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Operations Management
PBSB 813 Contact 5
Johan Jordaan
jordaan.johan@nwu.ac.za
Note on the use of these slides
• These slides provide the basic theory that I would like you to know.
There are many more techniques on the slides that came with the
textbook, which are also available on eFundi. As I talk you through
this slide show, please stop where you don't understand, go to either
the textbook (Heizer and Render) or the Heizer & Render slides and
make sure you understand them. If you still do not understand, on
the first page that you have to submit is space for you to tell me what
you do not understand so that I can cover it in class.
• Once you have gone through the slides, go to the template on eFundi
and prepare your submissions for the next contact session.
Operations &
productivity (1)
Topics covered: Contact 5
Global envi-
ronment &
strategy (2)
Managing
projects (3)
Forecasting
demand (4)
Product
design (5)
Quality
management
(6)
Process
design (7)
Location
decisions (8)
Layout
decisions(9)
Job design &
work mea-
surement (10)
Supply chain
management
(11)
Inventory
management
(12)
Scheduling
(13 & 15)
MRP & ERP
(14)
JIT & Lean
operations
(16)
Maintenance
& reliability
(17)
Study school
Contact 1
Contact 2
Contact 3
Contact 4
Contact 5
Contact 6
Contact 7
Outcomes for today's contact
OUTCOMES OF THEME K
• Demonstrate a thorough understanding of supply chains by plotting the supply chain of
a real-life organisation
• Investigate and critically analyse the strategic benefits of strategic supply chain design.
• Effectively distinguish between the different methods of determining the optimal facility
positions.
• Critically discuss the concept of mass customisation
• Demonstrate a thorough understanding of the concepts by applying the theory to a real-
life organisation.
OUTCOMES OF THEME L
• Understand service levels and be able to the theory to real-life organisations
• Demonstrate a thorough understanding of inventory management concepts by applying
the theory to a real-life organisation
Chapter 11 Theory
Supply chain management
What is a Supply Chain?
Bullwhip Effect
Time
Retailer’s Orders
Time
Wholesaler’s
Orders
Time
Manufacturer’s
Orders
The magnification of variability in orders in the supply-chain
A lot of retailers
each with little
variability in their
orders….
…can lead to greater
variability for a fewer
number of
wholesalers, and…
…can lead to even
greater variability
for a single
manufacturer.
The Bullwhip Effect
Consumer
sales are
predictable and
steady.
Retailer orders start to show
variability as lot sizes and
other factors have an impact.
Farther up the supply
chain variability
increases.
Supply Chain Management
1. Transportation vendors
2. Credit and cash transfers
3. Suppliers
4. Distributors
5. Accounts payable and receivable
6. Warehousing and inventory
7. Order fulfillment
8. Sharing customer, forecasting, and production
information
Important activities include determining
A Supply Chain for Beer
Figure 11.1
Global Supply Chain Issues
 React to sudden changes in parts availability,
distribution, or shipping channels, import duties,
and currency rates
 Use the latest computer and transmission
technologies to schedule and manage the
shipment of parts in and finished products out
 Staff with local specialists who handle duties,
freight, customs and political issues
Supply chains in a global environment
must be able to
How Supply Chain Decisions
Impact Strategy
Low-Cost
Strategy
Response
Strategy
Differentiation
Strategy
Supplier’s
goal
Supply demand
at lowest
possible cost
(e.g., Emerson
Electric, Taco
Bell)
Respond quickly
to changing
requirements
and demand to
minimize
stockouts (e.g.,
Dell Computers)
Share market
research;
jointly develop
products and
options (e.g.,
Benetton)
Primary
selection
criteria
Select primarily
for cost
Select primarily
for capacity,
speed, and
flexibility
Select primarily
for product
development
skills
Table 11.1
Make-or-Buy Decisions
1. Maintain core competence
2. Lower production cost
3. Unsuitable suppliers
4. Assure adequate supply (quantity or delivery)
5. Utilize surplus labor or facilities
6. Obtain desired quality
7. Remove supplier collusion
8. Obtain unique item that would entail a prohibitive
commitment for a supplier
9. Protect personnel from a layoff
10. Protect proprietary design or quality
11. Increase or maintain size of company
Reasons for Making
Table 11.4
Outsourcing
 Transfers traditional internal activities
and resources of a firm to outside
vendors
 Utilizes the efficiency that comes with
specialization
 Firms outsource information
technology, accounting, legal, logistics,
and production
Ethics in the Supply Chain
 Opportunities for unethical behavior are
enormous and temptations are high
 Many companies have strict rules and
codes of conduct that define acceptable
behavior
 Institute for Supply Management has
developed a detailed set of principles and
standards for ethical behavior
Supply Chain Strategies
 Negotiating with many suppliers
 Long-term partnering with few
suppliers
 Vertical integration
 Keiretsu
 Virtual companies that use
suppliers on an as needed basis
Managing the Supply Chain
 Mutual agreement on goals
 Trust
 Compatible organizational cultures
 Integrating supply chains
There are significant management issues in
controlling a supply chain involving many
independent organizations
Technology in supply chain management
• RFID
• E-procurement
• Google
• E-Bay, Amazon, Kalahari, Bid-or-buy,
Different distribution systems
• Rail
• Road
• Water
• Air
• Pipeline
• Third-party logistics
• Outsourcing
Chapter 12 Theory
Inventory management
The trade-off
Risk of
being out-
of-stock
Cost to
carry
inventory
Inventory
 One of the most expensive assets of
many companies representing as
much as 50% of total invested capital
 Operations managers must balance
inventory investment and customer
service
Functions of Inventory
1. To decouple or separate various
parts of the production process
2. To decouple the firm from fluctuations
in demand and provide a stock of
goods that will provide a selection for
customers
3. To take advantage of quantity
discounts
4. To hedge against inflation
Types of Inventory
 Raw material
 Purchased but not processed
 Work-in-process
 Undergone some change but not completed
 A function of cycle time for a product
 Maintenance/repair/operating (MRO)
 Necessary to keep machinery and processes productive
 Finished goods
 Completed product awaiting shipment
The Material Flow Cycle
Figure 12.1
Input Wait for Wait to Move Wait in queue Setup Run Output
inspection be moved time for operator time time
Cycle time
95% 5%
Inventory Management
 How inventory items can be classified
 How accurate inventory records can
be maintained
ABC Analysis
 Divides inventory into three classes
based on annual dollar volume
 Class A - high annual dollar volume
 Class B - medium annual dollar volume
 Class C - low annual dollar volume
 Used to establish policies that focus on
the few critical parts and not the many
trivial ones
ABC Analysis
A Items
B Items
C Items
Percentofannualdollarusage
80 –
70 –
60 –
50 –
40 –
30 –
20 –
10 –
0 – | | | | | | | | | |
10 20 30 40 50 60 70 80 90 100
Percent of inventory items Figure 12.2
ABC Analysis
 Policies employed may include
 More emphasis on supplier development
for A items
 Tighter physical inventory control for A
items
 More care in forecasting A items
Cycle Counting
 Items are counted and records updated on
a periodic basis
 Often used with ABC analysis
to determine cycle
 Has several advantages
 Eliminates shutdowns and interruptions
 Eliminates annual inventory adjustment
 Trained personnel audit inventory accuracy
 Allows causes of errors to be identified and corrected
 Maintains accurate inventory records
Control of Service Inventories
 Can be a critical component
of profitability
 Losses may come from
shrinkage or pilferage
 Applicable techniques include
1. Good personnel selection, training, and discipline
2. Tight control on incoming shipments
3. Effective control on all goods leaving facility
Reordering points
R = Reorder point
Q = Economic ordering quantity
L = Lead time
L L
Q QQ
R
Time
#Unitsin
stock
0
Minimizing Costs
Objective is to minimize total costs
Table 11.5
Annualcost
Order quantity
Curve for total
cost of holding
and setup
Holding cost
curve
Setup (or order)
cost curve
Minimum
total cost
Optimal order
quantity (Q*)
Production Order Quantity Model
Inventorylevel
Time
Demand part of cycle
with no production
Part of inventory cycle during
which production (and usage) is
taking place
t
Maximum
inventory
Figure 12.6
Your assignment
• Step 1: Make sure you understand the concepts that are covered in this slide show. If
necessary, go through it again or study the textbook. The slides by Heizer & Render
(available on eFundi) also give valuable extra information.
• Step 2: Prepare a one-page summary of the theory. Make sure it fits into the template in
the study guide. Remember to make a note of those issues that you want explained in
class.
• Step 3: Find out how your organisation manages its supply chain and inventory. Give a
one-page summary on the template.
• Step 4: Critique the way supply chain and inventory management take place in your
organisation. Where necessary, suggest improvements. Give a one-page summary on the
template. (If there are diagrams, you are allowed a fourth page for them).
• Step 5: Submit your three-page report on efundi before Thursday night 23:59. This
counts towards your individual assignment and your final pass mark!
• Step 6: For your group assignment, prepare a three-slide PowerPoint show: Slide 1:
Briefly present the essence of supply chain and inventory management to your
community organisation. (Decide in conjunction with them to what extent the two topics
are important to them). Slide 2: Explain whether/how they presently do supply chain and
inventory management. Slide 3: Give them advice on how to improve their supply chain
and inventory management. Use the template that is on eFundi. One group member
must submit on efundi before Thursday night 23:59 as well!
• Names of both documents must be as indicated in your study guide.

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Slides 2015 for contact 5

  • 1. Operations Management PBSB 813 Contact 5 Johan Jordaan jordaan.johan@nwu.ac.za
  • 2. Note on the use of these slides • These slides provide the basic theory that I would like you to know. There are many more techniques on the slides that came with the textbook, which are also available on eFundi. As I talk you through this slide show, please stop where you don't understand, go to either the textbook (Heizer and Render) or the Heizer & Render slides and make sure you understand them. If you still do not understand, on the first page that you have to submit is space for you to tell me what you do not understand so that I can cover it in class. • Once you have gone through the slides, go to the template on eFundi and prepare your submissions for the next contact session.
  • 3. Operations & productivity (1) Topics covered: Contact 5 Global envi- ronment & strategy (2) Managing projects (3) Forecasting demand (4) Product design (5) Quality management (6) Process design (7) Location decisions (8) Layout decisions(9) Job design & work mea- surement (10) Supply chain management (11) Inventory management (12) Scheduling (13 & 15) MRP & ERP (14) JIT & Lean operations (16) Maintenance & reliability (17) Study school Contact 1 Contact 2 Contact 3 Contact 4 Contact 5 Contact 6 Contact 7
  • 4. Outcomes for today's contact OUTCOMES OF THEME K • Demonstrate a thorough understanding of supply chains by plotting the supply chain of a real-life organisation • Investigate and critically analyse the strategic benefits of strategic supply chain design. • Effectively distinguish between the different methods of determining the optimal facility positions. • Critically discuss the concept of mass customisation • Demonstrate a thorough understanding of the concepts by applying the theory to a real- life organisation. OUTCOMES OF THEME L • Understand service levels and be able to the theory to real-life organisations • Demonstrate a thorough understanding of inventory management concepts by applying the theory to a real-life organisation
  • 5. Chapter 11 Theory Supply chain management
  • 6. What is a Supply Chain?
  • 7. Bullwhip Effect Time Retailer’s Orders Time Wholesaler’s Orders Time Manufacturer’s Orders The magnification of variability in orders in the supply-chain A lot of retailers each with little variability in their orders…. …can lead to greater variability for a fewer number of wholesalers, and… …can lead to even greater variability for a single manufacturer.
  • 8. The Bullwhip Effect Consumer sales are predictable and steady. Retailer orders start to show variability as lot sizes and other factors have an impact. Farther up the supply chain variability increases.
  • 9. Supply Chain Management 1. Transportation vendors 2. Credit and cash transfers 3. Suppliers 4. Distributors 5. Accounts payable and receivable 6. Warehousing and inventory 7. Order fulfillment 8. Sharing customer, forecasting, and production information Important activities include determining
  • 10. A Supply Chain for Beer Figure 11.1
  • 11. Global Supply Chain Issues  React to sudden changes in parts availability, distribution, or shipping channels, import duties, and currency rates  Use the latest computer and transmission technologies to schedule and manage the shipment of parts in and finished products out  Staff with local specialists who handle duties, freight, customs and political issues Supply chains in a global environment must be able to
  • 12. How Supply Chain Decisions Impact Strategy Low-Cost Strategy Response Strategy Differentiation Strategy Supplier’s goal Supply demand at lowest possible cost (e.g., Emerson Electric, Taco Bell) Respond quickly to changing requirements and demand to minimize stockouts (e.g., Dell Computers) Share market research; jointly develop products and options (e.g., Benetton) Primary selection criteria Select primarily for cost Select primarily for capacity, speed, and flexibility Select primarily for product development skills Table 11.1
  • 13. Make-or-Buy Decisions 1. Maintain core competence 2. Lower production cost 3. Unsuitable suppliers 4. Assure adequate supply (quantity or delivery) 5. Utilize surplus labor or facilities 6. Obtain desired quality 7. Remove supplier collusion 8. Obtain unique item that would entail a prohibitive commitment for a supplier 9. Protect personnel from a layoff 10. Protect proprietary design or quality 11. Increase or maintain size of company Reasons for Making Table 11.4
  • 14. Outsourcing  Transfers traditional internal activities and resources of a firm to outside vendors  Utilizes the efficiency that comes with specialization  Firms outsource information technology, accounting, legal, logistics, and production
  • 15. Ethics in the Supply Chain  Opportunities for unethical behavior are enormous and temptations are high  Many companies have strict rules and codes of conduct that define acceptable behavior  Institute for Supply Management has developed a detailed set of principles and standards for ethical behavior
  • 16. Supply Chain Strategies  Negotiating with many suppliers  Long-term partnering with few suppliers  Vertical integration  Keiretsu  Virtual companies that use suppliers on an as needed basis
  • 17. Managing the Supply Chain  Mutual agreement on goals  Trust  Compatible organizational cultures  Integrating supply chains There are significant management issues in controlling a supply chain involving many independent organizations
  • 18. Technology in supply chain management • RFID • E-procurement • Google • E-Bay, Amazon, Kalahari, Bid-or-buy,
  • 19. Different distribution systems • Rail • Road • Water • Air • Pipeline • Third-party logistics • Outsourcing
  • 21. The trade-off Risk of being out- of-stock Cost to carry inventory
  • 22. Inventory  One of the most expensive assets of many companies representing as much as 50% of total invested capital  Operations managers must balance inventory investment and customer service
  • 23. Functions of Inventory 1. To decouple or separate various parts of the production process 2. To decouple the firm from fluctuations in demand and provide a stock of goods that will provide a selection for customers 3. To take advantage of quantity discounts 4. To hedge against inflation
  • 24. Types of Inventory  Raw material  Purchased but not processed  Work-in-process  Undergone some change but not completed  A function of cycle time for a product  Maintenance/repair/operating (MRO)  Necessary to keep machinery and processes productive  Finished goods  Completed product awaiting shipment
  • 25. The Material Flow Cycle Figure 12.1 Input Wait for Wait to Move Wait in queue Setup Run Output inspection be moved time for operator time time Cycle time 95% 5%
  • 26. Inventory Management  How inventory items can be classified  How accurate inventory records can be maintained
  • 27. ABC Analysis  Divides inventory into three classes based on annual dollar volume  Class A - high annual dollar volume  Class B - medium annual dollar volume  Class C - low annual dollar volume  Used to establish policies that focus on the few critical parts and not the many trivial ones
  • 28. ABC Analysis A Items B Items C Items Percentofannualdollarusage 80 – 70 – 60 – 50 – 40 – 30 – 20 – 10 – 0 – | | | | | | | | | | 10 20 30 40 50 60 70 80 90 100 Percent of inventory items Figure 12.2
  • 29. ABC Analysis  Policies employed may include  More emphasis on supplier development for A items  Tighter physical inventory control for A items  More care in forecasting A items
  • 30. Cycle Counting  Items are counted and records updated on a periodic basis  Often used with ABC analysis to determine cycle  Has several advantages  Eliminates shutdowns and interruptions  Eliminates annual inventory adjustment  Trained personnel audit inventory accuracy  Allows causes of errors to be identified and corrected  Maintains accurate inventory records
  • 31. Control of Service Inventories  Can be a critical component of profitability  Losses may come from shrinkage or pilferage  Applicable techniques include 1. Good personnel selection, training, and discipline 2. Tight control on incoming shipments 3. Effective control on all goods leaving facility
  • 32. Reordering points R = Reorder point Q = Economic ordering quantity L = Lead time L L Q QQ R Time #Unitsin stock 0
  • 33. Minimizing Costs Objective is to minimize total costs Table 11.5 Annualcost Order quantity Curve for total cost of holding and setup Holding cost curve Setup (or order) cost curve Minimum total cost Optimal order quantity (Q*)
  • 34. Production Order Quantity Model Inventorylevel Time Demand part of cycle with no production Part of inventory cycle during which production (and usage) is taking place t Maximum inventory Figure 12.6
  • 35. Your assignment • Step 1: Make sure you understand the concepts that are covered in this slide show. If necessary, go through it again or study the textbook. The slides by Heizer & Render (available on eFundi) also give valuable extra information. • Step 2: Prepare a one-page summary of the theory. Make sure it fits into the template in the study guide. Remember to make a note of those issues that you want explained in class. • Step 3: Find out how your organisation manages its supply chain and inventory. Give a one-page summary on the template. • Step 4: Critique the way supply chain and inventory management take place in your organisation. Where necessary, suggest improvements. Give a one-page summary on the template. (If there are diagrams, you are allowed a fourth page for them). • Step 5: Submit your three-page report on efundi before Thursday night 23:59. This counts towards your individual assignment and your final pass mark! • Step 6: For your group assignment, prepare a three-slide PowerPoint show: Slide 1: Briefly present the essence of supply chain and inventory management to your community organisation. (Decide in conjunction with them to what extent the two topics are important to them). Slide 2: Explain whether/how they presently do supply chain and inventory management. Slide 3: Give them advice on how to improve their supply chain and inventory management. Use the template that is on eFundi. One group member must submit on efundi before Thursday night 23:59 as well! • Names of both documents must be as indicated in your study guide.