Operations Management Exam 2

bottleneck and non-bottleneck have independent markets for their output

- X goes to market, and Y goes to market

bottleneck feeding non-bottlenecks

- X to Y to Market

Building strategic platforms

-A firm is no longer constrained by the capabilities it owns -Reducing procurement/purchasing costs -Vertical integration -Managing global relationships -Picking appropriate suppliers

Outsourcing

-Active moving some of a firms, internal activities, and decision responsibility to outside -Terms of the agreement or established in a contract -Goes beyond common purchasing and consulting contracts -Responsibilities for making decisions over certain elements of the activities are transferred -Outsourcing lots of firm to focus on activities that represent its core competencies -Company can create a competitive advantage while reducing cost

Multi period Inventory systems.

-Designed to ensure that an item will be available on an ongoing basis throughout the year -Items will be ordered multiple times throughout the year where the logic in the system dictates and the actual quantity ordered and the timing of the order

Fixed order quantity model information

-Fixed order quantity models of time to determine a specific point, R, at which an order will be placed in the size of the order, Q -The order point, R, is always a specified number of units -and order size of Q is place with the inventory available reaches the point R

Fixed order quantity model with safety stock

-Fixed order quantity system perpetually monitors the inventory level and place is a new order when the stock reaches some level -Danger to stock out in this model occurs only during the lead time the time when an order is placed, and the time it is received -amount of safety stock depends on the service level desired -The quantity to be ordered, Q, is calculated in the usual way, considering the demand, shortage class, ordering cost, Holden cost -Reorder point is that to cover the expected demand during the lead time plus a safety stock determined by the desired service level -The key difference between a fixed order quantity model word Amanda's now and one more demanding on certain is in computing the reorder point -The order quantity is the same in both cases

Distinction between fixed order quantity, and fix time period Models

-Fixed order quantity: event triggered -Fixed time period: time triggered. -Fixed order quantity model at initiate an order when the event of reaching a specified re-order level occurs -can-take place at any time, depending on the demand for the items -fixed time period Model is limited to placing orders at the end of a predetermined time. Period, only the passage of time triggers model -fixed order quantity model is a perpetual system, which requires it every time withdrawal from inventory, or in addition to inventories made records must be updated to reflect what are the reorder point has been reached -In contrast, six-time counting, takes place only at the review period

Innovative products

-Have a life cycle of just a few months -Imitators quickly erode the competitive advantage, that innovative products, enjoy, and companies are forced to introduce a steady stream of new renovations -The short lifecycle and the great variety typical of these products further increase unpredictability

Safety stock

-I'm out of inventory carried in addition to the expected demand -Must be maintained to provide some level of protection against stockouts -Common approach for determining safety stock levels: simply say that a certain number of weeks of supply needs to be kept in safety stock

Optimal product mix

-Identifying the bottle neck by calculating the load on each step in the process, and exploring the bottle neck by maximizing contribution margin or gross profit per minute at the bottleneck

Eli Goldratt's Theory of Constraints

-Israeli business management consultant -manufacturers are not doing a goof job in scheduling and controlling resources and inventories -optimized production technology: schedules were feasible and accurate and can be run on a computer -described 9 scheduling rules

Functional products

-Staples that people buy in a wide range of retail outlets, such as grocery stores and gas stations -Product satisfy basic needs, which do not change overtime, they have stable, predictable demand, and long life cycles -Stability, invites competition, which leads to low profit margins

Strategic sourcing

-The development and management of supplier relationships to acquire goods and services in a way that aids in achieving the immediate needs of the business -Firm is no longer constrained by the capabilities. It owns: what matters is the ability to make the most of available capabilities, whether they are owned by the firm or not -Outsourcing a sophisticated, core functions, such as engineering, research and development, manufacturing, information, technology, and marketing can be moved outside the firm -Sourcing varies greatly and depend on the item being purchased

Output of bottleneck and non-bottleneck assembled into a product

-X and Y to the final assembly to market

Relationship with Other Functional Areas

-accounting's influence: led into making decisions to suit the measurement system rather than follow the firm's goals -problems in cost accounting measurements: cost accounting used for performance measurement, cost determinations, investment justification, and inventory valuation -performance traditionally based on cost and full utilization -market and production: communicate and conduct their activities in close harmony -marketing people judged on growth of company in terms of sales, market share, and new products introduced -marketing is sales oriented -manufacturing people are evaluated on cost and utilization

Supply chain designs

-alliance apply relationships around market characteristics and strategic priorities -Predictable demand and lower cost priorities use efficient supply chains -Less predictable demand a new product development, priorities, employee, responsive supply chain relationships

Fixed time period models

-an inventory control model that specifies inventory ordered at the end of a predetermined time period -The interval of time between orders is fixed, and the order quantity berries -Periodic system, periodic review, system, fixed order, interval, system, P model

Cost of good sold

-annual cost for a company to produce the goods or services provided to customers -Sometimes referred to as the cost of revenue -Does not include the selling and administrative expenses of the company

non-bottleneck

-any resource whose capacity is greater than the demand placed on it -should not be working constantly because it can produce more than is needed -contains idle time

bottleneck

-any resource whose capacity is less than the demand placed on it -constraint within the system limits throughput -point in manufacturing process where flow thins to a narrow stream -may be a machine, scarce or highly skilled labor or specialized tool -most plants have very few bottleneck operations -no bottleneck, excess capacity exists and system should be changed to create a bottleneck

Theory of constraints

-any sequential process, the single slowest stop determines capacity for entire system -Predict the overall capacity is governed by the constraint of the system -Identify, exploit, subordinate, elevate, and repeat

Average aggregate, inventory value

-average total value of all items had an inventory for the firm valued at cost -Includes the raw material, working process, finish goods, and distribution inventory considered owned by the firm -good inventory turnover values very by industry and the type of products being handled -A grocery store chain may turn inventory over 100 times per year

Vertical integration

-bringing activities in house -Not always cheaper -acquiring, usually for control, upstream, toward raw materials, or downstream, toward the end, customer, supply chain players -You decide to supply a specific part of the company -More control over the process and quality, such as Netflix originals

throughput

-defined as goods sold -inventory of finished goods, not throughput -actual sales must occur -inventory that might be sold increases costs, builds inventory, and consumes cash

Forward placement of inventory enables:

-delivery, speed, and increasingly important competitive dimension -Finished goods inventory is more expensive than raw materials inventory -Finish good is more responsive

Assumptions of a based fixed order quantity model

-demand for the product is constant in uniform throughout the period -Leadtime is constant -Price per unit of product is constant -Inventory holding cost is based on average inventory -Ordering or set up costs are constant -All demand for the product will be satisfied

ABC inventory classification

-divide inventory items into three groupings: high dollar volume, A, moderate dollar volume, B, and low dollar volume, C -Dollar Valium is a measure of importance, and item low in cost, but high and volume can be more important than a high cost item with low volume -if annual usage of items is listed, according to dollar volume, the list shows that a small number of items a count for a large dollar volume and a large number of items account for a small dollar volume -A items constitute roughly the top 15% -B items the next 35% -C items the last 50% -Segmentation may not a currently, objective is to try and separate the important from unimportant -Purpose of classifying. These items into groups is to establish the appropriate degree of control over them.

Class notes on Zara

-fast fashion, speedy supply for trendy items -Trade off between labor costs and time: focus on time, more expensive -Choosing labor in London versus China can slow things down -Vertical integration, cost more, but enable Zara to supply more of a customers want when they want -They advertise last, markdowns are lower or higher

Theory of constraints model

-financial (high level) view: net profit + return in investment + cash flow -operational level view: throughput increases, inventory decreases, decrease operating expenses -no margin, no mission -goal: make money

Supply chain networks

-firms connected by flow of information, goods and services, and money -Materials and services flow downstream tour the customer as money and information flow upstream

Important information about multi inventory models

-fixed time model has a larger average inventory because they must also protect against stock out during the review. -Text order quantity model has no review period -Fix order quantity model favors more expensive items because average inventories lower -Fixed order quantity model is more appropriate for important items, such as critical repair part because there is closer monitoring, and therefore quicker response a potential stock out -Fix order quantity model requires more time to maintain, because every addition or withdrawal is logged

unbalanced capacity

-historically, manufacturers tried to balance capacity across a sequence of processes in an attempt to match capacity with market demand -unbalanced capacity is better -making all capacities the same is a bad decision -normal variation in output times causes downstream stations to have idle tine when upstream stations take longer to process -when upstream stations process in a shorter time, inventory builds up between stations -capacities within the process sequence should not be balanced to the same levels -flow is balanced, capacity is unbalanced

from an operations standpoint, the goal of the firm is:

-increase throughput while simultaneously reducing inventory and reducing operating expense

Fixed order quantity models

-inventory control model were the amount requisitioned is fixed, and the actual ordering is triggered by inventory, dropping to a specific level of inventory -Economic order quantity, EOQ, and Q model

Competing with supply chain management: Zara case

-local factories: trendy items, fast delivery, more expensive, responsive supply chain -Global factories: basic items, slow delivery, cheaper, efficient supply chain

Outsourcing

-makes fixed costs, variable, as one firm buys rather than makes it themselves -Done for labor, raw, material, and or transportation cost reasons -Reduce a firms volume risk exposure -For strategic reasons: focus on components of a value chain

productivity

-measured in terms of output per labor hour -measure of how well resources are used -all actions that being a company closer to its goals -all the actions that bring a company closer to its goals

Inventory position

-on hand plus an on order minus back order quantities

capacity constrained resource

-one whose utilization is close to capacity and could be a bottleneck if it is not scheduled carefully -CCR may be receiving work in job shop environment from several sources -sources schedule flow in way that causes occasional idle time for the CCR in excess of its unused capacity time -CCR becomes a bottleneck when surge of work arrives at later time

customer order decoupling point

-point where inventory is positioned to allow processes or entities in the supply chain to operate independently -product is stocked at retailer, customer pulls item from shelf and the manufacturer never sees a customer order -selection of decoupling point is a strategic decision that determines customer lead times and can impact inventory investment -closer to this point, quicker customer can be served -tradeoff where quicker response to customer demand comes at expense of greater inventory investment

Weeks of supply

-preferred measure of supply chain efficiency that is mathematically the inverse of inventory turnover times 52 -Used when distribution inventory is dominant -Measure of how many weeks worth of inventory is in the system at a particular point in time

Process capacity

-rate of output for a process or system -Unit or dollars per period of time

manufacturing inventory

-refers to items that contribute to or become part of a firm's product output -typically classified into raw materials, finished products, component parts, supplies, and work in process -tangible goods to be sold and supplied necessary to administer services -in transit: moving in system -warehouse: inventory in warehouse or distribution

Forward buying

-refers to win a customer, responding to a promotion, buys for an advance of one item will be used -Adversarial relations between supply chain partners, and dysfunctional industry practices, such as a reliance on price promotions -Retailer response to the price cut is to stock up, and some case, buying a year's supply, which is forward buying -Retailers have to carry the year supply, and add a cost in the supply system

Sawtooth effect

-relating Q and R -Shows win the inventory position drops to point are, reorder is placed -The order is received at the end of the time period L which does not vary with this model

Bottlenecks

-slow process down, long process, lots of energy -Build up of WIP -If capacity is less than demand, a constraint considered a bottleneck -Constraints or bottlenecks are often indicated by a buildup of work and process inventory, or by process steps with higher utilization rate

Bullwhip effect

-smallest change in demand can affect upstream supply chain -Small variations in demand lead to bigger variations in upstream supply chain -supply chains are subject to systems dynamics -Mitigation tactics must balance, local optimization and global risk

inventory

-stock of any item or resource used in an organization -inventory system: set of policies and controls that monitor levels of inventory and determine what levels should be maintained -when stock should be replenished and how large orders should be

the goal of the firm

-to make money -organization has many purposes- providing jobs, consuming raw materials, increasing sales, increasing share the market, developing technology, producing high quality products -means to achieve the goal -firm makes money, they prosper

Customer order decoupling point

-upstream from the coupling point, all is Done based on forecast -Downstream from the coupling point, all is done based on customer order -MTS: located at the delivery point, downstream -MTO: closer to source, upstream

Efficient supply chains

-utilize strategies aimed at creating the highest levels of cost efficiency -For efficiencies to be achieved, non-value added activities should be eliminated, scale, economies it should be pursued, optimization techniques should be deployed to get the best capacity utilization in production, distribution, and information linkages should be established to ensure the most efficient, accurate, and cost-effective transmission of information across the supply chain

Risk, hedging supply chains

-utilize strategies and I'm pulling in sharing resources in a supply chain so risks and supply disruption can be shared -Single entity in the supply chain can be vulnerable to supply disruptions, but if there is more than one supply stores, or if alternative supply resources are available in the risk of disruption is reduced -Can increase safety stock to hedge against risk of supply chain disruption -information technology is important for the success of these strategies

Responsive supply chains

-utilize strategies end up being responsive and flexible to the changing a diverse needs a customers -Use build to order and mass customization processes as a means to meet the specific requirements of customers

Bull Whip Effect

-variability in demand is magnified as we move from the customer to the producer in the supply chain -Effect indicates a lack of synchronization among supply chain members -Even a slight change in consumer sales ripple backward, in the form of magnified, oscillations upstream, resembling the result of a flick of a bullwhip

Weeks of supply calculation

-weeks of supply = (average aggregate inventory value/cost of goods sold) x 52 weeks

Fender manage inventory

-when a customer actually allows the supplier to manage inventory policy of an item, a group of items -Supplier is given the freedom to replenish. The item as they see fit -there are some constraint related to the maximum that the consumer is willing to Carrie, they required service levels, and other billing transaction processes -Selecting, proper process depends on minimizing the balance between suppliers, delivering costs of the item over a period of time, and the customers costs of managing the inventory

decoupling point

-where inventory is carried and allows the upstream part of the supply chain to operate relatively independent of the downstream part

Purchasing teams

-work is often done and teams with operations, engineering, marketing, finance, quality, logistics, and others -Both inward and outward facing -Understanding internal requirements and resolving issues -Communicating need in resolving issues with suppliers: procurement with engineering and quality -Both analytical an interpersonal -Understanding total cost and make versus by -Selecting in managing supplier to make cost, quality, delivery, and other performance specifications -Negotiation of prices in contract, monitoring performance

Agile supply chains

-you know I strategies and being responsive inflexible to customer needs while the risks of supply shortages or disruptions are hedged by pulling inventory and other capacity resources a have strategies in place that combine the strength of hedged and responsive supply chains -Agile, because they have ability to be responsive to the changing, diverse and unpredictable demands of customers on the front end, while minimizing the back end risks of supply chain

Outsourcing decision benefits

1) financial -Improve return on assets by reducing inventory and selling unnecessary assets -Generate cash by selling low Return entities. -Gain access to new markets, particularly in developing countries -Reduce costs through lower cost structure -Turn fixed costs into variable costs 2) improvement -Improve quality and productivity -Shorten cycle time -Obtain, expertise, skills, and technology that or otherwise unavailable -Improve risk management -Improve credibility, and image by associating with superior providers 3) organizational -Improve effectiveness by focusing on what the firm does best -Increase flexibility to meet change in demand for products and services -Increase product and service value by improving response to customer needs -Enables firm to focus on creating a competitive advantage, while reducing the risk/costs

Inventory costs

1. Holding costs: costs for storage facilities, handling, insurance, pilferage, breakage, absence, depreciation, taxes, and the opportunity cost of capital. 2) set up a production costs: to make each different product involves obtaining materials, arranging specific equipment, set ups, filling out the required papers, appropriately, change the time and materials, and moving out the previous stock 3) ordering costs: managerial, and clerical costs to prepare the purchase or order production 4) storage costs: when the stock of an item is depleted, in order for the item must be either wait until the stock is replenished or canceled

Synchronous manufacturing

1. Identify the system constraint: bottleneck. 2. Decide how to explain the system constraint: maximize output of existing resource, stagger shifts, lunches, breaks 3. Subordinate everything else to that decision: run production at the rate of the bottle 4. Elevator system constraint: add bottle neck capacity. 5. Repeat the process: practice, continuous improvement -The entire production process working in harmony to achieve the proper goal of the firm

Purposes of inventory

1. To maintain independence of operations: supply of materials at a workcenter allows the center flexibility in operations. -Costs for making new production set up, inventory allows management to reduce number of set ups -Independence of workstations desirable on assembly lines 2. To meet variation in product demand: if demand for the product is known, precisely, can produce the product to exactly meet demand. -Safety or buffer stock must be maintained to absorb variation 3. To allow flexibility in production, scheduling: a stock of inventory, relieve the pressure on the production system to get the goods out. -Causes longer lead times, which permit production planning for smoother flow and lower cost operation through larger lot size production 4. Provide a safe guard for variation in raw material delivery time: when material is ordered from a vendor, delays can occur for a variety of reasons. 5. To take advantage of economic purchase order size: their cost to place an order. -The larger each order is, if you were the order that need to be written 6. Many other domain, specific reasons: inventory may need to be carried

Goldratt's 9 rules

1. do not balance capacity, balance the flow 2. the level of utilization of a non-bottleneck resource is determined not by its own potential, but by some other constraint in system 3. utilization and activation of a resource are not the same 4. an hour lost at a bottleneck is an hour lost for entire system 5. an hour saved at a non-bottleneck is a mirage 6. bottlenecks govern both throughput and inventory in the system 7. transfer batch may not and many times should not be equal to process batch 8. process batch should be variable both along its route and in time 9. priorities can be set only by examining the systems constraints, lead time is a derivative of the schedule

performance measures

1. financial measures: ability to make money -net profit: absolute measurement in dollars -return on investment: relative measure based on investment -cash flow: survival measure 2. operational measurements -throughput: rate at which money is generated by system through sales -inventory: all money that the system has invested in purchasing things it intends to sell -operating expenses: all money system spends to tuen inventory into throughput

two accounting performance measurements

1. global measurements: financial statements showing net profit, return on investment, and cash flow 2. local cost accounting measurements showing efficiencies or utilization rate (hours worked/hours present)

Goldratt's Theory of Constraints

1. identify the system of constraints (no improvement is possible unless the constraint or weakest link is found) 2. decide how to exploit the system constraints (make the constraints as effective as possible) 3. subordinate everything else to that decision (align every other part of the system to support the constraints even if this reduces efficiency of non-constraint resources 4. elevate the system constraints (if output is still inadequate acquire more of this resource so it is no longer a constraint) 5. if in previous steps, constraints have been broken, go back to step one, but do not let inertia become system constraint (after constraint problem is solved, go back to the beginning and start over, continuous process of improvement: identifying constraints, breaking them, and then identifying the new ones that result)

three models used

1. single period model: used when we are making a one time purchase of an item 2. fixed order quantity model: used when to maintain an item in-stock and when we resupply the item, a certain number of units must me ordered each time, inventory for the item is monitored until it gets down to a level where the risk of stocking out is great enough that we are compelled to order 3. fixed time period model: when item should be in-stock and ready to use, rather than monitoring inventory levels, item is ordered at certain intervals of time

basic purpose of inventory analysis

1. when items should be ordered 2. how large the order sgould ve

Inventory turn

A measure of the expected number of times inventory is replaced over a year

Through put time

Amount of time it takes a customer to complete all steps in a service process

Reorder point

And order is placed when inventory drops to this level

Independent demand

Demands for these items are unrelated to each other, or two activities that can be predicted with certainty

Distinction between independent, and dependent demand

Independent demand, the demands for various items are related to each other -Deep in a demand: need for any one item as a direct result of the need for another item, usually higher level item of which it is part of

Dependent demand

Need for an item is a direct result of the need for some other item, usually an item of which it is a part -Demand for the item can be predicted with accuracy due to a schedule or specific activity

Supply chains

Networks of operations and processes -Upstream: info, orders, money -Downstream: goods, products -tier, 2 suppliers, tier, 1 suppliers, manufacturers, distributors, retailers, customers

Bullwhip affact: supply chain dynamics

Phenomenon in supply chains, whereby ordering patterns experience, increasing variance as you proceed upstream in the supply chain

Sourcing

Process suitable for procuring products that are strategically important to the firm -More complex process suitable for products that are strategically important -Purchasing process that spans from a simple spot or one time purchase to a long-term alliance

Supply chain financial impact

Supply chain management is important because it affects finances

Optimal order quantity

The order size minimizes total annual cost -Point where the slope of the curve zero

Non-bottleneck feeding bottleneck

Y to X to Market

Total annual cost

annual purchase cost + annual ordering cost + annual holding cost

Inventory turnover

cost of goods sold/average inventory

capacity

defined as available time for production

dependent events

process sequence -ability to do process is dependent on the preceding one

synchronous manufacturing

production process coordinated to work in harmony to achieve goals of the firm

statistical fluctuation

the normal variation about a mean or average -when occur in a dependent sequence without any inventory between workstations, no opportunity to achieve average output -when one process takes longer than average, next process cannot make up time