Exam 3

Empowered employees are

An integral part of Lean.

Economic order quantity (EOQ) model

An inventory-control technique that minimizes the total of ordering and holding costs.

Fixed-quantity, or Q, systems

An ordering system with the same order amount each time.

Predictive analytics

Analyzes past data to predict the future.

Annual holding cost formula

Annual holding cost = (Order quantity/2) X (Holding cost per unit per year)

Annual setup cost formula

Annual setup cost = (Annual demand/Number of units in each order) X (Setup or order cost per order)

Variability

Any deviation from the optimum process that delivers a perfect product on time, every time. A polite word for problems.

If an EOQ for a given price is feasible,

The EOQ for any higher price cannot lead to a lower cost (TC is guaranteed to be higher).

Lean inventory

The minimum inventory necessary to keep a perfect system running.

Class B items

Those inventory items of medium annual dollar volume. These items may represent about 30% of inventory items and 15% to 25% of the total value.

Class A items

Those on which the annual dollar volume is high. Although such items may represent only about 15% of the total inventory items, they represent 70% to 80% of the total dollar usage.

Class C items

Those with low annual dollar volume. May represent only 5% of the annual dollar volume but about 55% of the total inventory items.

Heat map

Uses colors to represent values, with darker colors applied to more extreme values and lighter colors applied to more moderate values.

Cross-sourcing

Using one supplier for a component and a second supplier for another component, where each supplier acts as a backup for the other.

Bidding policies

Usually require that the purchasing agent have several potential suppliers and quotations from each.

Kaizen event

When members of a work cell group or team meet to develop innovative ways to immediately implement improvements in the work area or process.

Cycle counting

A continuing reconciliation of inventory with inventory records.

Forward integration

A firm operates its own distribution system for delivering its outputs.

Backward integration

A firm purchases its suppliers.

Inventories in production and distribution systems often exist

"Just in case" something goes wrong.

Lean inventory tactics require

"Just in time," not "just in case."

Accurate pull data are generated by sharing

(1) Point-of-sales (POS) information so that each member of the chain can schedule effectively and (2) computer-assisted ordering (CAO).

Most common graph types

(a) Bar graphs, (b) line graphs, (c) scatter diagrams, (d) slope graphs, (e) pie charts, (f) histograms, (g) regression lines, and (h) network diagrams.

Retail inventory loss of ________ of sales is considered good, with losses in many stores exceeding ________.

1%, 3%

Cycle counting advantages

1. Eliminates the shutdown and interruption of production necessary for annual physical inventories. 2. Eliminates annual inventory adjustments. 3. Trained personnel audit inventory accuracy. 4. Allows causes of errors to be identified and corrected. 5. Maintains accurate inventory records.

If a computer is doing the calculations,

1,000 days would be helpful in reaching accurate cost estimates.

Eleven opportunities for effective management in the supply chain

1. Accurate pull data 2. Lot size reduction 3. Single-stage control of replenishment 4. Vendor-managed inventory (VMI) 5. Collaborative planning, forecasting, and replenishment (CPFR) 6. Blanket orders 7. Standardization 8. Postponement 9. Electronic ordering and funds transfers 10. Drop shipping and special packaging 11. Blockchain

Three independent demand models

1. Basic economic order quantity (EOQ) model 2. Production order quantity model 3. Quantity discount model

The dual focus of jidoka

1. Education and training of employees 2. The responsiveness of the system to problems make the seemingly rigid system flexible and adaptable

To use simulation, an OM manager should

1. Define the problem. 2. Introduce the important variables associated with the problem. 3. Construct a numerical model. 4. Set up possible courses of action for testing by specifying values of variables. 5. Run the experiment. 6. Consider the results (possibly modifying the model or changing data inputs). 7. Decide what course of action to take.

Economic order quantity (EOQ) model is based on these assumptions

1. Demand for an item is known, reasonably constant, and independent of decisions for other items. 2. Lead time—that is, the time between placement and receipt of the order—is known and consistent. 3. Receipt of inventory is instantaneous and complete. In other words, the inventory from an order arrives in one batch at one time. 4. Quantity discounts are not possible. 5. The only variable costs are the cost of setting up or placing an order (setup or ordering cost) and the cost of holding or storing inventory over time (holding or carrying cost). 6. Stockouts (shortages) can be completely avoided if orders are placed at the right time.

Three categories of analytics

1. Descriptive 2. Predictive 3. Prescriptive

The necessary steps to develop equations that solve directly for Q*

1. Develop an expression for setup or ordering cost. 2. Develop an expression for holding cost. 3. Set setup (order) cost equal to holding cost. 4. Solve the equation for the optimal order quantity.

Lot sizes are reduced through aggressive management which may include

1. Developing economical shipments of less than truckload lots 2. Providing discounts based on total annual volume rather than size of individual shipments 3. Reducing the cost of ordering through techniques such as standing orders and various forms of electronic purchasing.

Supplier concerns include

1. Diversification: Suppliers may not want to tie themselves to long-term contracts with one customer. The suppliers' perception is that they reduce their risk if they have a variety of customers. 2. Scheduling: Many suppliers have little faith in the purchaser's ability to produce orders to a smooth, coordinated schedule. 3. Lead time: Engineering or specification changes can play havoc with JIT because of inadequate lead time for suppliers to implement the necessary changes. 4. Quality: Suppliers' capital budgets, processes, or technology may limit ability to respond to changes in product and quality. 5. Lot sizes: Suppliers may see frequent delivery in small lots as a way to transfer buyers' holding costs to suppliers.

Supply chain managers outsource logistics to meet three goals

1. Drive down inventory investment 2. Lower delivery costs 3. Improve delivery reliability and speed

The four categories (areas) of PivotTables

1. Filters: filters the whole dataset according to user specifications (similar to Excel's Data Filtering tool). 2. Rows: all entries with the same value for that field will be summarized in one row in the table. 3. Columns: all entries with the same value for that field will be summarized in one column in the table. 4. Values: contain the numeric fields that the user wishes to summarize.

Applicable techniques for inventory accuracy and control

1. Good personnel selection, training, and discipline: These are never easy but very necessary in food-service, wholesale, and retail operations, where employees have access to directly consumable merchandise. 2. Tight control of incoming shipments: This task is being addressed by many firms through the use of Universal Product Code (or bar code) and radio frequency ID (RFID) systems that read every incoming shipment and automatically check tallies against purchase orders. When properly designed, these systems—where each stock keeping unit (SKU; pronounced "skew") has its own identifier—can be very hard to defeat. 3. Effective control of all goods leaving the facility: This job is accomplished with bar codes, RFID tags, or magnetic strips on merchandise, and via direct observation. Direct observation can be personnel stationed at exits (as at Costco and Sam's Club wholesale stores) and in potentially high-loss areas or can take the form of one-way mirrors and video surveillance.

The main disadvantages of simulation

1. Good simulation models can take a long time to develop. 2. It is a repetitive approach that may produce different solutions in repeated runs. It does not generate optimal solutions to problems (as does linear programming). 3. Managers must generate all of the conditions and constraints for solutions that they want to examine. The simulation model does not produce answers without adequate, realistic input. 4. Each simulation model is unique. Its solutions and inferences are not usually transferable to other problems.

Determine the quantity that will minimize the total annual inventory cost

1. Identify all possible order quantities that could be the best solution. 2. Calculate the total cost of all possible best order quantities, and the least expensive order quantity is selected.

Three logistics-related costs

1. Inventory costs 2. Transportation costs 3. Facility costs

The main advantages of simulation

1. It can be used to analyze large and complex real-world situations that cannot be solved by conventional operations management models. 2. Real-world complications can be included that most OM models cannot permit. For example, simulation can use any probability distribution the user defines; it does not require standard distributions. 3. "Time compression" is possible. The effects of OM policies over many months or years can be obtained by computer simulation in a short time. 4. Simulation allows "what-if?" types of questions. Managers like to know in advance what options will be most attractive. With a computerized model, a manager can try out several policy decisions within a matter of minutes. 5. Simulations do not interfere with real-world systems. It may be too disruptive, for example, to experiment physically with new policies or ideas in a hospital or manufacturing plant.

Setting the number of containers involves knowing

1. Lead time needed to produce a container of parts 2. The amount of safety stock needed to account for variability or uncertainty in the system

Three issues complicate development of an efficient, integrated supply chain

1. Local optimization 2. Incentives 3. Large lots

Six sourcing strategies

1. Many suppliers 2. Few suppliers 3. Vertical integration 4. Joint ventures 5. Keiretsu networks 6. Virtual companies

Two changes need to be made for small-lot material flow to work

1. Material handling and work flow need to be improved. With short production cycles, there can be very little wait time. 2. Radical reduction in setup times.

Taiichi Ohno's seven wastes

1. Overproduction 2. Queues 3. Transportation 4. Inventory 5. Motion 6. Overprocessing 7. Defective product

Three aspects of ethics

1. Personal ethics 2. Ethics within the supply chain 3. Ethical behavior regarding the environment

The six parts of the Supply Chain Operations Reference (SCOR) model

1. Plan 2. Source 3. Make 4. Deliver 5. Return 6. Enable

Policies that may be based on ABC analysis include

1. Purchasing resources expended on supplier development should be much higher for individual A items than for C items. 2. A items, as opposed to B and C items, should have tighter physical inventory control; perhaps they belong in a more secure area, and perhaps the accuracy of inventory records for A items should be verified more frequently. 3. Forecasting A items may warrant more care than forecasting other items.

A certification process often involves three steps

1. Qualification 2. Education 3. The certification performance process

Designing distribution networks to meet customer expectations suggests three criteria

1. Rapid response 2. Product choice 3. Service

Four types of inventories

1. Raw material inventory 2. Work-in-process inventory 3. Maintenance/repair/operating supply (MRO) inventory 4. Finished-goods inventory

Five steps of the Monte Carlo method of simulation

1. Setting up a probability distribution for important variables. 2. Building a cumulative probability distribution for each variable. 3. Establishing an interval of random numbers for each variable. 4. Generating random numbers. 5. Actually simulating a series of trials.

Four stages of supplier selection

1. Supplier evaluation 2. Supplier development 3. Negotiations 4. Contracting

Simple inventory models assume

1. That a firm will place an order when the inventory level for that particular item reaches zero 2. That it will receive the ordered items immediately

Three specific measures can be helpful for making scheduling and quantity decisions that determine the assets committed to inventory

1. The amount of money invested in inventory, usually expressed as a percentage of assets 2. Inventory turnover 3. Weeks of supply

The idea behind simulation is threefold

1. To imitate a real-world situation mathematically 2. Then to study its properties and operating characteristics 3. Finally, to draw conclusions and make action decisions based on the results of the simulation

Four functions of inventory

1. To provide a selection of goods for anticipated customer demand and to separate the firm from fluctuations in that demand. Such inventories are typical in retail establishments. 2. To decouple various parts of the production process. For example, if a firm's supplies fluctuate, extra inventory may be necessary to decouple the production process from suppliers. 3. To take advantage of quantity discounts, because purchases in larger quantities may reduce the cost of goods or their delivery. 4. To hedge against inflation and upward price changes.

Six major means of shipping

1. Trucking 2. Railroads 3. Airfreight 4. Waterways 5. Pipelines 6. Multimodal

Reverse auction (or Dutch auction)

A buyer initiates the process by submitting a description of the desired product or service. Potential suppliers then submit bids, which may include price and other delivery information.

Major retailers lose _____________ of overall profits due to poor or inaccurate inventory records.

10% to 25%

If a hand simulation is being conducted,

100 days would provide a better representation.

One terabyte equals

240 or approximately one trillion bytes

Transportation of goods to and from facilities can represent as much as ________ of the cost of products.

25%

The equivalent of ___________________ trailer loads are moved in the U.S. each year by rail.

47 million

Actual work time, or "run" time, is a small portion of the material flow time, perhaps as low as

5%

Inventory is one of the most expensive assets of many companies, representing as much as ________ of total invested capital.

50%

Warehousing often adds ____________ to the cost of a product, making warehousing a significant expense for many firms.

8-10%

Keiretsu

A Japanese term that describes suppliers who become part of a company coalition.

The solution procedure uses the concept of

A feasible EOQ.

A huge part of a firm's revenue is typically spent on purchases, so supply chains are

A good place to look for savings.

Good supplier partnerships require

A high degree of trust and respect by both supplier and purchaser—in a word, collaboration.

5Ss

A lean production checklist: Sort, Simplify, Shine, Standardize, Sustain.

Blanket order

A long-term purchase commitment to a supplier for items that are to be delivered against short-term releases to ship. It is NOT an authorization to ship anything.

A well-executed Lean program requires

A meaningful buyer-supplier partnership.

With the EOQ model, the optimal order quantity will occur at

A point where the total setup cost is equal to the total holding cost.

Quantity discount

A reduced price (P) for an item when it is purchased in larger quantities.

Random number

A series of digits (say, two digits from 01, 02, . . . , 98, 99, 00) that have been selected by a totally random process—a process in which each random number has an equal chance of being selected.

Random-number intervals

A set of numbers to represent each possible value or outcome in a computer simulation.

Supply Chain Operations Reference (SCOR) model

A set of processes, metrics, and best practices developed by the APICS Supply Chain Council.

Monte Carlo method

A simulation technique that uses random elements when chance exists in their behavior. The basis is experimentation on chance (or probabilistic) elements by means of random sampling.

Pilferage

A small amount of theft.

Electronic data interchange (EDI)

A standardized data- transmittal format for computerized communications between organizations.

Probabilistic model

A statistical model applicable when product demand or any other variable is not known, but can be specified by means of a probability distributions. A real-world adjustment because demand and lead time won't always be known and constant.

In a manufacturing facility, setups usually require

A substantial amount of preparation.

Many suppliers strategy

A supplier responds to the demands and specifications of a "request for quotation," with the order usually going to the low bidder. This is a common strategy when products are commodities. This strategy plays one supplier against another and places the burden of meeting the buyer's demands on the supplier. Suppliers aggressively compete with one another. This approach holds the supplier responsible for maintaining the necessary technology, expertise, and forecasting abilities, as well as cost, quality, and delivery competencies. Long-term "partnering" relationships are NOT the goal.

Closed-loop supply chain

A supply chain that considers forward and reverse product flows over the entire life cycle.

Single-period inventory model

A system for ordering items that have little or no value at the end of a sales period.

Vendor-managed inventory (VMI)

A system in which a supplier maintains material for the buyer, often delivering directly to the buyer's using department.

Collaborative planning, forecasting, and replenishment (CPFR)

A system in which members of a supply chain share information in a joint effort to reduce supply chain costs.

Perpetual inventory system

A system that keeps track of each withdrawal or addition to inventory continuously, so records are always current.

Blockchain

A technology that tracks, documents, and verifies by adding "blocks" of information after each transaction.

Pivot table

A tool to facilitate in-depth analysis of numeric data by applying filters and providing summary computations for categories and subcategories of the dataset.

Any activity that does not add value in the eyes of the customer is

A waste.

Logistics management

An approach that seeks efficiency of operations through the integration of all material acquisition, movement, and storage activities.

Alternatively, a warehouse can provide a break-bulk function by

Accepting a cheaper full truckload inbound shipment and then dividing it for distribution to individual sites.

Similar to a major airport hub, a warehouse can serve simply as a cross-docking facility

Accepting shipments from a variety of sources and recombining them for distribution to a variety of destinations, often without actually storing any goods during the transition.

Pull data

Accurate sales data that initiate transactions to "pull" product through the supply chain.

All-units discount

All units are discounted.

Using few suppliers can create value by

Allowing suppliers to have economies of scale and a learning curve that yields both lower transaction costs and lower production costs.

Conditional Formatting

An Excel tool to visually identify characteristics of data using formatting.

Just-in-time (JIT)

An approach of continuous and forced problem solving via a focus on throughput and reduced inventory.

Lean creates

An early warning system for quality problems so that fewer bad units are produced and feedback is immediate. This advantage accrues both within the firm and with goods received from outside vendors.

Production order quantity model

An economic order quantity technique applied to production orders. It is useful when inventory continuously builds up over time, and traditional economic order quantity assumptions are valid. We derive this model by setting ordering or setup costs equal to holding costs and solving for optimal order size, Q*.

Advanced shipping notice (ASN)

An electronic document that the supplier sends the retailer in advance of a shipment to tell the retailer exactly what to expect in the shipment.

Finished-goods inventory

An end item ready to be sold, but still an asset on the company's books.

Pipelines

An important form of transporting crude oil, natural gas, and other petroleum and chemical products.

Time aggregation

Applies to total items or dollars spent over a specific time period such as one year.

Incremental quantity discounts

Apply only to those units purchased beyond the price-break quantities rather than to all units.

Supplier evaluation

Involves finding potential suppliers and determining the likelihood of their becoming good suppliers. If good suppliers are not selected, then all other supply chain efforts are wasted.

A central feature of successful supply chains is

Members acting in ways that benefit the team (the supply chain).

Item aggregation

Bases price breaks on total units or dollars purchased.

Modern work areas are designed so they can

Be easily rearranged to adapt to changes in volume and product changes.

The disadvantage of the P system is

Because there is no tally of inventory during the review period, there is the possibility of a stockout during this time. This scenario is possible if a large order draws the inventory level down to zero right after an order is placed. Therefore, a higher level of safety stock (as compared to a fixed-quantity system) needs to be maintained to provide protection against stockout during both the time between reviews and the lead time.

Lean layouts allow cross-trained employees to

Bring flexibility and efficiency to the work area, reducing defects.

Continuous improvement under TPS means

Building an organizational culture and instilling in its people a value system stressing that processes can be improved—indeed, that improvement is an integral part of every employee's job.

Machine learning

Builds on paths and associations formed by neural networks to make science fiction a reality by creating speech recognition and self-driving cars.

The usual cargo on internal waterways is

Bulky, low-value cargo such as iron ore, grains, cement, coal, chemicals, limestone, and petroleum products.

Benchmarking

Can be very useful, but it is not always adequate for excellence in the supply chain.

Risk reduction tactic for distribution risk

Careful selection, monitoring, and effective contracts with penalties.

Risk reduction tactic for supplier quality failures

Careful supplier selection, training, certification, and monitoring.

Decentralized purchasing can offer

Certain inventory control, transportation cost, or lead-time benefits.

Data can be stored three ways

Character, pattern, or numeric.

Descriptive analytics

Characterizes and summarizes data to facilitate understanding.

The make-or-buy decision

Choosing which products and services can be advantageously obtained externally as opposed to produced internally.

Multimodal shipping

Combines shipping methods and is a common means of getting a product to its final destination, particularly for international shipments. The use of standardized containers facilitates easy transport from truck to rail to ship and back again, without having to unload products from the containers until the very end.

Virtual companies

Companies that rely on a variety of supplier relationships to provide services on demand. Also known as hollow corporations or network companies.

Even with a 1,000-day simulation, the generated distribution should be

Compared with the desired distribution to ensure valid results.

Data integrity requires that data be

Complete, consistent, and accurate.

Manufacturers, restaurants, and assemblers of products buy

Components and subassemblies that go into final products.

Neural networks

Computer systems, which, guided by statistical techniques, take large volumes of data and potential variables to form groupings of variables to identify complex paths and associations.

Large-scale models, simulating perhaps years of business decisions, are virtually all handled by

Computer.

Management sets the size of each container by

Computing the lot size, using a model such as the production order quantity model.

Three components of TPS

Continuous improvement, respect for people, and standard work practice, which are now considered an integral part of Lean.

Local optimization, incentives, and large lots

Contribute to distortions of information about what is really occurring in the supply chain.

Inventory turnover

Cost of goods sold divided by average inventory investment.

Cost of overage (we overestimated) formula

Cost of overage (we overestimated) = Cost per unit−Salvage value per unit (if there is any)

Cost of shortage (we underestimated) formula

Cost of shortage (we underestimated) = Sales price per unit−Cost per unit

For firms with the capital, managerial talent, and required demand, vertical integration may provide substantial opportunities for

Cost reduction, higher quality, timely delivery, and inventory reduction.

A low-cost strategy requires suppliers be selected based primarily on

Cost.

Water transportation is often preferred when

Cost is more important than speed.

Lean organizations have

Functional areas that communicate and collaborate to verify that customer expectations are not only understood, but also met efficiently.

Suppliers may provide a variety of services that include

Doing the payroll, hiring personnel, designing products, providing consulting services, manufacturing components, conducting tests, or distributing products.

With collaboration, costs for both buyers and suppliers can

Drop

Both the quantity of inventory and the cost of holding it go down as the inventory-reorder quantity and the maximum inventory level

Drop.

Push system

Dumps orders on the next downstream workstation, regardless of timeliness and resource availability. The antithesis of Lean.

The equation for ROP assumes that

Demand during lead time and lead time itself are constant.

Contracts

Designed to share risks, share benefits, and create incentive structures to encourage supply chain members to adopt policies that are optimal for the entire chain. The idea is to make the total pie (of supply chain profits) bigger and then divide the bigger pie among all participants. The goal is collaboration. Some common features include quantity discounts (lower prices for larger orders), buybacks (common in the magazine and book business where there is a buyback of unsold units), and revenue sharing (where both partners share the risk of uncertainty by sharing revenue).

Vertical integration

Developing the ability to produce goods or services previously purchased or actually buying a supplier or a distributor.

Lean layouts place material

Directly in the location where needed.

ABC analysis

Divides on-hand inventory into three classifications on the basis of annual dollar volume.

We can find the probability, or relative frequency, for each possible outcome of a variable by

Dividing the frequency of observation by the total number of observations.

Operations managers address three issues that are fundamental to operations improvement

Eliminate waste, remove variability, and improve throughput.

Lean operations

Eliminates waste through continuous improvement and focus on exactly what the customer wants.

Railroads in the U.S.

Employ 235,000 people and ship 40% of the ton-miles of all commodities, including 93% of coal, 57% of cereal grains, and 52% of basic chemicals.

Aided by aggressive cross-training and few job classifications, Lean firms

Engage the mental as well as physical capacities of employees in the challenging task of improving operations.

A wholesaler or retailer buys

Everything that it sells.

Sustainability requires

Examining the systems in which the firm and its stakeholders operate.

Leading organizations view suppliers as

Extensions of their own organizations and expect suppliers to be fully committed to constant improvement.

Safety stock (ss)

Extra stock to allow for uneven demand; a buffer.

Pattern analytics

Extracts information from images such as photographs, medical images (MRI, x-rays), or even facial recognition.

When layouts provide for sequential operations,

Feedback, including quality issues, can be immediate, allowing employees working together to tell each other about problems and opportunities for improvement.

Better quality means

Fewer buffers are needed, and therefore, a better, easier-to-maintain inventory system can exist.

Smaller lot sizes hide

Fewer problems.

When a layout reduces distance,

Firms often save labor and space and may have the added bonus of eliminating potential areas for accumulation of unwanted inventory.

Single-stage control of replenishment

Fixing responsibility for monitoring and managing inventory for the retailer.

Toyota Production System (TPS)

Focus on continuous improvement, respect for people, and standard work practices.

Distribution management

Focuses on the outbound flow of products.

Vertical integration can take the form of

Forward or backward integration.

A warehouse can serve as a consolidation point,

Gathering shipments from multiple sources to send outbound in one cheaper, fully loaded truck.

The management task is all about

Gathering the right data in a usable form and then applying the best tools to make well-informed decisions.

Robust

Giving satisfactory answers even with substantial variation in the parameters.

Lean firms respect employees by

Giving them the opportunity to enrich both their jobs and their lives.

Gemba or Gemba walk

Going to where the work is actually performed.

Record accuracy requires

Good incoming and outgoing record keeping as well as good security.

Risk reduction tactic for economic risk

Hedging to combat exchange rate risk; purchasing contracts that address price fluctuations.

Group technology codes

Help identify components with similar characteristics so they can be grouped into families. Once families are identified, work cells are built for them. The result can be thought of as a small product-oriented facility where the "product" is actually a group of similar products—a family of products. The cells produce one good unit at a time, and ideally, they produce the units only after a customer orders them.

In many environments, setup cost is

Highly correlated with setup time.

Freezing

Holding a portion of the schedule near due dates constant.

With few suppliers, the cost of changing partners is

Huge, so both buyer and supplier run the risk of becoming captives of the other.

Firms use SCOR to

Identify, measure, reorganize, and improve supply chain processes.

Random numbers may be generated for simulation problems in two ways

If the problem is large and the process under study involves many simulation trials, computer programs are available to generate the needed random numbers. If the simulation is being done by hand, the numbers may be selected from a table of random digits.

Better scheduling

Improves the ability to meet customer orders, drives down inventory by allowing smaller lot sizes, and reduces work-in-process.

Technological innovations in the supply chain are

Improving both security and inventory management and making logistics more reliable.

Two-bin system

In practice, a store manager sets up two containers (each with adequate inventory to cover demand during the time required to receive another order) and places an order when the first container is empty.

Enforcement of ethics standards can be done by

In-house inspectors, third-party auditors, governmental agencies, or nongovernmental watchdog organizations.

Incentives are issues because

Incentives push merchandise into the chain for sales that have not occurred. This generates fluctuations that are ultimately expensive to all members of the chain.

The "bullwhip" fluctuations in the supply chain

Increase the costs associated with inventory, transportation, shipping, and receiving, while decreasing customer service and profitability.

Lowering the order size

Increases the number of orders, but drops inventory levels.

Inventory control models assume that demand for an item is either

Independent of or dependent on the demand for other items.

Backward integration may be particularly dangerous for firms in

Industries undergoing technological change if management cannot keep abreast of those changes or invest the financial resources necessary for the next wave of technology.

Risk reduction tactic for natural catastrophes

Insurance; alternate sourcing; cross-country diversification.

Risk reduction tactic for theft, vandalism, and terrorism

Insurance; patent protection; security measures including RFID and GPS; diversification.

Fixed-period system

Inventory is ordered at the end of a given period. Then, and only then, is on-hand inventory counted.

Shrinkage

Inventory that is unaccounted for between receipt and time of sale.

Incomplete records suggest

Investigation.

Prescriptive analytics

Invokes advanced optimization tools to recommend a strategy or action.

JIT is such an important aspect of Lean because

It focuses attention on problems.

Cycle counting procedures

Items are counted, records are verified, and inaccuracies are periodically documented. The cause of inaccuracies is then traced and appropriate remedial action taken to ensure integrity of the inventory system. A items will be counted frequently, perhaps once a month; B items will be counted less frequently, perhaps once a quarter; and C items will be counted perhaps once every 6 months.

The vendor performing the outsourced service is an expert in that particular specialty. This leaves the outsourcing firm to focus on

Its key success factors and its core competencies.

As Lean shrinks queues and lead time, it

Keeps evidence of errors fresh and limits the number of potential sources of error.

Whereas inventory hides bad quality,

Lean exposes it.

When implemented as a comprehensive operations strategy

Lean sustains competitive advantage and results in increased overall returns to stakeholders.

Airfreight represents

Less than 1% of tonnage shipped in the U.S.

If Lean focuses on only the immediate process and system,

Managers may miss the sustainability issues beyond the firm.

Suppliers for a a low-cost strategy should have the ability to design

Low-cost products that meet the functional requirements, minimize inventory, and drive down lead times.

Maintenance/repair/operating supply (MRO) inventory

Maintenance, repair, and operating materials.

The operations manager's task in level schedules is to

Make and move small lots so the level schedule is economical.

To determine the number of containers moving back and forth between the using area and the producing areas,

Management first sets the size of each container.

Inventory holding costs are often understated because

Many firms fail to include all the inventory holding costs.

With the inclusion of JIT in Lean,

Materials arrive where they are needed only when they are needed.

Raw material inventory

Materials that are usually purchased but have yet to enter the manufacturing process.

Kanban places added emphasis on

Meeting schedules, reducing the time and cost required by setups, and economical material handling.

Local optimization is an issue because

Members of the chain are inclined to focus on maximizing local profit or minimizing immediate cost based on their limited knowledge. Slight upturns in demand are overcompensated for because no one wants to be caught short. Similarly, slight downturns are overcompensated for because no one wants to be caught holding excess inventory. So fluctuations are magnified.

The objective of most inventory models is to

Minimize total costs.

Efficient, sustainable production

Minimizes inputs and maximizes outputs, wasting nothing.

Lean operations adopt a philosophy of

Minimizing waste by striving for perfection through continuous learning, creativity, and teamwork.

Effective cost cutting may help a firm reach its profit goals __________ easily than would an increased sales effort.

More

Having fewer suppliers makes the supplier and customer ___________ dependent on each other, _______________ risk for both.

More, increasing

Lean layouts reduce another kind of waste

Movement.

Risk reduction tactic for logistics delays or damage

Multiple/redundant transportation modes and warehouses; secure packaging; effective contracts with penalties.

Expected number of orders placed during the year formula

N = Demand/Order quantity

The Pareto principle

Named after Vilfredo Pareto, a 19th-century Italian economist. Says there are a "critical few and trivial many."

Joint ventures

New entities formed within a strategic alliance in which two or more firms, the parents, contribute equity to form the new legal entity

An assembly line should be designed with delivery points

Next to the line so material need not be delivered first to a receiving department and then moved again.

Lean producers set their sights on perfection:

No bad parts, no inventory, only value-added activities, and no waste.

Purchase of standard items is often accomplished via

Online catalogs.

Assuming that demand during lead time (the reorder period) follows a normal curve,

Only the mean and standard deviation are needed to define the inventory requirements for any given service level.

Building a culture of continuous improvement requires

Open communication and destroying isolated functional disciplines that act as independent "silos."

Data management

Overall management of data's integrity, including completeness, consistency, and accuracy.

Keiretsu networks

Part collaboration, part purchasing from few suppliers, and part vertical integration. These manufacturers are often financial supporters of suppliers through ownership or loans. Members are assured long-term relationships and are therefore expected to collaborate as partners, providing technical expertise and stable quality production to the manufacturer. Members can also have second- and even third-tier suppliers as part of the coalition.

Supplier partnerships

Partnerships of suppliers and purchasers that remove waste and drive down costs for mutual benefits.

Percentage invested in inventor formula

Percentage invested in inventor=(Average inventory investment/Total assets)×100

Accuracy can be maintained by either

Periodic or perpetual systems.

Risk reduction tactic for political risk

Political risk insurance; cross-country diversification; franchising and licensing.

Channel assembly

Postpones final assembly of a product so the distribution channel can assemble it.

Dashboards

Present an overview of the most important metrics (i.e., key success indicators) all in one place, often presented in graphical form and regularly updated.

Market-based price model

Price is based on a published, auction, or index price.

Much of the preparation required by a setup can be done

Prior to shutting down the machine or process.

Level schedules

Process frequent small batches rather than a few large batches.

A key to slashing inventory is to

Produce good product in small lot sizes.

Work-in-process (WIP) inventory

Products or components that are no longer raw materials but have yet to become finished. Exists because of the time it takes for a product to be made (called flow time).

Finally, a warehouse can serve as a point of postponement in the process,

Providing final customer-specific value-added processing to the product before final shipment.

Pull system

Pulls a unit to where it is needed just as it is needed. A standard tool of Lean. Use signals to request production and delivery from supplying stations to stations that have production capacity available.

Most firms spend a huge portion of their sales dollars on

Purchases

E-procurement

Purchasing facilitated through the internet. Speeds purchasing, reduces costs, and integrates the supply chain. It reduces the traditional barrage of paperwork and, at the same time, provides purchasing personnel with an extensive database of supplier, delivery, and quality data.

Reorder point (ROP) formula

ROP = Demand per day×Lead time for a new order in days

Reorder point with safety stock formula

ROP = Expected demand during lead time+Safety stock

Few suppliers strategy

Rather than looking for short-term attributes, such as low cost, a buyer is better off forming a long-term relationship with a few dedicated suppliers.

Reducing setup time (and cost) is an excellent way to

Reduce inventory investment, improve productivity, and speed throughput.

Because Lean layouts reduce travel distance, they also

Reduce inventory.

A reduction in either holding or setup cost will

Reduce the total cost curve.

The major trade-off when considering quantity discounts is between

Reduced product cost and increased holding cost.

By driving out waste and delay, JIT

Reduces inventory, cuts variability and waste, and improves throughput.

A reduction in the setup cost curve

Reduces the optimal order quantity (lot size).

An orderly workplace

Reduces waste, releasing assets for other, more productive, purposes.

Operations managers move toward Lean by first

Reducing inventory. The idea is to eliminate variability in the production system hidden by inventory.

Risk reduction tactic for information loss or distortion

Redundant databases; secure IT systems; training of supply chain partners on the proper interpretations and uses of information.

Because an increasing percentage of an organization's costs are determined by purchasing,

Relationships with suppliers are increasingly integrated and long term.

Work cells

Reorganizes people and machines into groups to focus on single products or product groups. Volume must justify cells. Cells can be reconfigured as designs or volume changes. Often arranged in a U shape.

Before Lean, defective products were

Replaced from inventory.

Periodic systems

Require regular (periodic) checks of inventory to determine quantity on hand. Some small retailers and facilities with vendor-managed inventory (the vendor checks quantity on hand and resupplies as necessary) use these systems. However, the downside is lack of control between reviews and the necessity of carrying extra inventory to protect against shortages.

Cost-based model

Requires that the supplier open its books to the purchaser. The contract price is then based on time and materials or on a fixed cost with an escalation clause to accommodate changes in the vendor's labor and materials cost.

U.S. managers often add two additional Ss that contribute to establishing and maintaining a Lean workplace:

Safety, Support/maintenance.

With these assumptions, the graph of inventory usage over time has a

Sawtooth shape.

Sentiment analysis or opinion mining

Seeks to extract 'sentiment' from text or audio data, such as the success or lack of success in dealing with recurring customer complaints to a call center.

The cycle of materials takes place among

Separate and often very independent organizations.

Service level formula

Service level = Cost of shortage/(Cost of shortage+Cost of overage)

The EOQ model is

Shallow, robust, and we can, therefore, conclude that significant errors do not cost us very much.

Drop shipping

Shipping directly from the supplier to the end consumer rather than from the seller, saving both time and reshipping costs.

Why do we use simulation when mathematical models described in other chapters can solve similar problems?

Simulation provides an alternative approach for problems that are very complex mathematically. It can handle, for example, inventory problems in which demand or lead time is not constant.

Once certified, the supplier may be awarded

Special treatment and priority, allowing the buying firm to reduce or eliminate incoming inspection of materials.

The advantages of virtual companies include

Specialized management expertise, low capital investment, flexibility, and speed.

Building effective and efficient processes requires establishing

Standard work practices.

Supplier selection considers numerous factors, such as

Strategic fit, supplier competence, delivery, and quality performance.

Vendors

Suppliers for those goods and services a firm buys.

To deliver goods and services to customers under continuously changing demand,

Suppliers need to be reliable, inventories low, cycle times short, and schedules nimble.

A supply chain includes

Suppliers; manufacturers and/or service providers; and distributors, wholesalers, and/or retailers who deliver the product and/or service to the final customer.

Expected time between orders formula

T = Number of working days per year/N

Text analysis

Tag or annotate terms or ideas, such as how often a new product is mentioned in the press.

Risk reduction tactic for outsourcing risk

Take over production; provide or perform the service yourself.

A quick way to see if there are any empty cells in a database is to use

The COUNTIF function.

Kanban

The Japanese word for card, which has come to mean "signal"; a kanban system moves parts through production via a "pull" from a signal.

Kaizen

The Japanese word for change for the good, or what is more generally known as continuous improvement.

Cumulative probability distribution

The accumulation of individual probabilities of a distribution.

A real-life system need not be touched until

The advantages and disadvantages of a major policy decision are first measured on the model.

The number of kanban cards, or containers, sets

The amount of authorized inventory.

Simulation

The attempt to duplicate the features, appearance, and characteristics of a real system.

Inventory investment

The average inventory value for the same period as the other measures being considered.

Long-term suppliers are more likely to understand

The broad objectives of the procuring firm and the end customer.

Assuming that a firm wants to proceed with a particular supplier, how does it integrate this supplier into its system?

The buyer makes sure the supplier has an appreciation of quality requirements, product specifications, schedules and delivery, and procurement policies.

If the cell cursor is placed at the top of a column of numbers or characters, and then the <End> key is pressed, followed directly by pressing the <Down Arrow> key,

The cell cursor will go all the way to the bottom of that column to the last cell that contains a nonblank entry.

Service level

The complement of the probability of a stockout. For instance, if the probability of a stockout is 0.05, then the service level is .95. Uncertain demand raises the possibility of a stockout.

Supply chain management

The coordination of all supply chain activities, starting with raw materials and ending with a satisfied customer.

The amount of safety stock maintained depends on

The cost of incurring a stockout and the cost of holding the extra inventory.

Ordering cost

The cost of the ordering process. Includes costs of supplies, forms, order processing, purchasing, clerical support, and so forth. Can be lowered by reducing setup costs and by using such efficient procedures as electronic ordering and payment.

Setup cost

The cost to prepare a machine or process for manufacturing an order. This includes time and labor to clean and change tools or holders.

Cost of goods sold

The cost to produce the goods or services sold for a given period.

Three classic types of negotiation strategies

The cost-based model, the market-based price model, and competitive bidding.

Holding costs

The costs associated with holding or "carrying" inventory over time. Include obsolescence and costs related to storage, such as insurance, extra staffing, and interest payments.

Lean organizations understand

The customer and the customer's expectations.

Accuracy

The degree of conformity of a measure to a standard value (e.g., the dimension, strength, or price of a part). Numeric data, such as unusual variations in a part's dimension, may be identified by inspecting for data values outside a predetermined range. We want to identify "outliers" prior to them being accepted into the dataset.

Completeness

The degree to which all required data are present.

Consistency

The degree to which data are equivalent across systems.

Postponement

The delay of any modifications or customization to a product as long as possible in the production process. The concept is to minimize internal variety while maximizing external variety.

Price-break quantities

The first order amount that would lead to a new lower price with quantity discounts.

If there is any change in focus of Lean between manufacturing and services, it may be that

The high level of customer interaction places added emphasis on enabling people through training, motivation, and empowerment to contribute to their fullest.

Big data

The huge amount of production, consumer, and social media data collected in digital form.

Bullwhip effect

The increasing fluctuation in orders that often occurs as orders move through the supply chain.

Often, average inventory investment is based on nothing more than

The inventory investment at the end of the period—typically at year-end.

Reorder point (ROP)

The inventory level (point) at which action is taken to replenish the stocked item.

The total cost of the EOQ changes little in

The neighborhood of the minimum.

Vertical integration appears to work best when

The organization has a large market share and the management talent to operate an acquired vendor successfully.

The optimal order quantity occurs at

The point where the ordering-cost curve and the carrying-cost curve intersect.

Reverse logistics

The process of sending returned products back up the supply chain for value recovery or disposal.

Throughput

The rate at which units move through a process.

When inventory usage is constant, the average inventory level is

The sum of the maximum inventory plus the minimum inventory divided by 2.

The cumulative probability for each level of demand is

The sum of the number in the probability column added to the previous cumulative probability.

Just as the OM function supports the firm's overall strategy,

The supply chain must support the OM strategy.

Lead time

The time between placement and receipt of an order. AKA delivery time.

Setup time

The time required to prepare a machine or process for production.

Total logistics costs tend to follow

The top curve, first declining, and then rising.

Competitive bidding

The typical policy in many firms for the majority of their purchases. The major disadvantage of this method is that the development of long-term relations between buyer and seller is hindered. It may also make difficult the communication and performance that are vital for engineering changes, quality, and delivery.

The advantage of the fixed-period system is

There is no physical count of inventory items after an item is withdrawn—this occurs only when the time for the next review comes up. This procedure is also convenient administratively.

Large lots are issues because

There is often a bias toward large lots because large lots tend to reduce unit costs. A logistics manager wants to ship large lots, preferably in full trucks, and a production manager wants long production runs. Both actions drive down unit shipping and production costs, but they increase holding costs and fail to reflect actual sales.

Data mining

This process is designed to explore very large datasets (i.e., big data), looking for relevant patterns or relationships that may provide insights for improved decision making.

Cohort analysis

This technique focuses on the study of the behavior of groups over time.

Cluster analysis

This technique identifies and organizes data into groups with similar attributes.

One common way to establish a probability distribution for a given variable is

To examine historical outcomes.

The few suppliers strategy encourages suppliers

To provide design innovations and technological expertise.

The way to drive down lot sizes and reduce inventory cost is

To reduce setup cost, which in turn lowers the optimum order size.

The objective of inventory management is

To strike a balance between inventory investment and customer service.

The objective of supply chain management is

To structure the supply chain to maximize its competitive advantage and benefits to the ultimate consumer.

Total annual cost including the cost of the product

Total annual cost = Annual setup (ordering) cost+Annual holding cost+Annual product cost,

Total annual cost formula

Total annual cost =S etup (order) cost+Holding cost

One of the reasons continuous improvement works at Toyota is because of another core value at Toyota:

Toyota's respect for people.

Perpetual inventory

Tracks both receipts and subtractions from inventory on a continuing basis. Receipts are usually noted in the receiving department in some semiautomated way, such as via a bar-code reader, and disbursements are noted as items leave the stockroom or, in retailing establishments, at the point-of-sale (POS) cash register.

The purchaser in a few supplier strategy must be concerned about

Trade secrets and suppliers that make other alliances or venture out on their own.

Electronic ordering and bank transfers

Traditional approaches to speeding transactions and reducing paperwork.

Supplier development may include everything from

Training, to engineering and production help, to procedures for information transfer.

Outsourcing

Transfers some of what are traditional internal activities and resources of a firm to outside vendors, making it slightly different from the traditional make-or-buy decision. Part of the continuing trend toward using the efficiency that comes with specialization.

Inconsistency occurs when

Two data items in the dataset contradict each other (e.g., a sale is recorded in two different systems).

Lean and sustainability are

Two sides of the same coin.

Online exchanges

Typically industry-specific Internet sites that bring buyers and sellers together.

Firms must achieve integration of strategy

Up and down the supply chain and they must expect that strategy to be different for different products and to change as products move through their life cycle.

Risk reduction tactic for supplier failure to deliver

Use multiple suppliers; effective contracts with penalties; subcontractors on retainer; preplanning.

Containers are typically

Very small, usually a matter of a few hours' worth of production.

Sustainability drives out waste because

Waste is both expensive and has an adverse effect on the environment.

Weeks of supply formula

Weeks of supply=Average inventory investment/(Annual cost of goods sold/52 weeks)

World-class benchmarks are the result of

Well-managed supply chains that drive down costs, lead times, late deliveries, and shortages while improving service levels.

Jidoka

What Japanese call the practice of stopping production because of a defect.

Lean operations are driven by

Workflow initiated by the "pull" of the customer's order.

Demand per day formula

d = Annual demand/Number of working days in a year

Business analytics

ses tools and techniques to convert data into summary information and business insights.

Firms with technology-sensitive products estimate that the rapid product innovations can cost as much as

½% to 2% of the values of inventory each week.

Lean layout tactics

• Build work cells for families of products • Include a large number operations in a small area • Minimize distance • Design little space for inventory • Improve employee communication • Use poka-yoke devices • Build flexible or movable equipment • Cross-train workers to add flexibility

Lean scheduling tactics

• Make level schedules • Use kanbans • Communicate schedules to suppliers • Freeze part of the schedule • Perform to schedule • Seek one-piece-make and one-piece-move • Eliminate waste • Produce in small lots • Each operation produces a perfect part

Principles and standards to be used as guidelines for ethical behavior from the Institute for Supply Management

• Promote and uphold responsibilities to one's employer; positive supplier and customer relationships; sustainability and social responsibility; protection of confidential and proprietary information; applicable laws, regulations, and trade agreements; and development of professional competence. • Avoid perceived impropriety; conflicts of interest; behaviors that negatively influence supply chain decisions; and improper reciprocal agreements.

Some specific goals of supplier partnerships

• Removal of unnecessary activities, such as receiving, incoming inspection, and paperwork related to bidding, invoicing, and payment. • Removal of in-plant inventory by delivery in small lots directly to the using department as needed. • Removal of in-transit inventory by encouraging suppliers to locate nearby and provide frequent small shipments. The shorter the flow of material in the resource pipeline, the less inventory. Inventory can also be reduced through a technique known as consignment. Consignment inventory, a variation of vendor-managed inventory, means the supplier maintains the title to the inventory until it is used. • Obtain improved quality and reliability through long-term commitments, communication, and cooperation.

Lean operations tend to share these attributes

• Respect and develop employees by improving job design, providing constant training, instilling commitment, and building teamwork. • Empower employees with jobs that are made challenging by pushing responsibility to the lowest level possible. • Develop worker flexibility through cross-training and reducing job classifications. • Build processes that destroy variability by helping employees produce a perfect product every time. • Develop collaborative partnerships with suppliers, helping them not only to understand the needs of the ultimate customer, but also to accept responsibility for satisfying those needs. • Eliminate waste by performing only value-added activities. Material handling, inspection, inventory, travel time, wasted space, and rework are targets, as they do not add value.

Lean quality tactics

• Use statistical process control Empower employees • Build fail-safe methods (poka-yoke, checklists, etc.) • Expose poor quality with small lots • Provide immediate feedback

Several additional points regarding kanbans may be helpful:

• When the producer and user are not in visual contact, a card can be used; otherwise, a light, flag, or empty spot on the floor may be adequate. • Usually each card controls a specific quantity of parts, although multiple card systems are used if the work cell produces several components or if the lot size is different from the move size. • The kanban cards provide a direct control (limit) on the amount of work-in-process between cells.

The underlying principles in standard work practices

• Work is completely specified as to content, sequence, timing, and outcome; this is fundamental to a good process. • Supplier connections for both internal and external customers are direct, specifying personnel, methods, timing, and quantity. • Material and service flows are simple and directed to a specific person or machine. • Process improvements are made only after rigorous analysis at the lowest possible level in the organization.

Major categories of risks

•Supplier failure to deliver •Supplier quality failures •Outsourcing •Logistics delays or damage •Distribution •Information loss or distortion •Political •Economic •Natural catastrophes •Theft, vandalism, and terrorism

Typical benefits of a centralized purchasing function

•‌ Leverage purchase volume for better pricing •‌ Develop specialized staff expertise •‌ Develop stronger supplier relationships •‌ Maintain professional control over the purchasing process •‌ Devote more resources to the supplier selection and negotiation process •‌ Reduce the duplication of tasks •‌ Promote standardization

Fixed-period systems have several of the same assumptions as the basic EOQ fixed-quantity system

•‌ The only relevant costs are the ordering and holding costs. •‌ Lead times are known and constant. •‌ Items are independent of one another.

Lean inventory tactics

•‌ Use a pull system to move inventory •‌ Reduce lot size •‌ Develop just-in-time delivery systems with suppliers •‌ Deliver directly to the point of use •‌ Perform to schedule •‌ Reduce setup time •‌ Use group technology