Operations Management: A supply chain approach

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1 Operations Management: A supply chain approach Dr. Patricia Deflorin 3/12/2012 Page 1

2 Overview 1. Operation Strategy: Origins and New Directions 2. Supply Chain Management 3. Creating an Edge through New Process Development 4. Sharpening the Edge: Driving Operations Improvement 5. Designing and Managing Operating Networks 3/12/2012 Page 2

3 Todays topics The Supply Chain: Introduction Supply Chain Management (SCM) Supply Chain Management Enablers Process Control and SCOR Green Supply Chain Managing Disintegrated Supply Chains: An Example Summary 3/12/2012 Page 3

4 The Supply Chain: Introduction All facilities, functions, and activities associated with flow and transformation of goods and services from raw materials to customer, as well as the associated information flows An integrated group of processes to source, make, and deliver products 4

7 The Supply Chain: Introduction Processes and Interfaces Operations and supply chain activities Purpose Key Interfunctional Participants Key Interorganizational Participants Process selections Design and implement the transformation processes that best meet the needs of the customer and the firm. Engineering, Marketing, Finance, Human resources, IT Customers Forecasting Develop the planning numbers needed for effective decision making. Marketing, Finance, Accounting Suppliers, Customers Capacity planning Establish strategic capacity levels (bricks and mortar) and tactical capacity levels (workforce, inventory). Finance, Accounting, Marketing, Human resources Suppliers, Customers Inventory management Manage the amount and placement of inventory within the company and the supply chain. IT, Finance Suppliers, Customers Planning and control Schedule and manage the flow of work through an organization and the supply chain; match customer demand to supply chain activities. Marketing, IT Suppliers, Customers Purchasing Identify and qualify suppliers of goods and services; manage the ongoing buyersupplier relationships. Engineering, Finance, Marketing Suppliers Logistics Manage the movement of physical goods throughout the supply chain. Marketing, Engineering Suppliers, Customers 3/12/2012 (Bozarth and Handfield, 2005) Page 7

8 The Supply Chain: Introduction Job descriptions Analyst Commodity manager Customer service manager International logistics manager Logistics services salesperson Production manager Sourcing analyst Sourcing manager Logistics and Material Planner Systems support manager (Management Information Systems) Transportation manager Uses analytical and quantitative methods to understand, predict, and improve processes within the supply chain. Acquires knowledge in a specific market in which the organization purchases significant quantities of materials and services. Helps formulate long-term commodity stragies and manage long-term relationships with selected suppliers. Plans and directs customer service teams to meet the needs of customers and support company operations. Works closely with marketing and sales, logistic, and transportation departments. Works closely with manufacturing, marketing, and purchasing to create timely, cost-effective import/export supply chains. Markets transportation, warehousing, and specialized services to other companies. Supervises production in a manufacturing setting. Responsible for a wide range of personnel. Identifies global sources of materials, selects suppliers, arranges supplier s contracts, and manages ongoing supplier s relationships. Measures supplier performance, identifies suppliers requiring improvement, and facilitates efforts to imporve supplier s processes. Reviews existing procedures and examines opportunities to streamline production, purchasing, warehousing, distribution, and financial forecasting to meet product distribution needs. Provides analytical support in the management of logistics information, supplier performance data, materials requirements, and scheduling processes. Manages private, third-party, and contract carriage systems to assure timely and cost-efficient transportation of all incoming and outgoing shipments. 3/12/2012 (Bozarth and Handfield, 2005) Page 8

9 The Supply Chain: Introduction Value Chain versus Supply Chain Value chain every step from raw materials to the eventual end user ultimate goal is delivery of maximum value to the end user Supply chain activities that get raw materials and subassemblies into manufacturing operation ultimate goal is same as that of value chain Terms are used interchangeably Value: creation of value for customer is important aspect of supply chain management 9

10 Supply Chain Management (SCM) Managing flow of information through supply chain in order to attain the level of synchronization that will make it more responsive to customer needs while lowering costs Keys to effective SCM information communication cooperation trust 10

11 Supply Chain Management (SCM) Supply Chain Uncertainty and Inventory Inventory insurance against supply chain uncertainty A major objective of SCM: respond to uncertainty in customer demand without creating costly excess inventory Factors that contribute to uncertainty 11

Supply Chain Management (SCM) Bullwhip Effect Occurs when slight demand variability is

13 Supply Chain Management (SCM) Effective SCM Keys to effective SCM Information Communication Cooperation Trust Enablers to effective SCM: - Risk pooling - Information Technology - Supply Chain integration and collaboration 3/12/2012 Page 13

14 Supply Chain Enabler Risk Pooling Risks are aggregated to reduce the impact of individual risks Combine inventories from multiple locations into one Reduce parts and product variability, thereby reducing the number of product components Create flexible capacity 14

16 Supply Chain Enablers E-Business Savings due to lower transaction costs Reduction of intermediary roles Shorter supply chain response times Wider presence and increased visibility Greater choices & more info for customers Improved service Collection & analysis of huge amounts of customer data & preferences Access to global markets, suppliers & distribution channels Copyright 2011 John Wiley & Sons, Inc. 16

17 Supply Chain Enablers Electronic Data Interchange (EDI) Computer-to-computer exchange of documents in a standard format Purchasing, shipping and receiving Improve customer service Reduce paperwork Increase productivity Improve billing and cost efficiency Reduce bullwhip effect through information sharing Copyright 2011 John Wiley & Sons, Inc. 17

18 Supply Chain Enablers Bar Codes Automated data collection system Bar code contains identifying information Provide instantaneous tracking information Checkout scanners create point-of-sale data Update inventory records Identify trends Order material Schedule orders Plan deliveries Copyright 2011 John Wiley & Sons, Inc. 18

Supply Chain Enablers Radio Frequency Identification (RFID) Use radio waves to transfer data from chip to a reader Provides complete visibility of product location

19 Supply Chain Enablers Radio Frequency Identification (RFID) Use radio waves to transfer data from chip to a reader Provides complete visibility of product location Continuous inventory monitoring Reduce labor to manage inventory Reduce inventory costs. RFID is not standardized yet Data protection issues Copyright 2011 John Wiley & Sons, Inc. 19

22 Supply Chain Enablers RFID 3/12/2012 Page 22

23 Supply Chain Enablers Supply Chain Integration Share information among supply chain members Reduced bullwhip effect Early problem detection Faster response Builds trust and confidence Collaborative planning, forecasting, replenishment, and design Reduced bullwhip effect Lower costs (material, logistics, operating, etc.) Higher capacity utilization Improved customer service levels 23

24 Supply Chain Enablers Collaborative Planning, Forecasting, and Replenishment (CPFR) Two or more companies in a supply chain to synchronize their demand forecasts into a single plan to meet customer demand Parties electronically exchange past sales trends point-of-sale data on-hand inventory scheduled promotions forecasts (Bozarth and Handfield, 2005) 24

25 Process Control and SCOR Process Control not only for manufacturing operations can be used in any processes of supply chain Supply Chain Operations Reference (SCOR) a cross industry supply chain diagnostic tool maintained by the Supply Chain Council (Bozarth and Handfield, 2005) 25

26 Process Control and SCOR SCOR Model Processes Plan Develop a course of action that best meets sourcing, production and delivery requirements Source Procure goods and services to meet planned or actual demand Make Transform product to a finished state to meet planned or actual demand Deliver Provide finished goods and services to meet planned or actual demand, including order management, transportation and distribution Return Return products, postdelivery customer support (Bozarth and Handfield, 2005) 26

27 Process Control and SCOR SCOR Performance Metrics Performance Attribute Performance Metric Definition Customer Facing Supply chain delivery reliability Delivery performance Percentage of orders delivered on time and in full to the customer Fill rate Percentage of orders shipped within 24 hours of order receipt Supply chain responsiveness Supply chain flexibility Perfect order fulfillment Order fulfillment lead time Supply chain response time Production flexibility Percentage of orders delivered on time and in full, perfectly matched with order with no errors Number of days from order receipt to customer delivery Number of days for the supply chain to respond to an unplanned significant change in demand without a cost penalty Number of says to achieve an unplanned 20% change in orders without a cost penalty (Bozarth and Handfield, 2005) 27

28 Process Control and SCOR SCOR Performance Metrics Performance Attribute Performance Metric Definition Internal Facing Supply chain cost Supply chain management cost Supply Chain Asset Management Efficiency Cost of goods sold Value-added productivity Warranty/returns processing cost Cash-to-cash cycle time Inventory days of supply Asset turns The direct and indirect cost to plan, source and deliver products and services The direct cost of material and labor to produce a product or service Direct material cost subtracted from revenue and divided by the number of employees, similar to sales per employee Direct and indirect costs associated with returns including defective, planned maintenace and excess inventory The number of days that cash is tied up as working capital The number of days that cash is tied up us inventory Revenue divided by total assets including working capital and fixed assets 3/12/2012 (Bozarth and Handfield, 2005) 28

29 Green Supply Chains Sustainability Meeting present needs without compromising the ability of future generations to meet their needs Sustaining human and social resources It can be cost effective and profitable Can provide impetus for product and process innovations Impulse comes from downstream in the supply chain and moves upstream to suppliers 29

30 Green Supply Chains Early success using Green SCM principles Texas Instruments: Saves $8 million each year by reducing its transit packaging budget for its semiconductor business through source reduction, recycling, and use of reusable packaging systems (20% annual savings). Commonwealth Edison: Produced $50 million in financial benefits from managing materials and equipment with a life-cycle management approach. Pepsi-Cola: Saved $44 million by switching from corrugated to reusable plastic shipping containers for one liter and 20- ounce bottles conserving 196 million pounds of corrugated material. Dow Corning: Saved $2.3 million by using reconditioned steel drums in Also conserved 7.8 million pounds of steel. 3/12/2012 (LMI, Supply Chain World Conference, 2005) Page 30

31 Green Supply Chain Potential for cost savings 3/12/2012 (LMI, Supply Chain World Conference, 2005) Page 31

32 Green Supply Chain Classification based on problem context 3/12/2012 Source: Srivastava, S.K. (2007), Green supply-chain management: A state-of the- Page 32 art literature review, International Journal of Management Reviews, p

33 Managing Disintegrated Supply Chains An Example Powertrain Cooling Engine Cooling Modules Radiators Condensers Charge-Air-Coolers Passenger Thermal Management (HVAC-Heating, Ventilating and Air- Conditioning) HVAC Modules (Underdash) Center Stack HVAC Module Evaporators Heater Cores.

34 Managing Disintegrated Supply Chains Supply Chain Collaboration Key Facts: Number of key suppliers: 25 Area: Europe Supply frequency: from multiple times per day to monthly

35 Managing Disintegrated Supply Chains Supplier Distribution

36 Managing Disintegrated Supply Chains Supply Chain Collaboration-Tools Logistics Quality Variation-Management Daily Delay monitoring for each product Analysis of PPM* monitoring Analysis of problems of the variation management If discrepancies occur: Entry into respective database Analysis of impact Initiation of special deliveries Request of an action plan Monthly Evaluation of volume-dependability (Red-Light Monitoring) Initiation of the escalation procedure Charging of costs (additional expenses) If discrepancies occur: Entry into respective database Product-Leader meeting Initiation of special actions Request of an action plan ppm analysis (top 3) Analysis of external quality occurrences Analysis of quality problems based on distinctive categories Check of action plan and its effectiveness Initiation of the escalation procedure If discrepancies occur: Entry into respective database Initiation of special actions Request of an action plan Top 3 List worst supplier Quarterly Analysis of supplier performance Supplier evaluation Definition of further escalation procedures: Request of an 8D Report Supplier site visit Invitation of the supplier for the performance discussion Supplier audit *(problems identified/delivered goods)*parts per million

37 Managing Disintegrated Supply Chains Elements of the collaboration management Input Logistic Quality Variation Monitoring and analysis Database Plan Implementation Supplier Management Escalation procedure Special audit Charge of costs Workshops Supplier meetings Supplier audits

38 Managing Disintegrated Supply Chains Claim management Problem list Data transfer from SAP Actions are effective if problem isn t repeated within 90 days Summary of the problems and graphical display Monthly notification of the data of the supplier creating problems Worst suppliers in terms of quality are displayed monthly within the plant Problem suppliers (max. 100%) First Quarter 2006 Modine Pliezhausen GmbH 40% Gate S.r.l. 41% Modine Austria GmbH 81%

39 Managing Disintegrated Supply Chains Supply Chain Coordination: Supplier Day Review of the last year Discussion of future activities and strategy Workshops on various topics for the joint process optimization Award of the supplier of the year Informal discussions and get together

40 Managing Disintegrated Supply Chain Study of Successful practice Measuring the strategic value of sourcing: 44% of customers and 42% of service providers do not undertake formal strategic reviews of the benefits to their business or sourcing contracts. 72% of the customers report that they do not have, or do not share with their service providers, criteria for measuring the success or failure of their sourcing arrangement. Source: KPMG 2007 (sample = 650 companies in 32 countries)

41 Managing Disintegrated Supply Chains Study of Successful practice Success in meeting expectations: Bringing experience to the business it did not have previously 47% Ensuring SLAs are met 66% Ensuring end users/user departments are satisfied with the service provided Cost targets and financial success criteria 64% 61% Percentage of respondents Source: KPMG 2007 (sample = 650 companies in 32 countries)

42 Summary Supply Chain Management is an important factor within international markets Supply Chain Management Enablers reduce risks and support value generation Effective Supply Chain Management is based upon: Information Communication Cooperation Trust 3/12/2012 Page 42

43 Next Assignments Date Topic Literature R&D Ellram et al (2008) Zirger and Maidique (1990) Please send the handouts until until March 19th, 2012

44 Definitions Operations function Also called operations. The collection of people, technology, and systems within an organization that has primary responsibility for providing the organization s products or services. Supply chain A network of manufacturers and service providers that work together to convert and move goods from the raw materials stage through to the end user. These manufacturers and service providers are linked together through physical flows, information flows, and monetary flows. Operations management The planning, scheduling, and control of the activities that transform inputs into finished goods and services. 3/12/2012 (Bozarth and Handfield, 2005) Page 44

45 Definitions Upstream A term used to describe activities or firms that are positioned earlier in the supply chain relative to some other activity or firm of interest. For example, corn harvesting takes place upstream of cereal processing, while cereal processing takes place upstream of cereal packaging. Downstream A term used of describe activities or firms that are positioned later in the supply chain relative to some other activity or firm of interest. For example, sewing a shirt takes place downstream of weaving the fabric, while weaving the fabric takes place downstream of harvesting the cotton First-tier supplier A supplier that provides products or services directly to a particular firm. 3/12/2012 (Bozarth and Handfield, 2005) Page 45

46 Definitions Second-tier supplier A supplier that provides products or services to a firm s first-tier supplier. Supply chain management The active management of supply chain activities and relationships in order to maximize customer value and achieve a sustainable competitive advantage. It represents a conscious effort by a firm or group of firms to develop and run supply chains in the most effective and efficient ways possible. Supply-Chain Operations Reference (SCOR) model A framework developed and supported by the Supply-Chain Council that seeks to provide standard descriptions of the processes, relationships, and metrics that define supply chain management. 3/12/2012 (Bozarth and Handfield, 2005) Page 46

Supply Chain Management. Supply Chain Management. Lecture Outline. Supply Chain. Supply Chain Illustration

Supply Chain Management. Supply Chain Management. Lecture Outline. Supply Chain. Supply Chain Illustration Ir. Haery Sihombing/IP Pensyarah Fakulti Kejuruteraan Pembuatan Universiti Teknologi Malaysia Melaka 5 Supply Chain Management Lecture Outline Supply Chain Management Information Technology: A Supply Chain