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OMGT2085 Topic 4 – Production & Operations Management

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Topic 4 – Production & Operations Management

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Contents Contents

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Introduction

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Learning objectives

The Role of Production Operations in SCM

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Production Process Functionality

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Production Trade-offs

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Production Challenges

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Operations & Planning

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Production Strategies

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Production Metrics

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Production Technology

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Bullwhip Effect

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Mitigation Strategies

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Summary

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Activities

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Introduction to Logistics & Supply Chain Management

Introduction Operations focus on the “make/build” portion of the supply chain. They focus on production of goods and services needed to fulfil customer requirements. Production involves the transformation of inputs into outputs that customers demand. In the execution of these processes, production facilities must interact with various supply chain functions and operations create the outputs that are distributed through supply chain networks. All activities in the purchase, production, and delivery of goods and services need to be synchronized to ensure consistent, efficient product and service flow.

Learning objectives 

Discuss the strategic value-adding role operations plays in the supply chain.

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Explain the concept of a transformation process and its application to goods and services.

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Appreciate the operations.

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Understand the primary production strategies and types of planning.

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Discuss the primary assembly processes and production methods for goods creation.

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Describe the various production process layouts.

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Explain the role of productivity and quality metrics for improving operations performance.

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Know how information technology supports efficient production of goods and services.

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Understand the implications of bullwhip effect on manufacturing and strategies for mitigating the effect.

trade-offs

and

challenges

involved

Topic 4 – Production & Operations Management

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production

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The Role of Production Operations in SCM Many of the supply chain and logistics activities discussed in previous chapters focus on operations—procurement operations that provide access to materials, transportation operations that support the flow of goods, distribution operations that streamline order fulfilment, and so on. Collectively, they create time and place utilities. However, the potential contributions of goods manufacturing and service production to supply chain effectiveness are often overlooked because they focus on a different, but also important, dimension of economic utility called form utility. Form utility drives the need for supply chain capabilities (i.e., time and place utilities). It takes a great deal of effort and coordination to run an effective production operation that is supported by and also supports the supply chain. Processes must be effectively designed and flawlessly executed, supply chain tradeoffs must be understood and made, and economies of scale need to be achieved, all while the organization addresses competitive challenges and other problems

Production Process Functionality Manufacturers, contract assemblers, and service providers all engage in production processes. The production process also uses resources such as facilities, equipment, knowledge, labour, and capital to support the transformation. Feedback of key information is used to make adjustments within the process in an attempt to synchronize production more closely to demand. Ignoring these feedback signals will lead to excess inventory of unpopular products or inventory shortages of hot items. The basic principles of production processes, no two processes are organized exactly alike or perform to the same level. Process functionality also plays a role in the success of an organization. The ability to perform different processes from those of competitors to create unique products and services can create a competitive advantage.

Production Trade-offs One of the most important issues for supply chain professionals to understand is the trade-offs involved within production operations and between production operations, other supply chain functions, and corporate strategy. All decisions are interrelated and can impact costs, productivity, and quality in other areas. In the next few paragraphs, common trade-offs are discussed. Higher volume leads to lower cost per unit of output, according to the longestablished economies of scale principle. In situations where production processes have high fixed costs and equipment like chemical production or paper manufacturing, it makes sense to pursue volume. In contrast, processes that can produce a range of products are said to have economies of scope. Fundamental trade-offs between responsiveness and efficiency arises when production facility decisions are made. Centralized production facilities 2

Introduction to Logistics & Supply Chain Management

provide operating cost and inventory efficiencies, while regional production facilities allow companies to be closer to customers and more responsive. Trade-offs between production processes for goods and the costs involved in manufacturing them must also be understood. Production and supply chain costs vary for make-to-stock, assemble-to-order, and build-to-order products Another consideration is whether to conduct your own production operations or to outsource production to external suppliers. The make versus buy decision can be very complex and involves sacrifice whichever way the company chooses to go.

Production Challenges Operations managers face numerous challenges and trade-offs that must be managed successfully if the organization and supply chain are to achieve their performance goals. Competitive pressures are a major challenge for many established manufacturers and service providers. Customers’ demand for choice and rapidly changing tastes make life difficult for product makers. While mass-production processes (and their economies of scale) are losing relevance in many customer-driven industries, company executives are no less demanding on the productivity and efficiency fronts. Operations managers face many other operations challenges. Labour availability and productivity issues, synchronization of activities with the supply chain, and capital costs are just a few of the additional obstacles that must be overcome.

Operations & Planning A great amount of planning, preparation and engagement of multiple players within the supply chain is essential for the production operations to be effective. Strategies need to encompass product/service characteristics, internal capabilities, and customer expectations and competitive issues.

Production Strategies In the era of mass production, operations strategy focused on reduction, efficiency, and scale. The strategy of choice for mass production is a pushbased system that relies on long-term forecasts for production planning and decision-making. In reality, few companies enjoy perfectly stable demand for their products and the related opportunity to maintain level production that is quickly consumed. More often, organizations must deal with demand variation. The push-based strategy works well for supply chains that focus on the immediate delivery of off-the-shelf, low-cost, standardized goods. Operating from forecasts that are derived from supply chain partners’ predictions may limit the producer’s responsiveness. Without visibility to actual end-consumer demand, the producer will be slow to react to changes Topic 4 – Production & Operations Management

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in the marketplace. The result may be continued production of items whose demand is dropping and may soon be obsolete. Alternatively, the producer may fail to recognize changing customer requirements and ramp up production of desired goods. The ultimate impact will be missed opportunities, unrecoverable costs, and/or missed revenues. Lean production is an integrated set of activities designed to minimize the movement and use of raw materials, work-in-process, and finished goods inventories during production. A principal focus of lean manufacturing is to minimize all forms of waste and to produce quality products without the need for rework and production relies on pull-based systems to coordinate production and distribution with actual customer demand rather than a potentially error-laden forecast of demand. In a pull system, the producer only responds to customer demand. No action is taken until an order is placed or a purchase is made. One of the main benefits of a lean, pull-based system is the reduction of waste. There are a few challenges inherent in the pull-based strategy, such as customers who want immediate access to products and don’t want to wait for production and delivery, and it can be difficult to achieve economies of scale in assemble-to-order and build-to-order product operations, making them more expensive to produce. Finally, a lack of technological capabilities makes it difficult to achieve the supply chain visibility and synchronization needed in pull-based systems. Although many companies have made significant gains during the evolution from mass production to lean production processes, perfection has not been achieved. Flexible manufacturing emerged in the early 1990s in response to the production challenges and the purpose is to build some flexibility into the production system in order to react effectively to change, whether predicted or unpredicted. One type of reactive capability is machine flexibility. Under this strategy, general-purpose machines and equipment staffed by cross-trained workers provide the ability to produce different types of products as well as change the order of operations executed on a product. Another type of reactive capability (there are eight in all) is called routing flexibility, which provides managers with production options and the ability to adapt to changing needs. In its simplest terms, routing flexibility provides managers with a choice between machines for a part’s next operation. A primary advantage of the flexible manufacturing strategy is the ability to leverage production resources but the flexible strategy is not perfect. Its main flaw is cost so should the activity be relocated to a contract manufacturer in another country, it is commonly called offshoring. Today, a popular location for offshore production is China due to its low labour costs. The business case for outsourcing varies by situation, but reasons for outsourcing often focus on cost and capacity issues. While outsourcing has proven to be a valuable strategy whose popularity has grown dramatically, concerns come with this strategy as well. A basic concern is trade-off between lower production costs and higher supply chain costs. Moving production from Charlotte, North Carolina, to Guangzhou, China, raises transportation costs, inventory carrying costs of goods in transit, customs costs, and a host of other hidden expenses. Visibility and timing are worrisome issues. A relatively new development in the evolution of production strategy is adaptive manufacturing. The goal of this strategy is to provide companies 4

Introduction to Logistics & Supply Chain Management

with the ability to replace planning and replanning with execution based on real-time demand. Technology is a key driver of the adaptive strategy. The main concern regarding adaptive manufacturing is limited adoption of the strategy.

Production Metrics The use of measurements and key performance indicators (KPIs) that do not support operational strategies, organizational objectives, or customer requirements should avoid the following mistakes when establishing production metrics for the organization: • Using KPIs that are too narrow—Limit the use of metrics that focus on discrete events and isolated points as indicators of overall success of the process. • Encouraging wrong outcomes— eliminate measurements that promote activity rather than needed output. • Focusing on issues that are not key priorities—Avoid the development of internally focused, myopic production goals that are disconnected from the overall strategy of the organization.

Production Technology The enterprise resource planning systems don’t provide detailed visibility within the four walls of the production facility or ensure that operations are being managed proactively. World-class manufacturers understand the importance of sharing realtime information across their extended manufacturing and supply chain network. Firms are employing a new generation of manufacturing execution systems (MES) that link to ERP and supply chain applications to ensure that operations are being managed in real time. Basic explanations focus on production control as follows: 

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A shop floor control system that includes either manual or automatic labour and production reporting as well as online inquiries and links to tasks that take place on the production floor. An automated system to help control processes, materials, manpower, and all the other inputs required for the smooth functioning of a manufacturing unit.

Both of these MES definitions are substantially correct, but they are incomplete. As these varying definitions imply, MES can be deployed on a wide scale and are linked to other enterprise tools like ERP systems, product life cycle management tools, and scheduling and planning. An advanced MES receives an order from an ERP system and then makes an intelligent decision on where to produce the orders. This decision is based on facility capabilities, capacity, and price. Next, the MES publishes the instructions for the best way to manufacture the product for the parties involved in the manufacturing process. Finally, the details of production performance are tracked via KPIs and dashboards in real time, allowing managers or the system to react to changes and problems in a timely fashion Improvement in real-time visibility is one key driver of MES implementation. Another Topic 4 – Production & Operations Management

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reason for the growth of MES is the improvements in implementation. No longer do companies have to spend extensive time and huge budgets on full MES packages as modular software is now available.

Bullwhip Effect In contemporary times, players in the supply chain have observed that inventory and backorders levels fluctuate considerably even though customer demand may not vary much. Consider a simple four-stage supply chain consisting of a single retailer, wholesale, distributor and manufacturer. External Demand

Retailer Order lead-time

Delivery lead-time

Wholesaler Order lead-time

Delivery lead-time

Distributor Order lead-time

Delivery lead-time

Manufacturer

Production lead-time

To understand how variability impacts the supply chain, we use the wholesaler as an example. The wholesaler receives orders from the retailers who in turn places orders his supplier, the distributor. To determine the order quantities, the wholesaler has to forecast the demand of the retailer. Since variability in orders placed by the retailers is significantly higher than customer demand’s variability, the wholesaler is forced to have more safety stock than the retailer or maintain a higher capacity to ensure the same service level as the retailer (Simchi-Levi et al., 2008). The consequences of the bullwhip effect:    

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Increased safety stock across all players in the supply chain Reduced service level as a result of overstocking Inefficient allocation of resources and capacity Increased transportations costs related to higher inventory

Introduction to Logistics & Supply Chain Management

Mitigation Strategies There are various strategies deployed to help mitigate or reduce the bullwhip effect: 

Improve transparency: Make actual demand available to suppliers

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Vendor-managed Inventory: Suppliers will be responsible for the managing the customer’s inventory and ensuring healthy service level. This reduces the length of the supply chain and also lead times from order to delivery.

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Frequent & smaller replenishment orders: Firms can order smaller quantities of a variety of items form a supplier or use a freight forwarders to consolidate small shipments.

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Reduce price fluctuations: Reduce price fluctuations through forward buying activities to take advantage of the low price offers between: retailers & consumers; distributors & retailers; and manufacturers & distribution. o

Eliminate price discounting: Many retailers have adopted everyday low prices (EDLP)

Summary The key concept from this chapter is the critical and co-dependent link between production operations and logistics. Production and logistics must work in concert to move product through the supply chain. For their part, production managers must coordinate demand information, inputs, and resources to transform them into outputs (products and materials) that are desired by customers. The faster and more flexible the transformation processes, the more responsive the production operation can be to changing conditions and disruptions. This, in turn, makes the supply chain more dynamic and competitive. •

Production operations include all activities and processes involved in changing the composition of a good or service—component fabrication, product assembly, and service request execution—for the purpose of creating form utility.

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Numerous trade-offs must be made regarding production: volume versus variety, responsiveness or efficiency, make or outsource, and focusing on a limited number of competitive dimensions.

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Intensified competition, more demanding customers, and relentless pressure for efficiency as well as adaptability are driving significant changes across many manufacturing industry settings.

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There have been significant development and shifts in production strategy. Organizations have advanced from forecast-driven mass production to demand-...