Operations Management

Order winners are the competitive priorities that must be met for a firm to qualify as a competitor in the marketplace. True or False?

*False*

Overall Challenges of the Supply Chain

*For a continuously improving supply chain management:* - Keep up with the speed & application of tech - Better integration of employees *Managing the demand uncertainty:* *Creating the need instead of estimating it:* - Subscriptions - Recommendations / Coupons / Discounts - Being outdated

Supply Uncertainty : *Evolving*

*High Supply Uncertainty* 1. *Potential quality problems* = unstable 2. Limited supply sources 3. Inflexible 4. Variable lead time

Performance Measures

*Inventory Related Measures:* - Average Queue Length (Iq) - Average Number in Service (Ip) - Average Total Number in Process *(I = Iq + Ip)* *Flow Time Related Measures* - Average Waiting Time in Queue (Tq) - Average Time in Service (p) - Average Time in Process *(T= Tq + p)* *Throughput Related Measures* - Flow Rate of the process (R) *Efficiency Related Measures:* - *Utilization (u) = Flow rate/ Process Capacity*

Inventory Turns

*Inventory turns = 1/T = R/1* *Yearly Turns = Average annual flow rate/Inventory* *Monthly turns = Average monthly flow rate/Inventory* *Weekly turns = Average weekly flow rate/Inventory* *Daily turns = Average daily flow rate/Inventory*

Relationship between Costs of Quality

*Investments in Appraisal* - More defects found before product is in the hands of the customers - Increases internal defect costs - Reduces external defect costs - Reduces the total cost of quality *Investments in prevention* - Produces fewer defects, in the first place - Reduces internal defect costs - Reduces the need for investments in appraisal - Reduces the total cost of quality

Supply Uncertainty : *Stable (Mature)*

*Low Supply Uncertainty* 1. *Less quality problems* = stable products 2. More supply sources 3. Flexible 4. Dependable lead time

Top Down Approach

*Market Driven Strategy* - Manager makes the strategy and employees follow the strategy

More variability means

*More Inventory* As variability increases 1. the more inventory is needed 2. more inventory needs to be added with higher service levels

Cu=

*P - C* underage costs

Bottom Up Approach

*Process Driven Strategy* - Develop operating capabilities and then identify a market - Adapted by technologically innovative firms - Lower level provides some feedback, as they have interaction with the customer - Adopted by high tech firms

Quality needs to address

*Product Design Quality* - product/service meets requirements *Process quality* - error free products

Facilities

*Production and Service* *Flexible vs. Dedicated* Flexibility costs - Production: BMW: "a sports car disguised as a sedan" - Service: Can your instructor teach music as well as SCM? - Sports: A goalkeeper who shoots well is rare.

Annual Inventory =

*Q/2 + SS*

How much should we order?

*Q=EOQ*

Unit Cost of Overage

*Q>D* = c - s - quantity is larger than demand therefore inventory is left over

Expected Inventory and service are controlled by...

*ROP* - *the higher the ROP the greater the expected inventory and the better the instock probability*

Shorten lead times do what to inventory

*Reduce Inventory* - reducing the lead time reduces expected inventory especially as the target in stock increases - lead time increases -> have a higher on hand inventory level -> increases the overall inventory level

A steady-State Process

- Average inflow rate = average outflow rate - Ideally, throughput rate should match demand rate - While average inventory accumulation is zero in a stable process, the average inventory (I) is typically positive.

Corporate Strategy

- Business in which the corporation will participate - acquisitions & allocation of key corporate resources to each business - Firm Level

Assignable Causes of Variation

- Can be readily addressed by process operators - Do not require a significant investment - *Variation that occurs outside of the control limits* - Addressing assignable causes returns the process to its "normal" variability (determined by common causes)

Competing on Variety

- Company environment changes rapidly (zara does well) - Company must accommodate change by being *flexible* - product variety can be increased by *easily switching production from one item to another* *easily customizing product/service to meet specific requirements of a customer* ex. Dell

Strategy Hierarchy

- Corporate Strategy - Business Unit Strategy - Operations Strategy ( and marketing, finance strategy)

Shortage Costs

- Cost of demand exceeding supply of inventory on hand - Lost sales, loss of customer goodwill - Hard to quantify usually - ex we dont have inventory but customer want it we incur a shortage cost

Fixed cost increases in the following cost items:

- Cost of periodically evaluating the sources of supply - preparing purchase orders - fixed-cost portion of transportation - receiving, inspecting and moving the goods to the storage.

Fundamental Trade Off

- Cost of providing capacity - cost of waiting & throughput loses - want the point where total cost is minimum

Ordering Costs (K)

- Cost of the actual placement of an order (not including purchase cost) - Charged every time an order is placed; K = $/order Independent of the size of the order - F

Order Winners

- Criterion that differentiates on from another firm - what make you unique Ex. Price, Service quality, variety, time

Order Qualifier

- Criterion that permits the firm's products to even be considered for purchase Ex. basic quality necessary to be considered a good car (consumer reports

The Need For Trade-Offs

- Decisions must emphasis priorities that support business strategy - decisions often required trade offs -decisions must focus on *order qualifiers and order winners*

EOQ Analysis

- Determine the order quantity Q and reorder point (ROP) that minimize total annual cost. - *The total cost is minimized at EOQ where annual carrying and ordering costs are equal.*

Supply Chain

A network of suppliers, manufactures, distributors and retailers that manufacture and distribute product

What is the right supply chain strategy?

A product facing stable demand and has reliable source of supply should not be managed in the same way as one with highly unpredictable demand and unreliable supply.

Resource Unit

A single "resource" that can perform a particular activity

A/F Ratio =

Actual demand/ forecast

Normal Distribution

All normal distributions are characterized by two parameters, mean = µ and standard deviation All normal distributions are related to the standard normal that has mean = 0 and standard deviation = 1.

Lead times

An order is received after a fixed number of periods, called the lead time.

R

Annual demand in units for the inventory item

Inputs

Any tangible or intangible items that flow into the process

Outputs

Any tangible or intangible items that flow out of the process

d bar =

Average demand/unit time (daily/weekly/monthly)

LT bar

Average lead time (in days/weeks/months)

Amazon's Inventory Model/Management before vs now

Before: customers to customers model (C to C) - individuals suppliers & customers Now: Business to customer model - Have individual suppliers - Also have their own inventory - Use their inventory from their warehouses

Bottleneck

Bottleneck is the process with the smallest throughput rate (longest flow time)

Expected Pay Off =

CU [1 - F(Q)] - CO F(Q)

Expected loss on the Qth unit =

Co*F(Q)

Which of these would increase system utilization for a demand-constrained system? a. an increase in the number of servers b. a decrease in the duration of a service c. an increase in the inter-arrival time d. an increase in the arrival rate e. none of the above

D - an increase in the arrival rate

Certain Demand - EOQ

Demand is certain the firm knows exactly when it will run out-of stock

Mismatch between supply and demand

Demand waits for supply -> inventory = waiting customers Supply waits for demand -> inventory= good or resources

Activity/Buffer Network

Details of the process *Activity* smallest process of interest *Precedence Relations* necessary sequence of activities *Buffers* storage (inventory) between activities

EOQ Objective

Determine the order quantity Q and reorder point (ROP) that minimize total annual cost.

H

Holding or carrying cost per unit per year

Newsvendor Model Question

How much to order so as to maximize profit? (Q) - when to order is not relevant

Product and service flow

Involves movement of goods and services from suppliers to customers as well as handling customer service needs and product returns

Information Flow

Involves sharing forecasts and sales data, transmitting orders, tracking shipments, and updating order status

Supply Chain Management (SCM)

Managing material, information, financial flows in the entire network to meet customer demand most economically

Capacity of Unit/Work Center

Maximum sustainable flow rate if the resource is fully utilized durning its scheduled availability

The demand supply mismatch cost

includes the cost left over inventory (the "too much" cost) plus the opportunity cost of lost sales (the "too little")

Financial Flow

involves credit terms, payments, and consignment and title ownership arrangements

Q =

mean + z(sd)

The Capacity of the process is

minimum throughput rate at any of the stages

Z =

number of standard deviations

c =

purchase cost

s =

salvage value

Set the standard deviation to the normal distribution to : *sd of actual demand =*

sd of A/F ratios (forecast)

p =

selling price

sdLT =

standard deviation of demand during lead time

Reorder Points (ROP)

tells "when to order"

Inventory Management

the objective of inventory management is to strike a balance between *inventory investments* and *customer service* 1. When to order? 2. How much to order?

If demand is known exactly, place an order when....

when inventory equal demand durning leadtime

In a waiting line model, pooling will generally result in shorter waiting time but will increase service time. True or False?

*False*

Implied Utiliziation

* = Demand/ Capacity* - implied utilization capture the mismatch between what could flow through the resources (demand) and the resource can provide (capacity) - *implied utilization > 1* -> the process is supply constrained (demand is more than capacity) - *implied utilization equal or < 1* the process is demand constrained (demand is less than capacity)

Utiliziation

* = Flow Rate / Capacity* - is a measure of how much the process actually produces relative to how much it could produce if it were running at full speed (capacity) *bottleneck resource is the resource with highest utilization*

At the order quantity that maximizes expected profit, the probability that demand is less than the order quantity equals the critical ratio

* the expected profit maximizing order quantity balance that "too-much-too little" costs*

Annual purchasing cost =

*(C)(R)*

Annual Order Cost =

*(R/Q)(K)*

If ROP = Expected Demand, service level is...

*50%* - inventory left 50% of the time, stock outs 50% of the time - means we have 50% of inventory in stock - realization of the uncertain demand can be larger than the expected demand at a a rate of 50%

Total Annual Cost

*= Annual inventory holding cost + annual ordering cost + annual purchasing cost*

Expected Profit =

*= Maximum Profit - Mismatch Cost*

Increases in service you need to....

*Add Inventory* - the higher the targeted service, the more inventory needed. - inventory increases at an increasing rate as the target service approaches 100%

Annual Service Level (ASL)

*Annual Service Level (ASL) = 1 - Probability of stockout* = service level throughout the cycle of the product (not only lead time) - Higher service level means more safety stock - More safety stock means higher ROP

Which of these would decrease time spent waiting in a queue with one server? a. An increase in the activity time b. An increase in the inter-arrival time c. An increase in the coefficient of variation of both arrival and activity times d. An increase in system utilization e.None of the above

*B - an increase in the inter-arrival time*

Which of the following is the best example of competing quality? a. A firm produces its product with less raw material waste than its competitors do. b. A firm offers more reliable products than its competitors do. c. A firm's products are introduced into the market faster than its competitors' products are. d. A firm's research and development department generates many ideas for new products. e. A firm advertises more than its competitors do.

*B a firm offers more reliable products than its compeitors do.*

Co=

*C - S* overage cost

Which one of the following helps increase inventory turnovers? a. Decreasing flow rate or demand b. Increasing inventory c. Decreasing inventory d. Increasing flow time e. Decreasing cost of goods sold (COGS)

*C Decreasing inventory*

Which of the following is likely to happen when there is an increase in process variability? a. X Bar and R charts both reveal the increase b. X Bar chart reveals the increase, R-chart does not reveal the increase c. X Bar chart does not reveal the increase, R-chart reveals the increase d. X Bar and R charts cannot be used to identify such variability in process e. None of the above

*C X Bar chart does not reveal the increase, R-chart reveals the increase*

Strategic Fit

*Consistency between the competitive advantage the firm seeks and the process capabilities and managerial policies* A process is effective if there exists a strategic fit among - strategic position - process architecture - managerial policies

Which one of the following can be wrong considering the tactics to match supply with demand? a. Make staffing changes b. Adjust equipment c. Redesign products to facilitate more throughput d. Decrease the throughput e. Add process flexibility to meet changing product preferences

*D decrease the throughput*

Unit Cost of Underage

*D>Q* = p - c - demand is larger than quantity - there is no more inventory left but still demand

What characteristic does Beleza Natural operations display by specializing in only one type of service: Super-relaxant Treatment?

*Efficiency*

Supply Chains Structure

*Efficiency* <-------> *Responsiveness*

A waiting line never forms if service rate exceeds arrival rate. True or False?

*False*

As system utilization decreases, the expected number of customers waiting for service increases. True or False?

*False*

Companies that compete based on cost often can compete on flexibility as well. True or False?

*False*

If a company attempts to offer a greater variety of product choices to its customers, it means the company competes on quality. True or False?

*False*

If the mean of a sample is below the lower control limit in a x-bar-chart it implies that the process variability is decreasing. True or False?

*False*

Traditional Supply Chain Flows

*Successful SCM requires coordination and information sharing among all the partners* - Customer doesn't do business with wholesaler or distributor so money comes from retailer and then moves it to manufacture - Retailer has the best sense of customer demand, first to get information from the source

Objective of Managing the Supply Chain

*Synchronize supply and demand to make products available when and where they are demanded*

Mismatch costs as % of the maximum profit

*The mismatch cost can be estimated as a percentage of the maximum profit when demand is normally distributed and the newsvendor expected profit-maximizing quantity is ordered*: Step 1: Calculate the Critical Ratio Step 2: Calculate the Coefficient of Variation for demand Step 3: Find the corresponding percentage from the Mismatch Cost Table for given critical ratio and the coefficient of variation Step 4: *Mismatch Cost = Maximum Profit x Percentage*

Detect Abnormal Variation in the Process: Identifying Assignment Causes

*Track process parameter over time* - mean - percentage defects *Distinguish between* - common cause variation  (within control limits) - assignable cause variation  (outside control limits) *Measure process performance:* - how much common cause variation is in the process while the process is "in control"?

If demand is higher than capacity, the process is accepted to be capacity constrained. True or False?

*True*

If the sample size increases (everything else remaining the same), the distance between the control limits for a x-bar-chart will decrease. True or False?

*True*

In a waiting line model, increasing the number of servers will bring down the waiting cost but increase the capacity cost. True or False?

*True*

Quality Measures: Attributes and Variables

*Variable Measure* - quantitative - a characteristic that is continuous and can be measure - weight, length, voltage, volume *Attribute* - qualitiative - a characteristic which is evaluated with discrete response -good/bad ;yes/no;correct/incorrect

As more units are ordered the expected benefits from ordering one unit... *blank* ... while the expected loss of order one more unit... *blank* ...

*decrease* *increases*

Traditional View: Cost breakdown of a manufactured good

*efforts spent for supply chain activities are invisible to the customer*

Firm must have a demand model that include an ....

*expected demand and uncertainty in that demand*

want the point where

*expected gain = expected loss*

Annual Inventory Holding Cost =

*h(Q/2+ SS)*

The safety stock model is appropriate for products with...

*random demand but many replenishment opportunities*

If the critical ratio falls between two values in the table, choose the greater z-stat this is called....

*round up rule*

To reduce stocks, we add...

*safety stocks* - decision to determine how much safety stock we should hold 1. Expanding lead time demand a. What we do for the demand expectations 2. Safety stock a. What we do for the uncertainty of lead time demand b. Function of safety stock is to avoid an out of stock *order quantity -> Q=EOQ*

With the normal distribution, uncertainty in demand is captured with ....

*the standard deviation parameter*

When Should We Order?

*when inventory = re order point*

Flow Rate (Throughput Rate)

- # of units that flow through the process per unit of time - Measure: Average Throughput Rate *R* - Stable Process: One where average inflow rate = average outflow rate

Fixed Order Quantity Models

- *Demand and lead time are know* - Economic order quantity (EOQ) - Quantity discount

Probabilistic Models

- *demand & lead time may be uncertain* - Safety Stock model - Newsvendor model

Two aspects of quality

- *features*: more features that meet customer needs = higher quality - *freedom from trouble*: fewer defects = higher quality - Horizontal and vertical advantage -> make a graph - X axis = features-> Horizontal advantage - Y axis = freedom-> Vertical advantage

Different Ways to Count Inventory

- *flow units* (The " I " in I = R x T): Number of wetsuits, patients, tons of wheat, semiconductor chips, etc. Useful when the focus is on one particular flow unit. - *$s* (The " I " in I = R x T): The $ value of inventory This is an intuitive measure of a firm's total inventory. - *days-of-supply*: The average number of days a unit spends in the system -> the number of days inventory would last at the average flow rate if no replenishments arrive. *turns*: - The number of times the average amount of inventory exits the system.

If Actual Demand > Expected Demand

- *stock out* - inventory level will be zero before you receive the order

What is a demand model?

- A demand model specifies what demand outcomes are possible and the probability of these outcomes. - Traditional distributions from statistics can be used as demand models: e.g., the normal, gamma, Poisson distributions

Transportation

- Air - Truck - Rail - Ship - Pipeline: (those goods that have left firms warehouse but are still in the company's distribution chain as they are yet to be bought by ultimate consumers) - Electronic

Flow Time

- Amount of time a unit spends in the process (waiting + activity) - Measure: Average Flow Time *T*

Inventory

- Amount of units within boundaries - Measure: Average Inventory *I*

Common (Natural) Causes of Variation

- Appear to be inherent in a process - Pervasive, affect all production unless they are addressed - Addressing common causes requires significant investments - Only management can address common causes, because of the investments required - Determines the control limits

2. Identify & Exploit Trade Offs

- Example Call center - Objective: 80% of income calls wait less than 20 seconds - Now: 30% of incoming calls wait less than 20 seconds - Problem: Staffing levels of call center / impact on efficiency *OM helps: provide tools to balance responsiveness with efficiency*

1. Overcome Inefficiencies

- Example call center - benchmarking shows the pattern - Don't just manage the current system ... change it! *OM helps: Provide tools to identify and eliminate inefficiencies*

What makes IKEA that mastermind of Inventory Management?

- Flat-pack design - No assembly cost, lower transportation/inventory cost - Outside of the city - Warehouse & Retail, same location - Simple Supply Chain : Factory -> DC -> Retail - In-store logistics, assembly : customer - Cost-per-touch principle less steps, lower costs - Targeted Min/Max (s,S) - Inventory Policy

Trade Offs

- High variety vs fast delivery - high quality vs. low costs - all are trade offs

Too much-to little challenge

- If demand exceeds the order quantity, sales are lost. - If demand is less than the order quantity, there is left over inventory.

The Success Story Of Wal-Mart

- Inventory at retail store turned over 2x a week (industry avg is 1 every 2 weeks) - Improved targeting of products to markets - Sales per square foot increased from $102 in 1985 to $140 in 1991 (Industry average increased from $102 to $110) - By 1999, $137.6 billion in revenue, 910,000 associates and 3,599 stores: Ready to face the future challenges. - In 2009, it generated 51% of its US$258 billion sales in the U.S. from grocery business

What is inventory?

- Inventory: Stack of idle goods. - Raw materials & purchased parts - Partially completed goods: work in progress - Finished-goods inventories - Manufacturing firms or merchandise (retail stores) - Replacement parts, tools, & supplies (important for service companies) - Goods-in-transit to warehouses or customers

Allow demand and/or lead time to vary

- Lead time demand (LTD) follows normal distribution - Other EOQ assumptions apply

Tactics to Match Supply with Demand (5)

- Making staffing changes - Adjusting equipment (buying more machines, selling or leasing equipment) - Improving process to increase throughput - Redesigning products to facilitate more throughput - Adding process flexibility to meet changing product preferences

Work Center

- Multiple resource units that perform the same set of activities

Safety Stock Model vs. Newsvendor Model

- Newsvendor Model - You know expected demand but do now know realization - Order is made before expectation is realized - Single period model - Only have 1 opportunity to place an order

Limitations to Pooling

- Pooling benefits are significantly lower when the systems that are pooled are not truly independent. - Pooling may require workers to have *a broader set of skills*, which may require *more training and higher wages:* - Customers might value being treated by the same server. *Pooling may disrupt the customer* - server relationship:. - Pooling may increase the time-in-queue for one customer class at the expense of another: - Pooling can introduce additional set-ups. - Pooling can backfire if pooling combines different customer classes.

Competing on Quality

- Quality is subjective - Quality is defined differently by every person 2 major quality dimensions - *high performance design* superior features, high durability & excellent customer service - *Product & Service consistency* meets design specification, close tolerance, error free delivery

Process Variablity

- Random (common cause variation) - Non-random (assignable cause variation)

Critical Ratio

- Represents the additional money we can make by ordering 1 more unit - Positive = we are benefited when ordering 1 more Negative = don't buy more

Business Unit Strategy

- Scope of business (product/market/service segments) - Basis of which BU will achieve and maintain competitive advantage

The Operations Frontier and Trade Offs & Toyota

- Setting early 70's depressed economy seeking product variety - Toyota strategy positioning: high variety, high quality, on time delivery, low costs -> zero error - Toyota Production System: Lean Manufacturing -> a production management system that aims for the "ideal" through continuous improvement

Competitive Priorities - The Edge

- Strategist must consider their competitive advantage - Compete on 4 Operations Questions: *Price, Quality, Time, Variety*

Batching and Quality

- Suppose process A can start making defective units and once it starts to make defective units it does so until corrective action is taken, - Suppose quality inspection to discover defective units is only done at process step C. - With two units allowed in the buffers, there will be four defective units made before the problem is discovered.

Newsvendor Model can be applied in settings in which...

- There is a single order/production/replenishment opportunity. Demand is uncertain. There is a "too much-too little" challenge

Quantity Discount Model

- This time allows quantity discounts - Reduced price when item is purchased in larger quantities (quantity discount on all units) - Other EOQ assumptions apply - Trade-off is between lower price & increased holding cost - Optimal order quantity = Largest feasible EOQ or price breakpoint for lower prices *Total cost = inv. holding cost + ordering cost + total purchasing cost* *total purchasing cost = (p)(R)*

Timing in the Safety Stock Model

- Time is divided into periods of equal length, e.g., one hour, one month. - *During a period the following sequence of events occurs:* 1. A replenishment order can be submitted. 2. Inventory is received. 3. Random demand occurs.

Alternative Strategy Formulations

- Top Down Approach - Bottom up Approach

System with one server

- Utilization increase -> waiting time increases -> means server will be busy the majority of the time 1. To reduce activity time (also reduce utilization) examples: employ more workers/ experience employee 2. To increase the number of servers, have some saving from waiting time 3. To replace human labor with machines, to reduce activity time 4. To reduce variability in the arrival process or service process; e.g., surge pricing/ happy hours: shift demand from other time slots, to smooth demand pattern.

3. Evaluate Proposed Redesigns and New Technologies

- What will happen if we develop /purchase technology x? - Better technologies are always (?) nice to have, but will they pay? *OM helps: evaluates systems designs before they occur*

Type 1 error (alpha risk)

- concluding that the process is out of control when not - made wrong decision

Inventory Holding (Carrying) Costs (H)

- cost to physically carry an item in inventory - Usually represented as an annual cost - h = $/unit/year or h = $/unit/time unit (week, month) - Usually *h = i*p* where i = annual interest rate and p = purchase/production cost - Charged proportional to the average level of inventory.

Core of Business Unit: Strategic Positioning

- current position and strategic directions of movement in the competitive product space - established through analysis of the market as well as internal capabilities - usually when increase variety it increases costs effectiveness - when increase cost effectiveness usually costs more ie. trade off

If there is variability in arrival and/or service times, queues will build up

- even if the average arrival rate is less than the average processing rate (ie. system is under-utilized)

Over-stock

- excess inventory - costs of ordering and carrying inventory increase

Waiting Time - Capacity Trade-off Responsive or Efficent

- increase capacity decrease waiting time - want to find the equilibrium

Random (common cause variation)

- inherent in a process - depends on equipment and machinery, engineering, operator, and system of measurement - natural occurrences

Maximum Profit

- is the expected profit without any mismatch costs ie, every unit is sold and there are no lost sales = *(p - c) x mean*

Statistical Process Control (SPC) - uses

- is the process in control? - Identify problems in order to make improvements - Contribute to the TQM goal of continuous improvement

Process capaibility

- measure the allowable tolerance relative to the actual variation of the process

SPC applied to services

- nature of defect is different in service - service defect is a failure to meet customer requirements - monitor time and customer satisfaction

Competing On Price

- offering a product at a low price relative to competition - typically *high volume product* - often *limit product range & offer little customization* - May invest in *automation to reduce unit costs* - Can use *lower skill labor* - *Low price does now mean low quality* Ex. Budget airlines, dollarama (economies of scale)

If actual demand < expected demand

- realization of lead time demand is too long` - when you receive the order the inventory level is not zero

Non-random (assignable cause variation)

- special causes - identifiable and correctable - include equipment out of adjustment, defective materials, changes in parts or materials, broken machinery or equipment, operator fatigue or poor work methods, or errors due to lack of training

Under stock

- stock outs - loss sales, loss of customers willingness to pay - low level of customer service (dont want a product if it is always out of stock)

Underage Cost (Cu)

- the consequence of *ordering one more unit* than what you would have ordered had you know demand - Cu is the increase in profit you would have enjoyed had you order one more unit - order fewer than necessary

Overage Cost (Co)

- the consequence of *ordering one more unit* that what you would have ordered had you known demand - Co is the increase in profit you would have had if you ordered one fewer unit - *Cost of ordering too much*

External Defect Costs

- the cost of defects discovered after the product is in the hand of the customer ex. warranty costs, recall costs, lawsuits, negative word of mouth

Prevention Costs

- the cost of prevention detects from occurring - training costs - cost of changing a more reliable supplier - cost of changing to better raw materials - investments in equipment

Appraisal Costs

- the cost of running an internal inspection operation - labour costs of Qc inspectors - Equipment costs, such as gages and measurement devices - destructive testing costs

Internal Defect Costs

- the costs defects discovered before the product is in the hands of the customer - *Cost of scraping defection items* - material & labour - *Cost of reworking defective item*

The Key Factors that determine the amount of inventory needed are..

- the length of the replenishment lead time - the desired in-stock probability - demand uncertainty

Competing On Time

- time/speed one of the most important competition priorities first that can delivery often wins the race - Time related issues involve *Rapid Delivery* - focuses on shorter time between order placement and delivery *On-Time Delivery* - Deliver product exactly when needed every time

Variability -> how to measure / where does it come from

- variety of customer entering store - products not arriving at the right time - when entering the system, there is variance in the process *Coefficient of Variation = standard deviation / mean*

Stock out probability equal

1 - the prob demand is Q or lower *Stock out probability = 1 - F(Q)*

Bottleneck Management

1) Release work orders to the system at the pace of set by the bottleneck 2) Lost time at the bottleneck represents lost time for the whole system 3) Increasing the capacity of a non-bottleneck station is a mirage 4) Increasing the capacity of a bottleneck increases the capacity of the whole system

Inventory

1. *Convenience:* Cycle inventory - No customer buys eggs one by one - EOQ Model 2. *Unstable demand:* Seasonal inventory - Bathing suits - Xmas toys and computer sales - Newsvendor Model 3. *Randomness:* Safety inventory - 20% more syllabi than the class size were available in the first class - Safety Stock Model

2 Types of uncertainty framework for designing a strategy

1. *Demand Uncertainty* which functional vs. innovative 2. *Supply Uncertainty* which is stable vs. evolving

Supply Chain Strategies (4)

1. *Efficient* supply chains utilize strategies aimed at creating the highest cost efficiency 2. *Risk-hedging* supply chains: utilize strategies aimed at pooling and sharing resources in a supply chain to share risk. 3. *Responsive* supply chains utilize strategies aimed at being responsive and flexible; focus on flexibility through make to order and mass customization. 4. *Agile* supply combines both risk- hedging and responsive supply chain strategies, aiming to cope with both high level of supply and demand uncertainties.

Demand Uncertainty : *Innovative* Characteristics

1. *High demand uncertainties* 2. *Short selling season* 3. High inventory costs 4. High profit margins 5. High product variety 6. High obsolescence

Drivers of Supply Chain Fit : *Logistical Drivers*

1. *Inventory* 2. *Transportation* 3. *Facilities* 4. *Information* 5. *Sourcing* 6. *Pricing*

Demand Uncertainty : Functional Characteristics

1. *low demand uncertainties* 2. *long product life* = stable product 3. Low inventory costs 4. Low profit margins 5. Low product variety 6. Low obsolescence

3 types of flow Management

1. *product and service flow* 2. *information flow* 3. *financial flow*

Process Capacity Analysis

1. Compute the capacity of each step for each resource unit 2. compute capacity of each step for each work center *Capacity = (Resource Unit Capacity)(# Resource units)* 3. Compute theoretical Process Capacity *Process Capacity = Min (Work Center Capacity)* *the slowest resources is the bottleneck resources 4. Compute capacity & demand related performance measures -> process utilization, resource utilization, implied utilization, flow rate

Economic Order Quantity (EOQ) Assumptions

1. Demand is known and constant 2. Lead time is known and constant 3. Receipt of inventory is instantaneous and complete 4. Quantity discounts are not possible 5. Only variable costs are setup and holding 6. Stock-outs can be completely avoided

Amazon Inventory Steps

1. Each order is assigned by computer to the closest distribution center that has the product(s) 2. A "flow meister" at each distribution center assigns work crews 3. Lights indicate products that are to be picked and the light is reset 4. Items are placed in crates on a conveyor, bar code scanners scan each item 15 times to virtually eliminate errors 5. Crates arrive at central point where items are boxed and labelled with new bar code 6. Gift wrapping is done by hand at 30 packages per hour 7. Completed boxes are packed, taped, weighed and labelled before leaving warehouse in a truck 8. Order arrives at customer within 2-3 days

Steps in Analyzing a Quantity Discount

1. For each discount, calculate EOQ 2. If EOQ for a discount doesn't fall into discount range, choose the smallest possible order size to get the discount.*DQ = EOQ (if admissible) or lower bound of the range* 3. Compute the total cost for each DQ 4. Select the DQ that gives the lowest total cost

Elements of a Process

1. Inputs 2. Outputs 3. Flow Unit 4. Activity/Buffer Network 5, Resources 6. Information Structure

Cost of Quality (4)

1. Internal Failure Costs 2. External Failure Costs 3. Appraisal Costs 4. Prevention Costs

Calculating Inventory Turns and Per-Unit Inventory Costs from Balance Sheets

1. Look up the value of inventory from the balance sheet 2. Look up the cost of goods sold (COGS) from the earnings statement, do not use the sales!! 3. Compute the inventory turns as Inventory Turns = COGS/Inventory 4. Compute per-unit inventory cost as *Per-unit inventory cost = Annual Inventory Cost/Inventory turns*

Effectively matching supply with demand requires synchronization of 2 type of flows:

1. Material 2. Information

Role of Operations Management (3)

1. Overcome Inefficiencies 2. Identity & Exploit Trade-Offs 3. Evaluate Proposed Redesigns and New Technologies

Sourcing

1. Role in the *supply chain* *Set of processes required to purchase goods and services in a supply chain* Supplier selection, single vs. multiple suppliers, contract negotiation 2. Role in the *competitive strategy* Sourcing is crucial. *It affects efficiency and responsiveness in a supply chain* In-house vs. outsource decisions - improving efficiency and responsiveness TI: More than half of the revenue spent for sourcing. 3. *Components of sourcing decisions* a) In-house versus outsource decisions b) Supplier evaluation and selection c) Procurement process: every department of a firm buy from suppliers independently, or all together.

Information

1. Role in the *supply chain* *The connection between the various stages in the supply chain* Crucial to daily operation of each stage in a supply chain E.g., production scheduling, inventory levels 2. Role in the *competitive strategy* *Allows supply chain to become more efficient and more responsive at the same time (reduces the need for a trade-off)* Information technology

Pricing

1. Role in the *supply chain* Pricing determines the amount to charge customers in a supply chain Pricing strategies can be used to match demand and supply 2. Role in the *competitive strategy* Use pricing strategies to *improve efficiency and responsiveness* *Low price and low product availability; vary prices by response times* Ex. Amazon Prime 3. Components of *pricing decisions* a) Pricing and economies of scale b) Everyday low pricing vs sales c) Fixed price vs menu pricing, depending on the product and services d) Packaging, delivery location, time, customer pick up e) Bundling products; products and services

Functions of Inventory (4)

1. To take *advantage of Economies of Scale:* holding, purchasing, producing 2. To smooth the *production requirements* (seasonality) 3. To *avoid stock-outs*, increase customer service level 4. To *hedge against* inflation or *price increases*

3 Basic steps in achieving strategic fit

1. Understanding the customer 2. Understanding the supply chain 3. Achieving strategic fit

Statistical Process Control (SPC)

1. process outputs 2. sample of size n 3. inspect sample 4. sample information 5. compare 6. decision criteria 7. In control or out of control -> action to cause and fix

Mismatch costs as a percentage of the maximum profit increases as

1. the coefficient of variation of demand increase 2. the critical ratio decrease - *CV increase => SD increases or demand becomes more uncertain* which means less likely demand is matched with supply - CV = SD/ mean

The Travelers Insurance Company processes 80 claims every day. At any point in time, there is an average of 5 claims in-process (being worked on). Assuming an 8-hour working day, what is the average processing time for a claim?

1/2 hour

Mismatch cost =

= *(Co x expected left over inventory) + (Cu x expected lost sales)* = *Maximum Profit x Percentage*

Expected gain on the Qth unit

= Cu*[1-F(Q)]

a

= average inter arrival time 1/a = average rate of arrivals (customer/time)

P

= average service (processing) time 1/p = capacity of one resource

Cva

= coefficient of variation of inter arrival times = standard deviation of inter-arrival time/ avg arrival time = 1

CVp

= coefficient of variation of service times - if exponentially distributed CVp = 1

F(Q)

= distribution function of demand = Prob (demand <Q)

IAi

= inter arrival time of ith customer

Flow Rate

= min (demand, process capacity)

Utilization

=Flowrate / Capacity = (1/a)/(m*1/p) = P/am

A pediatric practice has 5 physicians. Historically, patients were assigned to one physician and these patients always were treated by the same physician. For example, Alice's patients always visited her (for "well visits" and "sick visits") and never interacted with the other physicians. However, they have decided to change how they see patients. Now patients will be seen by whoever is available (i.e., not treating patients). Based on our discussion of queuing theory, which of the three outcomes below are likely to occur due to this change? i) The coefficient of variation of patient inter-arrival times will increase ii) The utilization of each physician will increase iii) The average number of patients actually with a physician (that is, "inventory in process") will increase

None of the above

Q

Number of pieces per order

Holding cost increases as the following cost items increase:

Opportunity cost of capital (most important) = means no ROI Insurance, tax, storage Obsolescence, spoilage and breakage

Determining ROP to satisfy a target *Service Level*

Percent of annual demand immediately satisfied (Annual Service Level or Fill Rate)

z =

Q - mean / sd

If customers arrive at a constant rate and are served at a constant rate:

Queues will build up if and only if the arrival rate is greater than the processing rate

Managerial Levers to reduce Waiting & Improve Quality of Service

Reducing arrival and service variability - demand management- pricing/promotions - improve training, cross train, standardized procedures Reduce utilization (increase safety capacity) - add more servers (m) - work faster (reduce activity time) - decrease arrival rate (1/a) Pooling Manage psychological aspects of waiting

Methodology of SPC

Sample Statistics - (e.g. Average, Range): Represent the random variability as obtained from the samples of the outputs. Sampling Distribution: - Distribution of sample averages (Different from Process Dist.)

K

Setup or ordering cost for each order

𝜎𝑑 bar =

Standard deviation of demand

𝜎𝐿𝑇 bar:

Standard deviation of lead time

Safety Stock

Stock that is held in excess of expected demand due to variable demand rate and/or lead time.

Resources

Tangible assets that are "utilized" *Capital* building, machines, equipment, etc labor

Flow Unit

The Units of analysis - information, material, input, output

Expected lost Sales

The expected number of units by which demand will exceed the order quantity

Expected left over inventory

The expected number of units left over after demand (but before salvaging)

Expected Sales

The expected number of units sold

Pooling

The pooled process uses the available capacity more effectively, as it prevents the case that one resource is idle. Thus pooling identical resources balances the load of all servers, leading shorter waiting time.

Probability Mass Functions

The probability the demand equals to that value P(d)

Cumulative Probability

The probability the demand is less than or equal to demand Ex. demand = 37 the Cumulative Probability is 0.05+0.07=0.12

Capacity Consideration

Too little capacity loses customer and too much capacity is expensive Ex. Call center - Not enough staff -> low capacity -> not enough ppl to answer phones -> lose customer - Too many staff -> high capacity -> too many salaries to pay -> Raise prices

D =

Uncertainty in demand

Probabilistic Demand

Use prescribed service levels to decide safety stock when the cost of stock-outs cannot be determined. *ROP = lead time demand + ZsdLT*

Probabilistic Models and Safety Stock

Used when demand is not constant or certain: demand ~𝑁(𝜇𝑑, 𝜎𝑑) Use safety stock to achieve a desired service level and avoid stock-outs *ROP = (𝝁𝒅)(L) + ss* *𝝁𝒅 x L : Lead time demand* ud= daily demand

Control Charts

Variables chart - mean (x bar - chart) - range (R-chart) Attributes chart - p-chart -c-chart

Operations Strategy (and marketing, finance strategy)

What must operations do particularly well? what capabilities must ops develop?

Process Analysis

Why do we need to analyze the process? - To identify *inefficient* tasks - To spot possible *effectiveness* improvement tasks - To understand where *value* can be added

Set the mean of the normal distribution to : *expected actual demand =*

expected A/F ratio (forecast)

In Stock Probability

has *stock available for every customer* that occurs if *demand is less than or equal to the order quantity* *In stock probability = F(Q)*