Operations Management & Performance Modeling
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Operations Management & Performance Modeling. 1 Operations Strategy 2 Process Analysis 3 Lean Operations 4 Supply Chain Management Class 5a: Inventories & Economies of Scale Class 5b: Dealing with Uncertainty & role of Centralization Class 6a: Supply Chain Design

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Operations Management & Performance Modeling

1 OperationsStrategy

2 Process Analysis

3 Lean Operations

4 Supply Chain Management

  • Class 5a: Inventories & Economies of Scale

  • Class 5b: Dealing with Uncertainty & role of Centralization

  • Class 6a: Supply Chain Design

    • Multi-product Pooling: Postponement & Commonalities

      • Benetton

    • Accurate Response

  • 5 Capacity Management in Services

    6 Total Quality Management

    7 Business Process Reengineering

  • OM&PM/Class 6a


    Postponement commonality hp laserjet l.jpg

    Generic Power

    Production

    Unique Power

    Production

    Transportation

    Europe

    Process I:

    Unique

    Power Supply

    N. America

    Europe

    Process II:

    Universal

    Power Supply

    N. America

    Make-to-Stock Push-Pull Boundary Make-to-Order

    Postponement & Commonality: HP Laserjet

    OM&PM/Class 6a


    Hp laserjet european dc safety stocks 2 month lead time l.jpg
    HP LaserJet: European DC Safety Stocks(2 month Lead time)

    OM&PM/Class 6a


    Hp laserjet the effect of aggregation l.jpg
    HP LaserJet: The Effect of Aggregation

    • Total European safety stock with 2 month lead time = 26,409 units.

    • Total European safety stock with 2 month lead time on aggregation = 17,661 units.

    • Reduction = 8,749 units (33%).

    OM&PM/Class 6a


    Slide5 l.jpg

    United Colors

    of Benetton

    Production Process

    OM&PM/Class 6a


    Benetton extra cost of postponement l.jpg
    BenettonExtra Cost of Postponement

    • factory shipments woolen items

      • $311M x 60% = $186.6M

    • Labor and O/H costs woolen items

      • 6.6% + 21.8% (assuming half of O/H from Exh. 1) = 28.4%

      • $186.6M x 28.4% = $53.0M

    • If 10% of items are dyed to order at 10% extra cost

      • $53.0M x 10% x 10% = $0.53M

    OM&PM/Class 6a


    Benetton inventory benefits of its strategy l.jpg
    BenettonInventory Benefits of its Strategy

    • Inv. Turns = Avg. Throughput (COGS)/Avg. Inventory

    • Inventory Reduction = ($67.9-$38.875)M = $29.025M

    • Savings in inventory carrying costs (@25%) = $7.256M

    OM&PM/Class 6a


    Benetton profitability of agents fy 81 l.jpg
    BenettonProfitability of Agents (FY 81)

    • Commissions (4% on shipments)

      • $311M * 4% / 70 agents = $178K / agent

    • Earnings on Shop Sales (10% ownership)

      • Sales = $311M * 180% (markup) * 37/44 (realized markup) = $471M

      • NIBT = $471M*19% = $89M

      • 10% ownership = $8.9M/70 agents = $128K / agent

    • Total = $306K / agent

    OM&PM/Class 6a


    Benetton profitability of retailers franchisees fy 81 l.jpg
    BenettonProfitability of Retailers/Franchisees (FY 81)

    • Store Sales = $305K

    • NIBT = 19% * $305K = $58K

    • Less agent’s share ($5.8K) = $52K

    OM&PM/Class 6a


    Postponement and re assortment the advantage to forecasting l.jpg

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    Postponement and Re-assortment: The Advantage to Forecasting

    Actual total sales

    Initial Forecast Updated Forecast after observing 20% of sales after 80%

    Each data point represents the forecast and the actual season sales for a particular item (at the style-color level).

    OM&PM/Class 6a


    Take away s benetton is an example of how to manage an entire supply chain and l.jpg
    Take-Away’s: Benetton is an example of how to manage an entire supply chain and

    • make it profitable for all entities in the chain (suppliers, Benetton, agents, retailers)

    • by tailoring its operational response very carefully:

      • Step 1. Reduce S, L, variability:

        • the basics: implement everywhere in supply chain: highest pay-back

      • Step 2. Centralization

        • intermediate: trick is in the implementation: medium pay-back

      • Step 3. Partial postponement flexibility

        • last step: need this on only a small set of products & processes

    • and meshing it with financial and marketing response.

    OM&PM/Class 6a


    Accurate response to demand uncertainty when you can order only once l l bean l.jpg
    Accurate Response to Demand Uncertainty when you can order only once: L.L. Bean

    • L.L. Bean is planning the order size for winter parkas. Each parka costs the company $70 and sells for $140. Any unsold parkas at the end of the season are disposed off by a sale at $40. Using historical data and a feel for the market, L.L. Bean forecasts the winter season demand:

      Demand: 21 22 23 24 25 26 27 28

      Probability: 3% 4% 5% 8% 10% 15% 12% 10%

      Demand: 29 30 31 32 33 34 35

      Probability: 9% 6% 5% 4% 4% 3% 2%

    • How many parkas should L.L. Bean plan (make/order)?

    OM&PM/Class 6a


    Accurate response find optimal order level q with excel l.jpg
    Accurate Response: Find optimal order level Q with Excel

    OM&PM/Class 6a


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    Accurate response: Find optimal Q from formula

    • Cost of overstocking by one unit = Co

      • the out-of-pocket cost per unit stocked but not demanded

      • “Say demand is one unit below my stock level. How much did the one unit overstocking cost me?” E.g.: purchase price - salvage price.

    • Cost of understocking by one unit = Cu

      • The opportunity cost per unit demanded in excess of the stock level provided

      • “Say demand is one unit above my stock level. How much could I have saved (or gained) if I had stocked one unit more?” E.g.: retail price - purchase price.

        Given an order quantity Q, increase it by one unit if and only if the expected benefit of being able to sell it exceeds the expected cost of having that unit left over.

    • At optimal Q, do not order more if

    Prob( Demand > Q ) <Co/(Co + Cu ).

    OM&PM/Class 6a


    Wal mart l.jpg

    Strategic goals

    Provide customers access to quality good, when and where needed at competitive prices

    Operations strategy

    Short cycle times

    Low inventory levels

    Logistics strategy

    Accurate information availability

    Rapid transportation

    Logistics structure

    Electronic data interchange

    Communication between retail stores

    Bar coding

    Cross docking

    Fast responsive transportation system

    Long lead time items

    Stored at DC and shipped as needed

    Stable demand items

    Continuous replenishment programs

    Short lead time items

    Made to order and cross-docked at DC

    Wal-Mart

    OM&PM/Class 6a


    Class 6a learning objectives l.jpg
    Class 6a: Learning Objectives

    • Pooling of stock reduces the amount of inventory

      • physical

      • information

      • specialization

      • substitution

      • commonality/postponement

    • Benetton: Tailored response (e.g., partial postponement) can be used to better match supply and demand

    • Accurate Response in one-shot inventory management under uncertainty

      • trade-off cost of over and understocking

    Single product

    Multi product

    OM&PM/Class 6a


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