Operations and Supply Chain Management for MBAs [6th ed.] 978-1-119-23953-6

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Operations and Supply Chain Management for MBAs

Operations and Supply Chain Management for MBAs

Sixth Edition Jack R. Meredith Scott M. Shafer Wake Forest University

VICE PRESIDENT & DIRECTOR EXECUTIVE EDITOR DEVELOPMENT EDITOR ASSOCIATE DEVELOPMENT EDITOR SENIOR PRODUCT DESIGNER MARKET SOLUTIONS ASSISTANT SENIOR DIRECTOR PROJECT MANAGER PROJECT SPECIALIST PROJECT ASSISTANT PROJECT ASSISTANT EXECUTIVE MARKETING MANAGER ASSISTANT MARKETING MANAGER ASSOCIATE DIRECTOR SENIOR CONTENT SPECIALIST PRODUCTION EDITOR

George Hoffman Lise Johnson Jennifer Manias Kyla Buckingham Allison Morris Amanda Dallas Don Fowley Gladys Soto Nichole Urban Anna Melhorn Emily Meussner Christopher DeJohn Puja Katariwala Kevin Holm Nicole Repasky Ezhilan Vikraman

This book was set in 10/12 Times LT Std by SPi Global and printed and bound by Lightning Source Inc. Founded in 1807, John Wiley & Sons, Inc. has been a valued source of knowledge and understanding for more than 200 years, helping people around the world meet their needs and fulfill their aspirations. Our company is built on a foundation of principles that include responsibility to the communities we serve and where we live and work. In 2008, we launched a Corporate Citizenship Initiative, a global effort to address the environmental, social, economic, and ethical challenges we face in our business. Among the issues we are addressing are carbon impact, paper specifications and procurement, ethical conduct within our business and among our vendors, and community and charitable support. For more information, please visit our website: www.wiley.com/go/citizenship. Copyright © 2016, 2013, 2010, 2007, 2002, 1999 John Wiley & Sons, Inc. All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning or otherwise, except as permitted under Sections 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923 (Web site: www.copyright.com). Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030-5774, (201) 748-6011, fax (201) 748-6008, or online at: www.wiley.com/go/permissions. Evaluation copies are provided to qualified academics and professionals for review purposes only, for use in their courses during the next academic year. These copies are licensed and may not be sold or transferred to a third party. Upon completion of the review period, please return the evaluation copy to Wiley. Return instructions and a free of charge return shipping label are available at: www.wiley.com/go/returnlabel. If you have chosen to adopt this textbook for use in your course, please accept this book as your complimentary desk copy. Outside of the United States, please contact your local sales representative. ISBN: 978-1-119-23953-6 (PBK) ISBN: 978-1-119-22321-4 (EVALC) Library of Congress Cataloging in Publication Data: Names: Meredith, Jack R., author. | Shafer, Scott M., author. Title: Operations and Supply Chain Management for MBAs / Jack R. Meredith, Scott M. Shafer. Description: Sixth edition. | Hoboken, NJ : John Wiley & Sons, 2016. | Includes bibliographical references and index. Identifiers: LCCN 2015038625 | ISBN 978-1-119-23953-6 (pbk. : alk. paper) Subjects: LCSH: Production management. | Business logistics. Classification: LCC TS155 .M393 2016 | DDC 658.5—dc23 LC record available at http://lccn.loc.gov/2015038625 Printing identification and country of origin will either be included on this page and/or the end of the book. In addition, if the ISBN on this page and the back cover do not match, the ISBN on the back cover should be considered the correct ISBN. Printed in the United States of America 10 9 8 7 6 5 4 3 2 1

This book is dedicated to the Newest Generation: Avery, Mitchell, Ava, Chase, and Ian. J.R.M. Brianna, Sammy, and Kacy S.M.S.

Brief Contents Preface

Part 1 Strategy and Execution 1 Operations and Supply Chain Strategy for Competitiveness 2 Executing Strategy: Project Management

Part 2 Process and Supply Chain Design 3 4 5 6

Process Planning Capacity and Scheduling Supply Chain Planning and Analytics Supply Chain Management

Part 3 Managing and Improving the Process 7 Monitoring and Controlling the Processes 8 Process Improvement: Six Sigma 9 Process Improvement: Lean Cases Glossary Index

vi

xiii

1 2 34

65 66 97 126 157

199 200 225 258 284 338 343

Contents Preface

Part 1 Strategy and Execution 1

2

xiii

1

Operations and Supply Chain Strategy for Competitiveness

2

1.1 Operations 1.1.1. Systems Perspective 1.1.2. Inputs 1.1.3. Transformation Processes 1.1.4. Outputs 1.1.5. Control 1.1.6. Operations Activities 1.1.7. Trends in Operations and Supply Chain Management 1.2 Customer Value 1.2.1. Costs 1.2.2. Beneits 1.2.3. Innovativeness 1.2.4. Functionality 1.2.5. Quality 1.2.6. Customization 1.2.7. Responsiveness 1.3 Strategy and Competitiveness 1.3.1. Global Trends 1.3.2. Strategy 1.3.3. Strategic Frameworks 1.3.4. Core Capabilities

4 5 6 6 7 9 9 10 11 11 12 12 14 14 15 18 19 19 21 22 28

Executing Strategy: Project Management

34

2.1 Deining a Project 2.2 Planning the Project 2.2.1. The Project Portfolio 2.2.2. The Project Life Cycle 2.2.3. Projects in the Organizational Structure 2.2.4. Organizing the Project Team 2.2.5 Project Plans

37 38 38 41 42 42 43 vii

viii

Contents 2.3 Scheduling the Project 2.3.1. Project Scheduling with Certain Activity Times: A Process Improvement Example 2.3.2. Project Scheduling with Uncertain Activity Times 2.3.3. Project Management Software Capabilities 2.3.4. Goldratt’s Critical Chain 2.4 Controlling the Project: Earned Value

Part 2 Process and Supply Chain Design 3

4

5

46 47 50 55 56 58

65

Process Planning

66

3.1 Forms of Transformation Systems 3.1.1. Continuous Process 3.1.2. Flow Shop 3.1.3. Job Shop 3.1.4. Cellular Production 3.1.5. Project Operations 3.2 Selection of a Transformation System 3.2.1. Considerations of Volume and Variety 3.2.2. Product and Process Life Cycle 3.2.3. Service Processes

68 68 69 75 79 83 83 84 86 87

Capacity and Scheduling

97

4.1 Long‐Term Capacity Planning 4.1.1. Capacity Planning Strategies 4.2 Effectively Utilizing Capacity Through Schedule Management 4.2.1. Scheduling Services 4.3 Short‐Term Capacity Planning 4.3.1. Process‐Flow Analysis 4.3.2. Short‐Term Capacity Alternatives 4.3.3. Capacity Planning for Services 4.3.4. The Learning Curve 4.3.5. Queuing and the Psychology of Waiting

99 100 104 106 109 109 115 117 119 122

Supply Chain Planning and Analytics

126

5.1 Importance of Supply Chain Planning and Analytics 5.2 Demand Planning 5.2.1. Forecasting Methods 5.2.2. Factors Influencing the Choice of Forecasting Method 5.2.3. Time Series Analysis 5.2.4. Causal Forecasting with Regression 5.2.5. Assessing the Accuracy of Forecasting Models

128 129 130 131 132 141 147

Contents

6

5.3 Sales and Operations Planning 5.3.1. Aggregate Planning Strategies 5.3.2. Determining the Service Level: An Example Using the Newsvendor Problem 5.3.3. Collaborative Planning, Forecasting, and Replenishment

148 149 150 153

Supply Chain Management

157

6.1 Deining SCM 6.2 Supply Chain Strategy 6.2.1. Strategic Need for SCM 6.2.2. Measures of Supply Chain Performance 6.3 Supply Chain Design 6.3.1. Logistics 6.4 Sourcing Strategies and Outsourcing 6.4.1. Purchasing/Procurement 6.4.2. Supplier Management 6.5 Inventory and Supply Planning 6.5.1. Functions of Inventories 6.5.2. Forms of Inventories 6.5.3. Inventory‐Related Costs 6.5.4. Decisions in Inventory Management 6.6 Role of Information Technology 6.6.1. ERP 6.6.2. Customer Relationship Management Systems 6.7 Successful SCM 6.7.1. Closed‐Loop Supply Chains and Reverse Logistics

160 162 163 165 166 167 175 177 179 180 181 182 183 185 185 186 188 188 189

Supplement A—The Beer Game

195

Supplement B—The Economic Order Quantity Model (online)

Part 3 Managing and Improving the Process 7

199

Monitoring and Controlling the Processes

200

7.1 Monitoring and Control 7.2 Process Monitoring 7.2.1. Stages of Operational Effectiveness 7.2.2. Balanced Scorecard 7.2.3. The Strategy Map 7.2.4. ISO 9000 and 14000 7.2.5. Failure Mode and Effect Analysis (FMEA) 7.3 Process Control 7.3.1. Statistical Process Control 7.3.2. Constructing Control Charts

201 203 203 204 206 207 208 209 210 213

ix

x

Contents

8

9

7.4 Controlling Service Quality 7.4.1. Service Defections

216 217

Process Improvement: Six Sigma

225

8.1 Approaches for Process Improvement 8.2 Business Process Design (Reengineering) 8.3 Six Sigma and the DMAIC Improvement Process 8.3.1. Example Six Sigma Project 8.4 The Deine Phase 8.4.1. Benchmarking 8.4.2. Quality Function Deployment 8.5 The Measure Phase 8.5.1. Defects per Million Opportunities (DPMO) 8.5.2. Measurement Systems Analysis 8.6 The Analyze Phase 8.6.1. Brainstorming 8.6.2. Cause-and-Effect Diagrams 8.6.3. Process Capability Analysis 8.7 The Improve Phase 8.7.1. Design of Experiments 8.8 The Control Phase 8.9 Six Sigma in Practice 8.9.1. Six Sigma Roles 8.9.2. Becoming Certiied 8.9.3. The Need to Customize Six Sigma Programs

228 229 231 232 235 235 236 238 239 241 243 244 246 246 249 249 251 251 251 252 252

Process Improvement: Lean

258

9.1 History and Philosophy of Lean 9.1.1. Traditional Systems Compared with Lean 9.2 Specify Value and Identify the Value Stream 9.2.1. Identify the Value Stream 9.3 Make Value Flow 9.3.1. Continuous Flow Manufacturing 9.3.2. The Theory of Constraints 9.4 Pull Value through the Value Stream 9.4.1. Kanban/JIT in Services 9.5 Pursue Perfection 9.5.1. 5S 9.5.2. The Visual Factory 9.5.3. Kaizen 9.5.4. Poka Yoke 9.5.5. Total Productive Maintenance

261 262 266 268 271 272 273 275 276 277 277 277 278 278 278

Contents 9.6 Beneits of Lean and Lean Six Sigma 9.6.1. Lean Six Sigma

Cases BPO, Incorporated: Call Center Six Sigma Project Peerless Laser Processors General Micro Electronics, Inc.: Semiconductor Assembly Process Heublein: Project Management and Control System D. U. Singer Hospital Products Corp. Automotive Builders, Inc.: The Stanhope Project

279 280

284 284 297 302 315 327 331

Case (online)—United Lock: Door Hardware Division (A) Bibliography (online) Glossary

338

Index

343

xi

Preface The enthusiasm of the users of this MBA‐oriented book has been greatly rewarding for us, and we thank them for their comments, suggestions, criticism, and support. Although the book is not the massive seller that an undergraduate textbook can become, it is clear that there is, as we felt, a need for a solely MBA‐level text. The book was originally written because of the express need we felt in our many MBA programs at Wake Forest University for an operations management textbook directed specifically to MBA students and especially to those who had some real‐world experience. We tried all of the current texts but found them either tomes that left no time for the cases and other materials we wanted to include or shorter but simplistic quantitative books. Moreover, all the books were so expensive they did not allow us to order all the cases, readings, and other supplements and class activities (such as the “Beer Game”; see Chapter 6 Supplement) that we wanted to include in our course. What we were looking for was a short, inexpensive book that would cover just the introductory, basic, and primarily conceptual material. This would allow us, as the professors, to tailor the course through supplementary cases and other materials for the unique class we would be teaching: executive, evening, full time, short course, and so on. Although we wanted a brief, supplementary‐type book so that we could add other material, we have colleagues who need a short book because they only have a half‐semester module for the topic. Or they may have to include another course (e.g., statistics) in the rest of the semester.

Changes in this Sixth Edition A lot has happened since our previous edition, and we felt compelled to reorganize the book to reflect these changes. First, we amended the title to reflect the increased importance of supply chain management concepts and added an extra chapter (5) as well, focusing on demand planning, forecasting, analytics, and sales and operations planning. Also, project management is now being used for implementing strategic plans through the project portfolio, since the successful execution of strategy has continued to be a problem. Also, the concepts of lean and six sigma are now well established in organizations, and the details of their procedures are of less importance for MBA students. As a result of all these changes, we reorganized the material into three parts of the book. In Part I: Strategy and Execution, we discuss operations and supply chain strategy in Chapter 1 and then follow this up with executing strategy through project management in Chapter  2. Part II: Process and Supply Chain Design then covers four chapters. Process planning is described first in Chapter  3 and then the planning of capacity and schedules in Chapter  4. Chapter  5: Supply Chain Planning and Analytics is our first chapter on the supply chain as described above, and then Chapter  6 covers many of the details on managing the supply chain. Part III: Managing and Improving the Process then begins with Chapter 7 on monitoring and controlling the processes, followed by Chapter  8 on process improvement through the use of six sigma. The last chapter, also on process improvement, covers the concepts of lean management. The book then concludes with six cases, one of which—General Micro Electronics—is new. This is followed by a Glossary of key terms to help students quickly refresh their memories on the terminology used in the chapters. We have also updated the examples and added a few new xiii

xiv

Preface short cases to those at the back of the chapters. To conserve space and improve the pace of the book, we have cut about 80 pages from the previous edition and moved the bibliographies online, as well as some of the supplements. Of course, we have added a lot of new material as listed below so the book may still run about the same total length: r
Process mapping r
Supply chain disruptions r
Total cost of ownership r
Strategic sourcing r
Sustainability r
Collaborative planning and replenishment r
SCOR model r
Change management r
Reverse logistics r
Triple bottom line r
Analytics r
Demand planning r
Forecasting r
Sales and operations planning In revising the book, we have kept the elements of our earlier philosophy. For example, we kept the other majors such as marketing and finance in mind—what did these students need to know about operations to help them in their careers? And we still minimize the heavier quantitative material, keeping only discussions and examples that illustrate a particular concept since finance and marketing majors would not be solving operations problems. Moreover, even operations managers probably wouldn’t themselves be solving those problems; more likely, they would be assigned to an analyst. For those chapters in which exercises are included, they are intended only to help illustrate the concept we are trying to convey rather than make experts of the students. We continued to add service examples throughout the text, since the great majority (over 80 percent these days!) of our students would be, or are already, employed in a service organization. And since these students will be working and competing in a highly global economy, we employ many international examples. We also kept the textual flow of material in the chapters away from the current undergraduate trend of fracturing the material flow with sidebars, examples, applications, solved problems, and so forth, in an attempt to keep the students’ interest and attention. Given the maturity of MBA students, we instead worked these directly into the discussions to attain a smoother, clearer flow. As noted below, the Instructor’s Manual includes suggestions for readings, cases, videos, and other course supplements that we have found to be particularly helpful for MBA classes since this book is intended to be only a small part of the MBA class.

Supplements Our approach to supplementary MBA‐level material here is to reference and annotate in the Instructor’s Manual additional useful cases, books, video clips, and readings for each of the nine textbook chapters. The annotation is intended to help the instructors select the most appropriate materials for their unique course. Although we have added some of our own and our colleagues’

Preface cases to the rear of this edition, we also rely on our favorite Harvard, Darden, Western Ontario, and European cases, plus Harvard Business Review readings to fully communicate the nature of the chapter topic we are covering. Although we didn’t think that Test Bank Questions or PowerPoint slides would be used by most MBA instructors, these materials are available from the publisher also. For that matter, the publisher can also custom bind selected content from this text, our larger undergraduate (or any other) Web text, along with cases and articles, should this approach be of interest to the professor. Please contact your local Wiley representative for more details.

Your Inputs Appreciated We would once again like to encourage users of this book to send us their comments and suggestions. Tell us if there is something we missed that you would like to see in the next edition (or the Instructor’s Manual or web site) or if there is perhaps material that is unneeded for this audience. Also, please tell us about any errors you uncover or if there are other elements of the book you like or don’t like. We hope to continue keeping this a living, dynamic project that evolves to meet the needs of the MBA audience, an audience whose needs are also evolving as our economy and society evolve and change. We want to thank the many reviewers of this book and its previous editions: Alexander Ansari, Seattle University; Dennis Battistella, Florida Atlantic University; Linda Brennan, Mercer University; David Cadden, Quinnipiac University; Satya Chakravorty, Kennesaw State University; Okechi Geoffrey Egekwu; Michael H. Ensby, Clarkson University; James A. Fitzsimmons, University of Texas; Lawrence D. Fredendall, Clemson University; William C. Giauque, Brigham Young University; Mike Godfrey, University of Wisconsin–Oshkosh; Damodar Golhar, Western Michigan University; Suresh Kumar Goyal, Concordia University, Canada; Hector Guerrero, The College of William & Mary; Robert Handfield, North Carolina State University; Mark Gerard Haug, University of Kansas; Janelle Heineke, Boston University; Zhimin Huang, Hofstra University; David Hollingworth, Rensselaer Polytechnic Institute; James L. Hoyt, Troy State University; Kendra Ingram, Texas A&M University–Commerce; Jonatan Jelen, NYU–Poly; Mehdi Kaighobadi, Florida Atlantic University; Casey Kleindienst, California State University–Fullerton; Archie Lockamy III, Samford University; Manoj Malhotra, University of South Carolina; Gus Manoochehri, California State University–Fullerton; Robert F. Marsh, Sacred Heart; Ron McLachlin, University of Manitoba; Ivor P. Morgan, Babson College; Rob Owen, Thunderbird School of Global Management; Seungwook Park, California State University–Fullerton; Ranga V. Ramasesh, Texas Christian University; Jaime S. Ribera, IESE–Universidad de Navarra, Spain; Gary D. Scudder, Vanderbilt University; Sue Perrott Siferd, Arizona State University; Samia Siha, Kennesaw State University; Donald E. Simmons, Ithaca College; William J. Tallon, Northern Illinois University; Forrest Thornton, River College; Richard Vail, Colorado Mesa University; Asoo J. Vakharia, University of Florida; Jerry C. Wei, University of Notre Dame; and Jack Zhang, Hofstra University. For this edition we thank the following reviewers: Patrick Jaska, University of Mary Hardin–Baylor; Deborah Kellogg, University of Colorado, Denver; JD McKenna, Colorado Technical University; Madeleine Pullman, Portland State University; Anthony Steigelman, California Lutheran University. Jack Meredith

Scott Shafer

School of Business Wake Forest University, P.O. Box 7897 Winston‐Salem, NC 27109 [email protected] www.mba.wfu.edu/faculty/meredith 336.758.4467

School of Business Wake Forest University, P.O. Box 7897 Winston‐Salem, NC 27109 [email protected] www.mba.wfu.edu/faculty/shafer 336.758.3687

xv

part

Strategy and Execution In this first part of the book, we describe the importance of operations and the supply chain to the global competitiveness of all organizations. We then move into a discussion of their role in designing and executing a competitive strategy for the organization. Chapter 1 first describes the functions of operations and the supply chain in an organization and then lists the aspects of value that customers and clients desire of the products and services they buy. Next, a range of strategic frameworks are described that organizations commonly employ. However, selecting and carefully designing a strategy for the organization are only half the battle for survival in a very competitive global economy— the organization must be able to successfully execute the strategy. As discussed in Chapter 2, a major tool for achieving this is project management, which has developed into a field in itself, with a full range of tools and techniques for executing projects of all kinds, including strategy.

I

ROLE OF OPERATIONS AND SUPPLY CHAINS IN THE ORGANIZATIONS’ COMPETITIVENESS

PART I: Strategy and Execution

Chapter. 1: Operations and Supply Chain Strategy for Competitiveness

Chapter. 2: Executing Strategy: Project Management

PART II: Process and Supply Chain Design

PART III: Managing and Improving the Process

Chapter. 3: Process Planning

Chapter. 7: Monitoring and Controlling the Process

Chapter. 4: Capacity and Scheduling

Chapter. 8: Process Improvement: Six Sigma

Chapter. 5: Supply Chain Planning and Analytics

Chapter. 9: Process Improvement: Lean

Chapter. 6: Supply Chain Management

1

chapter

1

Operations and Supply Chain Strategy for Competitiveness C HA P TE R IN P ERS PECTIVE The crucial role that operations and the supply chain play in the global competitiveness of all organizations is achieved through the execution of an operations strategy devoted to designing, improving, and then executing the production process by which the organization’s services and products are created. In Chapter 1, we first describe the nature of the operations function within the global competitive environment. Then, we analyze what customers value such as innovativeness, functionality, quality, customization, and responsiveness at minimal cost. Last, we explore the major strategic frameworks used in operations to provide these valued benefits at low cost.

Introduction • No discussion of global competitiveness would be complete without the inclusion of Apple Inc.’s amazing comeback from its near‐death experience over a decade ago. Under the futuristic vision of the late Steve Jobs, the firm has innovated in the electronics market like no firm has ever done before, with high quality and reasonable pricing to bring magical capabilities to small gadgets and overwhelm its competitors. Over the five‐year period from February 2010 to February 2015, Apple’s share price has risen to 338.3 percent, compared to the S&P 500’s increase of 89.6 percent. At the end of 2014, Apple became the most valuable company of all time as its market capitalization crossed the $700 billion mark. This example of Apple’s uniqueness shows how important operations capabilities in areas such as innovation, quality, customization, and cost can be to an organization’s global competitiveness (Cheng and Intindola 2012). • As in sports, numerous intense rivalries exist in the world of business, such as the rivalries between Visa and MasterCard, Microsoft and Apple, Ford and General Motors, Energizer and Duracell, and Nike and Reebok. Certainly, any list of top business rivalries would be incomplete without Coke and Pepsi. Interestingly, while these two firms compete in the same industry, one has had considerable success on the important dimension of share price performance, while the other’s performance has been rather dismal. More specifically, over the 10‐year period ending in February 2015, Pepsi’s stock price increased by 85.6 percent, while Coke’s increased by 100.6 percent. The result was that Coke’s market capitalization increased to $182.4 billion compared to Pepsi’s market capitalization of $145.8 billion. This difference in market capitalization is even more dramatic when one considers the fact that Pepsi’s sales are significantly higher than Coke’s—$66.4 billion versus $46.9 billion in 2013. A question that naturally arises is: What accounts for these very different outcomes? One explanation offered by analysts and critics is that Pepsi simply took its eye off the ball. In particular, while Coke focused its attention on beverages, Pepsi has been distracted by attempting to develop nutritious snacks. One result is that Pepsi Cola went from being the number‐two soda to the number‐three soda behind Coke and Diet Coke. To address its 2

Introduction

weakened performance, Pepsi’s board of directors initiated a strategic review of the company. A  variety of opinions have been offered regarding what the outcome of Pepsi’s strategic review will be, from reducing its payroll to free up additional resources for marketing its soft drink products to breaking up the company into a beverage company and a snack food company (Esterl 2012). • General Motors’ market share had been in a long downward decline from about 45 percent in 1980 to about 20 percent in 2008 when the entire automotive industry got hit with a powerful one‐two punch, throwing all the weakened American automobile producers into chaos. First, in early 2008, extreme gasoline prices killed the truck and SUV market, and then, the sudden credit crisis and recession killed the rest of the automobile market. The high cost of debt, unionized labor, and unfunded liabilities (pensions and health care) forced GM and Chrysler to go begging to the government for bailouts, with GM getting a $50 billion lifeline from US taxpayers, for example. By late 2008, GM was burning through billions of dollars of cash every month. One industry analyst calculated that GM’s obligations in March of 2009 amounted to $62 billion, 35 times its market capitalization (Denning 2009, p. C10)! Finally, both GM and Chrysler had to file for a prepackaged structured bankruptcy. The bankruptcy helped GM to cut its labor costs, get rid of a lot of its debt, get rid of some of its pension and health care obligations, and cut the number of models it was offering to the public. So how did the restructuring work out? In 2011, GM had the largest annual profit, at $7.6 billion, in its 103‐year history, up 62 percent from 2010. GM’s revenues were up 13 percent on sales of 1.37 million cars (Chrysler’s sales were up 26 percent), and GM had hired 100,000 workers in each of the previous five months! GM’s car sales are growing quickly in China as well as in North America, and the company now has very little debt, over $38 billion in liquidity, and minimal taxes (as a part of their bankruptcy agreement). This represents a tremendous turnaround in the competitiveness of the US automobile industry. But the news is not all good. GM’s European business is in trouble, having lost $747 million in 2011 (but $2 billion in 2010). And its share of the US market also continues to slip, dropping to 17.8 percent in 2014 (Bennett 2012; Terlep 2012; McIntyre 2014). These brief examples highlight the diversity and importance of operations while providing a glimpse of two themes that are central to operations: customer satisfaction and competitiveness. They also illustrate a more subtle point—that improvements made in operations can simultaneously increase customer satisfaction and lower costs. The Apple example demonstrates how a company obtained a substantial competitive advantage by improving their innovation capability, their production process, and their supply chain. The American automobile industry example shows how losing an operations focus can drive a firm into bankruptcy but how, through restructuring, the firm can regain its operational competitiveness. The Pepsi example illustrates a fundamental principle in strategy and competitiveness—namely, that organizations that focus on doing a few things well usually outperform organizations that lack this focus. And Apple’s success demonstrates how quickly technology can upend an industry and change the major players and their competitiveness. Today, in our international marketplace, consumers purchase their products from the provider that offers them the most “value” for their money. To illustrate, you may be doing your course assignments on a Japanese notebook computer, driving a German automobile, or watching a sitcom on a TV made in Taiwan while cooking your food in a Korean microwave. However, most of your services—banking, insurance, and personal care—are probably provided domestically, although some of these may also be owned by, or outsourced to, foreign corporations. There is a reason why most services are produced by domestic firms while products may be produced in part, or wholly, by foreign firms, and it concerns an area of business known as operations.

3

4

Operations and Supply Chain Strategy for Competitiveness

A great many societal changes that are occurring today intimately involve activities associated with operations. For example, there is great pressure among competing nations to increase their exports. And businesses are intent on building efficient and effective supply chains, improving their processes through “Six Sigma,” and successfully applying the precepts of “lean management” and other operations‐based programs. Another characteristic of our modern society is the explosion of new technology, an important aspect of operations. Technologies such as smart phones, e‐mail, notebook computers, tablets, and the Web, to name a few, are profoundly affecting business and are fundamentally changing the nature of work. For example, many banks are shifting their focus from building new branch locations to using the Web as a way to establish and develop new customer relationships. Banks rely on technology to carry out more routine activities as well, such as transferring funds instantly across cities, states, and oceans. Our industries also rely increasingly on technology: robots carry and weld parts together, and workerless, dark “factories of the future” turn out a continuing stream of products. And soft operations technologies, such as “supply chain management” and “lean production” (Feld 2000; Womack and Jones 2003), have transformed world markets and the global economy. This exciting, competitive world of operations is at the heart of every organization and, more than anything else, determines whether the organization survives in the international marketplace or disappears into bankruptcy or a takeover. It is this world that we will be covering in the following chapters.

1.1 Operations Why do we argue that operations be considered the heart of every organization? Fundamentally, organizations exist to create value, and operations is the part of the organization that creates value for the customer. Hammer (2004) maintains that operational innovation can provide organizations with long‐term strategic advantages over their competitors. Regardless of whether the organization is for profit or not for profit, primarily service or manufacturer, or public or private, it exists to create value. Thus, even nonprofit organizations like the Red Cross strive to create value for the recipients of their services in excess of their costs. Moreover, this has always been true, from the earliest days of bartering to modern‐day corporations. Consider McDonald’s as an example. This firm uses a number of inputs, including ingredients, labor, equipment, and facilities; transforms them in a way that adds value to them (e.g., by frying); and obtains an output, such as a chicken sandwich, that can be sold at a profit. This conversion process, termed as production system, is illustrated in Figure 1.1. The elements of the figure represent what is known as a system1: a purposeful collection of people, objects, and procedures for operating within an environment. Note the word purposeful; systems are not merely arbitrary groupings but goal‐directed or purposeful collections. Managing and running a production system efficiently and effectively are at the heart of the operations activities that will be discussed in this text. Since we will be using this term throughout the text, let us formally define it. Operations is concerned with transforming inputs into useful outputs according to an agreed‐upon strategy and thereby adding value to some entity; this constitutes the primary activity of virtually every organization. Not only is operations central to organizations, it is also central to people’s personal and professional activities, regardless of their position. People, too, must operate productively, adding value to inputs and producing quality outputs, whether those outputs are information, reports, services, products, or even personal accomplishments. Thus, operations should be of major interest to every reader, not just professionally but also personally. 1

Note the word system is being used here in a broad sense and should not be confused with more narrow usages such as information systems, planning and control systems, or performance evaluation systems.

1.1 Operations

5

Environment • Customers • Government

Strategy • Value proposition • Vision/mission • Strategic frameworks • Core capabilities

Inputs • Capital • Materials • Equipment • Facilities • Suppliers • Labor • Knowledge • Time

Action

Action

• Competitors • Technology

Transformation processes

• Alteration • Transportation • Storage • Inspection

Data

Action

• Suppliers • Economy

Output • Facilitating goods • Services

Data

Data

Control • Measure • Compare • Plan improvements • Implement improvements

1.1.1 Systems Perspective As Figure 1.1 illustrates, a production system is defined in terms of the environment, a strategy, a set of inputs, the transformation process, the outputs, and some mechanism for controlling the overall system. The strategy includes determining such elements as what customers value (often referred to as the value proposition), the vision and mission of the organization, an appropriate framework to execute this vision, and the core capabilities of the organization. We discuss the strategy in detail a bit later. The environment includes those things that are outside the actual production system but that influence it in some way. Because of its influence, we need to consider the environment, even though it is beyond the control of decision makers within the system. For example, a large portion of the inputs to a production system are acquired from the environment. Also, government regulations related to pollution control and workplace safety affect the transformation system. Think about how changes in customers’ needs, a competitor’s new product, or a new advance in technology can influence the level of satisfaction with a production system’s current outputs. As these examples show, the environment exerts a great deal of influence on the production system. Because the world around us is constantly changing, it is necessary to monitor the production system and take action when the system is not meeting its strategic goals. Of course, it may be that the current strategy is no longer appropriate, indicating a need to revise the strategy. On the other hand, it may be found that the strategy is fine but that the inputs or transformation processes, or both, should be modified in some way. In either case, it is important to continuously collect data from the environment, the transformation processes, and the outputs; compare that data to the strategic plan; and, if substantial deviations exist, design and implement improvements to the system, or perhaps the strategy, so that results agree with the strategic goals.

FIGURE 1.1 The production system.

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Thinking in terms of systems provides decision makers with numerous advantages. To begin with, the systems perspective focuses on how the individual components that make up a system interact. Thus, the systems perspective provides decision makers with a broad and complete picture of an entire situation. Furthermore, the systems perspective emphasizes the relationships between the various system components. Without considering these relationships, decision makers are prone to a problem called suboptimization. Suboptimization occurs when one part of the system is improved to the detriment of other parts of the system and, perhaps, the organization as a whole. For example, if a retailer decides to broaden its product line in an effort to increase sales, this could actually end up hurting the retailer as a whole if it does not have sufficient shelf space or service personnel available to accommodate the broader product line. Thus, decisions need to be evaluated in terms of their effect on the entire system, not simply in terms of how they will affect one component of the system. In the remainder of this section, we elaborate on inputs, the transformation processes, and outputs. In later sections and chapters, we further discuss both strategy and elements of the control system in more detail.

1.1.2 Inputs The set of inputs used in a production system is more complex than might be supposed and typically involves many other areas such as marketing, finance, engineering, and human resource management. Obvious inputs include facilities, labor, capital, equipment, raw materials, and supplies. Supplies are distinguished from raw materials by the fact that they are not usually a part of the final output. Oil, paper clips, pens, tape, and other such items are commonly classified as supplies because they only aid in producing the output. Another very important but perhaps less obvious input is knowledge of how to transform the inputs into outputs. The employees of the organization hold this knowledge. Finally, having sufficient time to accomplish the operations is always critical. Indeed, the operations function quite frequently fails in its task because it cannot complete the transformation activities within the required time limit.

1.1.3 Transformation Processes The transformation processes are the part of the system that add value to the inputs. Value can be added to an entity in a number of ways. Four major ways are described here: 1. Alter: Something can be changed structurally. That would be a physical change, and this approach is basic to manufacturing industries, where goods are cut, stamped, formed, assembled, and so on. We then go out and buy the shirt, or computer, or whatever the good is. But it need not be a separate object or entity; for example, what is altered may be us. We might get our hair cut, or we might have our appendix removed. Other, more subtle, alterations may also have value. Sensual alterations, such as heat when we are cold, or music, or beauty, may be highly valued on certain occasions. Beyond this, even psychological alterations can have value, such as the feeling of worth from obtaining a college degree or the feeling of friendship from a long‐distance phone call. 2. Transport: An entity, again including ourselves, may have more value if it is located somewhere other than where it currently is. We may appreciate having things brought to us, such as flowers, or removed from us, such as garbage. 3. Store: The value of an entity may be enhanced for us if it is kept in a protected environment for some period of time. Some examples are stock certificates kept in a safe‐deposit box, our pet boarded at a kennel while we go on vacation, or ourselves staying in a hotel.

1.1 Operations

4. Inspect: Last, an entity may be more valued because we better understand its properties. This may apply to something we own, plan to use, or are considering purchasing, or, again, even to ourselves. Medical exams, elevator certifications, and jewelry appraisals fall into this category. Thus, we see that value may be added to an entity in a number of different ways. The entity may be changed directly, in space, in time, or even just in our mind. Additionally, value may be added using a combination of these methods. To illustrate, an appliance store may create value by both storing merchandise and transporting (delivering) it. There are other, less frequent, ways of adding value as well, such as by “guaranteeing” something. These many varieties of transformations, and how they are managed, constitute some of the major issues to be discussed in this text.

1.1.4 Outputs Two types of outputs commonly result from a production process: services and products. Generally, products are physical goods, such as a personal computer, and services are abstract or nonphysical. More specifically, we can consider the characteristics in Table 1.1 to help us distinguish between the two. However, this classification may be more confusing than helpful. For example, consider a pizza delivery chain. Does this organization produce a product or provide a service? If you answered “a service,” suppose that instead of delivering its pizzas to the actual consumer, it made the pizzas in a factory and sold them in the frozen food section of grocery stores. Clearly, the actual process of making pizzas for immediate consumption or to be frozen involves basically the same tasks, although one may be done on a larger scale and use more automated equipment. The point is, however, that both organizations produce a pizza, and defining one organization as a service and the other as a manufacturer seems to be a little arbitrary. In addition, both products and services can be produced as commodities or individually customized. We avoid this ambiguity by adopting the point of view that any physical entity accompanying a transformation that adds value is a facilitating good (e.g., the pizza). In many cases, of course, there may be no facilitating good; we refer to these cases as pure services. The advantage of this interpretation is that every transformation that adds value is simply a service, either with or without facilitating goods! If you buy a piece of lumber, you have not purchased a product. Rather, you have purchased a bundle of services, many of them embodied in a facilitating good: a tree‐cutting service, a sawmill service, a transportation service, a storage service, and perhaps even an advertising service that told you where lumber was on sale. We refer to these services as a bundle of “benefits,” of which some are tangible (the sawed length of lumber, the type of tree) and others are intangible (courteous salesclerks, a convenient location, and payment by charge card). Some services may, of course, even be negative, such as an audit of your tax return. In summary, services are bundles of benefits, some of which may be tangible and others intangible, and they may be accompanied by a facilitating good or goods. ■ TABLE 1.1 Characteristics of Products and Services Products

Services

Tangible

Intangible

Minimal contact with customer

Extensive contact with customer

Minimal participation by customer in the delivery

Extensive participation by customer in the delivery

Delayed consumption

Immediate consumption

Equipment‐intense production

Labor‐intense production

Quality easily measured

Quality difficult to measure

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Flour purchase Magazine purchase Movie rental Auto repair Hand-made suit Travels Plush restaurant Theatrical performance

FIGURE 1.2 The range from services to products.

Medical examination

100

50

% Service

0

50

100

% Product

Firms often run into major difficulties when they ignore this aspect of their operations. They may think of, and even market themselves as, a “lumberyard” and not as providing a bundle of services. They may recognize that they have to include certain tangible services (such as cutting lumber to the length desired by the customer) but ignore the intangible services (charge sales, having a sufficient number of clerks). Another reason for not making a distinction between manufacturing and services is that when a company thinks of itself as a manufacturer, it tends to focus on measures of internal performance such as efficiency and utilization. But when companies consider themselves as providing services, they tend to focus externally and ask questions such as “How can we serve our customers better?” This is not to imply that improving internal performance measures is not desirable. Rather, it suggests that improved customer service should be the primary impetus for all improvement efforts. It is generally not advisable to seek internal improvements if these improvements do not ultimately lead to corresponding improvements in customer service and customer satisfaction. In this text, we will adopt the point of view that all value‐adding transformations (i.e., operations) are services, and there may or may not be a set of accompanying facilitating goods. Figure 1.2 illustrates how the tangible product (or facilitating good) portion and the intangible service portion for a variety of outputs contribute to the total value provided by each output. The outputs shown range from virtually pure services to what would be known as products. For example, the Plush restaurant appears to be about 75 percent service and 25 percent product. Although we work with “products” as extensively as with services throughout the chapters in this book, bear in mind that in these cases we are working with only a portion of the total service, the facilitating good. In general, we will use the nonspecific term outputs to mean either products or services. One particular type of output that is substantially different from products and many other types of services is that of knowledge or information. These outputs often have the characteristic that the more they are used, the more valuable they become. For example, in a network, the more entities that belong to the network, the more useful it may be. If you are on Facebook® or use e‐ mail, the more other people that are also there, the more valuable it is to you. And when you share this output, you don’t lose anything, you gain. Some other characteristics of information or knowledge that differ from normal goods and services are as follows.

1.1 Operations

• Giving or selling the information/knowledge to someone doesn’t mean you can’t give or sell it to someone else. • The information/knowledge doesn’t wear out. • The information/knowledge isn’t subject to the law of diminishing returns. • The information/knowledge can be replicated at minimal cost and trouble. • The more the knowledge is used, the more valuable it becomes.

1.1.5 Control Suppose that in our production system, we make a mistake. We must be able to observe this through, for example, accounting records (measurement data), compare it to a standard to see how serious the error is, and then, if needed, plan and implement (usually via a project) some improvements. If the changes are not significantly affecting the outputs, then no control actions are needed. But if they are, management must intercede and apply corrective control to alter the inputs or the transformation processes and, thereby, the outputs. The control activities illustrated in Figure  1.1 are used extensively in systems, including management systems, and will be encountered throughout this text. One example of the components of the production system for a school would be as follows: A strategy of providing a safe, trustworthy, friendly environment for passing knowledge on to the students. The inputs would be, among others, the teachers, facility, books, and students that are exposed to a transformation system of learning, counseling, motivating, and so on to produce outputs of educated, skilled students. Control is exercised through examinations, demographics, grievance procedures, and constant oversight. This all occurs in a physical and structural environment that includes state and county school boards to provide oversight policies and tax systems to provide the resources.

1.1.6 Operations Activities Operations include not only those activities associated specifically with the production system but also a variety of other activities. For example, purchasing or procurement activities are concerned with obtaining many of the inputs needed in the production system. Similarly, shipping and distribution are sometimes considered marketing activities and sometimes considered operations activities. Because of the important interdependencies of these activities, many organizations are attempting to manage these activities as one process commonly referred to as supply chain management. As organizations begin to adopt new organizational structures based on business processes and abandon the traditional functional organization, it is becoming less important to classify activities as operations or nonoperations (e.g., sales, marketing, and accounting). However, to understand the tasks more easily, we commonly divide the field of operations into a series of subject areas such as scheduling, process design, inventory management, maintenance, and quality control. These areas are quite interdependent, but to make their workings more understandable, we discuss them as though they were easily separable from each other. In some areas, a full‐fledged department may be responsible for the activities, such as quality control or scheduling, but in other areas, the activities (such as facility location) may be infrequent and simply assigned to a particular group or project team. Moreover, some of the areas such as supply chain management are critically important because they are a part of a larger business process or because other areas depend on them. Finally, since we consider all operations to be services, these subject areas are equally applicable to organizations that have traditionally been classified as manufacturers and services.

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1.1.7 Trends in Operations and Supply Chain Management As has been previously discussed in this chapter and will be further emphasized in the remaining chapters, an organization’s operations play a critical role in its overall competitiveness and long‐ term success. Given the critical role played by operations, it is important to stay abreast of the significant trends in the operations area as well as general business trends that may impact the operations function. As in other disciplines, technology is having a significant impact on the practice of operations. For example, communication technologies such as the Internet and cloud computing are greatly facilitating the ability of organizations to share real‐time information with their suppliers and customers. Having more timely information enhances the opportunities for supply chain partners to coordinate and integrate their operations, which ultimately leads to a more effective and efficient supply chain that benefits both the end customer and the trading partners in the supply chain. One exciting technology that promises to greatly enhance the ability of organizations to have real‐time information on their inventory and other assets is radio‐frequency identification (RFID); RFID tags are attached to individual inventory items, and these tags transmit identification and location information. For example, by attaching an RFID tag to a part, its progress through the production process can be monitored and, when finished, its location in the warehouse tracked. RFID tags are classified as passive or active. Passive RFID tags contain no power source and therefore rely on the power source of an RFID reader to transmit their information. Active RFID tags contain a power source such as a battery and use this power source to periodically transmit a signal that provides identification information. Perhaps the greatest challenge to greater adoption of RFID tags is the cost of the tags themselves. As with other technologies, the cost of RFID has decreased dramatically and is expected to continue on this trajectory. The cost of basic passive RFID tags ranges from $0.10 to $1.50, depending on the volume of tags purchased and the environmental factors they are designed to withstand. The cost of active RFID tags starts from $15 to $20 and again increases depending on the features desired. Thus, at present, the costs of active RFID tags are mainly justified for tracking expensive assets such as a rail car or delivery truck. Beyond technology, another important trend in business is the increasing emphasis organizations are placing on effectively managing their supply chains. Indeed, to remain competitive, organizations are discovering the importance of leveraging the volumes of customer data that are a natural by‐product of our computerized society, developing stronger relationships with their supply chain partners, and proactively managing the risks associated with disruptions to their supply chain. Regarding the increasing volumes of data, as will be discussed in greater detail in Chapter 5, many organizations are finding ways to combine the volumes of data they accumulate with advanced analytical techniques to manage and improve their supply chains in ways that were unthinkable in the past. Another area gaining increasing attention in supply chain management is the development of strong relationships with supply chain partners through increased collaboration. It is now widely accepted that all supply chain partners can benefit through greater collaboration. For example, including all supply chain partners in the development of the demand forecast not only increases the amount of information available from different perspectives but also helps ensure that the detailed plans of suppliers and customers are aligned and working toward achieving the same goals. We return to the issue of building relationships with supply chain partners and the benefits of greater collaboration in Chapter 5. Related to the area of developing stronger relationships with supply chain partners is the emphasis organizations are placing on the sourcing of their products. In the past, sourcing decisions

1.2 Customer Value

were frequently viewed as primarily tactical in nature with the overarching goal of obtaining the lowest possible unit cost. Often, the strategy used to obtain the lowest cost was to play one supplier against another. Now, we see organizations increasingly discussing strategic sourcing and thinking more holistically in terms of the total cost of ownership, not just the unit cost. Likewise, the potential benefits of outsourcing overseas are being increasingly questioned, and new terms such as reshoring and next‐shoring have entered the lexicon. The topic of strategic sourcing is discussed in greater detail in Chapter 6. Managing the risk of disruptions to the supply chain is yet another area gaining increasing attention. For example, consider the impact of the earthquake and the tsunami that hit Japan in 2011 on the availability of product components and finished goods. Disruptions to the supply chain are generally either the result of nature (natural disasters such as earthquakes, blizzards, floods, and hurricanes) or human behavior (terrorist strikes, glitches in technology, and workers going on strike). Managing such disruptions is especially challenging because they are often difficult to predict. The best approach for dealing with these types of disruptions to the supply chain is to brainstorm potential disruptions, assess the impact of the identified disruptions, and develop contingency plans to mitigate the risk of the disruption. A final important trend impacting the practice of operations management is the increasing levels of concern for the environment which in turn have led many organizations to place greater emphasis on issues related to sustainability. Addressing environmental concerns impacts virtually all aspects of operations management from the design of the organization’s output to the sourcing of parts, the distribution of the product, and even the disposal or recycling of the product or its components once it reaches the end of its useful life. Green sourcing, for example, seeks to identify suppliers in such a way that the organization’s carbon footprint and overall impact on the environment are minimized. As a result of the increasing importance organizations are placing on sustainability, some organizations are adopting the triple bottom line approach for assessing their performance. In addition to assessing profits, organizations that employ the triple bottom line approach also assess themselves on social responsibility (people) and their environmental responsibility (planet). Reducing the waste associated with products is another top sustainability priority of organizations that seek to minimize the negative impact they have on the environment. In this case, organizations can deploy a strategy often referred to as the three Rs: reduce, reuse, and recycle. As its name suggests, the reduce strategy seeks to decrease the amount of waste associated with a product. One way to accomplish this is to minimize the amount of product packaging used. In services, switching to electronic copies of documents helps reduce waste, such as when a bank switches to electronic statements. Reuse is a second strategy for minimizing waste. The idea underlying reuse is to identify alternative uses for an item after its initial use. For example, there are kits available for converting old computer monitors into fish aquariums. Finally, recycling involves using the materials from old products to create new products. For example, many greeting cards are made from recycled paper.

1.2 Customer Value 1.2.1 Costs In the “Introduction” to this chapter, we mentioned that customers support the providers of goods and services who offer them the most “value.” In this section, we elaborate on this concept. The equation for value is conceptually clear: Value

perceived benefits /costs

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The perceived benefits can take a wide variety of forms, but the costs are usually more straightforward: • The upfront monetary investment • Other monetary life‐cycle costs of using the service or product, such as maintenance • The hassles involved in obtaining the product or service, such as travel required, obtaining financing, the friendliness of service, and so on The cost to the customer is, of course, the price paid, but this is usually highly correlated with the cost of producing the service or product, which is itself largely based on the “efficiency” of the production process. Efficiency is always measured as output/input; for example, a standard automobile engine that uses gasoline is usually about 15 to 20 percent efficient (that is, the energy put into the engine in terms of gasoline vs. the energy put out in terms of automobile motion). However, electric and jet engines are more efficient, and rocket engines can reach almost 70 percent efficiency. The primary method of attaining efficiency in production is through high productivity, which is normally defined as output per worker hour. This definition of productivity is actually what is known as a partial factor measure of productivity, in the sense that it considers only worker hours as the productive factor. Although in the past, labor often constituted as much as 50 percent of the cost of a product—or even more for a service—it is now frequently as little as 5 percent, so labor productivity is no longer a good measure of efficiency. Clearly, labor productivity could easily be increased by substituting machinery for labor, but that doesn’t mean that this is a wise, or even cost‐saving, decision. A multifactor productivity measure uses more than a single factor, such as both labor and capital. Obviously, the different factors must be measured in the same units, such as dollars. An even broader gauge of productivity, called total factor productivity, is measured by including all the factors of production—labor, capital, materials, and energy—in the denominator. This measure is to be preferred in making any comparisons of productivity for efficiency or cost purposes. Last, we also frequently hear of “effectiveness,” which is a measure of the achievement of goals; where efficiency is sometimes considered to be “doing the thing right,” effectiveness is instead considered to be “doing the right thing” or being focused on the proper task or goal.

1.2.2 Benefits In contrast to the role of costs in the customer’s value equation, the benefits can be multiple. We will consider five of these in detail: innovativeness, functionality, quality, customization, and responsiveness.

1.2.3 Innovativeness Many people (called “early adopters” in marketing) will buy products and services simply because they are so innovative, or major improvements over what has been available formerly. It is the field of research and development (known as R&D) that is primarily responsible for developing innovative new product and service ideas. R&D activities focus on creating and developing (but not producing) the organization’s outputs. On occasion, R&D also creates new production methods by which outputs, either new or old, may be produced. Research itself is typically divided into two types: pure and applied. Pure research is simply working with basic technology to develop new knowledge. Applied research is attempting to develop new knowledge along particular lines. For example, pure research might focus on developing a material that conducts electricity with zero resistance, whereas applied research

1.2 Customer Value

13

could focus on further developing this material to be used in products for customers. Development is the attempt to utilize the findings of research and expand the possible applications, often consisting of modifications or extensions to existing outputs to meet customers’ interests. Figure 1.3 illustrates the range of applicability of development as the output becomes more clearly defined. In the early years of a new output, development is oriented toward removing “bugs,” increasing performance, improving quality, and so on. In the middle years, options and variants of the output are developed. In the later years, development is oriented toward extensions of the output that will prolong its life. Unfortunately, the returns from R&D are frequently meager, whereas the costs are great. Figure  1.4 illustrates the mortality curve (fallout rate) associated with the concurrent design,

Pure

Research Applied

Development Options

Variants

Growth

Saturations Full marketing Idea incubation

Extensions

Acceptance testing, modification

Improving performance

Decline

Output selection

Discovery

Death

Time

FIGURE 1.3 The development effort.

10

In the market

20

Commercialization and production

30

Design and testing

40

Development

50

Economic analysis

Evaluation and screening

60

Number of products remaining

Effort

Maturity Idea refinement

Idea examination and evaluation

0 0

1

2

3

4 Years

5

6 Success

FIGURE 1.4 Product mortality curve.

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Operations and Supply Chain Strategy for Competitiveness

evaluation, and selection for a hypothetical group of 50 potential products, assuming that the 50 candidate products are the result of earlier research. Initial evaluation and screening reduce the 50 to about 22, and economic analysis further reduces the number to about 9. Development reduces this number even more, to about 5, and design and testing reduce it to perhaps 3. After two and a half more year’s commercialization and production are completed, there is only one successful product left. (Sometimes there are none!) One study found that, beyond this, only 64 percent of the new products brought to market were successful or about two out of three. Two alternatives to research frequently used by organizations are imitation of a proven new idea (i.e., employing a second‐to‐market strategy) or outright purchase of someone else’s invention. The outright purchase strategy is becoming extremely popular in those industries where bringing a new product to market can cost huge sums, such as pharmaceuticals and high technology. It is also employed in those industries where technology advances so rapidly that there isn’t enough time to employ a second‐to‐market strategy. Although imitation does not put the organization first in the market with the new product or service, it does provide an opportunity to study any possible defects in the original product or service and rapidly develop a better design, frequently at a better price. The second approach—purchasing an invention or the inventing company itself—eliminates the risks inherent in research, but it still requires the company to develop and market the product or service before knowing whether it will be successful. Either route spares the organization the risk and tremendous cost of conducting the actual research leading up to a new invention or improvement. In addition to product research (as it is generally known), there is also process research, which involves the generation of new knowledge concerning how to produce outputs. Currently, the production of many familiar products out of plastic (toys, pipe, furniture, etc.) is an outstanding example of successful process research. Motorola, to take another example, extensively uses project teams that conduct process development at the same time as product development.

1.2.4 Functionality Many people confuse functionality with quality (discussed next). But functionality involves the activities the product or service is intended to perform, thereby providing the benefits to the customer. A contemporary example is the ubiquitous cell phone. These days, it is probably rare to find a cell phone that is only a phone; many phones include a camera and a way to send its picture to another person or provide access to the Internet, as well as a myriad of other functions. However, many products, especially electronics, but also some services, may be advertised to provide purchasers with a new, unique function and they may do so, but it may not work well or for long. The former involves performance and the latter has to do with reliability. Clearly, these are different attributes of the output, and one can be well addressed while others disappoint. Our discussion of quality, next, elaborates a bit more on the distinction between these attributes.

1.2.5 Quality Quality is a relative term, meaning different things to different people at different times. Moreover, quality is not an absolute but, rather, is based on customers’ perceptions. Customers’ impressions can be influenced by a number of factors, including brand loyalty and an organization’s reputation. Richard J. Schonberger has compiled a list of multiple quality dimensions that customers often associate with products and services: 1. Conformance to specifications. Conformance to specifications is the extent to which the actual product matches the design specifications, such as a pizza delivery shop that consistently meets its advertised delivery time of 30 minutes.

1.2 Customer Value

2. Performance. Customers frequently equate the quality of products and services with their performance. (Note, however, that this dimension may in some cases actually refer to functionality.) Examples of performance include how quickly a sports car accelerates or the battery life of a cell phone. 3. Features. Features are the options that a product or service offers, such as side impact airbags or leather seats in automobiles. (Again, however, this dimension may also be confused with functionality.) 4. Quick response. Quick response is associated with the amount of time required to react to customers’ demands. However, we consider this to be a separate benefit, discussed further in the following text. 5. Reliability. Reliability is the probability that a product or service will perform as intended on any given trial or for some period of time, such as the probability that a car will start on any given morning. 6. Durability. Durability refers to how tough a product is, such as a notebook computer that still functions after being dropped or a knife that can cut through steel and not need sharpening. 7. Serviceability. Serviceability refers to the ease with which maintenance or a repair can be performed. 8. Aesthetics. Aesthetics are factors that appeal to human senses, such as the taste of a steak or the sound of a sports car’s engine. 9. Humanity. Humanity has to do with how the customer is treated, such as a private university that maintains small classes so students are not treated like numbers by its professors. It is worth noting that not all the dimensions of quality are relevant to all products and services. Thus, organizations need to identify the dimensions of quality that are relevant to the products and services they offer. Market research about customers’ needs is the primary input for determining which dimensions are important. Of course, measuring the quality of a service can often be more difficult than measuring the quality of a product or facilitating good. However, the dimensions of quality described previously apply to both.

1.2.6 Customization Customization refers to offering a product or service exactly suited to a customer’s desires or needs. However, there is a range of accommodation to the customer’s needs, as illustrated in Figure 1.5. At the left, there is the completely standard, world‐class (excellence suitable for all markets) product or service. Moving to the right is the standard with options, continuing on to

Increasing customization

Standard world-class

Standard with options

Variants

Increasing standardization

Alternate models

Customization

FIGURE 1.5 Continuum of customization.

15

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Operations and Supply Chain Strategy for Competitiveness

variants and alternative models and ending at the right with made‐to‐order customization. In general, the more customization, the better—if it can be provided quickly, with acceptable quality and cost.

Flexibility However, to offer customization demands flexibility on the part of the firm. Professor Upton (1994), formerly of the Harvard Business School, defines flexibility as “the ability to change or react with little penalty in time, effort, cost, or performance” (p. 73). There are more than a dozen different types of flexibility that we will not pursue here—design, volume, routing through the production system, product mix, and many others. But having the right types of flexibility can offer the following major competitive advantages: • Faster matches to customers’ needs because change over time from one product or service to another is quicker • Closer matches to customers’ needs • Ability to supply the needed items in the volumes required for the markets as they develop • Faster design‐to‐market time to meet new customer needs • Lower cost of changing production to meet needs • Ability to offer a full line of products or services without the attendant cost of stocking large inventories • Ability to meet market demands even if delays develop in the production or distribution process

Mass Customization Until recently, it was widely believed that producing low‐cost standard products (at the far left in Figure 1.5) required one type of transformation process and producing higher‐cost customized products (far right) required another type of process. However, in addition to vast improvements in operating efficiency, an unexpected by‐product of the continuous improvement programs of the 1980s was substantial improvement in flexibility. Indeed, prior to this, efficiency and flexibility were thought to be trade‐offs. Increasing efficiency meant that flexibility had to be sacrificed, and vice versa. Thus, with the emphasis on continuous improvement came the realization that increasing operating efficiency could also enhance flexibility. For example, many manufacturers initiated efforts to reduce the amount of time required to set up (or change over) equipment when switching from the production of one product to another. Obviously, all time spent setting up equipment is wasteful, since the equipment is not being used during this time to produce outputs that ultimately create revenues for the organization. Consequently, improving the amount of time a resource is used productively directly translates into improved efficiency. Interestingly, these same reductions in equipment times also resulted in improved flexibility. Specifically, with shorter equipment setup times, manufacturers could produce economically in smaller‐size batches, making it easier to switch from the production of one product to another. In response to the discovery that efficiency and flexibility can be improved simultaneously and may not have to be traded off, the strategy of mass customization emerged (see Pine 1993; Gilmore and Pine 1997). Organizations pursuing mass customization seek to produce low‐cost, high‐quality outputs in great variety. Of course, not all products and services lend themselves to being customized. This is particularly true of commodities, such as sugar, gas, electricity, and flour. On the other hand, mass customization is often quite applicable to products characterized by short life cycles, rapidly advancing technology, or changing customer

1.2 Customer Value

requirements. However, recent research suggests that successfully employing mass customization requires an organization to first develop a transformation process that can consistently deliver high‐quality outputs at a low cost. With this foundation in place, the organization can then seek ways to increase the variety of its offerings while at the same time ensuring that quality and cost are not compromised. In an article published in the Harvard Business Review, Gilmore and Pine (1997) identified four mass customization strategies: 1. Collaborative customizers. These organizations establish a dialogue to help customers articulate their needs and then develop customized outputs to meet these needs. For example, one Japanese eyewear retailer developed a computerized system to help customers select eyewear. The system combines a digital image of the customer’s face and then various styles of eyeware are displayed on the digital image. Once the customer is satisfied, the customized glasses are produced at the retail store within an hour. 2. Adaptive customizers. These organizations offer a standard product that customers can modify themselves, such as fast‐food hamburgers (ketchup, etc.) and closet organizers. Each closet‐organizer package is the same but includes instructions and tools to cut the shelving and clothes rods so that the unit can fit a wide variety of closet sizes. 3. Cosmetic customizers. These organizations produce a standard product but present it differently to different customers. For example, Planters packages its peanuts and mixed nuts in a variety of containers on the basis of specific needs of its retailing customers, such as Wal‐Mart, 7‐Eleven, and Safeway. 4. Transparent customizers. These organizations provide custom products without the customers knowing that a product has been customized for them. For example, Amazon.com provides book recommendations based on information about past purchases.

Example: Hewlett‐Packard Faced with increasing pressure from its customers for quicker order fulfillment and for more highly customized products, Hewlett‐Packard (HP) wondered whether it was really possible to deliver mass‐customized products rapidly while at the same time continuing to reduce costs (Feitzinger and Lee 1997). HP’s approach to mass customization can be summarized as effectively delaying tasks that customize a product as long as possible in the product supply process. It is based on the following three principles: • Products should be designed around a number of independent modules that can be easily combined in a variety of ways. • Manufacturing tasks should also be designed and performed as independent modules that can be relocated or rearranged to support new production requirements. • The product supply process must perform two functions. First, it must cost‐effectively supply the basic product to the locations that complete the customization activities. Second, it must have the requisite flexibility to process individual customers’ orders. HP has discovered that modular design provides three primary benefits. First, components that differentiate the product can be added during the later stages of production. This method of mass customization, generally called postponement, is one form of the assemble‐to‐order production process, discussed in more detail in Chapter 3. For example, the company designed its printers so that country‐specific power supplies are combined with the printers at local distribution centers and actually plugged in by the customer when the printer is set up. Second, production time can be significantly reduced by simultaneously producing the required modules. Third, producing in modules facilitates the identification of production and quality problems.

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1.2.7 Responsiveness The competitive advantages of faster, dependable response to new markets or to the individual customer’s needs have occasionally been noted in the business media (Eisenhardt and Brown 1998; Stalk 1988; Vessey 1991). For example, in a study of the US and Japanese robotics industry, the National Science Foundation found that the Japanese tend to be about 25 percent faster than Americans, and to spend 10 percent less, in developing and marketing new robots. The major difference is that the Americans spend more time and money on marketing, whereas the Japanese spend five times more than the Americans on developing more efficient production methods. Table 1.2 identifies a number of prerequisites for and advantages of fast, dependable response. These include higher quality, faster revenue generation, and lower costs through elimination of overhead, reduction of inventories, greater efficiency, and fewer errors and scrap. One of the most important but least recognized advantages for managers is that by responding faster, they can allow a customer to delay an order until the exact need is known. Thus, the customer does not have to change the order—a perennial headache for most operations managers. Faster response to a customer also can, up to a point, reduce the unit costs of the product or service, sometimes significantly. On the basis of empirical studies reported by Meredith et al. (1994) and illustrated in Figure 1.6, it seems that there is about a 2:1 (i.e., 0.50) relationship between response time and unit cost. That is, starting from typical values, an 80 percent reduction in response time results in a corresponding 40 percent reduction in unit cost. The actual empirical data indicated a range between about 0.60 and 0.20, so for an 80 percent reduction in response time, there could be a cost reduction from a high of 0.60 × 80 percent = 48 percent to a low of 16 percent. This is an overwhelming benefit because if corresponding price reductions are made, it improves the value delivered to the customer through both higher responsiveness and lower price. The result for the producer is a much higher market share. If the producer chooses not to reduce the price, then the result is both higher margins and higher sales, for significantly increased profitability. ■ TABLE 1.2

Prerequisites for and Advantages of Rapid Response

1

Sharper focus on the customer. Faster response for both standard‐ and custom‐designed items places the customer at the center of attention

2

Better management. Attention shifts to management’s real job, improving the firm’s infrastructure and systems

3

Efficient processing. Efficient processing reduces inventories, eliminates nonvalue‐added processing steps, smoothes flows, and eliminates bottlenecks

4

Higher quality. Since there is no time for rework, the production system must be sufficiently improved to make parts accurately, reliably, consistently, and correctly

5

Elimination of overhead. More efficient, faster flows through fewer steps eliminate the overhead needed to support the remaining steps, processes, and systems

6

Improved focus. A customer‐based focus is provided for strategy, investment, and general attention (instead of an internal focus on surrogate measures such as utilization)

7

Reduced changes. With less time to delivery, there is less time for changes in product mix, engineering changes, and especially changes to the order by the customer who just wanted to get in the queue in the first place

8

Faster revenue generation. With faster deliveries, orders can be billed faster, thereby improving cash flows and reducing the need for working capital

9

Better communication. More direct communication lines result in fewer mistakes, oversights, and lost orders

10

Improved morale. The reduced processing steps and overhead allow workers to see the results of their efforts, giving a feeling of working for a smaller firm, with its greater visibility and responsibility

1.3 Strategy and Competitiveness

19

Percentage change in cost

100

80

Upper range Lower range Approximation

60

40

20

20

40

60

80

100

Percentage change in response time

1.3 Strategy and Competitiveness Competitiveness can be defined in a number of ways. We may think of it as the long‐term viability of a firm or organization, or we may define it in a short‐term context such as the current success of a firm in the marketplace as measured by its market share or its profitability. We can also talk about the competitiveness of a nation, in the sense of its aggregate competitive success in all markets. The US President’s Council on Industrial Competitiveness gave this definition in 1985: Competitiveness for a nation is the degree to which it can, under free and fair market conditions, produce goods and services that meet the test of international markets while simultaneously maintaining and expanding the real incomes of its citizens.

1.3.1 Global Trends The United States provides a graphic example of global trade trends. The trend in merchandise trade for the United States is startling. Although some might think that foreign competition has been taking markets away from US producers only in the past decade, US merchandise imports have grown considerably for over 30 years. Although exports have increased over this period as well, they have not increased as fast as imports; the result is an exploding trade deficit with foreign countries. Partly as a result of this deficit, the United States is now the biggest debtor nation in the world, with a cumulative deficit of about $5 trillion, nearly half of the US annual gross domestic product (GDP), and an annual deficit running about 6 percent of GDP. However, these values hold only for the period up to mid‐2008, when the global financial/credit/recession crisis started. It now appears that all these figures will become much worse—not for just the United States, but globally. Another important issue relating to the financial crisis involves the exchange rate between currencies. Let’s consider in more detail what it means when a country’s currency declines in value relative to foreign currencies. A weaker currency means that citizens in that country will have to pay more for products imported from foreign countries. Meanwhile, the prices for products produced in that country and exported to foreign countries will decline, making them more desirable. Thus, a decline in the value of a country’s currency is a double‐edged sword. Such a decline makes imported goods more expensive for citizens to purchase but at the same time makes exports less expensive for foreign consumers, increasing the demand for domestic products.

FIGURE 1.6 Cost reductions with decreases in response time.

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As an example, let’s consider the American dollar. In the financial crisis of 2008, the dollar grew stronger as Americans sold foreign assets and foreigners rushed to hold assets in the dollar, the world’s strongest currency, as well as a “reserve” (commodities are priced in dollars) currency. However, given the massive amount of dollars, the US government borrowed and created to overcome the financial crisis, there is widespread concern that the dollar may weaken or even collapse in the future. According to economic theory, a stronger dollar should make American products less desirable (or competitive) in foreign markets and imports more desirable in American markets. However, some market actions that governments and businesses often take to keep from losing customers can alter this perfect economic relationship. For instance, in the 1990s, when the price of Japanese products in the United States started increasing in terms of dollars, Japanese firms initiated huge cost‐cutting drives to reduce the cost (and thereby the dollar price) of their products, to keep from losing American customers, which was largely successful. Similarly, China controls the exchange rate of its currency, the renminbi, to stay at about 7 to the dollar (though they have been letting it strengthen recently), so it always sells its goods at a competitive price. In the last decade, particularly with the economic rise of China and India, global markets, manufacturers, and service producers have evolved in a dramatic manner. With the changes occurring in the World Trade Organization (WTO), international competition has grown very complex in the last two decades. Previously, firms were domestic, exporters, or international. A domestic firm produced and sold in the same country. An exporter sold goods, often someone else’s, abroad. An international firm sold domestically produced as well as foreign‐produced goods both domestically and in foreign countries. However, domestic sales were usually produced domestically, and foreign sales were made either in the home country or in a plant in the foreign country, typically altered to suit national regulations, needs, and tastes. Now, however, there are global firms, joint ventures, partial ownerships, foreign subsidiaries, and other types of international producers. For example, Canon is a global producer that sells a standard “world‐class” camera with options and add‐ons available through local dealers. And automobile producers frequently own stock in foreign automobile companies. Mazak, a fast‐ growing machine tool company, is the US subsidiary of Yamazaki Machinery Company of Japan. Part of the reason for cross‐ownerships and cross‐endeavors is the spiraling cost of bringing out new products. New drugs and memory chips run in the hundreds of millions to billions of dollars to bring to market. By using joint ventures and other such approaches to share costs (and thereby lower risks), firms can remain competitive. Whether to build offshore, assemble offshore, use foreign parts, employ a joint venture, and so on is a complex decision for any firm and depends on a multitude of factors. For example, the Japanese have many of their automobile manufacturing plants in foreign countries. The reasons are many and include to circumvent foreign governmental regulation of importers, to avoid the high yen cost of Japanese‐produced products, to avoid import fees and quotas, and to placate foreign consumers. Of course, other considerations are involved in producing in foreign countries: culture (e.g., whether women are part of the labor force), political stability, laws, taxes, regulations, and image. Other complex arrangements of suppliers can result in hidden international competition. For example, many products that bear an American nameplate have been totally produced and assembled in a foreign country and are simply imported under a US manufacturer’s or retailer’s nameplate, such as Nike shoes. Even more confusing, many products contain a significant proportion of foreign parts or may be composed entirely of foreign parts and only assembled in the United States (e.g., toasters, mixers, and hand tools). This recent strategic approach of finding the best mix of producers and assemblers to deliver a product or service to a customer has come to be known as “supply chain management,” a topic we discuss in detail in Chapters 5 and 6.

1.3 Strategy and Competitiveness

1.3.2 Strategy The organization’s business strategy is a set of objectives, plans, and policies for the organization to compete successfully in its markets. In effect, the business strategy specifies what an organization’s competitive advantage will be and how this advantage will be achieved and sustained through the decisions the organization’s business units make in the future. A key element of the business strategy is determining the window of opportunity for executing this strategy before competitors do the same. The strategic plan that details this business strategy is typically formulated at the executive committee level (CEO, president, vice presidents) and is usually long range, at least three to five years. In fact, however, the actual decisions that are made over time become the long‐range strategy. In too many firms, these decisions show no pattern at all, reflecting the truth that they have no active business strategy, even if they have gone through a process of strategic planning. In other cases, these decisions bear little or no relationship to the organization’s stated or official business strategy. The point is that an organization’s actions tell more about its true business strategy, or the lack thereof, than its public statements. But devising a winning strategy is only the first step in being competitive. The organization and its various business units still need to successfully implement this strategy, and that is where so many fail. It is now clear that more organizational strategies fail not so much for being a poor strategy but instead for poor execution. As Morgan, Levitt, and Malek note in their widely heralded book, “Executing your Strategy; How to Break it Down and Get it Done” (Morgan et al. 2007, p. 1), “Corporations spend about $100 billion a year on management consulting and training, most of it aimed at creating brilliant strategy. Yet studies have found that . . . something like 90 percent of companies consistently fail to execute strategies effectively.” They confirm that thousands of such strategies fail every year because of poor execution.

DILBERT: © Scott Adams/Dist. by United Feature Syndicate, Inc.

Executing a winning strategy is a major project that must be implemented within a limited time, taking substantial resources and experienced talent, the province of project management (Meredith et al. 2015). Unfortunately, as Morgan et al. point out, top managers consider the tedious work of project management as “too ‘tactical’ to take up their precious time . . . leaving the grunt work of execution to the lower echelons. Nothing could be further from the truth . . . that is precisely where strategy goes awry.” (p. 2, 4). Morgan et al. suggest that a simple test of this failure in perspective of top executives is to examine the set of projects—the project portfolio—to see whether it is aligned with the organization’s stated strategy or not. The execution of strategic initiatives through project management will be dealt with in the next chapter of this first part of the book concerning strategy and execution.

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1.3.3 Strategic Frameworks We now move to a discussion of the business unit strategies organizations employ to support the overall strategy of the organization. Clearly, the business unit strategies are also projects—there will be a marketing strategy, a financial strategy, an R&D strategy, and so on. Here, of course, we are interested in the operations and supply chain strategy. As it happens, there are a number of fairly well‐defined such strategies. One that is common to many of the functional areas is related to the life cycle of the organization’s products or services.

The Life Cycle

Demand

A number of functional strategies are tied to the stages in the standard life cycle of products and services, shown in Figure 1.7. Studies of the introduction of new products indicate that the life cycle (or stretched S growth curve, as it is also known) provides a good pattern for the growth of demand for a new output. The curve can be divided into three major segments: (1) introduction and early adoption, (2) acceptance and growth of the market, and (3) maturity with market saturation. After market saturation, demand may remain high or decline, or the output may be improved and possibly start on a new growth curve. The length of product and service life cycles has been shrinking significantly in the last decade or so. In the past, a life cycle might have been five years, but it is now six months. This places a tremendous burden on the firm to constantly monitor its strategy and quickly change a strategy that becomes inappropriate to the market. The life cycle begins with an innovation—a new output or process for the market, as discussed earlier. The innovation may be a patented product or process, a new combination of existing elements that has created a unique product or process, or some service that was previously unavailable. Initial versions of the product or service may change relatively frequently; production volumes are small, since the output has not caught on yet; and margins are high. As volume increases, the design of the output stabilizes and more competitors enter the market, frequently with more capital‐intensive equipment. In the mature phase, the now high‐volume output is a virtual commodity, and the firm that can produce an acceptable version at the lowest cost usually controls the market. Clearly, a firm’s business strategy should match the life‐cycle stages of its products and services. If a firm such as HP is good at innovation, it may choose to focus only on the introduction and acceptance phases of the product’s life cycle and then sell or license production to others as the product moves beyond the introduction stage. If its strength is in high‐volume, low‐cost production, the company should stick with proven products that are in the maturity stage. Most

FIGURE 1.7 The life‐cycle curve.

Introduction

Growth

Maturity

Time

1.3 Strategy and Competitiveness

common, perhaps, are firms that attempt to stick with products throughout their life cycle, changing their strategy with each stage. One approach to categorizing an organization’s business strategy is based on its timing of introductions of new outputs. Two researchers, Maidique and Patch (1979), suggest the following four product development strategies: 1. First‐to‐market. Organizations that use this strategy attempt to have their products available before the competition. To achieve this, strong applied research is needed. If a company is first‐to‐market, it has to decide if it wants to price its products high and thus skim the market to achieve large short‐term profits or set a lower initial price to obtain a higher market share and perhaps larger long‐term profits. 2. Second‐to‐market. Organizations that use this strategy try to quickly imitate successful outputs offered by first‐to‐market organizations. This strategy requires less emphasis on applied research and more emphasis on fast development. Often, firms that use the second‐to‐ market strategy attempt to learn from the mistakes of the first‐to‐market firm and offer improved or enhanced versions of the original products. 3. Cost minimization or late‐to‐market. Organizations that use this strategy wait until a product becomes fairly standardized and is demanded in large volumes. They then attempt to compete on the basis of costs as opposed to features of the product. These organizations focus most of their R&D on improving the production process, as opposed to focusing on product development. 4. Market segmentation. This strategy focuses on serving niche markets with specific needs. Applied engineering skills and flexible manufacturing systems are often needed for the market‐segmentation strategy. Be aware that a number of implicit trade‐offs are involved in developing a strategy. Let us use the first‐to‐market strategy to demonstrate. A first‐to‐market strategy requires large investments in product development in an effort to stay ahead of the competition. Typically, organizations that pursue this strategy expect to achieve relatively higher profit margins, larger market shares, or both as a result of initially having the market to themselves. The strategy is somewhat risky because a competitor may end up beating them to the market. Also, even if a company succeeds in getting to the market first, it may end up simply creating an opportunity for the competition to learn from its mistakes and overtake it in the market. To illustrate, although Sony introduced its Betamax format for VCRs in 1975, JVC’s VHS format—introduced the following year—is the standard that ultimately gained widespread market acceptance. Such trade‐offs are basic to the concept of selecting a business strategy. Although specific tasks must be done well to execute the selected strategy, not everything needs to be particularly outstanding—only a few things. And, of course, strategies based on anything else—acquisitions, mergers, tax loss carry‐forwards, even streams of high‐technology products—will not be successful if the customer is ignored in the process.

Performance Frontiers As we know from the earlier “Customer Value” section, there are a wide range of benefits and costs that organizations can compete on and various groups of customers value. If, say, n of these factors are important for an organization to consider, we might then conceive of a graph or space with n dimensions on it showing the organization’s measures on each of the n factors as well as their competitors’ measures. The curve connecting all these measures would then be called the organization’s performance frontier (Clark 1996). For simplicity, let us use just two factors, say, cost and variety, as shown in Figure 1.8, with the performance frontier curve labeled 1.

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As illustrated by the points A, B, and C, improvement on one dimension can usually only be attained by sacrificing performance on another dimension. For example, as shown in Figure 1.8, increasing output variety may result in higher unit costs. In effect, this curve represents the level of performance that organizations in an industry can achieve across two dimensions given the technology available at a given point in time. According to the figure, company A is apparently pursuing more of a customization strategy than the two other competitors shown, offering a wider variety of outputs but incurring greater cost. We might think of a high end furniture store as perhaps fitting point A. Company C, perhaps Costco, seems to be pursuing a standardization strategy, offering a smaller range of furniture but incurring lower unit costs. An interesting use of this framework is to investigate and evaluate the impact of a change in technology or operational innovation (Hammer 2004). For example, in Figure 1.9, assume a new innovation such as “cross‐docking” has been developed by company B, perhaps represented by Wal‐Mart, shifting its performance frontier to curve 2. In this case, company B could hold its unit price constant and offer higher output variety than company A and at lower unit cost (position B1). Alternatively, company B could maintain its current level of output variety and lower its unit cost to levels below company C’s (position B2) or perhaps choose a position somewhere between points B1 and B2. Suppose you were employed at company A and company B chose to operate at point B1. In effect, company B can now offer a wider variety of outputs and at lower unit costs. What are your options? As it turns out, there are two generic options or improvement trajectories company A could try to follow. One improvement trajectory would be for company A to streamline its operations and make cost‐variety trade‐offs, moving down curve 1 toward company C. Upon streamlining its operations, company A could then attempt to adopt the new technology and choose a position on the new frontier. A second improvement trajectory would be for company A to attempt to directly adopt the new technology and move to the new frontier without streamlining its current operations.

Unit cost

1 A B C

FIGURE 1.8 Example performance frontier.

Output variety

Unit cost

1

FIGURE 1.9 Development of new technology results in shift in the performance frontier.

A

2

B C

B1 B2 Output variety

1.3 Strategy and Competitiveness

There are advantages and disadvantages associated with both trajectories. An advantage of streamlining operations first is that this might provide a better understanding of current processes. In turn, this better understanding might increase company A’s options in choosing a location on the new frontier and might even better position it to adopt the new technology. One drawback of streamlining its current operations first is that the knowledge gained might be irrelevant when the new technology is eventually adopted and delaying the adoption of the new technology might mean reduced market share and profits. Another important factor is the amount of time required to execute the improvement trajectory and get to the new position on the new performance frontier. However, although it might appear that streamlining the current operation first before adopting the new technology should take more time than immediately adopting the technology, when ease of implementation is considered, the former approach might in fact be more expedient. On a more practical note, Kmart some years ago tried to challenge Wal‐Mart on low prices but was unsuccessful. Then, Sears and Kmart merged instead, but that didn’t seem to work well either; now, both seem to be in trouble. One final point. In Figure 1.9, it was assumed that the result of the new technology/innovation was simply a shift in the performance frontier. It is also important to be aware of the possibility that a new technology can change the shape as well as the location of the performance frontier. Such a change in shape can have important implications regarding choosing a location on the new frontier as well as the nature of the trade‐off facing the industry. In either case, the way to beat your competition is through developing or using new technology to move to a new frontier.

Focus In the past, firms primarily competed on one factor, such as low cost or innovation, because that was what they were good at. Obviously, they could not ignore the other factors of competition, which they had to do acceptably on, but their heavy attention to their one strength was based on a strategic framework called focus (Skinner 1974). McKinsey & Company, a top management consulting firm, studied 27 outstanding firms to find their common attributes. Two of the major attributes reported in Business Week are directly related to focus: 1. Stressing one key business value. At Apple, the key value is developing innovative new products that are easy to use; at Dana Corporation, it is improving productivity. 2. Sticking to what they know best. All the outstanding firms define their core capabilities (or strengths) and then build on them. They resist the temptation to move into new areas or diversify. When an organization chooses to stress one or two key areas of strength, it is referred to as a focused organization. For example, IBM is known for its customer service, General Electric for its technology, and Procter & Gamble for its consumer marketing. In general, most but not all areas of focus relate to operations. Some firms, such as those in the insurance industry, focus on financial strength and others focus on marketing strengths. For example, Harley‐Davidson considers its strength to be in building relationships with its dealers and motorcycle owners. And many health care organizations are achieving significant operational efficiencies by focusing on a narrow range of ailments. For example, by treating only long‐term acute cases, Intensiva HealthCare has been able to reduce its costs to 50 percent of those of a traditional intensive‐care ward. Clearly, adopting a focus strategy means knowing not only what customers to concentrate on but also knowing what customers you do not want. Table 1.3 identifies several areas of focus that organizations commonly choose when forming their competitive strategy; all are various forms of differentiation. Recent competitive behavior among firms seems to be dividing most of the factors in Table 1.3 into two sets that Hill (2000), an operations strategist and researcher in England, calls order qualifiers and order winners.

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■ TABLE 1.3

Common Areas of Organizational Focus

Innovation. Bringing a range of new products and services to market quickly Customization. Being able to quickly redesign and produce a product or service to meet customers’ unique needs Flexibility of products and services. Switching between different models or variants quickly to satisfy a customer or market Flexibility of volume. Changing quickly and economically from low‐volume production to high volumes and vice versa Performance. Offering products and services with unique, valuable features Quality. Having better craftsmanship or consistency Reliability of the product or service. Always working acceptably, enabling customers to count on the performance Reliability of delivery. Always fulfilling promises with a product or service that is never late Response. Offering very short lead times to obtain products and services After‐sale service. Making available extensive, continuing help Price. Having the lowest price

An order qualifier is a characteristic of the product or service that is required if the product is even to be considered or in the running. In other words, it is a prerequisite for entering the market. An order winner is a characteristic that will win the bid or the purchase. These qualifiers and winners vary with the market, of course, but some general commonalties exist across markets. For example, response time, performance, customization, innovation, and price seem to be frequent order winners, and the other factors (e.g., quality, reliability, and flexibility) tend to be order qualifiers. Working with marketing and sales to properly identify which factors are which is clearly of major strategic importance. In addition to the advantages of being focused, there are also some dangers. A narrowly focused firm can easily become uncompetitive in the market if the customers’ requirements change. In addition to being focused, a firm must also be flexible enough to alter its focus when the need changes and to spot the change in time. Frequently, a focus in one area can be used to an advantage in another way if there is enough time to adapt—for example, to move into a new product line or alter the application of the focus. Moreover, as products go through their life cycle, the task of operations often changes, as shown in Figure 1.10, from being flexible enough

Emphasis required Volume Capacity

Introduction

Growth

Price

Sales

Design changes Quality Performance

FIGURE 1.10 Product life cycle: stages and emphasis.

Time

Maturity

1.3 Strategy and Competitiveness

27

to accept changes in design, to meeting the growing demand in the marketplace, and to cutting costs. Throughout this life cycle, the focus of the organization has to change if it stays with the same output. Many firms, however, choose to compete at only one stage of the life cycle and abandon other stages so that they can keep the strength of their original focus. An organization can also easily lose its focus. For example, in the traditional functional organization, purchasing may buy the cheapest materials it can. This requires buying large quantities with advance notice. Scheduling, however, is trying to reduce inventories, so it orders materials on short notice and in small quantities. Quality control is trying to improve the output, so it carefully inspects every item, creating delays and extensive rework. In this example, each functional department is pursuing its own objectives but is not focusing on how it can support the organization’s overall business strategy. However, the most common reason a firm loses its focus is simply that the focus was never clearly identified in the first place. Never having been well defined, it could not be communicated to the employees, could therefore not gain their support, and thus was lost. Sometimes a focus is identified but not communicated throughout the organization because management thinks that lower‐level employees don’t need to know the strategic focus of the firm in order to do their jobs.

The Sand Cone For many organizations that relied on the focus framework of strategy, the traditional view was that competing on one competitive dimension required trading off performance on one or more other dimensions (e.g., higher quality results in higher costs). However, research suggests that, at least in some cases, building strengths along alternative competitive dimensions may in fact be cumulative and that building a strength on one dimension may facilitate building strengths on other dimensions (Ferdows and De Meyer 1990). Furthermore, according to this research, there is a preferred order in developing strengths on various competitive dimensions. According to the sand cone model (as it is called), shown in Figure 1.11, organizations should first develop the capability to produce quality outputs. Once an organization has developed this proficiency, it is next appropriate to address the issue of delivery dependability. Next, according to the model, the competitive dimensions of speed and cost should be addressed, respectively. In addition to providing guidance to organizations regarding the order in which to focus their attention and initiatives, the model has intuitive appeal. For example, it makes little sense to focus on improving delivery dependability before an organization can provide a consistent level of quality. In today’s competitive marketplace, providing defective outputs in a timely fashion is not a recipe for long‐term success. Likewise, organizations should achieve consistent quality levels and delivery dependability before attempting to reduce lead times. Of course, the model is not set in stone (remember that it is called the sand cone) and organizations facing different circumstances may choose to address the competitive dimensions in a different order.

Cost Speed Dependability

Quality

FIGURE 1.11 The sand cone model. Adapted from Ferdows and De Meyer 1990, p. 175.

28

Operations and Supply Chain Strategy for Competitiveness

1.3.4 Core Capabilities One important result of developing a business strategy is identifying the organization’s core competencies and capabilities that provide those product/service dimensions important to customers and hence are the source of customer value. Core competencies (Prahalad and Hamel 1990) are the collective knowledge and skills an organization has that distinguish it from the competition. In effect, these core competencies become the building blocks for organizational practices and business processes, referred to as core capabilities (Stalk et al. 1992). (Hereafter, we will refer to both of these simply as “core capabilities.”) The importance of these core capabilities derives from their strong relationship to an organization’s ability to integrate a variety of technologies and skills in the development of new products and services. Clearly, then, one of the top management’s most important activities is the identification and development of the core capabilities the organization will need to successfully execute the business strategy. In effect, core capabilities provide the basis for developing new products and services and are a primary factor in determining an organization’s long‐term competitiveness. Hammer (2004) points out the importance of “operational innovation” in the organization as one basis for sustained competitive advantage, the clear result of a core capability. Therefore, two important parts of strategic planning are identifying and predicting the core capabilities that will be critical to sustaining and enhancing the organization’s competitive position. On this basis, an organization can also assess its suppliers’ and competitors’ capabilities. If the organization finds that it is not the leader, it must determine the cost and risks of catching up with the best versus the cost and risks of losing that core capability. Hayes and Pisano (1994) stress the importance of a firm not looking for “the” solution to a current competitive problem but rather the “paths” to building one or two core capabilities to provide the source of customer value for the indefinite future. Moreover, the firm should not think in terms of “trade‐offs” between core capabilities (e.g., moving from flexibility as a strength to low cost), but rather of “building” one capability on top of others and determining which set will provide the most customer value. Often, it is more useful to think of an organization in terms of its portfolio of core capabilities, rather than its portfolio of businesses or products. For instance, Sony is known for its expertise in miniaturization; 3M for its knowledge of substrates, coatings, and adhesives; Black and Decker for small electrical motors and industrial design; Boeing for its ability to integrate large‐ scale complex systems; and Honda for engines and power trains. Had Sony initially viewed itself as primarily a manufacturer of Walkmans, rather than as a company with expertise in miniaturization, it might have overlooked several profitable opportunities, such as entering the camcorder business. As another example, Boeing has successfully leveraged its core capability related to integrating large‐scale systems in its production of commercial jetliners, space stations, fighter‐ bombers, and missiles. As these examples illustrate, core capabilities are often used to gain access to a wide variety of markets. Canon used its core capabilities in optics, imaging, and electronic controls to enter the markets for copiers, laser printers, cameras, and image scanners. In a similar fashion, Honda’s core capabilities in engines and power trains comprise the basis for its entry into other businesses: automobiles, motorcycles, lawn mowers, and generators. In addition to providing access to a variety of markets, a core capability should be strongly related to the benefits provided by the product or service that customers value. In Sony’s case, its expertise in miniaturization translates directly into important product features such as portability and aesthetic designs. Alternatively, suppose Sony developed a core competence in writing understandable user manuals. Since people who purchase an HD TV or a camcorder rarely base their purchase decision on the quality of the user manual (when was the last time you read a user manual?), this core capability would provide little of any competitive advantage.

1.3 Strategy and Competitiveness

Another characteristic of core capabilities is that they should be difficult to imitate. Clearly, no sustainable competitive advantage is provided by a core capability that is easily imitated. For example, Sony’s expertise in miniaturization would mean little if other electronics manufacturers could match it simply by purchasing and taking apart Sony’s products (this is called reverse engineering). Bartmess and Cerny (1996) identify three elements of a core capability that hinder imitation: • It is complex and requires organizational learning over a long period of time. • It is based on multiple functional areas, both internal and external to the organization. • It is a result of how the functions interact rather than the skills/knowledge within the functions themselves. The topic of core capabilities is also strongly related to the recent surge in outsourcing and offshoring. Outsourcing involves subcontracting out certain activities or services. For example, a manufacturer might outsource the production of certain components, the management and maintenance of its computer resources, employee recruitment, or the processing of its payroll. When we consider the concept of core capability, it is important to recognize that not all parts, services, and activities are equal. Rather, these activities and parts can be thought of as falling on a continuum ranging from strategically important to unimportant. Parts and activities are considered strategically important when: • They are strongly related to what customers perceive to be the key characteristics of the product or service. • They require highly specialized knowledge and skill, a core capability. • They require highly specialized physical assets, and few other suppliers possess these assets. • The organization has a technological lead or is likely to obtain one. Activities that are not strategic or core are candidates for outsourcing. These parts or activities are not strongly linked to key product characteristics, do not require highly specialized knowledge, and do not need special physical assets, and the organization does not have the technological lead in this area. Thus, if it is beneficial to outsource these parts or activities—perhaps because of lower cost or higher quality—no loss in competitiveness should result. On the other hand, when a firm’s strategic parts and activities have been outsourced, particularly to a foreign supplier, called offshoring, the firm has become hollow (Jonas 1986). As we have stated, the wise firm will outsource only nonstrategic, simple, relatively standard parts and processes such as screws or types of processes that are not worth the time for the firm to produce itself; the complex, proprietary parts and processes that give their products an edge in the marketplace are produced internally. If the firm outsources these parts and processes as well, it soon finds that the engineering design talent follows the production of the part outside the firm, too, and its core capabilities have been lost. Then, the firm has been hollowed out, becoming merely a distributor of its supplier’s products. Given the huge potential effects of outsourcing, both positive and negative, a firm should consider such a move very carefully. Management needs to think about both the long‐term and short‐term effects. They also need to consider the impact of this decision on their core capabilities and everything else they do within the company. Such a major decision as outsourcing will affect other decisions as well, such as sourcing materials, hiring/releasing labor and management, marketing, finance, and a wide range of other areas. So what is the problem? If a supplier can deliver the parts at lower cost and better quality when they are needed, why not use the supplier? The problem is that the supplier gains the

29

30

Operations and Supply Chain Strategy for Competitiveness

expertise (and core capabilities) to produce the critical parts you need, and as Hayes and Pisano (1994), among others, note, organizations quickly forget how they produced those critical parts. After a while, when the supplier has improved on the process and you have forgotten how to make the parts, it is likely to start competing with you, producing the products you have been selling and dropping you as a customer. This is even more dangerous if, as already noted, the product and transformation system has also been hollowed out, following the production activities to the supplier. This happened extensively in the television industry, where the Japanese learned first how to produce and then how to engineer black‐and‐white and, later, color television sets. They then started tentatively introducing their own brands, to see if US customers would buy them. Their products were inexpensive, of high quality, and caught on quickly in the free‐enterprise American markets. The Japanese and Koreans now virtually control this industry.

E X PA N D Y O U R U N D E R S TA N D I N G 1. Why is it so hard to increase productivity in the service sector? 2. Identify other major differences between services and products in addition to those listed in Table 1.1. 3. Many foreign firms have been successful in the following areas: steel, autos, cameras, and televisions. Are services more protected from foreign competition? How? 4. It is commonly said that Japanese firms employ 10 times as many engineers per operations worker as US firms and 10 times fewer accountants. What effect would you expect this to have on their competitiveness? Why? 5. How might the concept of a “facilitating good” alter the way we perceive a product? A service? 6. Is it wise for a firm to stick to what it knows best, or should it expand its market by moving into adjoining products or services? How can it avoid losing its focus? 7. Can you think of any other areas of possible focus for a firm besides those identified in Table 1.3? 8. What core capabilities do you think China possesses? India? Japan? The United States? 9. According to K. Blanchard and N. V. Peale (The Power of Ethical Management, New York: Morrow, 1988), the following three ethical tests may be useful: (1) Is it legal or within company policy? (2) Is it balanced and fair in the short and long term? (3) Would you be proud if the public or your family knew about it?

Apply these tests to the following situations: a. A foreign firm subsidizes its sales in another country. b. A foreign firm dumps its products (sells them for less than cost) in another country. c. A country imports products that, had they been made domestically, would have violated domestic laws (e.g., laws against pollution). 10. In responding faster to customers’ needs, where might the cost savings come from? What benefits would result? 11. Can you think of companies that have moved the performance frontier of their industries? 12. Why do Americans invest more in marketing new products while the Japanese invest more in engineering? What advantages accrue to each investment? 13. Using new technologies, it is not uncommon for firms to cut their response times by a factor of 10. What effect would you expect this to have on their unit costs? 14. What are the order winners and order qualifiers for Wal‐Mart? Toyota? BMW? Sony? 15. Given the recent trends in products and services, does the focus strategy or sand cone strategy seem most applicable these days? 16. Why don’t we see more mass customization in products and services?

Apply your Understanding

31

A P P LY Y O U R U N D E R S T A N D I N G ■ IZMIR NATIONAL UNIVERSITY Izmir National University (INU) was chartered in 2010 to facilitate Turkey’s expected eventual entry into the economy of Europe, via the EU. To foster growth and development in the European economy, engineering, science, and business were deemed to be the institution’s primary areas of intellectual endeavor. The university grew rapidly during its first three years. By 2015, the enrollment had reached just over 9300 students. However, with this rapid growth came a number of problems. For example, because the faculty had to be hired so quickly, there was little real organization, and curriculum seemed to be decided on the basis of which adviser a student happened to consult. The administrative offices were often reshuffled, with vague responsibilities and short tenures. The faculty of the new Business School was typical of the confusion that gripped the entire university. The 26 faculty members were mostly recent graduates of doctoral programs at major European and Turkish universities. There were 21 Assistant Docents and Lecturers, 3 Docents, and 2 full Professors, spread fairly evenly over the four departments, each overseen by a Kürsü professor (department head). In addition, funds were available to hire three additional faculty members, either assistant or regular Docents. The background of the newly recruited Dekan (administrative head, dean) of the Business School included five years of teaching at a primarily Muslim university in Turkey and two years of departmental administration at a large southern European university. Upon arriving at the Business School, the Dekan asked the faculty to e‐mail their concerns to her so that she could begin to get a handle on the major issues confronting the school. Her office assistant selected the following comments as representative of the sentiments expressed: • “Our student–teacher ratio is much higher than what it was at my former university. We need to fill those open slots as quickly as possible and ask the university to fund at least two more faculty positions.”

• “If we don’t get the quality of enrollments up in the MBA program, the graduate school will never approve our application for a doctoral program. We need the doctoral program to attract the best faculty, and we need the doctoral students to help cover our courses.” • “Given that research is our primary mission, we need to fund more graduate research assistants.” • “The travel budget isn’t sufficient to allow me to attend the meetings I’m interested in. How can we improve and maintain our visibility if we get funding for only one meeting per year?” • “We need better staff support. Faculty members are required to submit their exams for copying five days before they are needed. However, doing this makes it difficult to test the students on the material covered in class right before the exam, since it’s difficult to know ahead of time exactly how much material we will cover.” • “I think far too much emphasis is placed on research. We are here to teach.” • “Being limited in our consulting is far too restrictive. In Europe, we were allowed one day a week. How are we supposed to stay current without consulting?” • “We need a voice mail system. I never get my important messages.” Questions

1. What do the comments by the faculty tell you about INU’s strategy? 2. What would you recommend the Dekan do regarding the Business School’s strategic planning process? What role would you recommend the Dekan play in this process? 3. Productivity is defined as the ratio of output (including both goods and services) to the input used to produce it. How could the productivity of the Business School be measured? What would the effect be on productivity if the faculty all received a 10 percent raise but continued to teach the same number of classes and students?

32

Operations and Supply Chain Strategy for Competitiveness

■ TARACARE, INC. Taracare, Inc. operates a single factory in Ensenada, Mexico, where it fabricates and assembles a wide range of outdoor furniture for the US market, including chairs, tables, and matching accessories. Taracare’s primary production activities include extruding the aluminum furniture parts, bending and shaping the extruded parts, finishing and painting the parts, and then assembling the parts into completed furniture. Upholstery, glass tabletops, and all hardware are purchased from outside suppliers. Jorge Gonzalez purchased Taracare in 2011. Before that, Jorge had distinguished himself as a top sales rep of outdoor furniture for the western region of one of the leading national manufacturers. However, after spending 10 years on the road, he wanted to settle down and spend more time with his family back in Mexico. After searching for a couple of months, he came across what he believed to be an ideal opportunity. Not only was it in an industry that he had a great deal of knowledge about, but he would be his own boss. Unfortunately, the asking price was well beyond Jorge’s means. However, after a month of negotiation, Jorge convinced Jesus Garza, Taracare’s founder, to maintain a 25 percent stake in the business. Although Jesus had originally intended to sell out completely, he was impressed with Jorge’s knowledge of the business, his extensive contacts, and his enthusiasm. He therefore agreed to sell Jorge 75 percent of Taracare and retain 25 percent as an investment. Jorge’s ambition for Taracare was to expand it from a small regional manufacturer to one that sold to major national retailers. To accomplish this objective, Jorge’s first initiative was to triple Taracare’s sales force in 2012. As sales began to increase, Jorge increased the support staff by hiring an accountant, a comptroller, two new designers, and a purchasing agent. By mid‐2015, Taracare’s line was carried by several national retailers on a trial basis. However, Taracare was having difficulty both in meeting the deliveries its sales reps were promising and in satisfying the national retailers’ standards for quality. To respond to this problem, Jorge hired Alfredo Diaz as the new manufacturing manager. Before accepting Jorge’s offer, Alfredo was the plant manager of a factory that manufactured replacement windows sold by large regional and national retailers.

After several months on the job—and after making little progress toward improving on‐time delivery and quality—Alfredo scheduled a meeting with Jorge to discuss his major concerns. Alfredo began: I requested this meeting with you, Jorge, because I am not satisfied with the progress we are making toward improving our delivery performance and quality. The bottom line is that I feel I’m getting very little cooperation from the other department heads. For example, last month purchasing switched to a new supplier for paint; and although it is true that the new paint costs less per gallon, we have to apply a thicker coat to give the furniture the same protection. I haven’t actually run the numbers, but I know it is actually costing us more, in both materials and labor. Another problem is that we typically run a special promotion to coincide with launching new product lines. I understand that the sales guys want to get the product into the stores as quickly as possible, but they are making promises about delivery that we can’t meet. It takes time to work out the bugs and get things running smoothly. Then, there is the problem with the designers. They are constantly adding features to the product that make it almost impossible for us to produce. At the very least, they make it much more expensive for us to produce. For example, on the new “Destiny” line, they designed table legs that required a new die at a cost of 250,000 pesos. Why couldn’t they have left the legs alone so that we could have used one of our existing dies? On top of this, we have the accounting department telling us that our equipment utilization is too low. Then, when we increase our equipment utilization and make more products, the finance guys tell us we have too much capital tied up in inventory. To be honest, I really don’t feel that I’m getting very much support.

Rising from his chair, Jorge commented: You have raised some important issues, Alfredo. Unfortunately, I have to run to another meeting right now. Why don’t you send me a memo outlining these issues and your recommendations? Then, perhaps, I will call a meeting and we can discuss these issues with the other department heads. At least our production problems are really no worse than those of our competitors, and we don’t expect you to solve all of our problems overnight. Keep up the good work and send me that memo at your earliest convenience.

Apply your Understanding

Questions

1. Does Alfredo’s previous experience running a plant that made replacement windows qualify him to run a plant that makes outdoor furniture? 2. What recommendations would you make if you were Alfredo?

33

3. Given Jorge’s background and apparent priorities, how is he likely to respond to Alfredo’s recommendations? On the basis of this likely response, is it possible to rephrase Alfredo’s recommendations so they are more appealing to Jorge?

chapter

2

Executing Strategy: Project Management C HA P TE R IN P ERS PECTIVE In the last chapter, we discussed the importance of successfully implementing the organization’s strategic plans. Such efforts are executed through major projects involving changes in the organization’s systems and procedures. In this chapter, we address the management of such projects. We use a process improvement project as an example, but projects are used in all kinds of organizations for every conceivable purpose. They range from simple combinations of tactical tasks to strategic organizational change and from setting up a party to putting a person on the moon. The chapter begins with a discussion of the crucial topics of project selection, project planning, and organizing the project team. We then move on to an explanation of some project scheduling techniques, showing some typical project management software printouts that are available to project managers. The chapter continues with a discussion of controlling project cost and performance, primarily through the use of “earned value,” and then concludes with a brief description of Goldratt’s “critical chain.”

Introduction r

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35

36

Executing Strategy: Project Management

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2.1 Defining a Project

BSFBT
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37

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Executing Strategy: Project Management

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2.2 Planning the Project

39

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40

Executing Strategy: Project Management

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2.2 Planning the Project

41

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42

Executing Strategy: Project Management

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43

44

Executing Strategy: Project Management

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FIGURE 2.4 Three project objectives. Reprinted with permission from J. Meredith, S. J. Mantel, Jr., and S. M. Shafer, Project Management: A Managerial Approach, 9th ed. New York: Wiley, 2015.

Cost Budget limit

Due date Time (“schedule”)

Quick Response Teams

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2. Where

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FIGURE 2.5 Work breakdown structure.

46

Executing Strategy: Project Management

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FIGURE 2.6 Linear responsibility chart or RACI matrix. Reprinted with permission from J. Meredith, S. J. Mantel, Jr., and S. M. Shafer, Project Management: A Managerial Approach, 9th ed. Hoboken, NJ: Wiley, 2015.

Subproject

Task

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47

48

Executing Strategy: Project Management

■ TABLE 2.1 Data for a Bank’s Mortgage Refinancing Project Expected time, te

Preceding activities

A: Identify all stakeholders

10

—

B: Develop the project charter

10

—

C: Uncover all relevant regulations

5

—

D: Set up project procedures

7

A

E: Determine total refinancing time

5

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F: Use accounting data for total cost

7

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G: Interview to determine unknown risks

2

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H: Redesign so as to reduce task times

5

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I: Determine cost reductions of new design

8

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J: Uncover any new constraints on design

4

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End

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FIGURE 2.7 Network diagram for mortgage process improvement project.

I, 8 12, 20 13, 21 C, 5 0, 5 3, 8

H, 5 5, 10 8, 13

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Executing Strategy: Project Management

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■ TABLE 2.2 Six Sigma Activity Times (Days) Project activity

Optimistic time to

Most likely time tm

Pessimistic time t p

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53

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FIGURE 2.8 Probability distribution of path completion time.

23

Time (days)

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FIGURE 2.9 Network for simulating.

54

Executing Strategy: Project Management

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FIGURE 2.10 Spreadsheet for simulating the network.

FIGURE 2.11 Simulation results.

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

A Activity A 32.1

B Activity B 24.6

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E Activity E 34.4

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G Path ACF 88.8

Assumption Cells

Formulae: Cell G3 = A3 + C3 + F3 Cell H3 = B3 + D3 + F3 = B3 + E3 Cell I3 = MAX (G3:I3) Cell J3

H Path BDF 85.2

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J Completion Time 88.8

Forecast Cell

2.3 Scheduling the Project

55


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December WBS Name Software review begins 1

January

February

March

Duration Sch. start Sch. finish 4 11 18 25 1 8 15 22 29 5 12 19 25 5 12 19 26 2 0d

Dec 7

Dec 7

2

Literature search

2d

Dec 7

Dec 8

3

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12d

Dec 9

Dec 26

4

Vendor calls

10d

Dec 27

Jan 9

4.1

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10d

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Jan 9

4.2

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1d

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Dec 27

4.3

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1d

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Dec 27

5

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1d

Jan 10

Jan 10

6

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5d

Jan 10

Jan 16

40d

Jan 11

Mar 7

1d

Jan 11

Jan 11

Demo evaluation 7 7.1 Participants selected 7.2

Software loaded on system

1d

Jan 11

Jan 11

7.3

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9d

Jan 12

Jan 24

7.4

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30d

Jan 25

Mar 7

8

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3d

Dec 28

Dec 30

9

Purchase recommendation prepared

5d

Mar 8

Mar 14

10

Purchase order prepared

0d

Mar 14

Mar 14

Project: software evaluation

Critical

Progress

Summary

Date: 1/20/94

Noncritical

Milestone

Rolled up

April 9 16

FIGURE 2.12 Microsoft project’s Gantt chart for a software information system upgrade.

56

Executing Strategy: Project Management Project approval

Script writing

Script approval

Revise script

Shooting

1 0d 12/3/98 12/3/98

2 14d 12/3/98 12/22/98

9 5d 12/23/98 12/29/98

10 5d 12/30/98 1/5/99

11 1/6/99

Editing 10d 1/19/99

12 7d 1/20/99 1/28/99

Final approval Schedule shoots

13 5d 1/31/99 2/4/99

3 10d 12/3/98 12/16/98

Deliver video to client Begin scheduling

Propose shoots

Schedule shoots

Scheduling complete

4 0d 12/3/98 12/3/98

5 5d 12/3/98 12/9/98

7 5d 12/10/98 12/16/98

8 0d 12/16/98 12/16/98

14 0d 12/4/99 12/4/99

Hire secretary 6 5d 12/3/98 12/9/98

FIGURE 2.13 PERT chart generated by Microsoft Project for a video sales tool.

Name

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Subproject

ID Duration Scheduled start Scheduled finish

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Summary

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58

Executing Strategy: Project Management

Critical chain

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60

Executing Strategy: Project Management

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61

Questions


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■ NUTRI‐SAM: THE LATIN AMERICAN EXPANSION DECISION
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62

Executing Strategy: Project Management


5IF
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UJNF
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UIF
NBKPS
BDUJWJUJFT
Activity

Optimistic time (months)

A: Concept development

Most likely time (months)

Pessimistic time (months)

3

12

24

B: Define project scope

1

2

12

C: Develop broad schedule

0.25

0.5

1

D: Detailed cost estimates

0.2

0.3

0.5

E: Develop staffing plan

0.2

0.3

0.6

2

3

6

G: Facility construction

8

12

24

H: Mobilization of employees

0.5

2

4

I: Procurement of equipment

1

3

12

0.25

0.5

K: Recruiting and training

0.25

0.5

1

L: Solving start‐up problems

0

1

2

M: Centerlining

0

1

4

Plan definition

Design and construction F: Detailed engineering

Start‐up and turnover J: Prestart‐up inspection

1

BTTVNJOH
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UJNFT
Questions

EXERCISES 2.1


5IF
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BO
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UIF
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PG
FBDI
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8IBU
JT
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QBUI
8IJDI
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C, 1 A, 4

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2.2


3FGFS
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2.3


(JWFO
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CZ

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CZ

XFFLT


I, 1

D, 5 G, 3

Start

Times (weeks)

E, 4

End

B, 3

J, 2 F, 1

H, 5


U
UIF
FOE
PG
UIF
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#
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EBZT
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RVFTUJPO






Activity

Optimistic

Most likely

Required Pessimistic precedence

A

5

11

11

—

B

10

10

10

—

C

2

5

8

—

D

1

7

13

A

63

Exercises Times (weeks)

(a) 
EBZT (b) 
EBZT (c) 
EBZT

Required Pessimistic precedence

Activity

Optimistic

Most likely

E

4

4

10

B

F

4

7

10

B

G

2

2

2

B

H

0

6

6

C

I

2

8

14

G,H

J

1

4

7

D, E

2.6

*G
UIF
GJSN
DBO
DPNQMFUF
UIF
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XJUIJO

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B
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PG
ĸ 
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JG
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PG
ĸ
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CSFBLFWFO
QSPKFDU 2.4

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UJNF Activity

2.5

1VTBO
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PO
UIF
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DPBTU
PG
4PVUI
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PG
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PG
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JOUP
B
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B
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MBSHF
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B
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PG
UIF
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1.
FWBMVBUFE
UIF
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VTJOH
$1.
BOBMZTJT
5IF
GPMMPXJOH
BDUJWJUJFT
XJUI
UIFJS
DPSSFTQPOEJOH
UJNFT
XFSF
SFDPSEFE Times Most likely

Pessimistic

Preceding tasks

8

10

13

—

5

6

8

—

Insert scale bases

13

15

21

2

te (Weeks)

Preceding activities

#

Activity

1

Lay foundation

2

Dig hole for scale

3

Optimistic

a

3

None

b

5

a

c

3

a

d

1

c

e

3

b

f

4

b, d

4

Erect frame

10

12

14

1, 3

g

2

c

5

11

20

30

4

h

3

g, f

Complete building

i

1

e, h

6

Insert scales

4

5

8

5

7

Insert display cases

2

3

4

5

8

Put in office equipment

4

6

10

7

9

Give finishing touches

2

3

4

8, 6

&TUJNBUFE
BDUJWJUZ
UJNFT
BOE
QSFDFEFODFT
BSF
HJWFO
CFMPX Times (days)

Activity

Optimistic

Most likely

Required Pessimistic precedence

A

6

7

14

—

B

8

10

12

—

C

2

3

4

—

D

6

7

8

A

E

5

5.5

9

B, C

F

5

7

9

B, C

G

4

6

8

D, E

H

2.7

3

3.5

F

8IBU
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UIF
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UIBU
UIF
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CF
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XJUIJO

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$1.
BOBMZTJT
GJOE
UIF
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UJNF 2.7

"T
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UIF
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BO
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8FCƞ EFTJHO
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BU
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POMZ

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XIFO

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GPS
BO
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PG

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XBT
ĸ 
BU
EBZ

BOE
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EBZ

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BOE
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BU
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'JOE
UIF
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WBSJBODF
DPTU
WBSJBODF
BOE
TDIFEVMF
WBSJ BODF
BU
EBZ


64 2.8

2.9

2.10

Executing Strategy: Project Management

"T
JO
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TIPXO
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B
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BU
NPOUI

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PG
 
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PG
 
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BU
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IBE
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PG
 
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PG
 
BOE
BO
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WBMVF
PG
 
'JOE
UIF
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WBSJBODFT

2.12 Activity 1

1

—

2

—

3

3

—

4

4

3

5

3

2, 4

6

8

3

7

2

2, 4

8

4

1, 5

9

2

17

10

6

2, 4

E, 5

F, 6

B, 3

G, 10

Start

End

H, 8

C, 6

I, 4 D, 7

/PUF
UIBU
GPVS
BDUJWJUJFT
DBO
TUBSU
JNNFEJBUFMZ 'JOE
UIF
GPMMPXJOH (a) $SJUJDBM
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UP
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UIF
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PO
BDUJWJUJFT
&
'
BOE
) 2.11

(JWFO
UIF
BDUJWJUJFT
EBUB
JO
UIF
UBCMF
CFMPX

Preceding activities

2

(JWFO
B
OFUXPSL

A, 5

Duration

11

5

6, 10

12

10

7, 8, 11

13

11

7, 8, 11

14

1

6, 10

15

9

12

16

3

6, 10

17

8

12

18

6

13, 14, 15

(a) %SBX
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OFUXPSL
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QBUI (c) 'JOE
UIF
DPNQMFUJPO
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Activity

Times (weeks)

Preceding activities

A

3

—

B

6

—

C

8

—

*
O
UIF
QSPKFDU
OFUXPSL
TIPXO
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JO
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UIF
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D

7

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Process and Supply Chain Design In this second part of the book, “Process and Supply Chain Design,” we first describe in Chapter  3 how to plan and design the organization’s transformation and supply processes to produce services and/or products for its customers and clients. In Chapter 4, we go further into the design details by elaborating the importance of planning for the amount to be offered as well as its timing through proper scheduling of the processes. In Chapters  5 and  6, we describe how to plan and manage the supply chain. Chapter 5 focuses on the planning and analysis of the supply chain and its critical ties to the sales function. Chapter 6 then gets into the details of supply chain strategy in terms of its design, such as sourcing, inventory management, and the role of information technology.

part

II

Role of Operations and Supply Chains in The Organizations’ Competitiveness

PART I: Strategy and Execution

PART II: Process and Supply Chain Design

PART III: Managing and Improving the Process

Chapter. 1: Operations and Supply Chain Strategy for Competitiveness

Chapter. 3: Process Planning

Chapter. 7: Monitoring and Controlling the Process

Chapter. 2: Executing Strategy: Project Management

Chapter. 4: Capacity and Scheduling

Chapter. 8: Process Improvement: Six Sigma

Chapter. 5: Supply Chain Planning and Analytics

Chapter. 9: Process Improvement: Lean

Chapter. 6: Supply Chain Management

65

chapter

3

Process Planning C HA P TE R IN P ERS PECTIVE Chapters  1 and 2 in PART I focused on determining a competitive strategy for the organization and planning its implementation. As we start PART II, our first task is the selection and design of the transformation process that can execute that strategy in an efficient and effective manner. If an organization is using the wrong transformation process, frequently because the organization has changed or the market has changed over time, it will not be competitive. The chapter begins with an overview of the five major types of transformation processes and their respective advantages and disadvantages. Next, issues related to the selection of a competitive transformation process, such as considerations of volume, variety, and product life cycles, are discussed. Last, explicit attention is given to some of the unique aspects of designing service operations.

Introduction r

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66

Introduction

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67

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UIF
IJHIMZ
TQFDJBMJ[FE
BOE
BVUPNBUFE
OBUVSF
PG
UIF
FRVJQNFOU
DIBOHJOH
UIF
SBUF
PG
PVUQVU
DBO
CF
RVJUF
EJG GJDVMU
5IF
GBDJMJUZ
JT
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B
NB[F
PG
QJQFT
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TUBHFT
PG
UIF
QSPEVDU
BOE
UIF
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SBUF
JT
DPOUSPMMFE
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GMPX
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BSF
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QSJNBSJMZ
UP
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BOE
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UIF
FRVJQNFOU 3FTFBSDI
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BOE
.FSFEJUI



IPXFWFS
IBT
TIPXO
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JT
B
NVDI
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PG
DPOUJOVPVT
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JOEVTUSJFT
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GBDU
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JOEVT USJFT
SBOHF
BMM
UIF
XBZ
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JOUFSNJUUFOU
GPSNT
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UP
job shops
UP
SJHJEMZ
DPOUJOVPVT
flow shops
CPUI
EFTDSJCFE
OFYU 
*O
GBDU
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CF
BU
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GPSNT
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DPOUJOVPVT
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GPS
B
TIPSU
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POF
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PO
EFNBOE
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UIF
TQFDJGJDBUJPO
PG
JOEJWJEVBM
DVTUPN FST
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PG
DPNNPEJUZ
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*O
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FYUSFNFT
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BMTP
CMFOEJOH
UZQFT
PG
DPOUJOVPVT
QSPDFTTFT
BT
XFMM
BT
VOVTVBM
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PG
CPUI
KPC
BOE
GMPX
TIPQT 5IF
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PG
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FTQFDJBMMZ
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JOUP
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PVUQVUT
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TPNFUJNFT
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NBZ
CF
POMZ
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3.1 Forms of Transformation Systems

FH ŇDMFBO
DIMPSJOBUFE
XBUFS 
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NBOZ
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UP
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DSFBUF
UIF
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NBOVGBDUVSJOH
UIF
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PG
QSPDFTTJOH
BSF
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DIFNJDBM
SFBDUJPOT
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CF
BDDVSBUFMZ
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JT
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UIF
JOJUJBM
TFUVQ
PG
FRVJQNFOU
BOE
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GMPX
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3.1.2 Flow Shop 5IF
flow shop
JT
B
USBOTGPSNBUJPO
TZTUFN
TJNJMBS
UP
UIF
DPOUJOVPVT
QSPDFTT
UIF
NBKPS
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QSPEVDU
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DPOUJOVPVT
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PS
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CF
OFFEFE
UP
HFU
UIF
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JOUP
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-JLF
UIF
DPOUJOVPVT
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GMPX
TIPQ
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BT
CBTJDBMMZ
UIF
TBNF
BOE
UIF
GMPX
PG
XPSL
JT
UIVT
SFMBUJWFMZ
DPOUJOVPVT
0SHBOJ[BUJPOT
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VTF
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5IF
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PG
UIF
GMPX
TIPQ
BSF
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GJYFE
TFU
PG
JOQVUT
DPOTUBOU
UISPVHI QVU
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BOE
B
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TFU
PG
PVUQVUT
&YBNQMFT
PG
UIF
GMPX
GPSN
GPS
EJTDSFUF
QSPEVDUT
BSF
QFODJM
NBOVGBDUVSJOH
TUFFMNBLJOH
BOE
BVUPNPCJMF
BTTFNCMZ
XIFSFBT
GPS
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UIF
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PG
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DMBJNT
BOE
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GBTUƞGPPE
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PSHBOJ[BUJPO
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PS
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B
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PG
B
TNBMM
WBSJFUZ
PG
PVUQVUT
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UIVT
QSPCBCMZ
PSHBOJ[F
JUT
PQFSBUJPOT
BT
B
GMPX
TIPQ
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TP
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PG
UIF
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BOE
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JO
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DPTUT
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PG
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PG
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B
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FBTJFS
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PG
UIF
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5IF
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UP
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UP
CF
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BOE
DPOUSPMMFE
4UBOEBSEJ[BUJPO
PG
PQFSBUJPOT
NFBOT
UIBU
GFXFS
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DBO
CF
VTFE
BOE
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TQBO
PG
DPOUSPM
DBO
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GPSN
PG
UIF
GMPX
TIPQ
JT
JMMVTUSBUFE
JO
'JHVSFŇ
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TIPXT
B
production line
*G
POMZ
BTTFNCMZ
PQFSBUJPOT
XFSF
CFJOH
QFSGPSNFE
BT
JO
NBOZ
BVUPNPUJWF
QMBOUT
UIF
MJOF
XPVME
CF
DBMMFE
BO
assembly line
5IJT
QSPEVDUJPO
MJOF
DPVME
SFQSFTFOU
OFX
NJMJUBSZ
JOEVDUFFT
UBLJOH
UIFJS
QIZTJDBM
FYBNT
TNBMM
BQQMJBODFT
CFJOH
BTTFNCMFE
PS
EPVCMFƞEFDLFS
IBNCVSHFST
CFJOH
QSFQBSFE /PUF
UIBU
CPUI
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BOE
QSPEVDUT
DBO
CF
PSHBOJ[FE
BT
GMPX
TIPQT
BOE
DBO
DBQJUBMJ[F
PO
UIF
NBOZ
BEWBOUBHFT
PG
UIJT
GPSN
PG
QSPDFTTJOH

Advantages of the Flow Shop 5IF
QSJNBSZ
BEWBOUBHF
PG
B
GMPX
TIPQ
JT
UIF
MPX
QFSƞVOJU
DPTU
UIBU
JT
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PXJOH
UP
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MBCPS
SBUFT
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VUJMJ[BUJPO
PG
UIF
GBDJM JUZ
MPX
JOƞQSPDFTT
JOWFOUPSJFT
BOE
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NBOBHFSJBM
DPOUSPM
*O
BEEJUJPO
XJUI
FWFSZPOF
XPSLJOH
PO
BMM
UIF
SFRVJSFE
UBTLT
TJNVMUBOFPVTMZ
SFGFSSFE
UP
BT
PWFSMBQQJOH
QSPEVDU
PS
TFSWJDF
PVUQVUT
BSF
QSPEVDFE
WFSZ
RVJDLMZ

69

70

Process Planning

Shipping Out

Storage In FIGURE 3.1 A generalized low shop operation.

#FDBVTF
PG
UIF
IJHI
SBUF
PG
PVUQVU
NBUFSJBMT
DBO
PGUFO
CF
CPVHIU
JO
MBSHF
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BU
TJH OJGJDBOU
TBWJOHT
"MTP
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PQFSBUJPOT
BSF
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UFOE
UP
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TP
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JOƞQSPDFTT
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BSF
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UP
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VQ
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5IJT
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buffer
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UIF
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BSF
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MFTT
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CF
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BSF
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4JODF
UIF
GMPX
TIPQ
JT
HFOFSBMMZ
DPOUJOVPVT
XJUI
NBUFSJBMT
IBOEMJOH
PGUFO
CVJMU
JOUP
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UIF
PQFSBUJPOT
DBO
CF
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UP
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DPNQBDUMZ
BOE
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XJUI
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NBLJOH
NBYJNVN
VTF
PG
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JO
NBOBHFSJBM
DPOUSPM
PG
B
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GMPX
TIPQ
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CF
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VOFOEJOH
NBOBHFSJBM
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UIF
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CZ
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NBOBHFST
GSPN
UIFJS
OPSNBM
EVUJFT
PG
QMBOOJOH
BOE
EFDJTJPOƞNBLJOH

Disadvantages of the Flow Shop %FTQJUF
UIF
JNQPSUBOU
DPTU
BEWBOUBHF
PG
UIF
GMPX
TIPQ
JU
DBO
IBWF
TPNF
TFSJPVT
ESBXCBDLT
/PU
POMZ
JT
WBSJFUZ
PG
PVUQVU
EJGGJDVMU
UP
PCUBJO
FWFO
DIBOHFT
JO
UIF
SBUF
PG
PVUQVU
BSF
IBSE
UP
NBLF
$IBOHJOH
UIF
rate
PG
PVUQVU
NBZ
SFRVJSF
VTJOH
PWFSUJNF
MBZJOH
PGG
XPSLFST
BEEJOH
BEEJUJPOBM
TIJGUT
PS
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DMPTJOH
UIF
QMBOU
"MTP
CFDBVTF
UIF
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JT
TP
TQFDJBMJ[FE
NJOPS
DIBOHFT
JO
UIF
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PG
UIF
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PGUFO
SFRVJSF
TVCTUBOUJBM
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JO
UIF
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5IVT
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DIBOHFT
JO
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EFTJHO
BSF
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BOE
UIJT
DPVME
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UIF
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QPTJUJPO "
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QSPCMFN
JO
GMPX
TIPQT
JT
CPSFEPN
BOE
BCTFOUFFJTN
BNPOH
UIF
MBCPS
GPSDF
4JODF
UIF
FRVJQNFOU
QFSGPSNT
UIF
TLJMMFE
UBTLT
UIFSF
JT
OP
DIBMMFOHF
GPS
UIF
XPSLFST
"OE
PG
DPVSTF
UIF
DPOTUBOU
VOFOEJOH
SFQFUJUJWF
OBUVSF
PG
UIF
NBOVGBDUVSJOH
MJOF
DBO
EFIVNBOJ[F
XPSL FST
#FDBVTF
UIF
SBUF
PG
XPSL
GMPX
JT
HFOFSBMMZ
TFU
paced
CZ
UIF
MJOF
TQFFE
JODFOUJWF
QBZ
BOE
PUIFS
PVUQVUƞCBTFE
JODFOUJWFT
BSF
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MJOF
GPSN
IBT
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JNQPSUBOU
ESBXCBDL
*G
UIF
MJOF
TIPVME
TUPQ
GPS
BOZ
SFBTPO‡B
CSFBLEPXO
PG
B
NBDIJOF
PS
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B
TIPSUBHF
PG
TVQQMJFT
BOE
TP
GPSUI‡
QSPEVDUJPO
NBZ
DPNF
UP
BO
JNNFEJBUF
IBMU
VOMFTT
8*1
JT
TUPSFE
BU
LFZ
QPJOUT
JO
UIF
MJOF
4VDI
PDDVSSFODFT
BSF
QSPIJCJUJWFMZ
FYQFOTJWF

3.1 Forms of Transformation Systems

0UIFS
SFRVJSFNFOUT
PG
UIF
GMPX
TIPQ
BMTP
BEE
UP
JUT
DPTU
BOE
JUT
QSPCMFNT
'PS
FYBNQMF
QBSUT
NVTU
CF
TUBOEBSEJ[FE
TP
UIBU
UIFZ
XJMM
GJU
UPHFUIFS
FBTJMZ
BOE
RVJDLMZ
PO
UIF
BTTFNCMZ
MJOF
"OE
TJODF
BMM
NBDIJOFT
BOE
MBCPS
NVTU
XPSL
BU
UIF
TBNF
SFQFUJUJWF
QBDF
JO
PSEFS
UP
DPPSEJOBUF
PQFSBUJPOT
UIF
XPSLMPBET
BMPOH
UIF
FOUJSF
MJOF
BSF
HFOFSBMMZ
balanced
UP
UIF
QBDF
PG
UIF
TMPXFTU
FMFNFOU
5P
LFFQ
UIF
MJOF
SVOOJOH
TNPPUIMZ
B
MBSHF
TVQQPSU
TUBGG
JT
SFRVJSFE
BT
XFMM
BT
MBSHF
TUPDLT
PG
SBX
NBUFSJBMT
BMM
PG
XIJDI
BMTP
BEE
UP
UIF
FYQFOTF -BTU
JO
UIF
GMPX
TIPQ
TJNQMJDJUZ
JO
ongoing operation
JT
BDIJFWFE
BU
UIF
DPTU
PG
DPNQMFYJUZ
JO
UIF
JOJUJBM
setup
5IF
QMBOOJOH
EFTJHO
BOE
JOTUBMMBUJPO
PG
UIF
UZQJDBMMZ
DPNQMJDBUFE
TQFDJBMƞ QVSQPTF
IJHIƞWPMVNF
FRVJQNFOU
BSF
NBNNPUI
UBTLT
5IF
FRVJQNFOU
JT
DPTUMZ
OPU
POMZ
UP
TFU
VQ
PSJHJOBMMZ
CVU
BMTP
UP
NBJOUBJO
BOE
TFSWJDF
'VSUIFSNPSF
TVDI
TQFDJBMƞQVSQPTF
FRVJQNFOU
JT
WFSZ
TVTDFQUJCMF
UP
PCTPMFTDFODF
BOE
JT
EJGGJDVMU
UP
EJTQPTF
PG
PS
UP
NPEJGZ
GPS
PUIFS
QVSQPTFT

Layout of the Flow Shop 5IF
DSVY
PG
UIF
QSPCMFN
PG
SFBMJ[JOH
UIF
BEWBOUBHFT
PG
B
GMPX
TIPQ
JT
XIFUIFS
UIF
XPSL
GMPX
DBO
CF
TVCEJWJEFE
TVGGJDJFOUMZ
TP
UIBU
MBCPS
BOE
FRVJQNFOU
BSF
VUJMJ[FE
TNPPUIMZ
UISPVHIPVU
UIF
QSP DFTTJOH
PQFSBUJPOT
*G
GPS
FYBNQMF
POF
PQFSBUJPO
UBLFT
MPOHFS
UIBO
BMM
UIF
PUIFST
UIJT
TJOHMF
PQFSBUJPO
QFSIBQT
B
NBDIJOF
XJMM
CFDPNF
B
CPUUMFOFDL
EFMBZJOH
BMM
UIF
PQFSBUJPOT
GPMMPXJOH
JU
BOE
SFTUSJDUJOH
UIF
PVUQVU
SBUF
PG
UIF
FOUJSF
QSPDFTT 0CUBJOJOH
TNPPUI
VUJMJ[BUJPO
PG
XPSLFST
BOE
FRVJQNFOU
BDSPTT
BMM
PQFSBUJPOT
JOWPMWFT
BTTJHOJOH
UP
HSPVQT
UBTLT
UIBU
UBLF
BCPVU
UIF
TBNF
BNPVOU
PG
UJNF
UP
DPNQMFUF
5IJT
CBMBODJOH
BQQMJFT
UP
QSPEVDUJPO
MJOFT
XIFSF
QBSUT
PS
PVUQVUT
BSF
QSPEVDFE
BT
XFMM
BT
UP
BTTFNCMZ
MJOFT
XIFSF
QBSUT
BSF
BTTFNCMFE
JOUP
GJOBM
QSPEVDUT 'JOBM
BTTFNCMZ
PQFSBUJPOT
VTVBMMZ
IBWF
NPSF
MBCPS
JOQVU
BOE
GFXFS
GJYFEƞFRVJQNFOU
DZDMFT
BOE
DBO
UIFSFGPSF
CF
TVCEJWJEFE
NPSF
FBTJMZ
GPS
TNPPUI
GMPX
&JUIFS
PG
UXP
UZQFT
PG
MJOFT
DBO
UIFO
CF
VTFE
"
paced line
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71

72

Process Planning

Balancing the Production Line 8F
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UIF
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DPNQMFUF
BMM
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UP
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B
GJOJTIFE
JUFN

■ TABLE 3.1

Tasks in Credit Application Processing

Task

Average time (minutes)

Immediately preceding tasks

a Open and stack applications

0.20

None

b

0.37

a

c Check off form 1 for page 1 of application

0.21

a

d Check off form 2 for page 2 of application; file original copy of application

0.18

a

e Calculate credit limit from standardized tables according to forms 1 and 2

0.19

c, d

f Supervisor checks quotation in light of special processing of letter and notes type of form letter, address, and credit limit to return to applicant

0.39

b, e

g Administrative assistant types in details on form letter and mails

0.36

f

Total

1.90

Process enclosed letter; make note of and handle any special requirements

b 0.37

a

c 0.20

FIGURE 3.2 Precedence graph for credit applications.

e 0.21

d 0.18

f 0.19

g 0.39

0.36

3.1 Forms of Transformation Systems

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73

74

Process Planning

r
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Station 2 b

0.37

Station 3 a

c

0.20

e

0.21

0.19

f

0.39

Station 4

g

0.36

Station 5

Station 1 d

0.18

FIGURE 3.3 Station assignments.

■ TABLE 3.2 Station Task Assignments Station

Time available

Eligible tasks

Task assigned

Idle time

1

0.40 0.20 0.02

a b, c, d b, c

a d None will fit

2

0.40 0.03

b, c c

b c will not fit

0.03

3

0.40 0.19

c e

c e

0.00

4

0.40 0.01

f g

f g will not fit

0.01

5

0.40

g

g

0.04

0.02

3.1 Forms of Transformation Systems

75

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Dept. A

Dept. B

Shipping Product B5 Product A63

Dept. G Dept. C Dept. E

Dept. D

Dept. F

Receiving

Product B5 Product A63

FIGURE 3.4 A generalized job shop operation.

76

Process Planning

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77

78

Process Planning

■ TABLE 3.3

Directly Specified Closeness Preferences* Department

Department 1 2

1

2 E

3

4

5

A

U

U

U

U

I

I

U

U

U

A

I

U

3 4

6

5

I

6

*Note: A = Absolutely necessary E = Especially important

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I = Important

A

1

3

5

I

E

I I

2

A

4

I

6

(a) I

4 I

FIGURE 3.5 Closeness preferences layout: (a) initial layout. (b) final layout.

2

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79

3.1.4 Cellular Production $FMMVMBS
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FIGURE 3.6 Conversion of (a) a job shop layout into (b) a cellular layout for part families.

80

Process Planning

Unorganized parts

FIGURE 3.7 Organization of miscellaneous parts into families.

Turned parts

Geometric parts

Formed parts

Parts organized by families

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GPS
NBOVGBDUVSFST
JT
UIF
NJOJNBM
DPTU
SFRVJSFE
UP
NPWF
UP
DFMMVMBS
QSPEVDUJPO
"MUIPVHI
TPNF
DFMMT
NBZ
CF
IJHIMZ
BVUPNBUFE
XJUI
FYQFOTJWF
TQFDJBMƞQVSQPTF
FRVJQNFOU
JU
JT
OPU
OFDFTTBSZ
UP
JOWFTU
BOZ
BEEJUJPOBM
DBQJUBM
JO
PSEFS
UP
BEPQU
UIF
DFMMVMBS
GPSN
*U
SFRVJSFT
POMZ
UIF
NPWFNFOU
PG
FRVJQNFOU
BOE
MBCPS
JOUP
DFMMT
0S
XJUI
FWFO
MFTT
USPVCMF
UIPVHI
XJUI
TPNF
MPTT
PG
FGGJDJFODZ
UIF
GJSN
DBO
TJNQMZ
EFTJHOBUF
DFSUBJO
QJFDFT
PG
FRVJQNFOU
BT
EFEJDBUFE
UP
B
TJOHMF
QBSU
GBNJMZ
CVU
OPU
SFMPDBUF
UIFN
5IF
UFSN
VTFE
JO
UIJT
DBTF
JT
virtual cell
PS
logical cell
BMTP
LOPXO
BT
nominal
CFDBVTF
UIF
FRVJQNFOU
JT
OPU
QIZTJDBMMZ
BEKPJOJOH
CVU
JT
TUJMM
SFTFSWFE
GPS
QSPEVDUJPO
PG
POMZ
POF
QBSU
GBNJMZ "OPUIFS
GPSN
PG
DFMMVMBS
QSPEVDUJPO
JT
DBMMFE
B
NJOJQMBOU
)FSF
UIF
DFMM
OPU
POMZ
EPFT
UIF
NBOVGBDUVSJOH
CVU
BMTP
IBT
JUT
PXO
JOEVTUSJBM
FOHJOFFS
RVBMJUZ
NBOBHFS
BDDPVOUBOU
NBSLFUJOH
SFQSFTFOUBUJWF
BOE
TBMFTQFSTPO
BT
XFMM
BT
BMNPTU
BMM
UIF
PUIFS
TVQQPSU
TFSWJDFT
UIBU
B
SFHVMBS
QMBOU
IBT
0OMZ
GBSƞSFNPWFE
TFSWJDFT
TVDI
BT
3%
BOE
IVNBO
SFTPVSDFT
BSF
OPU
EFEJDBUFE
UP
UIF
NJOJQMBOU
5IF
FOUJSF
GBDJMJUZ
PG
UIF
GJSN
JT
UIVT
CSPLFO
EPXO
JOUP
B
OVNCFS
PG
NJOJQMBOUT
FBDI
XJUI
JUT
PXO
HFOFSBM
NBOBHFS
QSPEVDUJPO
XPSLFST
BOE
TVQQPSU
TFSWJDFT
TP
UIBU
JU
DBO
PQFSBUF
BT
BO
JOEFQFOEFOU
QSPGJU
DFOUFS

81

82

Process Planning

Disadvantages of Cellular Production 4PNF
EJTBEWBOUBHFT
PG
UIF
DFMMVMBS
GPSN
BSF
UIPTF
PG
UIF
GMPX
TIPQ
BOE
UIF
KPC
TIPQ
CVU
UIFZ
BSF
OPU
BT
TFSJPVT
"T
JO
B
GMPX
TIPQ
JG
B
QJFDF
PG
FRVJQNFOU
TIPVME
CSFBL
EPXO
JU
DBO
TUPQ
QSPEVD UJPO
JO
UIF
DFMM
CVU
JO
B
DFMM
GPSN‡VOMJLF
B
GMPX
TIPQ
XIFSF
UIBU
NJHIU
CF
UIF
POMZ
QJFDF
PG
FRVJQNFOU
JO
UIF
GBDJMJUZ‡XPSL
NJHIU
JG
QFSNJTTJCMF
UFNQPSBSJMZ
CF
TIJGUFE
UP
PUIFS
DFMMT
UP
HFU
B
KPC
PVU )PXFWFS
PCUBJOJOH
CBMBODF
BNPOH
UIF
DFMMT
XIFO
EFNBOET
GPS
B
QSPEVDU
PS
TFSWJDF
GBNJMZ
LFFQ
DIBOHJOH
JT
B
MFTTFS
QSPCMFN
JO
CPUI
GMPX
BOE
KPC
TIPQT
'MPX
TIPQT
BSF
SFMBUJWFMZ
GJYFE
JO
DBQBDJUZ
BOE
QSPEVDF
B
TUBOEBSE
PVUQVU
TP
UIFSF
JT
OP
RVFTUJPO
PG
CBMBODF
+PC
TIPQT
TJNQMZ
ESBX
GSPN
B
QPPM
PG
TLJMMFE
MBCPS
GPS
XIBUFWFS
KPC
DPNFT
JO
8JUI
DFMMT
CZ
DPOUSBTU
JG
EFNBOE
GPS
B
GBNJMZ
ESJFT
VQ
JU
NBZ
CF
OFDFTTBSZ
UP
CSFBL
VQ
UIBU
DFMM
BOE
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UIF
FRVJQNFOU
PS
SFGPSN
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GBNJMJFT
*O
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SVO
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MBCPS
DBO
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CF
BTTJHOFE
UP
XIBUFWFS
DFMM
OFFET
JU
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UIF
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DFMM 0G
DPVSTF
WPMVNFT
BSF
UPP
TNBMM
JO
DFMMVMBS
QSPEVDUJPO
UP
BMMPX
UIF
QVSDIBTF
PG
UIF
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FGGJDJFOU
FRVJQNFOU
UIBU
GMPX
TIPQT
VTF
5IF
DFMMVMBS
GPSN
BMTP
EPFT
OPU
BMMPX
GPS
UIF
FYUFOU
PG
DVTUPNJ[BUJPO
VTVBMMZ
GPVOE
JO
KPC
TIPQT
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UIF
MBCPS
QPPM
IBT
MBSHFMZ
CFFO
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UP
JOEFQFOEFOU
DFMMT
BMUIPVHI
UIF
SFNBJOEFS
DFMM
NBZ
CF
BCMF
UP
EP
UIF
XPSL 
.PSFPWFS
UIF
GPTUFSJOH
PG
TQFDJBMJ[FE
LOPXMFEHF
BTTPDJBUFE
XJUI
WBSJPVT
PQFSBUJPOBM
BDUJWJUJFT
JT
SFEVDFE
CFDBVTF
UIF
XPSLFST
XIP
QFSGPSN
UIFTF
BDUJWJUJFT
BSF
TQSFBE
PVU
BOE
UIFSFGPSF
IBWF
MJNJUFE
PQQPSUVOJUJFT
UP
DPMMBCPSBUF

Cellular Layout $FMMVMBS
QSPEVDUJPO
DSFBUFT
UFBNT
PG
XPSLFST
BOE
FRVJQNFOU
UP
QSPEVDF
GBNJMJFT
PG
PVUQVUT
5IF
XPSLFST
BSF
DSPTTƞUSBJOFE
TP
UIBU
UIFZ
DBO
PQFSBUF
BOZ
PG
UIF
FRVJQNFOU
JO
UIFJS
DFMM
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UIFZ
UBLF
GVMM
SFTQPOTJCJMJUZ
GPS
UIF
QSPQFS
QFSGPSNBODF
PS
SFTVMU
PG
UIF
PVUQVUT
8IFOFWFS
GFBTJCMF
UIFTF
PVUQVUT
BSF
GJOBM
QSPEVDUT
PS
TFSWJDFT
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PUIFS
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QBSUJDVMBSMZ
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NBOVGBDUVSJOH
UIF
PVUQVUT
BSF
QBSUT
UIBU
HP
JOUP
B
GJOBM
QSPEVDU
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UIF
MBUUFS
JT
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DBTF
JU
JT
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UIF
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DMPTFMZ
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UIF
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PS
BTTFNCMZ
MJOF
TP
UIBU
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PVUQVU
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JOUP
UIF
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BT
JU
JT
OFFEFE *O
TPNF
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B
virtual cell
JT
GPSNFE
CZ
JEFOUJGZJOH
DFSUBJO
FRVJQNFOU
BOE
EFEJDBUJOH
JU
UP
UIF
QSPEVDUJPO
PG
GBNJMJFT
PG
PVUQVUT
CVU
XJUIPVU
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JOUP
BO
BDUVBM
QIZTJDBM
DFMM
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DBTF
OP
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BU
BMM
UIF
PSHBOJ[BUJPO
TJNQMZ
LFFQT
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MBZPVU
JU
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5IF
FTTFODF
PG
UIF
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UIFO
JT
UIF
JEFOUJGJDBUJPO
PG
UIF
PVUQVU
GBNJMJFT
BOE
UIF
FRVJQ NFOU
UP
EFEJDBUF
UP
FBDI
PG
UIFN *U
JT
NPSF
DPNNPO
GPS
BO
PSHBOJ[BUJPO
UP
BDUVBMMZ
GPSN
QIZTJDBM
DFMMT
8IFO
QIZTJDBM
DFMMT
BSF
DSFBUFE
UIF
MBZPVU
PG
UIF
DFMM
NBZ
SFTFNCMF
B
TPSU
PG
NJOJGMPX
TIPQ
B
KPC
TIPQ
PS
B
NJY
PG
UIFTF
EFQFOEJOH
PO
UIF
TJUVBUJPO
5IVT
XF
XJMM
EJSFDU
PVS
BUUFOUJPO
IFSF
UP
UIF
GPSNBUJPO
PG
UIF
QBSU
PS
QSPEVDU
GBNJMJFT
BOE
UIFJS
BTTPDJBUFE
FRVJQNFOU
MFBWJOH
UIF
JTTVFT
PG
QIZTJDBM
MBZPVU
UP
CF
BEESFTTFE
JO
UIF
EJTDVTTJPOT
PG
UIF
GMPX
TIPQ
BOE
KPC
TIPQ *O
QSBDUJDF
PSHBOJ[BUJPOT
PGUFO
VTF
UIF
UFSN
cell
UP
JODMVEF
B
XJEF
SBOHF
PG
WFSZ
EJGGFSFOU
TJUVBUJPOT
B
GVODUJPOBM
EFQBSUNFOU
DPOTJTUJOH
PG
JEFOUJDBM
NBDIJOFT
B
TJOHMF
NBDIJOF
UIBU
BVUP NBUJDBMMZ
QFSGPSNT
B
WBSJFUZ
PG
PQFSBUJPOT
PS
FWFO
B
EFEJDBUFE
BTTFNCMZ
MJOF
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XF
BMTP
SFGFSSFE
UP
UIF
QPSUJPO
PG
B
TIPQ
UIBU
JT
OPU
BTTPDJBUFE
XJUI
B
TQFDJGJD
QBSU
GBNJMZ
BT
B
DFMM
B
remainder cell
/FWFSUIFMFTT
XF
EP
OPU
DPOTJEFS
BMM
UIFTF
HSPVQT
UP
CF
QBSU
PG
XIBU
XF
BSF
DBMMJOH
DFMMVMBS
QSPEVDUJPO 0SHBOJ[BUJPOT
UIBU
GPSNBMMZ
QMBO
UIFJS
TIPQ
MBZPVUT
UZQJDBMMZ
DIPPTF
UP
HSPVQ
UIFJS
FRVJQ NFOU
PO
UIF
CBTJT
PG
FJUIFS
UIF
GVODUJPO
JU
QFSGPSNT
JF
KPC
TIPQT
PS
UIF
QSPDFTTJOH
SFRVJSF NFOUT
PG
B
QSPEVDU
PS
HSPVQ
PG
QSPEVDUT
JF
GMPX
TIPQT 
"T
XF
EJTDVTTFE
UIF
QVSQPTF
PG
HSPVQJOH
FRVJQNFOU
PO
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CBTJT
PG
JUT
GVODUJPO
JT
UP
NBYJNJ[F
GMFYJCJMJUZ
XIFSFBT
UIF
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PG
HSPVQJOH
JU
PO
UIF
CBTJT
PG
QSPDFTTJOH
SFRVJSFNFOUT
JT
UP
NBYJNJ[F
FGGJDJFODZ

3.2 Selection of a Transformation System

$PNQBOJFT
UIBU
BEPQU
DFMMVMBS
NBOVGBDUVSJOH
UZQJDBMMZ
DSFBUF
B
pilot cell
JOJUJBMMZ
UP
FYQFSJ NFOU
XJUI
UIF
DFMMVMBS
BQQSPBDI
BOE
UIFSFGPSF
NPTU
PG
UIF
FRVJQNFOU
JO
UIF
TIPQ
SFNBJOT
JO
GVODUJPOBM
EFQBSUNFOUT
BU
UIJT
TUBHF
"T
UIFTF
GJSNT
HBJO
FYQFSJFODF
XJUI
UIF
DFMM
BOE
CFDPNF
DPOWJODFE
UIBU
JU
JT
CFOFGJDJBM
UIFZ
CFHJO
B
QIBTF
PG
JNQMFNFOUJOH
BEEJUJPOBM
DFMMT
5IJT
DBO
CF
SFGFSSFE
UP
BT
UIF
hybrid stage
CFDBVTF
BT
UIF
TIPQ
JT
JODSFNFOUBMMZ
DPOWFSUFE
UP
DFMMT
B
TJHOJGJ DBOU
QPSUJPO
PG
UIF
GBDJMJUJFT
BSF
TUJMM
BSSBOHFE
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GVODUJPOBM
EFQBSUNFOUT
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TPNF
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UIF
GPS NBUJPO
PG
BEEJUJPOBM
DFMMT
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UFSNJOBUFE
BOE
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NBZ
PS
NBZ
OPU
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UIF
NBKPSJUZ
PG
JUT
FRVJQNFOU
BSSBOHFE
JO
DFMMT
0GUFO
DPNQBOJFT
TUPQ
DSFBUJOH
OFX
DFMMT
XIFO
UIF
WPMVNF
PG
UIF
SFNBJOJOH
QBSUT
JT
JOTVGGJDJFOU
UP
KVTUJGZ
GPSNJOH
BEEJUJPOBM
DFMMT

3.1.5 Project Operations Project operations
BSF
PG
MBSHFƞTDBMF
BOE
GJOJUF
EVSBUJPO
BMTP
UIFZ
BSF
OPOSFQFUJUJWF
DPOTJTUJOH
PG
NVMUJQMF
BOE
PGUFO
TJNVMUBOFPVT
UBTLT
UIBU
BSF
IJHIMZ
JOUFSEFQFOEFOU
)PXFWFS
UIF
QSJNBSZ
DIBSBDUFSJTUJDT
PG
UIF
UBTLT
BSF
UIFJS
MJNJUFE
EVSBUJPO
BOE
JG
UIF
PVUQVU
JT
B
QIZTJDBM
QSPEVDU
UIFJS
JNNPCJMJUZ
EVSJOH
QSPDFTTJOH
(FOFSBMMZ
TUBGG
NBUFSJBMT
BOE
FRVJQNFOU
BSF
CSPVHIU
UP
UIF

PVUQVU
BOE
MPDBUFE
JO
B
OFBSCZ
staging area
VOUJM
OFFEFE
1SPKFDUT
IBWF
QBSUJDVMBSMZ
MJNJUFE
MJWFT
3FTPVSDFT
BSF
CSPVHIU
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GPS
UIF
EVSBUJPO
PG
UIF
QSPKFDU
TPNF
BSF
DPOTVNFE
BOE
PUIFST
TVDI
BT
FRVJQNFOU
BOE
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BSF
EFQMPZFE
UP
PUIFS
VTFT
BU
UIF
DPODMVTJPO
PG
UIF
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5ZQJDBMMZ
UIF
PVUQVU
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B
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EFWFMPQNFOU
B
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DBNQBJHO
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BŇUSJBM  *O
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B
QSPDFTTJOH
TZTUFN
B
OVNCFS
PG
DPOTJEFSBUJPOT
NBZ
JOEJDBUF
UIBU
UIF
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GPSN
JT
BQQSPQSJBUF
0OF
PG
UIFTF
JT
UIF
SBUF
PG
DIBOHF
JO
UIF
PSHBOJ[BUJPOT
PVUQVUT
*G
POF
EFQBSU NFOU
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LFFQ
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PO
B
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PG
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DIBOHJOH
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PSHBOJ[B UJPO
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GBMM
CFIJOE
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5IF
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GPSN
PGGFST
FYUSFNFMZ
TIPSU
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UJNFT
UP
FOWJSPONFOUBM
PS
JOUFSOBM
DIBOHFT
BOE
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CF
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GPS
*O
BEEJUJPO
JG
UIF
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BSF
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B
MJNJUFE
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JT
JOEJDBUFE
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JT
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XIFO
UIF
PVUQVU
JT
PG
B
WFSZ
MBSHF
TDBMF
XJUI
NVMUJQMF
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BDUJWJUJFT
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DMPTF
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UIF
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DPPSEJOBUJPO
JT
BDIJFWFE
UISPVHI
GSFRVFOU
NFFUJOHT
PG
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SFQ SFTFOUBUJWFT
PG
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PG
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PG
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BT
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JT
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UP
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VOEFS
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PG
USBOTGPSNBUJPO
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3.2 Selection of a Transformation System 5IJT
TFDUJPO
BEESFTTFT
UIF
JTTVF
PG
TFMFDUJOH
UIF
BQQSPQSJBUF
USBOTGPSNBUJPO
TZTUFN
PS
NJY
PG
TZTUFNT
UP
QSPEVDF
BO
PVUQVU
'SPN
UIF
QSFDFEJOH
EJTDVTTJPO
JU
TIPVME
CF
DMFBS
UIBU
UIF
GJWF
USBOTGPSNBUJPO
TZTUFNT
BSF
TPNFXIBU
TJNQMJGJFE
FYUSFNFT
PG
XIBU
JT
MJLFMZ
UP
CF
PCTFSWFE
JO
QSBDUJDF
'FX
PSHBOJ[BUJPOT
VTF
POF
PG
UIF
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GPSNT
JO
B
QVSF
TFOTF
NPTU
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UXP
PS
NPSF
GPSNT
JO
XIBU
XF
DBMM
B
hybrid
TIPQ
'PS
FYBNQMF
JO
NBOVGBDUVSJOH
DPNQVUFS
LFZCPBSET
TPNF
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BOE
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BSF
QSPEVDFE
JO
KPC
TIPQT
PS
DFMMT
CVU
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GFE
JOUP
B
GMPX
TIPQ
BU
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BTTFNCMZ
MJOF
XIFSF
B
CBUDI
PG
POF
NPEFM
JT
QSPEVDFE
5IFO
UIF
MJOF
JT
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UP
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B
CBUDI
PG
BOPUIFS
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&WFO
JO
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KPCT
BSF
PGUFO
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JO
HSPVQT
PG
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DPNNPO
JUFNT
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NPTU
PG
UIFJS
QSPDFTTJOH
MFBWJOH
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EFUBJMT
TVDI
BT
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B
DPVDI
PS
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PG
B
IPVTF
UP
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PG
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TFSWJDFT
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B
KPC
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CFFO
PO
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UP
NBTTƞQSPEVDF
UIFN
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DFMMT
PS
GMPX
TIPQT
TP
BT
UP
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BOE
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VOJU
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PGUFO
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DPNCJOFE
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PG
QSPDFTT
EFTJHO
.D%POBMET
QSFQBSFT


83

84

Process Planning

CBUDIFT
PG
#JH
.BDT
CVU
XJMM
BDDFQU
JOEJWJEVBM
DVTUPN
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,JOH
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B
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UP
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FIGURE 3.8 Effect of output characteristics on transformation systems—the product– process matrix.

86

Process Planning

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3.2 Selection of a Transformation System

87

No. of innovations

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Time

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FIGURE 3.9 Product–process innovations over time.

88

Process Planning

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3.2 Selection of a Transformation System

Customer contact intensity

Capital-Intensive

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Airlines Package/postal services Hotels Recreation Mass service

Labor-Intensive

Sporting events School classes Retailing Fast food

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89

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Apply your Understanding

93

A P P LY Y O U R U N D E R S T A N D I N G ■ PARADISE STATE UNIVERSITY
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Faculty

Number of students per year

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8

100

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6

40

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7

70

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10

150

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94

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UBCMF Station number

Task(s) performed at station

Time to perform task

1

Get box bottom and place plastic money tray in box bottom. Take two dice from bin and place in box bottom in area not taken up by tray.

10 seconds

2

Count out 35 plastic houses and place in box bottom.

35 seconds

3

Count out 15 plastic hotels and place in box bottom.

15 seconds

4

Take one game piece from each of eight bins and place them in box bottom.

15 seconds

5

Take one property card from each of 28 bins. Place rubber band around property cards and place cards in box bottom.

40 seconds

6

Take one orange card from each of 15 bins. Place rubber band around cards and place cards in box bottom.

20 seconds

7

Take one yellow card from each of 15 bins. Take orange cards from box and remove rubber band. Place yellow cards on top of orange cards. Place rubber band around yellow and orange cards and place cards in box bottom.

35 seconds

8

Count out 25 $500 bills and attach to cardboard strip with rubber band. Place money in box bottom.

30 seconds

Exercises Station number

Task(s) performed at station

Time to perform task

9

Count out 25 $100 bills. Take $500 bills from box bottom and remove rubber band. Place $100 bills on top of $500 bills. Attach rubber band around money and place in box bottom.

40 seconds

10

Count out 25 $50 bills. Take $500 and $100 bills from box bottom and remove rubber band. Place $50 bills on top. Attach rubber band around money and place in box bottom.

40 seconds

11

Count out 50 $20 bills. Take money in box and remove rubber band. Place $20 bills on top. Attach rubber band around money and place in box bottom.

55 seconds

Count out 40 $10 bills. Take money in box and remove rubber band. Place $10 bills on top. Attach rubber band around money and place in box bottom.

45 seconds

12

13

Count out 40 $5 bills. Take 45 seconds money in box and remove rubber band. Place $5 bills on top. Attach rubber band around money and place in box bottom.

14

Count out 40 $1 bills. Take money in box and remove rubber band. Place $1 bills on top. Attach rubber band around money and place in box bottom.

45 seconds

15

Take money and remove rubber band. Shrink‐wrap money and place back in box bottom.

20 seconds

16

Take houses, hotels, dice, and game pieces and place in bag. Seal bag and place bag in box.

30 seconds

17

Place two cardboard game board halves in fixture so that they are separated by ¼ in. Peel backing off of printed game board decal. Align decal over board halves and lower it down. Remove board from fixture and flip it over. Attach solid blue backing decal. Flip game board over again and fold blue backing over front of game board, creating a ¼ in. border. Fold game board in half and place in box covering money tray, game pieces, and cards.

90 seconds

18

Place game instructions in box. Place box top on box bottom. Shrink‐wrap entire box.

30 seconds

19

Place completed box in carton.

10 seconds



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Time to perform task

Task(s) performed at station

Questions

EXERCISES 3.1

Station number

95

1 2 3 4 5 6

1

2

3

4

5

6

I

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96 3.2

3.3

Process Planning

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Time required (min)

Predecessor tasks

a

4

—

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5

a

c

3

a

d

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1

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Time (min)

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1

0.4

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1

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1.1

1

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1

2

3

1

25

0

3

5

2

30

5

4

3

3

10

2

0

1

4

5

3

2

0

5

14

6

2

3

Capacity and Scheduling C H A P T ER IN P E R SP E C TIV E Now that we have selected a process, we need to determine the detailed specifications of that process. An important early element in our specifications concerns the capacity we will require. Having adequate capacity and effectively utilizing it are critical for dependability, speed, and maximizing revenues, while having excess capacity will impair costs—all strategic competitive factors. We begin the chapter with an overview of various measures of capacity and then discuss issues related to long‐term capacity planning strategies. Following this, we consider issues related to efficiently using the available capacity through effective schedule management. The chapter then concludes with a discussion of short‐term capacity planning, including process‐flow mapping, capacity planning for services, and how humans’ ability to learn affects capacity planning.

chapter

4

Introduction r

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97

98

Capacity and Scheduling

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4.1 Long‐Term Capacity Planning

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XFFLEBZ  ■ TABLE 4.1 Examples of Measures of Capacity Production system Airline

Measure of capacity in terms of outputs produced

Measure of capacity in terms of inputs processed

Available seat miles per year

Reservation calls handled per day

Hospital

Babies delivered per month

Patients admitted per week

Supermarket

Customers checked out per hour

Cartons unloaded per hour

Post office

Packages delivered per day

Letters sorted per hour

University

Graduates per year

Students admitted per year

Automobile assembly plant

Autos assembled per year

Deliveries of parts per day

99

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FIGURE 4.1 Envelope of lowest unit output costs with facility size.

102

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anticyclic
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Furnaces Air conditioners Total

600

Sales (units)

500 400 300 200 100

FIGURE 4.2 Anticyclic product sales.

Jan.

Feb.

Mar.

Apr.

May

June

July

Aug. Sept.

Oct.

Nov.

Dec.

4.1 Long‐Term Capacity Planning

103

Required capacity

Capacity requirements for six different outputs Total current output Additional required output between years 4 and 7

Now

1

2

3

4

5

6

7

8

9

10

Year

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Timing of Capacity Increments 0ODF
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IBOE

FIGURE 4.3 Forecast of required organizational capacity from multiple life cycles.

104

Capacity and Scheduling

Single increment

Units

Units

Demand Capacity

Capacity additions

(a)

(b)

FIGURE 4.4 Methods of adding fixed capacity.

Units

Time Large capacity increments

Units

Time Small capacity increments

Time Preceding demand

Time Following demand

(c)

(d)

4.2 Effectively Utilizing Capacity Through Schedule Management "O
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4.2 Effectively Utilizing Capacity Through Schedule Management

105

■ TABLE 4.2 Sequential Operations Required for Two Jobs Job

Operations resource needed

Time required (hours)

A

10

1

2

C

10

A

30

B

20

C

5

B

15

A

10

C

10

A

10

B

10

Job 1 Job 2

Resource

A

B

C

0

8

16

24

32

40

48

56

64

72

80

88

56

64

72

80

88

Time (hour) (a)

Resource

A

B

C

0

8

16

24

32

40

48

Time (hour) (b)

FIGURE 4.5 Gantt charts for capacity planning and scheduling.

106

Capacity and Scheduling

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4.2.1 Scheduling Services *O
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Approaches to Resource Scheduling 5IF
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JG
NVMUJQMF
BSFBT
XJUIJO
BO
PSHBOJ[BUJPO
UFOE
UP


4.2 Effectively Utilizing Capacity Through Schedule Management

FYQFSJFODF
WBSZJOH
EFNBOE
JU
JT
PGUFO
IFMQGVM
UP
VTF
floating
XPSLFST
PS
DPNCJOF
EFQBSUNFOUT
UP
NJOJNJ[F
WBSJBCJMJUZ
0O
PDDBTJPO
OFX
UFDIOPMPHJFT
TVDI
BT
ƞIPVS
BVUPNBUFE
UFMMFST
ƞIPVS
PSEFS
FOUSZ
WJB
UIF
8FC
BOE
CJMM
QBZNFOU
CZ
UFMFQIPOF
DBO
BJE
UIF
PSHBOJ[BUJPO 5IF
VTF
PG
QSPNPUJPO
BOE
BEWFSUJTJOH
UP
TIJGU
demand
GPS
SFTPVSDFT
JT
IJHIMZ
QSBDUJDBM
JO
NBOZ
TJUVBUJPOT
5IVT
XF
TFF
off‐peak pricing
JO
UIF
VUJMJUJFT
BOE
DPNNVOJDBUJPO
JOEVTUSJFT
TVNNFS
TBMFT
PG
TOPXCMPXFST
JO
SFUBJMJOH
BOE
DVU
SBUFT
GPS
USBOTQPSUBUJPO
BOE
UPVST
CPUI
JO
PGGƞ QFBL
TFBTPOT
GBMM
XJOUFS
BOE
BU
PGGƞQFBL
UJNFT
XFFLFOET
OJHIUT 
-FU
VT
OPX
DPOTJEFS
IPX
TPNF
TQFDJGJD
TFSWJDF
PSHBOJ[BUJPOT
BQQSPBDI
UIFJS
TDIFEVMJOH
QSPCMFNT Hospitals
5IFSF
BSF
NVMUJQMF
OFFET
GPS
TDIFEVMJOH
JO
IPTQJUBMT
"MUIPVHI
BSSJWBMT
PG
QBUJFOUT
UIF
KPCT
BSF
JO
QBSU
VODPOUSPMMBCMF
FH
FNFSHFODJFT


UIFZ
BSF
UP
TPNF
FYUFOU
DPOUSPM MBCMF
UISPVHI
TFMFDUJWF
BENJTTJPOT
GPS
FMFDUJWF
TVSHFSZ
TPNF
NBUFSOJUZ
DBTFT
JOIPTQJUBM
PCTFSWB UJPO
BOE
TP
PO
8JUI
TFMFDUJWF
BENJTTJPOT
UIF
IPTQJUBM
BENJOJTUSBUPS
DBO
TNPPUI
UIF
EFNBOE
GBDFE
CZ
UIF
IPTQJUBM
BOE
UIFSFCZ
JNQSPWF
TFSWJDF
BOE
JODSFBTF
UIF
VUJMJ[BUJPO
PG
UIF
IPTQJUBMT
MJNJUFE
SFTPVSDFT 7FSZ
TQFDJBMJ[FE
FYQFOTJWF
FRVJQNFOU
TVDI
BT
B
EJBMZTJT
NBDIJOF
JT
BMTP
DBSFGVMMZ
TDIFE VMFE
UP
BMMPX
PUIFS
IPTQJUBMT
BDDFTT
UP
JU
UIVT
NBYJNJ[JOH
JUT
VUJMJ[BUJPO
#Z
TIBSJOH
TVDI
FYQFO TJWF
FRVJQNFOU
BNPOH
B
OVNCFS
PG
IPTQJUBMT
NPSF
IPTQJUBMT
IBWF
BDDFTT
UP
NPEFSO
UFDIOPMPHZ
GPS
UIFJS
QBUJFOUT
BU
B
SFBTPOBCMF
MFWFM
PG
JOWFTUNFOU 0G
BMM
UIF
TDIFEVMJOH
JO
IPTQJUBMT
UIF
NPTU
DSVDJBM
JT
QSPCBCMZ
UIF
TDIFEVMJOH
PG
OVSTFT
BT
JMMVTUSBUFE
JO
UIF
GPMMPXJOH
FYBNQMF
EFTDSJCJOH
)BSQFS
)PTQJUBM
'JMMFZ
 
5IJT
JT
CFDBVTF
 ŇJU
JT
NBOEBUPSZ
HJWFO
UIF
OBUVSF
PG
IPTQJUBMT
UIBU
OVSTFT
BMXBZT
CF
BWBJMBCMF

OVSTJOH
SFTPVSDFT
BSF
B
MBSHF
FYQFOTF
GPS
B
IPTQJUBM
BOE

UIFSF
BSF
B
OVNCFS
PG
DPOTUSBJOUT
PO
UIF
TDIFEVMJOH
PG
OVSTFT
TVDI
BT
OVNCFS
PG
EBZT
QFS
XFFL
IPVST
QFS
EBZ
XFFLT
QFS
ZFBS
BOE
IPVST
EVSJOH
UIF
EBZ -JLF
NBOZ
PUIFS
IPTQJUBMT
)BSQFS
)PTQJUBM
PG
%FUSPJU
XBT
VOEFS
IFBWZ
QSFTTVSF
GSPN
#MVF
$SPTT
.FEJDBSF
BOE
.FEJDBJE
UP
QSPWJEF
NPSF
IFBMUI
DBSF
BU
MFTT
DPTU
*O
BEEJUJPO
JU
OFFEFE
UP
BDIJFWF
NPSF
FDPOPNJFT
PG
TDBMF
GSPN
B
NFSHFS
UIBU
IBE
UBLFO
QMBDF
TPNF
ZFBST
CFGPSF
*U
BMTP
XBOUFE
UP
JNQSPWF
JUT
QBUJFOU
DBSF
0OF
UBSHFU
UP
IFMQ
BDIJFWF
UIFTF
HPBMT
XBT
B
CFUUFS
TZTUFN
GPS
TDIFEVMJOH
OVSTFT 1SFWJPVTMZ
OVSTFT
XFSF
TDIFEVMFE
PO
UIF
CBTJT
PG
TUSJDU
CFE
DPVOUT
QSPCMFNT
XJUI
JOBEF RVBUF
TUBGGJOH
EVSJOH
UIF
QSJPS
EBZ
BOE
SFRVFTUT
GPS
FYUSB
IFMQ
8IBU
XBT
EFWFMPQFE
XBT
B
patient classification system
1$4
UIBU
JODPSQPSBUFE
MBCPS
TUBOEBSET
UP
EFUFSNJOF
XIBU
MFWFMT
PG
OVSTJOH
XFSF
OFFEFE
"U
UIF
FOE
PG
FBDI
TIJGU
EFTJHOBUFE
OVSTFT
FWBMVBUFE
FBDI
BSFBT
QBUJFOUT
CZ
UIFJS
DPOEJUJPO
BOE
BTTJHOFE
UIFN
UP
B
iDBSF
MFWFMu
SBOHJOH
GSPN
NJOJNBM
UP
JOUFOTJWF
"O
IPVS
CFGPSF
UIF
OFYU
TIJGU
CFHBO
UIF
QBUJFOUT
OFFET
GPS
DBSF
XFSF
BEEFE
VQ‡BDDPVOUJOH
GPS
OFX
BENJTTJPOT
DIFDLPVUT
BOE
SFUVSOT
GSPN
TVSHFSZ‡UP
EFUFSNJOF
UIF
UPUBM
MFWFMT
PG
DBSF
SFRVJSFE
(JWFO
UIF
MFWFMT
JO
FBDI
BSFB
OVSTJOH
MBCPS
TUBOEBSET
XFSF
VTFE
UP
EFUFSNJOF
IPX
NBOZ
OVSTFT
XFSF
OFFEFE
PO
UIF
OFYU
TIJGU "T
B
SFTVMU
PG
UIF
OFX
TZTUFN
CPUI
UIF
RVBMJUZ
PG
QBUJFOU
DBSF
BOE
UIF
OVSTFT
TBUJTGBDUJPO
XFOU
VQ
"OOVBM
MBCPS
TBWJOHT
GSPN
UIF
OFX
TZTUFN
XFSF
FTUJNBUFE
BT
FYDFFEJOH
 
)BSQFS
IBT
GVSUIFS
GJOFƞUVOFE
UIF
1$4
BOE
OPX
SFDBMJCSBUFT
JUT
TUBOEBSET
FWFSZ
UXP
ZFBST Urban Alarm Services
*O
VSCBO
TFSWJDFT
UIBU
SFTQPOE
UP
BMBSNT‡TVDI
BT
QPMJDF
GJSF
BOE
SFTDVF
TFSWJDFT‡UIF
KPCT
BMBSNT
BQQFBS
SBOEPNMZ
BOE
NVTU
CF
RVJDLMZ
TFSWJDFE
XJUI
TVGGJDJFOU
SFTPVSDFT
0UIFSXJTF
FYUSFNF
MPTT
PG
MJGF
PS
QSPQFSUZ
NBZ
SFTVMU
*O
NBOZ
XBZT
UIJT
QSPCMFN
JT
TJNJMBS
UP
UIBU
PG
B
IPTQJUBM
TJODF
UIF
DPTU
PG
TUBGGJOH
QFSTPOOFM
JT
B
NBKPS
FYQFOTF
CVU
GMPBUJOH
GJSF
DPNQBOJFT
BOE
QPMJDF
48"5
VOJUT
NBZ
CF
VUJMJ[FE
XIFSF
OFFEFE
BOE
TPNF
TFSWJDFT
TVDI
BT
GJSF
JOTQFDUJPO
DBO
CF
TDIFEVMFE
UP
IFMQ
smooth
EFNBOE 4PNFUJNFT
B
NBKPS
EJGGFSFODF
WBTUMZ
DPNQMJDBUFT
TPNF
PG
UIFTF
TFSWJDFT
QBSUJDVMBSMZ
GJSF 
duty tours
PG
FYUFOEFE
EVSBUJPO
BT
PQQPTFE
UP
SFHVMBS
TIJGUT
SVO
PWFS
NVMUJQMF
EBZT
5IFTF
UPVST
WBSZ
GSPN

UP

IPVST
JO
UFBNT
PG
UXP
UP
GPVS
NFNCFST
$PNNPO
TDIFEVMFT
GPS
TVDI
TFSWJDFT
BSF
iUXP
EBZT
PO
BOE
UISFF
PGGu
BOE
iPOF
PO
BOE
UXP
PGG u
XJUI
FWFSZ
GJGUI
UPVS
PS
TP
PGG
BT
XFMM


107

108

Capacity and Scheduling

GPS
B
SVOOJOH
UJNF
PGG
FWFSZ
UISFF
XFFLT
PG
QFSIBQT

+

+

=

EBZT 
#FDBVTF
MJWJOH
BOE
TMFFQJOHƞJO
BSF
DPOTJEFSFE
QBSU
PG
UIF
KPC
SFRVJSFNFOUT
UIF
TUBOEBSE
XPSLXFFL
JT
JO
FYDFTT
PG
ŇIPVST‡DPNNPO
WBMVFT
BSF

BOE

IPVST
$MFBSMZ
UIF
TDIFEVMJOH
PG
TVDI
EVUZ
UPVST
JT
B
DPNQMFY
QSPCMFN
OPU
POMZ
CFDBVTF
PG
UIF
VOVTVBM
EVSBUJPO
PG
UIF
UPVST
CVU
BMTP
CFDBVTF
PG
UIF
JNQMJDBUJPOT
DPODFSOJOH
PWFSUJNF
UFNQUBUJPOT
UP
iNPPOMJHIU u
BOE
PUIFS
TVDI
JTTVFT Educational Services
$PMMFHFT
BOE
VOJWFSTJUJFT
IBWF
TDIFEVMJOH
SFRVJSFNFOUT
GPS
BMM
UZQFT
PG
USBOTGPSNBUJPOT
JOUFSNJUUFOU
TVDI
BT
DPVOTFMJOH


DPOUJOVPVT
&OHMJTI



CBUDI
GJFME
USJQT


BOE
QSPKFDU
SFHJPOBM
DPOGFSFODFT 
*O
TPNF
PG
UIFTF
TJUVBUJPOT
UIF
KPCT
TUVEFOUT
BSF
TDIFEVMFE
JO
TPNF
UIF
TUBGG
GBDVMUZ
BENJOJTUSBUPST
BSF
TDIFEVMFE
BOE
JO
PUIFST
UIF
GBDJMJUJFT
DMBTTSPPNT
DPOWFOUJPO
DFOUFST
BSF
TDIFEVMFE 5IF
QSJNBSZ
QSPCMFN
IPXFWFS
JOWPMWFT
UIF
TDIFEVMJOH
PG
DMBTTFT
BTTJHONFOU
PG
TUVEFOUT
BOE
BMMPDBUJPO
PG
GBDJMJUJFT
BOE
GBDVMUZ
SFTPVSDFT
UP
UIFTF
DMBTTFT
5P
PCUBJO
B
NBOBHFBCMF

TDIFEVMF
UISFF
EJGGJDVMU
FMFNFOUT
NVTU
CF
DPPSEJOBUFE
JO
UIJT
QSPDFTT 1. "DDVSBUF
GPSFDBTU
PG
TUVEFOUT
EFNBOE
GPS
DMBTTFT 2. -JNJUBUJPOT
PO
BWBJMBCMF
DMBTTSPPN
TQBDF 3. .VMUJQMF
OFFET
BOE
EFTJSFT
PG
UIF
GBDVMUZ
TVDI
BT r
/VNCFS
PG
iQSFQBSBUJPOTu r
/VNCFS
PG
DMBTTFT r
5JNJOH
PG
DMBTTFT r
-FWFM
PG
DMBTTFT r
-FBWF
SFRVJSFNFOUT
TBCCBUJDBM
NBUFSOJUZ
FUD

r
3FMFBTF
SFRVJSFNFOUT
SFTFBSDI
QSPKFDUT
BOE
BENJOJTUSBUJPO

#FDBVTF
PG
UIF
OVNCFS
PG
PCKFDUJWFT
JO
TVDI
TDIFEVMJOH
QSPCMFNT
B
WBSJFUZ
PG
NVMUJDSJUFSJB
BQQSPBDIFT
IBWF
CFFO
VTFE
UP
BJE
JO
GJOEJOH
BDDFQUBCMF
TDIFEVMFT
JODMVEJOH
TJNVMBUJPO
HPBM
QSPHSBNNJOH
BOE
JOUFSBDUJWF
NPEFMJOH *O
TVNNBSZ
UIF
BQQSPBDI
UP
TDIFEVMJOH
TFSWJDFT
JT
VTVBMMZ
UP
NBUDI
SFTPVSDFT
BOE
GPSF DBTUFE
EFNBOE
4JODF
EFNBOE
DBOOPU
CF
DPOUSPMMFE
JU
JT
JNQPTTJCMF
UP
CVJME
VQ
JOWFOUPSZ
BIFBE
PG
UJNF
BOE
CBDLPSEFSJOH
JT
VTVBMMZ
OPU
GFBTJCMF
$BSFGVM
TDIFEVMJOH
PG
TUBGG
GBDJMJUJFT
BOE
NBUF SJBMT
JT
EPOF
JOTUFBE
XJUI
MJNJUFE
GMFYJCJMJUZ
BDIJFWFE
UISPVHI
GMPBUJOH
QBSUƞUJNF
BOE
PWFSUJNF
MBCPS
BOE
PGGƞQFBL
SBUFT
UP
FODPVSBHF
MFWFMJOH
PG
EFNBOE
5IF
CFTU
TDIFEVMF
JT
PGUFO
OPU
UIF
POF
UIBU
PQUJNJ[FT
UIF
VTF
PG
SFTPVSDFT
PS
NJOJNJ[FT
MBUFOFTT
GPS
UIF
FYQFDUFE
EFNBOE
CVU
SBUIFS
UIF
POF
UIBU
HJWFT
BDDFQUBCMF
SFTVMUT
VOEFS
BMM
MJLFMZ
PQFSBUJOH
DPOEJUJPOT
"T
EFTDSJCFE
MBUFS
JO
UIJT
DIBQUFS
BO
JNQPSUBOU
BTQFDU
PG
TDIFEVMJOH
TFSWJDFT
JT
UIF
RVFVFT
UIBU
UFOE
UP
CVJME
VQ
JG
DBQBDJUZ
JT
JOBEFRVBUF
)FSF
RVFVJOH
UIFPSZ
BOE
QTZDIPMPHZ
DPODFSOJOH
XBJUJOH
DBO
CF
QSPGJUBCMZ
BQQMJFE

Yield/Revenue Management and Overbooking Yield management
BMTP
DBMMFE
revenue management
JT
UIF
BUUFNQU
UP
BMMPDBUF
UIF
GJYFE
DBQBDJUZ
PG
B
TFSWJDF
BMUIPVHI
UIF
QSPDFTT
JT
OPX
CFJOH
VTFE
CZ
SFUBJMFST
BOE
NBOVGBDUVSFST
UPP
UP
NBUDI
UIF
IJHIFTU
SFWFOVF
EFNBOE
JO
UIF
NBSLFUQMBDF
*U
BQQFBST
UIBU
"NFSJDBO
"JSMJOFT
XBT
POF
PG
UIF
GJSTU
UP
EFWFMPQ
UIJT
UFDIOJRVF
CVU
JUT
VTF
IBT
TQSFBE
UP
IPUFMT
DSVJTF
MJOFT
BOE
PUIFS
TFSWJDFT
UIBU
IPME
B
GJYFE
DBQBDJUZ
GPS
SFWFOVFƞQSPEVDJOH
DVTUPNFST
KPCT
JUFNT
BOE
TP
PO
"T
EFTDSJCFE
CZ
,JNFT



ZJFME
NBOBHFNFOU
JT
NPTU
BQQSPQSJBUF
VOEFS
UIF
GPMMPXJOH
DJSDVNTUBODFT 1. Fixed capacity:
5IFSF
BSF
POMZ
B
MJNJUFE
JOEJWJTJCMF
OVNCFS
PG
DBQBDJUZ
PQFOJOHT
BWBJMBCMF
GPS
UIF
QFSJPE
5IFSF
JT
OP
GMFYJCJMJUZ
JO
FJUIFS
EJWJEJOH
VQ
UIF
DBQBDJUZ
PS
JO
GJOEJOH
BEEJ UJPOBM
DBQBDJUZ 2. Perishable capacity:
0ODF
UIF
QFSJPE
QBTTFT
UIF
DBQBDJUZ
DBO
OP
MPOHFS
CF
VTFE
GPS
UIBU
QFSJPE
5IFSF
JT
FTTFOUJBMMZ
OP
TBMWBHF
WBMVF
GPS
UIF
DBQBDJUZ

4.3 Short‐Term Capacity Planning

3. Segmentable market:
5IF
EFNBOE
GPS
UIF
DBQBDJUZ
NVTU
CF
TFHNFOUBCMF
JOUP
EJGGFSFOU

SFWFOVFQSPGJU
DMBTTFT
TVDI
BT
CVTJOFTT
WFSTVT
QMFBTVSF
4BUVSEBZ
OJHIU
TUBZPWFS
PS
OPU
EFMVYF
WFSTVT
CVEHFU
BOE
TP
PO 4. Capacity sold in advance:
5IF
DBQBDJUZ
JT
TPME
CZ
SFTFSWBUJPO
6TJOH
ZJFME
NBOBHFNFOU
UFDIOJRVFT
DFSUBJO
DMBTTFT
PG
DBQBDJUZ
BSF
IFME
CBDL
GPS
DFSUBJO
NPSF
QSPGJUBCMF
DMBTTFT
PG
SFTFSWBUJPOT
PS
QFSJPET
PG
UIF
TFBTPO
*G
UIF
QSPGJUBCMF
DMBTTFT
GBJM
UP
GJMM
CZ
B
DFSUBJO
UJNF
QPJOU
TPNF
PG
UIF
DBQBDJUZ
JT
UIFO
SFMFBTFE
GPS
UIF
OFYUƞMPXFTU
QSPGJU
DMBTT
5IJT
QSPDFEVSF
DBTDBEFT
EPXO
UISPVHI
CPUI
SFTFSWBUJPO
DMBTTFT
BOE
UJNF
QPJOUT
BT
UIF
QFSJPE
JO
RVFTUJPO
BQQSPBDIFT 5. Uncertain demand:
"MUIPVHI
EFNBOE
GPS
FBDI
SFTFSWBUJPO
DMBTT
NBZ
CF
GPSFDBTU
UIF
BDUVBM
EFNBOE
FYQFSJFODFE
JO
FBDI
DMBTT
GPS
FBDI
UJNF
QFSJPE
JT
VODFSUBJO 6. Low marginal sales cost and high marginal capacity addition cost:
5IF
DPTU
UP
BEE
B
VOJU
PG
DBQBDJUZ
JT
FYUSFNFMZ
IJHI
CVU
UIF
DPTU
UP
TFMM
SFOU
B
VOJU
PG
JU
GPS
UIF
QFSJPE
JO
RVFTUJPO
JT
MPX 5IF
UFDIOJRVF
VTFE
UP
EFUFSNJOF
IPX
UP
BMMPDBUF
DBQBDJUZ
BNPOH
UIF
EJGGFSFOU
DMBTTFT
JT
TJNJMBS
UP
UIBU
VTFE
GPS
overbooking
0WFSCPPLJOH
JT
BO
BUUFNQU
UP
SFEVDF
DPTUT
UISPVHI
CFUUFS
TDIFEVMF
NBOBHFNFOU
BT
JMMVTUSBUFE
CZ
4DBOEJOBWJBO
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4"4
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FU
BM
 
4"4
PQFSBUFT
B
GMFFU
PG
%$ƞ
BJSDSBGU
XJUI

TFBUT
FBDI
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4"4
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GPS
POMZ
UIFTF

TFBUT
BOE
iOPƞTIPXTu
QBTTFOHFST
XIP
GBJM
UP
TIPX
VQ
GPS
B
GMJHIU
SFGVTF
UP
QBZ
GPS
UIFJS
SFTFSWBUJPOT
4"4
DBO
MPTF
GSPN

UP

QFSDFOU
PG
UIF
BWBJMBCMF
TFBUT
*G
UIFSF
BSF

GMJHIUT
FWFSZ
EBZ
UIFTF
OPƞTIPXT
DBO
DPTU
UIF
BJSMJOF
BT
NVDI
BT

NJMMJPO
B
ZFBS
5P
BWPJE
UIJT
MPTT
BMM
BJSMJOFT
PWFSCPPL
GMJHIUT
CZ
BDDFQUJOH
B
GJYFE
QFSDFOUBHF
PG
SFTFSWBUJPOT
JO
FYDFTT
PG
XIBU
JT
BWBJMBCMF 5IF
NBOBHFNFOU
PG
4"4
EFDJEFE
UP
EFWFMPQ
BO
BVUPNBUFE
PWFSCPPLJOH
TZTUFN
UP
JODMVEF
TVDI
GBDUPST
BT
DMBTT
EFTUJOBUJPO
EBZT
CFGPSF
EFQBSUVSF
DVSSFOU
SFTFSWBUJPOT
BOE
FYJTUJOH
DBODFM MBUJPOT
5IF
PCKFDUJWF
PG
UIF
TZTUFN
XBT
UP
EFUFSNJOF
BO
PQUJNBM
PWFSCPPLJOH
QPMJDZ
GPS
UIF
EJG GFSFOU
DMBTTFT
PO
FBDI
GMJHIU
DPOTJEFSJOH
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109

110

Capacity and Scheduling

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Raw materials

FIGURE 4.6 King Sports production process.

Machine A Framer 4 minutes

Machine B Handler 3 minutes

Machine C Stringer 10 minutes

Machine D Finisher 2 minutes

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111

112

Capacity and Scheduling

■ TABLE 4.3

Return to King for Using More Machines Machine times (min)

Number of machines

Type of next machine

4

—

5

C

D

10

2

10

6

47.5

5

2

5

12

76.0

B

C

4

3

4

3

Efficiency (%)

6

C

4

3

3.33

2

4

15

79.2

7

A

2

3

3.33

2

3.33

18

81.4

8

C

2

3

2.5

2

3

20

79.2

9

B

2

1.5

2.5

2

2.5

24

84.4

10

C

2

1.5

2

2

2

30

95.0

11

D

2

1.5

2

1

2

30

86.0

12

A

1.33

1.5

2

1

2

30

79.2

13

C

1.33

1.5

1.67

1

1.67

36

87.5

14

C

1.33

1.5

1.43

1

1.5

40

90.5

Efficiency (%)

80 60 40 20 0

50

Hourly output (units)

100

FIGURE 4.7 Efficiency and output change as machines are added.

A

Total hourly output

Cycle time (min)

40 30 20 Efficiency Output

10 0

0

2

4

6

8

10

12

14

Number of machines

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1.5 Raw material tons/ 2-ton capacity day 1 load/day

Storage

375 lb/hour

3500-lb cap.

Fabrication 25 lb/component 25 components/hour 15 components/hour Assembly

Parts 300 cap.

240 parts/ day

20 units/hour Storage 500 cap.

30 parts/hour

15 units/ hour

Packaging A 5 minutes process time Packaging B 10-minutes process time

80 units/ day 120 units/ day 40 units/ day

FIGURE 4.8 Process low for manufactured unit.

113

114

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5

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30 Ask specifications: # of copies type of paper reduce/enlarge

CC

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CC

10

F

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5 Take originals to back room

CC 10 Original and copies to customer F

CC

25

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No CC Leaves

10

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CC 10 Change, receipt, and thank customer F

Line of visibility 20 Originals and instructions to operator

45

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FIGURE 4.9 Process‐low map for a service.

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Seconds

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Paper, toner F

60 Run copies F

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115

116

Capacity and Scheduling

■ TABLE 4.4 Techniques for Increasing Short‐Run Capacity I.

Increase resources 1. Use overtime 2. Add shifts 3. Employ part‐time workers 4. Use floating workers 5. Lease workers and facilities 6. Subcontract

II.

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IV.

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117

118

Capacity and Scheduling Distribution of fire alarms by 2-hour periods Dade County, Florida A.M.

P.M.

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% of daily total

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Noon (a) Distribution of fire alarms by month Dade County, Florida Dry season

Wet season

Total fire alarms Building fire alarms Outdoor fire alarms

% of annual total

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5

FIGURE 4.10 Fire alarm histories. (a) Hourly. (b) Monthly.

Jan.

Feb.

Mar.

Apr.

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119

120

Capacity and Scheduling

FIGURE 4.11 80 percent learning curve for airplane production.

Labor-hours, M (1000)

100.00 Labor-hours

80.00 60.00 40.00 20.00 0.00

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4.3 Short‐Term Capacity Planning A B 1 Improvement Rate: 2 Hours for 1st Unit (m): 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29

Unit 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

C 80% 100,000

Cell B5: =$C$2*A5^(LN($C$1)/LN(2)) Copy to cells B6:B29

Cumulative Time 100,000.0 180,000.0 250,210.4 314,210.4 373,774.1 429,942.4 483,391.4 534,591.4 583,886.3 631,537.3 677,748.4 722,683.1 766,474.6 809,233.8 851,053.7 892,013.7 932,182.0 971,618.0 1,010,373.5 1,048,494.3 1,086,021.0 1,122,989.9 1,159,433.5 1,195,381.2 1,230,859.6

Unit Time 100,000.0 80,000.0 70,210.4 64,000.0 59,563.7 56,168.3 53,449.0 51,200.0 49,295.0 47,651.0 46,211.1 44,934.6 43,791.6 42,759.2 41,819.9 40,960.0 40,168.3 39,436.0 38,755.5 38,120.8 37,526.7 36,968.9 36,443.6 35,947.7 35,478.4

121

Cell C6: =C5+B6 Copy to cells C7:C29

FIGURE 4.12 Example learning curve table.

Theoretical curve

Labor-hours/unit

Actual curve Learning plateau

“Forgetting” curve Relearning curve

Breakthrough

Natural variability exceeds improvement

No production 0

10

20

30

Continuation of original curve 30

40

50

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70

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1

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FIGURE 4.13 Typical pattern of learning and forgetting.

122

Capacity and Scheduling

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Cost

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FIGURE 4.14 The relevant queuing costs.

Optimal capacity

Service facility capacity

Expand Your Understanding

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124

Capacity and Scheduling

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chapter

5

Supply Chain Planning and Analytics C HA P TE R IN P ERS PECTIVE Now that the organization has a transformation process selected to execute its strategy and has decided on the required capacity and scheduling of that transformation system, the next step is to design the supply chain to feed that system and get the service/product to its clients or customers. There are two parts to this endeavor, planning the chain itself and then deciding how to manage the chain. We discuss the planning of the chain first here in Chapter 5 and then supply management in the next chapter. Supply chain planning has become much more sophisticated in the last decade and a large part of it is concerned with attempting to predict what the actual demand is going to be for the service or product. The good news is that we now have a much greater amount of data (“big data”) to help us make this forecast, but the bad news is that we need substantially more powerful tools to analyze all this data. To help make these forecasts, organizations are turning to analytics to dissect and analyze the data to turn it into information for managerial use. The chapter starts with some elementary statistical forecasting techniques to illustrate how masses of data can be analyzed to determine some limited range of future demand. Having these forecasts in hand, the next step is for management to decide how much of this forecast the organization wants to and can supply, called the service level, and then bring sales and operations together to create an aggregate plan for producing that amount.

Introduction r

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126

Introduction

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127

128

Supply Chain Planning and Analytics

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129

130

Supply Chain Planning and Analytics

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Delphi method Qualitative

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FIGURE 5.1 A classification of forecasting methods.

Consumer panels Test marketing

5.2 Demand Planning

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5.2.2 Factors Influencing the Choice of Forecasting Method 8IJDI
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131

132

Supply Chain Planning and Analytics

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5.2 Demand Planning E

F

G

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Variable of interest

(a) 40 20 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 Time

(b) Variable of interest

30 25 20 15 10 5 0 1

2

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4

5

6

7

8

9 10 11 12 13 14 15

Time

(c) Variable of interest

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45

133

800 600 400 200 0 1

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FIGURE 5.2 Three common trend patterns. (a) Constant change, (b) constant percent change, and (c) standard “S” curve.

134

Supply Chain Planning and Analytics

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5.2 Demand Planning

2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22

Quarter Q3 2010 Q4 2010 Q1 2011 Q2 2011 Q3 2011 Q4 2011 Q1 2012 Q2 2012 Q3 2012 Q4 2012 Q1 2013 Q2 2013 Q3 2013 Q4 2013 Q1 2014 Q2 2014 Q3 2014 Q4 2014 Q1 2015 Forecast

iPad sales (millions) 3.27 4.19 7.33 4.69 9.25 11.12 15.43 11.80 17.04 14.04 22.86 19.28 14.62 14.08 26.04 16.35 13.28 12.32 21.42

C 4-Period moving average

D

E

F

G

H

I

J

K

L

M

N

iPad sales (millions of units) 30 25

4.87 6.37 8.10 10.12 11.90 13.85 14.58 16.44 18.31 17.70 17.71 18.51 17.77 17.44 17.00 15.84

20 15 iPad sales (millions)

10

4-period moving average

5 0

Q3 2010 Q4 2010 Q1 2011 Q2 2011 Q3 2011 Q4 2011 Q1 2012 Q2 2012 Q3 2012 Q4 2012 Q1 2013 Q2 2013 Q3 2013 Q4 2013 Q1 2014 Q2 2014 Q3 2014 Q4 2014 Q1 2015 Forecast

1

B

Unit sales

A

135

Date

Cell C6: =Average(B2:B5) and copy to cells C7:C21

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FIGURE 5.3 Four‐period moving average of iPad sales. Statista, www.statista. com, February 8, 2015.

136

Supply Chain Planning and Analytics

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B 0.2

3

FIGURE 5.4 Using exponential smoothing to forecast iPad sales. Statista, www.statista.com, February 8, 2015.

4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24

Quarter Q3 2010 Q4 2010 Q1 2011 Q2 2011 Q3 2011 Q4 2011 Q1 2012 Q2 2012 Q3 2012 Q4 2012 Q1 2013 Q2 2013 Q3 2013 Q4 2013 Q1 2014 Q2 2014 Q3 2014 Q4 2014 Q1 2015 Forecast

C

D

iPad unit sales Exponential (millions) smoothing 3.27 3.27 4.19 3.27 7.33 3.45 4.69 4.23 9.25 4.32 11.12 5.31 15.43 6.47 11.80 8.26 17.04 8.97 14.04 10.58 22.86 11.27 19.28 13.59 14.62 14.73 14.08 14.71 26.04 14.58 16.35 16.87 13.28 16.77 12.32 16.07 21.42 15.32 16.54

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iPad sales (millions of units) 30 25 20 15

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Exponential smoothing Q3 2010 Q4 2010 Q1 2011 Q2 2011 Q3 2011 Q4 2011 Q1 2012 Q2 2012 Q3 2012 Q4 2012 Q1 2013 Q2 2013 Q3 2013 Q4 2013 Q1 2014 Q2 2014 Q3 2014 Q4 2014 Q1 2015 Forecast

1 2

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138

Date Cell C5: =(B$1*B4)+((1B$1)*C4) and copy to C6:C23

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FIGURE 5.5 Number of visitors to Medfo.com.

B

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Medfo.com Number of visitors to web site

A

Visitors to 1 2 Quarter web site 3 1 35,000 4 2 80,000 5 3 55,000 6 4 100,000 7 5 95,000 8 6 140,000 9 7 115,000 10 8 160,000 11 9 155,000 12 10 200,000 13 11 175,000 14 12 220,000 15 13 215,000 16 14 260,000 17 18 b a 19 15461.54 27252.75 20

300,000 250,000 200,000 150,000 100,000 50,000 0 1

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A

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Quarter 1 2 3 4 5 6 7 8 9 10 11 12 13 14

Visitors to web site 35,000 80,000 55,000 100,000 95,000 140,000 115,000 160,000 155,000 200,000 175,000 220,000 215,000 260,000

Tx 42714.29 58175.82 73637.36 89098.90 104560.44 120021.98 135483.52 150945.05 166406.59 181868.13 197329.67 212791.21 228252.75 243714.29

D Seasonal factor (Y/T) 0.82 1.38 0.75 1.12 0.91 1.17 0.85 1.06 0.93 1.10 0.89 1.03 0.94 1.07

FIGURE 5.6 Calculation of quarterly seasonal factors.

140

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142

Supply Chain Planning and Analytics D

C

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FIGURE 5.9 Least squares approach to fitting line to set of data.

Supply Chain Planning and Analytics A B C D E F G H I J K 1 Lot House House TREND 2 number size (ft) price $500,000 3 145 2,620 $266,500 $281,020 R2 = 0.9006 $450,000 4 144 2,635 $266,900 $283,927 5 119 3,019 $364,500 $358,339 $400,000 6 136 3,049 $384,900 $364,152 7 7 3,141 $389,900 $381,980 $350,000 8 114 3,141 $399,900 $381,980 9 97 3,264 $439,000 $405,815 $300,000 10 90 3,319 $405,000 $416,473 11 108 3,403 $414,500 $432,751 $250,000 12 200 3,578 $442,000 $466,663 13 $200,000 14 b a 2,500 2,700 2,900 3,100 3,300 3,500 3,700 193.7816 -226.688 15 =TREND(C3:C12,B3:B12) House size (square feet) 16 17 =LINEST(C3:C12,B3:B12) 18 19 House price ($)

144

FIGURE 5.10 Using Excel’s LINEST and TREND functions.

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Dependent variable

400 Outlier 300 200

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100 0 70

90

110

130

150

Independent variable

Outlier on dependent variable dimension

Dependent variable

350

FIGURE 5.11 Impact of outliers on regression line fit to set of data.

300 250 200

Regression line with outlier excluded

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150 100

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125

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135 Independent variable

140

145

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5.2 Demand Planning

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Supply Chain Planning and Analytics

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147

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Supply Chain Planning and Analytics

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149

150

Supply Chain Planning and Analytics

5.3.2 Determining the Service Level: An Example Using the Newsvendor Problem &BSMJFS
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Frequency (days)

Relative frequency

28

10

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■ TABLE 5.2 Probability Table for Kacy’s Newspaper Ordering Problem Cumulative probability of selling more than N units

Order size, N

Probability of selling N units

28

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151

152

Supply Chain Planning and Analytics

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Expected demand

■ TABLE 5.3

N

Revised Probability Table for Kacy’s Newspaper Ordering Problem Cumulative probability of selling more than N units

Order size, N

Probability of selling N units

28

0.15

0.85

29

0.25

0.60

30

0.20

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31

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0

Expand Your Understanding

153

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JOGPSNBUJPO
FH
VQDPNJOH
TBMFT
QSPNP UJPOT
TUPSF
PQFOJOHT
QSPEVDUT
UIBU
XJMM
CF
EJTDPOUJOVFE
BOE
UIF
BDDVSBDZ
PG
UIF
GPSFDBTU
DBO
CF
JNQSPWFE
CZ
DPOTJEFSJOH
UIFTF
NVMUJQMF
QFSTQFDUJWFT
5IF
GJOBM
TUBHF
SFQMFOJTINFOU
GPDVTFT
PO
FYFDVUJPO
%VSJOH
UIJT
QIBTF
BDUVBM
PSEFST
BSF
QMBDFE
PSEFST
BSF
TIJQQFE
BOE
QBZNFOUT
BSF
NBEF
"DSPTT
BMM
UISFF
QIBTFT
QFSGPSNBODF
JT
BOBMZ[FE
PO
LFZ
QFSGPSNBODF
NFUSJDT
BOE
PQQPS UVOJUJFT
GPS
JNQSPWJOH
UIF
QSPDFTT
BSF
JEFOUJGJFE E X PA N D Y O U R U N D E R S TA N D I N G 1. *O
XIBU
TJUVBUJPOT
XPVME
FYQPOFOUJBM
TNPPUIJOH
BT
PQQPTFE
UP
NPWJOH
BWFSBHFT
CF
NPTU
BQQSPQSJBUF

7. 8IBU
DJSDVNTUBODFT
NJHIU
MFBE
B
GPSFDBTUFS
UP
XFJHIU
PMEFS
EBUB
NPSF
IFBWJMZ
UIBO
SFDFOU
EBUB

2. 8IZ
NJHIU
B
EFDJTJPO
NBLFS
DIPPTF
B
RVBMJUBUJWF
GPSFDBTUJOH
NFUIPE
XIFO
FYUFOTJWF
IJTUPSJDBM
EBUB
BSF
BWBJMBCMF

8. )PX
NJHIU
ZPV
FWBMVBUF
B
UJNF
TFSJFT
UP
TFF
JG
UIFSF
JT
BOZ
DZDMJD
DPNQPOFOU
JO
JU

*G
ZPV
EJE
JEFOUJGZ
B
DZDMJD
DPNQP OFOU
IPX
DPVME
ZPV
VTF
JU
UP
JNQSPWF
ZPVS
GPSFDBTU
JO
UIF
VQDPNJOH
QFSJPE

3. 5P
IFMQ
QBZ
UIFJS
DPMMFHF
FYQFOTFT
UXP
PG
ZPVS
GSJFOET
JOWFTUFE
JO
B
IPU
EPH
DPODFTTJPO
TUBOE
UIBU
UIFZ
QMBO
UP
PQFS BUF
EVSJOH
TQPSUJOH
FWFOUT
BOE
EVSJOH
MVODI
PO
DBNQVT

5IFZ
IBWF
BTLFE
GPS
ZPVS
IFMQ
JO
GPSFDBTUJOH
UIF
EFNBOE
GPS
IPU
EPHT

)PX
XPVME
ZPV
EFWFMPQ
B
GPSFDBTU
GPS
EFNBOE
BTTVN JOH
UIBU
OP
IJTUPSJDBM
EBUB
BSF
BWBJMBCMF

8IBU
BSF
UIF
DPOTF RVFODFT
PG
PWFSFTUJNBUJOH
WFSTVT
VOEFSFTUJNBUJOH
EFNBOE 4. 1SPWJEF
BO
FYBNQMF
PG
IPX
EBUB
BOBMZUJDT
DBO
CF
VTFE
UP
VODPWFS
B
IJEEFO
TVQQMZ
DIBJO
QSPCMFN
PS
JOFGGJDJFODZ 5. )PX
DBO
EBUB
BOBMZUJDT
IFMQ
NBOBHFST
DPQF
XJUI
UIF
JODSFBT JOH
VODFSUBJOUZ
JOIFSFOU
JO
UIF
CVTJOFTT
FOWJSPONFOU 6. )PX
NJHIU
ZPV
RVBOUJGZ
UIF
CFOFGJUT
PG
IBWJOH
B
CFUUFS
GPSF DBTUJOH
NPEFM

8IBU
UZQFT
PG
DPTUT
BSF
JODVSSFE
JO
EFWFMPQ JOH
B
CFUUFS
GPSFDBTUJOH
NPEFM

9. 8IBU
CFOFGJUT
BDDSVF
UP
B
GJSN
BT
JU
FWPMWFT
GSPN
SFQPSUJOH
EBUB
UP
VTJOH
EBUB
UP
QSFTDSJCF
BQQSPQSJBUF
GVUVSF
BDUJPOT 10. 8IZ
JT
JU
JNQPSUBOU
GPS
BMM
BSFBT
BDSPTT
UIF
FOUFSQSJTF
UP
CF
XPSLJOH
PGG
PG
UIF
TBNF
GPSFDBTU
PG
EFNBOE 11. 8IBU
PUIFS
JOWFOUPSZ
TJUVBUJPOT
BSF
TJNJMBS
UP
UIF
iOFXTWFO EPS
QSPCMFNu
EJTDVTTFE
JO
UIF
DIBQUFS 12. *O
NBLJOH
SFTFSWBUJPOT
GPS
TFSWJDFT
B
DPNNPO
BQQSPBDI
GPS
EFBMJOH
XJUI
UIF
VODFSUBJO
EFNBOE
JT
UP
iPWFSCPPLu
UP
BWPJE
UIF
DPTUT
PG
OPƞTIPXT

)PX
FUIJDBM
JT
UIJT

154

Supply Chain Planning and Analytics

A P P LY Y O U R U N D E R S T A N D I N G ■ RUSH AIRLINES
VTI
"JSMJOFT
JT
B
OFX
MPX
DPTU
BJSMJOF
UIBU
CFHBO
PQFSBU 3 JOH
UISFF
ZFBST
BHP
*UT
TUSBUFHZ
JT
UP
JEFOUJGZ
QBJST
PG
DJU JFT
UIBU
IBWF
B
MBSHF
OVNCFS
PG
USBWFMFST
UIBU
OFFE
UP
DPNNVUF
CFUXFFO
UIFN
BOE
PGGFS
QPJOUƞUPƞQPJOU
GMJHIUT
CFUXFFO
UIF
DJUJFT
5P
LFFQ
JUT
DPTUT
MPX
JU
IBT
TUBOEBSE J[FE
JUT
GMFFU
PG
GJWF
QMBOFT
PO
#PFJOH
ƞ
BJSDSBGU
5P
GVSUIFS
LFFQ
JUT
DPTUT
EPXO
JU
MFBTFT
QMBOFT
UIBU
BSF
m
ZFBST
PME
BU
BO
BWFSBHF
BOOVBM
DPTU
PG
 
8IJMF
UIF
BJSMJOF
DPNQFUFT
PO
UIF
CBTJT
PG
PGGFSJOH
MPX
BJSGBSFT
JU
JT
EPFT
OPU
BDDFQU
UIBU
MPX
BJSGBSFT
NVTU
DPNF
BU
UIF
FYQFOTF
PG
DPOWFOJFODF
5IVT
JO
BEEJUJPO
UP
POMZ
PGGFS JOH
QPJOUƞUPƞQPJOU
USBWFM
UIF
BJSMJOF
BMTP
PGGFST
JUT
QBTTFO HFST
UIF
NPTU
MFH
SPPN
PG
BOZ
NBKPS
BJSMJOF
5P
BDDPNQMJTI
UIJT
JU
IBT
DPOGJHVSFE
JUT
QMBOFT
XJUI

TFBUT
XIFSFBT
PUIFS
BJSMJOFT
TRVFF[F
JO

TFBUT
JO
UIF
TBNF
QMBOF
"OPUIFS
XBZ
UIF
DPNQBOZ
PGGFST
HSFBUFS
DPOWFOJFODF
UP
JUT
DVTUPNFST
JT
UIBU
JU
PGGFST
B
GVMM
SFGVOE
UP
QBTTFOHFST
XIP
DBODFM
UIFJS
SFTFSWBUJPO

1FSIBQT
BT
B
SFTVMU
PG
JUT
SFGVOE
QPMJDZ
POF
JTTVF
UIF
DPNQBOZ
IBT
CFFO
TUSVHHMJOH
XJUI
JT
OPƞTIPXT
&WFSZ
UJNF
B
QMBOF
JT
JO
UIF
BJS
XJUI
BO
FNQUZ
TFBU
UIF
DPNQBOZ
IBT
MPTU
PVU
PO
QPUFOUJBM
SFWFOVF
0O
UIF
PUIFS
IBOE
XIFO
B
GMJHIU
JT
PWFSCPPLFE
BOE
NPSF
QBTTFOHFST
TIPX
VQ
UIBO
UIF
BWBJMBCMF
TFBUT
UIF
DPNQBOZ
PGGFST

HJGU
DBSET
UP
FOUJDF
QBTTFOHFST
UP
TXJUDI
UP
B
MBUFS
GMJHIU
)PXFWFS
JG
JU
JT
UIF
MBTU
GMJHIU
PG
UIF
EBZ
UIF
DPN QBOZ
BMTP
QSPWJEFT
QBTTFOHFST
XJUI
BO
FYUSB

UP
DPWFS
B
IPUFM
TUBZ
BOE
B
NFBM

5P
CFUUFS
VOEFSTUBOE
UIF
QSPCMFN
XJUI
OPƞTIPXT
UIF
DPNQBOZ
DPMMFDUFE
EBUB
PO
OPƞTIPXT
PWFS
UIF
MBTU

GMJHIUT
CFUXFFO
/FX
:PSL
$JUZ
BOE
%BMMBT
$VSSFOUMZ
UIF
BJSMJOF
IBT
POF
QMBOF
EFEJDBUFE
UP
TFSWJOH
UIFTF
DJUJFT
BOE
PGGFST
GPVS
GMJHIUT
B
EBZ
CFUXFFO
UIFN
UXP
B
EBZ
JO
FBDI
EJSFDUJPO 
5PUBM
GMJHIU
UJNF
JODMVEJOH
UBYJJOH
UP
BOE
GSPN
UIF
SVOXBZ
JT

IPVST
5IF
UBCMF
CFMPX
TVNNB SJ[FT
UIF
OPƞTIPX
EBUB
DPMMFDUFE

Number of no‐shows

Number of flights

0

50

1

60

2

40

3

30

4

20


5IF
BJSGBSF
GPS
UIF
GMJHIU
CFUXFFO
/:$
BOE
%BMMBT
JT

5IFSF
BSF
GPVS
NBKPS
DPTU
DBUFHPSJFT
GVFM
DPTU
UIF
MFBTF
DPTU
PG
UIF
BJSDSBGU
GMJHIU
TUBGG
DPTU
BOE
NBJOUFOBODF
DPTUT
5IF
GVFM
DPTU
GPS
UIF
GMJHIU
CFUXFFO
/:$
BOE
%BMMBT
JT
DVSSFOUMZ

CBTFE
PO
B
GVFM
QSJDF
PG
HBMMPO
5IF
GMJHIU
CFUXFFO
/:$
BOE
%BMMBT
JT
TUBGGFE
XJUI
B
QJMPU
DPQJ MPU
BOE
UXP
GMJHIU
BUUFOEBOUT
BU
BO
BWFSBHF
DPTU
PG

QFS
GMJHIU
*O
UFSNT
PG
NBJOUFOBODF
DPTU
3VTI
DSFBUFT
B
SFTFSWF
GVOE
GPS
NBJOUFOBODF
CBTFE
PO
CPUI
UIF
IPVSMZ
MFOHUI
PG
UIF
GMJHIU
BOE
UIF
OVNCFS
PG
GMJHIUT
GPS
FBDI
BJS DSBGU
5IF
IPVSMZ
DIBSHF
GPS
UIF
NBJOUFOBODF
SFTFSWF
GVOE
JT

QFS
IPVS
JODMVEJOH
UBYJJOH
UJNF 
*O
BEEJUJPO
UIFSF
JT
B
GMBU

NBJOUFOBODF
DIBSHF
QFS
GMJHIU

"T
OPUFE
FBSMJFS
UIF
BJSDSBGU
EFEJDBUFE
UP
UIF
/:$ %BMMBT
SPVUF
NBLFT
GPVS
GMJHIUT
QFS
EBZ
5IF
QMBOF
PQFSBUFT

EBZT
QFS
ZFBS
BOE
UIF
PUIFS

EBZT
BSF
SFTFSWFE
GPS
NBJOUFOBODF
Questions


)
PX
NBOZ
UJDLFUT
XPVME
ZPV
SFDPNNFOE
3VTI
TFMM
GPS
FBDI
/:$%BMMBT
GMJHIU
FYDMVEJOH
UIF
MBTU
GMJHIU
PG
UIF
EBZ
UP
NBYJNJ[F
JUT
FYQFDUFE
QSPGJU


)PX
NBOZ
UJDLFUT
XPVME
ZPV
SFDPNNFOE
3VTI
TFMM
GPS
JUT
MBTU
GMJHIU
PG
UIF
EBZ
CFUXFFO
/:$
BOE
%BMMBT
GMJHIU
UP
NBYJNJ[F
JUT
FYQFDUFE
QSPGJU

*
O
XIBU
XBZT
JT
UIF
DIBMMFOHF
GBDJOH
3VTI
"JSMJOFT
CPUI
TJNJMBS
UP
CVU
BMTP
EJGGFSFOU
GSPN
UIF
TUBOEBSE
OFXTWFO EPS
QSPCMFN


■ BARDSTOWN BOX COMPANY
BSETUPXO
#PY
$PNQBOZ
JT
B
TNBMM
DMPTFMZ
IFME
DPSQP # SBUJPO
JO
#BSETUPXO
,FOUVDLZ
*UT
TUPDL
JT
EJWJEFE
BNPOH
UISFF
CSPUIFST
XJUI
UIF
QSJODJQBM
TIBSFIPMEFS
CFJOH
UIF
GPVOEJOH
CSPUIFS
#PC
8JMTPO
#PC
GPSNFE
UIF
DPNQBOZ

ZFBST
BHP
XIFO
IF
SFTJHOFE
BT
B
TBMFTNBO
GPS
B
MBSHF
NBOVGBDUVSFS
PG
DPSSVHBUFE
CPYFT



#PC
BUUSJCVUFT
IJT
TVDDFTT
UP
UIF
GBDU
UIBU
IF
DBO
TFSWF
UIF
GJWFƞTUBUF
BSFB
IF
DPOTJEFST
iIJT
UFSSJUPSZu
CFUUFS
UIBO
BOZ
PG
IJT
MBSHF
DPNQFUJUPST
#BSETUPXO
#PY
TVQQMJFT
DPS SVHBUFE
DBSUPOT
UP
NBOZ
SFHJPOBM
EJTUJMMFSJFT
BOE
UP
TFWFSBM
CSFXFSJFT
"MTP
JU
QSJOUT
TUBOEBSEƞTJ[F
CPYFT
GPS
NBOZ
TNBMM
NBOVGBDUVSJOH
GJSNT
JO
UIF
SFHJPO
#PC
GFFMT
UIBU
UIF


155

Exercises

MBSHF
CPY
NBOVGBDUVSFST
DBOOPU
FDPOPNJDBMMZ
QSPWJEF
UIJT
QFSTPOBM
TFSWJDF
UP
IJT
BDDPVOUT

#PC
SFDPHOJ[FT
UIF
EBOHFS
PG
CFDPNJOH
UPP
EFQFOEFOU
VQPO
BOZ
POF
DMJFOU
BOE
IBT
FOGPSDFE
UIF
QPM JDZ
UIBU
OP
TJOHMF
DVTUPNFS
DBO
BDDPVOU
GPS
PWFS

QFS DFOU
PG
TBMFT
5XP
PG
UIF
EJTUJMMFSJFT
BDDPVOU
GPS

QFSDFOU
PG
TBMFT
FBDI
BOE
IFODF
BSF
MJNJUFE
JO
UIFJS
QVS DIBTFT
#PC
IBT
QFSTVBEFE
UIF
QVSDIBTJOH
BHFOUT
PG
UIFTF
UXP
DPNQBOJFT
UP
BEE
PUIFS
TVQQMJFST
TJODF
UIJT
BMUFSOBUJWF
TVQQMZ
QSPUFDUT
UIFN
BHBJOTU
QSPCMFNT
#BSETUPXO
NJHIU
IBWF
TVDI
BT
TIJQQJOH
EFMBZT
QBQFS
TIPSUBHFT
PS
MBCPS
QSPCMFNT

#BSETUPXO
DVSSFOUMZ
IBT
PWFS

DVTUPNFST
XJUI
PSEFST
SBOHJOH
GSPN
B
MPX
PG

CPYFT
UP
CMBOLFU
PSEFST
GPS
 
CPYFT
QFS
ZFBS
#PYFT
BSF
QSPEVDFE
JO

TUBOEBSE
TJ[FT
XJUI
TQFDJBM
QSJOUJOH
UP
DVTUPNFST
TQFDJGJDBUJPOT
#BSETUPXOT
QSJOUJOH
FRVJQNFOU
MJNJUT
UIF
QSJOU
UP
UXP
DPMPST
5IF
TUBOEBSEJ[BUJPO
BOE
MJNJUFE
QSJOUJOH
BMMPX
#BSETUPXO
UP
CF
QSJDFƞDPNQFUJUJWF
XJUI
UIF
CJH
QSPEVDFST
XIJMF
BMTP
QSPWJEJOH
TFSWJDF
GPS
TNBMM
PSEFST
BOE
iFNFSHFODZu
PSEFST
UIBU
MBSHF
CPY
NBOVGBD UVSFST
DBOOPU
QSPWJEF

4VDI
QFSTPOBM
TFSWJDF
IPXFWFS
SFRVJSFT
UJHIU
JOWFOUPSZ
DPOUSPM
BOE
DMPTF
QSPEVDUJPO
TDIFEVMJOH
4P
GBS
#PC
IBT
BMXBZT
GPSFDBTU
EFNBOE
BOE
QSFQBSFE
QSP EVDUJPO
TDIFEVMFT
PO
UIF
CBTJT
PG
FYQFSJFODF
CVU
CFDBVTF
PG
UIF
FWFSƞHSPXJOH
OVNCFS
PG
BDDPVOUT
BOE
DIBOHFT
JO
QFSTPOOFM
JO
DVTUPNFS
QVSDIBTJOH
EFQBSUNFOUT
UIF
BDDV SBDZ
PG
IJT
GPSFDBTUT
IBT
CFFO
SBQJEMZ
EFDMJOJOH
5IF
OVNCFS
PG
CBDLPSEFST
JT
PO
UIF
JODSFBTF
MBUF
PSEFST
BSF
NPSF
DPNNPO
BOE
JOWFOUPSZ
MFWFMT
PG
GJOJTIFE
CPYFT
BSF
BMTP
PO
UIF
JODSFBTF
"
TFDPOE
XBSFIPVTF
IBT
SFDFOUMZ
CFFO
MFBTFE
CFDBVTF
PG
UIF
PWFSDSPXEJOH
JO
UIF
NBJO


XBSFIPVTF
1MBOT
BSF
UP
TIJGU
TPNF
PG
UIF
TMPXFSƞNPWJOH
CPYFT
UP
UIF
MFBTFE
TQBDF

5IFSF
IBT
BMXBZT
CFFO
BO
JODSFBTF
JO
EFNBOE
GPS
CPYFT
KVTU
CFGPSF
UIF
IPMJEBZ
TFBTPO
XIFO
DVTUPNFST
CFHJO
TUPDLJOH
VQ
5IJT
TFBTPOBMJUZ
JO
EFNBOE
IBT
BMXBZT
TVCTUBO UJBMMZ
JODSFBTFE
UIF
EJGGJDVMUZ
PG
NBLJOH
B
SFMJBCMF
GPSFDBTU

#PC
GFFMT
UIBU
JU
JT
OPX
JNQPSUBOU
UP
EFWFMPQ
BO
JNQSPWFE
GPSFDBTUJOH
NFUIPE
UP
IFMQ
TNPPUI
QSPEVDUJPO
BOE
XBSFIPVTJOH
WPMVNF
)F
IBT
DPNQJMFE
UIF
GPMMPXJOH
EFNBOE
EBUB

4BMFT
JO
OVNCFS
PG
CPYFT

Month January

20X1

20X2

20X3

20X4

20X5

12,000

8,000

12,000

15,000

15,000

February

8,000

14,000

8,000

12,000

22,000

March

10,000

18,000

18,000

14,000

18,000

April

18,000

15,000

13,000

18,000

18,000

May

14,000

16,000

14,000

15,000

16,000

June

10,000

18,000

18,000

18,000

20,000

July

16,000

14,000

17,000

20,000

28,000

August

18,000

28,000

20,000

22,000

28,000

September

20,000

22,000

25,000

26,000

20,000

October

27,000

27,000

28,000

28,000

30,000

November

24,000

26,000

18,000

20,000

22,000

December

18,000

10,000

18,000

22,000

28,000

Questions



%FWFMPQ
B
GPSFDBTUJOH
NFUIPE
GPS
#BSETUPXO
BOE
GPSF DBTU
UIF
UPUBM
EFNBOE
GPS
9



4IPVME
#PCT
FYQFSJFODF
XJUI
UIF
NBSLFU
CF
GBDUPSFE
JOUP
UIF
GPSFDBTU
*G
TP
IPX


EXERCISES 5.1


1MPU
UIF
GPMMPXJOH
EBUB
BOE
UIFO
DBMDVMBUF
BOE
QMPU
B
UISFFƞ QFSJPE
NPWJOH
BWFSBHF
5IFO
DBMDVMBUF
BOE
QMPU
B
GJWFƞ QFSJPE
NPWJOH
BWFSBHF
8IBU
EP
ZPV
PCTFSWF
JO
DPNQBSJOH
UIF
QMPUT
PG
UIF
UISFFƞ
BOE
GJWFƞQFSJPE
NPWJOH
BWFSBHFT

Period Demand

5.2

5.3

1

2

3

4

5

6

7

8

9

10

60

52

55

42

57

33

26

42

35

31


3FGFSSJOH
UP
FYFSDJTF

EFWFMPQ
B
GPSFDBTU
GPS
QFSJPE

VTJOH
FYQPOFOUJBM
TNPPUIJOH
BOE
UISFF
WBMVFT
PG

α



BOE

1MPU
UIF
BDUVBM
EBUB
BOE
UIF
FYQPOFOUJBM
BWFSBHFT
GPS
UIF
UISFF
WBMVFT
PG

α

8IBU
EP
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156

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9 (a)

Supply Chain Management C H A P T ER IN P E R SP E C TIV E As the organization designs its processes to achieve its competitive strategy, a major element is the supply chain for its products and/or services. We now consider the execution, or management, of the supply chain, which often involves relationships with organizations outside the firm. Supply chain management fundamentally involves matching supply with demand and as such is strongly related to a firm’s competitiveness. Important supply chain management topics include designing and restructuring the value chain, outsourcing, and e‐commerce. Furthermore, competent management of the supply chain has major impacts on all the strategic sand cone factors described in Chapter 1: quality, dependability, speed, and cost. We first define the concept of supply chains and discuss their strategic importance. We then describe the many elements involved in their design, such as logistics, global sourcing, and supplier management. From this, we move to the role of information technology and provide guidelines for successful supply chain management. We conclude the chapter with a discussion of closed‐loop supply chains. Two supplements to the chapter describe a supply chain classroom exercise used by many MBA classes (Supplement A: The Beer Game) and an online quantitative technique that is popular for some MBA classes (Supplement B: The Economic Order Quantity Model).

chapter

6

Introduction • While Apple’s enormous success is most commonly attributed to its ability to design highly innovative products that are easy to use, the significant contribution its operations makes to its success gets much less publicity. Nevertheless, experts and analysts that closely follow Apple readily acknowledge that Apple’s operations excellence is as much an asset to Apple as is its product innovation and marketing. Indeed, it is Apple’s operational capabilities that allow it to pull off its massive, high‐volume product launches by managing its inventory efficiently. It is not widely known, but Apple’s focus on improving its supply chain dates back to the return of Steve Jobs in 1997. For example, to ensure that there was an adequate supply of Apple’s new translucent blue iMacs, Apple spent $50 million to acquire all the available holiday air transport capacity. Not only did this ensure that Apple could get its products to the customers but also the move crippled competitors, such as Compaq, that didn’t recognize the need to ship products by air until it was too late. Based on this example and others like it, Apple has learned that making investments in its supply chain up front pays for itself in the long run in the form of greater volume. Greater volumes also yield additional benefits. For example, when the sales volume of iPods increased in 2001, Apple discovered it could air‐ship the iPods economically from the Chinese factories directly to its customers’ homes. Not only does this help Apple reduce its investment in inventory but also it provides an added level of service for the customer. Beyond investing financial resources in its supply chain, Apple invests in its human capital as well. For example, to facilitate the process of translating product prototypes into 157

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Supply Chain Management

successful new products, Apple’s design engineers live in hotels for months to be close to their suppliers in order to help them perfect their production processes. For example, when Apple designed a new MacBook with a case that was made from a single piece of aluminum, Apple’s design engineers worked with the suppliers to develop the equipment to fabricate the cases. With a huge cash war chest, Apple planned to almost double its supply chain capital expenditures in 2011 to $7.1 billion. In part, this investment was used to purchase capacity from its suppliers to ensure the prices and availability of its products. For example, prior to the introduction of the iPhone 4 in June 2010, supplier capacity for screens was being used for iPhones, forcing Apple’s competitor HTC to scramble for sources of phone screens. Likewise, when Apple launched the iPad 2, it purchased so many of the high‐end drills used to produce the tablet’s internal casing that the lead time for other companies to get these drills extended to as long as six months. Turning the tables, being selected by Apple to be one of its suppliers can be very profitable. However, this comes at a price. For example, when a potential supplier is asked to provide a price quote for a part or assembly that will go into an Apple product, the supplier is required to submit in great detail how it arrived at the quote, including the specific material costs, labor costs, and its estimated profit. Furthermore, to guard against supply disruptions, Apple requires its suppliers to maintain a two‐week supply of inventory within a mile of the Asian assembly plants. Carefully orchestrated events announcing new products are eagerly anticipated by industry analysts and loyal customers. Here, too, Apple’s supply chain management (SCM) practices play an important role. For example, supplier factories work overtime weeks in advance of new product launches to build up inventory to meet the often overwhelming demand for new Macs, iPods, iPhones, and iPads. Furthermore, the success of the new product debuts centers on the secrecy Apple is able to maintain about the features of its new products. To ensure that the secrecy of its new products is not breached and to discourage leaks, Apple places electronic monitors in a subset of the boxes of parts that go into its products so that it is able to monitor the parts through the production process. Through this monitoring, Apple is able to track every part handoff from the loading docks through the distribution centers. And not to leave anything to chance, once the new products are finished, they are shipped in plain boxes or even disguised boxes, such as tomato boxes. A final piece of Apple’s supply chain that contributes to its operational excellence is its retail stores. Apple tracks the sales at its stores hour by hour and, based on these sales, adjusts its production forecast each day. When a risk of a product shortage is identified, Apple immediately deploys teams, and the added capacity is acquired (Satariano and Burrows 2011). • Even with the lean inventories that have resulted from the prevalence of just‐in‐time (JIT) inventory systems, shifts in economic cycles can still wreak havoc for industry‐wide supply chains. The electronics industry during the global recession of 2008–2009 illustrates this well. At one end of the electronics, supply chain are the retailers that sell electronic products to end consumers. With the financial crisis rapidly escalating in the fall of 2008, Minnesota‐ based retailer Best Buy experienced a significant decline in sales. Best Buy orders electronic products such as DVD players six weeks prior to when they are needed. With the 2008 Thanksgiving shopping season approaching, Best Buy revised its prior forecast and dramatically reduced its orders to its suppliers, such as Japan’s Toshiba and Korea’s Samsung Electronics in early October 2008. As the financial crisis was uncharted territory, Best Buy’s merchandising chief had to make his best guess in deciding how to modify the forecast. Lacking a direct relationship with the final consumers, Best Buy’s suppliers were caught off guard by its revised forecast and reduced orders. As expected, these suppliers in turn reduced orders from their suppliers. As an example, Zoran Corp, a designer of specialty chips used in electronic products, such as televisions (TVs), cameras, cell phones, DVD players, and

Introduction

digital picture frames, saw its revenue decline in the fourth quarter of 2008 by 42 percent. Zoran, which only designs chips, relies on companies like Taiwan Semiconductor Manufacturing Company (TSMC) to produce its chips. Faced with decreased orders for its chips, Zoran slashed its orders to TSMC. In January and February of 2009, TSMC saw its revenue decrease by 58 percent compared to the prior year and was only utilizing 35 percent of its plant capacity. With decreased demand for its chips, TSMC in turn reduced its orders for chip‐making equipment by 20 percent. Applied Materials is one company that makes the equipment used in chip‐making factories. With the downturn in demand for chip‐making equipment, Applied Materials was forced to lay off 2000 workers and require another 12,000 workers to take an unpaid leave. With the downturn in its business, Applied Materials reduced orders to its suppliers. For example, D&H Manufacturing Company, which makes aluminum parts for chip‐making equipment, reduced its employment from 600 to 150 workers in 18 months because of the drop‐off in business. It also found itself sitting on a one‐year supply of inventory versus its usual three months of inventory. This example illustrates how the effects and decisions made at one end of the supply chain are often amplified as they cascade to the other end. And because the players at different stages in the supply chain are often caught off guard, it is not surprising that they frequently overreact to the situation. In this particular case, Best Buy was actually having trouble keeping its shelves stocked in the early part of 2009 despite the decline in demand. In fact, Best Buy estimated in March 2009 that it could have sold more in the preceding three months had its suppliers made less drastic reductions to their production plans (Dvorak 2009). • Milwaukee, Wisconsin, is home to two of the biggest multibillion‐dollar manufacturers of earth‐moving equipment that sells for up to $180 million: Bucyrus International, Inc. and Joy Global, Inc. However, they disagree completely on how to locate their production facilities. Bucyrus makes all their machines in the United States and Europe, where they have developed highly efficient, low‐cost production processes, and then ships them from there to customers all over the globe. Moreover, they expect the U.S. dollar and the euro to remain relatively weak currencies, making manufacturing there affordable. Although they were invited to build a plant in China in the 1970s, they declined to do so because the Chinese government decided to make the production of industrial mining machinery “strategically critical,” meaning that they would be heavily subsidizing their own domestic manufacturers. • In contrast, Joy prefers to design and engineer in the United States but build their plants close to emerging markets and in low‐cost developing countries, such as China, where the mining market is growing and customers and domestic suppliers are plentiful. Joy’s Chinese factory operating costs are fully 20 percent less than in the United States or Europe, though they admit to having had some early quality problems. As Bucyrus’s CEO says, “It’s going to be interesting to see how it plays out. One of us is more right than the other” (Matthews 2010). The concept of SCM has taken on the nature of a crusade in U.S. industry, in part because of the tremendous benefits that accrue to firms participating in a well‐managed supply chain. The examples above illustrate this by highlighting the important role SCM plays in an organization’s competitiveness. In Apple’s case, its supply chain practices ensure a stable supply of its highly demanded products, which in turn leads to satisfied customers and minimizes potential lost sales. On the other hand, the Best Buy example illustrates the potential for lost sales and profits when the supply chain overreacts. It is also worth noting that, although the benefits of superior SCM are clear for manufacturing and distribution firms, even service organizations benefit from good SCM. This is not only

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because services use supplies and facilitating goods in the delivery of their service (as noted in Chapter 1) but also because they, too, outsource many of their internal functions, such as information technology, accounting, and human resource management, just like manufacturers do. Thus, the provision of these services becomes part of another supply chain, a chain of services rather than goods, but nonetheless one requiring the same attention to strategy, purchasing, logistics, and management oversight, just like for goods. We begin the chapter with some definitions of the supply chain and SCM. As with any new concept, not everyone envisions SCM in the same way. We then discuss some of the important strategic advantages that accrue from wise management of the supply chain. From this overview, we then consider the elements of the supply chain in depth, including purchasing/procurement, logistics, transportation, global sourcing, and supplier management. An important element of SCM is the critical role of information technology as a major catalyst in the supply chain movement. Next, we provide some guidelines for successful SCM. We conclude with a discussion of closed‐loop supply chains.

6.1 Defining SCM

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The term supply chain generally refers to all the activities involved in supplying an end user with a product or service. The perception of each organization that is involved—the ore refiners, the transporters, the component producers, the manufacturer, the wholesaler, the retailer, and the customer—being a link in the process makes the analogy of a chain quite appropriate. In Figure 6.1, we show the position of a typical company (A) in the chain, with its suppliers to the left of it, all the way “upstream” (as it is often called) to the raw materials, and its customers to the right, all the way “downstream” to the ultimate consumer. However, company C in the chain (a downstream “customer” as far as company A is considered) sees the same thing as company A, with its suppliers (including upstream supplier company A) to its left and its customers to its right. And as is seen, company B in the middle is the customer of one firm and the supplier to another firm, as is the situation of almost all the companies in the chain. Of course, all these companies typically need multiple materials and services to serve their immediate customer in the chain, so there are really a lot of upstream supplier company links connected on the left side of each link in the chain (only shown with links for company A, arrows for all others). And most firms typically sell to more than one customer, so there are also multiple downstream customer links connected on the right side of each link in the chain (again shown only for company A). Clearly, managing all these links—that is, suppliers and customers—even if only those directly connected to your company, is a major task!

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6.1 Defining SCM

Given such a lengthy process, it may behoove companies to store inventories of their outputs (if feasible) for immediate delivery. Moreover, it must be remembered that it is not just goods that are flowing along the chain but also information, funds, paper, people, and other such items, and they are flowing in both directions along the chain. In addition, the green revolution encourages recycling, recovery, and reuse of products, so even the used product may be flowing back up the chain. (We will return to the topic of closed‐loop supply chains later in this chapter.) In addition, the supply chain also involves other functional areas and activities such as product/ service design, finance, accounting, marketing, human resources, and engineering. Thus, instead of a chain, we should probably think of the supply process as more of a network, with everyone communicating with, and passing monies and items between, everyone else. SCM, then, concerns the process of trying to manage this entire chain from initial receipt of the ultimate consumer’s order all the way back to the raw material providers and then ultimate delivery back to the consumer. Note that SCM is not restricted to managing only the links that connect with your company’s position in the chain, but all the links along the chain, so that savings (or increased value) in any part of the chain can be shared or leveraged by other companies along the chain. For example, Toyota is famous for teaching their suppliers how to install and operate their famed Toyota Production System (also known as lean manufacturing). But the teaching doesn’t stop there, since Toyota’s first‐tier suppliers can gain additional improvements by teaching their suppliers, the second tier, and so on up the supply chain. The interest in SCM has exploded primarily because of the development of new information technologies such as intranets, e‐mail, electronic data interchange (EDI), and, of course, the Internet. These technologies, in conjunction with greater global competition, have fostered an interest and ability in improving processes along the entire supply chain, resulting in better performance at reduced cost. SCM can also be considered to include a number of other managerial thrusts, such as quality management (Chapters 1 and 7), inventory management (discussed later), enterprise resource planning (ERP, also discussed later), and lean production (including JIT; Chapter 9). But it is even more comprehensive than that. For example, it includes marketing aspects in terms of communication with the customer, engineering issues involved in product/service design, financial aspects in terms of payments and float, purchasing elements such as sole sourcing, and, of course, technological initiatives such as the omnipresent Internet. To a large extent, this breakthrough in conceptualizing the potential for improvement in customer value by including all elements of the value chain is due to the development of advanced information technologies, such as the Internet. Other definitions of SCM include the following points (Walker and Alber 1999): • SCM coordinates and integrates all the supply chain activities into a seamless process and links all of the partners in the chain, including departments within an organization as well as the external suppliers, carriers, third‐party companies, and information system providers. • SCM enables manufacturers to actively plan and collaborate across a distributed supply chain to ensure that all parties are aware of commitments, schedules, and expedites. By actively collaborating as a virtual corporation, manufacturers and their suppliers can source, produce, and deliver products with minimal lead time and expense. • The goal of SCM is to optimally deliver the right product to the right place at the right time while yielding the greatest possible profit. The SCM objective of attempting to manage activities that lie outside a manager’s normal realm of internal responsibility (i.e., managing second‐ or third‐tier suppliers or downstream customers) is to reduce the costs of delivering a product or service to a user and improve its value. Sometimes, a distinction is made between a “value” chain, a “demand” chain, and a narrowly defined supply chain that simply manages suppliers to obtain the lowest cost. The conceptualization

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Supply Chain Management

of the value chain is that it considers other important aspects of customer value besides cost, such as timeliness, quality, and functionality. That is, where the supply chain tends to focus on efficiency, the value chain focuses on effectiveness. These important issues will be discussed in more detail in the next section. Also, as many have pointed out (e.g., Lummus and Vokurka 1999), the current conceptualization of the supply chain still has many elements of the old “push” system of production based on forecasts of demand. (See Section 5.2 on demand planning for more information on this topic.) The newer “pull” systems, consisting of JIT deliveries, lean manufacturing, and so on, dictate a different view of the value chain called a demand chain. In this conceptualization, a customer order pulls the product through the chain on demand, thereby further improving costs and benefits. Of course, acting after the fact rather than anticipating demand will put even further stress on the ability of the value chain to respond in a timely manner. Another layer of complexity is often added when managing service supply chains, as the customers of the service can also serve as suppliers. For example, you supply the yard to your landscaping service. Likewise, your lifestyle and budget are important inputs to the architect you hire to design your dream house. Because the customers of a service may also be a supplier, it is likely that these customer–suppliers need to be handled differently than suppliers that are not customers. For example, suppliers that are not customers need to be selected, but customer–suppliers need to be attracted. The dual nature of the customer–supplier role further compounds the complexity of the service supply chain. With a more manufacturing‐oriented supply chain, the goods tend to flow in one direction downstream. In service supply chains and the dual customer–supplier role, services flow in both directions, with the customer both upstream and downstream from the service provider. Finally, service providers may require additional flexibility to deal with the added variation that is associated with customer‐supplied inputs compared to other situations where the inputs are supplied by a more limited set of suppliers. Attempts to reduce the costs of supply (previously considered as “purchasing” or “procurement”) have been ongoing for decades, of course. However, management has also realized that there are costs other than strict materials and production costs in the supply chain that can be reduced with better information sharing and tighter management, and these costs are at the forefront of attention in SCM. For example, costs of multiple shipments, costs of inappropriate functionality, costs of low quality, and costs of late delivery are all costs that can be eliminated with better information sharing and managerial oversight.

6.2 Supply Chain Strategy The concept of the value chain was mentioned earlier, and it should be emphasized that an organization’s supply chain strategy needs to be tailored to meet the needs of its customers, which isn’t always the lowest cost. In fashion goods, for example, fast response to short fashion seasons is much more important than lowest cost. And in high technology, new functionality (or reliability or security) may be more important than cost. Thus, the strategy for building an organization’s supply chain should focus on maximizing the value to its customers, where value can be considered to be benefits received for the price paid or benefits/cost. In situations where the goods are basic commodities with standard benefits (food, home supplies, and standard clothing), then cost reduction will be the focus. But in fashion goods, timeliness should be the focus of the supply chain, meaning quick deliveries, stockpiling of long lead time items, and so on. In new notebook computers, the focus might be on identifying firms that offer new functionality; in telecom, the focus might be on reliability; and in music, the focus might be on flexibility to meet quickly changing tastes or talent. Thus, the supply chain needs to

6.2 Supply Chain Strategy

be carefully matched to the firm’s market and needs. Where the firm operates in multiple markets or appeals to multiple needs within the same market, it may find it necessary to operate different supply chains for each focus. Although most of the remaining discussion in this chapter is directed toward the traditional supply chain strategy of minimizing costs, which is always an important consideration and probably the major focus of most supply chains today, the other possible strategic purposes should be kept in mind also. It is also important to point out that many organizations choose to outsource portions of the SCM function to the so‐called third‐party logistics (3PL) companies. These 3PL companies provide a range of services, including handling the distribution of the organization’s products, receiving incoming materials, managing the organization’s warehouses, managing the purchasing function, and handling product returns. The balance of activities kept in‐house and those outsourced vary by company and should be driven by the organization’s strategy and competencies. There a number of reasons why organizations choose to outsource portions of or the entire supply chain function to a 3PL. First, assuming that SCM is not the organization’s core competency, shifting these activities to a 3PL allows the organization to focus more directly on its core competencies. Second, outsourcing these activities reduces the capital investments in the infrastructure needed to support these activities. In effect, the use of a 3PL converts a significant portion of what was a fixed cost into a variable cost. Finally, by utilizing a 3PL, the organization gains access to the best practices and technologies that it might not be able to afford or develop if the function was kept in‐house. 3PLs are able to make the investment to develop these best practices and technologies because these development costs are spread across multiple organizations served by the 3PL. However, there are also disadvantages in using 3PLs, such as the longer response time and greater risk of disruption in the supply chain when customers are wanting faster, more reliable response. An added danger of all outsourcing is the natural tendency for management to measure only the internal response time of the firm when the customer is measuring the total time from order to obtaining the good or service. In any outsourcing decision, the added time and risk of delay from outside suppliers need to be considered. This response time is also affected by the production process adopted, since make‐to‐stock (MTS) will have the fastest response because the order can simply be pulled off the shelf and sent to the customer, assemble‐to‐order (ATO) is a bit slower, make‐to‐order (MTO) is slower still, and engineer‐to‐order (ETO) is the slowest of all.

6.2.1 Strategic Need for SCM To understand the potential for obtaining strategic advantage from better management of the supply chain, whether it is kept in‐house or outsourced to a 3PL, it is useful to realize that total supply chain costs represent more than half, and in some cases three‐quarters, of the total operating expenses for most organizations (Quinn 1997). To understand these values, bear in mind that the broader concept of the supply chain includes the supply, storage, and movement of materials, information, personnel, equipment, and finished goods within the organization and between it and its environment. The objective of SCM is to integrate the entire process of satisfying the customer’s needs all along the supply chain. This includes procuring different groups of raw materials from multiple sources (often through purchasing or recycling or recovery), transporting them to various processing and assembly facilities, and distributing them through appropriate distributors or retailers to the final consumer. Within this process are a great variety of activities such as packaging, schedule coordination, credit establishment, inventory management, warehousing, maintenance, purchasing, order processing, and supplier selection and management. As organizations have continued to adopt more efficient production techniques such as lean manufacturing, total quality management, and inventory reduction techniques to reduce costs and

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improve the quality, functionality, and speed of delivery of their products and services to customers, the costs and delays of procuring the requisite inputs and distributing the resulting goods and services are taking a greater and greater fraction of the total cost and time. For example, the cost of just physical distribution itself is now up to 30 percent of sales in the food industry. To achieve quick response with quality goods that accurately satisfy the need at the lowest possible cost requires taking a broad, long‐range, integrated perspective of the entire customer fulfillment process instead of focusing on the little segments and pieces of the chain. For instance, if each segment of the supply chain is acting in a way to optimize its own value, there will be discontinuities at the interfaces and unnecessary costs will result. If an integrated view is taken instead, there may be opportunities in the supply chain where additional expense or time in one segment can save tremendous expense or time in another segment. If a broad enough view is then taken, the savings in the one segment could be shared with the losing segment, so everyone would be further ahead. This broad, integrated view of the supply chain is more feasible these days due to the recent capabilities of advanced information technology and computer processing (e.g., bar codes, computerized manufacturing, the Internet, ERP systems, and electronic funds transfer). Other factors are also driving the need to better manage the supply chain: • Increasing global competition. In addition to increased pressure on cost from global competitors who have lower labor rates, they also frequently offer better quality, functionality, and customer responsiveness. This is pressuring firms to look globally for better or cheaper suppliers, resulting in increased outsourcing and offshoring. • Outsourcing. Since more organizations are outsourcing and thereby increasing the need for transportation, this has pushed up transportation costs. • E‐commerce. The advent of e‐commerce and other electronic technologies has made it easier and cheaper to outsource, either domestically or even globally. • Shorter life cycles. Customers are demanding greater variety, faster response, higher quality, and cheaper prices. One result of these demands is shorter product life cycles, which means constantly changing supply chains and using more chains over the same period of time. • Greater supply chain complexity. The increased complexity of supply chains requires much more attention and better management of these chains. For example, in early 2001, when the bottom fell out of the telecom market, Solectron Corp., the world’s biggest electronics contract manufacturer, was holding $4.7 billion of inventory from its 4000 suppliers to fill firm orders from Cisco, Ericsson, Lucent, and other telecoms. But when the telecoms canceled their orders, no one knew who owned all that inventory (Engardio 2001)! • Increasing levels of concern for the environment. Addressing environmental concerns impacts virtually all aspects of SCM from the sourcing of parts to the distribution of the product and even to the disposal of the product once it reaches the end of its useful life. Green sourcing seeks to identify suppliers in such a way that the organization’s carbon footprint and overall impact on the environment are minimized. Reducing the waste associated with products is another way organizations minimize the negative impact they have on the environment. Along these lines, and as is discussed in Chapter 1, organizations can deploy a strategy referred to as the three R’s: reduce, reuse, and recycle. Implementing SCM has brought significant documented benefits to many companies. Ferguson (2000) reports, for example, that compared to their competitors, such firms enjoy a 45 percent supply chain cost advantage, an order cycle time and inventory days of supply 50 percent lower, and finished product delivery 17 percent faster. Lummus and Vokurka (1998)

6.2 Supply Chain Strategy

note that these firms operate with 36 percent lower logistics costs, which, by itself, translates into a 4 percent increase in net profit margins. One firm reported a 25 to 50 percent reduction in finished product inventories, a 10 percent reduction in cost, and a 10 to 25 percent improvement in production process reliability. Of course, these are primarily the cost aspects of the SCM process, which are more easily measured than the qualitative benefits, such as more loyal customers and a larger market share. There are also significant effects on other important aspects of an organization, such as its ability to learn new procedures and ways of operating, the morale of its employees, and the ability to change direction quickly.

6.2.2 Measures of Supply Chain Performance Better supply chain performance will show up in a number of standard financial measures of a company’s health. Lower inventories, normally considered an asset, will be reflected in less need for working capital (WC) and a higher return on assets (ROA) ratio (since assets are reduced). And the lower cost to carry these inventories (as well as other reduced costs in the supply chain) will be seen in a reduced cost of goods sold (CGS) and thus a higher contribution margin, return on sales (ROS), and operating income. Moreover, if the supply chain is also better managed to provide other benefits to the consumer, as mentioned earlier, the effect should be seen in higher total revenue, since the consumer will be willing to pay more. Lower costs, if used to reduce prices, will also result in higher volumes, which will further increase revenues. One performance measure that provides managers with a broad view of the supply chain is the cash conversion cycle (CCC). This financial performance metric helps a company assess how well it is managing its capital. In effect, the CCC is the amount of time the organization’s cash is tied up in WC before being returned by customers as they pay for delivered products or services. The key inputs needed to calculate the CCC are inventory (I), accounts receivable (AR), and accounts payable (AP). These inputs are readily available from the organization’s financial statements. Before calculating the CCC, the inputs are standardized into days as follows: I

inventory annual cost of goods sold

AR

accounts receivable annual net sales

AP

accounts payable annual cost of goods sold

365

365

365

These standardized inputs are used to calculate the CCC as follows: CCC

I

AR AP

A positive CCC represents the number of days the organization’s capital is tied up waiting for the customer to pay for the products or services. A negative CCC represents the number of days the organization is able to receive cash from its sales before it pays its suppliers. Thus, the smaller the CCC, including negative numbers, the better the organization is performing. Dell has reduced their supply time so much that they actually receive payment from the customer before (known as float, another financial term) they have to pay their suppliers for the parts that make up the customer’s product! In 1998, Dell’s CCC was 29 days. By 2005, it had improved to 230 days, and by 2009, it was 244 days (Dignan 2002; Magretta 1998).

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Beyond these standard financial measures, however, we can also look at some more operations‐oriented measures that we typically use to see how well operations is performing, such as defect rates, lead times, inventory turns, productivity ratios, and so on. Since one of the major cost savings in SCM is the cost of inventories, it is worthwhile to examine some performance measures related to inventory reduction. One such measure to track is the percent of the firm’s assets represented by inventory. First, we calculate the aggregate inventory value (at cost) on average for the year (AAIV): AAIV

raw materials work-in-process finished goods %Assets in inventories

AAIV / total assets

Another inventory measure is the inventory turnover (or “turns,” as it is sometimes called): Inventory turnover (“ turns”) annual CGS / AAIV Note that the inventory turnover is based on the same items that make up total annual revenues but is based on their cost instead of their price. Turnover essentially represents how often the average inventory is used up to obtain the total sales for the year. Like ROA, the more the inventory and assets can be reduced and still maintain the same sales, the better! Inverting the equation for turns gives us the same information, but through a measure of the proportion of the year’s sales we are holding in inventory. This is usually expressed in daily (or weekly) periods: Days of supply

AAIV / daily CGS

In some firms that have achieved supply chain excellence, they measure their supply in hours instead of days. Dell Computer is one of these firms (Dignan 2002; Magretta 1998) due to the outstanding job they have done on fine honing their supply chains.

6.3 Supply Chain Design As shown in Figure 6.2, the supply chain consists of the network of organizations that supply inputs to the business unit, the business unit itself, and the customer network. Note that the supplier network can include both internal suppliers (i.e., other operating divisions of the same organization) and external suppliers (i.e., operating divisions of separate organizations). Also, note how design activities cut across the supplier network and the business unit and how distribution activities cut across the business unit and the customer network. This broader view of the entire process of serving customer needs provides numerous benefits. For example, it focuses management attention on the entire process that creates value for the customer, not the individual activities. When viewed in this way, information is more freely shared up and down the supply chain, keeping all parties informed of one another’s needs. Furthermore, activities can be performed at the point in the supply chain where they make the most sense. To illustrate, instead of providing Johnson Controls with detailed specifications for car seats, car manufacturers provide broad specifications and rely on Johnson Controls’ expertise to design and manufacture their car seats. In this section, we will look at each of the major logistical elements of the supply chain to better understand how they operate and interact to deliver value to the final customer: the “bullwhip” effect, transportation, and location. Outsourcing, purchasing, supplier management, and the role of information technology are discussed later in the chapter.

6.3 Supply Chain Design Supplier network Second tier

Business unit

Customer network

First tier S

Retailers Transformation system

S S S S

167

Raw materials

Customer distribution center

R

R WIP

Finished goods

Components

S

Customer distribution center

R

R

R

Design

E n d c u s t o m e r s

Distribute

Information

6.3.1 Logistics Logistics can be defined as planning and controlling the efficient, effective flows of goods, services, and information from one point to another. As such, it consists of inventories, distribution networks, storage and warehousing, transportation, information processing, and even production—a rather all‐enveloping term. In these days of intense worldwide competition, international production in supply chains, and global distribution, logistics is taking on tremendous importance. Labor cost is dropping as a proportion of total output cost, as are manufacturing costs in general, but the costs of acquisition and distribution have remained about the same and now account, as noted previously, for up to 30 percent of sales. Generally speaking, when organizations design their supply chains, they tend to focus on one of two overarching goals: maximizing efficiency and minimizing the cost of the supply chain versus maximizing the flexibility and responsiveness of the supply chains. A logical question is: Are there guidelines that can help an organization determine whether its supply chain focus should be on efficiency or responsiveness? The good news is that there are indeed guidelines for this and, as you might suspect, the emphasis on efficiency versus responsiveness depends largely on the demand pattern of the outputs. More specifically, Professor Marshall Fisher of the Wharton School distinguishes two fundamentally different types of outputs that he refers to as functional and innovative products. Functional products tend to be staples that we routinely purchase. As such, functional products tend to be more mature products with predictable demand patterns, long life cycles, and relatively low contribution margins. Examples of functional products include frozen vegetables, batteries, paper towels, soft drinks, and printer paper. At the other extreme, innovative products represent products that are continuously being improved and enhanced with new styles, features, capabilities, and so on. Because they are continuously updated, innovative products have unpredictable demand, short life cycles, and relatively high contribution margins as well as being offered in

FIGURE 6.2 Simplified supply chain.

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many varieties and options. Examples of innovative products include smart phones, tablet computers, tennis rackets, and designer blue jeans. Using this classification, Professor Fisher suggests that focusing on supply chain efficiency is appropriate for functional outputs, while focusing on responsiveness is appropriate for innovative products. In fact, when seeking to identify the root cause of supply chain problems, quite often you will find that the problems are the result of the supply chain not being properly aligned with the demand pattern of the product. Most often, this occurs when an organization seeks to offer innovative products but is focusing on the efficiency of the supply chain. In these cases, the organizations would be well served to either consider marketing their products as functional products or placing greater emphasis on improving the responsiveness of their supply chain as opposed to optimizing its efficiency.

The Bullwhip Effect While all products have an underlying demand pattern, the way the supply chain is managed can distort our perception of what the true underlying pattern of demand is. We now have a better understanding of one logistical effect that distorts the demand pattern known as the bullwhip effect, named after the action of a whip where each segment further down the whip goes faster than that above it. Unfortunately, this same effect occurs in a supply chain, but in reverse order, and has been well documented. More specifically, in supply chains, the bullwhip effect results when the variability of demand increases from the customer stage upstream to the factory stage. This is often the result of different parties in the supply chain being overly reactive in their ordering practices, as in the Best Buy example at the beginning of the chapter. For example, this happens when a small percentage increase in a retailer’s orders results in the wholesaler increasing its orders by an amount greater than that of the retailer—a safety stock—just to be covered in case demand is increasing. Then, the distribution center sees this greater demand from its wholesalers and increases its orders by some safety percentage, also to be safe. The end result is that the factory sees a huge jump in demand. As it orders more equipment, labor, and materials to satisfy this big increase, too much is fed into the pipeline, and the retailer cuts back, with the wholesaler and distribution center likewise cutting back even more. The factory then sees a tremendous drop in demand and reverses the cycle, cutting excessively into production and initiating another round of excessive demand. This boom–bust cycle is particularly prevalent in some industries, such as commercial building. Obviously, both overproduction and underproduction are expensive and drive up supply chain costs. The Beer Game discussed in the supplement to this chapter is a staple of MBA programs and is used to provide students with firsthand experience with the bullwhip effect. The bullwhip effect can occur whenever any one of the three conditions is extreme enough to cause the boom–bust cycle. The first condition is simply long lead times between the stages of the supply chain, so that changes in demand requirements are slowly moving up and down the chain, thereby allowing excessive changes to occur in the other stages of the chain. The second condition is large lot sizes with infrequent orders, resulting again in lags in information. And the third condition is the slow transmission of information occurring by handoffs from one link of the chain to the next. The ways to eliminate the bullwhip effect are to reverse these three conditions. Reducing lead times through JIT programs, for example, will result in immediate deliveries of the ordered amounts, so safety stocks are unnecessary. Reducing lot sizes means smaller, more frequent deliveries, which again eliminates the need for large safety stocks. And, finally, the sharing of information from the retailer throughout the supply chain gives the factory, as well as the other supply chain partners, accurate information, so appropriate amounts of items are produced and delivered. In addition to these three conditions, there are a number of business practices that also contribute to the bullwhip effect. One business practice is the tendency for customers to have a

6.3 Supply Chain Design

preference for placing all their orders either at the beginning or the end of the week (or month) rather than spacing orders out evenly. This leads to a situation where incoming orders will be bunched up around the beginning and end of the week (or month), thereby increasing the variability of the supplier’s daily demand beyond the variability of the customers’ daily demand. Furthermore, this problem tends to be amplified as the orders cascade upstream. Another business practice that contributes to the bullwhip effect is the use of standard batch sizes. For example, if a particular product is packaged in cases of 24 units, then replenishment orders for this product will be done in multiples of 24. This practice further bunches up orders and again results in the supplier’s daily demand being larger than that of the customers placing the orders. Trade promotions are yet another practice that contributes to the bullwhip effect. Trade promotions are short‐term discounts suppliers offer their customers. These discounts provide customers with an incentive to order more product than they need, called forward buying. Because customers will choose to place their orders when the trade promotion is offered and even delay orders in anticipation of a trade promotion, these trade promotions create another order‐bunching problem. A final practice that contributes to the bullwhip effect is shortage gaming. This practice occurs in situations where a product is in short supply. Anticipating that the supplier will allocate its inventory to its customers, some suppliers inflate their orders, fearing that they will be shipped less than they ordered. Attempting to game the system in this manner exacerbates the shortage problem, as some customers end up with less than they can sell because they did not inflate their orders, while others end up with more than they can sell. In some cases, the suppliers themselves further compound this problem by allowing their customers to return unsold inventory. There are several actions suppliers can take to mitigate these practices. For example, suppliers can ask their customers to share information more frequently about actual demand. Likewise, suppliers can coordinate with their customers to eliminate the batching of orders. Alternatively, suppliers can encourage their customers to make greater use of technology such as the Web and EDI to place smaller but more frequent orders. Furthermore, suppliers can eliminate the practice of offering trade promotions. Finally, suppliers can enhance the value proposition they provide their customers while at the same time helping smooth out incoming orders by taking over the management of their customers’ inventory, referred to as “vendor‐managed” inventory.

Location Another key supply chain design decision is determining the location of the facilities relative to suppliers and potential customers. In general, the decision about location is divided into three stages: regional (including international), community, and site. Sources of information for these stages are chambers of commerce, realtors, utilities, banks, suppliers, transportation companies, savings and loan associations, government agencies, and management consultants who specialize in relocation. For some pure service organizations (e.g., physicians), only the site selection stage may be relevant because they are already focused on a specific region and community. Before discussing these stages in detail, however, we first highlight the relationship between the location decision and the development of core capabilities. Developing Capabilities and the Location Decision In examining the rationale offered by organizations regarding their decisions to relocate existing facilities or open new ones, it often appears that these decisions are being driven primarily by short‐term considerations such as differentials in wage rates and fluctuations in exchange rates. In addition to having the appearance of being more band‐aid solutions than addressing how to improve long‐term competitiveness, these decisions are often dominated by operational factors such as wage rates and transportation

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costs. The problem with such static and one‐dimensional analyses is that conditions change. For example, if one competitor chooses a location based on low wage rates, there is very little to prevent its competitors from locating in the same region. Furthermore, the benefit of low wages is likely to be short lived, as the demand for labor will increase when more organizations locate in the region. An alternative approach for the location decision is to consider the impact these decisions have on the development of key organizational capabilities. In Chapter 1, we defined core capabilities as the organizational practices and business processes that distinguish an organization from its competition. Clearly, the way various organizational units are located relative to one another can have a significant impact on interactions between these units, which in turn impacts the development of core capabilities. In order to leverage the location decision to enhance the development of long‐term capabilities, Bartmess and Cerny (1993) suggest the following six‐step process: 1. Identify the sources of value the company will deliver to its customers. In effect, this translates into identifying the order winners discussed in Chapter 1. 2. Once the order winners have been defined, identify the key organizational capabilities needed in order to have a competitive advantage. 3. Based on the capabilities identified, assess the implications for the location of organizational units. For example, if the company determines that a rapid product development capability is needed, then it follows that design needs to be in close contact with manufacturing and leading‐edge customers. Alternatively, if operational flexibility is needed, then it follows that manufacturing needs to be in close proximity to design, marketing, and management information systems. 4. Identify potential locations. 5. Evaluate the sites in terms of their impact on the development of capabilities, as well as on financial and operational criteria. 6. Develop a strategy for building an appropriate network of locations. Having highlighted the relationship between the choice of a location and the development of capabilities, we next turn our attention to the actual stages that location decisions typically progress through.

Stage 1: Regional–International In the regional–international stage, an organization focuses on the part of the world (e.g., North America, Europe, and Pacific Rim) or perhaps the region of a country (e.g., Southwest, Midwest, Northeast) in which it wants to locate its new facility. For example, when Mercedes‐Benz needed a new facility to produce its new multipurpose vehicle (MPV), it initially decided that its new facility should be located in North America and subsequently further narrowed the region to sites in the Southeastern United States. There are four major considerations in selecting a national or overseas region for a facility: proximity, labor supply, availability of inputs, and environment. To minimize transportation costs and provide acceptable service to customers, the facility should be located in a region in close proximity to customers and suppliers. Although methods of finding the location with the minimum transportation costs will be presented later in this chapter, a common rule of thumb in the United States is that the facility should be within 200 miles of major industrial and commercial customers and suppliers. Beyond this range, transportation costs begin to rise quickly.

6.3 Supply Chain Design

The region should have the proper supply of labor available and in the correct proportions of required skills. One important reason for the past expansion of American firms abroad, particularly to Japan in the 1980s, was the availability of labor there at wage rates much lower than rates at home. Currently, this disparity has been eliminated because of Japan’s increased wages. However, the real consideration should not be wage rates but rather the productivity of domestic labor relative to productivity abroad. This comparison would thus involve considering level of skills, use of equipment, wage rates, and even work ethics (which differ even between regions within the United States) to determine the most favorable labor supply in terms of output per dollar of wages and capital investment. The organization of the labor pool should also be given consideration—that is, whether all the skills are unionized or whether there is an open shop. Some states have passed right‐to‐work laws that forbid any requirement that all employees join a union in order to work in an organization. Often, these laws result in significantly lower wage rates in these states. The region selected for location of the facility should have the necessary inputs available. For example, supplies that are difficult, expensive, or time consuming to ship and those that are necessary to the organization (i.e., no reasonable substitutes exist) should be readily available. The proper type (rail, water, highway, and air) and supply of transportation; sufficient quantities of basic resources such as water, electricity, gas, coal, and oil; and appropriate communication facilities should also be available. Obviously, many American industries are located abroad in order to use raw materials (oil, copper, etc.) available there. The regional environment should be conducive to the work of the organization. Not only should the weather be appropriate, but the political, legal, and social climate should also be favorable. The following matters should be considered: 1. Regional taxes 2. Regional regulations on operations (pollution, hiring, etc.) 3. Barriers to imports or exports 4. Political stability (nationalization policies, kidnappings) 5. Cultural and economic peculiarities (e.g., restrictions on working women) These factors are especially critical in locating in a foreign country, particularly an underdeveloped country. Firms locating in such regions should not be surprised to find large differences in the way things are done. For example, in some countries, governmental decisions tend to move slowly, with extreme centralization of authority. Very little planning seems to occur. Events appear to occur by “God’s will” or by default. The pace of work is unhurried, and at times, discipline, especially among managers, seems totally absent. Corruption and payoffs often seem to be normal ways of doing business, and accounting systems are highly suspect. Living conditions for the workers, especially in urbanized areas, are depressing. Transportation and communication systems (roads, ports, phone service) can be incomplete and notoriously unreliable. Attempting to achieve something under such conditions can, understandably, be very discouraging. When locating in such countries, a firm should allow for such difficulties and unexpected problems. In such an environment, Murphy’s law thrives. With the escalating use of outsourcing, and especially offshoring, the roles of location and capacity in the competitive elements of a firm’s strategy take on increased importance. By subcontracting production to another firm, an organization can often save substantially on labor costs (especially when offshoring) and at the same time reduce its own asset base tremendously, thereby increasing both its profit margins and ROAs. Contract manufacturers such as Flextronics, Selectron, and Jabil Circuit are quick to point out these advantages and others, such as leaving the organization free to concentrate on its strengths, such as design, brand building, marketing, and

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strategy. There are, however, also disadvantages in both outsourcing and offshoring. One is the loss of control of the product. Another is a probable reduction in speed of response to customers. A third, which is especially sensitive in communities and is increasingly publicized by the media, is the loss of domestic jobs when the company outsources its work. And outsourcing production is always a dangerous action for two reasons: (1) Engineering and then design typically must follow production overseas, meaning the additional loss of these capabilities within the organization. (2) There is the increased potential that the firm is simply training a powerful competitor (especially if engineering and design have also been outsourced), thereby “hollowing itself out.” In the 1980s, many firms in the TV and VCR industries outsourced all their production overseas, simply slapping on their own logo to sell their product domestically. Then, the foreign producers started introducing their own brands, and all the formerly domestic producers went out of business, losing the entire industry to foreign competition.

Stage 2: Community After the region of a new facility has been selected, candidate communities within the region are identified for further analysis. Many of the considerations made at the regional–international stage should also be considered at this next stage. For example, the availability of acceptable sites, attitudes of the local government, regulations, zoning, taxes, labor supply, the size and characteristics of the market, and the weather would again be considered. In addition, the availability of local financing, monetary inducements (such as tax incentives) for establishing operations there, and the community’s attitude toward the organization itself would be additional factors of interest to the organization. Last, the preferences of the organization’s staff should play a role in selecting a community. These would probably be influenced by the amenities available in the community, such as homes, religious congregations, shopping centers, schools and universities, medical care, fire and police protection, and entertainment, as well as local tax rates and other costs. Upper‐level educational institutions may also be of interest to the organization in terms of opportunity for relevant research and development (R&D). For example, it was no coincidence that major IBM plants were located in Lexington, Kentucky; in Denver, Colorado; and in Austin, Texas, all of which are also sites of major state universities. The standard “breakeven” or “cost–volume–profit” model can be helpful for this stage of the location decision, except that there is no revenue line and there are multiple costs lines, each representing a different community’s costs. We assume that the problem is to choose from among a set of predetermined communities, on the basis of a range of fixed and variable costs. Although the relevant factors for comparison between the communities may be known (e.g., labor costs, taxes, and utility charges), their values may be uncertain, particularly if they are a function of the output rate of the facility being located. The various alternatives for location are then compared by graphing total operating costs for each alternative at different levels of demand, as in Figure 6.3. This is accomplished by dividing the total operating cost into two components—fixed costs that do not vary with the demand for the output (e.g., land, buildings, equipment, property taxes, and insurance) and variable costs such as labor, materials, and transportation—and plotting them on the axes of a graph. At the demand point E (the intersection of the two lines), the costs for the two alternatives are the same; for demand levels in excess of E, community 2 is best, and for levels less than E, community 1 is best. Thus, if the range of uncertainty concerning the output volume is entirely above point E, the manager need not be concerned about which community to choose—community 2 is best. Similar reasoning holds for any uncertainty existing entirely below point E—community 1 is best. If the range of uncertainty is closely restricted to point E, then either community may be selected because the costs will be approximately the same in either case. However, if the range of uncertainty is broad and varies considerably from point E in both directions, then the breakeven

6.3 Supply Chain Design

Total annual operation cost

Community 1 Community 2

Variable costs community 1

Fixed costs community 2 Fixed costs community 1 E

Output demand volume

chart will indicate to the manager the extra costs that will be incurred by choosing the wrong community. Before selecting either community, the manager should probably attempt to gather more information in order to reduce the range of uncertainty in demand.

Stage 3: Site After a list of candidate communities is developed, specific sites within them are identified. The site—the actual location of the facility—should be appropriate to the nature of the operation. Matters to consider include size; adjoining land; zoning; community attitudes; drainage; soil; the availability of water, sewers, and utilities; waste disposal; transportation; the size of the local market; and the costs of development. The development of industrial parks in some communities has alleviated many of the difficulties involved in choosing a site, since the developer automatically takes care of most of these matters. Before any final decision is made, a cash‐flow analysis is conducted for each of the candidate sites; this includes the cost of labor, land, taxes, utilities, and transportation. A model that can help with the site selection is the weighted score model. This approach can combine cost measures, profit measures, other quantitative measures, and qualitative measures to help analyze multiple locations (as well as any other multicriteria decision). Deciding on a location, whether for products or services, is complicated by the existence of multiple criteria such as executives’ preferences, maximization of facility use, and customers’ attitudes. These and other criteria may be very difficult to quantify or even to measure qualitatively; if they are important to the decision, however, they must be included in the location analysis. Locations can be compared in a number of ways. The most common is probably just managerial intuition: Which location best satisfies the important criteria? The weighted score model is a simple formalization of this intuitive process that is useful as a rough screening tool for locating a single facility. In this model, a weight is assigned to each factor (criterion), depending on its importance to the manager. The most important factors receive proportionately higher weights. Then, a score is assigned to each of the alternative locations on each factor, again with higher scores representing better results. The product of the weights and the scores then gives a set of

FIGURE 6.3 Breakeven location model.

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weighted scores, which are added up for each location. The location with the highest weighted score is considered best. In quantitative terms, Wi Si

Total weighted score i

where i Wi

index for factors weight of factor i

Si

score of the loccation being evaluated on factor i

Quebec City, Canada, provides a good example of almost exactly this process (Price and Turcotte 1986). The Red Cross Blood Donor Clinic and Transfusion Center of Quebec City was located in a confined spot in the downtown area and wanted to expand in another location. The center’s main activities affecting the choice of a new location were receiving donors, delivering blood and blood products throughout the community and the province of Quebec, and holding blood donor clinics across the same region. Accordingly, the following criteria for a site were identified: • Highway access for both clinics and blood deliveries • Ability to attract more donors as a result of improved accessibility and visibility • Convenience to both public and private transportation • Ease of travel for employees • Internal floor space • Lot size • Acceptability of the site to management and governmental authorities involved in the decision The analysis of the problem was very complicated, owing to conflicting requirements and the unavailability of data. Nevertheless, five sites were finally identified and evaluated on the basis of four final criteria. The five sites were then ranked on each of these criteria, and a scoring model was constructed to help management determine the best location. The weights were to be determined by management, and they could be modified to determine if changing them would have any effect on the best location. The final scores and rankings, with equal weights across the four criteria, are shown in Table 6.1.

Locating Pure Services Although all the material presented so far applies equally to services and product firms, some aspects of locating service organizations are worth noting. First, service location decisions are usually based on how the location will help increase the organization’s service revenues, with ■ TABLE 6.1 Site

Comparison of Quebec City’s Site Factors Road access

Bus access

Proximity

Availability

Rank

1

0.4

0.0

0.4

0.7

1

2

0.2

0.2

0.3

0.7

2

3

0.3

0.3

0.2

0.0

4

4

0.0

0.4

0.1

0.0

5

5

0.1

0.1

0.0

0.7

3

6.4 Sourcing Strategies and Outsourcing

particular attention paid to avoiding poor locations, which can be fatal to some services. Since the majority of services are highly dependent on physical interaction with the customer, the most important factor in service location is being close to and easily accessible by customers. And if the service relocates, it does not want to move too far from its original location. The second major factor is usually access to qualified labor at a reasonable cost. Then come various other factors such as rent, infrastructure, business climate, competition, and so on. There are some exceptions, such as competitive clustering (auto dealers, motels) and saturation marketing (Walgreens, Starbucks). There are various approaches to analyzing service locations, depending on some distinctions such as whether the issue is locating a single facility or multiple facilities. Another distinction involves the recipient coming to the facility, as in retailing, as opposed to the facility going to the recipient, as with “alarm” services.

6.4 Sourcing Strategies and Outsourcing As was noted in Chapter 1, one trend in business is the emphasis organizations are placing on the sourcing of their products. In the past, sourcing decisions were frequently viewed as primarily tactical in nature with the overarching goal of obtaining the lowest possible unit cost. Often, the strategy used to obtain the lowest cost was to play one supplier against another. Now, we see organizations increasingly discussing strategic sourcing and thinking more holistically in terms of the total cost of ownership, not just the unit cost. Outsourcing is the process of contracting with external suppliers for goods and services that were formerly provided internally and offers an important benefit for SCM. Global sourcing is an important aspect of supply chain outsourcing strategy, and we see it occurring more and more. In the news, we read and hear about the meetings of the World Trade Organization (WTO), the latest accords of the G7 major trading nations, the dangers of North American Free Trade Agreement (NAFTA), the job losses due to overseas outsourcing (furniture manufacturers closing U.S. plants and sourcing from Asia, call centers being relocated to India), and so on. When asked on the Lou Dobbs show for the reasons all this outsourcing is occurring now, the economist Paul Craig Roberts responded that two primary factors were responsible: (1) the fall of communism and the economic insulation it had maintained and (2) the advent of telecommunications and computer technology, which physically allow work that previously had to be done locally or regionally to now be conducted overseas. The classic example of global outsourcing has been Nike, where the shoes are designed in the United States, but all the production is done overseas. The strategic appeal of this lean model of business to other manufacturing and consumer firms is multiple. First, overseas production offers the promise of much cheaper labor costs, clearly a strategic benefit. But equally attractive to many firms that are outsourcing, whether globally or domestically, is the ability to dump a large portion of their capital‐intensive production assets and staff, thus giving a big boost to their balance sheets, especially their ROAs. In addition, not being burdened with fixed, unchangeable capital production assets allows firms to be more flexible and responsive to their customers’ changing needs. There is a danger to outsourcing, however, particularly overseas outsourcing, and that is the possibility of being hollowed out, as noted in Chapter 1. To summarize, this is the situation where the supplier has been trained to produce, and even sometimes design, the customer’s product so well that it can simply sell the product under its own brand and compete successfully against its former customer. In many cases, the customer has gone so long without designing or producing its own product—simply slapping its logo on the foreign‐produced item—that it has lost the knowledge and skills to even compete in the market. This happened in the 1980s when American

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manufacturers trained foreign firms in how to produce TV sets and other electronic goods—and lost those entire industries. Clearly, decisions about outsourcing at this level are strategic ones for the organization, involving great potential benefits but also great risks, and should be deliberated thoroughly. A more recent phenomenon is the trend toward outsourcing the entire production process to third‐party contract manufacturers. In this case, the firms often conclude that their core competency is not in manufacturing per se but rather in system innovation or design. In the electronics industry, this is becoming a major element of SCM strategy for firms like Cisco, Apple, IBM, and many others. Cisco, for example, hardly makes any products itself. The big players in this growing industry are Jabil Circuit, Flextronics, and SCI Systems. In fact, in the electronics sector, contract manufacturing was growing faster than the rate of growth of electronics itself in the late 1990s. In spite of the provision of products, these contract manufacturers consider themselves manufacturing service providers, and, indeed, this is a substantial service they offer their customers. However, in addition to the major impacts outsourcing involves for operations, it also has major impacts on other functional areas of the organization, such as marketing, finance, R&D, and human resource management. Moreover, to use this approach successfully requires that the firm maintain a strong, perhaps even core, competence in outsourcing. Many failures have resulted when firms jumped into outsourcing but didn’t have the skills to manage it properly. Outsourcing in general is a strategic element of SCM these days, not just for production materials but for a wide range of services as well. For example, organizations are coming to realize that many of the activities they perform internally, such as accounting, human resources, R&D, and even product design and information systems, are not part of their core competencies and can be performed more efficiently and effectively by third‐party providers, often at a fraction of the cost of in‐house workers. There is thus a growing movement toward increasing the span of SCM to include the acquisition of these services. Recently, beginning in the early 2000s, there has been a trend toward reshoring or moving the production of products that had been offshored back to the United States. In making the decision to reshore the production of products, organizations consider a number of factors such as taxes, regulations, wages, oil prices, transportation, and fluctuations in the values of currencies. A survey conducted at MIT in 2012 found that of the 105 firms participating in the survey, 39 percent were considering reshoring some of their products produced overseas (Hagerty, 2012, 2013). As one example, in 2012, Whirlpool made the decision to reshore the production of its hand mixers after offshoring them to China six years earlier. And in 2013, Whirlpool moved the production of some of its washing machines to a plant in Ohio from a plant in Mexico. As another example, Apple began producing some of its high‐end desktop computers in Austin, Texas, in 2013. The nonprofit organization The Reshoring Initiative estimates that between 2010 and 2013, 80,000 manufacturing jobs have been created in the United States as a result of reshoring. It appears that heavy, bulky, and/or expensive products are the best candidates for reshoring. While often the primary considerations for offshoring and reshoring focus on the supply side of the equation (e.g., taxes, regulations, wages, oil prices, and fluctuations in the values of currencies), the latest trend referred to as next‐shoring considers the demand side of the equation. More specifically, next‐shoring recognizes the significant benefits that accrue by being in close proximity to where the demand for products and services actually occurs. Indeed, the McKinsey Global Institute estimates that the share of global demand coming from emerging markets will increase from 40 percent in 2008 to 66 percent by 2025. Proponents of next‐shoring recognize that being in closer proximity to the sources of demand enhances the ability of organizations to adapt to changes such as shifts in customer requirements and emerging technologies. By the same token, next‐shoring also creates new challenges related to the development of new supply chain partnerships.

6.4 Sourcing Strategies and Outsourcing

6.4.1 Purchasing/Procurement Organizations depend heavily on purchasing activities to help them achieve their supply chain strategy by obtaining quality materials and services at the right cost when they are needed. Purchasing is expected to be able to quickly identify and qualify suppliers, negotiate contracts for the best price, arrange for transportation, and then continue to oversee and manage these suppliers. Lately, purchasing has been given the added responsibility in many organizations for also supplying major services to the organization, such as information technology, accounting, human resources, and other previously internal functions. Another common term for the purchasing function is procurement. Whereas “purchasing” implies a monetary transaction, “procurement” is the responsibility for acquiring the goods and services the organization needs, by any means. Thus, it may include scrap and recycled as well as purchased materials. Procurement thus allows the consideration of environmental aspects of obtaining and distributing products. For example, there is often the possibility of recovering certain materials through recycling, reuse, or scrap purchases. And remanufacturing of goods is an inexpensive alternative to virgin production. On the distribution side, the concept of reverse logistics is being practiced in Germany, where packaging must reverse the logistics chain and flow back to the producer that originated it for disposal or reuse. The purchasing area has a major potential for lowering costs and increasing profits— perhaps the most powerful within the organization. Consider the following data concerning a simple manufacturing organization: Total sales Purchased materials Labor and salaries Overhead Profit

$10, 000, 000 7, 000, 000 2, 000, 000 500, 000 500, 000

To double profits to $1 million, one or a combination of the following five actions could be taken: 1. Increase sales by 100 percent. 2. Increase selling price by 5 percent (same volume). 3. Decrease labor and salaries by 25 percent. 4. Decrease overhead by 100 percent. 5. Decrease purchase costs by 7.1 percent. Although action 2 may appear easiest, it may well be impossible, since competitors and the market often set prices. Moreover, raising prices almost always reduces the sales volume. In fact, raising prices often decreases the total profit (through lower volume). Action 5 is thus particularly appealing. Decreasing the cost of purchased material provides significant profit leverage. In the previous example, every 1 percent decrease in the cost of purchases results in a 14 percent increase in profits. This potential is often neglected in both business and public organizations. Furthermore, this logic is also applicable to service organizations. For example, investment firms typically spend 15 percent of their revenues on purchases. However, manufacturing firms spend about 55 percent of their revenues for outside materials and services (Tully 1995)! And with factory automation and outsourcing increasing, the percentage of expenditures on purchases is increasing even more. In addition, with lean and JIT programs at so many firms (discussed in

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greater detail in Chapter 9), “JIT purchasing” is even further increasing the importance of purchasing and procurement, since delays in the receipt of materials, or receiving the wrong materials, will stop a JIT program dead in its tracks. SCM programs are putting ever greater emphasis on the purchasing function. Thus, we are seeing multiple new initiatives for cutting purchasing costs, including reverse auctions and joint venture Web sites by organizations that are normally competitors. Reverse auctions use a Web site to list the items a company wants to buy and bidders make proposals to supply them, the lowest qualified bidder typically winning the auction. Joint venture Web sites are typically for the same purpose, but combine the purchasing power of multiple large players in an industry— automobile manufacturing, aerospace, and health care, for example—in order to obtain even bigger cost savings. Such sites are virtual online bazaars, including all the goods and services the joint partners wish to outsource. But the range and volumes are massive, considering that the old‐big‐three U.S. auto companies each spent close to $80 billion a year on such purchases.

Value Analysis A special responsibility of purchasing, or purchasing working jointly with engineering/design and operations (and sometimes even the supplier), is to regularly evaluate the function of purchased items or services, especially those that are expensive or used in high volumes. The goal is to either reduce the cost of the item or improve its performance. This is called “value analysis” because the task is to investigate the total value of the item to see if it can be eliminated, redesigned for reduced cost, or replaced with a less expensive or more beneficial item, or even if the specifications can be relaxed. Other aspects are investigated, too, such as the packaging, the lead time, the transportation mode, the materials the item is made from, whether the part can be combined with another part or parts, and so on. Recent efforts in this area have extended the reach farther up the supply chain to involve second‐ and third‐tier suppliers, even bringing them in before the product is designed in order to improve its value up front, called early supplier involvement. Value analysis should be a continuing effort to improve supply chain performance and increase its value to the ultimate consumer.

Key Elements of Effective Purchasing Organizations that are highly effective in SCM purchasing seem to follow three practices: 1. They leverage their buying power. The advantages associated with decentralization are typically not achieved when it comes to purchasing. For example, Columbia/HCA combines the purchases of its 200‐plus hospitals to increase its overall purchasing power. By combining all of its purchases for supplies ranging from cotton swabs to IV solutions, for instance, it was able to reduce purchasing costs by $200 million and boost profits by 15 percent. 2. They commit to a small number of dependable suppliers. Leading suppliers are invited to compete for an organization’s business on the basis of set requirements, such as state‐of‐the‐art products, financial condition, reliable delivery, and commitment to continuous improvement. The best one‐to‐three suppliers are selected from the field of bidders on the basis of the specified requirements. Typically, one‐ to five‐year contracts are awarded to the selected suppliers. These contracts provide the supplier with the opportunity to demonstrate its commitment to the partnership. The customer shares information and technology with the supplier, and the supplier responds in turn. If a supplier is able to consistently improve its performance, the organization reciprocates by increasing the volume of business awarded to that supplier and extending the contract.

6.4 Sourcing Strategies and Outsourcing

3. They work with and help their suppliers reduce total cost. Often, organizations will send their own production people to a supplier’s plant to help the supplier improve its operating efficiency, improve its quality, and reduce waste. Additionally, an organization may benchmark key aspects of a supplier’s operation such as prices, costs, and technologies. If it is discovered that a supplier has slipped relative to the competition, the organization can try to help the supplier regain its lead. If the supplier is unable or unwilling to take the steps necessary to regain its leadership position, the organization may need to find a new partner.

6.4.2 Supplier Management Our discussion of the management of an organization’s suppliers will focus on three areas: (1) selecting the suppliers, (2) contemporary relationships with suppliers, and (3) certification and auditing of ongoing suppliers.

Supplier Selection and Vendor Analysis The general characteristics of a good supplier are as follows: • Deliveries are made on time and are of the quality and in the quantity specified. • Prices are fair, and efforts are made to hold or reduce the price. • The supplier is able to react to unforeseen changes such as an increase or decrease in demand, quality, specifications, or delivery schedules—all frequent occurrences. • The supplier continually improves products and services. • The supplier is willing to share information and be an important link in the supply chain. However, these are not the only factors to be considered in selecting a supplier. Additional considerations involve the supplier’s reputation/reliability, its having a nearby location (especially important for JIT delivery), its financial strength, the strength of its management, and even what other customers and suppliers are involved with it. For example, if we are a relatively small customer, we might be more at risk of not getting a delivery if a larger customer experiences a problem and needs our supplier’s immediate help. Or if our supplier has weak or unreliable second‐ or third‐ tier suppliers, we might encounter a problem getting our supplies through no fault of our direct supplier. Another important factor to consider in selecting a supplier is the total cost of ownership. In particular, one pitfall that organizations should avoid is the tendency to overly emphasize the unit cost being charged for a purchased item to the exclusion of other important aspects that also impact the organization’s costs. In many cases, the actual costs of using, maintaining, transporting, inspecting, reworking, servicing, and handling a purchased item can be much greater than its unit cost. For example, after‐sales service or the amount of maintenance required for a purchased item may have a larger impact on an organization’s costs than simply the cost of acquiring the product or service. Thus, the objective for employing a total cost of ownership approach is to consider and analyze all costs related to a purchase, not just the obvious purchase price. It is also worth pointing out that when all costs of the purchase are considered (e.g., import costs, duties, and currency fluctuations), outsourcing overseas may not be as advantageous as when only the unit cost of the item is considered.

Supplier Relationships In these days of intense global competition and SCM, the relationship between customers and suppliers has changed significantly. In the past, most customers purchased from the lowest bidders who could meet their quality and delivery needs, often maintaining at least two or three

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suppliers in case one was suddenly unable to meet their needs due to a wildcat strike or delivery problem. As pressure mounted to reduce costs, they often pressured their suppliers to cut costs by promising larger volumes to those that had the lowest costs and provided smaller amounts to other suppliers. To implement SCM, customers are seeking a closer, more cooperative relationship with their suppliers. They are cutting back the total number of their suppliers by a factor of 10 or 20 and combining their purchases, with those remaining getting the overwhelming volume of all their business. They are also asking suppliers to do a greater portion of assembly, such as with automobile seats and other automotive components, which can then simply be installed as a package rather than assembled first and then installed. Not only does the reduced assembly labor save them cost, but in return for the higher volumes, they are expecting even further reductions in cost from their reduced number of suppliers.

Supplier Certification and Audits As can be seen, these sole‐sourcing arrangements are becoming virtual partnerships, with the customer asking the supplier to become more involved even at the design stage and asking for smaller, more frequent JIT deliveries of higher quality items. This means longer‐term relationships, help with each other’s problems, joint planning, sharing of information, and so on. To do this, suppliers are being certified or qualified so that their shipments do not need to be inspected by the customer—the items go directly to the production line. This is often referred to as stockless purchasing because the items do not sit in the stockroom costing capital for holding and securing them. To ensure that the contracted supplies will be available when needed, the customers periodically conduct supplier audits of their vendors, checking for potential production or delivery problems, quality assurance, design competence, process improvement procedures, and the management of corrective actions. Some customers rely on standard industry certifications such as ISO 9000 (see Chapter 7) rather than incurring the time and expense of conducting their own certification. Such certified suppliers are sometimes known as world‐class suppliers. Of course, most of the benefits of this partnership accrue to the customer rather than the supplier. The main immediate benefit to the supplier is that it stays in business and even grows. If managed properly, it should even become more profitable. However, with the help of its customers, its production processes should improve substantially, both in quality and efficiency, resulting in cost reductions that are shared between the partners. Toyota is known for helping their suppliers, and even their second‐ and third‐tier suppliers, in this kind of fashion. In the not too distant past, when JIT production was still novel, customers were using sole sourcing as a way to put pressure on their suppliers, forcing the supplier to stock inventories of items for immediate delivery rather than holding the stock themselves. Singing the praises of JIT—and insisting that the supplier implement JIT so that its deliveries could be made in smaller, more frequent batches—was often just a ploy to accommodate the customers’ own sloppy schedules, because they never knew from week to week what they were going to need the following week. Today, firms are moving to lean/JIT (described in detail in Chapter 9) and bringing their suppliers along with them. In many cases, the customer, like Toyota, is teaching the supplier how to implement effective lean/JIT programs in their own organizations.

6.5 Inventory and Supply Planning A key aspect of SCM is the use of inventory. In this section, we look at the use of inventory and the factors that help determine the best levels of inventories to hold. We describe the various functions of inventories, the forms of inventories, specific inventory‐related costs, and the two

6.5 Inventory and Supply Planning

DILBERT: © Scott Adams/Dist. by United Feature Syndicate, Inc.

fundamental inventory decisions all organizations must make. An online supplement to the chapter provides additional details on using the economic order quantity model to determine how much inventory should be ordered. Although inventory is inanimate, the topic of inventory and inventory control can arouse completely different sentiments in the minds of people in various departments within an organization. The salespeople generally prefer large quantities of inventory to be on hand. This allows them to meet customers’ requests without having to wait. Customer service is their primary concern. The accounting and financial personnel see inventory in a different light. High inventories do not translate into high customer service in the accountant’s language; rather, they translate into large amounts of tied‐up capital that could otherwise be used to reduce debt or for other, more economically advantageous purposes. From the viewpoint of the operations manager, inventories are a tool that can be used to promote efficient operation of the production facilities. Neither high inventories nor low inventories per se are desirable; inventories are simply allowed to fluctuate so that production can be adjusted to its most efficient level. And top management’s concern is with the “bottom line”—what advantages the inventories are providing versus their costs.

6.5.1 Functions of Inventories There are many purposes for holding inventory, but, in general, inventories have five basic functions. Be aware that inventories will not generally be identified and segregated within the organization by these functions and that not all functions will be represented in all organizations: 1. Transit inventories. Transit inventories exist because materials must be moved from one location to another. (These are also known as pipeline inventories.) A truckload of merchandise from a retailer’s regional warehouse to one of its retail stores is an example of transit inventory. This inventory results because of the transportation time required. 2. Buffer inventories. Another purpose of inventories is to protect against the uncertainties of supply and demand. Buffer inventories—or, as they are sometimes called, safety stocks— serve to cushion the effect of unpredictable events. The amount of inventory held over and above the expected demand requirement is considered to be buffer stock held to meet any demand in excess of what is expected. The higher the level of inventory, the better the customer service—that is, the fewer the stockouts and backorders. A stockout exists when a customer’s order for an item cannot be filled because the inventory of that item has run out. If there is a stockout, the firm will usually back‐order the item immediately, rather than wait until the next regular ordering period. 3. Anticipation inventories. An anticipated future event such as a price increase, a strike, or a seasonal increase in demand is the reason for holding anticipation inventories. For example, rather than operating with excessive overtime in one period and then allowing the production system to be idle or shut down because of insufficient demand in another period,

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inventories can be allowed to build up before an event to be consumed during or after the event. Manufacturers, wholesalers, and retailers build anticipation inventories before occasions, such as Christmas and Halloween, when demand for specialized products will be high. 4. Decoupling inventories. It would be a rare production system in which all equipment and personnel operated at exactly the same rate. Yet, if you were to take an inspection tour through a production facility, you would notice that most of the equipment and people were producing. Products move smoothly even though one machine can process parts five times as fast as the one before or after it. An inventory of parts between machines, or fluid in a vat, known as decoupling inventory, acts to disengage the production system. That is, inventories act as shock absorbers, or cushions, increasing and decreasing in size as parts are added to and used up from the stock. Even if a preceding machine were to break down, the following machines could still produce (at least for a while), since an in‐process inventory of parts would be waiting for production. The more inventories management carries between stages in the manufacturing and distribution system, the less coordination is needed to keep the system running smoothly. Clearly, there is an optimum balance between inventory level and coordination in the operations system. Without decoupling inventories, each operation in the plant would have to produce at an identical rate (a paced line) to keep the production flowing smoothly, and when one operation broke down, the entire plant would come to a standstill. 5. Cycle inventories. Cycle inventories—or, as they are sometimes called, lot‐size inventories —exist for a different reason from the others just discussed. Each of the previous types of inventories serves one of the major purposes for holding inventory. Cycle inventories, on the other hand, result from management’s attempt to minimize the total cost of carrying and ordering inventory. If the annual demand for a particular part is 12,000 units, management could decide to place one order for 12,000 units and maintain a rather large inventory throughout the year or place 12 orders of 1000 each and maintain a lower level of inventory. But the costs associated with ordering and receiving would increase. Cycle inventories are the inventories that result from ordering in batches, or “lots,” rather than as needed.

6.5.2 Forms of Inventories Inventories are usually classified into four forms, some of which correspond directly with the previous inventory functions but some of which do not: 1. Raw materials. Raw materials are objects, commodities, elements, and items that are received (usually purchased) from outside the organization to be used directly in the production of the final output. When we think of raw materials, we think of such things as sheet metal, flour, paint, structural steel, chemicals, and other basic materials. But nuts and bolts, hydraulic cylinders, pizza crusts, syringes, engines, frames, integrated circuits, and other assemblies purchased from outside the organization would also be considered part of the raw materials inventory. 2. Maintenance, repair, and operating (MRO) supplies. MRO supplies are items used to support and maintain the operation, including spares, supplies, and stores. Spares are sometimes produced by the organization itself rather than purchased. These are usually machine

6.5 Inventory and Supply Planning

parts or supplies that are crucial to production. The term supplies is often used synonymously with inventories. The general convention, and the one that we will adopt in this book, is that supplies are stocks of items used (consumed) in the production of goods or services but are not directly a part of the finished product. Examples are copier paper, staples, pencils, and packing material. Stores commonly include both supplies and raw materials that are kept in stock or on shelves in a special location. 3. Work in process (WIP). WIP inventory consists of all the materials, parts, and assemblies that are being worked on or are waiting to be processed within the operations system. Decoupling inventories are an example of WIP. That is, they are all the items that have left the raw materials inventory but have not yet been converted or assembled into a final product. 4. Finished goods. The finished goods inventory is the stock of completed products. Goods, once completed, are transferred out of WIP inventory and into the finished goods inventory. From here, they can be sent to distribution centers, sold to wholesalers, or sold directly to retailers or final customers. As you can see from this discussion, the inventory system and the operations system within an organization are strongly interrelated. Inventories affect customer service, utilization of facilities and equipment, capacity, and efficiency of labor. Therefore, the plans concerning the acquisition and storage of materials, or “inventories,” are vital to the production system. The ultimate objective of any inventory system is to make decisions regarding the level of inventory that will result in a good balance between the purposes for holding inventories and the costs associated with them. Typically, we hear inventory management practitioners and researchers speaking of total cost minimization as the objective of an inventory system. If we were able to place dollar costs on interruptions in the smooth flow of goods through the operations system, on not meeting customers’ demands, or on failures to provide the other purposes for which inventories exist, then minimization of total costs would be a reasonable objective. But since we are unable to assign costs to many of these subjective factors, we must be satisfied with obtaining a good balance between the costs and the functions of inventories.

6.5.3 Inventory‐Related Costs There are essentially five broad categories of costs associated with inventory systems: ordering or setup costs, inventory carrying or holding costs, stockout costs, opportunity costs, and cost of goods. This section looks at these costs in turn.

Ordering or Setup Costs Ordering costs are costs associated with outside procurement of material, and setup costs are costs associated with internal procurement (i.e., internal manufacture) of parts or material. Ordering costs include writing the order, processing the order through the purchasing system, postage, processing invoices, processing accounts payable, and the work of the receiving department, such as handling, testing, inspection, and transporting. Setup costs also include writing orders and processing for the internal production system, setup labor, machine downtime due to a new setup (e.g., cost of an idle, nonproducing machine), parts damaged during setup (e.g., actual parts are often used for tests during setup), and costs associated with employees’ learning curve (e.g., the cost of early production spoilage and low productivity immediately after a new production run is started).

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Inventory Carrying or Holding Costs Inventory carrying or holding costs have the following major components: • Capital costs • Storage costs • Risk costs Capital costs include interest on money invested in inventory and in the land, buildings, and equipment necessary to hold and maintain the inventory, an item of special interest to both financial and top management. These rates often exceed 20 percent of the cost of the goods. If these investments were not required, the organization could invest the capital in an alternative that would earn some return on investment. Storage costs include rent, taxes, and insurance on buildings; depreciation of buildings; maintenance and repairs; heat, power, and light; salaries of security personnel; taxes on the inventory; labor costs for handling inventory; clerical costs for keeping records; taxes and insurance on equipment; depreciation of equipment; fuel and energy for equipment; and repairs and maintenance. Some of these costs are variable, some fixed, and some “semifixed.” Risk costs include the costs of obsolete inventory, insurance on inventory, physical deterioration of the inventory, and losses from pilferage. Even though some of these costs are relatively small, the total costs of carrying items in inventory can be quite large. Studies have found that for a typical manufacturing firm, the cost is frequently as large as 35 percent of the cost of the inventoried items. A large portion of this is the cost of the invested capital.

Stockout Costs If inventory is unavailable when customers request it, a situation that marketing detests, or when it is needed for production, a stockout occurs. Several costs are associated with each type of stockout. A stockout of an item demanded by a customer or client can result in lost sales or demand, lost goodwill (which is very difficult to estimate), and costs associated with processing backorders (such as extra paperwork, expediting, special handling, and higher shipping costs). A stockout of an item needed for production results in costs for rescheduling production, costs of downtime and delays caused by the shortage, the cost of “rush” shipping of needed parts, and possibly the cost of substituting a more expensive part or material.

Opportunity Costs Often, capacity and inventory costs can be traded off for one another. For example, capacity costs can be incurred because a change in productive capacity is necessary or because there is a temporary shortage of or excess in capacity. Why would capacity be too great or too small? If, for example, a company tried to meet seasonal demand (or any fluctuations in demand) by changing the level of production rather than by allowing the level of inventory to rise or fall, capacity would have to be increased during high‐demand periods and lie idle during low‐demand periods. Also, capacity problems are often due to scheduling conflicts. These commonly arise when multiple products have to be produced on the same set of facilities. Opportunity costs include the overtime required to increase capacity; the human resource management costs of hiring, training, and terminating employees; the cost of using less skilled workers during peak periods; and the cost of idle time if capacity is not reduced during periods when demand decreases.

6.6 Role of Information Technology

Cost of Goods Last, the goods themselves must be paid for. Although they must be acquired sooner or later anyway, when they are acquired can influence their cost considerably, as through quantity discounts.

6.5.4 Decisions in Inventory Management The objective of an inventory management system is to make decisions regarding the appropriate level of inventory and changes in the level of inventory. To maintain the appropriate level of inventory, decision rules are needed to answer two basic questions: 1. When should an order be placed to replenish the inventory? 2. How much should be ordered? The decision rules guide the inventory manager or computerized materials management system in evaluating the current state of the inventory and deciding if some action, such as replenishment, is required. Various types of inventory management systems incorporate different rules to decide “when” and “how much.” Some depend on time and others on the level of inventory, but the essential decisions are the same. Even when complexities, such as uncertainty in demand and delivery times, are introduced, deciding “how many” and “when to order” still remains the basis of sound inventory management (refer to Supplement B online).

6.6 Role of Information Technology Everyone knows that computers are everywhere these days and embedded in all kinds of products that one would not have expected. But why is this, and why now? Professor Richard Chase of the University of Southern California believes that the answer lies in two esoteric laws—one about physical goods and the other about abstract information. The first is the better known of the two: Moore’s law, which states that computing power doubles every 18 to 24 months. The unstated surprise about Moore’s law is that this doubling of power comes at the same or lower cost as before the doubling. Clearly, with enough money, our big computer companies could double computing power every 18 (or 12 or 6) months, but the size of the computers would grow enormously, as would their costs. Yet, this law implies that the cost and size do not increase. As a result, more and more computing power is becoming available for less and less money; hence, it is becoming omnipresent, appearing everywhere we go and in everything we buy. The second law is less familiar to the public but derives from the fact that information assets, like knowledge, tend to grow with use rather than dwindle, as with physical assets. This second law is called Metcalfe’s law, which says that the value of a network is proportional to the square of the number of elements (or users) connected to the network. This is why Amazon, Microsoft, and eBay have been so successful—with more people in a network, the value of the network to the user is enhanced, so more people join this network. And competing networks with fewer users are of less value and hence fade away. As a result of these two laws, the growth of computers, which support networks, and networks, which support people’s needs (business transactions, communication, blogging, etc.), has exploded. This phenomenon has been particularly prevalent in business, where it has contributed to both increased value (and thus revenues) and reduced costs, thereby having a double impact on increased profits. Next, we will look at some particular types of information technology that are commonly used in business, especially to support SCM.

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Arguably, the most significant information technology development for SCM is the Internet, and more specifically, its graphical component known as the World Wide Web (Web). Without a doubt, the Web offers enormous opportunities for members of a supply chain to share information. Companies such as IBM, General Electric, Dun & Bradstreet, and Microsoft are rapidly developing products and services that will help make the Web the global infrastructure for electronic commerce (Verity 1996). For example, as noted earlier in the purchasing discussion, the Web will allow various forms of purchasing fulfillment to take place, from placing electronic catalogs on a Web site to holding joint purchasing bazaars, exchanges, and auction marketplaces involving massive amounts of materials. Bazaars and reverse auctions (one buyer, multiple sellers) were discussed earlier, but exchanges are for information transfer (often hosted by third parties, such as mySAP. com), and auction marketplaces (one seller, multiple buyers) are primarily for selling commodities or near commodities at low prices. Of course, the costs of initiating and executing these forms of purchasing will be almost trivial compared to their paper‐based predecessors. For example, updating an electronic catalog can be done instantaneously, rather than waiting until next year’s printing. In addition, password‐protected customized catalogs reflecting negotiated prices can also be placed on a firm’s Web site for use by individual customers. Intranets are Web‐based networks that allow all employees of a firm to intercommunicate. They are usually firewall protected and use existing Internet technologies to create portals for company‐specific information and communication, such as newsletters, training, human resource information and forms, and product information. Extranets are private networks to allow the organization to securely interact with external parties. They use Internet protocols and public telecommunication systems to work with external vendors, suppliers, dealers, customers, and so on. Clearly, the extranet would be a major element of a firm’s supply chain information system. Collaborative software facilitates the work of groups or teams in the organization. Its purpose is communication, collaboration, and coordination (of schedules, workflow, etc.). Most collaborative systems these days are Web based. Microsoft’s NetMeeting and Cisco’s WebEx are well‐known commercial systems.

6.6.1 ERP ERP systems greatly facilitate communication throughout the supply chain and over the Internet. The ERP system embodies much more than just the supply chain, however; it also includes all the electronic information concerning the various parts of the firm. These massive systems can not only reduce costs and allow instant access to the entire firm’s database but can also help increase revenues by up to 25 percent in some cases (Mabert et al. 2001, p. 50). As the name suggests, the objective of these systems is to provide seamless, real‐time information to all employees who need it, throughout the entire organization (or enterprise), and to those outside the organization. Figure 6.4 provides a broad overview of SAP’s MySAP ERP system. MySAP, announced in 2003, represents the latest evolution of SAP’s ERP system. SAP introduced its R/2 system in 1979, which was an ERP system that ran on mainframe computers, and its R/3 system for client–server computing environments in 1992. MySAP takes the evolution one step further and is based on service‐oriented architecture (SOA) whereby organizations will be able to access the SAP software via the Internet and thereby have access to the full functionality of the software without having to actually install and deploy the software throughout the enterprise. With the introduction of MySAP, SAP has announced that they will no longer continue to develop R/3. As shown in Figure 6.4, an ERP system consists of a number of modules that provide the functionality to support a variety of organizational processes. These modules all access data from the central database, and changes made via these modules update the central database. Using

6.6 Role of Information Technology

Central database

ERP modules Analytics

Financials

Corporate services

Sales and service

Customers

Suppliers Human capital management

Procurement and logistics

Product development and manufacturing

Employees

ERP, each area interacts with a centralized database and servers, so suppliers can check on the latest demands and customers can determine the status of their order or available capacity for new orders. ERP can also handle international complications such as differences in taxes, currency, accounting rules, and language. With the ERP approach, information is entered once at the source and made available to all stakeholders needing it. Clearly, this approach eliminates the incompatibility created when different functional departments use different systems, and it also eliminates the need for people in different parts of the organization to reenter the same information over and over again into separate computer systems. Although ERP ties all these areas together, the actual implementation of an ERP system in an organization may include only portions of these modules on an as‐ needed basis. Davenport (1998) provides an example that illustrates the opportunity to automate tasks in a business process with an ERP system. In the example, a Paris‐based sales rep of a U.S. manufacturer prepares a quote for a customer in Paris. After the rep enters the customer information into a notebook computer, the ERP system creates the sales contract in French. Included in the sales contract are important details of the order, such as the product’s configuration, quantity ordered, price, delivery date, and payment terms. When the customer agrees to the terms of the quote, the sales rep submits the order electronically with a single keystroke. The system then automatically checks the customer’s credit and accepts the order if it is within the customer’s credit limit. Upon accepting the order, the ERP system then schedules the shipment of the completed order based on the agreed‐upon delivery date and then, based on the delivery date and appropriate lead times, reserves the required raw materials. The system also determines if the required materials will be available and, if not, automatically generates the orders for the needed materials from suppliers. Next, the ERP system schedules the actual assembly of the order in one of the organization’s Asian facilities. In addition, sales and production forecasts are updated, the commission due the rep is calculated and credited to his or her account (in French francs), and the profitability of the order (in U.S. dollars) is computed. Finally, the business units and corporate financial statements such as balance sheets, accounts payable, accounts receivable, and cash flows are immediately updated. As this example illustrates, the integration offered by ERP systems provides organizations with the potential to achieve dramatic improvements in the execution of their business processes. Owens Corning achieved this integration by replacing 211 legacy systems with one ERP system. Much of the benefit associated with this integration stems from having real‐time access to operating

FIGURE 6.4 SAP’s MySAP ERP.

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and financial data. For example, after implementing an ERP system, Autodesk reduced the time it took to deliver an order from an average of two weeks to shipping 98 percent of its orders within 24 hours. Before implementation of an ERP system, it took IBM’s Storage Systems Division five days to reprice all of its products. After implementing an ERP system, it was able to accomplish the same task in 5 minutes. IBM also reduced the time required to ship replacement parts from 22 days to 3 days and reduced the time to perform credit checks from 20 minutes to 3 seconds! Fujitsu Microelectronics achieved similar benefits, reducing its order fulfillment time from 18 days to less than 2 days and reducing the time required to close its financial books from 8 days to 4 days. Although ERP systems were originally developed for and adopted by manufacturing firms, employees working in service organizations have the same need for seamless, real‐time information. To meet the needs of service organizations, numerous ERP systems specific to the needs of service organizations have been developed. For example, Carroll Hospital Center in Westminster, Maryland, adopted an ERP system to help streamline its operations and reduce costs (Monegain 2009). Carroll Hospital is using the ERP to facilitate a variety of functions from payroll to budgeting and planning. According to the CIO of Carroll Hospital, the ERP system has impacted all aspects of the hospital from how patients receive their care to how employees are paid. Employees at Carroll Hospital appreciate the ERP system’s ability to provide them with the information they need and eliminate paperwork. Overall, Carroll Hospital has found that the ERP system provides everyone with more timely and accurate information, which in turn has facilitated the work of all employees. In a similar fashion to the health‐care industry, a number of specialized ERP systems have been developed for higher education. These ERP systems contain a number of specialized modules that universities can select from for maintaining and developing relationships with alumni, student services such as financial aid and course registration, finance and human capital management, and academic applications for tasks such as monitoring student progress and retention.

6.6.2 Customer Relationship Management Systems Another important information technology is the customer relationship management (CRM) systems. CRM systems are designed to collect and interpret customer‐based data (Ragins and Greco 2003). This could be from internal sources such as marketing, sales, or customer support services or from external sources like market research or the customer. The aim is to develop a process for improving the firm’s response to its customers’ needs, especially the most profitable customers. CRM systems thus provide comprehensive customer data so the firm can provide better customer service and design and offer the most appropriate products and services for its customers.

6.7 Successful SCM The basic requirements for successful SCM are trustworthy partners, good communication, appropriate performance measures, and competent managers with vision. Innovation to suit the particular situation of the individual organization is particularly desirable. Here are some examples of visionary SCM innovations that have been developed: • Dell’s “direct model” (Magretta 1998). • Wal‐Mart’s “cross‐docking” technique of off‐loading goods from incoming trucks at a warehouse directly into outbound distribution trucks instead of placing them into inventory. • The relatively common approach used by Dell and many others of “delayed differentiation,” where final modules are either inventoried for last‐minute assembly to customer order or differentiating features are added to the final product upon receipt of the customer’s order.

6.7 Successful SCM

• Sport Obermeyer’s and Hewlett‐Packard’s “postponement” approach to delayed differentiation, where variety and customization are delayed until as late in the production process as possible, sometimes even arranging with the carrier to perform the final customization (called channel assembly). In Sport Obermeyer’s (Fisher et al. 1994) version, those product lines where demand is better known are produced first, while customer demand volume information is being collected on less easily forecast lines whose production has thus been postponed. Similarly, Hewlett‐Packard ships generic printers to regional centers around the globe, where local workers add country‐specific power supplies, power cords, and local language instructions. Another variant of postponement was mentioned in the Dell example cited earlier, where drop shipping arrangements are made with the carrier to deliver third‐party‐supplied elements of the product (e.g., monitors) to the customer at the same time that the main product is being delivered. One framework that is particularly useful in helping organizations assess the current performance of their supply chain and identify opportunities for improvement is the supply chain operations reference (SCOR) model which was developed by the Supply Chain Council (which more recently merged with APICS). The emphasis of the SCOR model is on modeling the supply chain process, determining and using appropriate performance metrics, and identifying best practices through techniques such as benchmarking (discussed in detail in Chapter 1). More specifically, the SCOR model helps managers understand their supply chain at four levels that become increasingly detailed as one progresses down the levels. At the highest level (level 1), the SCOR model identifies the five fundamental supply chain processes: • Plan. Develop a strategy for aligning available supply with anticipated demand. • Source. Procure the needed inputs to execute the plan. • Make. Transform the inputs into outputs in order to meet the plan. • Deliver. Move the finished outputs to the places where they are needed. • Return. Process outputs that have reached the end of their useful life (discussed in more detail in the next section). The second level in the SCOR model breaks the first level into greater detail and is referred to as the configuration level. For example, the level 1 general Make process can be further broken down into the more specific processes MTS, MTO, and ETO. Level 3 (Process Elements) focuses on the process activities needed to execute the level 2 processes, and level 4 addresses the topic of implementation.

6.7.1 Closed‐Loop Supply Chains and Reverse Logistics Guide and Van Wassenhove (2009, p. 10) define closed‐loop SCM as “the design, control, and operation of a system to maximize value creation over the entire life cycle of a product with dynamic recovery of value from different types and volumes of returns over time.” An important aspect of closed‐loop SCM is recovering value from returned products. The potential for recovering value from returns is enormous, as it is estimated that commercial returns exceed $100 billion annually (Stock et al. 2002). Large retailers like Home Depot can expect to have 10 percent or more of their sales returned, while Hewlett‐Packard estimates that it incurs costs equivalent to 2 percent of its outbound sales in returned merchandise. Product returns are categorized as commercial returns, end‐of‐use returns, end‐of‐life returns, and repair and warranty returns. Commercial returns are typically returns to the reseller and occur within 90 days of purchase. For example, many cell phone companies allow customers to return their cell phones for any reason within 30 days of purchase. End‐of‐use returns occur

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when a product is returned so that its functionality can be upgraded. For example, in the United States, it is estimated that 80 percent of cell phone users upgrade their perfectly usable cell phones annually. End‐of‐life returns occur when the product still functions but is technologically obsolete. Finally, between commercial returns and end‐of‐life returns, customers return products to be repaired. The type of product return has important implications for how the return is handled. For example, commercial returns have usually been only lightly used. Therefore, they typically require minor processing, such as cleaning and perhaps some minor repairs. End‐of‐use returns have been used more heavily, and there is likely to be more variability in the quality of these returns. Given this, these returns will typically require more extensive processing. The focus in end‐of‐life returns is on parts recovery and recycling, since these products are technologically obsolete. In summary, then, commercial returns are repaired, end‐of‐use returns are remanufactured, and end‐of‐life returns are recycled. In addition to providing significant environmental benefits, the goal of operating a closed‐ loop supply chain is to generate more value through the recovery activities than the cost of performing these activities. The steps involved in operating a closed‐loop supply chain include acquiring the right quantities of the used product with the right quality and at the right time; using reverse logistics or moving the product back upstream from the customer to the repair/remanufacturing operations; sorting, testing, and grading the returned products to determine their disposition; repairing/remanufacturing the returned products; and, finally, remarketing the refurbished products. Some products, such as consumer electronics and computers, have short life cycles and therefore lose a significant portion of their value per week. In these cases, a slow reverse supply chain can erode much if not all of the potential value that can be recovered.

E X PA N D Y O U R U N D E R S TA N D I N G 1. Why is supply chain management such a topic of interest lately? Why wasn’t it previously?

8. Contrast SCM systems with ERP systems. Which do you suspect are larger and more costly?

2. What appears to be the primary “secret” of successful supply chain management?

9. Do any of the five functions and four forms of inventories exist in service firms? If so, which ones, and why? If not, how are the functions served?

3. Given that the current conceptualization of the supply chain includes JIT and lean manufacturing, what other elements of SCM need to be changed to move toward the idea of a demand chain? 4. In what way can contract manufacturers consider themselves service providers? Hasn’t Nike been doing this for years? What’s the difference? 5. To date, it appears that purchasing has been one of the primary beneficiaries of supply chain management. Why do you think this is so? What do you expect will happen in the future? 6. The bullwhip effect is often blamed for the boom‐and‐bust cycles in our national economy. Which of the remedies for eliminating this effect in a supply chain might also benefit the national economy? 7. How does postponement differ from assemble‐to‐order?

10. Contrast the functions and forms of inventories. Does every form exist for each function and vice versa, or are some more common? 11. In many of today’s firms, the customer’s computer is tied to the supplier’s computer so that purchase orders go directly into the supplier’s production planning system. What are the implications of this close relationship? 12. Discuss the pros and cons of relying on outside expertise in the selection and implementation of an ERP system. 13. When might an organization not use all three stages of the location selection process described here? 14. Might the breakeven model be used for the national or site stage of location? Might the weighted scoring model be used in the national or community stage of location? What factors would be used in these models at other stages?

Apply Your Understanding

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A P P LY Y O U R U N D E R S T A N D I N G ■ PEAK NUTRITION, INC. Peak Nutrition, Inc. (PNI) offers a line of premium sports recovery drinks. Its drinks are made from all‐natural fruit juices that are supplemented with protein, creatine, vitamins, and minerals. Each flavor is offered in both a 12‐ and 20‐ounce bottle. Eighty percent of PNI’s sales are to two national health food chains, and the remaining 20 percent are to independent health food stores and online retailers. PNI has a single production and bottling line, which has sufficient capacity to meet its current demand. Setting up the production line to produce a particular flavor requires an entire 8‐hour shift. Most of the setup time is related to flushing out the equipment in order to not contaminate the new flavor to be produced with the flavor that was last produced. Given the long setup times, the production and bottling lines are dedicated to producing a single flavor for an entire week. The typical production schedule involves setting up the line on Monday, producing 12‐ounce bottles on Tuesday and Wednesday, and producing 20‐ounce bottles on Thursday and Friday. The plastic bottles and labels are purchased from outside suppliers. There is a one‐week lead time for both the bottles and labels. PNI maintains a four‐week inventory of plastic bottles and orders labels three weeks before they are needed. Changing over the bottling line from 12‐ounce to 20‐ounce bottles requires about an hour and a half, which also includes changing the labels. Since each flavor is produced every six weeks, PNI historically produced an eight‐week supply for each flavor to provide a safety net in the event demand exceeded its forecasts. Despite having an extra two weeks of inventory, PNI often experienced stockouts. Given the problem with stockouts, PNI recently acquired additional warehouse space and now plans to produce 10 weeks of demand during each production run. It is expected that

producing a 10‐week supply may result in the need for a small amount of overtime in some weeks. PNI has limited communication with its customers, primarily consisting of the purchase orders it receives from its customers and the invoices and products it sends to them. PNI’s goal is to meet all orders from its inventory. In this way, it is able to provide its customers with a one‐week lead time. When the inventory level is insufficient to meet the quantity ordered, lead times increase to an average of two to three weeks, depending on how soon the product is next scheduled for production. Once last year, PNI was stocked out of a flavor for almost four weeks. At the end of each quarter, PNI offers its customers discounts for orders above certain order quantity thresholds. The purpose of the discounts is to provide retailers with an incentive to put the sports drinks on sale and help boost quarterly sales. As a result of these incentives, PNI’s sales tend to be 5 to 10 times higher in the last two weeks of the quarter compared to other times. In anticipation of the increase in sales, PNI builds up its inventory. However, while on average it has plenty of inventory across all flavors, it often experiences mismatches in its available supply and demand for specific flavors. In other words, it often finds that it has too much inventory of some flavors and too little of other flavors. Questions

1. What concerns do you have about PNI’s supply chain management practices? 2. What would you recommend PNI do to address your concerns? 3. Do you have any concerns about the way PNI determines its level of safety stock? 4. Should PNI focus on enhancing the efficiency or responsiveness of its supply chain? Why?

■ STAFFORD CHEMICAL, INC. Stafford Chemical, Inc. is a privately held company that produces a range of specialty chemicals. Currently, its most important product line is paint pigments used by the automobile industry. Stafford Chemical was founded more than 60 years ago by Phillip Stafford in a small town north of Cincinnati, Ohio, and is currently run by Phillip’s grandson, George Stafford. Stafford

has more than 150 employees, and approximately three‐ quarters of them work on the shop floor. Stafford Chemical operates out of the same plant Phillip built when he founded the company; however, it has undergone several expansions over the years. Recently, a Japanese competitor of Stafford Chemical, Ozawa Industries, announced plans to expand its operations

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Supply Chain Management

to the United States. Ozawa, a subsidiary of a large Japanese industrial company, decided to locate a new facility in the United States to better serve some of its customers: Japanese automobile manufacturers who have built assembly plants in the United States. The governor of Ohio has been particularly aggressive in trying to persuade Ozawa Industries to locate in a new industrial park located about 30 miles from Stafford’s current plant. She has expressed a willingness to negotiate special tax rates, to subsidize workers’ training, and to expand the existing highway to meet Ozawa’s needs. In a recent newspaper article, she was quoted as saying: “Making the concessions I have proposed to get Ozawa to locate within our state is a good business decision and a good investment in our state. The plant will provide high‐ paying jobs for 400 of our citizens. Furthermore, over the long run, the income taxes that these 400 individuals will pay will more than offset the concessions I have proposed. Since several other states have indicated a willingness to make similar concessions, it is unlikely that Ozawa would choose our state without them.”

George Stafford was outraged after being shown the governor’s comments. “I can’t believe this. Stafford Chemical has operated in this state for over 60 years. I am the third generation of Staffords

to run this business. Many of our employees’ parents and grand‐parents worked here. We have taken pride in being an exemplary corporate citizen. And now our governor wants to help one of our major competitors drive us out of business. How are we supposed to compete with such a large industrial giant? We should be the ones who are getting the tax break and help with workers’ training. Doesn’t 60 years of paying taxes and employing workers count for something? Where is the governor’s loyalty? It seems to me that the state should be loyal to its long‐term citizens, the ones who care about the state and community they operate in—not some large industrial giant looking to save a buck.”

Questions

1. How valid is George Stafford’s argument? How valid is the governor’s argument? Is Stafford Chemical being punished because it was already located within the state? 2. How ethical is it for states and local governments to offer incentives to attract new businesses to their localities? Are federal laws needed to keep states from competing with one another? 3. Does the fact that Ozawa is a foreign company alter the ethical nature of the governor’s actions? What about Ozawa’s size? 4. What are George’s options?

■ DART’S PARTS, INC. Z. “Dart” Mitchell leaned forward in his chair to read the e‐mail that had just arrived from one of his major customers, Avery Machine Corp. It read as follows: To all our preferred suppliers— Due to our commitments to our primary customer, Globus Enterprises, we will in the future be doing all of our supply chain business by way of the Internet, e‐mail, and EDI. This includes order preparation, bidding, forecasting, production scheduling, delivery monitoring, cost control, accounts payable and receivable, credit and financing, market and advertising planning, human resource acquisition, engineering specifications, and so on. To maintain compatibility with our systems, you will have to invest in a specific set of EDI hardware and software, available from GoingBust.com on the Web. Although the hardware and software are expensive, we anticipate that the cost savings and increased business this

will provide over the coming years can more than offset the additional cost. Please let us know if we can continue to count on you as one of our preferred suppliers as we move our supply chain into the information age. J. R. Avery, Chairman Avery Machine Corp.

Dart’s Parts had been founded in 1974 when the country was coming out of the 1973–1974 recession and the need for machine part fabricators was great. Over the years, Dart had built up the business to where it now had a solid base of major customers and a comfortable backlog of orders. Dart had increased the capacity of the plant substantially over the years, moving from a small rented facility to its own 200,000‐square‐foot plant, with a separate 50,000‐ square‐foot warehouse located adjacent to the main plant. Although not a “first adopter” when it came to new technology, Dart’s embraced proven advanced technologies both on the plant floor, with innovations such as robots and

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Exercises

numerically controlled machine tools, and in the office, with computers, digital copiers, and other such office equipment. Dart Mitchell had been reading industry magazines about some of these new technologies and had to admit they sounded promising. However, he had read about some horror stories, too, when the much‐advertised features turned into a nightmare. In one case, a customer had forced its suppliers to obtain production schedules off its Web site. Initially responding to high growth in a new product line, the firm had put its component needs on its Web site, but when a major order was canceled, it was late in changing the Web production schedule. As a result, the suppliers were stuck with hundreds of unneeded components, and the company wouldn’t reimburse them. In another case, a manufacturer had made a bid for electronic parts on a Web auction and won. However, when it received the parts, they were too large to fit in the standard‐sized enclosure it was using, and they all had to be scrapped.

EXERCISES 6.1 The location subcommittee’s final report to the board has focused on three acceptable communities. Table 15b in the appendix to the report indicates that the cost of locating in communities 1, 2, and 3 is approximately €400,000, €500,000, and €600,000 per year (respectively), mortgaged over 30 years. Paragraph 2 on page 39 of the report indicates that the variable cost per unit of product will increase 15 percent in community 1 but decrease 15 percent in community 3, owing to differences in labor rates. As plant manager, you know that variable costs to date have averaged about €3.05 per unit, and sales for the next decade are expected to average 20 percent more than the last 10 years, during which annual sales varied between 40,000 and 80,000 units. Which location would you recommend? 6.2 Nina is trying to decide in which of four shopping centers to locate her new boutique. Some cater to a higher class of clientele than others, some are in an indoor mall, some have a much greater volume than others, and, of course, rent varies considerably. Because of the nature of her store, she has decided that the class of clientele is the most important consideration. Following this, however, she must pay attention to her expenses; and rent is a major item—probably 90 percent as important as clientele. An indoor, temperature‐controlled mall is a big help, however, for stores such as hers, where 70 percent of sales are from passersby slowly strolling and

Dart believed that this new technology was indeed the future of the industry, but he was concerned about getting in too early and being stuck with the wrong equipment. The new supply chain technology would undoubtedly open avenues to increased business, but it would also result in a number of costs. Of course, it would also save the company’s reputation with Avery, a major customer. However, obtaining the EDI system would be a major financial investment for the firm, particularly if Avery later dropped this approach and went to an all‐Internet ERP system like some customers had been talking about doing. At this point, Dart wasn’t sure what to do. Questions

1. 2. 3. 4.

Identify the trade‐offs facing Dart’s Parts. What are the pros and cons of each alternative? What additional information would be useful to have? What recommendations would you make to Dart Mitchell?

window‐shopping. Thus, she rates this as about 95 percent as important as rent. Last, a higher volume of shoppers means more potential sales; she thus rates this factor as 80 percent as important as rent. As an aid in visualizing her location alternatives, she has constructed the following table. “Good” is scored as 3, “fair” as 2, and “poor” as 1. Use a weighted score model to help Nina come to a decision. Location 1

2

3

4

Class of clientele

Fair

Good

Poor

Good

Rent

Good

Fair

Poor

Good

Indoor mall

Good

Poor

Good

Poor

Volume

Good

Fair

Good

Poor

6.3 A new product involves the following costs associated with three possible locations. If demand is forecast to be 3900 units a year, which location should be selected? Location A

B

C

Annual cost ($)

10,000

40,000

25,000

Unit variable cost ($)

10.00

2.50

6.30

6.4 Select any publically traded organization you are familiar with and calculate its CCC.

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6.5 Use a weighted score model to choose between three locations (A, B, C) for setting up a factory. The weights for each criterion are shown in the following table. A score of 1 represents unfavorable, 2 satisfactory, and 3 favorable. Location Category

Weight

A

B

C

Location A

B

Construction cost (amortized over 10 years)

$1,000,000

$1,800,000

$950,000

Material cost per unit

2.46

2.17

2.64

0.65

0.62

0.67

Labor costs

20

1

2

3

Labor productivity

20

2

3

1

Labor cost per unit

C

Labor supply

10

2

1

3

Overhead: fixed

100,000

150,000

125,000

Union relations

10

3

3

2

0.15

0.18

0.12

Material supply

10

2

1

1

Overhead: variable per unit

Transport costs

20

1

2

3

Infrastructure

10

2

2

2

6.6 A manufacturer is considering three possible locations for its new factory. The choice depends not only on the operating costs at each location but also on the cost of shipping the product to the three regions it serves. Given the operating and distribution costs in the following tables, which location would you recommend for a production volume of 80,000 units per year?

Total Distribution Costs Location To region

A

B

C

1

$10,000

$20,000

$26,000

2

17,000

10,000

15,000

3

12,000

18,000

10,000

Supplement A The Beer Game1

chapter

6

The Beer Game has become a staple of the operations management course in MBA programs across the country. In effect, the game simulates material and information flows in a simplified supply chain. As shown in Figure 6SA.1, the supply chain consists of four stages. Moving from the factory downstream, the supply chain consists of a factory, wholesaler, distributor, and retailer. Accordingly, each stage in the supply chain is required to manage its inventory levels given the receipt of orders from its downstream customer through the placement of orders with its upstream supplier. The only exceptions to this are that the retailer’s demand comes from the final consumer and the factory schedules production requests as opposed to placing an order from an upstream supplier. There is a two‐week delay between the retailer, wholesaler, and distributor. Thus, orders from the retailer to the wholesaler in a given week arrive two weeks after the wholesaler ships them. Likewise, orders from the wholesaler to the distributor in a particular week arrive two weeks after the distributor ships it. Production orders at the factory are available to ship three weeks after the production requests. Your objective in playing the game is to minimize the sum of your total weekly costs. Weekly costs consist of two components: an inventory cost and a backlog cost. More specifically, weekly inventory cost is calculated at the rate of $0.50/keg of beer in inventory at the end of the week, while backlog costs are calculated at the rate of $1.00/keg on backlog at the end of the week. Obviously, only one of these costs can be positive in any given week (although it is possible that they both could be zero in a particular week). Because a supply chain for the beer industry in reality would likely be characterized by multiple factories, dozens of distributors, hundreds of wholesalers, and tens of thousands of retailers, it is often the case that the only information shared between a supplier and its customer is order information. Therefore, in the game, the only communication you may have with your upstream supplier is the placement of your order. In terms of the initial conditions, as it turns out, the demand at the retailer stage has been quite stable at four kegs per week for the last several weeks. Therefore, every order placed throughout the entire supply chain has been for four kegs over this period. Furthermore, each stage has maintained an inventory level of 12 kegs or the equivalent of three weeks of demand. However, as the weather turns warmer in the near future, demand is expected to increase. Also, it is expected that there will be one or more promotions over the coming months. In playing the game, you will be assigned to one of the four stages in the supply chain. During each week of simulated time, you will be required to perform the following five tasks. It is important that these tasks be completed in the order listed below and that each stage in the supply chain complete the task simultaneously with the other stages. Note that only the final task requires you to make a decision. 1. Deliver your beer and advance shipments. Move the beer in the Shipping Delay box (on the right, adjacent to your Current Inventory box) into the Current Inventory box. Next, move the beer in the other Shipping Delay box to the right to the now empty Shipping Delay box. 1

Adapted from Sterman, J. “Instructions for Running the Beer Distribution Game.” Massachusetts Institute of Technology (October 1984); Hammond, J. H. “The Beer Game: Description of Exercise,” Harvard Business School, 9-964-104.

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196

Supplement A

Orders sold to customer Incoming order for retailer

Order placed by retailer

Incoming order for wholesaler

OC

OC

Incoming Order order for placed by wholesaler distributor OC

OC

Order placed by distributor

Incoming order for factory

Production request

OC

OC

OC

* ** * ******Raw ** ** materials * ** ** * ** **

OC

P.D. Retailer

Wholesaler

**** **** ****

**** **** ****

Current inventory

* * * *

* * * *

S.D.

S.D.

Current inventory

* * * *

S.D.

S.D.

* = 1 keg, OC = order card, S.D. = shipping delay, P.D. = production delay

FIGURE 6SA.1

The beer game board and initial conditions.

Factory

Distributor

* * * *

**** **** **** Current inventory

* * * *

* * * *

* * * *

S.D.

S.D.

**** **** **** Current inventory

* * * * P.D.

Supplement A

(Factories move the inventory from the Production Delay box directly to the right of the Current Inventory box into the Current Inventory box. Then move inventory from the top Production Delay box to the bottom Production Delay box.) 2. Pick up the incoming order from your downstream customer in your Incoming Order box at your top left (retailers read incoming order from the consumer). Fill as much of the order as you can from your current inventory by placing the appropriate quantity of kegs in the Shipping Delay box directly to the left of your Current Inventory box. Quantities ordered above your current inventory level become part of your current backlog. More specifically, the amount to ship this week is calculated as follows: Quantity to ship

incoming order this week previous week’s backlog

3. Calculate and record in Figure 6SA.2 your ending inventory or backlog position (as a negative number). Count the number of kegs remaining in your current inventory after the shipment for the week has been made. If you get into a backlog situation, the backlog must be accumulated from week to week, since quantities ordered but not shipped must be made up. The week’s ending backlog position is calculated as follows:

Week

Inventory

Order placed

Week

1

26

2

27

3

28

4

29

5

30

6

31

7

32

8

33

9

34

10

35

11

36

12

37

13

38

14

39

15

40

16

41

17

42

18

43

19

44

20

45

21

46

22

47

23

48

24

49

25

50

FIGURE 6SA.2

Data sheet.

Inventory

Order placed

197

198

Supplement A

Current week’s backlog previous week’s backlog incoming order shipments received this week 4. Advance your order cards. (Factories fill their production requests.) Advance the order from the Order Placed box to the Incoming Order box (or, for the factory, read the Production Request and fill the Production Delay box from the raw materials inventory). Make sure to keep the order cards facedown as you move them. 5. Decide how much to order, write it down on your order card (and in Figure 6SA.2), and place the card facedown in the Orders Placed box. Factories decide how much to schedule for production, write it down on your order, and place the card facedown in the Production Request box. 6. Repeat steps 1–5. Most likely, your instructor will have the class complete one or more practice runs or go through the first couple of weeks at a slow pace.

part

Managing and Improving the Process

III

In this final part of the book, we begin in Chapter 7 with the crucial role of monitoring and controlling the processes that we have so carefully planned and designed in the earlier chapters. Once again, just planning and designing the supply chain and other processes is no guarantee of success or especially continued success. They must be monitored for errors, inefficiencies, and improper execution on a constant basis, and then management must intercede to correct, as well as improve, them. One of the major ways of improving these processes is through Six Sigma projects, described in Chapter 8, which have their own detailed procedures that identify and rectify problems in organizational processes. Another major way of improving processes is through the technique of lean production, described in Chapter 9, which reduces waste in all forms within any type of process. The book then concludes with a variety of cases that focus on many of the concepts and techniques presented in the previous chapters.

Role of Operations and Supply Chains in The Organizations’ Competitiveness

PART I: Strategy and Execution

Chapter. 1: Operations and Supply Chain Strategy for Competitiveness

Chapter. 2: Executing Strategy: Project Management

PART II: Process and Supply Chain Design

PART III: Managing and Improving the Process

Chapter. 3: Process Planning

Chapter. 7: Monitoring and Controlling the Process

Chapter. 4: Capacity and Scheduling

Chapter. 8: Process Improvement: Six Sigma

Chapter. 5: Supply Chain Planning and Analytics

Chapter. 9: Process Improvement: Lean

Chapter. 6: Supply Chain Management

199

chapter

7

Monitoring and Controlling the Processes C HA P TE R IN P ERS PECTIVE Having completed the process and supply chain design steps of Part II, we now turn to the need to manage, control, and improve these processes. With the organization’s processes designed, they must now be implemented. The effective and efficient execution of processes is complicated by changes that occur both inside and outside the organization. Hence, every process must be monitored and controlled to be sure it continues to achieve its objectives. This chapter discusses the task of monitoring and control. It includes some discussion of the measures that will be monitored and ways to then exercise control to correct the process. We illustrate the control process with the example of controlling quality through the use of quality control charts. Other topics include wellpopularized subjects such as the balanced scorecard, strategy maps, ISO 9000 and ISO 14000, benchmarking, process capability, and service defections. After we complete our discussion of how to plan for process monitoring and control, the next two chapters will then delve into ways to improve these processes.

Introduction r

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203

204

Monitoring and Controlling the Processes

■ TABLE 7.1

Measures for Operational Effectiveness

Stage

Measures

Internally neutral

The objective is to minimize operations negative potential. Firefighting is common. Outside experts are called in for strategic decisions. Operations is primarily reactive.

Externally neutral

Industry practice is followed. The aim is to achieve competitive parity.

Internally supportive

Operations investments support the business strategy. An operations strategy is formulated and pursued.

Externally supportive

Operations is involved upfront in major strategic decisions. The aim is to achieve a competitive advantage through operations. The goal is to achieve competitive superiority.

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205

206

Monitoring and Controlling the Processes

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Improve store performance (ROI)

Financial perspective

Revenue growth strategy

Productivity improvement strategy

Increase sales/ft2

Increase inventory turns

Customer perspective

Internal business process perspective

FIGURE 7.1 Sample strategy map for a department store.

Learning and growth perspective

Improved selling skills

Friendly and courteous sales associates

Stronger relationships between customers and associates

Happier sales associates

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Provide training to sales associates

7.2 Process Monitoring

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Monitoring and Controlling the Processes

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JODMVTJPO
JO
UIF
'.&"
MJTU
PS
GPS
NPOJUPSJOH
JO
HFOFSBM
JT
CZ
FWBMVBUJOH
UIFJS
iQSPDFTT
DBQBCJMJUZ u
B
UPQJD
XF
FYQMBJO
JO
EFUBJM
JO
$IBQUFSŇ
XIFO
XF
UBML
BCPVU
QSPDFTT
JNQSPWFNFOU
*O
FTTFODF
IPXFWFS
JG
UIF
TQFDJGJ DBUJPOT
GPS
B
NBDIJOF
PS
QSPDFTT
BSF
SFMBUJWFMZ
UJHIU
DPNQBSFE
UP
UIF
OBUVSBM
WBSJBUJPO
JO
UIF


■ TABLE 7.2 FMEA for a New Fast-Food Concept Potential ways to fail

S

L

D

RPN

Inadequate training

8

4

5

160

Weak marketing

6

3

8

144

Poor location

7

5

3

105

Defective concept

9

3

3

81

Local restaurant regulation change

3

5

8

120

Competitors’ reactions (e.g., price, ads)

4

6

4

96

7.3 Process Control

NBDIJOF
XF
IBWF
UP
DBSFGVMMZ
NPOJUPS
UIF
NBDIJOFT
QSPDFTT
DBQBCJMJUZ
UP
TBUJTGZ
UIF
SFRVJSF NFOUT
PG
UIF
QSPEVDUJPO
TZTUFN
'PS
FYBNQMF
JO
PVS
GBTUGPPE
FYBNQMF
BCPWF
JG
UIF
DPODFQU
SFRVJSFE
B
EJGGJDVMU
BOE
UJNFDPOTVNJOH
TUFQ
JO
UIF
QSFQBSBUJPO
PG
B
QBSUJDVMBS
NFOV
JUFN
XF
NJHIU
GBJM
CFDBVTF
PVS
DVTUPNFST
HPU
UJSFE
PG
XBJUJOH
GPS
UIFJS
GPPE
)FODF
XF
XPVME
XBOU
UP
NPOJUPS
UIF
UJNF
UIJT
QSPDFTT
SFRVJSFE
WFSZ
DBSFGVMMZ
BOE
UBLF
DPOUSPMMJOH
TUFQT
JG
JU
TUBSUFE
UP
FYDFFE
UIF
SFRVJSFE
TQFDJGJDBUJPOT
PG
PVS
QSPEVDUJPO
TZTUFN

7.3 Process Control 1SPDFTT
DPOUSPM
JT
UIF
BDU
PG
SFEVDJOH
EJGGFSFODFT
CFUXFFO
QMBO
BOE
SFBMJUZ
GPS
FBDI
QSPDFTT
.POJUPSJOH
BOE
DPNQBSJOH
BDUJWJUJFT
XJUI
UIF
QMBO
BOE
UIFO
SFQPSUJOH
UIFTF
GJOEJOHT
JT
UP
OP
BWBJM
JG
BDUJPOT
BSF
OPU
UBLFO
XIFO
SFBMJUZ
EFWJBUFT
TJHOJGJDBOUMZ
GSPN
XIBU
XBT
QMBOOFE
*O
GBDU
UIF
TJNQMF
BDU
PG
OPUJOH
BOE
SFQPSUJOH
EJTDSFQBODJFT
NBZ
NPUJWBUF
UIF
BDUJPOT
SFRVJSFE
UP
DPSSFDU
UIF
EFWJBUJPOT
8IFO
JU
EPFT
OPU
IPXFWFS
BDUJWF
DPOUSPM
JT
OFFEFE
UP
CSJOH
QFSGPSNBODF
CBDL
JO
MJOF
XJUI
UIF
QMBO
$POUSPM
IBT
UIF
QSJNBSZ
QVSQPTF
PG
FOTVSJOH
UIBU
UIF
QSPDFTT
JT
JO
DPNQMJBODF
XJUI
JUT
PCKFDUJWFT
*O
MBSHF
QSPEVDUJPO
TZTUFNT
QBSUJDVMBSMZ
FBSMZ
DPOUSPM
JT
DSVDJBM
TJODF
UIF
MPOHFS
XF
XBJU
UIF
NPSF
EJGGJDVMU
JU
JT
UP
DPSSFDU
UIF
EFWJBUJPO $POUSPM
JT
POF
PG
UIF
NBOBHFST
NPTU
EJGGJDVMU
UBTLT
JOWBSJBCMZ
JOWPMWJOH
CPUI
NFDIBOJDBM
BOE
IVNBO
FMFNFOUT
*O
BEEJUJPO
DPOUSPM
DBO
CF
EJGGJDVMU
CFDBVTF
QSPCMFNT
BSF
SBSFMZ
DMFBSDVU
BOE
IFODF
UIF
OFFE
GPS
DIBOHF
BOE
SFEJSFDUJPO
NBZ
CF
GV[[Z
%FUFSNJOJOH
XIBU
UP
DPOUSPM
SBJTFT
GVSUIFS
EJGGJDVMUJFT‡EJE
TPNFPOF
UBLF
BO
JODPSSFDU
BDUJPO
PS
JT
UIF
TZTUFN
UP
CMBNF
PS
QFSIBQT
TJNQMZ
.PUIFS
/BUVSF "
HPPE
DPOUSPM
TZTUFN
TIPVME
BMTP
QPTTFTT
TPNF
TQFDJGJD
DIBSBDUFSJTUJDT r
5IF
TZTUFN
TIPVME
CF
GMFYJCMF
8IFSF
QPTTJCMF
JU
TIPVME
CF
BCMF
UP
SFBDU
UP
VOGPSFTFFO
DIBOHFT
JO
TZTUFN
QFSGPSNBODF r
5IF
TZTUFN
TIPVME
CF
DPTUFGGFDUJWF
BOE
UIF
DPTU
PG
DPOUSPM
TIPVME
OFWFS
FYDFFE
UIF
WBMVF
PG
DPOUSPM
'PS
FYBNQMF
CFBS
JO
NJOE
UIBU
DPOUSPM
JT
OPU
BMXBZT
MFTT
FYQFOTJWF
UIBO
TDSBQ r
5IF
TZTUFN
TIPVME
CF
BT
TJNQMF
BT
QPTTJCMF
UP
PQFSBUF r
5IF
TZTUFN
NVTU
PQFSBUF
JO
B
UJNFMZ
NBOOFS
1SPCMFNT
NVTU
CF
SFQPSUFE
XIJMF
UIFSF
JT
TUJMM
UJNF
UP
EP
TPNFUIJOH
BCPVU
UIFN r
4FOTPST
BOE
NPOJUPST
TIPVME
CF
TVGGJDJFOUMZ
QSFDJTF
UP
DPOUSPM
UIF
QSPDFTT
XJUIJO
MJNJUT
UIBU
BSF
USVMZ
GVODUJPOBM
GPS
UIF
PSHBOJ[BUJPO r
5IF
DPOUSPM
TZTUFN
TIPVME
CF
FBTZ
UP
NBJOUBJO r
5IF
TZTUFN
TIPVME
TJHOBM
UIF
NBOBHFS
JG
JU
HPFT
PVU
PG
PSEFS r
5IF
TZTUFN
TIPVME
CF
DBQBCMF
PG
CFJOH
FYUFOEFE
PS
PUIFSXJTF
BMUFSFE r
$POUSPM
TZTUFNT
TIPVME
CF
GVMMZ
EPDVNFOUFE
XIFO
JOTUBMMFE
BOE
UIF
EPDVNFOUBUJPO
TIPVME
JODMVEF
B
DPNQMFUF
USBJOJOH
QSPHSBN
JO
TZTUFN
PQFSBUJPO r
5IF
TZTUFN
NVTU
PQFSBUF
JO
BO
FUIJDBM
NBOOFS /FYU
XF
UVSO
UP
B
DPNNPO
UPPM
GPS
DPOUSPMMJOH
QSPDFTTFT
UIF
DPOUSPM
DIBSU
BOE
JMMVTUSBUF
JU
XJUI
UIF
DBTF
PG
DPOUSPMMJOH
RVBMJUZ
)PXFWFS
JU
DBO
BMTP
CF
VTFE
GPS
DPOUSPMMJOH
NBOZ
PUIFS
NFBT VSFT
TVDI
BT
TDSBQ
UVSOPWFS
SFWFOVFT
QSPHSFTT
TFF
FH
.FSFEJUI
FU
BM

QQ
m


DPTUT
BOE
TP
PO

209

210

Monitoring and Controlling the Processes

7.3.1 Statistical Process Control 0OF
PG
NBOBHFNFOUT
NPTU
EJGGJDVMU
EFDJTJPOT
JO
RVBMJUZ
DPOUSPM
DFOUFST
PO
XIFUIFS
BO
BDUJWJUZ
OFFET
BEKVTUNFOU
5IJT
SFRVJSFT
TPNF
GPSN
PG
JOTQFDUJPO
BOE
JO
RVBMJUZ
DPOUSPM
UIFSF
BSF
UXP
NBKPS
UZQFT
PG
JOTQFDUJPO
FJUIFS

measuring
TPNFUIJOH
PS

TJNQMZ
EFUFSNJOJOH
UIF

existence
PG
B
characteristic 1. 5ZQF

JOTQFDUJPO
CZ
NFBTVSJOH
DBMMFE
inspection for variables
VTVBMMZ
SFMBUFT
UP
XFJHIU
MFOHUI
UFNQFSBUVSF
EJBNFUFS
PS
TPNF
PUIFS
WBSJBCMF
UIBU
DBO
CF
scaled 2. 5ZQF

JOTQFDUJPO
CZ
JEFOUJGZJOH
B
characteristic
DBMMFE
inspection of attributes
DBO
BMTP
FYBNJOF
TDBMFE
WBSJBCMFT
CVU
VTVBMMZ
DPOTJEFST
dichotomous
WBSJBCMFT
TVDI
BT
SJHIUmXSPOH
BDDFQUBCMFmEFGFDUJWF
CMBDLmXIJUF
PO
UJNFmMBUF
BOE
PUIFS
TVDI
DIBSBDUFSJTUJDT
UIBU
FJUIFS
DBOOPU
CF
NFBTVSFE
PS
EP
OPU
need
UP
CF
NFBTVSFE
XJUI
BOZ
NPSF
QSFDJTJPO
UIBO
ZFTmOP 8BMUFS
"
4IFXIBSU
EFWFMPQFE
UIF
DPODFQU
PG
TUBUJTUJDBM
control charts
JO
UIF
T
UP
EJT UJOHVJTI
CFUXFFO
chance variation
JO
B
TZTUFN
UIBU
JT
TUJMM
JO
DPOUSPM
BOE
WBSJBUJPO
DBVTFE
CZ
UIF
TZTUFNT
CFJOH
PVU
PG
DPOUSPM
XIJDI
IF
DBMMFE
assignable variation
4IPVME
B
QSPDFTT
HP
PVU
PG
DPOUSPM
UIBU
NVTU
GJSTU
CF
EFUFDUFE
UIFO
UIF
BTTJHOBCMF
DBVTF
NVTU
CF
JEFOUJGJFE
BOE
GJOBMMZ
UIF
BQQSPQSJBUF
DPOUSPM
BDUJPO
PS
BEKVTUNFOU
NVTU
CF
QFSGPSNFE
5IF
DPOUSPM
DIBSU
JT
VTFE
UP
EFUFDU
XIFO
B
QSPDFTT
IBT
HPOF
PVU
PG
DPOUSPM "
SFQFUJUJWF
PQFSBUJPO
XJMM
TFMEPN
QSPEVDF
JUFNT
PG
exactly
UIF
TBNF
RVBMJUZ
TJ[F
BOE
TP
PO
SBUIFS
XJUI
FBDI
SFQFUJUJPO
UIF
PQFSBUJPO
XJMM
HFOFSBUF
WBSJBUJPO
BSPVOE
TPNF
BWFSBHF
5IJT
WBSJBUJPO
JT
QBSUJDVMBSMZ
DIBSBDUFSJTUJD
PG
B
TBNQMJOH
QSPDFTT
XIFSF
SBOEPN
TBNQMFT
BSF
UBLFO
BOE
B
TBNQMF
NFBO
JT
DBMDVMBUFE
#FDBVTF
UIJT
WBSJBUJPO
VTVBMMZ
IBT
B
MBSHF
OVNCFS
PG
TNBMM
VODPO USPMMBCMF
TPVSDFT
UIF
QBUUFSO
PG
WBSJBCJMJUZ
JT
PGUFO
XFMM
EFTDSJCFE
CZ
B
TUBOEBSE
GSFRVFODZ
EJTUSJ CVUJPO
TVDI
BT
UIF
normal distribution
TIPXO
QMPUUFE
BHBJOTU
UIF
WFSUJDBM
TDBMF
JO
'JHVSFŇ 5IF
TVDDFTTJPO
PG
NFBTVSFT
UIBU
SFTVMUT
GSPN
UIF
DPOUJOVFE
SFQFUJUJPO
PG
TPNF
QSPDFTT
DBO
UIVT
CF
UIPVHIU
PG
BT
B
population
PG
OVNCFST
OPSNBMMZ
EJTUSJCVUFE
XJUI
TPNF
NFBO
BOE
TUBOE BSE
EFWJBUJPO
"T
MPOH
BT
UIF
EJTUSJCVUJPO
SFNBJOT
UIF
TBNF
UIF
QSPDFTT
JT
DPOTJEFSFE
UP
CF
JO
DPOUSPM
BOE
TJNQMZ
FYIJCJUJOH
DIBODF
WBSJBUJPO
0OF
XBZ
UP
EFUFSNJOF
JG
UIF
EJTUSJCVUJPO
JT
TUBZ JOH
UIF
TBNF
JT
UP
LFFQ
DIFDLJOH
UIF
NFBO
PG
UIF
EJTUSJCVUJPO‡JG
JU
DIBOHFT
UP
TPNF
PUIFS
WBMVF
UIF
PQFSBUJPO
NBZ
CF
DPOTJEFSFE
PVU
PG
DPOUSPM
5IF
QSPCMFN
IPXFWFS
JT
UIBU
JU
JT
UPP
FYQFOTJWF
GPS
PSHBOJ[BUJPOT
UP
LFFQ
DPOTUBOUMZ
DIFDLJOH
PQFSBUJPOT
5IFSFGPSF
samples
PG
UIF
PVUQVU
BSF
DIFDLFE
JOTUFBE *O
TBNQMJOH
UIF
PVUQVU
GPS
JOTQFDUJPO
JU
JT
JNQFSBUJWF
UIBU
UIF
TBNQMF
GVMMZ
represent
UIF
QPQVMBUJPO
CFJOH
DIFDLFE
UIFSFGPSF
B
rational subgroup
PG
EBUB
TIPVME
CF
VTFE
#VU
XIFO
99.74%

0.13%

Sample mean value

UCL

FIGURE 7.2 Control chart with the limits set at three standard deviations.

Mean

LCL 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16

Sample number

7.3 Process Control

DIFDLT
BSF
NBEF
POMZ
PG
TBNQMF
BWFSBHFT
SBUIFS
UIBO

QFSDFOU
PG
UIF
PVUQVU
UIFSF
JT
BMXBZT
B
DIBODF
PG
TFMFDUJOH
B
TBNQMF
XJUI
BO
VOVTVBMMZ
IJHI
PS
MPX
NFBO
5IF
QSPCMFN
GBDJOH
UIF
PQFSB UJPOT
NBOBHFS
JT
UIVT
UP
EFDJEF
XIBU
JT
too high
PS
too low
BOE
UIFSFGPSF
TIPVME
CF
DPOTJEFSFE
PVU
PG
DPOUSPM
"MTP
UIF
NBOBHFS
NVTU
DPOTJEFS
UIF
GBDU
UIBU
UIF
NPSF
TBNQMFT
FWFOUVBMMZ
UBLFO
UIF
IJHIFS
UIF
MJLFMJIPPE
PG
BDDJEFOUBMMZ
TFMFDUJOH
B
TBNQMF
XJUI
UPP
IJHI
PS
UPP
MPX
B
NFBO
when the process is actually still under control 5IF
WBMVFT
PG
UIF
TBNQMF
NFBO
UIBU
BSF
UPP
IJHI
PS
MPX
BSF
DBMMFE
UIF
upper control limit
6$-
BOE
UIF
lower control limit
-$-


SFTQFDUJWFMZ
5IFTF
MJNJUT
HFOFSBMMZ
BMMPX
BO
BQQSPBDI
UP
DPOUSPM
UIBU
JT
LOPXO
BT
management by exception
CFDBVTF
UIFPSFUJDBMMZ
UIF
NBOBHFS
OFFE
UBLF
OP
BDUJPO
VOMFTT
B
sample mean
JT
PVUTJEF
UIF
DPOUSPM
MJNJUT
5IF
DPOUSPM
MJNJUT
NPTU
DPN NPOMZ
VTFE
JO
PSHBOJ[BUJPOT
BSF
QMVT
BOE
NJOVT
three standard deviations
8F
LOPX
GSPN
TUBUJT UJDT
UIBU
UIF
DIBODF
UIBU
B
TBNQMF
NFBO
XJMM
FYDFFE
UISFF
TUBOEBSE
EFWJBUJPOT
JO
FJUIFS
EJSFDUJPO
EVF
TJNQMZ
UP
DIBODF
WBSJBUJPO
JT
MFTT
UIBO

QFSDFOU
JF
UISFF
UJNFT
QFS

TBNQMFT 
5IVT
UIF
DIBODF
UIBU
B
TBNQMF
XJMM
GBMM
BCPWF
UIF
6$-
PS
CFMPX
UIF
-$-
CFDBVTF
PG
OBUVSBM
SBOEPN
DBVTFT
JT
TP
TNBMM
UIBU
UIJT
PDDVSSFODF
JT
TUSPOH
FWJEFODF
PG
BTTJHOBCMF
WBSJBUJPO
'JHVSFŇ
JMMVT USBUFT
UIF
VTF
PG
DPOUSPM
MJNJUT
TFU
BU

TUBOEBSE
EFWJBUJPOT
0G
DPVSTF
VTJOH
UIF
IJHIFS
MJNJU
WBMVFT
UISFF
PS
NPSF
JODSFBTFT
UIF
SJTL
PG
OPU
EFUFDUJOH
B
QSPDFTT
UIBU
JT
POMZ
TMJHIUMZ
PVU
PG
DPOUSPM "O
FWFO
CFUUFS
BQQSPBDI
JT
UP
VTF
DPOUSPM
DIBSUT
UP
QSFEJDU
XIFO
BO
PVUPGDPOUSPM
TJUVBUJPO
JT
MJLFMZ
UP
PDDVS
SBUIFS
UIBO
XBJUJOH
GPS
B
QSPDFTT
UP
BDUVBMMZ
HP
PVU
PG
DPOUSPM
*G
POMZ
DIBODF
WBSJBUJPO
JT
QSFTFOU
JO
UIF
QSPDFTT
UIF
QPJOUT
QMPUUFE
PO
B
DPOUSPM
DIBSU
XJMM
OPU
UZQJDBMMZ
FYIJCJU
BOZ
QBUUFSO
0O
UIF
PUIFS
IBOE
JG
UIF
QPJOUT
FYIJCJU
TPNF
TZTUFNBUJD
QBUUFSO
UIJT
JT
BO
JOEJDBUJPO
UIBU
BTTJHOBCMF
WBSJBUJPO
NBZ
CF
QSFTFOU
BOE
DPSSFDUJWF
BDUJPO
TIPVME
CF
UBLFO 5IF
DPOUSPM
DIBSU
UIPVHI
PSJHJOBMMZ
EFWFMPQFE
GPS
RVBMJUZ
DPOUSPM
JO
NBOVGBDUVSJOH
JT
BQQMJDBCMF
UP
BMM
TPSUT
PG
SFQFUJUJWF
BDUJWJUJFT
JO
BOZ
LJOE
PG
PSHBOJ[BUJPO
5IVT
JU
DBO
CF
VTFE
GPS
TFSWJDFT
BT
XFMM
BT
QSPEVDUT
GPS
QFPQMF
PS
NBDIJOFT
GPS
DPTU
PS
RVBMJUZ
BOE
TP
PO
'PS
FYBNQMF
UIF
CFHJOOJOH
PG
UIF
DIBQUFS
NFOUJPOFE
UIF
6414T
VTF
PG
DPOUSPM
DIBSUT
UP
NPOJUPS
POUJNF
EFMJWFSZ
QFSGPSNBODF 'PS
UIF
DPOUSPM
PG
variables‡UIBU
JT
measured characteristics‡UXP
DPOUSPM
DIBSUT
BSF
SFRVJSFE 1. $IBSU
PG
UIF
sample means
X  2. $IBSU
PG
UIF
range
R
PG
WBMVFT
JO
FBDI
TBNQMF
MBSHFTU
WBMVF
JO
TBNQMF
NJOVT
TNBMMFTU
WBMVF
JO
TBNQMF  *U
JT
JNQPSUBOU
UP
VTF
UXP
DPOUSPM
DIBSUT
GPS
WBSJBCMFT
CFDBVTF
PG
UIF
XBZ
JO
XIJDI
DPOUSPM
PG
QSPDFTT
RVBMJUZ
DBO
CF
MPTU
5P
JMMVTUSBUF
UIJT
QIFOPNFOPO
XF
XJMM
VTF
UIF
EBUB
TVQQMJFE
JO
5BCMFŇ
XIJDI
DPSSFTQPOE
UP
UIF
NJOVUFT
OFFEFE
UP
QSPDFTT
B
GPSN
BU
BO
JOTVSBODF
DPNQBOZ
5ISFF
TBNQMFT
BSF
UBLFO
FBDI
EBZ
POF
JO
UIF
NPSOJOH
POF
OFBS
OPPO
BOE
POF
KVTU
CFGPSF
DMPT JOH
&BDI
TBNQMF
DPOTJTUT
PG
UISFF
GPSNT
SBOEPNMZ
TFMFDUFE
GSPN
UIF
TUBGG
XPSLJOH
PO
UIFTF
GPSNT
JO
UIF
QSPDFTTJOH
EFQBSUNFOU 3FGFSSJOH
UP
TDFOBSJP

XF
DBO
FBTJMZ
EFUFSNJOF
UIBU
UIF
BWFSBHF
PG
TBNQMF

JT

NJOVUFT
BOE
UIF
SBOHF
JT

NJOVUFT
X  R  
4JNJMBSMZ
X   R 
X
=

BOE
R 
*G
XF
DPOTJEFS
POMZ
UIF
SBOHFT
PG
UIF
TBNQMFT
OP
QSPCMFN
JT
JOEJDBUFE
CFDBVTF
BMM
UISFF
TBNQMFT
IBWF
■ TABLE 7.3 Sample Data of Process Times (minutes) Sample

Scenario 1

Scenario 2

1

4, 5, 6

5, 4, 6

2

6, 7, 8

3, 5, 7

3

7, 9, 8

8, 2, 5

211

212

Monitoring and Controlling the Processes

B
SBOHF
PG

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X
=

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X  
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6$- X

X

A R


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X

A R

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MJNJUT
GPS
UIF
SBOHF
DIBSU
BSF
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GSPN 6$- R D R
-$- R D R

FIGURE 7.3 Patterns of change in process distributions.

April 3 April 4 April 5

Frequency

Frequency

5IF
GBDUPST
A D
BOE
D
WBSZ
XJUI
UIF
TBNQMF
TJ[F
BOE
BSF
UBCVMBUFE
JO
5BCMFŇ

October 30 November 30 December 30

Process variable, X

Process variable, X

(a)

(b)

7.3 Process Control

■ TABLE 7.4 Control Chart Factors to Determine Control Limits Sample size, n 2

A

D

D

1.880

0

3.267

3

1.023

0

2.575

4

0.729

0

2.282

5

0.577

0

2.115

6

0.483

0

2.004

7

0.419

0.076

1.924

8

0.373

0.136

1.864

9

0.337

0.184

1.816

10

0.308

0.223

1.777

12

0.266

0.284

1.716

14

0.235

0.329

1.671

16

0.212

0.364

1.636

18

0.194

0.392

1.608

20

0.180

0.414

1.586

22

0.167

0.434

1.566

24

0.157

0.452

1.548

7.3.2 Constructing Control Charts 5IF
CFTU
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n 
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X




R

R
N

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213

214

Monitoring and Controlling the Processes

■ TABLE 7.5 Mean and Range of Ages of Mortgage Applications A 1

B

C

Sample

Sample

2

Date

mean

range

3

June 1

10

18

4

June 2

13

13

5

June 3

11

15

6

June 4

14

14

7

June 5

9

14

8

June 6

11

10

9

June 7

8

15

10

June 8

12

17

11

June 9

13

9

12

June 10

10

16

13

June 11

13

12

14

June 12

12

14

15

June 13

8

13

16

June 14

11

15

17

June 15

11

11

18

June 16

9

14

19

June 17

10

13

20

June 18

9

19

21

June 19

12

14

22

June 20

14

14

23

Average

11

14

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7.3 Process Control

Mean mortgage application age, X (days)

22

UCL

20 18 Sample means, X

16 14 12

X 10 8

Grand mean

6 4 2 0.8

LCL 1

5

10

15

20

Range in mortgage application ages, R (days)

Day of June

32 30 28 26

FIGURE 7.4 Mean mortgage application age.

UCL

24 22 20

Sample ranges, R Average range

18 16 14 12 10

R

8 6 4 2 0

1

5

10

15

20

LCL

Day of June

$POUSPM
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fraction-defective p-chart
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number-of-defects c-chart
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p
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PG
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FIGURE 7.5 Range in mortgage application age.

215

216

Monitoring and Controlling the Processes

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c

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7.4 Controlling Service Quality 'PS
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Harvard Business Review
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217

218

Monitoring and Controlling the Processes


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Apply Your Understanding

Year

Number of new subscribers

Number of renewals

Total subscriber revenues

20X1

531

0

20X2

163

482

Advertiser revenues

Production cost

Advertising cost

10,620

0

12,444

3109

13,595

2124

12,802

2817

20X3

210

571

17,783

3509

14,311

3055

20X4

228

706

21,227

4788

17,975

2478

219

Questions



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Investors Friend’s

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Questions



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221

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DPNNFOUFE I received Nancy’s memo yesterday and, frankly, the problem with the PFS 1000 does not surprise me. One of the problems we’ve had in final assembly is with the casing. Basically, the case is composed of a top and a bottom. The problem we are having is that these pieces rarely fit together, so we typically have to force them together. I’m sure this is adding a lot of extra stress on the cases. I haven’t seen a breakdown on what the problems with quality are, but it wouldn’t surprise me if one of the problems was cracked cases or cases that are coming apart. I should also mention that we never had this problem with our old supplier. However, when purchasing

determined that we could save over $A1 per unit, we switched to a new supplier for the cases.


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SFTQPOEFE We are having an extremely difficult time making the printed circuit boards for the PFS 1000. The designers placed the components closer together than this generation of equipment was designed to handle. As a result, the leads of the components are constantly being bent. I doubt that more than 25 percent of the boards have all their components installed properly. As a result, we are spending a great deal of time inspecting all the boards and reworking the ones with problems. Also, because of the huge backlog for these boards and the large number that must be reworked, we have been trying to operate the equipment 20 percent faster than its normal operating rate. This has caused the machine to break down much more frequently. I estimate that on a given 8-hour shift, the machine is down 1 to 2 hours. In terms of your job—to determine the cause of the problems with quality—faulty circuit boards are very likely a key contributor. We are doing our best to find and correct all the defects, but inspecting and reworking the boards is a very tedious process, and the employees are putting in a lot of extra hours. In addition, we are under enormous pressure to get the boards to final assembly. My biggest regret is that I didn’t have more input when they were building the prototypes of the PFS 1000. The prototypes are all built by highly trained technicians using primarily a manual process. Unfortunately, the prototypes are built only to give the engineers feedback on their designs. Had they shown some people in production the prototypes, we could have made suggestions on changes that would have made the design easier to produce.

222

Monitoring and Controlling the Processes


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SFTQPOEFE The fact of the matter is that switching suppliers for the cases saved $A1.04 per unit. That may not sound like a lot, but multiply that by the 125,000 units we are expecting to sell this year, and it turns out to be pretty significant. Those guys in production think the world revolves around them. I am, however, sympathetic to their problems, and I plan on discussing the problem with the supplier the next time we meet. That should be sometime next month.

So you are here to investigate our little quality snafu. The pressure that we are under here in engineering is the need to shrink things down. Two years ago fax machines, printers, scanners, and copiers were all separate pieces of equipment. Now, with the introduction of the PFS 1000, all this functionality is included in one piece of equipment not much larger than the original printer. That means design tolerances are going to be a lot tighter and the product is going to be more difficult to manufacture. But the fact of the matter is that manufacturing is going to have to get its act together if we are going to survive. The engineering department did its job. We designed a state-of-the-art piece of office equipment, and the prototypes we built proved that the design works. It’s now up to the manufacturing guys to figure out how to produce it. We have done all that we can and should be expected to do.


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DPNNFOUFE My biggest challenge as director of quality assurance is trying to convince the rest of the organization of the importance quality plays. Sure, everyone gives lip service to the importance of quality, but as the end of the month approaches, getting the product out the door is always the highest priority. Also, while I am officially held accountable for quality, I have no formal authority over the production workers. The quality inspectors that report to me do little more than inspect product and tag it if it doesn’t meet the specifications so that it is sent to the rework area. In all honesty, I am quite optimistic about Nancy’s current concern for quality and very much welcome the opportunity to work closely with you to improve Koala Tech’s quality initiatives.


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Process Improvement: Six Sigma C H A P T ER IN P E R SP E C TIV E While controlling the processes as described in Chapter  7, it is often determined that there are opportunities to improve the process. Thus, the focus of this chapter is on the redesign and continuous improvement of business processes in support of the overall business strategy. To put our discussion in perspective, we begin with an overview of three alternative approaches for process improvement. We then turn our attention to the first process improvement strategy, Business Process Design. This is then followed by a detailed discussion of the second process improvement strategy, Six Sigma. Next, each phase in Six Sigma’s DMAIC approach is discussed in more detail, including illustrating the use of representative Six Sigma tools in each phase. The chapter concludes with a discussion of Six Sigma in practice. Here, we discuss the various roles associated with Six Sigma, becoming certified, and the need for organizations to customize their approach to Six Sigma training and implementation. In the next chapter, we then continue our discussion of process improvement strategies and address the third process improvement strategy, namely, lean. The trend toward integrating Six Sigma and lean will also be discussed in the next chapter.

chapter

8

Introduction r

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"
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■ TABLE 8.1 Examples of Six Sigma Training and Benefits Company

Time period

Number of master black belts trained

Air Canada

2002–2005

11

American Express

Number of black belts trained

Number of green belts trained

51

1200

2002

Monetary benefits from Six Sigma ($M) $450 $200

American Standard

2000–2004

44

673

Cummins

2000–2005

65

500

4302

$170

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2001–2005

20

406

874

Sun Microsystems

2000–2005

6

122

207

$1170

Tyco International

2002–2005

263

870

$800

$1000

227

228

Process Improvement: Six Sigma

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Is the process fundamentally flawed or being designed? Yes

FIGURE 8.1 Alternative process design and improvement strategies.

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8.2 Business Process Design (Reengineering)

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FIGURE 8.2 Processing credit requests at IBM credit.

Order logged

Credit department

Business practices department

Pricer

Administrator

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231

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8.3 Six Sigma and the DMAIC Improvement Process

233

Define:
Goals for process improvement
Customer requirements
Project scope
The problem/opportunity

Measure:
Identify appropriate performance measures
Collect data
Evaluate current process performance

Analyze: Develop and test theories related to root causes of problems
Identify cause-and-effect relationships


Improve:
Develop, evaluate, and implement solutions to reduce gap between desired process performance and current performance

Control:
Monitor process to sustain improved performance
Ensure that problems do not resurface

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FIGURE 8.3 The six sigma DMAIC approach for process improvement.

234

Process Improvement: Six Sigma

■ TABLE 8.2 Common Tools and Methodologies in the Six Sigma Toolkit Six Sigma tool/methodology

DMAIC phase(s) most commonly used in

Affinity diagram

D, A

Benchmarking

D, M

Brainstorming

A, I

Business case

D

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M, A

Control charts

M, A, I, C

Critical to quality tree

D

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M, A, I, C

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M

Design for Six Sigma (DFSS)

An entire collection of tools/methodologies that can be used across all phases

Design of experiments (DOE)

A, I

Defects per million opportunities (DPMO)

M

Failure modes and effects analysis (FMEA)

M, I, C

Gantt chart

Tool used to manage entire DMAIC project

Kano model

D, M

Lean tools

An entire collection of tools/methodologies that can be used across all phases

Measurement systems analysis (gage R&R)

M

Nominal group technique

D, M

Pareto analysis

D, M, A, I

Process capability

M, A, I

Process maps

D, M, A, I, C

Process sigma

M, I

Project charter

D

Quality function deployment (QFD)

D, M

Regression

A

Rolled throughput yield (RTY)

D, M, A

Simulation

A, I

SIPOC

D

Stakeholder analysis

D, I

Theory of constraints (TOC)

One of the lean tools

Voice of the customer (VOC)

D

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235

236

Process Improvement: Six Sigma

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Output planning matrix

Process requirements

Output specification matrix

Process activities Process requirements

Component characteristics

Voice of customer

FIGURE 8.4 Quality function deployment process.

Component characteristics Technical requirements

Technical requirements

Process planning matrix

Process deployment matrix

8.4 The Define Phase

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237

238

Process Improvement: Six Sigma

Strong positive Positive Negative Strong negative

Food correct temperature

Average meal price < $4

Correct order

Food delivered in