OPERATIONS MANAGEMENT

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4. Introduction
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A supply chain is a system of organizations, people, activities, information, and
resources involved in moving a product or service from supplier to customer.
Supply chain activities transform natural resources, raw materials, and
components into a finished product that is delivered to the end customer. In
sophisticated supply chain systems, used products may re-enter the supply
chain at any point where residual value is recyclable.

5. BBA 6TH M2
Supply Chain Design
Totalcosts
Supply chain performance
New supply chain
efficiency curve with
changes in design
and execution
Inefficient
supply chain
operations Area of
improved
operations
Figure 9.1 – Supply Chain Efficiency Curve
Improve
perform-
ance
Reduce costs
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Supply Chain Design
 The goal is to reduce costs as well increase performance.
 Supply chains must be managed to coordinate the inputs with the outputs in a
firm to achieve the appropriate competitive priorities of the firm’s enterprise
processes.
 The Internet offers firms an alternative to traditional methods for managing the
supply chain.
 A supply chain strategy is essential for service as well as manufacturing firms.
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Supply Chains
 Every firm or organization is a member of some supply chain
 Services
 Provide support for the essential elements of various services the firm
delivers
 Manufacturing
 Control inventory by managing the flow of materials
 Suppliers identified by position in supply chain – “tiers”
 Suppliers and customers
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Home
customers
Commercial
customers
Flowers-on-Demand florist
Packaging
Flowers:
Local/International
Arrangement
materials
FedEx delivery
service
Local delivery
service
Internet
service
Maintenance
services
Supply Chains
Figure 9.2 – Supply Chain for a Florist
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East Coast West Coast East Europe West Europe Retail
USA Ireland
Distribution
centers
Manufacturer
Ireland
Assembly
Germany Mexico USATier 1
Major
subassemblies
Germany Mexico USA ChinaTier 2 Components
Supply Chains
Poland USA Canada Australia MalaysiaTier 3
Raw
materials
Figure 9.2 – Supply Chain for a Manufacturing Firm
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Inventory and Supply Chains
Scrap flow
Inventory level
Output flow of materials
Input flow of materials
Figure 9.4 – Creation of
Inventory
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Inventory and Supply Chains
 Balance the advantages and disadvantages
 Pressures for small inventories
Inventory holding cost
Cost of capital
Storage and handling costs
Taxes, insurance, and shrinkage
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Inventory and Supply Chains
 Pressures for large inventories
Customer service
Ordering cost
Setup cost
Labor and equipment utilization
Transportation cost
Payments to suppliers
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13.  Three aggregate categories
 Raw materials
 Work-in-process
 Finished goods
Types of Inventory
 Classified by how it is created
 Cycle inventory
 Safety stock inventory
 Anticipation inventory
 Pipeline inventory
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Types of Inventory
Figure 9.5 – Inventory at Successive Stocking Points
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Cycle Inventory
 Lot sizing principles
1. The lot size, Q, varies directly with the elapsed time (or
cycle) between orders.
2. The longer the time between orders for a given item, the
greater the cycle inventory must be.
Average cycle inventory = =
Q + 0
2
Q
2
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Safety Stock and Anticipation Inventory
 Safety Stock inventory
- Protects against uncertainties in demand, lead time, and
supply changes
 Anticipation inventory
- Used to absorb uneven rates of demand or supply
- Predictable, seasonal demand patterns lend themselves
well to the use of anticipation inventory
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Estimating Inventory Levels
1. Enter the average lot size, average demand during a period, and
the number of periods of lead time:
2. To compute cycle inventory, simply divide average lot size by 2. To
compute pipeline inventory, multiply average demand by lead time
Cycle inventory
Pipeline inventory
Average lot size
Average demand
Lead time
350
70
2
175
140
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Inventory Reduction Tactics
 Cycle inventory
Reduce the lot size
Reduce ordering and setup costs and allow Q to be reduced
Increase repeatability to eliminate the need for changeovers
 Safety stock inventory
 Place orders closer to the time when they must be received
 Improve demand forecasts
 Cut lead times
 Reduce supply chain uncertainty
 Rely more on equipment and labor buffers
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19. Inventory Reduction Tactics
 Anticipation inventory
Match demand rate with production rates
Add new products with different demand cycles
Provide off-season promotional campaigns
Offer seasonal pricing plans
 Pipeline inventory
 Reduce lead times
 Find more responsive suppliers and select new carriers
 Change Q in those cases where the lead time depends on the
lot size
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Inventory Placement
 Where to locate an inventory of finished goods
 Use of distribution centers (DCs)
 Centralized placement
 Inventory pooling
 Forward placement
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 Inventory measures
Measures of Supply Chain Performance
Average
aggregate
inventory
value
= +
Value of
each unit
of item B
Number of
units of item
B typically
on hand
Value of
each unit
of item A
Number of
units of item
A typically
on hand
Weeks of supply =
Average aggregate inventory value
Weekly sales (at cost)
Inventory turnover =
Annual sales (at cost)
Average aggregate inventory value
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 Financial measures
Total revenue
Cost of goods sold
Operating expenses
Cash flow
Working capital
Return on assets
Measures of Supply Chain Performance22

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Return on assets
(ROA)
Increase ROA with
higher net income and
fewer total assets
Total assets
Achieve the same or
better performance
with fewer assets
Working capital
Reduce working capital
by reducing inventory
investment, lead
times, and backlogs
Fixed assets
Reduce the number of
warehouses through
improved supply chain
design
Net income
Improve profits with
greater revenue and
lower costs
Measures of Supply Chain Performance
Total revenue
Increase sales through
better customer service
Cost of goods sold
Reduce costs of
transportation and
purchased materials
Operating expenses
Reduce fixed expenses by
reducing overhead
associated with supply
chain operations
Net cash flows
Improve positive cash flows
by reducing lead times and
backlogs
Inventory
Increase inventory turnover
Figure 9.8 – How Supply Chain Decisions Can Affect ROA
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Mass Customization
 Competitive advantages
Managing customer relationships
Eliminate finished goods inventory
Increased perceived value of services or products
 Supply chain design for mass customization
 Assemble-to-order strategy
 Modular design
 Postponement
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Outsourcing Processes
 Make-or-buy decision
 Vertical integration
Backward integration
Forward integration
 Outsourcing
Offshoring
Benefits to outsourcing
Pitfalls to outsourcing
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 Efficient supply chains
 Responsive supply chains
 Design of efficient and responsive supply chains
Strategic Implications26

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Strategic Implications
TABLE 9.1 | ENVIRONMENTS BEST SUITED FOR EFFICIENT AND RESPONSIVE
| SUPPLY CHAINS
Factor Efficient Supply Chains Responsive Supply Chains
Demand Predictable, low forecast errors Unpredictable, high forecast
errors
Competitive priorities Low cost, consistent quality,
on-time delivery
Development speed, fast
delivery times, customization,
volume flexibility, variety, top
quality
New-service/product
introduction
Infrequent Frequent
Contribution margins Low High
Product variety Low High
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Strategic Implications
TABLE 9.2 | DESIGN FEATURES FOR EFFICIENT AND RESPONSIVE SUPPLY CHAINS
Factor Efficient Supply Chains Responsive Supply Chains
Operation strategy Make-to-stock or standardized
services or products;
emphasize high volumes
Assemble-to-order, make-to-
order, or customized service or
products; emphasize variety
Capacity cushion Low High
Inventory investment Low; enable high inventory
turns
As needed to enable fast
delivery time
Lead time Shorten, but do not increase
costs
Shorten aggressively
Supplier selection Emphasize low prices,
consistent quality, on-time
delivery
Emphasize fast delivery time,
customization, variety, volume
flexibility, top quality
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