Principle of Inventory and Material Management LSM736

Lecture 1 Course Introduction

What Will We Do Today? How is this course organized? What is Inventory and Material Management Management? A Historical Perspective

What is Operations Management? Business strategy selecting market(s) to compete level of investment allocation of resources functional area strategy marketing finance production and operations

What is Operations Management? Operations Management = Strategy Execution Time Quality Flexibility Cost OM = Designing, operating, and improving the systems that deliver the firm’s primary products and services

Strategy Execution 1. What is our strategy? 2. How do we design our operations to support it? Product / Service Development Process Design and Management Supply Chain Management

What types of problems does OM address ? Example #1: Manufacturing - Supply Chain Management T3 T2 T1 OEM W C R .com

What types of problems does OM address ? Example #2: Bank Services Loans Deposits Credit Cards

What types of problems does OM address ? Example #3: R&D – New Product Development Phase 0 Phase 1 Phase 2 Phase 3 Phase 4 Phase 5 Planning Concept Development System-level Design Detail Design Testing and Refinement Production Ramp-Up Adapted from U&E 2002

Types of Decisions in OM … Strategic decisions (long-term impact) Tactical decisions (mid-term impact) Operational decisions (short-term impact)

Strategic Decisions … Strategic questions that operations managers ask and respond to … How much capacity do we need? How should our staff be trained? Which projects should we invest in? Manufacturing Services Prod. Development

Tactical Decisions … Tactical questions that operations managers ask and respond to … Should we have finished goods inventory or should we make-to-order? What types of queues should we employ in Hartsfield? Do we need to exchange preliminary information with mfg? Manufacturing Services Prod. Development

Operational Decisions … Operational questions that operations managers ask and respond to … Which product gets priority in front of machine A? Should the service system be FCFS or something else? What is the critical path of the project? Manufacturing Services Prod. Development

Goal of Operations Management What is the goal of OM with respect to production/service systems? Efficiency is doing something at the lowest possible cost Improving efficiency Improving effectiveness Increasing value Effectiveness is doing appropriate things to create value for the organization Value = “quality” / “price” Usually, these things require a tradeoff.

Value Added of Operations Management Adverse Financial Impact of Supply Chain Disruptions Study of 800 publicly traded firms over a 10-year period In the year leading up to disruption • 107 percent drop in operating income • 114 percent drop in return on sales • 93 percent drop in return on assets • 7 percent lower sales growth • 11 percent growth in cost • 14 percent growth in inventories 33 – 40% lower stock returns relative to industry benchmark in period starting 1 year before and 2 years after the disruption Share price volatility is 13.5% higher in the year after the disruption Hendricks and Singhal, “The Effect of Supply Chain Disruptions on Long-term Shareholder Value, Profitability, and Share Price Volatility

Value Added of Operations Management Reasons: 31% internal (equipment breakdown, manufacturing problems, quality problems, inaccurate inventory records, poor forecasting, capacity or labor shortages) 14.5% supplier failures 12.8% customers Part shortages: Underperformance by 25% Median decrease in operating income of 31% Hendricks and Singhal, “The Effect of Supply Chain Disruptions on Long-term Shareholder Value, Profitability, and Share Price Volatility

What are Operations Management Jobs Like? You can get an interesting job!! Supply Chain Manager Quality Manager Project Manager Operations Consultant Plant Manager Procurement Manager The OM Area at Tech is ranked in the top 10 in the US and employers take it seriously!

A Historical Perspective

The First Industrial Revolution (c. 1850) Textile manufacturing innovations “Flying shuttle” and “Spinning Jenny” J. Watt: The steam engine Substituting labor with machines A. Smith: Free markets – division of labor Free markets would enhance “quest” for profit Specialization could increase productivity small scale production

The American System of Manufacturing Vertical Integration Consolidating different operations under one roof Interchangeable parts Mass-produce parts to tight tolerance & assemble 1801 contract for 10,000 muskets for the government Unskilled workers

The Second Industrial Revolution (c. 1910) 1832: 36 enterprises in 10 states with > 250 workers Reliance on water power & local distribution system Transportation innovations Railroads are built in western world Communication innovations The telegraph is established Big retailers come to power Sears & Roebuck’s sales soar to $38M in 10 years Mass Production: the first vehicles arrive… Henry Ford starts producing Model T large scale production

1910-1920: The Scientific Method (Taylorism) Principles of Scientific Management Book published in 1911 by Fredrick Taylor Time and Motion studies How much time do workers need to do a task? Incentive systems What is the best payment scheme? Study how systems can be efficient Developed a set of principles that serve efficiency. Planning versus doing. Efficiency is the key!

1920’s - 1930’s: Taylorism Spreads Application of Taylor’s methods The DuPont Powder company More importance to the human element Studies at the Western Electric Hawthorne plant to understand ergonomics: the human element in manufacturing Investment in management education Between 1914 and 1940 B-schools grew a lot

1940’s - 1960’s: The Golden Era in the U.S. Operations Research tools are “born” G.B. Dantzig devises simplex algorithm Effort to study complex systems The importance of teamwork is introduced Mathematical analysis becomes the norm Scientific methods are applied throughout the organization Mathematics solidify the scientific method Simulation based models, computer usage, scheduling

1970’s: Computers and MRP take over Production Schedule Forecasted Demand Bill of materials Inventory status MRP (Materials Requirement Planning) MRP automated production… But, someone has to tell the computers what to analyze!

1980’s: The Japanese Challenge American manufacturing led until the late 70’s, but then… TQC: Total Quality Control Higher quality Less cost JIT: Just-In-Time The methods introduced by Japanese manufacturing firms outperformed the US …

1990’s: The U.S. rises to the challenge Entrepreneurship and the ability to change and re-invent themselves allowed American firms to move into new areas. U.S. firms improve productivity and quality. U.S. firms focus on emerging technologies, R&D. Growth of the service industry. Examples in OM….

Conclusion and Summary … Operations Management is about executing the firm’s strategy. Operations is a core function in every business – manufacturing or service oriented. Key Components of OM: Products, Processes, SCM. OM is important to everybody in the organization. OM involves strategic, tactical, and operational decisions. The efficiency–effectiveness–value tradeoff.

Flow of the Course Efficiency (managing internal processes well) Quality management & Statistical process control Efficiency (managing internal processes well) Process management process analysis (no variability) waiting line mgt (variability) Lean operations Product design Aggregate planning Forecasting & inventory management Material requirements Supply chain Effectiveness (meeting the demand) Setting the direction Corporate strategy Operations strategy

End of Lecture 1