11-1

Operations ManagementOperations Management

Supply-Chain ManagementSupply-Chain Management

Plastics

11-2

Class AgendaClass Agenda

1. Review of Break Even Analysis (Math problems) - 30 Min

2. Supply Chain Management and the Bull Whip Effect - 30 Min

3. Selecting the Right Supply Chain for your company - 10 Min

Break - 20 Min

4. Aggregate Planning - (Math Problems) - 30 Min

5. David Roussain - VP Fed Express E-Commerce

11-3

Plotting the Break Even PointPlotting the Break Even Point

-100,000

-50,000

0

50,000

100,000

150,000

200,000

250,000

1 2 3 4 5 6 7 8 9 10

Revenue

Variable Cost

Fixed Cost

Net Profit

Cum CM

Problem 7.16 option A

11-4

Plotting the Break Even PointPlotting the Break Even Point

Problem 7.16 option B

-100,000

-50,000

0

50,000

100,000

150,000

200,000

250,000

1 2 3 4 5 6 7 8 9 10

Revenue

Variable Cost

Fixed Cost

Net Profit

Cum CM

11-5

-80,000

-60,000

-40,000

-20,000

0

20,000

40,000

60,000

80,000

1 2 3 4 5 6 7 8 9 10 11 12 13

Net Profit A

Net Profit B

Volume Based DecisionVolume Based Decision

Problem 7.18

11-6

Dimensions of Operations StrategyDimensions of Operations Strategy& Competitive Advantage& Competitive Advantage

•Time

•Price

•Quality

•Variety

Goal of this course: How can you structure/change an operation so that these operational capabilities are best achieved?

ProfitMeans to best satisfy the customer

11-7

PartSuppliers

AssemblySites

Distribution Centers

RawMaterial

Components Finished Goods

Orders onthe Factory

PartOrders

Cycle Time Cycle Time

SalesChannel

FinishedGoods

DemandInformation

Cycle Time

Information FlowPhysical Flow

A supply chain involves a sequence of information flows, decisions, and physical flows,in order to meet a dynamic set of customer needs.

Typical Supply ChainTypical Supply Chain

11-8

Supply chain responsiveness refers to your system’s ability to respond to, and recover from, a demand surprise.

Supply Chain ResponseSupply Chain ResponseApparent Responsiveness

To a demand increase

time

Inventory

Responsetime

(~Flow time)

Recoverytime

Initial BuildRate

New DemandRate

Demand = BuildItarget

Demand>Build(Inventory Falls)

Demand

Initial Demand Rate

New Build Rate

Demand <Build(Inventory Recovers)

11-9

Responsiveness of a supply chain is manifest in the height and duration of inventory excursions.

Shorter supply chains are more robust to demand surprises.

How much is this robustness worth?

Supply Chain ResponseSupply Chain Response

Apparent ResponsivenessTo a Demand Decrease

time

Inventory

Responsetime

(~Flow time)

Recoverytime

BuildRate

DemandRate

Demand Rate = BuildRate

Itarget

Demand<Build(Inventory Climbs)

Build < Demand(Inventory Recovers)

New Demand Rate

New Build Rate

Demand

11-10

Financial impact: Inventory excursions create incremental cost and lost opportunity.

Inventory’s Financial ImpactInventory’s Financial Impact

• Stockouts begin to occur before inventory hits zero. Lost sales occur until SC adjusts.• Channel dries up, marketing momentum is lost.

timeProduct Life Cycle

Inventory Profile over Product Life Cycle

Inve

ntor

y Le

vel -

W.O

.S.

Initial Desired Inventory Level (ex: 4 WOS)

• Very high inventory.• High carrying costs (component depreciation, capital cost).• Very high inventory risk (time-to-consumption is high).

A

C

B

• Excess inventory at end-of-life creates clearance discounts, price protection.• Impacts pricing of next product.• Impacts time-to-market of next product.

11-11

Business goal: maximize total contribution margin over the life-cycle of a product.

Cumulative ContributionCumulative Contribution

Line B: Actual Results

Product Lifecycle Contribution Margin Profile(conceptual example)

Cum

ulat

ive C

ontr

ibut

ion

Mar

gin

time

End of Life Discounts

(inventory clearance,price protection)

Stock-out

InventoryCarrying Costs

No End-of-Life Costs

No Missed Demand

No Inventory Costs

ProductIntro

End ofLife

Line A: Theoreti

cal Maximum

11-12

The greater the lead time and forecast error or variability, the lower the cumulative contribution margin over the product life-cycle.

Profit Impact of Supply Chain LengthProfit Impact of Supply Chain Length

50

60

70

80

90

100

110

120

130

140

150

160

170

-30% -20% -10% +0% +10% +20% +30%Forecast Error

(Actual - Forecast)/Forecast

5 Weeks

10 Weeks

20 Weeks

30 Weeks

Modeling Inputs for a Hypothetical ProductNet Revenue per unit $500Variable Cost per unit $300Contribution Margin per unit $200

Planned Product Life Cycle 52 weeksPlanned Avg. Volume 12k per week

Flow Time

Example2: Responding to a 20% demand increase in 10 weeks instead of 30 weeks adds up to $10M of life-cycle contribution margin.

Impact of Supply-Chain Lengthon Contribution Margin Earned over a Product Life Cycle

for Unexpected Demand Shifts$M

Con

trib

utio

n M

argi

n ea

rned

ove

r P

rodu

ct L

ife

Cyc

le

Example 1: Responding to a 20% demand decrease in 10 weeks instead of 30 weeks adds up to $11M to life-cycle contribution margin.

11-13

PartSuppliers

AssemblySites

Distribution Centers

RawMaterial

Components Finished Goods

Orders onthe Factory

PartOrders

Cycle Time Cycle Time

SalesChannel/

End Customer

FinishedGoods

DemandInformation

Cycle Time

Information FlowPhysical Flow

Bullwhip Effect: As demand is passed through the supply chain, the variability is amplified. What impact does this have? What causes this phenomenon?

The Bullwhip EffectThe Bullwhip Effect

What costs? What causes?

11-14

Bull Whip CostsBull Whip Costs

Higher Inventory Levels to protect against variability and forecast error.

Capacity misalignment leading to stock-outs or excess inventory.

High cost of correction - air freight.

11-15

Bull Whip CausesBull Whip Causes

Order Batching - MRP timing, Cost to order

Price Manipulation for Volume - End of Quarter Financial Results

Transportation “Savings” - FTL versus LTL

Rationing - Allocate relative to the quantities requested.

11-16

What can be done?What can be done?

Order Batching - VMI, EDI Programs to reduce Cost

Price Manipulation for Volume - Every Day Low Price

Transportation “Savings” - 3rd Party, Combined Products Shipment

Rationing - Base allocation on prior business not forecasts.

11-17

What Supply Chain is Right for What Supply Chain is Right for your business?your business?

Innovative Functional

Demand Unstable Stable

Profit Margin High Low

Product Life Cycle Short Long

Goal of the SupplyChain

Responsive Efficient

Palm Tops Milk

11-18

Supply-Chain Support for Overall Supply-Chain Support for Overall StrategyStrategy

Supplier Characteristics

Primary Selection Criteria

Supply demand at lowest possible cost

Select primarily for cost

Low CostRespond quickly to changing requirements and demand to minimize stockouts

Select primarily for capacity, speed, and flexibility

ResponseShare market research; jointly develop products and options

Select primarily for product development skills

Differentiation

11-19

Supply-Chain Support for Overall Supply-Chain Support for Overall Strategy - continuedStrategy - continued

Process Characteristics

Maintain high average utilization

Low CostInvest in excess capacity and flexible processes

ResponseModular processes to lend themselves to mass customization

Inventory Characteristics

Minimize inventory throughout the chain to hold down costs

Develop responsive system, with buffer stocks positioned to ensure supply

Minimize inventory in the chain to avoid obsolescence

Differentiation

11-20

Supply-Chain Support for Overall Supply-Chain Support for Overall Strategy - continuedStrategy - continued

Lead-timeCharacteristics

Shorten lead-time as long as it does not increase costs

Low CostInvest aggressively to reduce production lead-time

ResponseInvest aggressively to reduce development lead-time

Differentiation

Product-design Characteristics

Maximize performance and minimize cost

Use product designs that lead to low set-up time and rapid production ramp-up

Use modular design to postpone product differentiation for as long as possible

11-21

Acquisition of goods & services Activities

Help decide whether to make or buy Identify sources of supply Select suppliers & negotiate contracts Control vendor performance

Importance Major cost center Affects quality of final product

PurchasingPurchasing

11-22

Purchasing Costs as a Percent of Purchasing Costs as a Percent of SalesSales

All industry Automobile Food Lumber Paper Petroleum Transportation

52% 61% 60% 61% 55% 74% 63%

Industry Percent of Sales

11-23

Objectives of the Purchasing Objectives of the Purchasing FunctionFunction

Help identify the products and services that can be best obtained externally; and

Develop, evaluate, and determine the best supplier, price, and delivery for those products and services

11-24

Plans to help achieve company mission Affect long-term competitive position Strategic options

Many suppliers Few suppliers Keiretsu network Vertical integration Virtual company Plan

© 1995 Corel Corp.

Purchasing StrategiesPurchasing Strategies

11-25

Supply-Chain StrategiesSupply-Chain Strategies Negotiate with many suppliers; play one supplier

against another

Develop long-term “partnering” arrangements with a few suppliers who will work with you to satisfy the end customer

Vertically integrate; buy the actual supplier

11-26

Many sources per item Adversarial relationship Short-term Little openness Negotiated, sporadic PO’s High prices Infrequent, large lots Delivery to receiving dock

© 1995 Corel Corp.

Many Suppliers StrategyMany Suppliers Strategy

11-27

1 or few sources per item Partnership (JIT) Long-term, stable On-site audits & visits Exclusive contracts Low prices (large orders) Frequent, small lots Delivery to point of use

© 1995 Corel Corp.

Few Suppliers StrategyFew Suppliers Strategy

11-28

Daimler Chrysler’s Supplier Cost Daimler Chrysler’s Supplier Cost Reduction EffortReduction Effort

Supplier Suggestion Model SavingsRockwell Use passenger car door

locks on trucksDodgetrucks

$280,000

Rockwell Simplify design/substitutematerials on manualwindow system

Various $300,000

3M Change tooling for wood-grain panels to allow threefrom one die instead of two

Caravan,Voyager

$1,500,000

Trico Change wiper-bladeformulation

Various $140,000

Leslie MetalArts

Exterior lighting suggestions Various $1,500,000

11-29

Purchasers Ties Themselves to Purchasers Ties Themselves to SuppliersSuppliers

TacticTactic 1. Reduce total number of

suppliers Certify suppliers Ask for JIT delivery from

key suppliers Involve key suppliers in

new product design Develop software linkages

to suppliers

ResultsResults Average 20% reduction in 5 years Almost 40% of all companies

surveyed were themselves currently certified

About 60% ask for this About 54% do this Almost 80% claim to do this About 50% claim this; about 15%

more than have EDI links to suppliers

11-30

Raw Material(Suppliers)

BackwardBackwardIntegrationIntegration

CurrentCurrentTransformationTransformation

ForwardForwardIntegrationIntegration

Finished GoodsFinished Goods(Customers)(Customers)

Ability to produce goods previously purchased Setup operations Buy supplier

Make-buy issue Major financial

commitment Hard to do all things well

Vertical Integration StrategyVertical Integration Strategy

11-31

Forms of Vertical IntegrationForms of Vertical Integration

Iron Ore

Steel

Automobiles

DistributionSystem

Dealers

Silicon

IntegratedCircuits

Circuit Boards

ComputersWatches

Calculators

Farming

Flour Milling

Raw Material(Suppliers)

BackwardIntegration

CurrentTransformation

ForwardIntegration

Finished Goods(Customers)

Baked Goods

11-32

Vendor evaluation Identifying & selecting potential vendors

Vendor development Integrating buyer & supplier

Example: Electronic data exchange

Negotiations Results in contract Specifies period of agreement, price, delivery terms etc.

Vendor Selection StepsVendor Selection Steps

11-33

Company Financial stability Management Location

Product Quality Price

Service Delivery on time Condition on arrival Technical support Training

Supplier Selection CriteriaSupplier Selection Criteria

11-34

Negotiation StrategiesNegotiation Strategies

Three types: cost-based price model - supplier opens its books to

purchaser; price based upon fixed cost plus escalation clause for materials and labor

market-based price model - published price or index competitive bidding - potential suppliers bid for contract

11-35

Supply-Chain Performance ComparedSupply-Chain Performance Compared

Number of suppliers perpurchasing agent

34 5

Purchasing costs as percent ofpurchases

3.3% 0.8%

Lead time (weeks) 15 8

Time spent in placing order 42 minutes 15 minutes

Percentage of late deliveries 33% 2%

Percentage of rejected material 1.5% .0001%

Number of shortages per year 400 4

Typical FirmsBenchmark

Firms

11-36

Meet demand Use capacity efficiently Meet inventory policy Minimize cost

Labor Inventory Plant & equipment Subcontract

Aggregate Planning GoalsAggregate Planning Goals

11-37

Aggregate Planning StrategiesAggregate Planning StrategiesPure StrategiesPure Strategies

Capacity Options — change capacity: changing inventory levels varying work force size by hiring or layoffs varying production capacity through overtime or idle

time subcontracting using part-time workers

11-38

Aggregate Planning StrategiesAggregate Planning StrategiesPure StrategiesPure Strategies

Demand Options — change demand: influencing demand backordering during high demand periods counterseasonal product mixing

11-39

Aggregate Scheduling Options - Aggregate Scheduling Options - Advantages and DisadvantagesAdvantages and Disadvantages

Option Advantage Disadvantage SomeComments

Changinginventory levels

Changes inhuman resourcesare gradual, notabruptproductionchanges

Inventoryholding costs;Shortages mayresult in lostsales

Applies mainlyto production,not serviceoperations

Varyingworkforce sizeby hiring orlayoffs

Avoids use ofother alternatives

Hiring, layoff,and trainingcosts

Used where sizeof labor pool islarge

11-40

Option Advantage Disadvantage SomeComments

Varyingproduction ratesthrough overtimeor idle time

Matches seasonalfluctuationswithouthiring/trainingcosts

Overtimepremiums, tiredworkers, may notmeet demand

Allowsflexibility withinthe aggregateplan

Subcontracting Permitsflexibility andsmoothing of thefirm's output

Loss of qualitycontrol; reducedprofits; loss offuture business

Applies mainlyin productionsettings

Advantages/Disadvantages - continuedAdvantages/Disadvantages - continued

11-41

Advantages/Disadvantages - continuedAdvantages/Disadvantages - continued

Option Advantage Disadvantage SomeComments

Using part-timeworkers

Less costly andmore flexiblethan full-timeworkers

Highturnover/trainingcosts; qualitysuffers;schedulingdifficult

Good forunskilled jobs inareas with largetemporary laborpools

Influencingdemand

Tries to useexcess capacity.Discounts drawnew customers.

Uncertainty indemand. Hard tomatch demand tosupply exactly.

Createsmarketing ideas.Overbookingused in somebusinesses.

11-42

Advantage/Disadvantage - continuedAdvantage/Disadvantage - continued

Option Advantage Disadvantage SomeComments

Back orderingduring high-demand periods

May avoidovertime. Keepscapacity constant

Customer mustbe willing towait, butgoodwill is lost.

Many companiesbacklog.

Counterseasonalproducts andservice mixing

Fully utilizesresources; allowsstable workforce.

May requireskills orequipmentoutside a firm'sareas ofexpertise.

Risky findingproducts orservices withopposite demandpatterns.

11-43

The ExtremesThe Extremes

Level Strategy

Chase Strategy

Production equals

demand

Production rate is constant

11-44

Mixed strategy Combines 2 or more aggregate scheduling options

Level scheduling strategy Produce same amount every day Keep work force level constant Vary non-work force capacity or demand options Often results in lowest production costs

Aggregate Planning StrategiesAggregate Planning Strategies

11-45

Graphical & charting techniques Popular & easy-to-understand Trial & error approach

Mathematical approaches Transportation method Linear decision rule

AggregateAggregate Planning Methods Planning Methods

11-46

The Graphical Approach to Aggregate The Graphical Approach to Aggregate PlanningPlanning

Forecast the demand for each period Determine the capacity for regular time,

overtime, and subcontracting, for each period Determine the labor costs, hiring and firing

costs, and inventory holding costs Consider company policies which may apply

to the workers or to stock levels Develop alternative plans, and examine their

total costs

11-47

Comparison of Aggregate Planning Comparison of Aggregate Planning Methods Methods

Charting/graphical methods

Transportation method

Trial and error

Optimization

Simple to understand, easy to use. Many solutions; one chosen may not be optimal

LP software available;permits sensitivity analysis and constraints. Linear function may not be realistic

Techniques Approaches Aspects

11-48

Plan A - Subcontract > 1,000 @ $60/unit

Demand Delta Hours CostApril 1,000 0 $0May 1,200 200 $12,000June 1,400 400 $24,000July 1,800 800 $48,000Aug 1,800 800 $48,000Sept 1,600 600 $36,000Total 168,000

Plan B - Change Employement Levels. $3K/100 increase, $6K/100 decrease

Demand/Production Delta Hours CostCurrent 1300April 1,000 -300 $18,000May 1,200 200 $6,000June 1,400 200 $6,000July 1,800 400 $12,000Aug 1,800 0 $0Sept 1,600 -200 $12,000Total 54,000

Problem 13.9

Aggregate Planning Problems Aggregate Planning Problems

11-49

Problem 13.15

Aggregate Planning Problems Aggregate Planning Problems

See Spreadsheet