-5  Sampling Plans Plans that specify lot size, sample size, number of samples, and acceptance/rejection criteria – Single-sampling one random sample from each lot if more than c defectives are found, the lot is rejected – Double-sampling a second sample may be drawn if the first sample is inconclusive c1, c2 for the first sample, c3 for the second sample – Multiple-sampling similar to double-sampling 10-6  Statistical Process Control (SPC) Major Concern in Quality Control Quality of Conformation: A product/service conforms to the intent of design. Major Method in Quality Control Statistical Process Control: Statistical evaluation of output of a process during production. Control chart: An important tool in SPC A time-ordered plot of representative sample statistics (e.g., sample means) obtained from an ongoing process Purpose: Process is in control? Output is random? Upper and Lower Control limits: Range of acceptable (i.e., random) variation 10-7  Statistical Process Control Steps in Effective Control Process  Define What is to be controlled?  Measure How measurement will be accomplished?  Compare Which level of quality will be sought?  Evaluate What is out of control? (Random vs. Nonrandom)  Correct How to correct the out-of-control process?  Monitor results Has the out-of-control process been corrected? 10-8  Statistical Process Control Variations and Control  Random variation: Natural variations in the output of a process, created by countless minor factors  Assignable variation: A variation whose source can be identified 10-9  Sampling vs. Process Distributions Sampling distribution Process distribution Lower control limit Upper control limit Mean Note: Control Limit is based on Sampling Distribution. 10-10 Control Charts based on Sampling Distribution Sampling distribution Lower control Mean Upper control limit limit UCL Centerline LCL 1 2 3 4 10-11  Types of Control Charts 1. Control Charts for Variables Variables data: measured, usually on a continuous scale, e.g., working time, physical size of product.  Mean chart  Range chart 2. Control Charts for Attributes Attributes data: counted data, e.g., number of defective parts in a sample, no. of calls per day.  p-chart  c-chart 10-12  Methods for Constructing Control Charts If the true parameters (e.g., mean and standard deviation) are known, then we can use formulas to find the z-sigma control limits. 1. z is the number of sigma for computing control limits. Usually, z = 1,2,3 (z = 3 is commonly used). 2. The formulas for four types of control charts differ and will be given later. 3. The control limits can be directly used to monitor the process. 10-13  Methods for Constructing Control Charts If the true parameters (e.g., mean and standard deviation) are unknown, then we CANNOT use the formulas that are used when the parameters are known. Instead, we have to follow two phases to estimate the z-sigma control limits. (z is the same as what were mentioned on the last page.) Phase I: Use preliminary samples to estimate control limits. 1. Select at least 20 to 25 preliminary samples; 2. Use some formulas (that are given later) to compute the trial control limits; 3. Test the reliability of the trial control limits. If all preliminary samples fall within the trial control limits, then the control limits are reliable and can be used to monitor the future production. Otherwise, we cannot use the limits but find the reason(s) and construct new limits. Phase II: Use reliable control limits to monitor the process. 10-14  Control Charts for Variables Mean Chart A control chart used to monitor the central tendency of a process.  Constructed based on a normal distribution. Also called x chart (x: sample mean)  How to construct control charts: Compute the control limits (i.e., LCL and UCL) 10-15  Mean Charts Formula when the process mean (μ) and sigma (σ) are known. UCL: = µ + zσ x ; LCL: = µ − zσ x , where σ x = σ n : S. D. of distribution of sample means; σ : Process standard deviation; n: Sample size; z: Standard normal deviation; x: Average of Sample means 10-16  Mean Charts Formula (in Phase I) when μ and σ are unknown. Available Information in Phase I: sample mean and sample range. UCL: = x + A2 R ; LCL: = x − A2 R , where A2 : a factor obtained from a table; R: Average of sample ranges Note: 1.The formula assumes z=3. 2.In Phase I, if the trial control limits are reliable (i.e., all preliminary samples are within the limits), then we can 1. use the limits to monitor the process (in Phase II); 2. also estimate μ and σ as: A2 R n µ =x ; σ = , 3 10-17  Range Charts Range Chart (R-Chart) A control chart used to monitor process dispersion.  Formulas when the parameter σ is known. 3D4σ 3D3σ UCL: = ; LCL: = , A2 n A2 n  Formulas (in Phase I) when σ is unknown. UCL: = D4 R ; LCL: = D3 R , where D3 and D4: two factors from a table; R : average of sample ranges. 10-18  An Example of Mean and Range Charts  Five samples, each including four observations.  Use three-sigma control limits, i.e., z=3.  Know the process s. d. is.02 minutes and mean is 12.108 minutes. Sample 1 2 3 4 5 1 12.11 12.15 12.09 12.12 12.09 2 12.10 12.12 12.09 12.10 12.14 3 12.11 12.10 12.11 12.08 12.13 4 12.08 12.11 12.15 12.10 12.12 x 12.10 12.12 12.11 12.10 12.12 R 0.03 0.05 0.06 0.04 0.05 10-19  Mean and Range Charts (process mean is shifting upward) Sampling Distribution UCL x-chart Detects shift LCL UCL R-chart Does not LCL detect shift 10-20  Mean and Range Charts Sampling Distribution (process variability is increasing) UCL x-chart Does not LCL reveal increase UCL R-chart Reveals increase LCL 10-21  Control Chart for Attributes p-Chart A control chart used to monitor the proportion of defectives in a process. When should we use p-chart? 1. When observations can be placed into one of two categories, e.g.,  Good vs. Bad  Pass vs. Fail  Operate vs. Don’t Operate 2. When the data consists of multiple samples, each involving several observations 10-22  Control Chart for Attributes p-Chart  Formula when the parameter p is known. UCL p = p + zσ p ; LCL p = p − zσ p , p(1 − p) where σ p = : s.d. of the sampling distribution; n p: Average fraction defective in the population. NOTE: 1. If p is unknown, we can estimate it (in Phase I) by using Total number of defectives p=. Total number of observations 2. If computed LCL is negative, ZERO is used. 10-23  Control Chart for Attributes c-Chart A control chart used to monitor the number of occurrences (e.g., defects) per unit.  We use c-Chart only when the number of occurrences per unit of measure can be counted, e.g., no. of complaints received each day.  Formula when the parameter c is known. c + z c ; LCLc = UCLc = c −z c, where c: the mean number of defects per unit. Note: If c is unknown, we can estimate it (in Phase I) by using Number of defectives c=. Number of samples 10-24  Process Capability Variability of Process Output  Specifications (Tolerances) A range of acceptable values established by engineering design or customer requirements.  Control Limits A statistical limits that reflect the extent to which sample statistics can vary due to Randomness  Process Variability Natural or inherent (i.e., random) variability in a process, which is measured by Process s. d. (σ). Q: Is a process capable of meeting the specifications?  Need Analysis of Process Capability! 10-25  Process Capability Process Capability Ratio (Cp)  Compute Cp specification width Process capability ratio Cp = process width Upper specification – lower specification Cp = 6σ  Analyze Cp Capable Process: Cp≥1.33. 10-26  An Example of Process Capability Ratio (Cp) Process Capability Ratio (Cp)  Specification: [10.00 mm, 10.80 mm] Machine S.D. (mm) Machine Cap. Cp A 0.13 0.78 (6×0.13) 0.80/0.78=1.03 B 0.08 0.48 0.80/0.48=1.67 C 0.16 0.96 0.80/0.96=0.83 Only Machine B is capable of meeting the specifications, since 1.67>1.33. 10-27  Process Capability Cpk Used when a process is not centered. Compute Cpk  Upper Specification - Process Mean  3σ C pk = min   Process Mean - Lower Specification  3σ Analyze Cp Capable Process: Cpk ≥ 1.33 10-28  An Example of Process Capability Ratio (Cpk) Cpk  A process: mean—9.20 grams; s.d.—0.30 grams  Specification: [7.50 grams, 10.50 grams] 1. Compute the ratio for Lower Specification Process Mean - Lower Specification 9.20 − 7.50 = = 1.89 3σ 3(.30) 2. Compute the ratio for Upper Specification Upper Specification - Process Mean 10.50 − 9.20 = = 1.44 3σ 3(.30) 3. Cpk=1.44>1.33: This process is capable! 10-29  Chapter 12 Inventory Management 12-1  What Is Inventory Materials or goods that are stored by an organization until they are needed (used or sold) Metal parts, electronic components, and many materials are stored in warehouses or flowing along the productions in auto industry and cars in transit to and kept at distribution centers and dealers Vegetables, meat, flour, rice, in warehouse, kitchen, refrigerator A4 paper, pencils, other staples in CDS general office 12-2  Functions of Inventory To meet anticipated demand To smooth production requirements To decouple operations To protect against stock-outs/hedge demand uncertainty To take advantage of economies of scale To help hedge against price increases To permit operations/achieve desirable capacity level To take advantage of quantity discounts 12-3  Types of Inventory By status/location By function – Raw materials – Theoretical or – Finished goods inventory pipeline inventory (FGI) – Cycle or batch – Work-in-process (WIP) inventory – Goods-in-transit – Decoupling inventory – Replacement parts, tools, – Safety inventory and supplies – Seasonal inventory – Strategic inventory 12-4  Effective Inventory Management A system to keep track of inventory A reliable forecast of demand Knowledge of lead times Reasonable estimates of  Holding/Carrying costs  Ordering costs  Shortage costs A reasonable inventory (decision) policy 12-5  Inventory (Counting) Systems Periodic-Review Systems Physical count of items in inventory made at periodic intervals (e.g., weekly, monthly)  Check inventory level periodically and Predict the demand to make the ordering decisions  Disadvantages  Lack of control between reviews  Need to protect against the shortages Perpetual (Continuous-Review) Systems System that keeps track of removals from inventory continuously (monitors current inventory levels)  Advantage: System in control  Disadvantage: higher cost of record keeping 12-6  Inventory (Counting) Systems Universal Product Code: Bar code printed on a label that has information about the item to which it is attached. The number of this item in stock is decreased by 214800 232087768 the units checked out. Continuously monitor the inventory level. 12-7  Information for Inventory Management Reliable forecast of demand quantity and timing  Use of point-of-sale systems Instantaneous and updated information for more accurate forecasts Lead time The time interval between ordering and receiving the items  Determine the time of placing an order  Estimate the shortage risk, and reduce it 12-8  Inventory-Related Costs Holding/Carrying Cost Cost to carry a unit of an item in inventory for a time period  Includes interests, insurance, warehousing cost, etc. Ordering Cost Cost of placing an order and receiving items, unrelated to the units to order.  Includes shipping cost, administrative cost, etc. Shortage Cost Cost incurred when demand cannot be satisfied  Includes loss of customer goodwill, lost profit, penalty, etc. 12-9  Inventory Policy Inventory Policy usually answers two questions When to order (ROP) How much to order (Q) The objective of an inventory policy is usually To minimize the total (or average) inventory cost (ordering cost, holding cost and backlogging cost) while maintaining a certain service level To maximize the service level with a given amount of inventory 12-10  The Economic Order Quantity Problem How much to order each time, order quantity Q units? Given – One product – Constant known demand rate, D units per unit time (year) – Constant lead time L – Inventory carrying cost $H per unit per unit time (year) – Fixed ordering cost $S per order 12-11  Ordering Process and Inventory Level Q Usage Quantity rate on hand Reorder point = D×L Time Receive Place Receive Place Receive products order products order products Lead time 12-12  Inventory-Related Costs per Unit Time Ordering cost per year = (Ordering cost per cycle) × (# of orders per year) = S × (D/Q) Holding cost per year = (Holding cost per unit per year) × (Avg. Inventory level) = H × (Q/2) No backlog, no shortage cost 12-13 A Tradeoff of Holding and Ordering Costs The Total-Cost Curve is Convex Q D TC = H + S 2 Q Annual Cost Holding Costs Ordering Costs Order Quantity (Q) EOQ (optimal order quantity) 12-14  The Economic Order Quantity The total cost reaches its minimum where the holding and ordering costs are equal (Q/2) H = (D/Q) S Optimal Order Quantity (EOQ) * 2DS EOQ = Q = H 12-15  The Quantity Discount Problem Price discounts are often offered if the order quantity is at or above a predetermined level (threshold) The unit price of the item, c, is different for different Q Holding cost H may be affected by c Discount may apply to the whole order or only to the part above the threshold level Basic EOQ model used with purchase cost added: TC = S D + H Q + cD Q 2 Here, we only consider the case when H is not affected by c and the discount is applied to the whole order 12-16  Effect of Quantity Discount Same shape 12-17  Solution Procedure Optimal order size is the same regardless of the discount price For each price/quantity range, if the upper boundary (e.g., a2) is smaller or the lower boundary (e.g., a3) is greater than the optimal order size, the optimal order quantity for that price/quantity range is the corresponding boundary value Determine the “optimal” quantities for each price range and then choose the one with the minimum total cost 12-18  Quantity Discount Example-1 The demand of a reference book at university bookstore D= 200 units/year, the ordering cost S = $2,500, the holding cost rate = $190/unit/year is constant unrelated to purchasing price. For following discount schedule offered by Comptek, should bookstore buy at the discount terms or order the basic EOQ order size? Quantity Price 1 – 49 $1,400 50 – 89 $1,100 90 + $ 900 12-19  Quantity Discount Example-2 Determine optimal order size and total cost S = $2,500, H = $190/unit/year, D = 200 units/year 2SD 2(2,500)(200) Q* = = = 72.5 units H 190 (1) Optimal quantity between 1 and 49 at price $1,400: As Qopt=72.5>49, the optimal order quantity for this price range is Qopt = 49 units SD Q (2,500)(200) (49) TC49 = + H + cD = + (190) + (1,400)(200) Q 2 (49) 2 = 10,204 + 4,655 + 280,000 = $294,859 12-20  Quantity Discount Example-3 (2) Optimal quantity between 50 and 89 at price $1,100 As Q* = 72.5 is between 50 and 89, Qopt = Q* =72.5 units. SD Qopt (2,500)(200) (72.5) TC72.5 = +H + cD = + (190) + (1,100)(200) Qopt 2 (72.5) 2 = 6,892 + 6,892 + 220,000 = $233,784 (3) Optimal order quantity at 90 or more at price $900: As Q* = 72.5 < 90, Qopt = 90 units. SD Qopt (2,500)(200) (190)(90) TC90 = +H + cD = + + (900)(200) Qopt 2 (90) 2 = $194,105 12-21  Quantity Discount Example-Solution Because $194,105 is the smallest TC, the maximum discount price should be taken and 90 units ordered. 12-22 (Q, R) Model, Uncertain Lead Time Demand Random Lead Time Demand The annual demand is 15600, but demand fluctuates over the year. Order lead time = 2 weeks, what is the lead-time demand? The best we can do is to assume the average weekly demand = 15600/52=300 12-23 Inventory Dynamics and Decision Problem Assuming the average weekly demand = 15600/52=300 2,800 Inventory Suppose we order 2,000 (Q) whenever the inventory on hand reduces to 1,200 (R) 2,000 order order Q 1,600 R 1,200 under shoot 800 These may happen 600 average Time/ 0 over shoot − 400 weeks two weeks two weeks lead time lead time How to determine the right R and Q? 12-24  Continuous-Review (Q, R) Model/Policy The When and How Much problem – Annual demand rate D is known – A positive order replenishment lead time L – Uncertain lead time demand (Q, R) Policy: Order Q whenever inventory falls to R A good approximate (optimal) solution is to determine Q and R separately Use EOQ for Q, i.e., Q = EOQ = 2DS / H Determine R by a service level approach 12-25  Service Level When inventory falls to R, we order Q. This Q cannot be used to satisfy the demand in the lead time If demand in the lead time is greater than R, we have a stock out and customer service is hurt For the management, some policy is needed regarding the chance of stock out during the lead time Service level = Probability (lead time demand ≤ R) =α α is a type-one service level 12-26 Reorder Point Under Service Level α 12-27  Service Level & Safety Factor Service 68% 69% 70% 71% 72% 73% 74% 75% 76% 77% 78% Level (α) Safety 0.47 0.50 0.53 0.56 0.59 0.62 0.65 0.68 0.71 0.74 0.78 factor (zα) Service 79% 80% 81% 82% 83% 84% 85% 86% 87% 88% 89% Level (α) Safety 0.81 0.85 0.88 0.92 0.96 1.0 1.04 1.09 1.13 1.18 1.23 factor (zα) Service 90% 91% 92% 93% 94% 95% 96% 97% 98% 99% 99.9% Level (α) Safety 1.29 1.34 1.41 1.48 1.56 1.65 1.75 1.88 2.05 2.33 3.08 factor (zα) See the Standard Normal Table for more details. 12-28 Random Lead Time and Random Demand Random lead time demand can be caused by lead time uncertainty or demand uncertainty or both Let d be the daily time demand and ( ) ( d ~ N d , σ d2 , L ~ N L, σ L2 ) We have R = µ X + zα σ X = d × L + zα Lσ d2 + d 2σ L2. When lead time is deterministic: σ L = 0 and σ X = σ d L When d is deterministic: σ d = 0 and σ X = d σ L 12-29  The Newsvendor Problem Demand X in the future is uncertain The selling period/season for the product is finite/fixed There is only one ordering opportunity How much to order, i.e., what should be Q? Q>X Leftover must be disposed Q X, G2000 salvages unsold units at $20 each with a loss of 30-20=$10, called excess cost Ce Ce = Acquisition cost per unit – Salvage value per unit 12-33 Critical Ratio—Service Level 12-34 Continuous Demand-Service Level Approach 12-35 G2000’s Optimal Order by Critical Ratio Demand (in 1,000) Probability Cum. Prob. 10 0.01 0.01 11 0.02 0.03 12 0.04 0.07 critical ratio 13 0.08 0.15 > 0.857 14 0.09 0.24 15 16 0.11 0.16 0.35 0.51 choose 0.92 > 0.857 17 0.18 0.69 18 0.167 0.857 Q* = 19,000 19 0.063 0.92 20 0.04 0.96 21 0.02 0.98 Discrete Approach 22 0.01 0.99 23 0.01 1.00 Total 1.00 12-36  Example: McHardee Press McHardee Press publishes the Fast Food Restaurant Menu Book and wishes to determine how many copies to print. The incremental profit per copy is $0.45. Any unsold copies of the book can be sold at salvage at a $0.55 loss Sales for this edition are estimated to be normally distributed. The most likely sales volume is 12,000 copies and the standard deviation is 4863 How many copies should be printed? 12-37  McHardee Press – Solution The demand is approximately normally distributed with mean µX =12,000 and σX = 4,863 With Cs = $0.45, Ce = $0.55, the service level that the company should maintain is α = Cs /(Cs + Ce) = 0.45/(0.45+0.55) = 0.45 From the normal table, z0.45 = -0.12 The optimal order quantity should then be Q* = µX + zασX = 12,000 - 0.12×4863 = 11,416 12-38  Chapter 11 Capacity Planning, Aggregate Planning and Master Scheduling 11-1  Capacity Planning Capacity The upper limit or ceiling on the load that an operating unit (e.g., a plant, a restaurant) can handle Capacity also includes  Equipment  Space  Employee skills The basic questions in capacity planning are:  What kind of capacity is needed?  How much is needed?  When is it needed? Goal of Capacity Planning:  Long-term supply capabilities Match Predicted level of long-term demand 11-2  Defining Capacity Design Capacity Maximum output rate or service capacity an operation, process, facility is deigned for Effective Capacity Design capacity minus allowances such as personal time, maintenance, and scrap Actual Output Rate of output actually achieved – cannot exceed effective capacity 11-3  Measuring System Effectiveness 1. Efficiency Actual Output Efficiency = Effective Capacity 2. Utilization Actual Output Utilization = Design Capacity Example The Design Capacity of a vehicle repair department is 50 trucks/day; Effective Capacity is 40 trucks/day; Actual output is 36 trucks/day Solution: 36 36 Efficiency= = 90%; Utilization = = 72%. 40 50 11-4  Concept of Aggregation  “Big picture” approach to planning Focus on a group of similar products/services, e.g., a TV manufacturer just needs to consider the production of all types.  Purpose Planning for future Planning for flexibility Overcome the inaccurate prediction for individual items Connecting to business plan A single-value monthly revenue plan provides a link to the upper level plan 11-5  Aggregate Planning Process Begin with intermediate-range forecast of aggregate demand Monthly outputs in dollar volume General plan to meet demand by setting – Output levels – Workforce (employment) level – Finished-goods-inventory level Production plan is the output of aggregate planning Update plan periodically – rolling planning horizon usually covers the next 6 – 18 months 11-6  Aggregate Planning Strategies Three Categories for Aggregate Planning Strategies  Proactive strategies: demand options Alter demand so that it matches capacity  Reactive strategies: capacity options Alter capacity so that it matches demand  Mixed strategies: demand and capacity options Alter both demand and capacity 11-7  Capacity and Demand Options Hire and layoff workers Pricing Overtime/slack time Promotion Part-time workers Back orders Inventories New demand Subcontracting 11-8  Aggregate Planning Strategies Maintain a level workforce Maintain a steady output rate Match demand period by period Use a combination of decision variables 11-9  Basic Strategies Level capacity strategy – Maintaining a steady rate of regular-time output while meeting variations in demand by a combination of options Chase demand strategy – Matching capacity to demand; the planned output for a period is set at the expected demand for that period 11-10  Chase Approach Advantages – Investment in inventory is low – Labor utilization is high Disadvantages – High cost of adjusting output rates and/or workforce levels 11-11  Level Approach Advantages – Stable output rates and workforce – Reduced overtime and idle time – Stable resource utilizations over time Disadvantages – Greater inventory costs 11-12  Aggregate Plan to Master Schedule A natural question after developing an aggregate plan How to execute the plan in practice? A plan involving the concept of aggregate Disaggregate the aggregate plan Break down the aggregate plan into specific requirements Aggregate Master Disaggregation Planning Schedule 11-13  Disaggregating the Aggregate Plan Master production schedule: result of disaggregation A schedule that shows quantity and timing of specific end items for a planning horizon Rough-cut capacity planning Approximate balancing of capacity and demand to test the feasibility of a master production schedule 11-14  Master Production Schedule Determines quantities needed to meet demand Weekly for a planning horizon Interfaces with Marketing Capacity planning Production planning Distribution planning 11-15  Master Scheduling Process Inputs Outputs Beginning inventory Projected inventory Forecast Master Master production schedule Scheduling Customer orders Uncommitted inventory 11-16  Master Scheduling Process Inputs Beginning Inventory Actual amount of products on hand at the beginning of a period Forecast Predicted demand for each period Customer orders Quantities already committed to customers 11-17  Master Scheduling Process Outputs Net Inventory Before MPS = Projected On-hand Ending Inventory in the previous period - MAX(Forecast, Committed Customer orders) MPS Quantity Received = 0, if Net Inventory Before MPS >= 0, = integer multiple of Lot size, if Net Inventory Before MPS < 0 Projected On-hand Ending Inventory = Net Inventory Before MPS + MPS Quantity Received 11-18  Master Scheduling Process Outputs Available To Promise (ATP) Inventory = Uncommitted inventory: The quantity that marketing can promise to deliver on specified date. For the 1st period: Available To Promise (ATP) Inventory = Beginning Inventory + MPS received in the first period – Committed total orders from 1st period to the period before a new MPS receipt For other period when there is an MPS receipt: Available To Promise (ATP) Inventory = MPS received in the current period – Committed total orders from current period to the period before a new MPS receipt 11-19  Master Scheduling Process An example: lot size = 70 units, Lead time = 1 week Week 0 1 2 3 4 5 6 7 8 Forecast 30 30 30 30 40 40 40 40 Committed Customer orders 33 20 10 4 2 0 0 0 Projected On-hand Ending Inventory 64 31 1 41 11 41 1 31 61 Net Inventory Before MPS 31 1 -29 11 -29 1 -39 -9 MPS Quantity Received 0 0 70 0 70 0 70 70 MPS Start 0 70 0 70 0 70 70 ATP Inventory 11 56 68 70 70 Need to determine ATP for 1st week and those weeks with Received MPS 11-20  Chapter 13 Material Requirements Planning (MRP) 13-1  Material Requirements Planning (MRP) Computer-based information system that translates master schedule requirements for end items into time-phased requirements for subassemblies, components, and raw materials.  Purpose  Scheduling for timely completion of finished products  Keeping inventory levels as low as possible  General procedure  Master scheduling for finished products  Schedule of requirements for items that are needed in the production of finished products in the specific time frame  Questions What and How much is needed? When is it needed? 13-2 Independent and Dependent Demand Independent Demand A Dependent Demand B(4) C(2) D(2) E(1) D(3) F(2) Independent demand is uncertain. Dependent demand is certain. 13-3  Independent and Dependent Demand Dependent demand: Demand for items that are subassemblies or component parts to be used in production of finished goods Independent demand: Demand for items that are not needed in the production of any other items Once the independent demand is known, the dependent demand can be determined 13-4  Overview of MRP MRP Inputs MRP Processing MRP Outputs Changes Order releases Master schedule Planned-order schedules Primary reports Exception reports Bill of Planning reports materials MRP computer Secondary Performance- programs reports control reports Inventory records Inventory transaction 13-5  MRP Inputs  Master schedule (Introduced in Ch. 13)  Which finished products (end items) will be produced?  When are these finished products needed?  In what quantity are these end items produced?  Cumulative lead time should be considered The sum of lead times that sequential phases of a process require, from ordering of parts (raw materials) to completion of final assembly. Assembly Subassembly Fabrication Procurement 1 2 3 4 5 6 7 8 9 10 13-6  MRP Inputs Bill of materials (BOM) A listing of all of the assemblies, subassemblies, parts, and raw materials that are needed to produce one unit end item.  A visual depiction: Product Structure Tree  Used to determine the quantities of each component 1st Level A 2nd Level B(2) C 3rd Level D(2) E E(2) F (3) 4th Level G(4) 13-7  MRP Inputs  Inventory records Stored information on the status of each item by time period.  Gross requirements (e.g., demand, need for assembly)  Scheduled receipts (i.e., arrival of items ordered previously)  Expected ending amount on hand (ending inventory)  Supplier (who delivers the items)  Lead time (time interval between ordering and receiving)  Lot size policy (order quantity)  Changes (e.g., cancelled orders, delayed shipping) 13-8  MRP Processing Converting master schedule into time-phased requirements for assemblies, parts and raw materials by using BOM with LT.  Conduct MRP processing in a table including the following items  Gross requirements Component quantities obtained from BOM  Scheduled receipts Items that were previously ordered and now arrive  Net requirements The actual amount needed in each time period Net Requirements = max{0, Gross Requirements – (Scheduled receipts + Ending inventory in the last period)} 13-9  MRP Processing  Planned-order receipts The quantity expected to be received by the beginning of the period in which it is shown.  Planned-order releases Planned amount to order in each time period. [The quantity to be ordered when Net Requirements>0.] Lot sizing policy: Lot-for-lot ordering; Economic order quantity; Fixed-period ordering.  Projected ending Inventory Expected quantity remaining at the end of a period. Projected ending inventory = Scheduled receipts + Ending inventory in the last period + Planned-order receipts – Gross Requirements 13-10 Chapter 16 Scheduling 16-1  Scheduling Scheduling Establishing the timing of the use of equipment, facilities and human activities in an organization. Efficient scheduling can yield – Cost savings e.g., an efficient scheduling in a production system can reduce the WIP inventory level. – Increases in productivity e.g., an efficient human scheduling can increase the utilization of human resources. 16-2  Job-Shop Scheduling Scheduling is established after receiving orders. Two natural questions to be considered: 1. Loading: assignment of jobs to workstations (job shops, work/processing centers). 2. Sequencing: order in which the jobs will be processed at a workstation. 16-3  Loading Gantt Chart (Henry Gantt, late 1800s) A chart that organizes and visually displays the actual or intended use of resources in a time horizon. – Gantt chart can be used as a visual aid for loading and scheduling Work Center Mon. Tues. Wed. Thurs. Fri. 1 Job 3 Job 4 2 Job 3 Job 7 3 Job 1 Job 6 Job 7 4 Job 10 16-4 Sequencing for One-Machine Multi-Job Systems Job: A set of processing activities, associated with a work piece, to be performed on machines Sequencing: Determine the order in which jobs at a work center will be processed Workstation: An area where one person works, usually with special equipment, on a specialized job Priority rules: Simple heuristics used to select the order in which jobs will be processed Job time: Time needed for setup and processing of a job 16-5  Factors Affecting Scheduling The number of jobs to be scheduled The number of machines involved Performance measures Approaches - Static approach: a fixed number of jobs are considered at a scheduling epoch (a snapshot of the system) - Dynamic approach: jobs arrive continuously and are scheduled upon their arrivals Constraints - A machine can process at most one job at a time - A job can be processed on one machine at a time 16-6  Priority Rules FCFS - first come, first served SPT - shortest processing time EDD - earliest due date  Due date- Today's date  CR - critical ratio    Processing time  S/O - slack per operation (time until due date minus remaining time to process) Rush - emergency 16-7  Assumptions of Priority Rules Setup times are known and are independent of the processing sequence Setup time and processing time are deterministic There will be no interruptions in processing such as: – Machine breakdowns – Accidents – Worker illness 16-8  Sequencing A natural question: Which rule should be used? Rule selection is based on measures of effectiveness – Measures of effectiveness: 1. Average flow time Average Total flow time (a job's waiting time plus processing time) = Flow time Number of jobs at the workstation 2. Average tardiness Average Total tardiness (max{0, a job's flow time - due date}) = tardiness Number of jobs at the workstation 16-9  Sequencing – Measures of effectiveness (cont’d): 3. Average number of jobs at the workstation Average number of jobs Total flow time = at a workstation Total processing time 16-10  Example Average Flow Average Tardiness Average Number of Jobs Rule Time (Days) (days) at the Work Center FCFS 20.00 9.00 2.93 SPT 18.00 6.67 2.63 EDD 18.33 6.33 2.68 CR 22.17 9.67 3.24 16-11 Sequencing for Two-Machine Flow Shops Johnson’s Rule: technique for minimizing the makespan for a group of jobs to be processed on two machines following the same processing sequence (called flow shop). Minimizes total idle time/makespan 1 2 16-12  Johnson’s Rule Conditions Job time must be known and constant Job times must be independent of sequence Jobs must follow the same two-step sequence Job priorities cannot be used Every unit must be completed at the first work center before moving to the second center 16-13  Johnson’s Rule Optimum Sequence 1. List the jobs and their times at each work center. 2. Select the job with the shortest time. a. If the shortest time of a job is at the first workstation, then schedule the job first. b. If the shortest time of a job is at the second workstation, then schedule the job last. c. Break ties arbitrarily. 3. Eliminate the job from further consideration. 4. Repeat steps 2 and 3 until all jobs have been scheduled. 16-14  Scheduling Services Problems not generally encountered in manufacturing systems: – The inability to store or inventory services – The random nature of customers requirements for service Scheduling in service systems may involve scheduling: – Customers: appointment systems, reservation systems, yield management – The workforce: cyclical scheduling – Equipment: scheduling multiple resources 16-15  Chapter 15 Supply Chain Management 15-1  Supply Chain Management Definition of a supply chain The sequence of organizations - their facilities, functions, and activities - that are involved in producing and delivering a product or service. Facilities (Supply chain members)  Warehouses  Factories  Processing Centers  Distribution Centers  Retail Outlets  Offices 15-2  Supply Chain Management Definition (LaLonde ) A process of managing relationships, information, and materials flow across enterprise borders to deliver enhanced customer service and economic value through synchronized management of the flow of physical goods and associated information from sourcing to consumption. Supply chains: value chains A chain where the value is added as goods and/or services progress through the chain. 15-3 Value Chains 15-4  Bullwhip Effect A well-known phenomenon of demand (inventory) variation increasing along a supply chain from downstream member to upstream member. Example (P & G) Wholesaler 15-5  Global Supply Chains Increasingly more complex – Language – Culture – Currency fluctuations – Political – Transportation costs – Local capabilities – Finance and economics – Environmental 15-6  Logistics Logistics refers to the movement of materials and information within a facility and to incoming and outgoing shipments of goods and materials in a supply chain Movement within a facility Work center Work center Work center Work Storage center Storage Storage RECEIVING Shipping 15-7  Logistics Incoming and outgoing shipments Schedules and decisions on shipping method and times. Bar coding and Radio Frequency Identification (RFID) Sale information recordings 0 Electronic Data Interchange (EDI) 214800 232087768 Foundation for information transmission among B2B trading partners. Distribution Requirement Planning (DRP) Inventory management and distribution planning (for multi-echelon warehouse systems). Third-Party Logistics (3-PL) Outsourcing of logistics management 15-8  E-Business and SCM E-Business Execution of business transactions over Internet. Supply Chain Transactions with E-Business – Providing information across supply chain – Negotiating prices and contracts with customers and suppliers – Allowing customers to place orders – Allowing customers to track orders – Filling and delivering orders to customers – Receiving payment from customers 15-9  Reverse Logistics Reverse logistics – the backward flow of goods returned to the supply chain Processing returned goods – Sorting, examining/testing, restocking, repairing – Reconditioning, recycling, disposing Gatekeeping – screening goods to prevent incorrect acceptance of goods Avoidance – finding ways to minimize the number of items that are returned 15-10  CPFR CPFR (Collaborative Planning, Forecasting and Replenishment) A supply chain initiative that focuses on information sharing among supply chain trading partners in planning, forecasting, and inventory replenishment. – Information Sharing: foundation of Supply Chain Integration “sharing sales data can help to reduce inventories and accelerate fulfillment.” – Dan DiMaggio, President of UPS Supply Chain Solutions. – Information shared by supply chain members  Demand information  Inventory-related data  Order status  Production schedule 15-11  Challenges Barriers to integration of organizations – Conflicting objectives of different parties Getting top management on board – Organizational strategy consistent with efficient SCM Dealing with trade-offs – Balancing the positive and negative issues. (see next slide) Small businesses – More difficult and costly for small businesses to join SCs. Variability and uncertainty – Uncertainty worsens supply chain performance. Response time – Lead-time reduction becomes more and more important. 15-12  Trade-offs 1. Lot-size-inventory – Bullwhip effect: Inventories are progressively larger moving backward through the supply chain 2. Inventory-transportation costs – Cross-docking: Goods arriving at a warehouse from a supplier are unloaded from the supplier’s truck and loaded onto outbound trucks. Avoid warehouse storage 3. Lead time-transportation costs 4. Product variety-inventory – Delayed differentiation: Production of standard components and subassemblies, which are held until late in the process to add differentiating features 5. Cost-customer service – Disintermediation: Reducing one or more steps in a supply chain by cutting out one or more intermediaries 15-13