Part 1: Ch.?s 2, 3, 5, 7 Part 2: Ch?s 14, 10, 9, 11 Part 3: Ch.?s 12, 13, 6, 8, 17 SCM Review Guide Part 1 of the course Product Priorities (Ch. 2) Quality: Fitness for consumption in terms of meeting customers needs and wants. How we judge if a product is a Quality product: Performance, features, reliability, conformance, durability, support, aesthetics, perceived quality Timeliness: Delivery or availability when customer wants When a product is delivered exactly when a customer needs it, not before or after. Lead Time: Time between beginning and end of activities: Time to market Customer is mainly concerned with Order to Delivery Lead Time Concern is related to Absolute speed and reliability Cost: Expenses incurred in acquiring or using the product Total Cost: Sum of all costs incurred between acquisition costs and includes its use, maintenance and disposal Costs: Purchase price, acquisition, repair, maintenance, operations, salvage/resale, disposal Process Priorities (Ch. 2) Innovation: Radical and incremental changes in products and processes Flexibility: ability to respond efficiently to changes in products and competitive environment Sustainability: Operatins that are profitable and non-damaging to society or the environment Becoming a critical concern Production processes, transportation, warehouses, and packaging Risk Management: Anticipating and dealing with unexpected events Sources of risk: disasters, disruptions, product integrity Principles of Process Performance: Theory of Constraints: (Ch. 3) Every Process has a constraint Bottleneck: anyplace demand is greater than or equal to capacity Constraint: A facility, department, machine, skill type, or demand. Measures of Process Flow: Flow Time: time for one unit to get through process Cycle Time: Time it takes to process one unity at an operation in the overall process Throughput Rate: Capacity of the bottleneck activity Little?s Law: there is a relationship between Flow time (F), Inventory Level (I), and Throughput Rate (TH) F=(I/TH) Every Process has variance that consumes capacity Variance occurs in a process?s inputs, activities, and outputs. Example: Inputs do not always arrive at a process or an activity at a constant rate, arrival rates vary. Cycle times are not necessarily constant. Every Process must be managed as a system Changing one element of a process may impact other elements Process elements are independent Activities, Inputs/Outputs/Flows, process structures, management policies Process measures are crucial to the process?s success Metrics: should address aspects of performance that are important to both customers and the organization Should be: Verifiable and quantifiable Align with standards and rewards Support strategy and priorities Provide the basis for monitoring, controlling and improving processes. Every process must continually move Business Process Reengineering: Radical redesign, expensive, difficult, but sometimes necessary Kaizen: Focused, incremental improvement efforts Team Focus: utilize the knowledge and experience of people in the process Short term and focused: quick, local improvement Action-Oriented: quick implementation Repetitive: regular events How Different Process Choice Alternatives Relate to the Critical Elements of Choice (Ch. 5) Critical Elements of Process Choice: Equipment: Flexibility Staffing and training: skill level of workers Volume of Output Product Design: Variety of products can be produced Engineer to Order (ETO): Unique, customized products Make to Order (MTO): Similar design, customized during production Assemble to Order (ATO): Produced from standard components and modules Make to Stock (MTS): goods made and held in inventory of customer orders Financial Implications of Inventory (CH.7) Inventory represent investment by the firm It is an asset on balance sheet Companies desire to keep investment in assets as low as possible Maintaining inventory costs money on an on-going basis Thus, inventory also causes expenses to be incurred These expenses show up on the firms income statement Not having inventory when customers want it results in negative financial consequences. Inventory Holding/Carrying Cost (ch.7) Cost of Capital (opportunity Cost) Cost of owning and maintaining storage space Taxes Insurance Costs of obsolescence and loss Costs of material handling, tracking, and management Reasons for Carrying Inventory (Ch.7) Balance Supply and Demand Seasonality, Production Processes Provide Buffer against uncertainty/variability in Supply and/or Demand Basic Economics of Buying Geographic Specialization Average Inventory, Inventory Turnover, and days of supply: (Ch.7) Inventory Turnover Advantages of HIGH turnover ?Fresh? inventory from high sales Reduced risk or mark down from obsolescence Reduced total carrying costs Lower asset investment and higher productivity Dangers of HIGH turnover Stockouts may mean lower sales Increased costs from missing quantity requirements Increased ordering costs Days of Supply How many days of demand into the future can we satisfy from inventory on hand =(Current Inventory/Expected rate of daily demand) Part 2 of Course Independent Demand Inventory Management (Ch.14) Independent Demand: Demand hat is random or unpredictable, not linked to another scheduled product or event Maintenance Supplies, Repair Parts, and Customer Demand Dependent Demand: Directly related to a scheduled product or event. Requirement that?s can be predicted by knowing the schedule or demand for the related product or event Component parts or sub-assemblies needed to meet and established production schedule Cartons and packaging materials for a similar established schedule Models for Managing Independent Demand Situations Continuous Review Systems Periodic Review Systems One-time (News Stand) Situations Reorder point =(Avg. Daily Demand)*(Lead Time) + Safety Stock When the amount on-hand and on-order=ROP, then place an order Economic Order Quantity (EOQ) The sum that minimizes the annual inventory carrying cost and annual ordering cost D= Annual Demand Co= Ordering Cost U= Unit Price Ci= Inventory Carrying Cost Price Break EOQ Procedure (Example on pg 425) Identify price breaks Calculate EOQ?s at each price break Determine order quantity for each price break Order EOQ if: eoq > min q Order Min Q if: EOQ< min q Calculate total acquisition cost for each price break, including product cost Pick Q with lowest total cost Safety Stock Because the world is not perfect we must need a certain level of safety stock to cover the uncertain time. Uncertainty: Demand Lead Time Each has an ?average? and a variance around the average Reducing Inventory Costs Managing Cycle Stock: Reducing order quantities Managing Safety Stock: Using ABC analysis and reducing variation The Strategic Sourcing Process (Ch. 10) A firms strategic objectives are better met when effective supply chain management: Ensures Timely availability of resources Reduces total cost (not just purchase price) Enhances quality Enables access to technology and innovations Fosters social responsibility Effective Supply Management Supply Risk: probability of an unplanned event that negatively affects a firm and its ability to serve customers Total Cost of Ownership (TCO): Sum of costs incurred before, during and after a purchase Before: costs of finding, assessing and selecting a supplier During: Costs of buying and receiving items After: Costs and risks of storing and owning items including those incurred after sale to customers Social Responsibility: behaviors that benefit communities Sourcing Strategies Analyze Spend & Market Develop Sourcing Strategy Identify Potential Suppliers Assess & Select Suppliers Supplier Based Optimization: number of suppliers to use Too few increases shortage and price risks Too many increases complexity and makes supply management difficult Competitive Bidding: price is most important factor, specifications are clear, high value, several equally qualified sources Request for Proposal (RFQ) or Quote (RFQ): described what customer wants; supplier responds with cost and other data for consideration Weighted Point Model: establishes performance categories that are weighted by importance Quality Delivery Price Weighted Score Online Reverse Auctions: suppliers bid in real time for buyer?s business Supplier can make multiple bids Usually price focused Negotiation: Bargaining process of planning, reviewing, analyzing, compromising to reach agreement Manage Relationship Information sharing: buyers and supplier need to share timely data about demand, supply and delivery Electronic Data Interchange (EDI): structured, secure mode of transmitting data Supplier Scorecard: track and report supplier performance in key areas Supplier Certification: assessment of suppliers ability to meet buyer?s needs Supplier Relationship Management (SRM): technology enabled data gathering about suppliers to manage strategic relationships Basic Transportation Terminology (Ch. 11) TL: Truck Load LTL: Less than truckload CL: Carrier Load LCL: Less than carrier load Carriers Backhaul Deadhead Bill of Lading Costs Transportation: Inbound, Outbound, and Inter-facility. Warehousing/Distribution Center Material Handling (receiving, checking, marketing, etc) Inventory Carrying Cost Information Systems/Processing Assets Inventory Transportations Equipment Handling Equipment Warehouse/Distribution Center Facilities Technology Investment Cost to Cost: Increase transportation cost to reduce Inventory Cost to Service: Increased logistics cost to obtain increased service Transportation Economics (Ch. 11) Economy of Scale: cost per unit of weight decreases as shipment size increases Economy of Distance: cost per unit traveled decreases as distance moved increases Transportation Modes and Cost Characteristics (Ch. 11) Rail (Second Best) High Fixed Costs and Low variable Costs Truck (Best) Low fixed costs and high variable costs Carries majority of freight in the U.S. Water (Worst) Low cost when speed is not crucial Air (Second Best) Relatively high shipping costs Newest and least utilized Pipeline (Worst) Highest fixed costs and Lowest variable costs Attractive because its runs constantly Transportation Consolidation Strategies (Ch. 11) Consolidation: One large shipment made of many smaller shipments Market Area: combine small shipments from one shipper going to the same area Pooled Delivery: combine small shipments from different shippers going to the same area Scheduled Delivery: Delivery at specific times Roles/Functions of warehouses (Ch. 11) Stockpiling: using inventories in warehouses to buffer the operations management system from variability either in supply or demand. Also take advantage of quantity discounts from suppliers Production Support: Locating warehouses very near major manufacturing plants Break-Bulk: Receiving a large load from one supplier and dividing it up among a number of different customers Consolidation: Taking small inbound loads and grouping them together into larger loads that can be moved at lower costs Cross-Dock: Receiving products from many suppliers and combining them into customized assortments for specific customers Reverse Logistics Repositories: Act as collection point for products or packaging materials that are sent back for disassembly, reclamation, or disposal. Warehouse Ownership Alternatives (Ch. 11) Private Advantages: Gives Greatest Control Disadvantages: Especially high fixed costs Public: Advantages: Offer Greater flexibility, Managers usually has greater experience and competency, lower costs. Disadvantages: Lose control over security and operating procedures Contract: Advantages: share the costs and risk Disadvantages: Long-term contract Part 3 of Course 12, 13, 15, 6, 8 Forecast Error, accuracy, and Bias (Ch. 12) Forecast Error: The difference between the actual demand and the forecasted demand for a given time period (difference between dt and Ft) Forecast Accuracy: Measures how closely the forecast aligns with the observations over time. Every error, whether positive or negative, reduces forecast accuracy. Forecast Bias: Indicates the tendency of a forecasting technique to over or under predict Bias=Mean Forecast Error (MFE) Factors Affecting Forecast Error and Accuracy (Ch. 12) Time Horizon Level of Detail Product Geography Time Manufacturing Postponement vs. Speculation (Ch. 12) Postponement: Do not finish manufacturing of a product until you know exactly what the customer wants Labeling (bright cans) Packaging (Juice boxes) Formulation (fertilizer) Assembly (computers, first-aid kits, Air Force) Speculation: Forecast or predict demand and act upon that prediction. Geographic Postponement vs. Speculation (Ch. 12) Postponement: Keep product in one central location Speculation: spread product out to warehouses/distribution centers Sales and Operations Planning (Aggregate Planning) (Ch. 13) Used in Medium Term (3-18 months) Many decisions are constrained Must decide things such as # of shifts/product mix/overtime/contracting/hiring vs. firing Sales and Operations Planning Process Determines how to cope with fluctuating demand patterns Provides the information necessary to actually develop the operational plans Sales and Operations Planning (S&OP): Process for integrating marketing and operations plan to develop a tactical plan Attempt to balance supply and demand Aggregate Production Planning Costs Aggregate Production Planning: Balances production, inventory, resources and demand. Holding Inventory: Having inventory on hand Regular Production: average labor and benefits Overtime: working more hours than standard Hiring: finding, acquiring and training new employees Fire/Layoff: separation packages Backorder/lost sales: expediting supply, lost good-will Subcontracting: unit cost and loss of control Level vs. Chase (Ch. 13) Level: Produce at a constant rate, use changing inventory levels to buffer supply and demand P= (Di+EI-BI)/(N) P=level production rate Di= Demand in period i EI= Ending Inventory BI= Beginning Inventory N= Number of planning periods Advantages: Constant Total Cost, easier to forecast Disadvantages: During periods of low demand costs remain high Chase: Change production to match demand, inventory remains relatively low and stable Advantages: If you hire/fire workers you save money Disadvantages: If workers have to work overtime it is expensive, harder to forecast. TQM Gurus and their contributions (Ch. 6&8) Dr. W. Edwards Deming Deming?s 5 deadly Sins Lack of Constancy Concentration on short-term profits Over reliance on performance appraisals Job-hopping Over Emphasis on visible figures Dr. Joseph Juran Compelling definitions of quality and the cost of quality (COQ) Appraisal Costs Internal Failure Costs External Failure Costs Prevention Costs Philip B. Crosby Absolutes for quality management Conformance to customer requirements Prevention Zero defects Price of nonconformance ?Quality is Free? Imai Kaizen (continuous improvement) Process view of the system Success comes from people Constant sense of urgency Benefits of Lean/JIT systems (Ch. 6&8) Only things customers want As quickly as customers want With only features customers want With perfect quality In minimum possible lead time Without waste With occupational development of workers Types of Waste: Causes and Symptoms (Ch. 17) Overproduction: Processing more units than necessary Waiting: Resources wasted waiting for work Transportation: Units being unnecessarily moved Processing: Excessive operations Inventory: Units waiting to be processed or delivered Motion: Unnecessary or excessive activity Product defects: waste due to unnecessary scrap, rework, or correction Flow Time= F = Inventory Level (I) Throughput Rate (TH) Resources Required= Total Resource Demands Effective capacity of 1 Resource Inventory Turnover= . Net Sales . Avg. Inventory in Retail Or Costs of Goods Sold Avg. Inventory at Cost Or Sales in Units Avg. Inventory in Units Days of Supply= Current Inventory Expected rate of Daily Demand Break Even Analysis= Total Revenue = Total Cost TR= Sales $ * Volume TC= Fixed Costs + (Variable * Volume) Reorder Point= (Avg. Daily Demand)*(Lead Time) + Safety Stock Mean Absolute Deviation (MAD)= Absolute Value of errors # Of Periods Mean Absolute Percentage Error (MAPE)= Absolute value of Percent Error # Of Periods Level Production Rate= P= (Di + EI ? BI) Di= Demand for period I N N= Number of Periods
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