Operations Management & Performance Modeling 1 Operations Strategy 2 Process Analysis 3 Lean Operations 4 Supply Chain Management Class 5a: Inventories & Economies of Scale Class 5b: Dealing with Uncertainty & role of Centralization Class 6a: Supply Chain Design Multi-product Pooling: Postponement & Commonalities Benetton Accurate Response 5 Capacity Management in Services 6 Total Quality Management 7 Business Process Reengineering OM&PM/Class 6a

Postponement & Commonality: HP Laserjet Generic Power Production Unique Power Process I: Unique Power Supply Europe N. America Transportation Process II: Universal Make-to-Stock Push-Pull Boundary Make-to-Order OM&PM/Class 6a

HP LaserJet: European DC Safety Stocks (2 month Lead time) OM&PM/Class 6a OM&PM/Class 6a

HP LaserJet: The Effect of Aggregation Total European safety stock with 2 month lead time = 26,409 units. Total European safety stock with 2 month lead time on aggregation = 17,661 units. Reduction = 8,749 units (33%). OM&PM/Class 6a

Variety and Marketing/Operations Braking system Transmission Electrical design Chassis design Exterior body panels Engine block Front & rear seats Floor mats Airbags & antilock system Rear-view mirrors Dashboard layout Headlights Cup holders Remote keyless entry Consumer Hierarchy Score Technical Hierarchy Score Low High Source: Mohan Sawhney OM&PM/Class 6a

United Colors of Benetton Production Process OM&PM/Class 6a

Benetton Extra Cost of Postponement factory shipments woolen items $311M x 60% = $186.6M Labor and O/H costs woolen items 6.6% + 21.8% (assuming half of O/H from Exh. 1) = 28.4% $186.6M x 28.4% = $53.0M If 10% of items are dyed to order at 10% extra cost $53.0M x 10% x 10% = $0.53M OM&PM/Class 6a

Benetton Inventory Benefits of its Strategy Inv. Turns = Avg. Throughput (COGS)/Avg. Inventory Inventory Reduction = ($67.9-$38.875)M = $29.025M Savings in inventory carrying costs (@25%) = $7.256M OM&PM/Class 6a

Benetton Profitability of Agents (FY 81) Commissions (4% on shipments) $311M * 4% / 70 agents = $178K / agent Earnings on Shop Sales (10% ownership) Sales = $311M * 180% (markup) * 37/44 (realized markup) = $471M NIBT = $471M*19% = $89M 10% ownership = $8.9M/70 agents = $128K / agent Total = $306K / agent OM&PM/Class 6a

Benetton Profitability of Retailers/Franchisees (FY 81) Store Sales = $305K NIBT = 19% * $305K = $58K Less agent’s share ($5.8K) = $52K OM&PM/Class 6a

Postponement and Re-assortment: The Advantage to Forecasting Actual total sales 500 1000 1500 2000 2500 3000 3500 4000 500 1000 1500 2000 2500 3000 3500 4000 500 1000 1500 2000 2500 3000 3500 4000 Initial Forecast Updated Forecast after observing 20% of sales after 80% Each data point represents the forecast and the actual season sales for a particular item (at the style-color level). OM&PM/Class 6a

Take-Away’s: Benetton is an example of how to manage an entire supply chain and make it profitable for all entities in the chain (suppliers, Benetton, agents, retailers) by tailoring its operational response very carefully: Step 1. Reduce S, L, variability: the basics: implement everywhere in supply chain: highest pay-back Step 2. Centralization intermediate: trick is in the implementation: medium pay-back Step 3. Partial postponement flexibility last step: need this on only a small set of products & processes and meshing it with financial and marketing response. OM&PM/Class 6a

Accurate Response to Demand Uncertainty when you can order only once: L.L. Bean L.L. Bean is planning the order size for winter parkas. Each parka costs the company $70 and sells for $140. Any unsold parkas at the end of the season are disposed off by a sale at $40. Using historical data and a feel for the market, L.L. Bean forecasts the winter season demand: Demand: 21 22 23 24 25 26 27 28 Probability: 3% 4% 5% 8% 10% 15% 12% 10% Demand: 29 30 31 32 33 34 35 Probability: 9% 6% 5% 4% 4% 3% 2% How many parkas should L.L. Bean plan (make/order)? ........................................................................................................................................................................................................................................ ........................................................................................................................................................................................................................................ ........................................................................................................................................................................................................................................ OM&PM/Class 6a OM&PM/Class 6a

Accurate Response: Find optimal order level Q with Excel OM&PM/Class 6a

Accurate response: Find optimal Q from formula Cost of overstocking by one unit = Co the out-of-pocket cost per unit stocked but not demanded “Say demand is one unit below my stock level. How much did the one unit overstocking cost me?” E.g.: purchase price - salvage price. Cost of understocking by one unit = Cu The opportunity cost per unit demanded in excess of the stock level provided “Say demand is one unit above my stock level. How much could I have saved (or gained) if I had stocked one unit more?” E.g.: retail price - purchase price. Given an order quantity Q, increase it by one unit if and only if the expected benefit of being able to sell it exceeds the expected cost of having that unit left over. At optimal Q, do not order more if Prob( Demand > Q ) < Co /(Co + Cu ). OM&PM/Class 6a

Wal-Mart Logistics structure Strategic goals Operations strategy Electronic data interchange Communication between retail stores Bar coding Cross docking Fast responsive transportation system Long lead time items Stored at DC and shipped as needed Stable demand items Continuous replenishment programs Short lead time items Made to order and cross-docked at DC Strategic goals Provide customers access to quality good, when and where needed at competitive prices Operations strategy Short cycle times Low inventory levels Logistics strategy Accurate information availability Rapid transportation OM&PM/Class 6a

Class 6a: Learning Objectives Pooling of stock reduces the amount of inventory physical information specialization substitution commonality/postponement Benetton: Tailored response (e.g., partial postponement) can be used to better match supply and demand Accurate Response in one-shot inventory management under uncertainty trade-off cost of over and understocking Single product Multi product OM&PM/Class 6a