LOG202 Summary Notes - Chapters 1,2,6,11 PDF

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Chapter 1: Operations Management and Value ChainsOperations Management  Science and art of ensuring that goods and services are created and delivered successfully to customers  Design of goods and services, processes that create them, day-to-day management of these processes and continual improvem...

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Chapter 1: Operations Management and Value Chains Operations Management  Science and art of ensuring that goods and services are created and delivered successfully to customers  Design of goods and services, processes that create them, day-to-day management of these processes and continual improvement of these aspects - Process Design: best way to produce new products  charting detailed steps needed to make the product - Inventory Management: Tightly controlled to keep cost down and avoid production that wasn’t needed - Scheduling: ensure that enough products is available for both retail and wholesale customers - Quality Management: inspect products and conform to high quality standards, if it deviates from the standards, it will be removed from the inventory where the process broke down and initiate corrective action Understanding Goods and Services (page 5)  Durable good: one that does not quickly wear out and lasts at least 3 years  Nondurable good: no longer useful once its used, or lasts for less than 3 years  Service: any primary or complementary activity that does not directly produce a physical product  Differences between goods and services  page 6-7 The Concept of Value  Perception of the benefits associated with a good, service, or bundle or goods and services in relation to what buyers are willing to pay for them Value =  

If the ratio is high, the good or service is perceived favorably by customers and the organization providing it is more likely to be successful To create value, more companies are adding services and digital content to complement the physical goods e.g. apps, streaming videos, social media

Customer Benefit Packages (pg 8)  A clearly defined set of tangible and intangible features that the customer recognizes, pays for, uses, or experiences  Primary good/service: core offering that attracts customers and meets their basic needs  Peripheral goods or service: not essential to the primary good or service but enhance it Value Chains

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Network of facilities and processes that describes the flow of materials, finished goods, services, information and financial transactions from suppliers, through the facilities and processes that create goods and services and those that deliver them to customers

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A supply chain is the portion of the value chain that focuses primarily on the physical movement of goods and materials and supporting flows of information and financial transactions through the supply, production and distribution processes.

Processes (pg 11)  Core processes, support processes, general management processes Value Chain Frameworks (pg 12)  Input-output framework - Begins with suppliers who provide inputs to a goods or service providing process or network of processes - Inputs may be physical goods or services – automobile parts, trained employees - These are transformed into value added goods and services through processes that are supported by resources like equipment and facilities, labour, money and information - Can be anything like people in a hospital, information in a publishing business - 3 types of processes: core, support and general management processes

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Pre and Postproduction Services Framework - Complete the ownership cycle for the good or service - Preproduction services include customized and team-oriented product design, consulting services, contract negotiations, product and service guarantees, customer financing to help purchase the product, training customers to use and maintain the product, purchasing and supplier services and other types of front-end services - Post-production services include on-site installation or application services, maintenance and repair in the field, servicing loans and financing, warranty and claim services, warehouse and inventory management of the company, training of employees, delivery services, post sale visits - Focus on “keeping the customer”

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AMAZON EXAMPLE ON PG 16

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Hierarchical Supply Chain (pg 18) - Supply chains are the foundation of most value chains - Has a direct impact on customer satisfaction, stock price and profitability - Purpose of a supply chain is to coordinate the flow of materials, services and information among the elements of the supply chain to maximise customer value - Purchasing and procurement, sales and processing, operations, inventory and materials management, transportation and distribution - Distribution Centres: warehouses that act as intermediaries between factories and customers, shipping directly to customers or to retail stors where products are made available to customers - Inventory: raw materials, WIP, finished goods that are maintained to support production or satisfy demand

Environmental, social and economic sustainability (pg 21)

Chapter 2: Performance Measures (pg 28)

Chapter 5: Forecasting and Demand Planning 1. The Need for Forecasts in Value Chain

2. Importance of Forecasting  Long-term: financial size planning and facilities locations  Medium-term: Sales volume and production plans  Short-term: Raw materials supply schedule and production schedule  less uncertainty and fluctuation - Uncertainty from: Sales promotions, competitive strategies, unusual economic/environmental disturbances, new product introductions, large one-time order, labour strikes 3. Concepts in Forecasting  Forecast Planning Horizon - Length of time the forecast is based on - Time bucket is the time-period measure unit in forecast - Year, quarter, month, week, day, hour, or minute (depending on long-term or short-term) - E.g. Forecasting customer call centers  demand 5-10minute intervals

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Data Patterns in Time Series - Time-series: A set of observations measured at successive points in time or over successive period-series - Understanding how the variable we forecast has changed historically - Trend: underlying pattern of growth or decline in a time series - Shows gradual shifts or movements to higher/lower values over a longer period - Usually due to long-term factors such as changes in performance, technology, productivity, population, geographic characteristics, and customer preferences - Seasonal patterns: characterized by repeatable periods of ups and downs over short periods of time - Cyclical patterns: regular patterns in a data series that take place over long periods of time - Random variation is the unexplained deviation of a time series from a predictable pattern such as a trend, seasonal or cyclical pattern - Irregular variation is a one-times variation that is explainable (e.g. hurricane)

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Forecast Errors and Accuracy - Refer to GBA Question 1 (MSE, MAD, MAPE, TS)

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Statistical Forecasting Models - Simple Moving Average: Average of the most recent “k” observations in a time series - Single Exponential Smoothing: forecasting technique that uses weighted average of past time-series to forecast the value of the time series in the next period

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Judgmental Forecasting - Relies upon opinions and expertise of people in developing forecasts - When no historical data is available - Cannot be sole basis of forecasting if historical data is available - Affected by: global trends, interest rates, inflation, technology, disposable income, competitors’ actions and government regulations - Grassroots forecasting  asking people who are close to end consumers about the customers’ purchasing plans - Delphi Method  forecasting by export opinion by gathering opinions of key personnel based on experience and knowledge of the situation

Chapter 6: Resource Management What is Resource Management?  Involves planning, executing, and controlling all the resources to produce goods and services in a value chain  E.g. materials, equipment, facilities and intellectual assets  Maximize profits, customer satisfaction & shareholder benefit; minimize costs

Aggregate Planning Options

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Demand Management - Marketing strategies such as pricing strategies and promotions/advertising - Goods: Shift demand to other time periods using promotions - Services: lower weekday rate for hotels (time dependent)

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Production-Rate Changes - Increasing output rate without changing existing resources  planned overtime - Hours can be reduced during slow periods  planned undertime - Can affect employee morale

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Workforce Changes - Hiring and layoffs - Hiring  higher costs for personnel department and for training - Layoffs  severance pay and unemployment insurance cost, low employee morale

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Inventory Changes - Build up during slack periods and held for peak periods - Increase carrying costs

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Facilities, Equipment and Transportation - Long-term capital investments - Short-term changes are seldom used due to capital costs involved - Rent additional equipment to accommodate high demand periods

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Level Production Strategy Same production rate in each period

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Reduce changes in production rate

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Stable labour and equipment plan

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Reduces large inventories or understock

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Possible understock/overstock

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May change the resource levels and

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Chase Demand Strategy Production rate = demand for each period

overtime, undertime and rate-change costs

Disaggregation in Manufacturing (pg 282)

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Master Production Scheduling - MPS is a statement of how many finished items are to be produced and when they are to be produced Materials Requirements Planning - Forward-looking, demand-based approach for goods production and ordering materials and components to minimize unnecessary inventories and reduce costs Capacity Requirement Planning - Determine the number of resources to finish production

Chapter 7: Capacity Management

What is Capacity?  Capacity is the capability of a manufacturing or service resource (i.e. facility, process, workstation, equipment) to accomplish its purpose over a specified period of time  Maximum load/rate of output per unit of time of an operating unit  Units of resource availability Capacity Management  Managers need to determine the appropriate levels of capacity in order to meet short term and long-term demands  Short-term: adjusting schedules & staffing levels; no. of call center workers during the holiday season  Long-term: capital investments; construct new manufacturing plants, expand new market segment  Meet customer’s needs, maintain service level, long-term financial stability, business Economies of Scale vs Diseconomies of Scale  EOS: When the average unit cost of a good or service decreases as the capacity/volume of throughput increases i.e. fixed cost is allocated over more units  DOS: When the average unit cost of a good or service increases as the capacity/volume of throughput increases i.e. larger amounts of overhead & operating expenses required by higher levels  This suggests that there is an optimal level of capacity where costs are at minimum Focused Factory  A way to achieve economies of scale without extensive investments in facilities and capacity by focusing on a narrow range of goods or services, target market segments and dedicated processes to maximize efficiency and effectiveness  Uses: a few key products, specific technology, certain process design & capability, a particular competitive priority objective (e.g. next day delivery), particular market segments or customers & associated volumes

Capacity Measurements in Operations

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Safety Capacity - Amount of capacity reserved for unanticipated events (capacity cushion) - Actual utilization rates at most facilities are not planned to be 100% effective - Due to unanticipated events like equipment breakdowns, employee absence, short-term surge in demand, material shortages Average Safety Capacity (%) = 100% - Average Resource Utilization (%)

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Capacity Required - Work order: specification of work to be performed for a customer or a client - Quantity to be produced, processing requirements, resources needed

= Si + (Pi x Qi)]

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Manufacturing work orders assumes that one setup is necessary for each work order, hence it is spread over a single work order quantity Setup time is independent of size of the order Some services require new set up for each unit e.g. surgery

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Utilization = Resources Used / Resources Available  equipment

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Utilization = Demand Rate / Service Rate x No. of Servers Resources Used = Utilization x Resources Available Resources Used = Utilization x [Service Rate x No. of Servers] Refer example on page 208

Long-term Capacity Strategies - Economic trade-off between cost of capacity and opportunity cost of not having adequate capacity - Capacity cost: initial investment in equipment and annual cost of operating and maintaining them (mostly fixed costs) - Opportunity cost: cost incurred from lost sales and reduced market share - Too much capacity  risk of obsolescent technology (cost of maintaining > revenue generated) - Too little capacity  squeeze profit margins, vulnerable to competitors - Complementary Goods and Services: can be produced/delivered using the same resources available to the firm but whose seasonal demand patterns are out of phase with each other  balance seasonal demand cycles

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(a) fixed cost of construction incurred only once  firm can allocate these costs over one large project; however, if aggregate demand has steady growth, the facility will be underutilized (b) matching capacity additions with demands as closely as possible (straddle)  when capacity is above demand, the firm has excess capacity, vice versa; short periods of over and underutilization of resources (c) capacity expansion strategy (capacity lead)  ensures sufficient capacity to minimize chances of not meeting demand; safety capacity to meet unexpected demand (d) capacity lag strategy  constant capacity shortages  waits till demand has increased to a point where more capacity is needed; requires less investment and provides high-capacity utilization and higher ROI  reduce long-term profitability through overtime, subcontracting and productivity loses that occur when the firm scrambles to satisfy demand  may lead to permanent loss of market share

Short-term Capacity Management - Generally easy to satisfy demand if short-term demand is stable and sufficient capacity is available - If demand fluctuates, firm can adjust capacity to match changes in demand (internal resources & capabilities) or shifting and stimulating demand (a) Adjust Capacity - Add/share equipment: capacity levels that are limited by machine and equipment availability are more difficult to change in the short run due to high capital expense; leasing equipment can be cost-effective, can also arrange innovative partnership arrangements - Sell unused capacity: sell idle capacity such as computer storage space, rent - Modify labour capacity: overtime, extra shifts, temp staff, outsourcing; can also adjust workforce to coincide with demand patterns - Change labour skill mix: hiring the right people that can learn quickly and adjust to job requirements; cross training them to perform different tasks provides flexibility to meet fluctuating demand - Shift work to slack periods: hotel clerks prepare bills and paperwork at night  allows more time to service customers; manufacturers also build inventory during slack periods and hold goods for peak demand periods

(b) Shifting and stimulating demand - Vary price of goods or services: e.g. hotels offer cheaper rates on the weekdays, airlines offer better prices for midweek flights, restaurant cut price after dinner - Provide customers with information: e.g. bank queue number shows how many customers in queue; automated messages for call centers - Advertising and promotion: draw customers to periods of low demand (afterholiday sales); coupons strategically distributed to increase demand when there is low sales or excess capacity - Add peripheral goods and services: movie theatre rentals of auditorium for business meetings; fast food chains offer venue for birthday parties; 24/7 supermarket - Provide reservations: promise to provide goods/services at a future time and place. Reduce uncertainty for both provider and customer  advance knowledge when customer demand will occur  better plan equipment and workforce and rely less on forecasts

Chapter 8: Managing Inventories in Supply Chains What is Inventory?  Inventory is any asset held for future use or sale  Management needs to understand the role of inventories in company’s financial performance, operational efficiency, customer satisfaction and meet strategic objectives  Inventory Management is the planning, coordinating, acquisition control, storage, handling, movement, distribution, possible sale of inventories, that are needed to meet customer wants and needs  Challenging as inventory objectives are viewed differently in every function (pg 223) Definitions/Concepts  Raw Materials/component parts/subassemblies/supplies: inputs in manufacturing and service delivery  Work-in-process inventory: partially finished products in various stages of completion that are waiting further processing (also acts as a buffer between workstations)  Finished-goods inventory: completed products ready for distribution or sale to customers; stored in warehouse or at the point of sale in retail stores; necessary to satisfy customers demands quickly  Safety stock inventory: additional amount that is kept over and above avg amount required to meet demand *high levels of WIP and finished goods are not desirable  unreliable machines, late supplier shipments, defective parts, obsolescence *lack of inventories can cause production lines to shut down or unsatisfied customers and purchase from competitors  use safety stocks

Decisions (pg 226)  When to order from supplier/initiate production runs  How much to order or produce each time  Ordering/set-up costs, Inventory-holding costs, Shortage costs, Unit cost of SKUs Inventory Characteristics (pg 227-228) 1. Number of Items - Firms maintain inventories for many items often at multiple locations - Each item is often assigned to a unique identifier, stock-keeping unit - SKU: single item or asset stored at a particular location 2. Nature of Demand - Independent: demand for an SKU is unrelated to the demand for other SKUs and needs to be forecasted - Directly related to customer market demand - Inventories of finished goods such as toothpaste and electric fans have independent demand characteristics - Dependent: directly related to the demand of other SKUs can be calculated without forecast - E.g. chandelier may consist of frame and six lightbulb sockets (demand for chandeliers is independent whilst demand for socket is dependent on demand for chandeliers) - Static Demand: stable demand - Dynamic Demand: demand that varies over time 3. Number and Duration of Time Periods - Some selling seasons are short; any leftover items cannot be stored until the next season (e.g. Christmas trees) - Single-period vs multiple-period inventory 4. Lead time - Time between placement of an order and receiving it - Affected by transportation carriers, buying order frequency and size, supplier production schedules 5. Stockouts - Inability to satisfy demand for an item - Backorder: customer is willing to wait for the item; results in additional cost for transportation, expediting, buying at a higher price from another supplier - Lost sale: unwilling to wait and purchases from somewhere else; opportunity cost  goodwill, potential future revenue

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