Instructor: Spyros Reveliotis homepage: IE3104: Supply Chain Modeling: Manufacturing & Warehousing Summer 2006

“Course Logistics” TA: Ms. Shuk-Yin Choi Office Hours: Monday 2-3:30pm and Thursday 10-11:30am Grading policy: –Homework: 25% –Midterm I: 20% (Tentative Date: Tue., June 20) –Midterm II: 20% (Tentative Date: Tue., July 11) –Final: 35% (Date: TBA) –Exams closed-book, with 2 pages of notes per midterm exam and 6 pages for the final –No make-up exams and incompletes. Reading Materials: –Course Textbook: S. Nahmias, “Production and Operations Analysis”, 5 th Ed. McGraw Hill / IRWIN –Course slides and any other material posted at my homepage or circulated in class.

Course Objectives (What is this course all about?) How to design and operate manufacturing and warehousing facilities (and more…) –A conceptual description and classification of modern production and warehousing environments and their operation –An identification of the major issues to be addressed during the design, planning and control of the production and warehousing activity –Decomposition of the overall production planning and control problem to a number of sub-problems and the development of quantitative methodologies for addressing the arising sub-problems –Emerging trends, including the implications of a globalized and internet-based economy

Our abstraction of the Production System Production System: A transformation process (physical, locational, physiological, intellectual, etc.) Organization InputsOutputs Materials Capital Labor Manag. Res. Goods Services The production system as a process network Stage 5 Stage 4 Stage 3 Stage 2Stage 1 SuppliersCustomers

Productivity: Basic Organizational Performance Measure Productivity = Value produced / Input used = Output / (Labor + Material + Capital + Energy + Miscellaneous) Remarks: Typically both the numerator and the denominator are measured in $$$. If the output corresponds to actual sales, then productivity measures both effectiveness (doing the right thing) and efficiency (in the right way). From an economic standpoint, major emphasis is placed on the annual percentage change (hopefully increase) of productivity. For the entire US economy, the annual increase in productivity is higher than 2.5% (38% of this increase is due to capital improvements, 10% to labor improvements and 52% to management improvements). For the Chinese economy, this number has been more than 6% lately!

Major Productivity Variables and their contribution to productivity increase Labor –Better basic education –Better diet –Better social infrastructure like transportation and sanitation –Better labor utilization and motivation Capital –Steady and well-planned investments on equipment and its timely maintenance –Research & Development –Controlling of the cost of capital Management –Exploitation of new (information) technologies –Utilization of accumulated knowledge –Education Knowledge Society

Operations Management (OM) Definition: The study and improvement / optimization of the set of activities that create goods and services in an organization. Typical issues addressed: Service and product selection and design Quality Management Process and capacity design Facility design Facility Location Human resources and job design Inventory management Production planning and control Maintenance Supply-chain management

The major functional units of a modern organization Strategic Planning: defining the organization’s mission and the required/perceived core competencies Production/ Operations: product/service creation Finance/ Accounting: monitoring of the organization cash-flows Marketing: demand generation and order taking

Examples (borrowed from Heizer & Render)

Fit Between Corporate and Functional Strategies (Chopra & Meindl) Corporate Competitive Strategy Supply Chain or Operations Strategy Product Development Strategy Marketing and Sales Strategy Information Technology Strategy Finance Strategy Human Resources Strategy

Corporate Mission The mission of the organization –defines its purpose, i.e., what it contributes to society –states the rationale for its existence –provides boundaries and focus –defines the concept(s) around which the company can rally Functional areas and business processes define their missions such that they support the overall corporate mission in a cooperative and synergistic manner.

Corporate Mission Examples Merck: The mission of Merck is to provide society with superior products and services-innovations and solutions that improve the quality of life and satisfy customer needs-to provide employees with meaningful work and advancement opportunities and investors with a superior rate of return. FedEx: FedEx is committed to our People-Service-Profit philosophy. We will produce outstanding financial returns by providing totally reliable, competitively superior, global air-ground transportation of high-priority goods and documents that require rapid, time-certain delivery. Equally important, positive control of each package will be maintained utilizing real time electronic tracking and tracing systems. A complete record of each shipment and delivery will be presented with our request for payment. We will be helpful, courteous, and professional for each other, and the public. We will strive to have a completely satisfied customer at the end of each transaction.

Defining the Corporate Strategy Differentiation (Quality; Uniqueness; e.g., Luxury cars, Fashion Industry, Brand Name Drugs) Cost Leadership (Price; e.g., Wal-Mart, Southwest Airlines, Generic Drugs) Responsiveness (Reliability; Quickness; Flexibility; e.g., Dell, Overnight Delivery Services) Competitive Advantage through which the company market share is attracted

The operations frontier, trade-offs, and the operational effectiveness Differentiation Cost Leadership Responsiveness

Defining the Corporate Strategy Corporate Strategy: The organization’s positioning in terms of –responsiveness, –cost leadership and –product differentiation requirements, i.e., the sought competitive advantage(s). The corporate strategy dictates the detailed strategies for each functional area (i.e., Operations, Finance, Marketing) but it is also affected by those areas. Collectively, all these strategies seek to exploit (external) opportunities and (internal) strengths, neutralize (external) threats, and address (internal) weaknesses

Factors affecting Corporate Strategy External –Emerging strengths and weaknesses of competitors => new threats and opportunities, respectively –New industry entrants –Development of substitute products –Development of new technologies –Legal developments (e.g., environmental concerns and regulations) –Economic and political developments (e.g., new international agreements, political crises) Internal –Company politics and restructuring –Modified relationships with customers and suppliers –Product Life Cycle

Strategy and Issues during a Product’s Life (J. Heizer & B. Render, “Operations Management”, Prentice Hall) Introduction GrowthMaturityDecline Time Sales Best period to increase market share R&D engineering critical Frequent product and process changes Short production runs High production costs Limited models Attention to quality Practical to change price or quality image Strengthen niche Forecasting critical Products and process reliability Increase capacity Shift towards product focus Enhance distribution Poor time to change image, price or quality Competitive costs become critical Defend market position Standardization - minor product changes Optimum capacity Process stability Long production runs Cost control critical Little product differentiation Overcapacity in the industry Reduce capacity and eventually prune line to eliminate items not returning good margin

The primary “drivers” for achieving strategic fit in Operations Strategy (adapted from Chopra & Meindl) Corporate Strategy Operations Strategy EfficiencyResponsiveness FacilitiesInventoryTransportationInformation Market Segmentation

The role of Facilities Facilities: The locations where inventory is –processed and transformed into another state (manufacturing) or –staged before being shipped to the next stage (warehousing) In general, centralization boosts efficiency, while decentralization boosts responsiveness Primary decisions: –Location Proximity to the customer Proximity to resources Access to markets (ability to circumvent quotas and tariffs) Infrastructure Operational costs and tax incentives –Capacity Capital cost vs. responsiveness –Operations Methodology for Manufacturing Facilities Product vs. functional focus Flexible vs. dedicated capacity –Warehousing methodology Storage modes and material flow organization Cross-docking

The role of Inventory Primary inventory components: –Raw Material –Work In Process (WIP) –Finished Goods It exists because of the finiteness of the production and transportation rates (Little’s Law: I=TH*T) Types of Inventory –Cycle Inventory: It is incurred in an effort to control the impact of “fixed” ordering and set-up costs. –Safety Inventory: It is used to deal with the randomness in the experienced demand; it is set so that it helps the supply chain meet some “service level” (i.e., control the probability that no stock-out will be experienced at any replenishment cycle). –Seasonal Inventory: It is used to help the supply chain deal with predictable variability in demand. –Opportunistic Inventory: Takes advantage of “bargains”. Sourcing: Determine the set of suppliers / subcontractors to be used, and develop the contracts that will govern the relationship.

The role of Transportation Transportation: The SC element that moves product between its different stages. Primary decisions: –Mode(s) of Transportation Air: fastest but most expensive Truck: Relatively quick, inexpensive and very flexible mode Rail: Inexpensive mode to be used for large quantities Ship: Slowest but often the most economical choice for large overseas shipments Pipeline: Used (primarily) for oil and gas Electronic transportation: for goods as music and movies –Route and Network Selection –In-house or Outsource to some 3PL provider

The role of Information Information exchange is necessary for the most extensive modes of coordination sought in contemporary supply chains. It allows the supply chain to improve simultaneously its efficiency and responsiveness. Information-related decisions –Push vs. pull –Extent and modes of information sharing and coordination –Forecasting and Aggregate Planning schemes –Pricing and revenue management policies –Enabling Technologies: Electronic Data Interchange (EDI): Enables paperless transactions, primarily for “backend” operations of the SC. The Internet and the WWW. Enterprise Resource Planning (ERP): enables transactional tracking and global visibility of information in the SC. Supply Chain Management (SCM) software: decision support tools.

The role of Market Segmentation Need to develop different strategies for different geographical or market segments that align to the preferences and attitudes of the corresponding customer bases. Need to align the provided products and services, as well as the deployed production and business functions, to the local culture and ethics. Supporting practices –broader product lines –globalized operations –(mass-)customization Need to manage the resulting complexity. –Modularity –Combinatorial customization –Design for postponement

Case Study: Expanding the Operations Frontier - Dell’s “revolution” in the PC market Dell’s competitive advantage: Provide customized PC configurations, with short delivery times and affordable prices. Dell’s success in PC market:

Virtual Integration Customer Dell Suppliers Dell Supply Chain PUSH PULL PC SUPPLY CHAINS Typical PC Supply Chain (Compaq, HP, IBM, etc.) Customer Distribution Channels Manufacturer Suppliers PUSH PULL

The Critical Success Factors underlying Dell’s competitive advantage Very high product (configurable) variety – mass customization! Direct fulfillment - no intermediaries No production launch until customer order booked (pure pull!) Very low finished goods inventory (costs) – high inventory turns (raw material inventory influenced by “recommended configurations”) High velocity material flows & fulfillment

Supporting Dell’s competitive advantage through a new operational model Focused on strategic partnerships: suppliers down from 200 to 47 Suppliers maintain nearby ship points; delivery time 15 minutes to 1 hour Suppliers own inventory until used in production Demand pull throughout value chain – “information for inventory” substitution Demand forecasting is critical – changes are shared immediately within Dell and with supply base Customers frequently steered to “recommended configurations” with high availability to balance supply and demand External logistics supplier used to manage inbound supply chain

Emerging factors and trends enabling Dell’s strategy The commoditization of the PC industry –Standardized and interchangeable components –Emergence of reliable manufacturing service providers Recent advances in Supply Chain Management –Information Technology (IT) platforms that allow the effective and efficient information exchange and coordination across the entire supply chain –3 rd party logistics service providers –Emerging emphasis on virtual rather than vertical company integration

Course Outline