portland state university operations management ba 339 instructor: scott culbertson jan 7 th, 2002

Portland State University

Operations Management BA 339 Instructor: Scott Culbertson

Jan 7th, 2002


General Information

Very full agenda - only have 10 class sessions.

• Class time: 1) Lecture, 2) Case Discussion, 3) Industry Speaker.

• Students take a large part of responsibility for learning the material. This is especially true for material that is required reading but may not be covered in lecture.

• Syllabus Review

• Hand Outs:• Class Syllabus• Varsity Subs - Questions due 1/14.

• Prepare to discuss on 1/14: Akron Zoological Park - p. 128


What is Operations Management?

• Finance: How to manage (raise, invest) the money.

• Accounting: How to keep track of the money.

• Marketing: How to convince customers to give you the money.

• Operations: ?


Operations Management: Process View

Transformation(business flow)

Energy

Materials

Labor

Capital

Outputs(goods and services)

Management of business processes to build capabilities that optimally convert inputs to outputs.


Operations Management Flows

A business process flow is a collection of recurring economic activities that takes one or more kinds of inputs and creates an output that is of valued to the customer.


Process View: Examples

Enterprise Process

Fed Ex

McDonalds

Quick Lub

Hospital

Bank

PSU

Package Delivery

Food Delivery

Oil Change

Patient care

Money LendingCheck Processing

EducationResearch


Dimensions of Operations Strategy& 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


Strategic Operational Audit

Business Strategy

Operations StructureProcess & Resources

Finance StrategyOperations StrategyMarketing Strategy

Price, QualityTime, Variety


Cycle Time

InventoryCapacity

The OPSTriangle

Key Elements


Key elements & Competitive Advantage

Time

Price

Quality

Variety

Dimensions of Competitive AdvantageKey Elements of OPS

Inventory

Capacity

Cycle Time


PartSuppliers

AssemblySites

Distribution Centers

RawMaterial

Components

Finished Goods

Orders onthe Factory

PartOrders

Cycle Time Cycle Time

SalesChannel

FinishedGoods

DemandInformation

Cycle Time

Information Flow

Physical Flow

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


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

Supply 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)


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 ResponseApparent Responsiveness

To 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


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

Inventory’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

nto

ry L

evel

- 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.


Shorter supply chains are more robust to demand surprises. How much is that worth?

Impact of Flow Time

Inventory Excursions vs. Demand Shifts:The Impact of Long Flow Times

0k

200k

400k

600k

800k

1,000k

1,200k

1,400k

-30% -20% -10% 0% 10% 20% 30%Demand / Forecast Delta

FG

I In

vent

ory

at D

C (k

un

its)

(Min

or

Max

for

Dem

and

Del

ta)

Inventory Target= 4 WOS

DC StockoutsOccur Below 2 WOS

5 WeekFlow time

30 WeekFlow time

20 WeekFlow time

10 WeekFlow time

Supply > DemandInventory profilesover life cycle:

Supply < Demand

Peak Inv. Peak@ 20% Delta


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

Cumulative 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


How much should I invest in supply chain flexibility?

What could it be worth?

Profit 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 C

ontr

ibut

ion

Mar

gin

earn

ed o

ver

Pro

duct

Lif

e C

ycle

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


Cycle Time - Average time through a process flow

Capacity:• Design Capacity - Maximum theoretical output• Effective Capacity - The Capacity a firm expects to achieve

Inventory• Turns = Throughput/inventory• WOS = 52/turns

Measures:• Throughput = Inventory/Cycle Time• Capacity Utilization = Actual Output/Design Capacity• Efficiency = Actual Output/Effective Capacity

Element Definitions


The Picante Company

The Picante Company produces Tabasco Sauce from peppers only harvested on Avery Island in the Gulf of Mexico. The bulk of the process flow of the production process is in storing the sauce in wood barrels for 2 years. The plant ships 1,000 barrels per week.

•What quantity of Tabasco Sauce does Picante have in WIP inventory?

Answer: if throughput = inventory/cycle time then cycle time * throughput = inventory

CT = 2 years Throughput = 1K cases per week

So: WIP is 52K/year * (2 years) = 104,000 cases


The Picante Company

The Picante Company produces Tabasco Sauce from peppers only harvested on Avery Island in the Gulf of Mexico. The bulk of the process flow of the production process is in storing the sauce in wood barrels for 2 years. The plant ships 1,000 barrels per week.

• What is Picante’s WIP inventory?

• How many turns does Picante achieve?

Answer: Turns = through-put/inventory

Throughput = 52,000/year barrels

Inventory = 104,000 barrels

Turns = 52,000/104,000 or .5 turns per year


The Picante Company

The Picante Company produces Tabasco Sauce from peppers only harvested on Avery Island in the Gulf of Mexico. The bulk of the process flow of the production process is in storing the sauce in wood barrels for 2 years. The plant ships 1,000 cases per week.

• What is Picante’s WIP inventory?

• How many turns does Picante achieve?

• How many weeks of supply does Picante carry?

Answer: WOS = 52/turns Turns = .5 so WOS = 52/.5 = 104 Weeks of supply


Portland International

At Portland international airport it is estimated that up to 60 planes can take off per hour. However, a plane taxis for 20 minutes on average after pushing off from the gate until finally taking off. Over the course of a day, on average 30 planes per hour actually take off.

• What is the design capacity of PDX in terms of take-offs?

• What is the effective capacity of PDX in terms of take-offs?

• What is the average cycle time for a plane?

Answer: Design capacity = 60 planes, Effective capacity = 30 planes, average cycle time per plane = 20 minutes


Portland International

At Portland international airport it is estimated that up to 60 planes can take off per hour. However, a plane taxis for 20 minutes on average after pushing off from the gate until finally taking off. Over the course of a day, on average 30 planes per hour actually take off.

• What is the average inventory of planes trying to take off?

• What is PDXs utilization?

Answer: if throughput = inventory/cycle time then cycle time * throughput = inventory

CT = 1/3 hour Throughput = 30 planes per hour, So: 1/3 * 30 = 10 planes

Utilization = actual output/design capacity = 30/60 planes = 50%


Emergency Room

Patients arrive to OHSU Emergency at an average rate of 40 per hour. There are two types of patients: Those who enter the system and eventually see a doctor, and those that balk immediately without entering the system (line is perceived to be too long). Patients who enter the system first delay in a wait area before seeing a doctor. Consider the following:

Wait area = 80 ChairsAve Patients in wait area = 50Ave delay before seeing the doctor = 2 hoursDoctors on staff = 15, of which 80% are utilized on average.

• What is the average rate (patients per hour) at which potential patients balk? Total throughput total = throughput balk + throughput seen by doctorSeen by Dr. (throughput actual) = inventory/CT or 50 people / 2 hours = 25 per hourSo: 40 = X + 25 X = 15 people/hour who balk.

• What is the average cycle time (in hours) spent seeing a doctor?CT = inventory/throughput. throughput = 25 people/hour, inventory of Dr.s = .8*15So CT seeing a Dr = 12/25 or .48 Hours

portland state university operations management ba 339 instructor: scott culbertson jan 7 th, 2002

Documents

variety slide

customer slide

supply chain response

quality time

class time

business process flow

sequence of information

shorter supply chains