Operations and Supply Chain Management

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Operations and Supply Chain Management
Supply Chain And Operations Management (University of Manitoba)
StudeerSnel wordt niet gesponsord of ondersteund door een hogeschool of universiteit

Gedownload door karima nurul fikri ([email protected])
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Class Notes
Operations and Supply Chain Management:
← What is Operations:
←
 Operations can be strategic, tactical, and operational
o 1. Strategic (CEO, CFO, etc)
 Long-term, how is this operation going to work
 Where is the factory going to be, etc
o 2. Tactical (middle managers)
Short-term (6 months to a year)
Design, store goods (warehouse), move goods, production
scheduling, monitoring quality
o 3. Operational (lower level managers and workers)
 Day-to-day
 Staffing, shifts, etc
o Internal to the organization
 Easy to duplicate and copy a product, but difficult to copy a supply chain
o Ex: iPhone and Samsung vs. Wal-mart and K-mart
 Vision  execution
o Operations and supply chain management work between vision and
execution
 Operations and supply chain management: transformation process making an input
into an output
 Key is to add value
← Inputs:
 1. Transformed
o Raw material (steel, plastic, metal, etc)
o Customer (ex: sick customer goes to hospital and comes out healthy –
transformed)
o Finished good
 2. Transforming

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o Information (do this for that to happen, get this before that, etc)
o Staff
o Facilities
o Capital (money, equipment, etc)
o The transformed and transforming inputs work together to make an output
← Outputs:
 1. Good (tangible – easier to see it happen)
 2. Service (intangible – harder to see the output effects)
← What is Supply Chain:
←
 Flow of the products and services from raw material manufacturers to the
customers
 External to the organization
o Operations (internal): design, scheduling, factory
o Supply Chain (external): purchasing, storage, movement to floor, warehouse,
distribution, customer
 The supply chain can also be internal
 Supply chain is sequencing the facilities, function, and activities
 Concern the with the flow of the goods (internal and external)
o In the transformation process
← Operations and Supply Chain Process:
 1. Planning
 2. Sourcing
 3. Making
 4. Delivering
 5. Returning
←
 Ideal for a company to balance the supply and demand to be successful
 Demand comes from marketing and sales

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 Supply comes from operations and supply chain management

 Excess supply is bad – idle money and goods
←
 Systems approach: looking at everything inside and outside the company and seeing
how there are dependant and reliant on each other
← Competitive Dimensions:
 1. Cost
o Ex: dollar store
o Reduce internal, operational costs in order to succeed
o Reduce labour, automation (ex: self-checkout, computer inventory)
 2. Quality
o 3 types of quality:
 Process quality – product quality, making something good
 Design quality – BMW vs. Honda Civic
 Use quality inspection point during manufacturing (costs money –
labour and time)
 Customer service
 3. Delivery speed
o How fast is the product/service available
o Need inventory on hand, people wages (this is why delivery speed is more
costly)
 4. Delivery reliability
o Infrastructure costs (computer systems, production schedules)
o More costly
 5. Coping with changes in demand
o Need to have an efficient operations and supply chain strategy,
communication system (internal and external), forecasting system (sales,
marketing)
 6. New product introduction and innovation
o Need new technology, good supplier relationship, invest in equipment
(equipment dedicated to certain individual functions), skilled workers
← Operations and Supply Chain Management Goals:

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 1. Improve efficiencies
o Doing things right (what you say you're going to do, do it right and once)
 2. Effectiveness
o Doing the right things
 3. Value
o As perceived by the customer
 These three goals are not a strategy, they are the means to achieve a strategy
← Level Of Success Of A Company Depend On:
 Quality
 Design
 Price
 Customer service
 Availability
← Two Types of Supply Chain Strategies:
 1. Horizontal
o Strategy across the entire company
o Unified understanding of what we want to be
 2. Vertical
o Where we look at the external to the organization
o Where the supply chain comes in
o The organization and the supplier need to have the same goals and
objectives in creating a product in order to succeed
o Idea in supply chain management that all suppliers and the organization are
an interconnected web of communication – all need the same objective
←
← Process Fundamentals and Capacity:
 1. Cost or price
 2. Quality

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 4. Delivery reliability
 6. New product introduction/innovation
← Transformation Process:
←
← Process Analysis:
 What you have
 How you do it
 How to improve
 These three questions are all interrelated
← Process Map:
←
← Process Mapping:
 Describes the process
 Tasks/transformation process (blue rectangle)
 Flow of material or information (black arrow)
 Storage: RM, WIP, FG (green triangle)
← Measuring the Process:
 Capacity: how much can be produced within a specific amount of time
o Measured as units/time
o Ex: pieces/hour
 Cycle time: average time for a product to be completed
o 1. Per task/activity/operation
o 2. Per entire process
o Measured as time/ unit
o Determines capacity
← Measuring the Process:

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 Bottleneck: slowest running activity

 Idle time: waiting time
 Set-up time: time to set up for each activity
 Throughput time: total time to make a product/service
o Includes idle time, set-up time, move time, etc
←
← The Goal:
← Capacity Planning:
 Huge financial impact
 Determine how much capacity is needed
 Determine when to start making a product
 Involves scheduling jobs and manpower (shifts)
 Involves strategic decisions
 Tied in with the objectives of the company
← Capacity Measurements:
 Throughput: the amount of time to get a product started and completed including
wait time and set up time
o The rate the system generates money
 Inventory: the money the system has invested in purchasing/making things which it
intends to sell
 Operational expenses: amount of money the system to turn inventory into
throughput
o Labour, RM, etc
← Production Planning Rules:
 1. Productivity does not guarantee profitability
 2. The slowest operation should regulate the flow
 3. Utilization and activation are not the same thing
 4. An hour lost at a bottleneck is an hour lost for the total system
 5. An hour saved at a non-bottleneck is a mirage
 6. Balance the flow – not the capacity

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← Rush Orders:
 3 orders in the system
 1st one is 5 minutes into the bottleneck (paint – 15 minutes)
 Safety margin – 2 minutes
 4 orders x bottleneck (15 minutes) – 5 minutes (already in prod.) + 2 minutes (safety
margin)
o = 55 minutes + 2 minutes
←
← Quality Management:
 When pressure is put on your system to make more than you can optimally make
(demand > supply), quality of your product decreases
 “You cants manage what you don’t measure”
Cost of Quality:
 Appraisal Costs:
o 1. Incoming inspection
o 2. In-process inspection
o 3. Calibration of tools
o 4. Dock audits
 Prevention Costs:
o 1. Maintaining equipment
o 2. Quality planning
o 3. Supplier capabilities
o 4. Corrective actions
o 5. Training
o 6. Team meeting
 External factors are huge and detrimental to a company
 Focus should be on prevention (and appraisal) which makes your company better
o Rather than on internal and external because that is just fighting fire

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← Six Σ Concepts:
 1. Critical to quality: attributes most important to the customers
o Ex: pizza in 30 minutes or free
 2. Defect: failing to deliver what the customer wants
 3. Process capability: what your process can deliver
 4. Variation: what the customer sees and feels
o Variation is bad (inconsistency)
 5. Stable operation: consistent and predictable process to improve what the
customer sees and feels
o Take out any variation
 6. Design for Six Σ: designing to meet customer needs and process capability
o Design you system to achieve all of these things
← DPMO: Defect Per Million Opportunities:
 Used when an item can have more than one defect
o Defect: anything outside of a customer’s specifications
o Opportunity: total quantity of chances for a defect
o Σ: standard deviation of the process (variation from average)
 Six Σ goal = 3.4 defects per million opportunities
 DPMO = total defects observed / total opportunities X 1,000,000
←
← Statistical Process Control:
 Process: set of people, equipment, procedures, and conditions that work together to
produce a result
 Control chart: a graph of the performance of a process over time, arranged to
emphasize process variation
 P-charts: charts items that are “good” or “bad”
← SPC: P Charts:
 1. Used in Yes or No decisions
 2. Assumed that the inspection process is consistent between samples
 3. Make defects visible

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 4. Determine what process adjustments needs to be made

 5. Determine is process is “in control” or “out of control”
← How To Make An SPC Chart:

 P = total number of defects from all samples / number of samples X sample size
 Sample standard deviation = sp
o Square root of [P(1 – P) / n]
 3 σ (99.7% confidence)
o UCL = p + σ(sp)
o LCL = p – σ(sp)
← “In Control” & “Out of Control” Process:
←
←
← Demand Management and Forecasting:
← Characteristics of Demand:
 1. Independent and dependant demand
 2. Sources of demand
 3. Demand patterns
← Independent Versus Dependent Demand:
 Independent:
o Basis for demand planning
o What the customer orders and is forecasted
o Not related to the demand for any other product
 Dependent:
o Demand that is related to the demand for another product
o It is calculated
 Ex: making a car

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o Level 0 – Car (independent)

 Make 1000 cars (forecasted)
o Level 1 – Tires (dependant)
 Need 4000 tires – cannot be forecasted, instead it is calculated based
on the independent demand item
 Ex: 4 tires per car = 1000 x 4 = 4000
← Impact on Operations and Supply Chain:
 1. Allocating resources
o Ex: employees – hiring/laying off
 2. Investing in equipment
 3. Information sharing
o If customers communicate with the company and the company
communicates with the supplier, etc, then operations and supply chain will
run more smoothly with less inventory left at the end
← Sources of Demand:
 1. Customer orders
o Actual demand
o External to the organization
 2. Forecasts
o Prediction of future demand
 Ask customers, do market research, etc
o Forecasting is always for the independent item
← Forecasting Techniques:
 Qualitative
o Good for long-term planning

o Very subjective
o More popular among companies
o Ex: IBM, Blackberry – both go from the top to the bottom of the chain
because they couldn’t predict future demand and couldn’t see past their
current success
 Quantitative

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o Time series data

Assumptions:

 1. What happened in the past will happen in the future
 2. That past information is available
 3. Patterns of demand should be an element of the forecast
o Moving average – take a certain number of time periods in the past, take an
average of them, and from that predict what will happen in the future
o Exponential smoothing = forecasted demand + a (actual – forecasted)
 a = smoothing constant
 Use lower a for stable/continuous demand
 Use higher a for changing demand (trend fluctuations)
← Forecasting Principles:
 1. Always wrong – never the same as actual demand
 2. Must include an estimate of error
 3. More accurate for product groups
o Family of the product (ex: all of Pepsi products is more accurate than
forecasting for cans vs. 2L vs. 1L. etc)
Demand Patterns:
 Trend
o Easiest forecast to make

 Seasonal
o Predictable
o Ex: reading week flight prices increase
 Cyclical

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o Things that happen in wave like formats

o Ex: demand during a recession
 Fluctuate from low inventory  high inventory  low inventory, etc
 Random
o Forest fires, tsunamis, earthquakes, etc
o Random demand – cannot predict anything
o Ex: alcohol brands demand rising during recession because everyone was sad
(couldn’t have predicted this)
Stable Versus Dynamic Demand:
 Stable = consistent
o Called a functional product
o Ex: Campbell’s soup
 Dynamic = fluctuate
o Called an innovative product
o Ex: technology – when a new product is introduced, no one knows what
demand will be like
 Mitigating forecast errors – collaborative planning, forecasting, and replenishment
o 1. Customer’s production schedule and future demand requirements are
shared
 Big problem is people don’t trust each other
o 2. Inventory strategies are mutually agreed upon
o 3. Complete transparency
 Everyone knows what’s going on – no secrets, no waiting
 Share software to see what’s happening online
o 4. Customer/supplier objectives are the same
o 5. Based on high levels of trust
o 6. Companies become strategically aligned
 Going to do this for the loyal customers who are worth it
←
← Aggregate Production Planning:

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 Concerned with planning overall production of all products combined over a

planning horizon (6 months to a year) for a given (forecast) demand schedule
o Called an aggregate plan rather than production plan because it takes
everything into consideration (looking at it as a complete whole)
o “Overall production of all production combined” – ex: tones of steel, liters of
paint, etc)
o Every month it is looked at and another month is added to the end
o We want to take forecasted demand and determine our
 Capacity (short-term) – workforce allocation, machine allocation
 Costs – every decision we make has a cost associated to it
 Commitment – everybody in the planning process needs to be
committed to what they are going to do
 Planning horizon:
o Long-term  strategic
o Short-term  day-to-day
 Business plan
Aggregate plan
o Finances
o Sales and marketing
o Operations
o Purchasing – critical: actually able to tell you what you can do
o Engineering (new products)
← Options to Meeting Fluctuating Demand:
 Level production strategy:
o “Every month I am going to make the same amount based on an average”
o Advantages:
 No fluctuations in labour and capacity costs
 Lower production cost per item because we can plan
o Disadvantages:
 Excess/short inventory
 Excess inventory isn’t as bad if carrying costs are low
 Forecasts are always wrong

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 Tolerate backorders/lost sale

 Chase production strategy:
o “Chasing the demand” – every month we are going to make exactly what it
says were doing
 Results in hiring and firing
 Can implement over and under time based on demand
o Advantages:
 Stable inventory
 Good for environments where demand fluctuates
o Disadvantages:
 Cost of human resources
 Employee moral
 Availability of skilled employees
← Level or Chase Strategy?:
 Production mix predictability:

o High – predictable: functional product
o Low – unpredictable: innovative product
 Each option involves costs (qualitative and quantitative)
 Aim is to choose optimum strategy
 Looking for optimal combination of the following three criteria to choose a
production planning strategy:
o 1. Production rate
o 2. Workforce (# of people)
o 3. Inventory dollars (unused inventory that we are sitting on)
← Kinds of Costs Involved:
 Production costs – labour, overtime, set-ups
 Procurement costs – economies of scale, receiving goods into warehouse
 Inventory holding costs – how much is it costing to sit on these goods?

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 Back orders and lost sales – how do you calculate how much is costs to expedite to a
customer, lose a sale, etc
 Costs of hiring and firing
← Example of How an Aggregate Production Planning Schedule:
 Neither of these are optimal

o Care about the cumulative amount of products we are making

o Cumulative forecast for 3 months added and divided by three for an average
inventory for 3 month periods
Company Policy:
 1. Are shortages okay?
o If someone doesn’t get the product, will they come back and get it
 2. Are we going to be doing subcontracting?
o Outsourcing
 3. What is our maximum overtime?
o Maximum we are going to have our employees work
 4. Inventory policy
o How long are we allowing ourselves to sit on inventory? How are we going to
store it?
 5. Are the people available?
o Are there always going to be the people there to make the product we want?
Are there always going to be people there to save us in times of need?
←
← Materials Requirement Planning:
← Master Production Schedule:

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←
← Goals:
 1. Manage resources
o How are you going to manage employees and equipment
 2. Inventory
o Match projected inventory in aggregate plan
 3. Customer service levels
 “On these dates, were going to make this many products”

← Formula:
 For level and chase strategies
 Ending Projected Available Balance (PAB) = Beginning Projected Available Balance
(PAB) + Scheduled Master Production Schedule (MPS) Receipt – Forecast
 Independent demand – demand is ONLY dependent on the forecast of the
customers
 Allows production people to see what’s going on
← Materials Requirement Planning (MRP):
 Dependent demand plan
 Software system (almost all manufacturing companies use it)
 Raw materials (purchase order)  WIP (work order)  FG (assemble)
o Purchase order and work order are important because we are going to have
to release or receive an order
o Purchase order = supplier – child parts
o Work order = internal employees – parent parts
o All dependent on the size of the order

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
← Independent Demand:
 1. Demand unrelated to the demand for other products
 2. Determined via forecast or actual orders
 3. Production strategy determines lot sizes
o Level = constant production
o Chase = production for what’s needed
← Dependent Demand:
 1. Demand directly related to demand for some other product
o “I don’t know how much steel to order until I know how many bikes are
going to sell”
 2. Requirements derived from delivery schedule for end items
 3. Use MRP to plan and control inventories of these products
← Input: Bill of Materials:
 Ex: to make a table
o 1 top = independent item (making this item)
o 3 boards, 20 nails = dependent item (buying these parts)
 Level 0 = top line independent item
 Level 1 = parts going into level 0
 Level 2 = parts going into level 1, and so on
← Input: Inventory Record File:
 1. Accurate current data on inventory status
 2. Computerized (item master file)
 3. Lead times (order lead times and manufacturing lead times)
 4. Inventory transactions (issue, receipt, order placement)
← Lead Times:

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
 Release  lead time  receive
← MRP Logic:
 1. Inputs
 2. Part explosion
 3. Netting of requirements
 4. Offset requirements according to lead times
 5. Lot sizing for production or purchasing
←
← Managing Inventory:
← The Supply Chain:
 A group of internal functions, external suppliers, and customers

 Extends from ultimate customer back to mother earth

← Supply Chain Networks:

← Supply Chain Management:
 Definition: “A systems approach to managing the entire flow of information,
materials, and services from raw materials suppliers through factories and
warehouses to the end-customer”
← Supply Chain Management Goals:

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 1. Lower cost
 2. Increased customer value and satisfaction
o Have to know what your customer wants
o Where the value will be added
o Different across countries and cultures
 3. Competitive advantage
o Companies compete on their supply chains
o Ex: automobile industry
← Supply Chain Planning (depends on the company, its objectives, and its products):
 1. Balancing supply and demand
o Very important – based on inventory
o Surpluses and shortages
o Affects your sales (if you don’t have the inventory in stock, customers will go
elsewhere)
 2. Coordinating a company’s assets to optimize the delivery of goods, services, and
information from supplier to customer
o Assets:
 Inventory (RM, WIP, FG)
 Warehouses (management of warehouses and location)
 Production facilities
 Equipment
← Where is the Inventory in the Supply Chain:

 Ex: 1 company with 4 suppliers and 4 customers
o All are holding onto inventory
 Inventory accounts for the dominant cost within a supply chain
 Bullwhip effect:
o ManufacturerWholesalerDistributorCustomer
 Customer usually orders 1, but due to a flood, customers are ordering
tons
 Distributor usually orders 10 for inventory, but because of the
customers ordering more, distributor is ordering 20

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 Wholesaler and distributor don’t communicate that it was due to

flood, therefore increases their inventory to 40
 Manufacturer is producing 100 because wholesaler ordered more
o Ripple effect – communication is necessary
← Goal of Inventory:
 “To have the correct inventory at the right place at the right time to minimize
system costs while satisfying customer service requirements”
← Inventory Trade Offs:

 Carrying costs
o Costs to store goods
o Handling the goods (forklift, moving, more room for damage the more its
moved)
o Obsolete (if the goods sit long enough, they become obsolete to customers
and design changes)
o Depreciation (value of the goods are going down, not worth the same
money)
o Opportunity (the money spent on storing goods could have been used for
something else)
 Cash conversion schedule - from the time you place the order until
the money is received from the customer which is a long time (money
is spent where you could have spent somewhere else)
o Perishability (rust, go bad)
← Forms of Inventory:
 Raw Materials:
o Requires further processing
o Used in the finished product
 Work in Process (WIP)

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o WIP is made up of materials, labour, machine & overhead

o Sitting on WIP costs more than just having the RM on hand
 Finished Goods
o Product that is ready for sale
 Consumables:
o Used in operating the facility
 The things you need in order to make the product
o Often operating costs are ignored because you are not allocating those costs
directly
o Ex: tape, paint, tools, ladders, gloves, etc
 Ex: competing on flexibility:
o Sitting on RM (best place for inventory to be stored)
 Ex: competing on cost:
o Sitting on FG (because we want economies of scale) – sitting ready to be
consumed
 Ex: competing on speed:
o Sitting on FG (have products there and ready for customer demands
o The quicker you want to respond to consumer demand, the higher the
inventory you need
Operational Strategy – Inventory:
 Make to stock:
o Like level production strategy
o Requires forecasts
o Higher inventory costs
o Lower transportation costs
o Finished goods inventory
o Inventory in RM format
 Make to order:
o Like chase production strategy
o Can make lead times extended
o Inventory held somewhere in the chain
o Lower inventory costs for the manufacturer
o Difficult when global supply chains
o Manage critical resources is key
o Inventory in RM format
 Assemble to order:

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o Ex: dell
o Delayed differentiation (mass customization)
o Inventory in WIP format (only for assemble to order)
 Wait for the order to come in and then put it together
 Called mass customization
 Problems:
 Customer doesn’t always know what they want
 Forecasts are difficult
 Technological change
 Engineer to order
o Major projects
o Long lead times (takes a very long time to make)
o Multiple inventory form
o Project focus
← Functions of Inventory (why do we have the inventory?):
 1. Transit or pipeline inventory (inventory sitting on a truck, boat, etc)
 2. Cycle inventory (more cost efficient to run at a certain batch/lot size)
 3. Uncertainty/safety stock (hold onto them because we don’t know what’s going to
happen) - ex: natural disaster, big events, protection, holidays, fear of strikes, late
deliveries (supplier), machine breakdowns, employee absenteeism
 4. Decoupling of operations (puts things in place between pieces of equipment in
case of delays to allow machines to keep running)
 5. Flexibility of operations
 6. Economies of scale
 7. Strategic
← Problem with Inventory:

o Inventory is the water, and problems are in the rocks, but water (inventory)
is high enough that the boat continues
o As water goes down (inventory), eventually the rocks become problem and
must be dealt with)
o Companies hide behind these problems by producing extra inventory
o Ex: easier to have extra inventory than to fix the training problem

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 Quality, productivity, and responsiveness problems:

o Missed due dates, poor product design specs, lack of training, unreliable
suppliers, large lot sizes, long set-up times, scrap and rework, long lead
times, poor vendor quality, machine breakdowns, etc
← Inventory Management Strategies:

← Typical ABC Inventory Distribution:
 Ex: 80% - 20% rule

 10% of parts accounts for 70% of final good
← Managing A Items:
 1. Tighter control
 2. Secured storage areas
 3. Better sales forecasts
 4. Re-order frequently – keep inventory as low as possible
← Managing C Items:
 1. Looser control – okay with having stock because parts are cheap
 2. Safety stock – don’t want to run out
 3. Larger bulk, less frequent orders
 4. Utilize a vendor managed inventory system
← Vendor Managed Inventory:
 1. Inventory held at supplier or consumer’s site
o If at customer site, you don’t own it, and pay for it as you use it
o If at supplier site, they send it to you as you need it
 2. Supplier monitors inventory levels at either location
o Customer indicates the range of inventory they want and supplier monitors
and meets those needs

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 3. Supplier replaces material consumed by customer based upon stocking quantities

(i.e. minimum/maximum)
 4. Supplier may have a “store” on customer’s site
 5. Quasi forecasts provided to supplier (often verbal)
← Collaborative Planning, Forecasting, and Replenishment:
 1. Customer’s production schedule and future demand requirements are shared
o Actually planning for the future with your supplier
 2. Inventory strategies are mutually agreed upon
 3. Complete transparency
o Share their financial information
 4. Customer/supplier objectives are the same
 5. Based on high levels of trust
 6. Companies become strategically aligned
←
← Lean Supply Chains:
 Push system:
o Keep producing and working (go, go, go) – most companies operate this way
o More chaotic
o More functional (only depends on what you're doing, not what the system is
doing)
o More inventory (WIP)
o Larger the quantity, the bigger the glut (surplus)
o Less FG
o More pressure on workers
o Lower quality products
o Higher costs (adding OT, quality issues, etc)
 Pull system:
o AKA Lean Production and JIT (just in time)
o Less WIP (saves money)
o Slower pace of production
o Workers waiting (idle time)
 Solution: cross train so they can do multiple jobs
o Higher quality products
o More FG
o Very hard to change the system in a company – employees are resistant to
change even though lean production is better

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 Push system vs. pull system:

PUSH SYSTEM PULL SYSTEM
Schedule based on demand Schedule based on what you need
Driven by due dates Driven by signals
Release dates are controlled
WIP is watched WIP is controlled (only make what you need)
Through-put is watched

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Tenets of Lean:
 Maximize customer value while minimizing waste
 Overproduction, waiting time, transportation, processing, motion, defects, inventory
← Lean Tools and Techniques – Design Principles:
 1. Produce in small lots
o Makes bottlenecks more obvious
o 1 piece flowing through at a time
 2. Uniform plant loading/level scheduling
o Level load your plant based on demand
 3. Set-up reduction
o Reduce set-up to save time and money
o Single minute exchange of dies (SMED)
 4. Quality at the source
o Have it done right (high quality) the first time
 5. Preventive maintenance
o Machinery will break if you don’t maintain it (take time regularly for
maintenance work)
 6. Kanban
o Japanese word for signal
o Ex: in class airplane example, the green x’s were kanbans
o Important in a lean system
o Need to use kanban in a consistent quantity system or with unimportant C
parts
o Need to bring in and hold on to what you need
 7. Cellular layout
o For lean systems
o In a traditional system, departments are separated by walls can cant see
what is coming in and what is going out
o In a lean system with cellular layout, departments are in a linear fashion with
the next function after the previous
o You can see when it comes in, you can see when it goes out
o Difficulty: cant have shared equipment (every department needs their own)
 8. Process flexibility
o Important for process to be flexible
 9. Employee involvement and empowerment

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o In a lean system, the employees have the right to stop and speak up because
they think they have a poor quality product, the system isn’t working, etc
o In a traditional system, you don’t speak up, you just work
 10. Supplier partnerships
o Want to have suppliers close to you
o Share your schedule with them so they can deliver at right times
o In a lean system, your suppliers are an extension of the company
← 5S – Steps to “clean up”:
 Sort: separate needed items from unneeded (dispose of unneeded)
 Set in order: neatly arrange items
o Many companies have peg boards (for tools) to always know where products
are and where they go
 Shine: clean up work areas
 Standardize: ensure there are standardized procedures (for the above steps)
o Have an audit to check these things
 Sustain: keep it that way
← Continuous Improvement:
 Kaizen – Japanese term for continuous improvement

← Benefit of a Lean System:
 1. Low unit cost
 2. Greater quality
o Most companies forget to measure performance based on external quality
 3. Better customer service
o Shorter lead times and more predictable outcomes
 4. Flexibility
o Able to change with your demand
o Able to respond to your customers needs
o No master production schedule telling you what to make and when
←
← Supply Chain Management Strategies:

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 Draw a supply chain map to see where everything is and going, and the costs
associated
 Globalization (don’t buy and make products in North America much anymore)
← Magnitude of Supply Chain Costs:
←
 Skipping distributor and the retailer reduces the cost of the product
 Intermediaries increase costs
 Ex: Costco and Walmart skip intermediaries which saves a lot of costs (working
directly with suppliers)
← Impact of Purchasing Dollars:
 Total sales = $10,000,000
 Purchased material = $7,000,000
 Labour and salaries = $2,000,000
 Overhead = $500,000
 Profit = $500,00
 How can we increase profits to $1,000,000?
o Increase sales by 100% - very difficult
o Increase selling price by 5% - upsets customers, lower sales if price is above
competitors
o Decrease labour and salaries by 25% - upsets employees
o Decrease overhead by 100% - impossible
o Decrease purchase cost by 7.1% - doable!!
← Right Supply Chain Strategy:
 1. Tailored to meet the needs of the customer
o Need your own supply chain that meets your strategic needs and objectives
o Cannot copy another companies supply chain
 2. Products with stable demand and reliable source supply should not be managed
the same as those unpredictable demand and unreliable sources of supply
o What works for one industry may not work for the other
o Need to look at characteristics of demand and characteristics of supply
← Demand Characteristics:
 Functional:
o Stable and predictable demand

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o Long lifecycle
o Less forecast error
o Mature product
o Low product variety
o Ex: T-shirt, groceries
 Innovative:
o Unpredictable demand
o Short lifecycle
o Difficult to forecast quick obsolescence
o High product variety
o Ex: technology, high fashion
 Competing Dimensions for Demand:
o Cost: functional products
o Speed to market: innovative products
o Flexibility: innovative products
o Quality: functional and innovative products (always want high quality)
Supply Characteristics (how easy is it to get their stuff):
 Stable:
o Manufacturing processes and underlying technology are mature
o Manufacturing complexity is low
o Automated
o Long term supply contracts in place
 Evolving:
o Manufacturing processes and underlying technology are still under
development
o Rapidly changing technology
o Supply based is limited in size and experience
o Equipment subject to break downs
o Ex: telephones
 Competitive Dimensions for Supply:
o Cost: efficient supply chain
o Flexible: risk hedging, responsive, and agile supply chains
o Speed to market: agile and responsive supply chains
o Quality: all want high quality

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← Bullwhip Effect:
←
 The further away we get, the more trouble we get into
 Try to plan supply chain so that there are the same trends in demand
 Slight change in demand in consumer sales, retailer responds by increasing demand,
which makes the wholesaler increase their sales because of retailers, and then
manufacturers increases production
 All due to lack of communication
 Ask why sudden increase in demand rather than assuming and responding
immediately
← Supply and Demand Uncertainty Reduction Strategies:
 Information sharing
o Reduced bullwhip effect
 Synchronized planning
o Ex: smart car – built factory and chose suppliers to help design the car
o Collaborative planning – planning and forecasting together
o Everybody feels apart of the process
 Use of technology/internet

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o Shared software systems

 Early design collaboration
o Ex: smart car – collaborative planning
←
← Project Management:
 Project: a series of related jobs that are directed towards a major output
 Project management: planning, directing, and controlling the resources to meet
technical, cost, and time constraints of the project
← Types of Project Structures:
 Pure project: self contained team works full time on a project
o Have a project manager, and take people out of their functional areas, and
everyone reports to the manager
o Pros: one boss, no distractions, short lines of communications, project
manager has full control
o Cons: project manager has full control, when the project is done employees
have to go back to their department (tough transition), duplication of jobs
while the person is taken out of their function because they have to hire
someone else to work their job while on the project
 Functional project: team members are assigned from functional areas of the
organization
o 2 bosses: boss of functional area, and boss of project
o Pros: no duplication of jobs, technical expertise is contained and not lost
while on the project
o Cons: 2 bosses
 Matrix project: blend of pure and functional projects
o Pros: combines both approaches
o Cons: who is the boss? Should be project manager
← Project Scope (A Projects Series of Steps):
 Charter is written outlining all the steps in a project
 1. Purpose and justification
o What are we going to do and why are we going to do it?
 2. Deliverable
o What are we going to get out of it?
 3. Acceptance criteria
o How are we going to know if we were successful (measurable)?
 4. Scope description

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o How are we going to do it?

 5. Major objectives
o What are our objectives? Results?
 6. Project constraints
o Resources? Cost/budget?
 7. Assumptions
o What are the assumptions we are going to make for the project?
 8. Risks
o What are the risks in the project? People? Business?
 9. Work breakdown structure (WBS)
o This is what I’m doing, this is who is in charge, this is how long it is going to
take, etc
← Controlling the Project: Critical Path:
 A – no predecessor
 B – A is the predecessor
 C – A is the predecessor
 D – B & C are predecessors
← Critical Paths:
 The critical path is the one that takes longer
o Must be managed more critically than others
 At each task, something it occurring
 Shows which tasks are dependent on the completion of a project

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←
← Controlling the Project: GANTT Chart
← GANTT Chart Advantages and Disadvantages:

 Advantages:
o 1. Simple
o 2. Good visual
o 3. Task durations can be easily compared
o 4. Good for scheduling resources
 Disadvantages:
o 1. Dependencies are more difficult to visualize
o 2. Minor changes in data can cause major changes in the chart

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Chapter 2 – Operations and Supply Chain Strategy

← What is Operations and Supply Chain Strategy:
 Operations and supply chain strategy: concerned with setting broad policies and
plans for using the resources of a firm to best support its long-term competitive
strategy
 The strategy involves a long-term process that must foster change
 Involves decisions that relate to the design of a process and the infrastructure
needed to support the process
 Viewed as part of a planning process that coordinates operational goals with those
of the larger organizations
 Since the goals of the larger organization (corporate or business strategy) change
over time, the operations strategy must be designed to anticipate for future needs
← A Sustainable Operations and Supply Chain Strategy:
 Strategy should describe how a firm intends to create and sustain value for its
current shareholders
 Sustainability: requirement to meet these current needs without compromising the
ability of future generations to meet their own needs
 Shareholders are those individuals or companies that legally own one or more
shares of stock in the company
 Many companies today have expanded the scope of their strategy to include
stakeholders
 Stakeholders are those individuals or organizations who are influences, either
directly or indirectly, by the actions of the firm
 EXHIBIT 2.1 – Triple Bottom Line
 Triple bottom line: evaluating the firm against social, economic, and environmental
criteria
 Social: pertains to fair and beneficial business practices toward labour, the
community, and the region in which a firm conducts its business
 Economic: obligations to compensate shareholders who provide capital through
stock purchases and other financial instruments via a competitive return on
investment (traditionally referred to as THE bottom line)

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 Environmental: refers to the firms impact on the environment – the company

should protect as much as possible or at least cause no harm (ecological footprint)
 Conventional strategy focuses on the economic part of this framework
 More environmental sustainability in poorer parts of the globe than in rich countries
 Different customers are attracted by different attributes
 1. Cost or price
o Usually a segment of the market that buys solely on the basis of low cost
o Products and services sold strictly on the basis of cost are typically
commodity-like
 Customers cannot distinguish the product or service of one firm from
that of another
o This segment of the market is frequently very large, and many companies are
lured by the potential for significant profits which they associate with the
large unit volumes

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o Competition in this segment is fierce – and so is the failure rate

o Ex: superstore
o Price, however, is not the only basis on which a firm can compete
o Ex: BMW – higher quality
o Canadian companies competing globally generally do not do so on the basis
of cost, because of our high labour costs
 2. Quality
o Two characteristics of a product or service define quality:
 1. Design quality
 2. Process quality
o Design quality relates to the set of features the product or service contains
Relates directly to the design of the product or service
The goal is establishing the proper level of design quality is to focus
on the requirements of the customer
o Process quality is critical because it relates directly to the reliability of the
product or service
 Customers want products without defects
 The goal is to produce defect-free products and services
o Firm’s ability to supply the product or service one or before a promised
delivery due date
o Ability to respond to increases and decreases in demand is important to its
ability to compete
o When demand is strong and increasing, costs at continuously reduced due to
economies of scale, and investments in new technologies can be easily
justified
o The ability to effectively deal with dynamic market demand over the long
term is an essential element of operations strategy
 5. Flexibility and new-product introduction speed
o Flexibility refers to the ability of a company to offer a wide variety of
products to its customers
o An important element of this ability to offer different products is the time
required for a company to develop a new product and to convert its
processes to offer the new product

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o Developing them in the shortest amount of time to get them out to market
faster than competitors
 6. Other product-specific criteria
o Other dimensions often relate to specific products or situations
o 1. Technical liaison and support
 Provide technical assistance for products development, particularly
during the early stages of design and manufacturing
o 2. Meeting a launch date
 Firm may be required to coordinate with other firms
o 3. Supplier after-sale support
 Ability of a firm to support its product after the sale
 Availability of replacement parts and possibly, modification of older,
existing products to new performance levels
 Speed of response to these after-sale needs is often important as well
o 4. Other dimensions
 These typically include factors such as available colours, size, weight,
location of the fabrication site, customization available, and product
mix options
← Emerging Competitive Dimensions:
 Environmentalism and corporate social responsibility (CSR)
o Products or services that are seen as environmentally friendly and are
created in an ethical manner command a higher price in the markets
o Companies are realizing that not maintaining a minimal level of corporate
social responsibility can be a competitive advantage
o Companies are becoming more transparent in their supply chain to
demonstrate this
o Help the company bottom line as well as the environment
o Companies have to avoid “greenwashing” customers by purporting to be
“green” while in reality they are not
o Counterfeiting – especially in products that can affect customer health and
safety
o The issue of CSR is increasingly important as supply chains become global
 Access to Information
o Providing customers with access to information that was previously available
only internally is increasingly valued by customers

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o Package tracking over the internet via FedEx, UPS, and Purolator, enables the
customer to have visibility into the internal processes of the courier
o Customers appear to value organizations providing access to “internal”
information, even paying more in some circumstances
← The Notion of Trade-Offs:
 The underlying logic is that an operation cannot excel simultaneously on all
competitive dimensions
 Management has to decide which parameters of performance are critical to the
firm’s success and then concentrate the resources of the firm on these particular
characteristics
 A strategic position is not sustainable unless there are compromises with other
positions
 Trade-offs occur when activities are incompatible – more of one thing necessitate
less of another
 Excellent companies are able to compete better on more competitive dimensions
 Better operations and supply management practices as well by using advanced
manufacturing and information technology
 Straddling: occurs when a company seeks to match the benefits of a successful
position while maintaining its existing position
 It adds new features, services or technologies onto the activities it already performs
o Ex: Continental Airlines - Continental Lite
← Order Winners and Order Qualifiers: The Marketing-Operations Link:
 An interface between marketing and operations is necessary to provide a business
with an understanding of its markets from both perspectives
o Ex: Terry Hill – oriented dimensions that are key to competitive success
 Order winner: criterion that differentiates the products or services of one firm from
another
o Cost of the product (price), product quality and reliability, or any of the other
dimensions developed earlier
 Order qualifier: a screening criterion that permits a firm’s products to even be
considered as possible candidates for purchase
 Must “requalify the order qualifiers” every day it is in business
 The order winning and order qualifying criteria may change over time
 Consumer groups continually monitor the quality and reliability criteria, thus
requalifying the top-performing companies

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 Customers know the set of features they want and they want to purchase a
particular combination at the lowest price, thus maximizing value
 Some aspects of corporate social responsibility such as ethical production are now
becoming order qualifiers
 Ex: a few years ago internet connection in hotels was order winner, today in-room
internet has become an order qualifier
← Strategic Fit: Fitting Activities to Strategy:
 A successful strategy requires strong linkages that are horizontal, vertical, and across
time
 An organizations strategy is only as strong as its weakest link
 Even if activities related to only one of the horizontal, vertical and across-time
strategies are incongruent with the corporate strategy, it will affect the performance
of the organization
← Horizontal Strategic Linkages:
 After corporate strategy is developed, all functional areas then must coordinate
their own strategies to implement
Vertical Strategic Linkages:
 An organization may be just one link in a vertical supply chain that spans from a
parent corporation all the way down to the organization’s suppliers
 The activities at every level of the chain have to be consistent with the overall
strategy
← Across time Strategic Linkages:
 The implementation of a strategy requires long-term (strategic), medium-term
(tactical), and short-term (operational) decisions for success
 Implementing a strategy requires “walking the talk” – following through with the
medium and short term decisions and processes that will enable the long-term
strategy to be successful
 In order to succeed in the market place, a company’s strategy must be delivered
through a set of tailored activities
 In companies with a clear strategy, a number of higher-order strategic themes can
be identified and implemented through clusters of tightly linked activities
← A Framework for Operations and Supply Chain Strategy:
 Operations strategy must be linked vertically to the customer and horizontally to
other parts of the enterprise
 Overlying this framework is senior management’s strategic vision of the firm

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 The vision identifies, in general terms, the target market, the firm’s product line, and
its core capabilities
 The firm may also have a mission, which expresses its method to achieve the vision
 With the given vision and mission, corporate strategy dines the specific businesses in
which the firm will compete and how it will compete
 The business strategy depends on the market requirements (such as customer
desires and success criteria in the market), the environment (such as competition,
technological advances, and government regulations) and the organizational
competencies (such as its core capabilities, its culture, and strengths and
weaknesses)
 The choice of a target make can be difficult
 The environment is also important in formulating strategy
 Use of technology in manufacturing and services has increased greatly in recent
years
 Naturally, this affects the market choice, and competitive priorities as well as
operations strategy decisions
 Functional strategies (operations, marketing, HR) are developed to support or align
with the established business strategy
 Core capabilities/competencies: the distinctive skills or capabilities that the
organization possesses
 These often differentiate the service or manufacturing firm from its competitors and
create a preference for its products in the marketplace
 Strategy is often based on core capabilities
 The operations activities must be linked to the activities of the other functions of the
firm
 Possibly the most difficult thing for a firm to do is part with tradition
 What companies need in this world of intense global competition is not more
techniques but a way to structure a while new product or service creation system
differently and better than any competitor
 EXHIBIT 2.3 – The Operations Strategy Process

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← Assessing the Risk Associated with Operations and Supply Chain Strategies:
 The uncertainty in the global environment where most supply chains operate
requires strategic planners to evaluate the relative risk of their operations and
supply chain strategies
 Supply chain risk: the likelihood of a disruption that would impact the ability of the
company to continuously supply products or services
 Supply chain disruptions that are unplanned and unanticipated events that disrupt
the normal flow of gods and materials within a supply chain, which expose firms
within the supply chain to operational and financial risks
 Operations and supply chain strategies must consider the risk in their supply chains
and develop initiates to cope with these disruptions and mitigate their impact on the
business
 Two dimensions:
o 1. Supply chain coordination risks that are associated with the day-to-day
management of the supply chain, which are normally dealt with using safety
stock, safety lead time, overtime, etc
o 2. Disruption risks, which are caused by natural or manmade disasters, such
as earthquakes, hurricanes, and terrorism
 Disruption risks – events related to these risks are highly random and virtually
impossible to predict with an precision
← Risk Management Framework:
 The nature of these types of risk lends itself to a four-step risk management process
that can be applied to situations where disruptions are possible
 The four steps are:
o 1. Identify the sources of potential disruptions
 Assessing the type of vulnerability

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o 2. Assessment of the potential impact of the risk

 Quantify the probability and the potential impact of the risk
 Could be based on financial, environmental, ongoing business liability,
brand image/reputation, potential human lives, etc
o 3. Develop plans to mitigate the risk
 A detailed strategy for minimizing the impact of the risk could take
many different forms, depending on the nature of the problem
 Communication between the different parts of the supply chain is key
in this step
 Risk mapping involves assessment of the probability or relative
frequency of an event against the aggregate severity of the loss
o 4. Develop contingency plans
← Plans that should be implemented if one of the risk events actually occurs

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Chapter 8 – Managing Quality

← GE Six-Sigma Supply Chain Processes:
 Six Sigma originated as a statistical quality control tool where the variation of a
product or process was monitored within six standard deviations
 It has expanded into a philosophy and methodology to help organizations virtually
eliminate defects
 Achieving a Six Sigma level of quality requires 99.9996 percent of an organization’s
products/processes to fall within their customer specification limits – a defect rate
of only 3.4 out of one million opportunities
 The core of Six Sigma is the define, measure, analyze, improve, and control (DMAIC)
methodology
← What is Six Sigma?
 Six Sigma is a highly disciplined process that helps us focus on developing and
delivering near-perfect products and services
← Why Sigma?
 The word is a statistical term that measures how far a given process deviates from
perfection
 The central idea behind Six Sigma is that if you can measure how many “defects”
you have in a process, you can systematically figure out how to eliminate them and
get as close to “zero defects” as possible
 To achieve Six Sigma quality, a process must produce no more than 3.4 defects per
million opportunities
 An “opportunity” is defined as a chance for nonconformance, or not meeting the
required specifications
 At its core, Six Sigma revolves around a few key concepts:
o Critical to quality – attributes most important to the customer
o Defect – failing to deliver what the customer wants
o Process capability – what your process can deliver
o Variation – what the customer sees and feels
o Stable operations – ensuring consistent, predictable processes to improve
what the customer sees and feels
o Design for Six Sigma – designing to meet customer needs and process
capabilities
← Operational Strategy and Quality Management:
 An organization’s operational strategy will influence its use of the quality
management techniques

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 Performance on the competitive priorities of cost, delivery, flexibility, service, and

recently, environmentalism, corporate social responsibility, and access to
information, can all be impacted by the choices made within the topic of quality
management, such as quality techniques, international certifications, what to
measure, and control chart limits
← Quality Techniques Implemented:
 Organizations that strategically prioritize quality, delivery, and service are more
likely to implement quality techniques such as total quality management, Six Sigma,
and continuous improvement to aid in accomplishing those priorities
← International Certifications:
 The International Organization for Standardization (ISO) has certifications for quality
(ISO 9000), environmentalism (ISO 14000) and more recently, a guidance document
for implementing social responsibility (ISO 26000)
 These “best practices” can aid organizations not only in accomplishing their related
strategic priorities, but also in their public image of attaining/implementing such
internationally recognized standards
← What to Measure:
 What an organization wants to assess its quality performance, it first has to decide
what to measure
 The organization’s strategic priorities can provide that guidance by revealing what
they want to focus on
 For example, if an organization has strategically prioritized service, it would likely
want to measure various aspects of customer satisfaction
← Control Chart Limits:
 If an organization strategically prioritizes quality it will not only employ statistical
process control (SPC), but also may use very tight control limits
 The rationale is to err on the side of caution by minimizing potential customer
“external failures”, even though there is a corresponding increased probability of
stopping the process for investigation purposes when the process is actually
operating as expected
 If, however, an organization strategically prioritizes low cost, it many employ SPC
with more lax control limits
 In this case, stopping the process for investigation is viewed as expensive due to the
lost capacity, and it should take place only when it is sure the process is not
operating as expected
← Total Quality Management:

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 Total quality management (TQM) may be defined as managing the entire

organization so that it excels on all dimensions of products and services that are
important to the customer
 It has two fundamental operational goals:
o 1. Careful design of the product or service
o 2. Ensuring that the organization’s systems can consistently produce the
design
 These two goals can be achieved only if the entire organization is oriented toward
them – hence the term total quality management
 TQM became a national concern in North America primarily as a response to
Japanese quality superiority in manufacturing automobiles and other durable goods
 One response to this quality challenge was the institution of the Canada Awards for
Excellence (CAE)
 These are quality awards given annually to Canadian organization by the National
Quality Institute (NQI) on behalf of the Canadian government
 In the United States, the Department of Commerce established the Malcolm
Baldrige National Quality Award to help companies review and structure their
quality programs
 Also gaining major attention at this time was the requirement that suppliers
demonstrate that they are measuring and documenting their quality practices
according to specified criteria, called ISO standards, if they wished to compete for
international contracts
 The philosophical leaders of the quality movement, so called quality gurus – had
slightly different definitions of what quality is and how to achieve it but they all had
the same general message:
o To achieve outstanding quality requires:
 1. Quality leadership from senior management
 2. A customer focus
 3. Total involvement of the workforce
 4. Continuous improvement based upon rigorous analysis of
processes
← The Quality Management Contributing Gurus:
 Walter A Shewhart:
o Developed the principle’s of statistical quality control (SQC)
o Created the Plan-Do-Check-Act (PDCA) principle of continuous improvement:
 We plan to the improvement

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 We do the improvement
 We check the results against the plan
 We act to improve again, which leads us back to the beginning of the
next PDCA cycle
 W. Edwards Deming:
o Deming emphasized the importance of organization-wide quality
management
o He placed great importance on the change in attitude of senior management
o “Red bead experiment”
o His well-know 14 point plan for quality improvement helps achieve long-term
competitiveness
o The plan focuses on the following major themes in quality improvement:
 1. Defect prevention rather than inspection
 2. Doing business with suppliers based on quality rather than price
 3. Leadership from top management that provides an atmosphere in
which employees can focus on continuous improvement and can take
price in their work though producing quality goods and services
 4. The importance of continuous training and education
o It was also his view that by focusing on quality, cost would be automatically
reduced in the long run
o His work influenced the rise in quality of Japanese products
 Joseph M. Juran:
o Also influenced the Japanese
o Developed the concert of quality as “fitness for use” – i.e. that product must
satisfy the customer’s needs
o Promoted the Pareto analysis in quality control and costs of quality
o His methods of preventing quality problems included:
 Quality improvement - finding ways to doing better than standard
 Quality planning - launching new products and process in ways that
result in minimal need for future quality improvements
 Genichi Taguchi:
o Applied the concept of design of experiments (changing various parameters
of the process), also referred to as DOE, in optimizing process quality
o His work influenced many companies like Toyota
 Philip Crosby:
o Developed the notion that “quality if free”

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o The cost and effort spent preventing defects will be more than offset by the
benefits, such as reduced repair cost, better reputation, and more market
share
o Focused on defect prevention or “zero defects”
 EXHIBIT 8.1: The Quality Gurus Compared
← Quality Specification and Quality Costs:

 Determining quality specifications and the costs of achieving (or not achieving) those
specifications are fundamental to any quality program
← Developing Quality Specifications:
 Design quality refers to the inherent value of the product I the marketplace and is
thus a strategic decision for the firm
 FIGURE 8.2: The Dimensions of Design Quality
 These dimensions refer to the features of the product or service that relate directly
to design issues
 A firm designs a product or service with certain performance characteristics and
features based on what the intended market expects
 Materials and manufacturing process attributes can greatly impact the reliability and
durability of a product
 The company attempts to design a product or service that can be produced or
delivered at reasonable cost
 Te serviceability of the product may have a great impact on the cost of the product
or service to the customer after the initial purchase is made
 It may also affect the warranty and repair cost to the firm
 Aesthetics may greatly impact the desirability of the product or service, in particular
consumers products

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 The design often represents the next generation of an ongoing stream of products or
services, especially when a brand name is involved
 Consistency in the relative performance of the product compared to the start of the
art may have a great impact on how the quality of the product is perceived
 This may be very important to the long-run success of the product or service
 Quality function development (QFD) is an important tool in improving design
quality
 QFD uses multifunctional teams from different departments, such as marketing,
design, engineering, and manufacturing, to ensure that the designed product is fit
for use
 The QFD process beings with understanding the customer to determine the
characteristics of the required product
 The customers’ product needs and preferences are then defined and broken down
into categories called customer attributes
 A weighted importance rating for each engineering characteristic that relates to
customer attributes is developed
 The customer is also asked to compare and rate the company’s products with those
of its competitors
 Thus, the QFD process helps the company to determine those product
characteristics that are important to the consumer and to evaluate its product in
relation to others
 The end result is a better understanding of and focus on the product characteristics
that require improvement
 Customer attribute information forms the basis for the QFD matrix, also called the
house of quality (HOQ)
 The matrix depicts:
o 1. Customer attributes
o 2. Design characteristics required to satisfy customer requirements
o 3. Weighted importance ratings for the design characteristics
o 4. Interrelationships between design characteristics (that could lead to trade
offs)
o 5. Competitor comparisons
 By building a HOQ matrix, the cross-function QFD team can use customer feedback
to make engineering, marketing, and design decisions
 The matrix helps the team translate customer attribute information into concrete
operating or engineering goals

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 The important product characteristics and goals for improvement are jointly agreed
on and detailed in the house
 This process encourages the different departments to work closely together and
results in a better understanding of each other’s goals and issues
 However, the most important benefit of the HOQ is that it helps the team to focus
on building a product that satisfies customers
 Conformance quality refers to the degree to which the product or service design
specifications are met
 The activities involved in achieving conformance are of a tactical, day-to-day nature
 Quality at the source is frequently discussed in the context of conformance quality
 This means the person who does the work takes responsibility for making sure that
their output meets specifications
 EXHIBIT 8.4: Examples of Dimensions of Quality
 Both quality of design and quality of conformance should provide products that
meet the customer’s objectives for those products
 This is often termed the product’s fitness for use, developed by Joseph M. Juran
 It entails identifying the dimensions of the product or service that the customer
wants and developing a quality control program to ensure that these dimensions are
met
← Cost of Quality:
 Recognized by Juran
 Cost of quality (COQ) analyses are common in industry and constitute one of the
primary functions of QC departments
 From the purist’s point of view, it means all of the costs attributable to the product
of quality that is not 100 percent perfect
 A less stringent definition considers only those costs that are the difference between
what can be expected from excellent performance and the current costs that exits
 How significant is the cost of quality?
o It has been estimated at between 15 to 20 percent of every sales dollar

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o Crosby states that the correct cost for a well-run quality management
program should be under 2.5 percent
 Three basic assumptions justify an analysis of the costs of quality:
o 1. Failures are caused
o 2. Prevention is cheaper
o 3. Performance can be measured
 The costs of quality are generally classified into four types (EXHIBIT 8.5):
o 1. Appraisal costs – costs of the inspection, testing, and other tasks to ensure
that the product or process is acceptable
o 2. Prevention costs – the sum of all of the costs to prevent effects
 Fail-safing measures to prevent defects are sometimes referred to by
the Japanese term poka-yoke
o 3. Internal failure costs – costs for defects incurred within the systems (scrap,
rework, repairs)
o 4. External failure costs – costs for defects that pass through the system
(customer warranty replacements, loss of customers or goodwill, handling
complaints, and product repair)
 Warranty replacements, an external failure cost, are directly related to product

quality levels, however, the price of the product has been shown to also influence
customer warranty behavior
 Prevention is the most important influence
 A rule of thumb says that for every dollar you spend on prevention, you can save $10
on failure and appraisal costs
 EXHIBIT 8.7: Spending Proactively on Quality: Reducing Defects without Increasing
Costs

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 The lesson is that it may not require new money to improve an organization’s quality
performance - just has to change where they are spending it
 Often, increases in productivity occur as a by-product of efforts to reduce the cost of
quality
← International Quality Management Systems Standards:
← ISO 9000:
 ISO 9000 is a series of international quality standards developed by the International
Organization for Standardization
 The idea behind the standards is that defects can be prevented through the planning
and allocation of best practices at every stage of business
 These standards focus on identifying criteria by which any organization, regardless of
whether it is manufacturing or service oriented, can ensure that product leaving its
facility meets the requirements of its customers
 These standards ask a company to first document and implement its systems for
quality management and then to verify, by means of an audit conducted by an
independent accredited third party, the compliance of those systems to the
requirements of the standards
 ISO 9000 is a family of standards on good quality management practices based on
international consensus
 ISO 9000:2008 is the main standard, providing standardized requirements of a
quality management system for any organization
 Other standards in the ISO 9000 family relate to things such as performance
improvements, training, and process documentation
 Only the ISO 9000:2008 standard provides the possibility of a certification, though
certifications is not mandatory
 These are process standards (not product standards), meaning that they indicate
how processes should be measured and documented from a quality view, but d not
prescribe specific tolerances for individual products (which may be covered by
industry-specific or jurisdiction-specific standards)
 The purpose of ISO is to facilitate international trade by providing a single set of
standards that people everywhere will recognize and respect
 The standards apply to all kinds of organizations in many industries
← ISO 9000 Certification:
 Registration procedures to become certified differ depending on the country

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 In Canada, although it is possible for organizations to self-declare conformity, most

companies are assessed by third party quality registrars for ISO 9000 certifications,
since most customers prefer their supplier to be independently assessed
 The Standards Council of Canada (SCC) is the accreditation body for registrars
 Although SCC’s accreditation of a company does not mean that the certification is
recognized worldwide, mutual agreements signed between the SCC and its
counterparts in other countries mean participating accreditation bodies will
recognize the SCC’s accreditation program as equivalent to their won
← ISO 14000 Series:
 The ISO 14000 series is a set of international standards and guidance documents for
environmental management
 Environmental management refers to the practice of managing the impact of n
organization’s activities on the environment
 Set of tools for determining the environmental aspects of an organizations activities,
establishing goals and targets for those aspects, evaluating how well those goals and
targets are being achieved, and auditing, labeling, and continually improving
performance
 The ISO 14000 series does not provide specific environmental targets or describe
ways to achieving them
 Instead, the documents provide generic frameworks and general principles
 Consumption of natural resources and energy, and measuring and managing
emissions, effluents, and other waste streams
 Having ISO 14000 does not necessarily indicate that a company’s environmental
performance is better than that of its competitors
 However, since establishing and maintaining an environmental management system
(EMS) requires a significant investment of time and resource, the registration
indicates a company’s commitment to monitoring, managing, and improving its
environmental performance on an ongoing basis
 To maintain its registration, the company must show not only consistency, but also
improvement in its performance over time
← ISO 26000 Guidance on Social and Environmental Responsibilities:
 The International Standard ISO 26000 provides guidance on social and
environmental responsibilities
 It is designed to be relevant for all organization types in public and private sectors,
and in developed and developing countries

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 A voluntary guidance tool to help move organizations from “good intentions to good
actions” by:
o Developing an international consensus on what social responsibility means
and the related issues that organizations need to address
o Providing guidance on translating principles into effective actions
o Refining best practices that have already evolved and disseminating the
information worldwide for the good of the international community
 ISO 26000 covers the following seven core subjects and their issues that are
addressed:
o Organizational governance
o Human rights
o Labour practices
o The environment
o Fair operating practices
o Consumer issues
o Community involvement and development
 The ISO standards are constantly evolving
← Recognition for Good Organization-Wide Quality:
 To foster better quality in products and services, many countries have instituted
annual awards for companies that achieve organization-wide quality
o Canada = Canada Awards for Excellence (CAE)
o United States = Malcolm Baldrige National Quality Award (MBNQA)
o European Union = European Quality Award
o Japan = Deming Award
Canada Awards for Excellence:
 The Canada Awards for Excellence (CAE) are quality awards given annually to
Canadian organizations by the National Quality Institute (NQI) on behalf of the
Canadian government to recognize outstanding achievement across major functions
of the organization
 EXHIBIT 8.8: The Integrated Framework for the Canada Award for Excellence

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 The criteria are leadership and governance, planning and environmental

sustainability, customer/citizen/client focus, people focus and healthy workplace,
process management, supplier/partner focus, and overall organizational
performance
 Each of the seven main criteria have sub-criteria
← CAE Criteria:
 The following are criteria for assessing overall quality of an organization and
determining the winners of the CAE awards
o Categories: there are ten categories of Canada Awards for Excellence,
adjudicated according to various NQI criteria
o Forms of recognition for the awards: gold, silver, bronze, order of excellence
 The US equivalent of the CAE is the Malcolm Baldrige National Quality Award
(MBNQA) given to organizations that have demonstrated outstanding quality in their
products and processes
 Four awards may be given annually in each of these categories: manufacturing,
service, small business, education and health care, and not-for-profit
← Six Sigma Quality:
 Six Sigma refers to the philosophy and methods developed by Motorola and made
popular by companies such as General Electric to eliminate defects in their products
and processes
 A defect is simply any component that does not fall within the customers
specification limits
 Each step or activity in a company represented an opportunity for defects to occur,
and Six Sigma programs seek to reduce the variation in the processes that lead to
these defects
 Six Sigma advocates see variation as the enemy of quality, and much of the theory
underlying Six Sigma is devoted to dealing with this problem
 Motorola’s definition of a Six Sigma process is one that will product no more than
3.4 defects out of every one million defect opportunities
 Today, many companies use Lean Six Sigma, a philosophy that combines traditional
Six Sigma methods with lean manufacturing techniques
 One of the benefits of Six Sigma thinking is that it allows managers to readily
describe the performance of the process in terms of its variability and to compare
different processes using a common metric
 This metric is defects per million opportunities (DPMO)
 This calculation requires three pieces of data:

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o 1. Unit: the item produced or being serviced

o 2. Defect: any item or event that does not meet the customer’s requirements
o 3. Opportunity: a chance for a defect to occur
 DPMO = number of defects X 1,000,000
# of opportunities for error per unit x # of units
 There are two aspects to Six Sigma programs: the methodology side and the people
side
← Six Sigma Methodology:
 Employed in a systematic product-oriented fashion through the define, measure,
analyze, improve, and control (DMAIC) cycle
 The overarching focus of the methodology is understand and achieving what the
customer wants, since that is seen as the key to profitability of a production process
 Some use the DMAIC as an acronym for “Dumb Managers Always Ignore Customers”
 The standard approach to Six Sigma projects is the DMAIC methodology developed:
o 1. Define (D):
Identify customers and their priorities

Identify a product suitable for Six Sigma efforts based on business

objectives as well as customer needs and feedback
 Identify CTQ’s (critical to quality characteristics) that the customer
considers to have the most impact on quality
o 2. Measure (M):
Determine how to measure the process and how it is performing
Identify the key internal processes that influence CTQ’s and measure
the defects currently generated relative to those processes
o 3. Analyze (A):
Determine the most likely causes of defects
Understand why defects are generated by identifying the key
variables that are most likely to create process variation
o 4. Improve (I):
Identify means to remove the causes of defects
Confirm the key variables and quantify their effects of the CTQ’s
Identify the maximum acceptance ranges of the key variables and a
system for measuring deviations of the variables
 Modify the process to stay within an acceptable range
o 5. Control (C):
 Determine how to maintain the improvements

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 Put tools in place to ensure that the key variables remain within the
maximum acceptance ranges under the modified process
← Analytical Tools for Six Sigma:
 The analytical tools of Six Sigma have been used for many years in traditional quality
improvement programs to collect, present, and analyze data about any kind of
process, including service processes
 The goal in using it is to provide management with the proper information to make
better decisions about how to design and improve process performance
 These seven basic quality control (QC) tools are:
o 1. Process flow charts (or diagrams)
o 2. Check sheets
o 3. Bar charts and histograms
o 4. Pareto charts
o 5. Scatter plots (or diagrams)
o 6. Run (or trend) charts
o 7. Cause-and-effect (or fishbone) charts
 Process Flow Charts (Or Diagrams):
o Process flow diagrams or flow charts show each of the steps required to
produce either a good or a service
o In service operations, flow charts often are referred to as “service blueprints”
o The primary purpose for using flow chart analysis is to properly sequence the
various tasks required to produce a given product or service and to identify
any bottlenecks in the process that limit its overall capacity
o The purpose of flowcharting, from a quality improvement perspective, is to
identify those steps in the process that could be potential sources of error
o
 Check sheets:
o Collected data about some process by noting how frequently an event occurs
and making a tick mark for a particular category in a check sheet

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o What is most important about check sheets is that the categories not overlap
and that all categories be listed – in other words, categories should be
mutually exclusive and collectively exhaustive
 Bar Charts and Histograms:

o Bar charts and histograms visually display data variation
o A bar chart is used to graph nominal data (also called categorical or attribute
data), which are data that can be categorized and counted, rather than
measured
o Histograms are used to display continuous data that can be measured
o Scale is continuous so we must determine how to divide it into intervals,
depending on how much variation there is
o Histogram intervals (also referred to as buckets or bins) must all be the same
size and must not overlap
o
 Parteo Charts:
o Pareto charts (sometimes referred to as Pareto analysis) are specialized bar
charts
o The frequency of occurrence of errors is sorted in descending order and a
cumulative percentage line is typically added to make it easier to determine
how the errors add up
o Pareto charts can help to establish priorities for action, focusing attention on
those errors that occur most frequently
o However, there are times when the frequency of occurrence by itself does
not determine how important an error problem might be
o The Pareto diagram an weigh the factors being considered to enable
managers to take action on those items that most need attention

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o
 Scatter Plots (Or Diagrams):
o Scatter plots show the relationship between two measured (not counted)
variables
o
 Run (Or Trend) Charts:
o Run charts show the behavior of some variable over time
o
 Cause-and-Effect (Or Fishbone) Diagrams:
o Cause-and-effect diagrams (also known as fishbone diagrams or Ishikawa
diagrams) are used to identify the causes that lead to a particular outcome or
effect
o Major categories of the causes are first identified, then for each cause, why is
asked until the root cause for that category can be identified
o
 Other tools that have seen extensive use in Six Sigma projects are failure mode and
effect analysis (FMEA) and design of experiments (DOE):
o Failure Mode and Effect Analysis (FMEA):
 This is a structured approach to identify, estimate, prioritize, and
evaluate risk of possible failures at each stage of a process

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It begins with identifying each element, assembly, or part of the

process and listing the potential failure modes, potential causes, and
effect of each failure
 A risk priority number (RPN) is calculated for each failure mode
 It is an index used to measure the rank importance of the items listed
in the FMEA chart
 These conditions include the probability that the failure takes place
(occurrence), the damage resulting from the failure (severity), and the
probability of detecting failure in-house (detection)
 High RPN items should be targeted to improvement first
o Design of Experiments (DOE):
 Also known as multivariate testing
 Statistical methodology used fro determining the cause-and-effect
relationship between process variables (X’s) and the output variable
(Y)
 DOE permits experimentation with many variables simultaneously by
carefully selecting a subset of them
 Taguchi pioneered the use of DOE in quality management
← Statistical Quality Control:
 SQC is a number of different techniques designed to evaluate quality from a
conformance view
 How well are we doing at meeting the specifications that have been set during the
design of the parts of services that we are providing?
 Managing quality performance using SQC techniques usually involves periodic
sampling of a process and analysis of these data using statistically derived
performance criteria
 SQC can be applied to logistics, manufacturing, and service processes
 Processes that provide goods and services usually exhibit some variation in their
output
 This variation can be cause by many factors, some of which we can control, others
that are inherent in the process
 Variation that is caused by factors that can be clearly identified and possible even
managed is called assignable variation
o Ex: workers not well trained, improper machine adjustments
 Variation that is inherent in the process itself is called common variation
o Often referred to as random variation

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o Ex: result of the type of equipment used to complete a process

 The mean is just the average value of a set of numbers
o Xi = observed value
o N = total number of observed values
 The standard deviation is
 In monitoring a process using SQC, samples of the process output would be taken
and sample statistics calculated
 Using samples allows for the quick detecting of changes in the actual distribution of
the process
 The purpose of sampling is to find when the process has changed in some
nonrandom way, so that the reason for the change can be quickly determined
← Variation Around Us:
 It is generally accepted that as variation is reduced, quality is improved
 With engineers, the knowledge is better defined
 When quality is unacceptable, customers are typically dissatisfied
 However, engineers also know that it is impossible to have zero variability
 For this reason, designers establish specifications that define not only the target
value of something but also acceptable limits about the target
 These design limits are often referred to as the upper and lower specification limits
 A traditional way of interpreting such a specification is that any part that falls within
the allowed range is equally good, whereas any part falling outside the range is
totally bad
 Taguchi has pointed out that the traditional view is nonsense for two reasons:
o 1. From the customer’s view, there is often practically no difference between
a product just inside specifications and a product just outside. Conversely,
there is a far greater difference in the quality of a product that is the target
an the quality of one that is near a limit
o 2. As customers get more demanding, there is pressure to reduce variability
 EXHIBIT 8.16: A Traditional View of the Cost of Variability

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 EXHIBIT 8.17: Taguchi’s View of the Cost of Variability

o Cost is represented by a smooth curve
 In nearly anything that can be measured, the customers sees not a sharp line, but a
gradation of acceptability away fro the “aim” specification
 Customers see the loss function as Taguchi’s view rather than the traditional view
 If products are consistently scrapped when they are outside specifications, the loss
curve flattens out in most cases at a value equivalent to scrap cost in the ranges
outside specifications
 This is because such products, theoretically at least, will never be sold, so there is no
external cost to society
 However, in many practical situations, either the process is capable of producing a
very high percentage of product within specifications and 100 percent checking is
not done, or, if the process is not capable of producing within specifications, 100
percent checking is done and out-of-spec products can be reworked to being them
within specs
 In either of these situations, the parabolic loss function usually a reasonable
assumption
← Process Capability:
 Taguchi argues that being within specifications is not a yes/no decision, but rather a
continuous function
 The Motorola quality experts argue that the process used to produce a good or
deliver a service should be so good that the probability of generating a defect should
be very, very low
 Motorola made process capability and product design famous by adopting Six Sigma
limits

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 When we design a part, we specify that certain dimensions should be within the
upper and lower specification limits
 There are many variables involved for parts
 The designer specifies limits for each of these variables to ensure that the parts will
fit properly, known as the lower and upper specification limits
 Usually, there are trade-offs that need to be considered when designing a process
for making a part
 We can run a test assuming that the process is under control
 After running our test, we find that the average or men is “centered” right in the
middle of the upper and lower specification limits
 In reality, it may be very difficult to have a perfectly centered process
 Let’s say that the values have a standard deviation; this means that the process does
not make each production exactly the same
 Normally we monitor a process suing control charts
 If the process makes products with more than three standard deviations above or
below, we stop the process
 This means that we will product parts that vary between ___ and ___ are referred to
as the upper and lower process limits
 The “process” limits relate to how consistent our process is for making the product
 The “specification” limits are related to the design of the part
 Normally in control charts, we will examine samples as a group
 Thus, we will have to use the standard deviation of the sample mean rather than the
standard deviation of the individual units
 Ex: if process limits are slightly greater than the specification limits
o Not good because we will produce some parts that do not meet
specifications
 Companies with Six Sigma processes insist that a process making a part be capable
of operating so that the design specification limits are six standard deviations away
for the process mean
 Using a 100 percent testing approach, the company would spend more time testing
than it takes to actually make the part, significantly slowing the process and
potentially doubling the cost of the part
 This is why organizations use small samples to periodically check that a process is in
statistical control

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 We say that a process is capable when the mean and standard deviation of the
process are operating such that the upper and lower control limits are acceptable
relative to the upper and lower specification limits
 If we can improve our process by reducing the standard deviation associated with
the part, the probability can be reduced
 Suppose the central value of mean of the process shifts away from the mean
(approx. 1 standard deviation closer to the upper specification limit)
o Causes a slightly higher number of expected defects (since the right edge of
the red area is now closer to the upper specification limit, but we can bee
that this is still very, very good
 We use the capability index to measure how well our process is capable of producing
relative to the design specifications
Capability Index (CPK):
 The capability index (CPK) shows how well the parts being produced fit into the
range of specified by the design specification limits
 If the specification limits are larger than the three σ allowed in the process, then the
mean of the process can be allowed to drift off-center before readjustment, and a
high percentage of good parts will still be produced
 The capability index (CPK) is the position of the mean and tails of the process relative
to design specifications
 EXHIBIT 8.18: Process Capability
 EXHIBIT 8.19: Process Capability with a Shift in the Process Mean

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 The more off-center, the greater the chance to produce defective parts
 Because the process mean can shift in either direction, the direction of shift and its
distance from the design specification set the limit on the process capability
 The direction shift is toward the smaller number
 The capability index (CPK) is calculated as the smaller number as follows:
o
 Note: CPK has to be at least 2 for a process to be capable
 At times, it is useful to calculate the actual probability of producing a defect
 The approach to use is to calculate the probability of producing a part outside the
lower and upper design specification limits, given the means and standard deviation
of the process
 The Z score is the number of standard deviations either to the right or to the left of
zero in s standard normal distribution

 An easy way to get the probabilities associated with these Z values is to use the
NORMSDIST functions built into excel
 The format for this function is NORMSDIST (Z), where Z is the Z value calculated
above
 NORMSDIST is giving the cumulative probability to the left of the given Z value
 If +/- 6 σ is a defect level of 2 per billion, why does Motorola’s Six Sigma definition
refer to 3.4 per million?
o The reasons I the Motorola’s definition allows for a shift in the process mean
itself by 1.5 σ (CPK = 1.5)
o A shift in the mean implies reduced process capability and increased
probability of defects

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o Motorola’s Six Sigma process definition is closely related to +/- 6 σ but is not
identical
← Process Control Procedures:
 Process control is concerned with monitoring quality while the product or service is
being produced
 Typical objectives of process control plans are to provide timely information on
whether currently produced items are meeting design specifications and to detect
shifts in the process the signal that future items (units) may not meet specifications
 Statistical process control (SPC) involves testing a random sample of output from a
process to determine whether the process is producing items within a preselected
range
 Attributes are quality characteristics that are classified as either conforming or not
conforming to specification
o Good or bad, functioning or malfunctioning, etc
o This type of measurement is known as sampling by attributes
 Amount of deviation from a set standard
o This type of measurement is known as sampling by variables
 EXHIBIT 8.20: Process Control Chart
← Process Control with Attribute Measurements: Using P Charts:

 Measurement by attributes means taking samples and using a single decision – the
item is good or it is bad
 Because it is a yes/no decision, we can use simple statistics to create a P chart with
the upper process control limit (UCL) and lower process control limit (LCL)
 We can draw these control limits on a graph and then plot the fraction defective of
each individual sample tested

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 The process is assumed to be working correctly when the samples, which are taken
periodically during the day, continue to stay between the control limits

 P bar is the fraction defective, Sp is the standard deviation, n is the sample size and z
is the number of standard deviations for a specific confidence
 Typically, Z = 3 (99.7% confidence) or Z= 2.58 (99% confidence) is use
← Size of the Sample:
 The size of the sample must be large enough to allow counting of the attribute
 A rule of thumb when setting up a P chart is to make the sample large enough to
expect to count the attribute twice in each sample
o Ex: is defect rate was 1%, sample size would be 200 units
 Assumption is that the sample size is fixed
 The calculation o the standard deviation depends on this assumption
 If the sample size varies, the standard deviation and upper and lower process
control limits should be recalculated for each sample
← Process Control with Variable Measurements: Using X bar and R Charts:
 X bar and R (range) charts are widely used in statistical process control
 In attribute sampling, we determine whether something is good or bad, fits or
doesn’t fit – it is a go/no-go situation
 In variables sampling, we measure the actual weight, volume, length, or other
variable measurements, and we develop control charts to determine the
acceptability of refection of the process based on those measurements
 These values are used to create or modify control charts and to see whether they fall
within the acceptable limits
 Four main issues need to be addressed in creating a control charts: the size of the
samples, number of samples, frequency of samples, and control limits
 Size of Samples:
o When we compared process limits and specification limits, the normal
method in process control is to use sample sizes greater than one
o For industrial applications in process control involving the measurement of
variables it is preferable to keep the sample size small

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o There are two reasons for this:

1. The same size needs to be taken within a reasonable length of

time; otherwise the process might change while the samples are
taken
 2. The larger the sample, the more it costs to take
o Sample sizes of four to five units seem to be preferred numbers
o The means of samples of this size have an approximately normal distribution,
no matter what the distribution of the parent population looks like
o Sample sizes greater than five give narrower process control limits and thus
more sensitivity
o For detecting finer variations of a process, it may be necessary to use larger
sample sizes
o However, when sample sizes exceed 15 it would be better to use X bar charts
with standard deviation rather than X bar charts with the range R
 Number of Samples:
o Each sample taken can be compared to the chart and a decision can be made
about whether the process is acceptable
o To set up the charts, caution and statistics suggest that 25 or so samples be
taken
 Frequency of Samples:
o Trade-off between the cost of sampling and the benefit of adjusting the
system
o Usually, it is best to start off with frequent sampling of a process and taper
off as confidence in the process builds
 Control Limits:
o Standard practice in statistical process control for variables is to set control
limits three standard deviations above the mean and three standard
deviations below
o This means that 99.7 percent of the sample means are expected to fall within
these process control limits (this is, within 99.7 percent confidence interval)
o Thus, if one sample mean falls outside this wide band, we have strong
evidence that the process is out of control
← How to Construct X Bar and R Charts:
 If the standard deviation of the process distribution is known, the X bar chart may be
defined:

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 An X bar chart is simple a plot of the means of the samples that were taken from a
process
 X bar bar is the average of the means
 The standard deviation of the process is not known
 For this reason, an approach that uses actual sample data is commonly used
 An R chart is a plot of the range within each sample
 The range is the difference between the highest and the lowest numbers in that
sample
 R values provide an easily calculated measure of variation used like a standard
deviation
 An R bar chart is the average of the range of each sample

o X bar = mean of the sample
o i = item number
o n = total number of items in the sample
o X bar bar = the average o the mean of the samples

o k = total number of samples

o R bar = average of the measurement differences R for all samples
 Upper and lower control limit for X bar and R formulas:
o
Acceptance Sampling:
← Design of a Single Sampling Plan for Attributes:

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 Acceptance sampling is performed on goods that already exist to determine what

percentage of products conforms to specifications
 Acceptance sampling is executed through a sampling plan
 The purpose of a sampling plan is to test the lot to either:
o 1. Find its quality
o 2. Ensure that the quality is what it is supposed to be
 Single sampling plan: a plan in which the quality is determined from the evaluation
of one sample
 A single sampling plan is defined by n and c, where n is the number of units in the
sample and c is the acceptance number
 The size of n may vary from one up to all the items in the low (usually denoted as N)
from which it is drawn
 The acceptance number c denotes the maximum number of defective items that can
be found in the sample before the lot if rejected
 Values for n and c are determined by the interaction of four factors (AQL, , LTPD,
and ) that quantify the objectives of the products producer and its consumer
 The objective of the producer is to ensure that the sampling plan has a low
probability for rejecting good lots
 Lots are defined as high quality if they contain no more than a specified level of
defectives, termed the acceptable quality level (AQL)
 There is some controversy surrounding AQL
 This is based on the argument that specifying some acceptable percentage of
defectives is inconsistent with the philosophical goal of zero defects
 Even in the best QC companies, there is an acceptable quality level
 The objective of the consumer is to ensure that the sampling plan has a low
probability to accepting bad lots
 Lots are defined as low quality if the percentage of defectives is greater than a
specified amount, terms lot tolerance percent defective (LTPD)
 The probability associated with reflecting a high-quality lot is denoted by the Greek
letter alpha  and is termed producer’s risk
 The probability associated with accepting a low-quality lot is denoted by the better
beta  and is termed the consumer’s risk
 The selection of particular values for AQL, , LTPD, and  is an economic decision
based on a cost trade-off, or more typically, on company policy or contractual
requirements
← Operating Characteristic Curves:

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 While a sampling plan meets our requirements for the extreme values of good and
bad quality, we cannot readily determine how well the plan discriminates between
good and bad lots at intermediate values
 For this reason, sampling plans are generally displayed graphically through the use
of operating characteristic (OC) curves
 These curves, which are unique for each combination of n and c, simply illustrate the
probability of accepting lots with varying percentages of defectives
 The procedure we have followed in developing the plan, specifies two point on an
OC curve:
o 1. One point defined by AQL and 1 - 
o 2. One point defined by LTPD and 
 Curves for common values of n and c can be computed or obtained from available
tables
 Shaping the OC Curve:
o A sampling plan discriminating perfectly between good and bad lots has an
infinite slope (vertical) at the selected value of AQL
o However, such a curve is possible only with compete inspection of all units
and thus is not a possibility with a true sampling plan
o An OC curve should be steep in the region of most interest (between the AQL
and the LTPD), which is accomplished by varying n and c
o If c remains constant, increasing the sample size n causes the OC curve to be
more vertical
o While holding n constant, decreasing c (the maximum number of defective
units) also makes the slope more vertical, moving closer to the origin
 The Effects of Lot Size:
o The size of the lot that the sample is taken from has relatively little effect on
the quality of protection
o This means that as long as the lot size is several times the sample size, it
makes little difference how large the lot is
o Statistically (on the average in the long run), whether we have a carload or
box full, we’ll get about the same answer
o This assumes that the lot is randomly chosen and that defects are randomly
spread through the lot

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Chapter 10 – Inventory Management

← Inventory is Money:
 Inventory is money
 For many businesses, inventory is the largest asset on the balance sheet at any given
time, even though it is often not very liquid
 Good idea to try to get your inventory down as far as possible
 The key here involves doing things that decrease your inventory order cycle time
and increase the accuracy of your forecast
 Look for ways to use automated systems and electronic communication
 The savings from reduced inventory results in increased profits
 This cost of inventory can be much higher in the case of perishables (such as food),
or short life cycle products (such as fashion or electronic goods)
← The Strategic Role of Inventory and its Positioning Within the Supply Chain:
 Customer order decoupling point: a point where inventory is positioned to allow
processes or entities in the supply chain to operate independently
 If a product is stocked at a retailer (made to stock), the customer pulls the item from
the shelf and the manufacturer never sees a customer order
 In this case, inventory acts as a buffer to separate the customer from the
manufacturing process
 The selection of decoupling points is a strategic decisions that determines customer
lead times and can greatly impact inventory investment
 The closer this point is to the customer, the quicker the customer can be served
 There is a trade-off where quicker response to customer demand comes at the
expense of greater inventory investment
 This is because finished goods inventory is more expensive than raw material
inventory and also needs to stock different types of end items
 In practice, the idea of a single decoupling point in a supply chain is unrealistic; there
may be multiple points where buffering takes place
 So the inventory decision is closely linked to operations strategy and process design
decisions
 The inventory decisions models discussed in this chapter will apply regardless of
where the decoupling point (inventory position) is so long as the demand is fairly
stable
 Examples of where the models described in this chapter are used include, retail
stores, grocery stores, wholesale distributors, hospital suppliers, and suppliers of
repair parts needed to fix or maintain equipment quickly

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 Situations in which it is necessary to have the item in stock are ideal candidates for
the models described in this chapter
 A distinction that should be made with the models in this chapter is whether this is a
one time purchase (ex: seasonal item or for special event), or whether the item will
be stocked on an ongoing basis
 EXHIBIT 10.1 – Supply Chain Inventories
o Different types of supply chain inventories that would exist in a make to

stock environment, typical of items directed at the consumer
 In the upper echelons of the supply chain, which are supply points closer to the
customer, stock usually is kept so that an item can be delivered quickly when a
customer need occurs
 Particularly if demand is not stable over time, the raw materials and manufacturing
plant inventory held in the lower echelon potentially can be managed in a special
way to take advantage of the planning and synchronization that are needed to
efficiently operate this part of the supply chain
 In this case, the models in this chapters are most appropriate for the upper echelon
inventories (retail and warehouse) and the lower echelon should use the Material
Requirements Planning (MRP) technique
 The applicability of these models could be different for other environments such as
when we produce directly to customer order
 The techniques described here also deal with situations where the average demand
is stable but actual demand is difficult to predict with great precision
 In these models, we characterize demand by using a probability distribution and
maintain stock so that the risk associated with stock out is managed
 Similarly, supply timing and quantity can also be uncertain
 Because of demand and supply uncertainties, often it is not possible to ensure that
all items are available all the time (100% fill rate) since this would require an
unaffordable level of inventory investment

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 In these situations, companies attempt to maximize the fill rate (95% or 99%) while
maintaining a reasonable inventory investment
 Note that in the make to order system no end product inventory is maintained
(instant fill rate is 0%)
 Companies that stock many items may use a combination of fill rate policies for
different items
 A few items that are crucial or are inexpensive to hold may have 100% fill rate, while
many others may have a 95% fill rate
 Other slow moving items may have a 0% fill rate and are backordered when the
customer wants them - implying that the customers understand that these are
special orders, and are willing to wait
 An item is considered backordered when there is not stock in inventory but an order
has been placed with the supplier
 This chapter looks at three types of inventory decision models (all of which assume
stable, though not necessarily deterministic demand)
 They are applicable in different situations and answer two decision questions:
o 1. When do we place an order
o 2. How much do we order
 Three inventory decision models are:
o 1. The single period model – this is used when making a one time purchase of
an item
o 2. The fixed-order-quantity model – this is used to maintain an item in stock,
and when we resupply the item, a certain number of units must be ordered
each time. Inventory for the item is monitored until it gets down to a level
where the risk of stocking out is great enough that we are compelled to
order
o 3. The fixed-review-period model – this is similar to the fixed-order-quantity
model; it is used when the item should be in stock and ready to use. The item
is ordered at certain intervals of time (ex: every Friday). Convenient when a
group of items are ordered together
 Ensuring accuracy in inventory records is essential to running an efficient inventory
control process
 Techniques such as ABC analysis and cycle counting are essential to the actual
management of the system since they focus attention on the high value items and
ensure the quality of the transactions that affect the tracking of inventory levels
 Also, effective inventory management leads to operations becoming more green

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 Ensuring that the right amount of inventory in carried starts with sales and
operations planning, and forecasting
 These two processes inform the manager of the likely sales and production plans by
period which then allows the planning of the inventory by period
← Definition of Inventory:
 Inventory is the stock of any item or resource used in an organization
 An inventory system is the set of policies and controls that monitor levels of
inventory and determine what levels should be maintained, hen stock should be
replenished, and how large orders should be
 Manufacturing inventory generally refers to items that contribute to or become part
of a firm’s product output
 Manufacturing inventory is typically classified into raw materials, finished products,
component parts, supplies, and work in process
 In services, inventory generally refers to the tangible goods to be sold and the
supplies necessary to administer the service
 The basic purpose of inventory analysis in manufacturing and stock keeping services
is to specify (1) when items should be ordered and (2) how large the order should be
 Many firms tend to enter longer-term relationships with vendors to supply their
needs for perhaps the entire year
 This changes the “when” and “how many to order” to “when” and “how many to
deliver”
← Purposes of Inventory:
 All firms keep a supply of inventory for the following reasons:
o 1. To maintain independence of operations
 A supply of materials at a work center allows that center flexibility in
operations
 Ex: reduce the number of set ups
 Independence of work stations is desirable on assembly lines as well
 The time that it takes to do identical operations will naturally vary
from one unit to the next
 Therefore, it is desirable to have a cushion of several parts within the
work station so that shorter performance times can compensate for
longer performance times
 This way, the average output can be fairly stable
o 2. To meet variation in product demand

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 If the demand for the product is known precisely, it may be possible

(though not necessarily economical) to produce the product to
exactly meet the demand
 Usually, however, demand is not completely known, and a safety or
buffer stock must be maintained to absorb variation
o 3. To allow flexibility in production scheduling
 A stock of inventory relieves the pressure on the production system
to get the goods out
 This allows for longer lead times, which permit production planning
for smoother slow and lower cost operation through larger lot size
production
 High set up costs, for example, favour producing a larger number of
units once the set up has been made
o 4. To provide a safeguard for variation in raw material delivery time
 When material is ordered from a vendor, delays can occur for a
variety of reasons (within the facility production and also with
delivery)
o 5. To take advantage of economic purchase order size
There are costs to place an order: labour, phone calls, typing,
postage, etc
 Therefore, the larger each order is, the fewer the orders that need to
be made
 Also, shipping costs favour larger orders – the larger the shipment,
the lower the per unit cost
o 6. Many other domain specific reasons
 Depending on the situation, inventory may need to be carried
 For each of the preceding reasons, be aware that inventory is costly and large
amounts are generally undesirable
 Long cycle times are cause by large amounts of inventory and are undesirable as
well
← Inventory Costs:
 In making any decision that affects inventory size, the following costs must be
considered:
o Holding/carrying costs: costs for storage facilities, handling, insurance,
pilferage, breakage, obsolescence, perishability, depreciation, taxes, and the
opportunity cost of capital

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Obviously, high holding costs tend to favour low inventory levels and
frequent replenishment
o Set-up/production change costs: making each different product involves
obtaining the necessary materials, arranging specific equipment set ups,
filling out the required papers, appropriately charging time and materials,
and moving out the previous stock of material
 If there were no costs or loss of time in changing from one product to
another, many small lots would be produced
 This would reduce inventory levels, with a resulting savings in cost
 One challenge today is to try to reduce these set-up costs to permit
smaller lot sizes
o 3. Ordering/order preparation costs: these costs refer to the managerial and
clerical costs to place the purchase order. Ordering costs include all the
details such as counting items and calculating order quantities. The costs
associated with maintaining the system needed to track orders are also
included in ordering costs.
 This costs is similar to the set-up cost expect that it is related to a
purchase order rather than a production order
o 4. Shortage costs: when the stock of an item is depleted, an order for that
item must either wait until the stock is replenished or be cancelled. There is a
trade-off between carrying stock to satisfy demand and the costs resulting
form stock out
 Establishing the correct quantity to order from vendors or the size of lots submitted
to the firms productive facilities involves a search for the minimum total cost
resulting from the combined effects of the individual costs: holding costs, set-p
costs, ordering costs, and shortage costs
 The timing of these orders is a critical factor that may affect inventory cost
← Managing Inventory for Independent Versus Dependent Demand:
 Inventory is managed differently depending how the demand for the item is derived
 Independent demand: demand for an item is not dependent on another item
 These are typically end items such as cars, TVs, and filing cabinets, or spare parts
 To determine the quantities of independent items that must be produced, firms
usually turn to their sales and market research departments
 Techniques used: customer surveys, forecasting techniques, and economic and
sociological trends

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 This demand is then converted into the master production schedule (MPS) which is a
production plan
 Because independent demand is uncertain, extra units (safety stock) must be carried
in inventory
 For many service organizations such as retailers, or hospitals that purchase the end
items, inventory management of end items is all they need to do
 But for the companies that manufacture the end items, managing inventory of the
components that go into the end item is critical too
 The demand for components of an end item are said to experience dependent
demand since the demand depends on the demand for another item (typically the
item of which this component is a part)
 Needed quantities of a dependent demand item are simply computed, based on the
number needed in each higher level item in which it is used
 However, it takes time to produce these components and there may be inventory of
some components
 Thus the time of production as well as net inventory needed have to be calculated
for a large number of components
← Inventory Systems:
 An inventory system provides the organizational structure and the operating policies
for maintaining and controlling goods to be stocked
 The system is responsible for ordering and receipt of goods: timing the order
placement and keeping track of what has been ordered, how much, and from whom
 The system must also follow up to answer questions, such as has the supplier
received the order? Has it been shipped? Are the dates correct? Etc
 This section divides systems into single-period systems and multiple-period systems
 The classification is based on whether the decision is just a one time purchasing
decisions where the purchase is designed to cover a fixed period of time and the
item will not be reordered, or if the decision involves an item that will be purchased
periodically and inventory should be kept in stock to be used on demand
← A Single-Period Inventory Model:
 Ex: t-shirts promoting a championship hockey game
 A simple way to think about this is to consider how much risk we are willing to take
for running out of inventory
 Co = cost per unit of demand overestimated
 Cu = cost per unit of demand underestimated
 The expected marginal cost equation is:

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o P(Co)  (1 – P) Cu
 P is the probability that the unit will not be sold
 1-P is the probability of it being sold, because one or the other must
occur
 Solving for P, we obtain a distribution independent equation:
o P  Cu
Co + C u
o This equation states that we should continue to increase the size of the order
as long as the probability of selling what we order is equal to or less than the
ratio Cu / Co + Cu
 Single-period inventory models are useful for a wide variety of service and
manufacturing applications
 Consider the following:
o Overbooking of airline flights
The cost of underestimating the number of cancellations if the
revenues lost due to an empty seat on a flight
 The cost of overestimating cancellations if the awards, such as free
flights or cash payments, that are given tot customers unable to
board the flight
o Ordering of fashion items
Often only a single order can be placed for the entire season
This is caused by long lead times and the limited life of the
merchandise
 The cost of underestimating demand is the lost profit due to sales not
made
 The cost of overestimating demand is the cost that results when it is
discounted
o Any type of one time order
 Ex: t-shirts for a sporting event, spare parts, or maps because
obsolete after a certain period of time
← Multi-Period Inventory System:
 There are two general types of multi-period inventory systems:
o 1. Fixed-order-quantity models (also called the economic order quantity,
EOC, and Q model)
o 2. Fixed-review-period models (also referred to variously as the periodic
system, periodic review system, fixed order interval system, and P model)

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 Multi-period inventory systems are designed to ensure that an item will be available
on an ongoing basis throughout the year
 Usually the item will be ordered multiple times throughout the year where the logic
in the system dictates the actual quantity ordered and the timing of the order
 The basic distinction is the fixed-order-quantity models are “event triggered” and
fixed-review-period models are “time triggered”
 A fixed-order-quantity model initiates an order when the event of reaching a
specified reorder level occurs
 This event may take place at any time, depending on the demand for the items
considered
 The fixed-review-period model is limiting to placing orders at the end of a
predetermined review period; only the passage of time triggers the model
 To use the fixed-order-quantity model (which places an order when the remaining
inventory drops to a predetermined order point, R), the inventory remaining must
be continually monitored
 Thus, the fixed-order-quantity model is a perpetual system, which requires that
every time a withdrawal from inventory or an addition to inventory is made, records
must be updated to reflect whether the reorder point has been reached
 In a fixed-review-period model, counting takes place only at the end of the review
period
 Some additional differences tend to influence the choice of systems:
o The fixed-review-period model has a larger average inventory because it
must also protect against stock out during the review period, T; the fixed-
order-quantity model has not review period
o The fixed-order-quantity model favors more expensive items because
average inventory is lower
o The fixed-order-quantity model is more appropriate for important items such
as critical potential stock out
o The fixed-order-quantity model requires more time to maintain because
every addition or withdrawal is logged
 EXHIBIT 10.2 – Fixed-Order-Quantity and Fixed-Review-Period Differences

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 EXHIBIT 10.3 – Comparison for Fixed-Order-Quantity and Fixed-Review-Period

Reordering Inventory Systems
o Shows what occurs when each of the two models is put into use and
becomes an operating system
o The fixed-order-quantity system focuses on order quantities and reorder
points
o Procedurally, each time a unit is taken out of stock the withdrawal is logged
and the amount remaining in inventory is immediately compared to eh
reorder point
o If it has dropped to this point, an order for Q items is placed
o If it has not, the system remains in the idle state until the next withdrawal
o In the fixed-review-period system, a decision to place an order is made after
the stock has been counted or reviewed
o Whether an order is actually placed may depend on the inventory position at
the time
← Fixed-Order-Quantity Models:
← Determining Optimal Order Quantities:
 Fixed-order-quantity models attempt to determine the specific point, R, at which an
order will be paced and the size of that order, Q
 The order point, R, is always a specified number of units
 An order of size Q is placed when the inventory available (currently in stock and on
order) reaches the point R
 Inventory position is defined as the on-hand plus on-order minus backordered
quantities
 The simplest models in this category occur when all aspects of the situation are
known with certainty
 EXHIBIT 10.4 –Basic Fixed-Order-Quantity Model

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 Exhibit 10.4 and the discussion about deriving the optimal order quantity are based
on the following characteristics of the model:
o Demand for the product is constant and uniform throughout the period
o Lead time (time from ordering to receipt) is constant
o Price per unit of product is constant
o Inventory holding cost is based on average inventory
o Ordering or set-up costs are constant
o All demands for the product will be satisfied (no backorders are allowed)
 The “saw tooth effect” relating Q and R shows that when the inventory position
drops to point R, a reorder is placed
 This order is received at the end of time period L, which does not vary in this model
 In constructing any inventory model, the first step is to develop a functional
relationship between the variables of interest and the measure of effectiveness
 Equation:
 TC = total annual cost

 D = demand (annual)
 C = cost per unit
 Q = quantity to be ordered - the optimal amount is termed the
economic order quantity, EOQ or Qopt
 S = set-up cost or cost of placing an order
 R = reorder point (ROP)
 L = lead time
 H = annual holding and storage cost per unit of average inventory
(often holding cost is taken as a percentage of the cost of the item,
such as H=iC, where i is the percent carrying cost

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 On the right side of the equation, DC is the annual purchase cost for the units,
(D/Q)S is the annual ordering cost (the actual number of orders placed, D/Q, times
the cost of each other, S), and (Q/2)H is the annual holding cost (the average
inventory, Q/2 times the cost per unit for holding and storage, H)
 These cost relationships are graphed in EXHIBIT 10.5 – Annual Product Costs, Based
on Size of the Order
 The second step in model development is to find that order quantity Qopt at which
total cost is a minimum
 The total cost is minimal at the point where the slope of the curve is zero
 Take the derivative of total cost with respect to Q and set this equal to zero
 For the basic model considered here, the formula is
 Because this simple model assumes constant demand and lead time, neither safety
stock nor stock out cost are necessary and the reorder point, R, is simply:
 d bar = average daily demand (stationary

 L = lead time in days (constant)
← Role of Ordering Cost in Optimal Order Quantity Determination:
 In the EOQ model, one can see that the optimal order quantity (or lot size) is related
to the ordering cost (set-up cost in manufacturing)
 The lower this cost, the lower the optimal order quantity
 EXHIBIT 10.6 – Relationship Between Lot Size and Set-Up Cost

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 Not only does the optimal order quantity decrease, which leads to carrying less
inventory and its associated benefits, but also the total cost decreases too
 Given all these benefits of smaller lot sizes, it is no wonder that in recent years firms
have been putting in great efforts to reduce ordering costs
← Fixed-Order-Quantity Model with Safety Stock:
 Recall that in the fixed-order-quantity model, the inventory is adjusted every time a
sale or withdrawal is made, and when the ROP, R is reached, an order for a fixed
quantity, Q, is placed
 However, in practice, the demand may not be known with certainty (hence our use
of the general term d bar for average daily demand)
 As a result, the inventory depletion line will not be straight, but will be crooked, as in
EXHIBIT 10.7 – Fixed-Order-Quantity Model under Uncertainty
 Thus, exactly when a new order will be placed is not known

 Regardless of the inventory level, when as order is placed it will be for a fixed
quantity Q
 The lead time L can vary
 A fixed-order-quantity system perpetually monitors the inventory level and places a
new order when stock reaches some level, R
 The danger of stock out in this model occurs only during the lead time, between the
time an order is placed and the time it is received
 During this lead time L, a range of demands is possible
 Safety stock must therefore be maintained to provide some level of protection
against stock outs
 Safety stock can be defined as the amount of inventory carried in addition to the
expected demand (so it can be applied to any inventory model, including the single-
period model)
 Safety stock can be determined based on many different criteria
 A common approach is for a company to simply state that a certain number of
weeks of supply be kept in safety stock
 It is better, though, to use an approach that captures the variability in demand
o Probability approach

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 A proactive approach to reducing the need for safety stock would be preferable
 Information on demand as well as supplier shipments can reduce the need for safety
stock
 However, given the uncertainties in the market even if we do good demand planning
and have reliable suppliers, some amount of safety stock may be necessary and we
can use a probabilistic approach to determine the optimum level of safety stock
 The Probability Approach:
o Assume that the demand over a period of time is normally distributed with a
mean and standard deviation
o Again, remember that this approach considers only the probability of running
out of stock, not how many units we are short
o To determine the probability of stocking out over the time period, we can
simply plot a normal distribution for the expected demand and note where
the amount we have on hand lies on the curve
o If running out this often was not acceptable, we would want to carry extra
inventory to reduce this risk of stocking out
o It is common for companies using this approach to set the probability of not
stocking out at 95%
o This means we would carry about 1.64 standard deviations of safety stock
o Thus, the safety stock level that one should have for any given item depends
on (1) demand variation, (2) the desired service level, and (3) the variability
in order delivery lead time, L
o The quantity to be ordered, Q, is calculated in the usual way, considering the
demand shortage cost, ordering cost, holding cost, etc
o The reorder point is then set to cover the expected demand during the lead
time plus a safety stock determined by the desired service level
o Thus, the key difference between a fixed-order-quantity model where
demand is known and one where demand is uncertain is in computing the
reorder point
o The order quantity is the same in both cases
o The uncertainty element is taken into account in the safety stock
o The reorder point is:
 R = reorder point in units

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 d bar = average daily demand

 L = lead time in days (assumed to be constant)
 z = number of standard deviations for a specified service probability
 L = standard deviation of usage (demand) during lead time
o The term z-σL is the amount of safety stock
o Note that if safety stock is positive, the effect is to place a reorder sooner
o That is, R without safety stock is simply the average demand during the lead
time
o The greater the safety stock, the sooner the order is placed
 Computing d bar, L, and z:
o Demand during the replenishment lead time is really an estimate or forecast
of expected use of inventory from the time an order is placed to when it is
received
o It may be a single number or it may be a summation of expected demands
over the lead time
o For the daily demand situation, d can be a forecast demand using any of the
models on forecasting
o If a 30 day period was used to calculate d, then a simple average would be:

 n = number of days
o The standard deviation of the daily demand is:

o Because σd refers to one day, if lead time extends over k (several) days, we
can use the statistical premise that the standard deviation of a serious of
independent occurrences is equal to the square root of the sum of the
variances

← Fixed-Review-Period Models:
 In a fixed-review-period system, inventory is counted only at particular times, such
as every week or every month
 Counting inventory and placing orders periodically is desirable in certain situations

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 Other firms operate on a fixed-review (time) period to facilitate planning their

inventory count
 Fixed-review-period models generate order quantities that vary from period to
period, depending on the usage rates
 These generally require a higher level of safety stock than a fixed-order-quantity
system
 The fixed-order-quantity system assumes continual tracking of inventory on hand,
with an order immediately placed when the reorder point is reached
 In contrast, the standard fixed-review-period models assume that inventory is
counted only at the time specified for review
 It is possible that some large demand will draw the stock down to zero right after an
order is placed
 This condition could go unnoticed unit the next review
 Then the new order, when placed, still takes time to arrive
 Thus, it is possible to be out of stock throughout the entire review period, T, and
order lead time, L
 Safety stock, therefore must protect against stock outs during the review itself as
well as during the lead time from order placement to order receipt
Fixed-Review-Period Model with Safety Stock:
 In a fixed-review-period system, reorders are placed at the time of review (T), and
the safety stock that must be maintained is:
o
 EXHIBIT 10.9 – Fixed-Review-Period Model
o In this case, demand is randomly distributed about a mean d

o The quantity to order q is:
 q = quantity to be ordered

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 T = the number of days between reviews

 L = lead time in days (time between placing an order and receiving it)
 d bar = forecast average daily demand
 z = number of standard deviations for a specified service probability
  T + L = standard deviation of demand over the review and lead time
 I = current inventory level (includes items on order)
 Note: the demand, lead time, review period, etc, can be any time units such as days,
weeks, months, etc, as long as they are consistent throughout the equation
 In this model, demand (d bar) can be forecast and revised each review period is
desired or the yearly average may be used if appropriate
 We assume that demand is normally distributed
 The value of z is dependent on the probability of stocking out
 Thus, with regard to safety stock levels, in a fixed-review-period model, in addition
to the three factors (demand variability, variability in lead time, and service level),
the length of the period is also a factor
 The fixed-order-quantity and fixed-review-period models respond differently to
demand level changes over time
 In the fixed-order-quantity model when demand changes, the amount ordered (Q)
remains the same, but the frequency at which this amount is ordered changes (t 1, t2,
etc)
 In the fixed-review-period model, when demand changes, the frequency of ordering
does not change (the time between orders is always T), but the amount of each
order changes (q1, q2, etc)
← Other Inventory Control Systems:
 Economic production quantity (EPQ) model is a modification of the EOQ that is
applicable to manufacturing situations since the inventory level increases at the
steady rate as items are produced rather than an instantaneous step increase as is
the case in the EOQ, which is applicable to purchase materials
 Similarly, the EOQ can be used in a modified form if there are price discounts
 Min-Max System:
o In a min-max system when the inventory level falls to the min level, enough
is ordered to being it up to a max level
o In the EOQ model, the min is the ROP (which may include safety stock) and
the max is the ROP + Q

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o So every time the system hits the ROP, Q quantity is ordered to being it up to
max (though by the time the batch arrives, part or all of the ROP would have
been consumed, thus we would be unlikely to reach the max level in actual
inventory)
o However, in the fixed-review-period system with demand uncertainty, using
a min-max would imply incorporating aspects of the fixed-order-quantity
system in that there is an TOP
o So inventory is replenished only is the amount on hand is below the ROP
(thus the flowchart of the P-model is representing the pure fixed-review-
period system that would rigger a replenishment at every review would have
to be modified to trigger a replenishment only if the review revealed an
inventory level below the ROP)
o The amount ordered would change depending on how much stock is on hand
consistent with the pure fixed-review-period system
 Lot-For-Lot System:
o Lot-for-lot means ordering only what is needed for each period in the
forecast horizon
o So the inventory arrives when needed and nothing is left at the end of the
period
o This reduces the inventory cost but may result in excessive ordering or set up
costs
← Inventory Control and Supply Chain Management:
 It is important for managers to realize that how they manage items using inventory
control logic relates directly to the financial performance of the firm
 A key measure that relates to company performance is inventory turn:
 Inventory turn = cost of goods sold / average inventory value
o Numerator:
The COGS for an individual item relates directly to the expected

yearly demand (D) for the item
 Given a cost per unit (C) for the item, the COGS is just D x C
 Recall that this it he same ass what was used in our EOQ equation
o Denominator:
 Recall from EOQ that the average inventory is Q/2, which is true if we
assume that demand is constant
 When we bring uncertainty into the equation, safety stock is needed
to manage the risk related by demand variability

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 The fixed-order-quantity model and fixed-review-period model both

have equations for calculating the safety stock required for a given
probability of stocking out
 In both models, we assume that when going through an order cycle,
half the time we need to use the safety stock and half the time we do
not
 So on average, we expect the safety stock (SS) to be on hand
 Given this, the average inventory is equal to:
o Average inventory value = (Q/2 + SS) C
 The inventory turn for an individual item then is:
o Inventory turn = DC / (Q/2 + SS) C
o Inventory turn = D / (Q/2 + SS)
← ABC Inventory Planning:
 Maintaining inventory through counting, placing orders, receiving stock, etc, takes
personnel time and costs money
 When there are limits on these resources, the logical move is to try to use the
available resources to control inventory in the best way
 In other words, focus on the most important items in inventory
 Pareto principle: 20 percent of the people controlled 80 percent of the wealth
 Any inventory system must specify when an order is to be placed for an item and
how many units to order
 Most inventory control situations involve so many items that it is not practical to
model and give thorough treatment to each time
 To get around this problem, the ABC classification scheme divides inventory items
into three groups:
o High dollar volume (A)
o Moderate dollar volume (B)
o Low dollar volume (C)
 Dollar volume is a measure of importance: an item low in cost but high in volume
can be more important than a high cost item with low volume
 ABC Classification:
o If the annual usage of items in inventory is generally listed according to dollar
volume, the list shows that a small number of items account for a large dollar
volume and that a large number of items account for a small dollar volume
o The ABC approach divides this list into three groups by values:
 A items constitute roughly the top 15% of the items

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 B items the next 35%

 C items the last 50%
o Segmentation may not always occur so neatly
o The objective, though, is to try to separate the important from the
unimportant
o Where the lines actually break depends on the particular inventory under
question and on how much personnel time is available
o The purpose of classifying items into groups is to establish the appropriate
degree of control over each item
o Note that the unit cost of items is not related to their classification
o An A item may have a high dollar volume through a combination of either
low cost and high usage or high cost and low usage
o Similarly, C items may have a low dollar volume because of either low
demand or low cost
o Sometimes an item may be critical to a system if its absence creates a sizable
loss
o Regardless of the items classification, sufficiently large stocks should be kept
on hand to prevent run out
o ABC classification may also be done based on multiple criteria rather than on
dollar volume alone
← Inventory Accuracy and Cycle Counting:
 Inventory records usually differ from the actual physical count; inventory accuracy
refers to how well the two agree
 Every production system must have agreement, within some specified range,
between what the record says is in inventory and what actually is in inventory
 There are many reasons records and inventory may not agree
 To keep the production system flowing smoothly without parts shortages and
efficiently without excess balances, records must be accurate
 How can a firm keep accurate, up-to-date records?
o Using bar codes and RFID tags is important for minimizing errors caused by
inputting wrong numbers into the system
o Keep stockroom locked
o Convey the importance of accurate records to all personnel
o Count inventory frequently and match this against records
 Every location of inventory stages should have a record keeping mechanism

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 Cycle counting is a physical inventory taking technique in which inventory is counted

frequently rather than one or twice a year
 The key to effective cycle counting and therefore, to accurate records, lies in
deciding which items are to be counted, when, and by whom
 Virtually all inventory systems these days re computerized
 Computers can be programmed to produce a cycle count notice in the following
cases:
o When the record shoes a low or zero balance on hand (easier to count fewer
items)
o When the record shows a positive balance but a backorder was written
(indicating a discrepancy)
o After some specified level of activity
o To signal a review based on the importance of the item
 The easiest time for stock to be counted is when there is no activity in the stockroom
or on the production floor
 If this is not possible, more careful logging and separation of items are required to
count inventory while production is going on and transactions are occurring
 Actual cycle counting depends on available personnel
 How much error is tolerable between physical inventory and records?
o Some firms strive for 100% accuracy
o Other accept 1-3 percent error
o The accuracy levels often recommended by experts is +/-0.2 percent for A
items, +/- 1 percent for B items, and +/-5 percent for C items
 The important point is that the level be dependable so that safety stocks may be
provided as a cushion
 Accuracy is important for a smooth production process so that customer orders can
be processed as scheduled and not held up because of unavailable parts

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Chapter 12 – Lean Supply Chains

←
 Lean production refers to a focus on eliminating as much waste as possible
 Moves that are not needed, unnecessary processing steps, and excess inventory in
the supply chain are targets for improvement during the leaning process
 Value chain refers to an emphasis that each step in the supply chain processes that
delivers products and services to customers should create value
 If a step does not create value, it should be removed from the process
 There is also a focus on continuing improvement
 The term lean supply chain has evolved from the JIT production concepts pioneered
in Japan at Toyota (1970’s)
 Henry Ford also used JIT concepts to make automobiles
 In the 1990’s, lean became a more global term for the evolution of the JIT
philosophy of systematically eliminating waste throughout the supply chain
 In Canada, a recent phenomenon is the multicultural nature of our workforce
 There is recognition of the value of lean at government levels also
 The benefits of a lean supply chain primarily are in the improved responsiveness to
the customer
 As business conditions change, the supply chain adapts to dynamic needs
 The ideal is a culture of rapid change with a bias for change when it is needed
 The reduced inventory inherent in a lean supply chain reduces obsolescence and
reduces flow time through the value-added processes
 The reduced cost along with improved customer services gives the firms using a lean
supply chain a significant competitive advantage when competing in the global
marketplace
 In the context of the lean supply chain, customer value is defined as something for
which the customer is willing to pay
 Value-adding activities transform materials and information into something the
customer wants
 Non-value-adding activities consume resources and do not directly contribute to the
end result desired by the customer
 Waste, therefore, is defined as anything that does not add values from the
customer’s perspective
 Examples of process wastes are defective products, overproduction, inventories,
excess motion, processing steps, transportation, and waiting

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 Waste elimination is a reasonable goal in service operations, just as it is in

manufacturing operations, but there is a difference in the sources of variation that
cause the waste
 Manufacturing operations, compared to service operations, are far more
controllable
 Services operate in a sea of uncertainty and variability that are much harder to
control
o Uncertainty in task times
The execution of each service delivery has some uniqueness

This variability typically leads to a negative exponential distribution of

task times
 While most task executions will fall within some right range, some
executions will take a long time
o Uncertainty in demand
While service demand can be forecasted, no forecast is perfect

Manufacturers can buffer this forecast uncertainty with some finished

goods inventory
 The simultaneous production and consumption in services precludes
this tactic
 The capacity must be available when the demand arises
o Customers’ production roles
 Variability is introduced based on how well the service provider
performs his or her role in conjunction with the customer
 Customers usually have to provide information to service agents to
initiate service, and the service agents typically have tangible tasks to
perform
 Lean supply chains and Six Sigma work best in repeatable, standardized operations
 There is often a price to pay for being lean, and that price often is at the expense of
customer service when unlikely events occur
 Whether in a service or manufacturing business, potential trade-offs exist with lean
supply chains and must be dealt with
 Lean supply chains are an integral part of sustainability in supply chains as the
objective is to minimize waste whether it is material or labour
← Lean Production Logic:

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 Lean production is an integral set of activities designed to achieve production with

minimum waste, which implies using minimal inventories of raw materials, work in
process, and finished goods
 Parts arrive at the next workstation “just in time” and are completed and move
through the process quickly
 Lean is also based on the logic that nothing will be produced until it is needed
 EXHIBIT 12.1 – Lean Production Pull System
 Production need is created by actual demand for the product

 In theory, when an item is sold, the market pulls a replacement from the last
position in the system – final assembly in this case, and so on through the chain
 To enable this pull process to work smoothly, lean production demands high levels
of quality at each stage of the process, strong vendor (supplier) relations, and a fairly
predictable demand for the end product
← The Toyota Production System:
 Benchmark for lean manufacturing
 Developed to improve quality and productivity and is predicated upon two
philosophies that are central to the Japanese culture:
o 1. Elimination or waste
o 2. Respect for people
← Elimination of Waste:
 Waste (called muda in Japanese), as defined by Toyota as anything other than the
minimum amount of equipment, materials, parts, and workers (working time) which
are absolutely essential to production
 Seven prominent types of waste to be eliminated from the supply chain:
o 1. Waste from overproduction
o 2. Waiting times
o 3. Transportation waste
o 4. Inventory waste
o 5. Processing waste
o 6. Waste of motion
o 7. Waste from product defects

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 An approach that has been adopted to analyze a process to identify steps that can
be improved is called value chain mapping or value stream mapping
Value Stream Mapping:
 Value stream mapping (VSM) is a special type of flowcharting tool that is valuable for
the development of lean processes
 The technique is used o visualize product flows through various processing steps
 The tool also illustrates information flows that result from the process as well as
information used to control flow through the process
 The technique is used to identify all of the value-adding as well as non-value adding
processes that materials are subjected to within a plant, from raw material coming
into the plant through delivery to the customer
 EXHIBIT 12.2 – Manufacturing Process Map
 With this map, wasteful processes and flows can be identified so that they can be
modified or eliminated and the manufacturing system made more productive
 VSM symbols are somewhat standardized but there are many variations
 EXHIBIT 12.3 – Value Stream Mapping Symbols
 There are categorized as process, material, information, and general symbols

 Value stream mapping is a two-part process
o 1. Depicting the current state of the process
o 2. Depicting a possible future state
 EXHIBIT 12.4 – Analysis Showing Potential Areas for Improving a Process

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 Kaizen is the Japanese philosophy that focuses on continuous improvement

 The kaizen bursts identify specific short-term projects that teams work on to
implement changes to the process
 VSM is a great visual way to analyze an existing system and to find areas where
waste can be eliminated
← Lean Supply-Chain Design Principles:
 1. Just-in-time production
 2. Focus on quality
 3. Lean process and product design
 4. Workforce involvement
 5. Close supplier relationships
 6. Problem solving and continuous improvement
← JIT Production:
 JIT means producing what is needed when needed and no more
 Anything over the minimum amount necessary is viewed as waste, because effort
and material expended for something not needed now cannot be utilized now
← Key requirements of JIT production:
 Production in Small Lots:
o JIT is typically applied to repetitive manufacturing, when the same or similar
items are made one after another
o JIT does not require large volumes and can be applied to any repetitive
segments of a business regardless of where they appear
o Under JIT, the ideal lot size or production batch is one
o The goal is the drive all inventory to as close to zero as possible, thus
minimizing inventory investment and shortening lead times
o Small lot sizes also result in less waste is a defective batch is produced
o Small lot sizes resulting in lower inventory levels have process advantages
 When inventory levels are low, quality problems become very visible
 EXHIBIT 12.5 – Inventory Hides Problems

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 The high level of water (inventory) hides the problem (rocks)

 Management assumes everything is fine, but the reason production is
moving smoothly is due to the high level of inventory
 This high level of inventory results in excessive costs and the firm will
become uncompetitive
 The lean philosophy reduces this inventory level
 This means that production is no longer proceeding smoothly and
customers experience shortages because the level of inventory is not
longer sufficient to cover sales when the process is stopped due to
the problems
 To improve the situation, the company will be forced to address one
or more of these problems
 Once this problem is successfully addressed, production proceeds
smoothly again
o An important aspect of JIT is continuous improvement
o Lean firms follow the PDCA cycle (Plan-Do-Check-Act)
o Any time production is proceeding smoothly, lean firms reduce the inventory
levels to expose more problems and they will be forced to solve these
problems; there is a focus on continuous problem identification and
improvement
 Uniform Plant Loading:

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o Smoothing the production flow to dampen the reaction waves that normally
occur in response to schedule variations is called uniform plant loading (or
in Japanese, heijunka)
o When a change is made in a final assembly, the changes are magnified
throughout the line and the supply chain
o The only way to eliminate the problem is to make adjustments as small as
possible by setting a firm monthly production plan for which the output rate
is frozen
o Toyota found it could do this by building the same mix of products every day
in small quantities
o Thus, Toyota always has a total mix available to respond to variations in
demand
o Cycle time is the time between two identical units being completed on the
line
o The cycle time figure is used to adjust resources to produce the precise
quantity needed
o Lean production desires a stable schedule over a lengthy time horizon
o This is accomplished by level scheduling, freeze windows, and
underutilization of capacity
o A level schedule is one that requires materials to be pulled into final
assembly in a pattern uniform enough to allow the various elements of
production to respond to pull signals
o A given production system equipped with flexible set-ups and a fixed amount
of material in the pipelines can respond
o Freeze window refers to that period of time during which the schedule is
fixed and no further changes are possible
o An added benefit of the stable schedule is seen in how parts and
components are accounted for in a pull system
o Backflush is used where the parts that go into each unit of the product are
periodically removed from inventory and accounted for based on the number
of units produced
o This eliminates much of the shop-floor data collection activity, which is
required if each part must be tracked and accounted for during production
o Underutilization and overutilization of capacity are features of élan
production

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o Conventional approaches use safety stocks and early deliveries as a hedge

against production problems
o Under lean production, excess labour, machines, and overtime provide the
hedge
o The excess capacity in labour and equipment that results is much cheaper
than carrying excess inventory
o When demand is greater than expected, overtime must be used
o Often, part-time labour is used when additional capacity is needed
o During idle periods, personnel can be put to work on other activities such as
special projects, work group activities, and work station housekeeping
 Kanban Production Control Systems:
o A kanban control system uses a signaling device to regulate JIT flows
o Kanban means “sign” or “instruction card” in Japanese
o Kanban pull system – the authority to produce or supply additional parts
comes from down stream operations
o EXHIBIT 12.7 – Flow of Two Kanbans
o Each container net to the assembly line has a withdrawal kanban and a
production kanban
o This is often referred to as a two-card kanban system
o The following are some other possible approaches:
 Kanban squares
 Container system
 Coloured golf balls
o The kanban pull approach can be used not only within a manufacturing
facility but also between manufacturing facilities
o Determining the Number of Kanbans Needed:
 Setting up a kanban control system requires determination of the
number of kanban cards or containers needed
 In a two card system, we are finding the number of sets of withdrawal
and production cares
 The kanban cards represent the numner of containers of material that
flow back and forth between the supplier and the user areas

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 Each container represents the minimum production lot size to be

supplied
 The number of containers, therefore, directly controls the amount of
work in process inventory in the system
 Accurately estimating the lead time needed to produce a container of
parts if the key to determining the number of kanbans
 Enough kanbans are needed to cover the expected demand during
this lead time plus some additional amount for safety stock
 The number of kanban card sets is:
k = number of kanban card sets


D = average number of units demanded per period (lead time

and demand must be expressed in the same time units)
 L = lead time to replenish an order (expressed in the same
units as demand)
 S = safety stock expressed as a percentage of demand during
the lead time
 C = container size
o Observe that a kanban system does not produce zero inventory; rather, it
controls the amount of material that can be in process at a time – the
number of containers of each item
o The kanban system can be easily adjusted to fit the current way the system is
operating because card sets can be easily added or removed from the system
 Minimized Set-Up Times:
o Because small lot sizes are the norm, machines must be quickly set-up to
produce the mixed models on the line
o This set-up reduction philosophy is also called Single-Minute-Exchange-of-Die
(SMED)
o Set-ups consist of the internal part, activities that can be done only when the
machine or resource is stopped (idle), and the external part, activities that
can be done while the machine is running
o Lean attempts to convert as much of he internal set-up as possible to
external set-up in addition to reducing the internal set-up time itself
← Focus on Quality:

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 Lean places high emphasis on quality

 Lean focuses on defect prevention or quality at the source
 “Do it right the first time” and when something goes wrong, stop the process or
assembly line immediately
 Toyota:
o Factory workers became their own inspectors
o Personally responsible for the quality of their output
o If too fast, quality problem, or safety issue, worker is obligated to push a
button and stop the line and turn on a visual sign (called jidoka)
o People from other areas respond to the alarm and the problem
 The lean process uses as many poke-yoke (Japanese for failsafe mechanisms) as
possible to prevent defects and promote safety
 Lean often uses manufacturing cells
 Inside each cell, the status of the line is shown
 An electronic version of this type of board, called an andon board, is shown in the
photograph from Kawasaki Motors
 This board can be used to identify problems and bottlenecks in the line
 Thus, in lean operations, there is an emphasis on visual control
 The notion is that if problems are clearly visible, it will be easier to address them
 Lean and Six Sigma quality have merged in theory and practice
 Six Sigma quality is the practice of building quality into the process rather than
relying on inspection
 It also refers to the theory of employees assuming responsibility for the quality of
their own work
 When all products are good, no “just in case” extra inventory is needed
 Thus, organizations can achieve high quality and high productivity
 By using statistical quality control and other quality improvement tools and training
workers to maintain quality, inspections can be reduced to the first and the last units
produced
 If they are perfect, we can assume the other units between these points re perfect
as well
 A foundation of quality is improved product design
 Standard product configurations fewer parts, and standardized parts are important
elements in lean production
 These design modifications reduce variability in the end item or in the materials that
go into the product

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 Product design activities can facilitate the possessing of engineering changes

← Lean Process and Product Design:
 Lean requires the plant layout to be designed to ensure balanced work flow with a
minimum of work in process inventory
 Each workstation is part of a production line, whether or not a physical line actually
exists
 Capacity is balanced using the same logic for an assembly line and operations are
linked through a pull system
 In addition, the system designer must visualize how all aspects of the internal and
external logistics system tie to the layout
 Preventative maintenance is emphasized to ensure that flows are not interrupted
by down time or malfunctioning equipment
 Preventative maintenance involves periodic inspection and repair designed to keep a
machine reliable
 Operators perform much of the maintenance because they are most familiar with
their machines and because machines are easier to repair, as lean operations favour
several simple machines, rather than one large complex one
 Another factor in lean layout is how the machinery is configured
 The 5S philosophy is based on five Japanese words starting with S that imply a clean
and safe workplace
 5S starts with sorting and discarding items that are not needed
 This helps keep the workplace need
 %S implies arranging the workplace ad keeping it clean
 each tool used should have its place and the equipment and workplace should be
cleaned frequently
 5S required a proper personal and work environment, which means wearing the
right clothing and safety equipment
 furthermore, the physical layout should be designed to minimize stress and the
equipment must be operated in a safe manner
 5S requires that process improvements be made permanent by including them in
standard operating procedures
← Group Technology (GT):
 GT is a philosophy in which similar parts are grouped into families, and the processes
required to make the parts are arranged in a specialized manufacturing cell
 GT considers all operations required to make a part and groups those machines
together

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 EXHIBIT 12.9 – Group Technology vs. Departmental Specialty
 The group technology cells eliminate movement and queue (waiting) time between
operations, reduce inventory, and reduce the number of employees required
 Workers must be flexible to run several machines and processes
 Due to their advanced skill level, these workers have increased job security
 GT provides several advantages:
o Work in process inventory in its factories is reduced
o Factory operating costs are reduced
o Decreased real estate costs
o The reduced inventory level has resulted in fewer required warehouses
← Focused Factory Networks:
 The Japanese build small specialized plants rather than large vertically integrated
manufacturing facilities
 Plants designed for one purpose can be constructed and operated more
economically
← Concurrent Engineering:
 In terms of product design, lean firms use concurrent engineering
 Traditionally in product design, the design of the product was sequential
o Marketing department thinks of idea, design department designs it,
manufacturing makes it
 In concurrent engineering, personnel from the different functions such as marketing,
design, manufacturing, costing, customers and suppliers, are involved in product
design so that issues are exposed early in the process
 This avoids the problems of sequential design
 The result is that products are launched quicker and at a lower cost
← Workforce Involvement:
 Respect for people and their capabilities is key to the Toyota production system
 Company unions exist to foster a co-operative relationship with management
 Employees know that if the company performs well, they will get a bonus
 This encourages workers to improve productivity
 Management views workers as assets, not as human machines

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 Automation and robotics are used extensively to perform dull or routine jobs so that
employees are free to focus on important improvement tasks
 JIT firms often use quality circles, which are groups of employees that meet during
work hours to analyze the processes that they are involved with and suggest
improvements to the process and the product
 So lean firms encourage employees to make suggestions for improvements
 Cross-training is very important since flexibility of the worker is key in effective lean
operations
 If a machine is idle due to its kanbans being full, the worker has to be employed
otherwise
 This could include working on process improvement or working on other machines
because he or she is cross-trained
← Close Supplier Relationships:
 Lean firms like Toyota rely heavily on subcontractor networks
 Some suppliers are specialists in a narrow field, usually serving multiple customers
 Firms have long term partnerships with their suppliers and customers
 Suppliers consider themselves part of a customer’ family
 The company and suppliers may be part of a close network of companies, not all of
which may be suppliers, called a keiretsu
 Change in procurement philosophy from one of trying to make many vendors
compete with each other to get the best price to one that fosters long term
collaborative relationship with fewer suppliers
 Lean was one of the influential factors in this phenomenon
 This is called single sourcing, though in practice each component will have more
than one vendor as most customers do not want to put all their eggs in one basket
 Another aspect of lean sourcing is that vendors are often located close to the
customer
 This allows for frequent deliveries in small lots and face to face meetings to improve
the product and the supply chain
 Lea firms share their projected usage requirements with vendors, so the vendors
have a long run picture of the demands that will be placed on their production and
distribution systems
 This avoids the bullwhip effect
 Some vendors are linked online with customers to share production scheduling and
input-needs data

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 This permits vendors to develop level production systems, thus perpetuating the
lean system all along the supply chain
 Confidence in the supplier’s or vendor’s delivery commitment allows reductions of
buffer inventories at the customer’s facility
 Maintaining stock at a lean level requires frequent deliveries during the day
 When vendors adopt quality practices, the customer can bypass incoming receiving
inspections of vendors’ products and have vendors deliver it directly to a location on
the production line and not to a receiving dock
 North American manufacturers have moved in the direction of closer co-operation
with suppliers
 A key to lean procurement is automation
 The term e-procurement relates to automatic transaction, sourcing, bidding, and
auctions using web-based applications, and the use of software that removes human
interaction and integrates with the financial reporting of the firm
 The key to lean procurement is visibility
 Suppliers must be able to “see” into customers’ operations and customers must be
able to “see” into their suppliers’ operations
 The overlap of these processes needs to be optimized to maximize values form the
end customer perspective
 A supply chain is the sum total of organizations involved – from raw materials firms
through tiers of suppliers to original equipment manufactures, onward to the
ultimate distribution and delivery of the finished product to the customers
 Guidelines for implementing a lean supply chain:
o Value must be designed jointly for each product family along with a target
cost based on the customer’s perception of value
o All firms along the value stream must make an adequate return of their
investments related to the value stream
o The firms must work together to identify and eliminate muda (waste) to the
point where the overall target cost and return on investment targets of each
firm are met
o When cost targets are met, the firms along the stream will immediately
conduct new analyses to identify remaining muda and set new targets
o Every participating firm has the right to examine every activity in every firm
relevant to the value stream as part of the joint search for waste
 To summarize: to be lean, everyone ahs to be on the same page
← Problem Solving and Continuous Process Improvement:

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 EXHIBIT 12.10 – How To Accomplish Lean Production
 Suggestions are geared to repetitive production systems – those that make the same
products again and again
 These elements are linked: any changes in part of the production system affect other
features of the system
 It is also important to note that lean is not a one time improvement and it involves
everybody in the workplace: management and non-management employees
 In fact, lean firms are big believers in the PDCA cycle (kaizen)
 The focus is on always seeking ways to improve the product and process
 Lean firms also recognize that the lean journey does not happen overnight; in fact, it
is never ending
 Thus, it requires patience and commitment
 In fact, as with any improvement process, initially results may be negative
 Firms must not loose hope
← Lean Services:
 Many lean techniques have been successfully applied by service firms
 The suitability of each technique and the corresponding work steps depends on the
characteristics of the firm’s market, production, and equipment technology, shill
sets, and corporate culture
 Tend of the more successful lean techniques applied to service companies:
o Organize Problem Solving Groups:
 Quality circles
o Upgrade Housekeeping:
 Only the necessary items are kept in a work area, that there is a place
for everything, and that everything is clean and in a constant state of
readiness
 Employees clean their own areas

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Dedication to housekeeping has meant that service processes work

better, the attitude of continuous improvement is easier to develop
and customers perceive that they are receiving better service
o Upgrade Quality:
 The only cost effective way to improve quality is to develop reliable
process capabilities
 Process quality is quality at the source – it guarantees first time
production of consistent and uniform products and services
 Quality doesn’t necessarily mean producing the best; it means
consistently producing products and services that give customers
their money’s worth
o Clarify Process Flows:
 Clarification of flows, based on lean themes, can dramatically improve
process performance
o Revise Equipment and Process Technologies:
 Revising technologies involves evaluating equipment and processes
for their ability to meet the process requirements, to process
consistently within tolerance, and to fit the scale and capacity of the
work group
o Level the Facility Load:
 Service firms synchronize production with demand
 Developed unique approaches to leveling demand so they can avoid
making customers wait for services
o Eliminate Unnecessary Activities:
A step that does not add value is a candidate for elimination
A step that does add value may be a candidate for re-engineering, for
improving process consistency, or for reducing the time to perform
the tasks
o Reorganize Physical Configuration:
 Work areas configurations frequently require re=organization during
a lean implementation
 Often manufactures accomplish this by setting up manufacturing cells
to product items in small lots, synchronous to demand
 These cells amount to micro-factories inside the plant
 Most service firms are far behind manufactures in this area
o Introduce Demand-Pull Scheduling:

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Due to the nature of service production and consumption, demand-

pull (customer-driven) scheduling is necessary for operating a service
business
 Moreover, many service firms are separating their operations into
“back room” and “customer contact” facilities
 This approach creates new problems in coordinating schedules
between the facilities
o Develop Supplier Networks:
 The term supplier networks in the lean context refers to the co-
operative association of suppliers and customers working over the
long term for mutual benefit
 Service firms have no emphasized supplier networks for materials
because the service costs are often predominantly labour

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Chapter 13 – Supply Chain Management Strategies

← What is Supply Chain Management?:
 Supply chain management (SCM) is a hot topic in business today
 Traditionally, companies focused much of their attention on internal operations but
did not consider the external supply chain
 This company-centric approach while possible optimizing operations, could result in
sub-optimality in the supply chain as a whole, thus making a product more
expensive and resulting in poorer customer service
 Supply chain management today, involves optimizing the entire supply chain
operations for the product by taking a system approach to managing the flow of
information, materials, and services from raw materials suppliers through factories
and warehouses to the end customer
 The term supply chain comes from a picture of how organizations are linked
together, as viewed from a particular company
 EXHIBIT 13.1 – The Supply Chain Network
 Note the linkage between suppliers that provide inputs; manufacturing and service
supply operations that transform the inputs into products and services; and the
distribution and local service providers that localize the product
 Localization can involve just the delivery of the product or some more involved
process that tailors the product or service to the needs of the local market
 The structure of the supply chain is dependent on the competitive priorities of the
company
 Many companies are achieving significant competitive advantage by the way they
configure and manage their supply chain operations
← Designing the Supply Chain:
 The supply chain includes suppliers, the transformation process, distributors, and
customers
 A number of issues need to be addressed in designing a company’s supply chain:
o 1. Product design to facilitate supply chain management
o 2. Strategic sourcing
o 3. Logistics and inventory management

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o 4. Vertical integration and out sourcing

o 5. Measuring supply chain performance
o 6. Information systems in supply chain management
← Strategic Sourcing:
 Strategic sourcing is the development and management of supplier relationships to
acquire goods and services in a way that aids in optimizing the supply chain needs of
the firm
 As a result of globalization and inexpensive communications technology, the basis
for competition is changing
 A firm is no longer constrained by the capabilities it owns; what meters is its ability
to make the most available capabilities, whether they are owned by the firm or not
 Outsourcing is so sophisticated that even core functions such as engineering, R&D,
manufacturing, information technology, and marketing can be moved outside the
firm
 Sourcing activities can vary greatly and depend on the item being purchased
 EXHIBIT 13.2 – The Sourcing/Purchasing Design Matrix
 The term sourcing implies a more complex process suitable for products that are
strategically important
 Specificity refers to how common the item is, and in a relative sense, how many
substitutes might be available
 Commonly available products can be purchased using a relatively simple process
 For low volume and inexpensive items purchased during the regular routine of work,
a firm may order form an online catalogue
o Often customized for a customer
 A request for proposal (RFP) is commonly used for purchasing items that are more
complex or expensive and for which there may be a number of potential vendors
 Vendor-managed inventory means that a customer actually allows a supplier to
manage an item or group of items for the customer
 Supplier is given the freedom to replenish the item as it sees fit

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 Typically, there are some constrained related to the maximum that the customer is
willing to carry, required service levels, and other billing transaction processes
 Selecting the proper process depends on minimizing the balance between the
supplier’s delivered costs of the item over a period of time and the customer’s costs
of managing the inventory
← The Bullwhip Effect:
 Forward buying: retailers respond to the price cut by stocking up
 EXHIBIT 13.3 – Increasing Variability of Orders Back Through the Supply Chain
 The retailer’s orders to the wholesaler display greater variability than the end-
consumer sales; the wholesaler’s orders to the manufacturer show even more
oscillations; and finally, the manufacturer’s orders to its suppliers are the most
volatile
 This phenomenon of variability magnification as we move from the customer to the
producer in the supply chain is referred to as the bullwhip effect
 The effect indicates a lack of synchronization among supply chain members
 Even a slight change in customer sales ripples backward in the form of magnified
oscillations upstream, resembling the result of a flick of a bullwhip
 Because the supply patterns do not match the demand patterns, inventory
accumulates at various stages and shortages and delays occur at others
 This bullwhip effect has been observed by many firms in numerous industries
o Ex: Campbell’s Soup, IBM, Procter & Gamble, etc
 In addition to forward buying, the lack of information sharing, and rationing and
gaming (in case of shortages, customers tend to exaggerate orders to ensure that
they get at least some amount), can cause the bullwhip effect
 Prevent the bullwhip effect by:
o Information sharing
o Reducing the lead time
o Vendor managed inventories
o Instituting and everyday price policy

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 Continuous replenishment that typifies what many manufacturers are doing to

smooth the flow of materials through their supply chain
← Supply Chain Uncertainty Framework:
 Marshall Fisher
 Many aspect of a product’s demand are important – for example, product life cycle,
demand predictability, product variety, and market standards for lead times and
service
 Products an be categorized as either primarily functional or primarily innovative
 Because each category requires a distinctly different kind of supply chain, the root
cause of supply chain problems is a mismatch between the type of product and the
type of supply chain
 Functional products include the staples that people buy in a wide range of retail
outlets, such as grocery stores and gas stations
o Satisfy basic needs
o Do not change much over time
o Stable, predictable demand
o Long life cycles
o Stability invites competition, which leads to low profit margins
 To avoid low margins, many companies introduce innovations in fashion or
technology to give customers an additional reason to but their products
 Innovative products
o Higher profit margins
o Newness of the product makes demand unpredictable
o Life cycle of just a few months
o Imitators quickly erode the competitive advantage
 Hau Lee expands on Fisher’s ideas by focusing on the supply side of the supply chain
 Stable supply process as one where the manufacturing process and the underlying
technology are mature and the supply base is well established
o The supply base may be limited in both size and experience
o Manufacturing complexity tends to be low or manageable
o Highly automated
o Long term supply contracts are important
 Evolving supply process is one in which the manufacturing process and the
underlying technology are still under early development and are rapidly changing
o Manufacturing process requires a lot of fine-tuning
o Often subject to breakdowns and uncertain yields

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o The supply base may not be reliable

 EXHIBIT 13.4 – Demand and Supply Uncertainty Characteristics
 Lee argues that while functional products tend to have more mature and stable
supply process, that is not always the case
 EXHIBIT 13.5 – Hau Lee’s Uncertainty Framework
 According to Lee, it is more challenging to operate a supply chain that is innovative

than evolving
 Before setting up a supply chain strategy, it is necessary to understand the sources
of the underlying uncertainties and explore way to reduce these uncertainties
 Information technologies play an important role in shaping such strategies:
o Efficient supply chains
 Use strategies aimed at creating the highest cost efficiency
o Risk-hedging supply chains
Use strategies aimed at pooling and sharing resources in a supply

chain so that the risks in supply disruption can be shared
o Responsive supply chains
 Use strategies aimed at being responsive and flexible to the changing
and diverse needs of the customers (mass customization)
o Agile supply chains
 Use strategies aimed at being responsive and flexible to customer
needs, while the risks of supply shortages or disruptions are hedged
by poling inventory and other capacity resources
 Combined the strengths of hedged and responsive supply
chains

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 Demand and supply uncertainty is a good framework for understanding supply chain
strategy
 Innovative products with unpredictable demand and an evolving supply process face
a major challenge
 Because of shorter and shorter product life cycles, the pressure for dynamically
adjusting and adopting a company’s supply chain strategy is great
← Trends in Strategic Sourcing:
 These has also been a move in recent years toward dealing with fewer high quality
and reliable suppliers
 This allows the company to establish long term and collaborative relationship with
fewer suppliers rather than having many suppliers compete primarily on price
 This was one of Deming’s 14 points
 When selecting a supplier, it is important to consider all of the costs involved, the
total cost of ownership (TCO)
 There are many qualitative as well as quantitative factors to consider
 One issue that is becoming increasingly important is that of fair trade practices
 Companies are recognizing the importance of corporate responsibly within their
supply chains
 It is important to ensure that supplier companies are environmentally conscious,
provide acceptable working conditions, and respect human rights issues
 Another emerging issue is that of fakes or counterfeits, and related to this,
intellectual property theft
 Globalization has resulted in many more suppliers that are widely dispersed
geographically
 We are in the middle of a major change in the global economy
 Great opportunities in global sourcing are available because of the collapse o
communism and the Eastern Bloc, the issuance of the euro currency, and emerging
markets
 We have seen the results of accords such as NAFTA and GATT
 Managers face an interesting predicament in global procurement management
 Companies that face such diverse sourcing, production, and distribution decisions
need to weigh the costs associated with materials, transportation, production,
warehousing and distribution to develop a comprehensive network designed to
minimize costs
← Logistics and Inventory Management:

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 Logistics refers to the management functions that support the complete cycle of
material flow: from the purchase and internal control of production materials, to the
planning and control of work in process, to the purchasing, shipping, and distribution
of the finished good
 Supply chains convert RM into FG which involves the storage and movement of
different types of inventory
 Therefore, organizations have to make decisions about how the inventory is
controlled
 Organizations have to make decisions about how to coordinate these decisions
among the supply chain partners
 Lean supply chains are relates to the management of inventory within supply chains
 Managing inventory across the supply chain is sometimes called multi-echelon
inventory management
 Inventory management involves deciding where and in what form to stock
inventory in the supply chain
 Another aspect of positioning is the form in which inventory is stored in various
locations
o Ex: Dell
o Assemble to order process is a middle ground between the make to stock
and make to order processes and is ideal for mass customization strategy
 In addition to assembly postponement, there are also potential flexibility benefits
for the supply chain with labeling and packaging postponement
 In labeling postponement, products are complete expect for labeling
 This occurs when manufacturer produces a generic product that is sold under
multiple labels
 Rather than holding safety stock for each label, inventory is stored generically then
labeled once the customer has placed an order
 In addition to the reduced inventory holding, labeling postponement reduces risk of
obsolete inventory, improves customer response times, and reduces the potential
rework in un-labeling and relabeling
 In packaging postponement products are completed but stored in bulk within
packaging
 In addition to reducing required storage space, packaging postponement provides
flexibility for demand fluctuations of different package sizes
 Many firms use vendor-managed inventories (VMI)

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 Under this concept, vendors manage the customer’s inventory for the products they
supply
 The supplier has oversight of the demand for its products, which helps its supply
chain management while decrease purchasing and record keeping for the company
← Vertical Integration and Outsourcing:
 Vertical integration refers to the proportion of the supply chain that the company
owns
 The current trend in many industries is to become less vertically integrated
 Some organizations have chosen to vertically integrate to manage their critical
supplies, illustrating that the outsourcing model is not universal
 Outsourcing is the act of moving some of a firm’s internal activities and decision
responsibility to outside providers; i.e. becoming less vertically integrated
 The terms o the agreement are established in a contract
 Outsourcing goes beyond the more common purchasing and consulting contracts
because not only are the activities transferred, but also resources that make the
activities occur – including people, facilities, equipment, technology, and other
assets – are transferred
 The responsibilities for making decisions over certain elements of the activities are
transferred as well
 The reasons a company decides to outsource (sometimes referred to as the make-
or-buy decision) can vary greatly
 EXHIBIT 13.6 - Reasons to Outsource and the Resulting Benefits
 Outsourcing allows a firm to focus on activities that represent its core competencies
 Thus, the company can create a competitive advantage while reducing cost
 An entire function may be outsourced, or some elements of an activity may be
outsourced, with the rest kept in-house

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 Identifying a function as a potential outsourcing target, and then breaking that

function into its components, allows decision makers to determine which activities
are strategic or critical and should remain in-house, and which can be outsourced
like commodities
 This outsourcing trend has provided opportunities for new companies to prosper
 There has been dramatic growth in outsourcing in the logistics area
 The emphasis on lean inventory means there is less room for error in deliveries
 Logistics companies now have complex tracking technology that reduces the risk in
transportation and allows the logistics company to add more value to the firm than
it could if the function were performed in-house
 One of the drawbacks to outsourcing is the layoffs that often result
o Lower wages with fewer benefits
 Outsourcing is perceived by many unions as an effort to circumvent union contracts
 EXHIBIT 13.7 – A Framework for Structuring Supplier Relationships
 The decision goes beyond the notion that “core competencies” should be
maintained under the direct control of management of the firm and that other
activities should be outsourced
 In this framework, a continuum that ranges from vertical integration in arm’s length
relationships forms the basis for the decision
 An activity can be evaluated using the following characteristics: required
coordination, strategic control, and intellectual property
 Required coordination refers to how difficult it is to ensure that the activity will
integrate well with the overall process
 Uncertain activities that require much back-and-forth exchange of information
should not be outsourced, whereas activities that are well understood and highly
standardized can easily move to business partners that specialize in the activity
 Strategic control refers to the degree of loss that would be incurred if the
relationship with the partner were severed

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 Many types of losses would be important to consider, including specialized facilities,

knowledge of major customer relationships, and investments in R&D
 A final consideration is the potential loss of intellectual property through the
partnership
 In some cases, companies leave themselves vulnerable to market coups by former
partners when they outsource
 Good advice is to keep control of – or acquire – activities that are true competitive
differentiators, or leave the potential to yield a competitive advantage, and to
outsource the rest
 It is important to make a distinction between “core” and “strategic” activities
 Core activities are key to the business, but do not confer a competitive advantage
 Strategic activities are a key source of competitive advantage
 Because the competitive environment can change rapidly, companies need to
monitor the situation constantly, and adjust accordingly
← Green Sourcing:
 Being environmentally responsible has become a business imperative, and many
firms are looking to their supply chains to deliver “green results”
 Opportunity to save money and benefit the environment might not be a strict trade-
off proposition
 Green sourcing process that can be used with conventional sourcing techniques to
enhance sourcing savings by taking advantage of environmental factors
 Green sourcing is not just about finding new environmentally friendly technologies
or increasing the use of recyclable materials
 It can also help drive cost reductions in a variety of ways, including product content
substitution, waste reduction and lower usage
 A comprehensive green sourcing effort should assess how a company uses items
that are purchased internally, in its own operations, or in its products and services
 As costs of commodity items continue to increase, property designed green sourcing
efforts should find ways to significantly reduce and possibly eliminate the need for
these types of commodities
 Another important cost area in green sourcing is waste reduction opportunities
 This includes everything from energy and water to packaging and transportation
 Green sourcing can help establish entirely new lines of business to serve
environmentally conscious customers
 Green sourcing can also be essential for companies interested in winning high-
profile deals

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 Being green can be the “order winner” from selection when many sourcing options
are available
 Logistics suppliers could find business opportunities coming directly to them as a
result of the green trend
 The following is an outline of a six-step process (EXHIBIT 13.8) designed to transform
a traditional process to a green sourcing process:
o 1. Assess the opportunity

All relevant costs need to be taken into account
Include electricity and other energy costs; disposal and recycling;
packaging; commodity substitution (alternative materials); and water
(or other related resources)
 These costs are identified and incorporated into an analysis of total
cost (sometimes referred to as “spend” cost analysis) at this step
 Prioritize the different costs based on the highest potential savings
and criticality to the organization
o 2. Engage internal supply chain sourcing agents
Internal sourcing agents are those within the firm that purchase items
and have direct knowledge of business requirements, product
specifications, and other internal perspectives inherent in the supply
chain
 These individuals and groups need to be partners in the improvement
process to help set realistic green goals
 The goal of generating no waste becomes a cross-functional supply
chain effect that relies heavily on finding and developing the right
suppliers
o 3. Assess the supply base
 A sustainable sourcing process requires engaging new and existing
vendors

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As in traditional sourcing, the firm needs to understand vendor

capabilities, constraints, and product offering
 The green process needs to be augmented with formal requirements
that relate to green opportunities, including possible commodity
substitutions and new manufacturing processes
 These requirements need to be incorporated in vendor bid
documents or the request of proposals (RFP)
o 4. Develop the sourcing strategy
The main goal with this step is to develop quantitative and qualitative
criteria that will be used to evaluate the sourcing process
 These are needed to properly analyze associated costs and benefits
 These criteria need to be clearly articulated in a bid documents and
RFP’s when working with potential suppliers so that their proposals
will address relevant goals related to sustainability
o 5. Implement the sourcing strategy
 the evaluation criteria developed in step 4 should gel pint he
selection of vendors and products for each business requirement
 he evaluation process should consider initial cost and the total cost of
ownership for the items in the bid
o 6. Institutionalize the sourcing strategy
 once the vendor is selected and contracts finalized, the procurement
process beings
 here the sourcing and procurement department needs to define a set
of metrics against which the supplier will be measured for the
contract’s duration
 these metrics should be based on performance, delivery, compliance
with pricing guidelines, and similar factors
 it is vital the metrics that relate to the company’s sustainability goals
are considered as well
 periodic audits may also need to be incorporated in the process to
directly observe practices that relate to these metrics to ensure
honest reporting of data
 The key aspect of greens sourcing, compared to a traditional process, is the
expanded view of the sourcing decision
 This expanded view requires the incorporation of new criteria for evaluating
alternatives

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 Further, it requires a wider range of internal integration such as designers,

engineers, and marketers
 Finally, visualizing and capturing the green sourcing savings often involves greater
complexity and longer payback periods compared to a traditional process
← Total Cost of Ownership:
 The total cost of ownership (TCO) is an estimate of the cost of an item that includes
all the costs related to the procurement and use of an item, including any related
costs in disposing of the item after it is no longer useful
 The concept can be applied to a company’s internal costs or it can be viewed more
broadly to consider costs throughout the supply chain
 Depending on the complexity of the purchasing process, activities such as pre-bid
conferences, visits by potential suppliers, and even visits to potential suppliers can
significantly impact the total cost of the item
 A TCO analysis is highly dependent on the actual situation
 EXHIBIT 13.9 – Total Cost of Ownership
 Costs can be categorized into three broad areas:

o Acquisition costs
Initial costs associated with the purchase of materials, products, and

services
 Not long-term costs of ownership, but represent an immediate cash
outflow
 Include the pre-purchase costs, identifying suppliers and evaluating
suppliers, and other costs associated with procuring the item
 The purchase prices, including taxes and transportation costs, are also
included
o Ownership costs
 Incurred after the initial purchase and are associated with the
ongoing use of the product or material

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 Costs that are quantifiable include energy usage, scheduled

maintenance, repair and financing
 There can also be qualitative costs such as aesthetic and ergonomic
factors
 These ownership costs can often exceed the initial purchase price and
have an impact on cash flow, profitability, and even employee morale
and productivity
o Post-ownership costs
 Salvage value and disposal costs
 Other areas that can be included are the long term environment
impact, warranty and product liabilities, and the negative marketing
impact of low customer satisfaction with the item
 Overemphasis on acquisition cost or purchase price frequently results in failure to
address other significant ownership and post-ownership costs
 TCO is a philosophy for understanding all relevant costs of doing business with a
particular supplier for a good or service
 It is not only relevant for a business that wants to reduce its cost of doing business,
but also for a firm that aims to design products or services that provide the lowest
total cost of ownership to customers
 These costs can be estimated as cash inflows (the sale of used equipment, etc) or
outflows (such as purchase prices, demolition of an obsolete facility, etc)
 TCO draws on many areas for a thorough analysis
 These include finance, accounting, operations management, marketing, and
information technology
 It is probability best to approach TCO using a cross-functional team representing the
key functional areas
 It is important that any analysis is adapted to the particular scenario
 Depending on the alternatives, there are a host of factors, often going beyond cost,
that need to be considered
 Adapting this type of cost analysis, and combining it with a more qualitative risk
analysis, is useful in actual company situations
← Measuring Supply Chain Performance:
 Companies evaluate the performance of their supply chain with measures such as
inventory turns, number of stock outs, lead times for order delivery, and overall
costs

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 This allows the company to benchmark its performance against competitors and its
own objectives
 Each group at any company has its own measures of performance
 The different measures focus the groups on different objectives
 If the groups are not properly coordinated, their attempts to optimize their own
performance may hurt the company’s ability to create the most efficient supply
network that can deliver a customer product at the lowest cost
 Negotiations among these groups are critical, with the goal being to decide to do
what is best for the company as a whole
 Balanced scorecard approach, including financial, customer, business process, an
learning and growth measured used at all levels of the supply chain
 Two common measures to evaluate supply chain efficiency are inventory turnover
and weeks-of-supply
 These essentially measure the same thing and mathematically are the inverse of one
another
 Inventory turnover is calculated as follows:
o Inventory turnover = COGS / average aggregate inventory value
 The cost of goods sold is the annual cost for a company to produce the goods or
services provided to customers; it is sometimes referred to as the cost of revenue
 This does not include the selling and administrative experience of the company
 The average aggregate inventory value is the total value of all items held in
inventory for the firm valued t cost
 It includes the raw material, work in process, finished goods, and distribution
inventory considered owned by the company
 Good inventory turnover values vary by industry and the type of products being
handled
 Many firms continuously work to improve the number of turns
 In man situations, particularly when distribution inventory is dominant, weeks of
supply is the preferred measure
 This is the measure of how many weeks’ worth of inventory is in the system at a
particular point in time
 The calculation is as follows:
o Weeks of supply = (average aggregate inventory value / COGS) x 52 weeks
 When company financial reports cite inventory turnover and weeks of supply, we
can assume that the measures are being calculated firm-wide
 Also, these calculations can be done on individual entities with the organization

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 A firm considers inventory an investment because the intent is for it to be used in

the future
 Inventory ties up funds that could be used for other purposes, and a firm may have
to borrow money to finance the inventory investment
 The objective is to have the proper amount of inventory and to have it in the correct
locations in the supply chain
 Determining the correct amount of inventory to have in each position requires a
thorough analysis of the supply chain coupled with the competitive priorities that
define the market for the company’s products
← Product Design to Facilitate Supply Chain Management:
 Companies have come to realize that product design can help or hinder supply chain
management
 Advantages of stocking standardized components and postponing assembly of the
final product until receipt of a customer order
 It is important to keep the supply chain in mind when designing products
 The term mass customization has been used to describe the ability of a company to
deliver highly customized products and services to different customers around the
world
 The key to mass customizing effectively is by postponing the task of differentiating
the product for a specific customer until the latest possible point in the supply
network
 In order to do this, companies must rethink and integrate the designs of their
products, the processes used to make a deliver those products, and the
configuration of the entire supply network
 By adopting such a comprehensive approach, companies can operate at maximum
efficiency and quickly meet customers’ orders with a minimum amount of inventory
 Three organization design principles together form the basic building blacks of an
effective mass customization program
o Principle 1: a product should be designed so it consists of independent
modules that can be assembled into different forms of the product easily and
inexpensively
o Principle 2: manufacturing and service processes should be designed so that
they consist of independent modules that can be moved or rearranged easily
to support different distribution network designs

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 Process postponement is the term used to describe delay of the

process step that differentiates the product to as late in the supply
chain as possible
o Principle 3: the supply network – the positioning of inventory and the
location, number and structure of service, manufacturing and distribution
facility – should be designed to provide two capabilities: (1) it must be able to
supply the basic product to the facilities performing the customization in a
cost-effective manner and (2) it must have the flexibility and the
responsiveness to take individual customers’ orders and deliver the finished,
customized good quickly
 To support mass customization, an agile supply network is needed
 Having distribution centers perform light manufacturing or assembly can help a
company both comply with the local-content rules that are prevalent in emerging
markets and respond to customers who are unwilling to wait for a customized
product to be shipped from a factory in another region
 Making decisions like these is not easy
 It involves people from at least five areas of the company: marketing, R&D,
manufacturing, distribution, and finance
 These five groups must play the following roles to support an effective mass
customization program:
o Marketing must determine the extent to which mass customization is needed
to fulfill customer requirements
o R&D must redesign the product so that it can be customized at the most
efficient point in the supply network
o Manufacturing and distribution must coordinate both the supply and
redesign of materials and situate manufacturing or assembly processes in the
most efficient locations
o Finance must provide activity-based cost information and financial analyses
of the alternatives
← Information Systems in Supply Chain Management:
 A supply chain links all of the stages, from RM to the customers
 The supply chain is coordinated with an electronic information system
 The frequency and speed of communicating information through the chain have a
great effect on inventory levels, efficiencies, and costs
 For manufacturing companies, enterprise resource planning systems (ERP) are now
being used extensively

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 Managing the supply chain is being shifted, to a large extent, to the vendor
 Purchasing contracts are now tied to delivery schedules
 Electronic information flow has shifted routine activities to the vendor by allowing
direct access to point of sales data and given responsibility for forecasting and
delivery of product directly to the vendor
 Today, such relationship tend to be long term, but one can speculate whether the
relationship will be long term in the future
← Collaborative Planning, Forecasting, and Replenishment (CPFR):
 Collaborative planning, forecasting, and replenishment is a technique used to
coordinate production and purchase planning, demand forecasting and inventory
replenishment between supply chain trading partners
 CPFR is being used as a means of integrating all members of an n-tier supply chain,
including manufacturers, distributors, and retailers
 EXHIBIT 13.10 – n-Tier Supply Chain with Retail Activities
 The ideal point of collaboration utilizing CPFR is the retail level demand forecast
which is successively used to synchronize forecasts, production, and replenishment
plans upstream thought the supply chain
 CPFR’s objective is to exchange selected internal information on a shared Web
server to provide reliable, longer-term future views of demand in the supply chain
 CPFR uses a cyclic and iterative approach to derive consensus supply chain forecasts
 It consists of the following five steps:
o 1. Creation of a front-end partnership agreement
o 2. Joint business planning
o 3. Development of demand forecasts
o 4. Sharing forecasts
o 5. Inventory replenishment
 The early exchange of information between trading partners provides for reliable,
longer term future views of demand in the supply chain
 One obstacle to collaboration is the lack of trust-over complete information sharing
between supply chain partners
 There is the potential loss of control as a barrier to implementation

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 The front-end partnership agreements, nondisclosure agreements, and limited

information access may help overcome these fears
← Lean Supply Chains:
 When considered from the entire supply chain, customer value should center on the
perspective of the end customer with the goal being to maximize what the customer
is willing to pay for a firm’s goods or services
 The value stream consists of the value-adding and non-value-adding activities
required to design, order, and provide a product or service from concept to launch,
order to delivery, and RM to customers
 When applied to supply chains, waste reduction relates to the optimization of the
value-adding activities and the elimination of non-value adding activities that are
part of the value stream
 Different components of a supply chain and what would be expected using a lean
focus:
o Lean suppliers
o Lean procurement
o Lean manufacturing
o Lean warehousing
o Lean logistics
o Lean customers
 The benefits of a lean supply chain primarily are in the improved responsiveness to
the customer
 As business conditions change, the supply chain adapts to dynamic needs
 The ideal is a culture of rapid change with a bias for change when it is needed
 The reduced inventory inherent in a lean supply chain reduces obsolescence and
reduces flow time through the value-added processes
 The reduced cost along with improved customer services gives the firms using a lean
supply chain a significant competitive advantage when competing in the global
marketplace
← The Reverse Supply Chain:
 Reverse supply chain as the series of activities required to retrieve a used product
(recycling) or product return from a customer and either dispose of it or reuse it
 Product returns are becoming an increasingly important issue as flexible return
policies to improve customer service are combining with increased online
purchasing

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 In addition, regulatory authorities are increasingly mandating companies to pay

more attention to reverse supply chains, and both consumers and regulations are
encouraging companies to pay attention to the environment
 Even where there are no regulations, companies are finding there are competitive
advantages to being more proactive about reverse logistics
 Guide and Van Wassenhove divide the reverse supply chain into five components,
one or more of which might be one by a third party:
o Product acquisition
o Reverse logistics
o Inspection and disposition
o Reconditioning
o Distribution and sales
 EXHIBIT 13.11 – Reverse Supply Chain Overview
 Companies successful in their reverse supply chains have often closely coordinated
them with their forward supply chains, creating a closed-loop system
 This implies that they design and manufacture products with eventual recycling in
mind
 Other companies take steps to avoid unnecessary reverse supply chain occurrences
by educating customers on product usage
← Third-Party Logistics and the Reverse Supply Chain:
 With organizations often focused on improving their forward supply chain, many
have recognized that third-party logistics (3PL) providers may be better equipped to
handle the complexity and challenges of their reverse supply chain
← Integrating It All: The Successful Supply Chain:
 The discussions in this chapter can be related to the following important themes:
o Supply chains should be customized: a supply chain has to be designed to fit
the product and process characteristics
o Partnerships are important: it is important to focus on improved
management of the entire supply chain and to create long term trust based
relationship with suppliers and customers

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o Information should be shared: if you build effective partnerships, it will be

easier to share information, which is another key ingredient of successful
supply chains. It allows for smoothing of the supply chain and also helps
avoid the negative consequences of the bullwhip effect
o Holistic and evolving supply chain management: it is important to remember
that supply chain issues affect decision making from product concept
inception all the way to the end of the products life cycle and disposal. What
is done during the design stage can affect how well the supply chain can be
managed during the product life cycle

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Exam
← 4 Sections:
←
← 1. Multiple choice (25 questions - 25%)
 From chapters: 2, 8, 10, 12, 13
 Only theory questions
← 2. Short answer (8 options, choose 6) – (30%)
 From chapters: 2, 8, 10, 12, 13
 Class notes
← 3. Case study (15%)
 From anything
← 4. Quantitative problems (4 questions – 30%)
 From:
o MRP
o P chart (SPC)
o Forecasting methods – 3/6 month moving averages
o Aggregate planning – level and chase planning based on demand
o Capacity analysis/planning (Harvard case)
o Project management
←
← Bring calculator
← Seats: 282-341

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National Cranberry Cooperative

←
 2 conflicting objectives
o Board: increase co-op value, profits, grow in size (long-term)
o Members: want dividends ($)
← Calculations:
 Dumpers:
o Unloading: 7.5 mins
o 60 min/7.7 min = time times
o Average truck = 75 barrels
o 75 x 8 = 600/hr
o 600 x 5 = 3000 barrels
 Dry storage:
o 1-16 = 250 barrels = 4000 barrels minimum
o 17-24 = 250 barrels = 2000 barrels
o = 6000 barrels maximum
 Wet storage:
o 25-27 = 250 barrels = 1200 barrels minimum
o 17-24 = 250 barrels = 2000 barrels
o = 3200 barrels maximum
 Destone:
o 4500 barrels
 Dechaff:
o 1. 1500 barrels
o 2. 3000 barrels
 Dryers:
o 600 barrels
o BOTTLENECK

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 Average = 10000 barrels/day

o # day/dry = 3000
o # day/wet = 7000
o # hour/dry = 2.72/hour
o # hour/wet = 636/hour
 Maximum = 19000
o # day/dry = 5700
o # day/wet = 13300
o # hour/dry = 518/hour
o # hour/wet = 1209/hour
← Basic and Immediate Issues:
 Immediate:
o Install new dryers
o Convert bins
 Basic:
o Trucks waiting
 Costing $ (farmers)
o Overtime
 Costing $ (affects co-op profitability)
o 50% #3
 Paying a premium  .75/barrel = $160000 (extra paid)
o Variability in loads
o Random deliveries
 Scheduling (eliminate overtime and idle time)
 Farmers don’t work on schedule
 Late trucks
 Weather

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 Customer satisfaction
o Staffing
 Seasonal
 OT/morale
 Dependability
 Staff agency
 Wages
 Union
 Hours
o Capacity
 Poor planning
 Limitation on holding wet
 Dumpers/storage
 More storage (farmer benefits – trucks wait less)
o Time frame
 60 months
 February
 Off season
 Planning, training
 Floor space
 Revenue
o Wet berries
 58-70% increasing
 Limits (market prices)
 Processed immediately
 Processing had stabilized
← Dryers: process 600 barrels/hour

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 600 x 8 = 4800 barrels

 Average = 7000 barrels / 600 barrels/hour = 11.6 required to process
 Maximum: 13300 / 600 = 22.16 hours required to process
o Cant add anymore OT
← Solutions:
 Eliminate variation in start times
 Add dryer
 Incentives for dry (marketing)
 Decrease absence
 Cleaning and maintenance
← Light Meter  could speed up production
 Speeding up non-bottleneck process
 More accurate
 More value added work
← Payback for 1 dryer is 1 and a half years = get dryer
← Decision Criteria:
 Time
 Cost  affecting operations and customers

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The Goal
←
 Cycle time = rate (ex: 2 miles/hour)
 Dependant event: have to do everything sequentially
o Cant do the next event unit the first is complete
 Statistical fluctuations: people do things at different rates
 Bottleneck: what holds up the process (ex: Herbie)
o Unplanned events (ex: Davey adjusting straps)
 Speeding up intermediary steps does not speed up overall through put because they
are dependant on all events
 Bottleneck has to make up for his fluctuations as well as everyone else’s
 Balanced system: everyone in process doing the same things in the same amount of
time
 Some fluctuations cannot be planned (match game)
o Last operations get overtime
 Slowest (bottleneck) governs the throughput as a whole
o Entire system
 Increase capacity at bottleneck
 Maximize bottleneck – keep it going
 Want to see more pieces/timeframe (throughput)

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DAV
← Difference Between Service and Manufacturing Company:
 1. No physical output
o measure
 2. Subjective
 3. Direct/indirect contact with customers
 4. Employee skill set
← Immediate Issues:
 Information?
 Implementation
 Sustainability
 Accuracy
← Decision Criteria:
 Customer satisfaction
o Temporary workers are not achieving customer service
o Growth of the company
o A lot of OT
← Basic Issues:
 Mistake classification
o Mistake is a mistake
o Unnecessary competition among departments
 Unnecessary competition among departments
o Tearing apart a team
o Focusing on each other rather than the customer
 Sampling size
 Resistance
o New system is a passing phase
o Uninformed

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o No goals
o No communication
 Many locations
o Communication
 Size of company
o Dynamic
o Diverse
o Consistency
o Customer service
o Communication
o Think about reputation
o Changes are slow
 Capacity issues
o Same day processing
 Double key entry
 Automated
o Costs money
o 1996
o Eliminate employees
o Change process
 Consistent measurement
o Subjectivity of right vs. wrong
 Continued success
 SPC applicability
o Lawyers
 Senior managers
o Lack of involvement

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o Focus on numbers
o Impatient (tunnel vision – want to do everything now)
 Results
o What is the purpose
o No planning
← Calculations:
 UCL = .0972
 LCL = .0171
 Week 23 and 24 out of control (no idea why)
o Audit, who was working, time frame, business environment at the time, etc
 What can we do about 2 plots out of control: find the root cause, talk to employees
← Quality Costs:
 Appraisal and prevent costs
o Appraisal – define the problem, expensive
 Not making it better
 Just becoming aware
o Prevention – if dealt with properly
 No plan yet
 Want to put money into prevention to make sure it doesn’t keep
happening
 External
o Customers service
o Loss of customers
o Competition

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Macpherson
← Talking points:
 Aggregate plan
 Seasonal employees
 Linda not knowing future demand
 Seasonal employees getting some time off
 Brand loyal
 Inventory getting damaged
 Bad relationships with customers over damaged inventory
← Immediate Issue:
 Which aggregate plan?
 Need an aggregate plan because they have many different products
← Business Plan:
 Strategy
 Goals
 Competitive dimensions (what is going to drive the company)
o Macpherson uses cost, efficiency, quality
← Aggregate Plan:
 Demand and forecasts come into aggregate demand
 Purchasing, design, accounting, etc
← Plans:
 Level
o Labour market
 Labour hours known
 Employee morale vs. feeling too comfortable (lazy)
 Relationship with the union
 Seasonal employees

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o Inventory
 Holding inventory vs. OT
 After 2.5 months cheaper to run OT
o Back orders and lost sales
 Forecasts being wrong
 Suppliers not supplying good raw materials
 Chase and OT
o Union = wants OT
o Tired, overworked employees
o No training/easy transition
o Consistent workers/high skill
o Labour cheaper
o Satisfy union
 Change and hire/fire
o Union = nightmare
o Job security
o Inventory
 Perish
 Damaged
 Obsolete
o Loyalty towards company

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Illustrious Corporation
← Participation:
← - Explained H590 tapped vs. untapped
← - Explained the problem with the weeks (back orders)
← - Question about G418
← - F416 in kits – own assembly of it
←
←
 It’s the sales peoples fault that back orders occur
o Late forecasting
o Bad scheduling
o Poor communication

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Mcleod Motors Ltd.

← Dependent item for manufacturing
← Independent item for the replacement market
← Bin supply  Milling  Drilling  Turning  Assembly  Inspection
← RM Inv Inv Inv Inv Inv
← Inventory bins (for each side in and out bin) are beside each step in the process
← Inventory is taken to storage after each step
← For each part, it is worked on, inventory, wait for work order, move, and then
warehouse
← Possessing time = 3.1 minutes
← Quantity = 1248
← 1248 x 3.1 = 64.45 hours
← Storage = 3 days
← Waiting = 1 day
← 32 hours per each operation x 4 operations + 8 hour wait = 136 hours
← Basic Issues:
 Supervisors (demanding time)
 Space
 Rationalization (1 part in place of 20)
o Lower inventory
o Less obsolete
o Quality
o Time
 Safety stock of inventory
o Unknown demand
o Labour negotiations
o Strategy
o Damage

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ITC eChoupal
← 1. Profit
 Growth potential (currently at 12%)
 Better quality
 Eliminate middle men
 Standardize
 Protection
 Market control
← 2. Future potential
 Expand sales
 Government partnership
← 3. Social
 Trust/loyalty
 Fair trade
 Cash flow
←
← Basic Issues:
 1. Finding the right middlemen
 2. Technology is limited (start up and training)
 3. Costs to startup and replace equipment
 4. Trust
 5. Success of implementation
 6. Participation
 7. Competition
 8. India’s culture and structure
 9. Cash flow
 10. Geography
 11. Illiteracy

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 12. Corruption
 13. Farm locations
Value:
 Quality
 Better life
 More accurate money
 Empowerment
 Less uncertainty
 Co-operative
 Efficient transportation
 More market share
 More profit
 Communication
 Less uncertainty of supply and demand
 Education
 Guaranteed cash flow
←
← ITC Advantage:
 First in the market with this
 Brand loyalty
 Government relationship
 Resources to give data to farmers
 Customers/suppliers
 One stop shop
 Farmer morale
 Controlling the source

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Zara
←
 Demand pattern: innovative
 Supply pattern: stable
 Responsive supply chain
← Supplier pressure:
 Zara is proven to be the pioneer in fast fashion with twice a week supply to its
stores, keeping them fresh and interesting for its customers.
← Elimination of stages in the supply chain:
 More than 40 000 items designed per year
 Continuously supplied to its stores increasing the number of “seasons” radically and
breaking the tradition two season model
← Strengths:
 Close communication between customers and its designers
 Ability to ship the desired items in a week catching the sales moment
 ASC is an aspect enhancing competition among organizations
 Good balance between in house and outsourcing task
 Minimal lead times
 Whole organization is agile and working very efficient (not just the supply chain)
 Does not spend money on advertising, instead on new stores
 One of the most innovative retailers in the world
 Efficient distribution
 Information technology
 Fast delivery of new products and trends
 Employee morale, empowerment, and responsibility
 Decentralized decision making
← Competitive Advantage:
 Speed:
o Reduces excess stock holding in the supply chain

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o Reduces risk associated with forecasting as product specifications are not

finalized until closer to delivery
o Improved customer satisfaction
o Increased market opportunity
o Decreased overall risks
o Reduced total costs
 Costs:
o Low priced products
o Imitating high end fashion
← Forecasting:
 Extensive market research
 Quick input and output response
 Frequent new styles
 Near-term forecasts
 Customer feedback
← Key Success Factors:
 Short lead times = more fashionable clothes
 Lower quantities = scarce supply
 More styles = more choice

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Agile
←
 Blame game
o Commitment
o Iso 9000 – quality guideline standard
o Pressure
o No guidelines
o Confusing
o Gaps
 Contracts
 Supplier choice
 Quality
 Different goals

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Operations and Supply Chain Management

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What are the three levels of operations?

What are the three levels of operations?

What are the inputs and outputs in the operations and supply chain process?

What are the inputs and outputs in the operations and supply chain process?

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Operations and Supply Chain Management

Supply Chain And Operations Management (University of Manitoba)

StudeerSnel wordt niet gesponsord of ondersteund door een hogeschool of universiteit

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 Supply comes from operations and supply chain management

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 Bottleneck: slowest running activity

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 4. Determine what process adjustments needs to be made

← How To Make An SPC Chart:

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o Level 0 – Car (independent)

o Good for long-term planning

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o Time series data

o Easiest forecast to make

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o Things that happen in wave like formats

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 Concerned with planning overall production of all products combined over a

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 Tolerate backorders/lost sale

 Production mix predictability:

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 “On these dates, were going to make this many products”

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 Wholesaler and distributor don’t communicate that it was due to

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o WIP is made up of materials, labour, machine & overhead

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 Quality, productivity, and responsiveness problems:

 Ex: 80% - 20% rule

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 3. Supplier replaces material consumed by customer based upon stocking quantities

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 Push system vs. pull system:

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o Shared software systems

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