mgt 311 operations management assignment

Operations Management in the Supply Chain Decisions and Cases Seventh Edition

Chapter 10 Forecasting

© McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill Education.

10-2© McGraw-Hill Education.

Learning Objectives 10.1 Describe why forecasting is important. 10.2 Describe the four common methods of qualitative

forecasting. 10.3 Calculate a moving average and exponential

smoothing forecast, and explain when they should be used.

10.4 Evaluate forecast accuracy using a variety of methods.

10.5 Carry out causal forecasting. 10.6 Evaluate factors that impact forecasting method

selection. 10.7 Explain the benefits and costs of CPFR

10-3© McGraw-Hill Education.

Forecasting for Decision Making • Forecasting demand for operations output

– Forecasting: what we think demand will be – Planning: what we think demand should be – Demand: may differ from sales

• Forecasts are used in all functional areas: marketing, finance, human resources, etc.

• Forecasts are necessary for operations decision areas: process design, capacity planning, inventory management, scheduling

10-4© McGraw-Hill Education.

Use of Forecasting: Operations Decisions

Time Horizon

Accuracy Required

Number of Forecasts

Management Level

Forecasting Method

Process design Long Medium Single or few Top Qualitative or causal

Capacity planning, facilities

Long Medium Single or few Top Qualitative or causal

Aggregate planning Medium High Few Middle

Causal and time series

Scheduling Short Highest Many Lower Time series

Inventory management Short Highest Many Lower Time series

10-5© McGraw-Hill Education.

Use of Forecasting: Marketing, Finance, & HR

Time Horizon

Accuracy Required

Number of Forecasts

Management Level

Forecasting Method

Long-range marketing programs

Long Medium Single or few Top Qualitative

Pricing decisions Short High Many Middle Time series

New product introduction Medium Medium Single Top

Qualitative and causal

Cost estimating Short High Many Lower Time series

Capital budgeting Medium Highest Few Top Causal andtime series

Labor planning Medium Medium Few Lower Qualitative and time series

10-6© McGraw-Hill Education.

‘Qualitative’ Forecasting Methods • Based on managerial judgment when there is

a lack of data available. No specific model. • Major methods:

– Delphi technique – Market surveys – Life-cycles analogy – Informed judgment (naïve models)

10-7© McGraw-Hill Education.

Time-Series Forecasting • Components of data:

– Level - average – Trend - general direction (increasing/descreasing) – Seasonality - short term recurring cycles – Cycle - long term business cycle – Error - random or irregular component

10-8© McGraw-Hill Education.

Moving Average • Assumes no trend, seasonality, or cycle • Simple moving average:

tt

Nttt t

AF N

DDD A

=

+++ =

+

+−−

1

11 ......

• Weighted moving average:

11211 ...... +−−+ ++== NtNtttt DWDWDWAF

10-9© McGraw-Hill Education.

Moving Average Example Period Actual Demand Forecast

1 10

2 18

3 29

4 - 19

• Compute three period moving average for Period 4 (number of periods is forecaster’s decision)

( ) ( ) 318294 F

193101829AF

5

34

++=

=++==

period for demand actual

10-10© McGraw-Hill Education.

Time-Series Data (Figure 10.2)

Note: The forecast is smoother as the number of periods in the moving average increases.

10-11© McGraw-Hill Education.

Exponential Smoothing • The new average is computed from the old

average:

( ) 11 -tt AA ααDt −+= • The value of the smoothing constant (α) is a

choice. It determines the extent to which the new forecast weights recent demand (smooths random variation).

( ) 0.2. - 0.1 usually is and 1, and 0 between ranges Alpha α

10-12© McGraw-Hill Education.

Simple Exponential Smoothing • Forecast:

( )ttt FDαF −+=+1tF F = forecast of demand D = actual demand t = time period

• Assumes no trend, seasonality, or cycle • Note: we are adjusting 1tt F get to F +

10-13© McGraw-Hill Education.

Exponential Smoothing Example • The Sept. forecast was 15, but Sept. actual

sales were 13. ( ) 0.2. of alpha Use α – What is the October forecast?

( ) ( )

14.6

forecast October

=−= −+=

−α +

=

4.015 15132.015

forecast Sept.actual Sept. forecast Sept.

10-14© McGraw-Hill Education.

Time-Series Data (Figure 10.3)

( ) reduced. is alpha of value the assmoother is forecast The

:Note α

10-15© McGraw-Hill Education.

Forecast Accuracy In addition to the forecast, firms should estimate forecast accuracy: • To monitor erratic demand observations or

“outliers” • To determine when the forecasting method is

no longer tracking actual demand • To determine the parameter values that

provide the forecast with the least error

10-16© McGraw-Hill Education.

Measures of Forecast Accuracy • Cumulative sum of forecast errors (CFE) • Mean square error (MSE) • Mean absolute deviation (MAD) • Mean absolute percentage errors (MAPE) • Tracking Signal (TS)

10-17© McGraw-Hill Education.

Forecast Accuracy: Formulas

t

n

t t

t

n

t t

n

t t

n

t t

n D e

n

e

n

e

e

MAD CFE

TSsignal Tracking

100 MAPE errors percentage absolute Mean

MAD deviation absolute Mean

MSEerror square Mean

CFE errors forecast of sum Cumulative

1

1

1

2

1

=

=

=

=

=

∑

∑

∑

∑

=

=

=

=

10-18© McGraw-Hill Education.

Advanced Time-Series Forecasting • Adaptive exponential smoothing

– ( ) varied is tcoefficien Smoothing α • Mathematical models

– Linear or nonlinear • Box-Jenkins method

– Requires about 60 periods of past data

10-19© McGraw-Hill Education.

Causal Forecasting Methods • Cause-and-effect model, using a data set of

other variables to predict demand (forecast). • Examples:

– Use population and location characteristics to forecast restaurant sales.

– Use supply chain data on inventory levels to forecast sales of new generation products such as cell phones.

10-20© McGraw-Hill Education.

Causal Forecasting Models • The general regression model:

bxay += ∧

• Other forms of causal model: – Econometric – Input-output – Simulation models

10-21© McGraw-Hill Education.

Example of Causal Model ( )

( ) ( )

( ) ( ) 7 Periodfor forecast128.3472.39738.23F

s000' income family medianI sales forecastedF

tyear in sales actualD

2.3965142b Slope 38.230937a Intercept

128.3437.6 125.46413036.4 123.78612535.7 122.58812435.2 125.22411936.3 123.78612435.7 121.1512034.6

tbaY

7

t

t

t

t

==+=

=

=

=

+=

ttt FDI

10-22© McGraw-Hill Education.

Selecting a Forecasting Method • Use or decision characteristics

– Scheduling decision? Facility expansion? – Short range? Long range?

• Data availability – Quantity and quality

• Data pattern – Level? Unstable?

10-23© McGraw-Hill Education.

Collaborative Planning, Forecasting, and Replenishment (CPFR)

• Aim is to achieve more accurate forecasts • Share information across supply chain with

customers and suppliers • Compare forecasts

– If discrepancy, look for reason – Reach a consensus forecast

• Works best in B2B with few customers (e.g., a small number of large retailers)

10-24© McGraw-Hill Education.

Summary 10.1 Describe why forecasting is important. 10.2 Describe the four common methods of qualitative

forecasting. 10.3 Calculate a moving average and exponential

smoothing forecast, and explain when they should be used.

10.4 Evaluate forecast accuracy using a variety of methods.

10.5 Carry out causal forecasting. 10.6 Evaluate factors that impact forecasting method

selection. 10.7 Explain the benefits and costs of CPFR

© McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill Education. 10-25

End of Presentation

Operations Management in the Supply Chain Decisions and Cases Seventh Edition

Chapter 11 Capacity Planning

© McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill Education.

11-2© McGraw-Hill Education.

Learning Objectives 11.1 Define capacity and utilization 11.2 Illustrate with an example a facilities strategy that

considers: amount, size, timing, location and type.

11.3 Explain how S&OP is done. 11.4 Identify the demand and supply options that are

available for S&OP 11.5 Contrast and compare the chase and level

strategies 11.6 Define the various costs associated with

aggregate planning 11.7 Create an alternative strategy for the Hefty Beer

Company example

11-3© McGraw-Hill Education.

Hierarchy of Capacity Decisions

Months Planning Horizon

11-4© McGraw-Hill Education.

Definition of Capacity Maximum output that can be produced

over a given period of time. • Theoretical capacity

– Labor availability and overtime – Physical assets, delayed maintenance, etc. – Can be used for short-term demand spikes

• Effective capacity – Used for planning – Subtracts maintenance downtime, shift breaks,

absenteeism, etc.

11-5© McGraw-Hill Education.

Capacity Utilization

100% Capacity

output Actual ×=nUtilizatio

→ Utilization is seldom 100%. → Estimates capacity usage and ‘busyness.’ A production facility that builds 1000 cars during the time it can actually produce 1200 cars has utilization = 1000/1200 = 83% A doctor who is busy working for 6 hours during an 8 hour shift has utilization = 6/8 = 75%

11-6© McGraw-Hill Education.

Facilities Decisions • How much capacity is needed? • How large should each facility be? • When is the capacity needed? • Where should the facilities be located? • What type of facilities/capacity are needed?

11-7© McGraw-Hill Education.

Facilities Strategy • How much? Amount of capacity

– Size of capacity cushion • How large? Size of facilities

– Economies/diseconomies of scale • When? Timing of facility decisions

– Preemptive, wait-and-see • Where? Location of facilities

– Variety of factors to consider • What type? Types of facilities

– Product-focused, market-focused, process- focused, general-purpose

11-8© McGraw-Hill Education.

Factors Affecting Facilities Strategy • Predicted demand • Cost of facilities • Likely behavior of competitors • Business strategy • Global considerations

11-9© McGraw-Hill Education.

How Much? Strategies for Capacity Cushion

• Capacity cushion = 100% – utilization • Three strategies:

– Large cushion (e.g., make-to-order) – Moderate cushion (cost of running out

balanced with cost of excess capacity) – Small cushion (e.g., make-to-stock)

11-10© McGraw-Hill Education.

How Large? Selecting Facility Size • Economies of scale

– Production costs are not linear – Overhead costs spread over more units

• Diseconomies of scale – Increased transportation costs – Cost of more bureaucracy – Increased organizational complexity

11-11© McGraw-Hill Education.

When? Timing of Facility Additions • Preemptive Strategy

– Build capacity ahead of need – Positive capacity cushion

• Wait-and-see Strategy – Small or negative capacity cushion – Lower-risk strategy

11-12© McGraw-Hill Education.

Where? Facility Location • Quantitative Factors

– ROI, NPV – Transportation, Taxes – Lead times

• Qualitative Factors – Language, norms – Worker and customer attitudes – Proximity to customers, suppliers, competitors

11-13© McGraw-Hill Education.

What Type? Types of Facilities • Product-focused (55%)

– One family of products/services (e.g., computers)

• Market-focused (30%) – Located near sales (e.g., electricity, bakeries)

• Process-focused (10%) – Few technologies (e.g., computer chips, MRI

center) • General purpose (5%)

– Several products/services (e.g., furniture, banking)

11-14© McGraw-Hill Education.

Sales & Operations Planning (S&OP) • Matching supply & demand over a medium

time range • Time horizon of about 12 months • Aggregated demand for one or few categories

of product. Demand may fluctuate or be uncertain.

• Possible to change both supply and demand • Variety of management objectives • Facilities are fixed (cannot be expanded or

reduced) during this timeframe

11-15© McGraw-Hill Education.

Cross-Functional Nature of S&OP • Budgeting: closely tied to aggregate plan • HR: workforce availability • Operations: capacity/inventory planning • Accounting: cost analysis • Finance: capital investments • Marketing: sales plan

11-16© McGraw-Hill Education.

Demand Management • Influence demand through:

– Pricing – Advertising and promotion – Backlogs or reservations (shift demand) – Development of complementary offerings  Seasonal products/service spread demand

o Lawn mower, snow blower o Ski resort, mountain biking

11-17© McGraw-Hill Education.

Supply Management • Influence (control) supply through:

– Hiring and layoff of employees – Using overtime and undertime – Using part-time or temporary labor – Carrying inventory – Outsourcing/subcontracting – Cooperative arrangements  Share capacity during demand peaks  e.g., airlines, hotels, utilities

11-18© McGraw-Hill Education.

Aggregate Planning Strategies • Level Strategy

– Constant workforce size – Inventory as buffer

• Chase Strategy – Vary workforce size – Produce to meet demand – Typical for services

11-19© McGraw-Hill Education.

Aggregate Planning Costs • Hiring and firing costs (Chase Strategy) • Overtime and undertime costs (Chase) • Subcontracting costs (Chase) • Part-time labor costs (Chase) • Inventory-carrying costs (Level Strategy) • Cost of stockout or back order (Level)

11-20© McGraw-Hill Education.

Aggregate Planning - Level Strategy Aggregate Planning Costs: Level Workforce

Jan Feb Mar Apr May June July Aug Sept Oct Nov Dec Total

Resources

Regular workers 45 45 45 45 45 45 45 45 45 45 45 45

Overtime (%) 0 0 0 0 0 0 0 0 0 0 0 0

Units Produced 450 450 450 450 450 450 450 450 450 450 450 450 5400

Sales Forecast 300 300 350 400 450 500 650 600 475 475 450 450 5400

Inventory (end of month) 200 350 450 500 500 450 250 100 75 50 50 50

Costs

Regular time $180 ### ### ### ### ### ### ### ### ### ### ### $2,160

Overtime 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Hire/Layoff 25 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 25

Inventory carrying 24 42 54 60 60 54 30 12 9 6 6 6 363

Total Cost $229 ### ### ### ### ### ### ### ### ### ### ### $2,548

11-21© McGraw-Hill Education.

Aggregate Planning - Chase Strategy Aggregate Planning Costs: Chase Demand

Jan Feb Mar Apr May June July Aug Sept Oct Nov Dec Total

Resources

Regular workers 30 30 35 40 45 50 65 60 48 47 45 45

Overtime (%) 0 0 0 0 0 0 0 0 0 0 0 0

Units Produced 300 300 350 400 450 500 650 600 480 470 450 450 5400

Sales Forecast 300 300 350 400 450 500 650 600 475 475 450 450 5400

Inventory (end of month) 50 50 50 50 50 50 50 50 55 50 50 50

Costs

Regular time $120 ### ### ### ### ### ### ### ### ### ### ### $2,160

Overtime 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Hire/Layoff 40.0 0.0 25.0 25.0 25.0 25.0 75.0 20.0 48.0 4.0 8.0 0.0 295

Inventory carrying 6.0 6.0 6.0 6.0 6.0 6.0 6.0 6.0 6.6 6.0 6.0 6.0 72.60

Total Cost $166 ### ### ### ### ### ### ### ### ### ### ### $2,527.60

11-22© McGraw-Hill Education.

Summary 11.1 Define capacity and utilization 11.2 Illustrate with an example a facilities strategy that

considers: amount, size, timing, location and type.

11.3 Explain how S&OP is done. 11.4 Identify the demand and supply options that are

available for S&OP 11.5 Contrast and compare the chase and level

strategies 11.6 Define the various costs associated with

aggregate planning 11.7 Create an alternative strategy for the Hefty Beer

Company example

© McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill Education. 11-23

End of Presentation

Operations Management in the Supply Chain Decisions and Cases Seventh Edition

Chapter 12 Scheduling Operations

© McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill Education.

12-2© McGraw-Hill Education.

Learning Objectives 12.1 Describe the concept of batch scheduling. 12.2 Construct a Gantt chart. 12.3 Create work schedules using forward and

backward scheduling. 12.4 Explain the implications of the theory of

constraints for scheduling. 12.5 Compare various dispatching rules. 12.6 Describe the important factors to consider

when designing a scheduling system.

12-3© McGraw-Hill Education.

Scheduling Operations • Most detailed and most constrained decisions

in capacity planning hierarchy • Results in a time-phased plan (by hour, week) • Allocation of resources (workers, machines)

to tasks • Trade-offs (conflicting objectives)

– High efficiency – Low inventories – Good customer service

12-4© McGraw-Hill Education.

Batch Scheduling • Network of queues, as job moves from work

station to work station – job = manufacturing parts, customer,

paperwork – work station = machine, room, facility, worker

• Customers or jobs spend most of their time at work stations waiting to be processed

• Typical for actual work to be 5-20% of total throughput time

12-5© McGraw-Hill Education.

Batch Processing move  queue  process  wait  move…

WS = work station “move” = movement of work: parts, customers, paperwork, etc.

12-6© McGraw-Hill Education.

Challenges of Batch/Job Shop Scheduling

• Variety of jobs processed • Different routing and processing requirements

of each job • Number of different job orders in the facility

at any one time • Competition for common (constrained)

resources

12-7© McGraw-Hill Education.

Gantt Charting • Scheduling multiple jobs thru a set of work

centers, minimizing completion time • Machine performance measures:

– Makespan = total time to complete a set of jobs

– Machine utilization = percent of makespan time machine (or person) is used.

• Used to monitor progress of jobs • Optimal schedule can be computationally

intensive for multiple jobs/multiple machines

12-8© McGraw-Hill Education.

Job Data for Scheduling Example

Job Work center / Machine hours Due date

1 A/2, B/3, C/4 3

2 C/6, A/4 2

3 B/3, C/2, A/1 4

4 C/4, B/3, A/3 4

5 A/5, B/3 2

12-9© McGraw-Hill Education.

Scheduling Example In what sequence should the jobs be done?

12-10© McGraw-Hill Education.

Gantt Chart for Example (1 of 2)

12-11© McGraw-Hill Education.

Gantt Chart for Example (2 of 2) Machine idle (hr)

A 5

B 8

C 4

17

Makespan = 20 hr Job Job waiting time (hr) Delivery time (hr)

1 0 9

2 9 19

3 14 20

4 1 11

5 3 11

12-12© McGraw-Hill Education.

Shop Performance Measures • Machine Efficiency: Makespan or machine

utilization • Customer: Delivery times of the jobs (minimizing

job waiting time is complementary measure) Change the job sequence from 1, 4, 5, 2, 3 to improve efficiency and/or delivery times to the customer. Machine(s) could be added to improve both efficiency and delivery times.

12-13© McGraw-Hill Education.

Conclusions About Batch Scheduling • Performance is highly sequence dependent. • Waiting time depends upon job interference

in the schedule and available capacity. • Finding optimal schedules is challenging, but

good heuristics are available.

12-14© McGraw-Hill Education.

Finite Capacity Scheduling • Scheduling jobs onto work stations, but not

exceeding the capacity of any given resource. • Used to identify bottlenecks. • Forward scheduling

– To determine completion date for all orders. • Backward scheduling

– Work backward from due date to determine start dates for orders.

12-15© McGraw-Hill Education.

Theory of Constraints (TOC) (1 of 3) • Proposed by Goldratt in The Goal (1983) • Goal is to make money from operations • Production does not have value until it is sold! • Key elements:

– Throughput = sales minus cost of raw materials

– Inventory = raw materials value – Operating expenses = cost of labor and

overhead

12-16© McGraw-Hill Education.

Theory of Constraints (TOC) (2 of 3) • Constraint is anything slowing down production …

a bottleneck. – Machine or workstation – Market – Procurement system

• The bottleneck determines the capacity of the system.

• Implication: Operations manager should focus on bottleneck to increase capacity and throughput (and make more money).

12-17© McGraw-Hill Education.

Theory of Constraints (TOC) (3 of 3) • The bottleneck should be scheduled to

achieve maximum throughput. • Non-bottlenecks should be scheduled to keep

the bottleneck busy. • A work-in-process queue should always be in

front of the bottleneck. • Non-bottleneck resources may be idle. • Find ways to relieve or reduce the

bottleneck.

12-18© McGraw-Hill Education.

Priority Dispatching Rules • Which job should be processed next?

– Rule for selecting the next job from the queue • Common in services:

– First come, first served – Priority rule (first-class customers first) – Preemptive rule (most severe patient treated next)

• Common in manufacturing:

time processing remaining date due until time remaining

=ratio Critical

– Shortest processing time (quickest job)

12-19© McGraw-Hill Education.

Planning and Control Systems • What delivery date should be promised? • Where is the bottleneck? • When should each activity or task be started? • How is on-time job completion ensured? • Sometimes referred to as:

– Advanced Planning & Scheduling (APS)

12-20© McGraw-Hill Education.

Summary 12.1 Describe the concept of batch scheduling. 12.2 Construct a Gantt chart. 12.3 Create work schedules using forward and

backward scheduling. 12.4 Explain the implications of the theory of

constraints for scheduling. 12.5 Compare various dispatching rules. 12.6 Describe the important factors to consider

when designing a scheduling system.

© McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill Education. 12-21

End of Presentation

Operations Management in the Supply Chain Decisions and Cases Seventh Edition

Chapter 13 Project Planning and Scheduling

© McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill Education.

13-2© McGraw-Hill Education.

Learning Objectives (1 of 2) 13.1 Explain the nature of tradeoffs among the

three objectives of project management 13.2 Describe the four activities included in project

management 13.3 Distinguish the advantages and

disadvantages of a network over a Gantt chart for project scheduling

13.4 Calculate the ES,EF, LS, LF for an example network

13-3© McGraw-Hill Education.

Learning Objectives (2 of 2) 13.5 Explain the significance of the critical path

and slack. 13.6 Calculate the cost of crashing a network by

one or two days. 13.7 Contrast and compare the use of constant-

time and CPM networks.

13-4© McGraw-Hill Education.

What is a Project? • “A temporary endeavor undertaken to create

a unique product/service/result.” - Project Mgmt Institute (PMI)

• Unique item or event; often a single unit. • Begins and ends; not ongoing activity. • Work often done on-site. • Resources (materials, labor) are brought to

the project.

13-5© McGraw-Hill Education.

Examples of Projects • Building construction • Bridge construction • Aircraft carrier • R&D project • Audit • Equipment installation • New product introduction • Opening/closing a facility • Making a movie • Fund-raising campaign • Ad campaign • Software installation

13-6© McGraw-Hill Education.

Objectives and Tradeoffs

13-7© McGraw-Hill Education.

Project Management Activities & Decisions

• Control – Planning – Scheduling – Closing

13-8© McGraw-Hill Education.

Planning Activities & Decisions • Identify the project customer • Establish the end product/service • Set project objectives • Estimate total resources and time required • Decide on the form of project organization • Make key personnel appointments • Define major tasks required • Establish a budget

13-9© McGraw-Hill Education.

Scheduling Activities & Decisions • Develop a detailed work-breakdown

structure • Estimated time required for each task • Sequence tasks in proper order • Develop a start/stop time for each task • Develop detailed budget for each task • Assign tasks to people, subcontractors, etc.

13-10© McGraw-Hill Education.

Control Activities and Decisions • Monitor actual time, cost, and performance • Compare planned to actual figures • Determine whether corrective action is

needed • Evaluate alternative corrective actions • Take appropriate corrective actions

13-11© McGraw-Hill Education.

Closing Activities and Decisions • Finish all work • Close contracts • Pay all accounts payable • Turn the project over to the owners • Reassign personnel and equipment

13-12© McGraw-Hill Education.

PMI Body of Knowledge • Integration • Scope • Time management • Costs • Quality management • Human resources • Communications • Risk • Procurement Project Management Institute’s required areas of knowledge for certification as a Project Manager.

13-13© McGraw-Hill Education.

Scheduling Methods • Gantt Chart

– Bar charts – Does not show interdependencies of activities – Visual & easy to understand

• Network Method – Graphs or networks – Shows precedence relations – More complex, difficult to understand, and

costly than Gantt charts

13-14© McGraw-Hill Education.

Gantt Chart Project Example (Figure 13.2)

13-15© McGraw-Hill Education.

Constant-Time Networks • Activity times assumed to be constant • Activities represented by nodes • Arrows show precedence relationships • Notation used to calculate start and finish times:

– ES(a) = early start of activity A (constrained by predecessors)

– EF(a) = early finish of activity A (constrained by early start time)

– LS(a) = late start of activity A (constrained by late finish time)

– LF(a) = late finish of activity A (without delaying successors)

13-16© McGraw-Hill Education.

Example: Write a Business Report (Table 13.4)

Activity Description ImmediatePredecessors Duration in Days

A Decide on topic None 1

B Collect data A 2

C Search the Internet A 3

D Write the report B and C 5

13-17© McGraw-Hill Education.

Network Diagram: Write a Business Plan (Figure 13.3)

13-18© McGraw-Hill Education.

Forward Pass: Write a Business Plan (Figure 13.4)

13-19© McGraw-Hill Education.

Calculating ES, EF, LS, LF, Completion Time

• Forward Pass: • ES (a) = 0 for the starting activities • EF (a) = ES(a) + t(a)* • ES (a) = Max [EF(all predecessors of a)] • Project completion time = Max [EF(all ending

activities)] • Backward pass: • LF (a) = Min [LS(all successors of a)] • LS (a) = LF(a) - t(a)* • * t(a) denotes the duration of activity a

13-20© McGraw-Hill Education.

Forward and Backward Pass: Write a Business Plan (Figure 13.5)

13-21© McGraw-Hill Education.

Critical Path • Critical Path = longest path in the network

– All activities for which ES = LS and EF = LF – Length of critical path is equal to the project

completion time – Any delay on critical path delays the project

(unless ‘corrective actions’ are taken) – Critical path in example (above) is A-C-D

13-22© McGraw-Hill Education.

Slack • Slack time is the time a path may be delayed

without delaying the project. • Paths not on the critical path have slack. • Slack = LS - ES = LF - EF

13-23© McGraw-Hill Education.

Precedence and Times for Opening a New Office (Table 13.5)

Activity Description Immediate Predecessors Activity

Time Computed

Slack

1 Lease the site None 1 0

2 Hire the workers 1 5 0

3 Arrange the furnishings 1 1 1

4 Install the furnishings 3 2 1

5 Arrange for phones 1 1 3

6 Install the phones 4, 5 1 1

7 Move into the office 2, 6, 4 2 0

13-24© McGraw-Hill Education.

Network: Open a New Office (Figure 13.6)

13-25© McGraw-Hill Education.

Critical Path Method • Critical Path Method (CPM) • Developed to start-up/shutdown plants • Activity times can be compressed by spending

more $ • Requires single time estimate for each activity • Looks at time/cost trade-offs

– Normal activity time – Normal cost – Crash time – Crash cost

13-26© McGraw-Hill Education.

Time-Cost Relationship in CPM (Fig. 13.8)

13-27© McGraw-Hill Education.

Use of Project Management Concepts • Scheduling is only part of a complete

approach to project management • Trade-off between sophistication and cost of

methods • Choice between constant-time, CPM or more

advanced techniques • Choice of project management software

packages – e.g., Microsoft Project

13-28© McGraw-Hill Education.

Summary (1 of 2) 13.1 Explain the nature of tradeoffs among the

three objectives of project management 13.2 Describe the four activities included in project

management 13.3 Distinguish the advantages and

disadvantages of a network over a Gantt chart for project scheduling

13.4 Calculate the ES,EF, LS, LF for an example network

13-29© McGraw-Hill Education.

Summary (2 of 2) 13.5 Explain the significance of the critical path

and slack. 13.6 Calculate the cost of crashing a network by

one or two days. 13.7 Contrast and compare the use of constant-

time and CPM networks.

© McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill Education. 13-30

End of Presentation

Operations Management in the Supply Chain Decisions and Cases Seventh Edition

Chapter 14 Independent

Demand Inventory

© McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill Education.

14-2© McGraw-Hill Education.

Learning Objectives 14.1 Define inventory types and the purpose of

inventory. 14.2 Explain the costs incurred by inventory. 14.3 Differentiate between independent and

dependent demand. 14.4 Calculate the economic order quantity and

identify the underlying assumptions. 14.6 Recall the uses of periodic and continuous review

systems. 14.7 Describe how inventory and service level are

related. 14.8 Define Vendor Managed Inventory and the ABC

system.

14-3© McGraw-Hill Education.

Definitions • Inventory: A stock of materials used to

facilitate production or satisfy customer demands.

• Types of inventory – Raw materials, purchased parts (RM) – Work in process (WIP) – Finished goods (FG)

14-4© McGraw-Hill Education.

Inventory Management Technologies • Bar coding • Point of sale (POS) data • Radio-frequency identification (RFID)

14-5© McGraw-Hill Education.

Materials-Flow Process (Figure 14.1)

14-6© McGraw-Hill Education.

Water Tank Analogy for Inventory (Figure 14.2)

14-7© McGraw-Hill Education.

Purpose of Inventories • To protect against uncertainties - demand,

supply, lead times, schedule changes – Safety stock

• To allow economic production and purchase – Cycle inventory

• To cover anticipated changes in demand/supply – Anticipation inventory

• To provide for transit – Pipeline inventory

14-8© McGraw-Hill Education.

Costs of Inventory (1 of 3) • Item cost

– Expressed as cost per unit or SKU – Quantity discounts possible

• Ordering (or setup) cost – Paperwork, electronic entry, worker time for

ordering – Worker time for setup, downtime – Transportation costs – Typically a fixed cost per order (or setup)

14-9© McGraw-Hill Education.

Costs of Inventory (2 of 3) • Carrying (or holding) cost

– Cost of capital (market rate or internal rate of return)

– Cost of storage (space, insurance, taxes) – Cost of obsolescence, deterioration, and loss

(shrinkage) – Estimated U.S. average is 35% of SKU cost

per year. – Businesses often use cost of capital

(understated).

14-10© McGraw-Hill Education.

Costs of Inventory (3 of 3) • Stockout cost

– Back order costs (expressed as a fixed cost per backorder or as a function of aging of backorders)

– Lost income – Customer dissatisfaction; loss of future sales

14-11© McGraw-Hill Education.

Distribution of 35% Carrying Cost: • Cost of capital: 9-20% • Obsolescence: 2-5% • Storage: 2-5 percent • Material handling: 1-3% • Shrinkage: 1-3% • Taxes & insurance: 1-3%

14-12© McGraw-Hill Education.

Types of Demand • Independent demand (this chapter)

– Finished goods, spare parts – Based on market demand, independent of other

items – Requires forecasting

• Dependent demand – Components/parts of the finished (parent)

products – Demand is a known function of (parent)

independent demand items – Calculate instead of forecast

14-13© McGraw-Hill Education.

Demand Patterns (Figure 14.4)

• The first graph - A pattern plus random influences

• The second graph - ‘Lumpy’ due to production lots

14-14© McGraw-Hill Education.

Economic Order Quantity (EOQ) • Answers question: “How much should we

order?” • Used for independent demand items. • Objective is to find order quantity (Q) that

minimizes total cost (TC) of managing inventory.

• Must calculate for each SKU. • Widely used and very robust (i.e., works well

in a variety of situations, even when its assumptions do not perfectly hold).

14-15© McGraw-Hill Education.

EOQ Assumptions 1. Demand rate is constant, recurring, and known. 2. Lead time is constant and known. 3. No stockouts allowed. 4. Items are ordered or produced in a lot or batch,

and the lot is received all at once. 5. Costs are constant:

– Unit cost (no quantity discounts). – Carrying cost is constant per unit. – Ordering (setup) cost per order.

6. Item is a single product or SKU; demand not influenced by other items.

14-16© McGraw-Hill Education.

EOQ Lot Size Intuition • Trade-off between ordering frequency (i.e.,

order size) and inventory level. – Frequent orders (small lot sizes) lead to lower

average inventory level, i.e., higher total ordering costs and lower total holding costs.

– Less frequent orders (large lot sizes) lead to higher average inventory level, i.e., lower total ordering costs and higher total holding costs.

14-17© McGraw-Hill Education.

EOQ Inventory Levels (Figure 14.5)

14-18© McGraw-Hill Education.

Notation in EOQ Calculation D = Demand rate, units per year S = Cost per order placed or setup cost, dollars per order C = Unit cost, dollars per unit i = Carrying rate, percent of dollar value per year Q = Lot size, units TC = Total of ordering cost plus carrying cost, dollars per year

14-19© McGraw-Hill Education.

Cost Equations in EOQ • Ordering cost per year = (cost per order) ×

(orders per year) = SD/Q • Carrying cost per year = (annual carrying rate)

× (unit cost) × (average inventory level) = iCQ/2

• Total annual cost (TC) = ordering cost per year + carrying cost per year = SD/Q + iCQ/2

14-20© McGraw-Hill Education.

Total Cost of Inventory (Figure 14.6)

14-21© McGraw-Hill Education.

EOQ Formula At the EOQ, ordering costs = holding costs S*(D/Q) = iC* (Q/2)

iC 2SD

Q EOQ ==

Note: Although we use annual costs, any time period can be used. Just be consistent throughout equation! The same is true for currencies.

14-22© McGraw-Hill Education.

EOQ Example (1 of 2) Demand = 10 cases/week S = $12/order i = 30% per year C = $80/case

( ) ( ) ( ) ordercases22.8 =

== 80*.352*10*12*2iC2SDEOQ

TC = ordering cost + holding cost = SD/Q + iCQ/2 = 12*520/22.8 + .3*80*22.8/2 = 273.68 + 273.60 = $547.28/year If ordering 22 cases, TC = $547.64 If ordering 23 cases, TC = $547.30

14-23© McGraw-Hill Education.

EOQ Example (2 of 2)

Total cost curve is quite flat near the optimal EOQ. Order size need not be exactly the EOQ to get cost advantages.

14-24© McGraw-Hill Education.

Continuous Review (Q) System (1 of 3)

• Relax assumption of constant demand. Demand is assumed to be random.

• Check inventory position each time there is demand (i.e., continuously).

• If inventory position drops below reorder point, place an order for the EOQ.

• Also called fixed-order-quantity or Q system (the fixed order size is EOQ).

14-25© McGraw-Hill Education.

Continuous Review (Q) System (2 of 3)

(Figure 14.7)

R = Reorder point Q = Order quantity L = Lead time

14-26© McGraw-Hill Education.

Continuous Review (Q) System (3 of 3)

Amount to order = EOQ Order when inventory position = Reorder point R = m + s R = Reorder point m = mean demand during lead time s = safety stock Reorder point is independent of EOQ! EOQ tells how much to order. Reorder point tells when to order

14-27© McGraw-Hill Education.

Service Level • When demand is random, reorder point must

account for desired service level (fill rate). • s = z σ

– s = safety stock – z = safety factor – σ = standard deviation in demand during lead time

• Service level can be defined several ways: – Probability all customer orders will be filled while

waiting for supply order to arrive. – Percentage of demand filled from stock. – Percentage of time item is on hand.

14-28© McGraw-Hill Education.

Probability Distribution of Demand over Lead Time (Fig. 14.8)

m = mean demand R = Reorder point s = safety stock

14-29© McGraw-Hill Education.

Periodic Review (P) System (1 of 2) • Review inventory position at fixed interval

(P). For example, bread delivery truck visits grocery stores on same days each week.

• Inventory brought up to a target level. • Order quantity varies according to demand. • Also called fixed-order-interval system or

P system.

14-30© McGraw-Hill Education.

Periodic Review (P) System (2 of 2) (Figure 14.9)

T = target level Q = order quantities L = lead time P = time between orders(period)

14-31© McGraw-Hill Education.

Periodic Review (P) System P = time between orders

iCD S

iC SD

DD Q

P 221

===

T = m’ + s’ where T = target inventory level m’ = average demand over P + L s’ = safety stock to cover P + L

14-32© McGraw-Hill Education.

P System Service Level Safety stock must cover a longer interval (P + L). s’ = zσ’ where z = safety factor σ’ = the standard deviation of demand over P + L

14-33© McGraw-Hill Education.

Service Level versus Inventory Level (Fig. 14.10)

14-34© McGraw-Hill Education.

Using P and Q System in Practice • Use P system when orders must be placed at

specified intervals. • Use P systems when multiple items ordered from

the same supplier (joint-replenishment). • Use Q system for expensive items; P for

inexpensive. • P requires more safety stock (and is more likely

to stockout) since the system cannot respond quickly to increased demand.

• Either may be more costly: – P in safety stock, Q in monitoring costs

14-35© McGraw-Hill Education.

P and Q Systems at Home • P system: You go to the grocery store on the

same day every week. “What will we need for the next week?” – P carries more inventory and is more likely to

run out since it cannot respond quickly to increases in demand.

• Q system: You go to the grocery store each time you need something. “What do we need?” – Q may require more unplanned trips to the

store.

14-36© McGraw-Hill Education.

Vendor Managed Inventory (VMI) • Supply chain management initiative passing

responsibility for managing inventory stocks to vendors (suppliers).

• Vendor must have access to buyer’s demand forecast and inventory records.

• Managed through contractual arrangement. • Supply chain partners share cost savings of

collaboration.

14-37© McGraw-Hill Education.

ABC Inventory Management • Based on Pareto concept (80/20 rule) and

total usage in dollars of each item. • Classification of A, B, and C items based on

usage. • Purpose is to set effort priorities to manage

different SKUs, i.e., to allocate scarce management resources.

14-38© McGraw-Hill Education.

ABC Inventory Classification • A items: 20% of SKUs, 80% of dollars • B items: 30% of SKUs, 15% of dollars • C items: 50% of SKUs, 5% of dollars • Three classes is arbitrary; could be any number. • Percentages are approximate. • Danger:

– Dollar use may not reflect importance of a particular SKU! Some critical but low value items may be classified as A.

14-39© McGraw-Hill Education.

Annual Usage of Items by Dollar Value (Table 14.4)

Item Annual Usage in Units Unit Cost Dollar Usage % of Total

Dollar Usage

1 5,000 $ 1.50 $ 7,500 2.9%

2 1,500 8.00 12,000 4.7%

3 10,000 10.50 105,000 41.2%

4 6,000 2.00 12,000 4.7%

5 7,500 0.50 3,750 1.5%

6 6,000 13.60 81,600 32.0%

7 5,000 0.75 3,750 1.5%

8 4,500 1.25 5,625 2.2%

9 7,000 2.50 17,500 6.9%

10 3,000 2.00 6,000 2.4%

Total $ 254,725 100.0%

14-40© McGraw-Hill Education.

ABC Chart for Table 14.4

14-41© McGraw-Hill Education.

Summary 14.1 Define inventory types and the purpose of

inventory. 14.2 Explain the costs incurred by inventory. 14.3 Differentiate between independent and

dependent demand. 14.4 Calculate the economic order quantity and

identify the underlying assumptions. 14.6 Recall the uses of periodic and continuous review

systems. 14.7 Describe how inventory and service level are

related. 14.8 Define Vendor Managed Inventory and the ABC

system.

© McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill Education. 14-42

End of Presentation

Operations Management in the Supply Chain Decisions and Cases Seventh Edition

Chapter 15 Material

Requirements Planning and ERP

© McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill Education.

15-2© McGraw-Hill Education.

Learning Objectives 15.1 Recall the elements, inputs and outputs of an MRP

system. 15.2 Contrast and compare MRP versus order-point

systems. 15.3 Construct a materials plan given the gross

requirements. 15.4 Describe in detail each element of an MRP system. 15.5 Discuss DRP and different ways to deal with

uncertain demand. 15.6 Explain the five requirements for a successful MRP

system. 15.7 Describe what an ERP system does.

15-3© McGraw-Hill Education.

Materials Requirements Planning (MRP)

• Used to manage dependent demand items – Raw materials, WIP parts – Parts used to make higher-level components

• Driven by the master schedule (which is driven by S&OP)

• Parts explosion breaks end items into all requirements for components/parts using bill of materials (BOM)

• Schedule is offset based on lead times • Push system used because master schedule is

constantly changing

15-4© McGraw-Hill Education.

Closed Loop MRP System (Figure 15.1)

15-5© McGraw-Hill Education.

Comparison of MRP & Order-Point Systems

Attribute MRP Order Point

Demand Dependent Independent

Order philosophy Requirements Replenishment

Forecast Based on master schedule Based on past demand

Control concept Control all items ABC

Objectives Meet manufacturing needs Meet customer needs

Lot sizing Discrete EOQ

Demand pattern Lumpy but predictable Random

Types of inventory Work in process and raw materials Finished goods and spare parts

15-6© McGraw-Hill Education.

MRP Elements • Inputs

– Master schedule – Bill of materials (BOM) – Inventory records

• Outputs – Capacity planning – Purchasing – Shop-floor control

15-7© McGraw-Hill Education.

MRP Example

15-8© McGraw-Hill Education.

BOM (Product Structure) • Table (end item) 1 week

– Leg assembly (1) 1 week  Short rails (2) 1 week  Long rails (2) 1 week  Legs (4) 1 week

– Top (1) 2 weeks

15-9© McGraw-Hill Education.

Indented BOM Level Code Component

0 Table (end-item)

1 Leg assembly (1)

2 Short rails (1)

2 Long rails (2)

2 Legs (4)

1 Top (1)

15-10© McGraw-Hill Education.

Materials Plan for BOM Levels 0 and 1 (1 of 2)

Week: 1

Week: 2

Week: 3

Week: 4

Week: 5

Week: 6

Tables

On hand = 50 Gross Requirement 200 150 100

LT = 1 wk Scheduled Receipts

Lot size: L4L Projected Ending Inventory 50 50 50

Saftey Stock = 0 Net Requirement 150 150 100

Planned order receipts 150 150 100

Planned order releases 150 150 100

Tops

On hand = 50 Gross Requirement 150 150 100

LT = 2 wk Scheduled Receipts 50

Lot size: L4L Projected Ending Inventory 50 100

Saftey Stock = 0 Net Requirement 50 150 100

Planned order receipts 50 150 100

Planned order releases 50 150 100

15-11© McGraw-Hill Education.

Materials Plan for BOM Levels 0 and 1 (2 of 2)

Week: 1

Week: 2

Week: 3

Week: 4

Week: 5

Week: 6

Leg Assembly

On hand = 100 Gross Requirement 150 150 100

LT = 1 wk Scheduled Receipts

Lot size: L4L Projected Ending Inventory 100 100

Saftey Stock = 0 Net Requirement 50 150 100

Planned order receipts 50 150 100

Planned order releases 50 150 100

15-12© McGraw-Hill Education.

Materials Plan On previous slide, note the following: • Gross requirements in level 0 (Tables) come from the

master schedule. • Gross requirements in level 1 (Tops, Leg assemblies)

come from the planned order releases in level 0. • Planned order releases are offset by the lead times. • Planned order releases are planned! Actual order

releases must take available capacity into account. • Net requirements are the gross requirements minus

the projected ending inventory.

15-13© McGraw-Hill Education.

Master Schedule • Quantities derived from aggregate production

plan (product families). • Frozen within production lead time (so all

parts can be obtained). • Quantities reflect “build” schedule rather than

demand forecasts. • Quantities represent what needs to be

produced (infinite capacity assumed)

15-14© McGraw-Hill Education.

Bill of Materials [BOM] • Structured list of all parts and materials • Must be 100 percent accurate • Should be one BOM per product per company • Engineering-change-order (ECO) system used

to update BOM as product redesigned

15-15© McGraw-Hill Education.

Inventory Records • Item master data segment

– Constant info (part number, cost, etc.) • Inventory status segment

– Materials plan for each item • Subsidiary data segment

– Info on outstanding orders, demand history, etc. • Records must be accurate

– Cycle counting: physical count of a few items each day, so that all items are counted on a regular cycle

15-16© McGraw-Hill Education.

Capacity Planning • Purpose is to aid management in checking

validity of master schedule – Is there enough capacity to produce as

scheduled? • Two methods

– Shop loading: assign work to work centers – Finite capacity scheduling: considers resource

limitations

15-17© McGraw-Hill Education.

Purchasing • Greatly enhanced by use of MRP • Past due orders mostly eliminated • Order expediting mostly eliminated • Can provide suppliers with reports of planned

future orders • Can use electronic data interchange (EDI) to

communicate directly with suppliers

15-18© McGraw-Hill Education.

Shop Floor Control • Purposes

– Release orders to the shop floor – Manage the orders for on-time completion  Can use manufacturing execution system (MES)

• Set job priorities (dispatching rules) • Manage lead times on basis of priority

– Expedite and de-expedite orders • Minimize inventory while meeting completion

dates

15-19© McGraw-Hill Education.

Operating an MRP System • Should MRP carry safety stock? • How much safety stock should be carried? • Safety lead time, safety capacity • Couple its use downstream with distribution

requirements planning (DRP) • Use upstream to give suppliers visibility into

schedule

15-20© McGraw-Hill Education.

Required Elements for a Successful MRP System

1. Implementation planning 2. Appropriate and adequate IT support 3. Accurate data 4. Management support 5. User knowledge (all levels of firm)

15-21© McGraw-Hill Education.

Enterprise Resource Planning (ERP) Systems

• Extension and integration of all functions through a common database – Forces standardized systems throughout firm – Accounting controls systems – Marketing and sales transactions – Human resource planning and payroll transactions

• Coordinate decisions along the supply chain • Major software vendors

– SAP – Oracle

15-22© McGraw-Hill Education.

Summary 15.1 Recall the elements, inputs and outputs of an MRP

system. 15.2 Contrast and compare MRP versus order-point

systems. 15.3 Construct a materials plan given the gross

requirements. 15.4 Describe in detail each element of an MRP system. 15.5 Discuss DRP and different ways to deal with

uncertain demand. 15.6 Explain the five requirements for a successful MRP

system. 15.7 Describe what an ERP system does.

© McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill Education. 15-23

End of Presentation

Operations Management in the Supply Chain Decisions and Cases Seventh Edition

Chapter 16 Supply Chain Management

© McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill Education.

16-2© McGraw-Hill Education.

Learning Objectives 16.1 Define supply chain and supply chain

management. 16.2 List five key measures of supply chain

performance. 16.3 Explain the bullwhip effect and how it can be

reduced. 16.4 Contrast structural and systems improvements. 16.5 Explain the effect of technology on the supply

chain. 16.6 Define supply chain risk, resilience and how risk

can be managed. 16.7 Describe supply chain sustainability.

16-3© McGraw-Hill Education.

Supply Chain and Supply Chain Management

A SUPPLY CHAIN is the set of entities and relationships that cumulatively define materials and information flows both downstream toward the customer and upstream toward the very first supplier. “Supply chain management is the design and management of seamless, value-added processes across organizational boundaries to meet the real needs of the end customer.”

--Institute for Supply Management

16-4© McGraw-Hill Education.

Typical Supply Chain (Figure 16.1)

16-5© McGraw-Hill Education.

Supply Chain from Manufacturer’s Perspective

16-6© McGraw-Hill Education.

SCOR SCOR = Supply Chain Operations Reference model SCOR is founded on five distinct management processes

16-7© McGraw-Hill Education.

The Five SCOR Functions • Plan. Coordinate the other functions. • Source. The sourcing function brings inputs into

the transformation process from other organizations.

• Make. The operations function is responsible for making the product or service.

• Deliver. The logistics function is responsible for the movement and storage of goods across organizations in a supply chain.

• Return. Return and recycle inputs or products in the supply chain.

16-8© McGraw-Hill Education.

Measuring Supply Chain Performance (1 of 3)

• Delivery – On time delivery – Fill rate

• Quality – Product or service performance – Conformance to specifications – Customer satisfaction

16-9© McGraw-Hill Education.

Measuring Supply Chain Performance (2 of 3)

• Flexibility – Time to change volume of output by a fixed

amount – Time to change the mix of products or

services • Time

– Total supply chain throughput time – Cash-to-cash cycle time = Days in inventory

+ days in accounts receivable - days in accounts payable

16-10© McGraw-Hill Education.

Measuring Supply Chain Performance (3 of 3)

• Cost – Unit cost = (materials + labor + overhead) /

# units – Distribution, inventory carrying, accounts

receivable – Total supply chain cost =  Suppliers (materials and components) +  Producer (fabrication and assembly) +  Logistics (shipping and WIP between firms)

16-11© McGraw-Hill Education.

Dynamics: Bullwhip Effect • Supply chain is a highly interactive system.

Decisions in each part of the chain affect the other entities.

• There is an accelerator (bullwhip) effect: Increased variability in upstream orders, resulting in more inventory upstream.

• Even with perfect information, replenishment lead times lead to an accelerator effect.

• Improve supply chain by reducing total replenishment time, share real demand information with all levels.

16-12© McGraw-Hill Education.

Improving Supply Chain Performance • Decisions to improve performance

– Change structure  Decisions that involve investments in bricks and

mortar (facilities, new products, technology, etc.)

– Change systems within a given structure  Decisions that involve people, process flow and

information systems

16-13© McGraw-Hill Education.

Supply Chain Structural Improvements

• Forward and backward integration • Major process simplification • Change configuration of factories,

warehouses, or retail locations (e.g. fewer plants or locations) – Can include supply base reduction,

outsourcing, off-shoring • Major product redesign

– Postponement, modularity

16-14© McGraw-Hill Education.

Supply Chain System Improvements • Cross-functional teams and partnerships with

suppliers and customers to increase coordination.

• Lean Systems for producers, suppliers and distribution

• Integrated information systems downstream and upstream

16-15© McGraw-Hill Education.

Technology and Supply Chain Management

• Growth of e-commerce – B2B (business-to-business) – B2C (business-to-consumer)

• Fundamental processes in supply chains: – Order placement process

 Information before order (Is product available in stock?)

 Actual order entry – Order fulfillment process

 Direct link to internal operations & suppliers • Use of analytics to improve supply chains

16-16© McGraw-Hill Education.

Supply Chain Risk and Resilience • Resilience: Ability to quickly respond to

unexpected disruptions in supply or demand, either natural or manmade. – Examples: strike, recession, price change, natural

disaster, manufacturing failure, unexpected demand.

• Risk mitigation* – Stage 1: Proactive plan – Stage 2: Minimize damage during disruption – Stage 3: Post-disruption recovery

* Each stage requires strategic and operational planning.

16-17© McGraw-Hill Education.

Analysis of Supply Chain Risk (1 of 2)

• Supply chain risk: the probability of supply chain disruption.

• Risk can be reduced at each node in the network. – Add inventory at the supplier node or firm itself. – Use two dispersed suppliers. – For a sole source, have quick recovery or second

supplier. • Do not solely focus on the highest spend

suppliers. Even small suppliers can add risk.

16-18© McGraw-Hill Education.

Analysis of Supply Chain Risk (2 of 2)

• For a given damage scenario and each supplier calculate

SR

S

R

T Tthat Insure sources. supply alternateor inventory using ,disruption a during

demand and supply match cansupplier time maximum T

disruption of impact eperformancPI recover to timeT

<

=

=

=

• Costs of a resilient network can be higher or sometimes lower, depending on the network configuration.

• Some supply chains can be too lean.

16-19© McGraw-Hill Education.

Sustainability of the Supply Chain • Sustainability: meeting present needs without

sacrificing the needs of future generations. • Triple bottom line: environmental, social,

financial • Rests on the concept that all stakeholders are

important • Sustainable supply chains, beyond firm to all

parties in supply chain • Goals, plans and implementation needed to

improve sustainability

16-20© McGraw-Hill Education.

Summary 16.1 Define supply chain and supply chain

management. 16.2 List five key measures of supply chain

performance. 16.3 Explain the bullwhip effect and how it can be

reduced. 16.4 Contrast structural and systems improvements. 16.5 Explain the effect of technology on the supply

chain. 16.6 Define supply chain risk, resilience and how risk

can be managed. 16.7 Describe supply chain sustainability.

© McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill Education. 16-21

End of Presentation