Operations Management

1. 山东财经大学 – OM Classwww.suse1.astate.edu/~jseydel Operations Management Supply Chain Management from an OM Perspective John Seydel, Ph.D. Arkansas State University (阿肯色州立大学）

2. Student Objectives Upon completion of this material you should be able to • Explain the strategic importance of the supply chain • Identify six sourcing strategies • Explain issues and opportunities in the supply chain • Describe the supplier selection process • Discuss the sustainability imperative for efficient and effective SCM • Summarize the ISM’s standards for ethical supply chain practices • Compute various measures of supply chain performance • Explain how benchmarking can be effective in evaluating supply chain performance • Summarize how good logistics management is essential to effective SCM

3. Purpose and Importance of SCM The objective of supply chain management (SCM) is to structure the supply chain to maximize its competitive advantage and benefits to the ultimate consumer • The coordination of all supply chain activities, starting with raw materials and ending with a satisfied customer • Includes suppliers, manufacturers and/or service providers, distributors, wholesalers, retailers, and final customers • Large portion of sales dollars spent on purchases • Supplier relationships increasingly integrated and long term • Improve innovation, speed design, reduce costs • Managing supplier relationships has added emphasis

4. Typical Supply Chain for Beer

5. Recall the Concept of a TransformationProcess • Something that uses resources to transform inputs into some desired outputs • Types and examples: • Physical -- construction • Locational-- transportation • Exchange -- retailing • Temporal(i.e., storage) -- warehousing • Physiological -- health care • Informational -- telecommunications

6. Operations and Supply Chain Processes Manufacturing Processes Sourcing Processes Distribution Processes Logistics Processes Logistics Processes Service Processes

7. Current Issues in OM • Coordinating the relationships among mutually supportive but separate organizations (SCM) • Optimizing global supplier, production, and distribution networks (SCM) • Increased coproduction of goods and services (SCM) • Managing the customer experience during a service encounter • Raising the awareness of operations as a significant competitive weapon(SCM)

8. Motivation: A Perspective on Supply Chain Costs

9. More Motivation: Supply Chain vs Sales Strategy Hau Lee Furniture 60% of sales $ in supply chain Current gross profit = $10,000 Increase profits to $15,000 (50%)

10. How Corporate Strategy Impacts Supply Chain Decisions

11. Sourcing: A Major SCM Decision • Make-or-buy decisions: choosing between obtaining products and services externally as opposed to producing them internally • Outsourcing • Transfer traditional internal activities and resources to outside vendors • Efficiency in specialization • Focus on core competencies • Six sourcing strategies • Many suppliers • Few suppliers • Vertical integration • Joint ventures • Keiretsu networks • Virtual companies

12. Sourcing Strategy: Many Suppliers • Commonly used for commodity products • Purchasing is typically based on price • Suppliers compete with one another • Supplier is responsiblefor technology, expertise, forecasting, cost, quality, and delivery • Danger: • Unreliability of the low cost provider (consider the space shuttle!) • Consider Deming’s Point #4

13. Sourcing Strategy: Few Suppliers • Buyer forms longer term relationshipswith fewer suppliers • Create value through economies of scale and learning curve improvements • Suppliers more willing to participate in JIT programs and contribute design and technological expertise • Possible downside: • Cost of changing suppliers is huge • Trade secrets and other alliances may be at risk • How to choose: a MCDMproblem

14. Vertical Integration Examples of Vertical Integration Sourcing Strategy: Vertical Integration (a)

15. Sourcing Strategy: Vertical Integration (b) • Developing the ability to produce goods or services previously purchased • Integration may be forward, toward the customer, or backward, toward suppliers • Can improve cost, quality, delivery, and inventory but requires capital, managerial skills, and demand • Risky in industries with rapid technological change

16. Sourcing Strategy: Joint Ventures • Formal collaboration • Enhance skills • Secure supply • Reduce costs • The challenge is to cooperate without diluting brand or conceding competitive advantage

17. Sourcing Strategy: Keiretsu Networks • A middle ground between few suppliers and vertical integration • Supplier becomes part of the company coalition • Often provide financial support for suppliers through ownership or loans • Members expect long-term relationships and provide technical expertise and stabledeliveries • May extend through several levels of the supply chain

18. Sourcing Strategy: Virtual Companies • Rely on a variety of supplier relationships to provide services on demand • Fluid organizational boundaries that allow the creation of unique enterprises to meet changing market demands • Relationships may be short- orlong-term • Exceptionally lean performance, low capital investment, flexibility, and speed • Consider: tourism supply chains

19. Supply Chain Risk • More reliance on supply chains means more risk (multiplicative, not additive!) • Fewer suppliers increase dependence • Compounded by globalizationand logistical complexity • Vendor reliability and quality risks • Politicaland currencyrisks

20. Risk Mitigation Tactics • Research and assesspossible risks • Innovative planning • Reduce potential disruptions • Prepare responsesfor negative events • Flexible, securesupply chains • Diversifiedsupplier base

21. Supply Chain Risks and Tactics (a)

22. Supply Chain Risks and Tactics (b)

23. Supply Chain Risks and Tactics (c)

24. Supply Chain Risks and Tactics (d)

25. Supply Chain Risks and Tactics (e)

26. Security and JIT • Shipmentsget misrouted, stolen, damaged, or excessively delayed • Technological innovationsare improving security and inventory management • Various sensorsare now available: • Location/motion • Broken seal • Temperature • . . . • Trackingcan help expedite shipments

27. Challenges to Managing the Integrated Supply Chain Issues: • Local optimization can magnify fluctuations • Incentives push merchandise into the supply chain for sales that have not occurred • Large lots reduce shipping and production costs but increase inventory holding and do not reflect actual sales

28. Challenges to Managing the Integrated Supply Chain Bullwhip effect occurs when orders are relayed through the supply chain with fluctuations increasing at each step Issues: • Local optimization can magnify fluctuations • Incentives push merchandise into the supply chain for sales that have not occurred • Large lots reduce shipping and production costs but increase inventory holding and do not reflect actual sales

29. Opportunities for Managing the Integrated Supply Chain • Accurate “pull” data, shared information • Lot size reduction, shipping, discounts, reduced ordering costs (note EOQ formula) • Single stage control of replenishment: single supply chain member responsible for ordering • Vendor managed inventory (VMI) • Collaborativeplanning, forecasting, and replenishment (CPFR) throughout the supply chain • Blanket orders against which actual orders are released • Standardization • Postponement: withholds modification as long as possible • Electronic ordering and funds transfer: speed transactions and reduce paperwork • Drop shipping and special packaging: bypasses the seller and reduces costs

30. Building the Supplier Base (a) • Supplier evaluation: findingpotential suppliers • Determine likelihood of their becoming good suppliers • Supplier certification; process: • Qualification • Education • Certification • Supplier development: integratingthe supplier into the system • Quality requirements • Product specifications • Schedules and delivery • Procurement policies • Training • Engineering and production help • Information transfer procedures

31. Building the Supplier Base (b) • Negotiation: a significant element in purchasing; usually for highly valued skills • Cost-basedprice model  supplier opens books • Market-based price model  based on published, auction, or indexed prices • Competitive bidding • Common policy for many purchases • Does not generally foster long-term relationships • Contracting: • Share risks and benefits • Creates incentives

32. Building the Supplier Base (c) • Centralized purchasing (e.g., aState IT purchases) • Leverage volume • Develop specialized staff • Develop supplier relationships • Maintain professional control • Devote resources to selection and negotiation • Reduce duplication of tasks • Promote standardization • eProcurement: speedspurchasing, reducescosts, integrates supply chain • Online catalogs and exchanges  standard items or industry-specific websites • Online auctions • Low barriers to entry • Reverse auctions for buyers • Price not always the most important factor

33. Recall Ethical and Social Responsibilities in OM Challenges facing operations managers • Developing and producing safe, quality products • Maintaining a clean environment • Providing a safe workplace • Honoring stakeholder commitments

34. Ethics and Sustainable SCM • Personalethics • Critical to long-term success of an organization • Supply chains particularly susceptible • Ethics withinthe supply chain • Ethical behavior regarding the environment • Consider using a “Balanced Scorecard” approach (the SBSC in particular)

35. Institute for Supply Management (ISM) Ethical Standards • Perceived impropriety. Prevent the intent and appearance of unethical or compromising conduct in relationships, actions and communications • Conflicts of interest. Ensure that any personal, business or other activity do not conflict with the lawful interests of your employer • Issues of influence. Avoid behaviors or actions that may negatively influence, or appear to influence, supply management decisions • Responsibilities to your employer. Uphold fiduciary and other responsibilities using reasonable care and granted authority to deliver value to your employer • Supplier and customer relationships. Promote positive supplier and customer relationships • Sustainability and social responsibility. Champion social responsibility and sustainability practices in supply management • Confidential and proprietary information. Protect confidential and proprietary information • Reciprocity. Avoid improper reciprocal agreements • Applicable laws, regulations and trade agreements. Know and obey the letter and spirit of laws, regulations and trade agreements applicable to supply management • Professional competence. Develop skills, expand knowledge and conduct business that demonstrates competence and promotes the supply management profession

36. Establishing Sustainability in Supply Chains • Return or reverselogistics: sending returned products back up the supply chain for resale, repair, reuse, remanufacture, recycling, or disposal • Closed-loop supply chain • Proactive design of a supply chain that tries to optimize all forward and reverse flows • Prepares for returnsprior to product introduction

37. Management Challenges of Reverse Logistics

38. Measuring Supply-Chain Performance • Inventory percentage of total assets • Inventory turnover • Weeks of supply • Additional measures • Order fill rate • Order fulfillment lead time • Cash-to-cash cycle time • Benchmarking the supply chain

39. Inventory as Percentage of Total Assets (a) • Assets committed to inventory Percentage invested in inventory Average inventory investment Total assets 11.4 44.4 = x 100 • Home Depot had $11.4 billion inventory, total assets of $44.4 billion Percentage invested in inventory = x 100 = 25.7%

40. Inventory as Percentage of Total Assets (b)

41. Inventory Turnover (a) • Inventory turnover Cost of goods sold Average inventory investment Inventory turnover = • For inventory investment, choose one of the following: • Average of several periods • (Beginning plus Ending)/2 • Ending inventory

42. Inventory Turnover (b) • From PepsiCo, Inc. Annual Report 14.2 1.69 Inventory turnover = = 8.4

43. Inventory Turnover (c)

44. Weeks of Supply • Weeks of supply Average inventory investment Annual cost of goods sold 52 weeks Weeks of supply = • For PepsiCo Inventory investment = $1.69 billion Average weekly cost of goods sold = $14.2b / 52 = $.273b Weeks of supply = 1.69 / .273 = 6.19 weeks

45. Some Additional Measures • Order fill rate • Order fulfillment lead time • Cash-to-cash cycle time

46. Benchmarking the Supply Chain (a)

47. Plan: Demand/Supply planning and Management Source: Identify, select, manage, and assess sources Make: Manage production execution, testing, and packaging Deliver: Invoice, warehouse, transport and install Return: Raw material Return: Finished goods Benchmarking the Supply Chain (b) • SCOR model • Supply Chain Operations Reference model • Refer to www.supplychain.org • Used for calculating benchmarking metrics

48. Benchmarking the Supply Chain (c)

49. Benchmarking the Supply Chain (d) • Benchmarking can be useful • But may not be adequate • Audits may be necessary • Monitoring communication, understanding, trust, performance, corporate strategy • Foster a mutual belief that "we are in this together"

50. Student Objectives • Explain the strategic importance of the supply chain • Identify six sourcing strategies • Explain issues and opportunities in the supply chain • Describe the supplier selection process • Discuss the sustainability imperative for efficient and effective SCM • Summarize the ISM’s standards for ethical supply chain practices • Compute various measures of supply chain performance • Explain how benchmarking can be effective in evaluating supply chain performance • Summarize how good logistics management is essential to effective SCM