OPMA 317 Final

Beer Game

 Game Lessons
o Why did people act the way they did?
 Lack of communication
 Led to guessing
 Led to arbitrary ordering decisions
 Bull whip effect
o Information going back through the supply chain is distorted
and then amplified
 Long lead time
 Creates panic
o When inventory does not instantly arrive and solve your
growing backlog, you panic and order even more
 Supply chain structure
o Leads to high costs throughout the supply chain leading to a higher end price for the
customer

o Stockouts at times
 Lost profit and potential lost good will
o Excess inventory at times
 Holding costs, risk of obsolesces, etc.
o Overtime costs
 50-100% increase in labor
o Layoffs/ rehiring
 Match staff levels to fluctuating demand
o Expediting
 Rush transportation costs
 Improving the supply chain
o Communication and cooperation
 Actual customer demand
 Information technology
 Avoid converting constant consumer demand into lumpy demand by lot
sizes – don’t stress your supply chain

Supply Chain Management

 A supply chain is a network of facilities that procure raw materials, transform them into
intermediate goods and then final products, and deliver the products to customers through a
distribution system. It spans procurement, internal transformation, and distribution.
Ford Example

 Main reason they chose to have a supplier campus

o Reduce lead times
 What percentage of inventory is provided from the supplier campus?
o 60%
 What was the unexpected supplier sourcing benefit that occurred from having the supplier
campus?
o Cross tier supplier relationships
 Suppliers began sourcing from each other
 What used to be the lead time for the wire harness assembly when an Asian supplier was used?
What where the challenges?
o 8 Weeks
o Accurately forecasting quantities to build
 What are the triple bottom line benefits of having the supplier campus so close to the Ford
assembly plant?
o Economic:
 Lower freight / transportation (logistics) costs
 Shorter lead time reduces supply chain uncertainty (inventory levels)
o Environmental:
 Shorter transportation = reduced carbon footprint
 Less inventory = less space required (building, heating, lighting, etc.)
o Social:
 Foreign supplier working conditions likely below U.S. standards
 Provide local jobs (“American-made”)

Vertical Integration

 Vertical integration refers to the proportion of the supply chain that the company owns

 Reasons to outsource

  Reasons not to outsource
 “Control”
 (strategic process, intellectual property, “messy” coordination, etc.)

Zara Example

 Chose to make rather than outsource

o Short lead time= small batches (flexibility)

Procurement (purchasing)

 Purchasing involves buying services or materials we elect to not develop internally

 As a percentage of sales, purchasing costs are substantial:

 Even modest reductions in these costs can lead to substantial payoffs!

Vendor Selection and Development

 Selecting a vendor as a supply chain partner should be based on many criteria

 Criteria weightings can be incorporated to indicate importance

 Research and rate each alternative supplier on each criteria

 Criteria examples:

 Work closely with selected vendors

 Logic: Improving supplier operations / efficiency will improve the entire supply chain’s
performance
 Some large companies offer “free consulting” to their vendors to help accomplish:
 Cost reductions
 Improved quality
 Fast & consistent delivery

Green Sourcing

 An environmentally responsible supply chain

 Expanded input from designers, engineers, and marketers

  In addition to being an “order winner”, green sourcing can also reduce costs (ex. less packaging)

Types of purchasing

1. Centralized purchasing

1. Positive: purchasing power

2. Negative: reduced flexibility/ speed

2. Stockless Purchasing

1. Supplier delivers material directly to the production rather than to a stock room

3. Blanket Purchase Orders (POs)

 A long-term purchase commitment to a supplier for items that are to be delivered upon
receipt of a shipping requisition

 Example: Retail sporting goods store commits to purchase 1000 hockey sticks during
the upcoming year and receives a unit cost discount (from $20 each to $18 each).
Retail store does not want all 1000 sticks delivered immediately – they will “draw
down” on the contract quantity by providing an anticipated delivery schedule for
the year and confirming quantities as dates approach.

 Pros for manufacturer

 Unit cost savings

 Lower “holding costs”

 Lower “order costs”

 Less supply uncertainty

 Pros for manufacturer

 Known demand (efficient production planning)

Vendor managed inventory

 Vendors manage the customer’s inventory of the products they supply (ordering, stocking
shelves, etc.)

 Relatively common in retail industry

 Can be employed for “supplies” too

Procurement- Supplier consolidation

 Lesson: work closer with fewer firms

Logistics

A. Time, Place and Form Utility

 Time utility (When): provides goods to customers when wanted, not when produced. E.g.
Storage, warehousing

 Place utility (Where): provide goods where they are needed, not where they are produced. E.g.
Transportation

 Form utility (What): physical/chemical change in goods and/or packaging. E.g. Assembly,
manufacturing

 It is important to consider all-inclusive costs…

 Transportation (air, rail, ship, truck, etc.)

 Inventory (holding costs)

 Packing (materials required – boxes, Styrofoam, etc.)

 Damage (in-transit, in-storage)

 Example: "The Good Earth Vegetable Company was shipping produce to distant
markets by train. The cost of shipping a ton of vegetables by train averaged less
than half the cost of airfreight, so the company assumed that rail was the best
method. But then Good Earth managers did a more complete analysis. To their
surprise, they found that the airfreight system was faster and cheaper.”

Alternative transportation modes

 Intermodal Shipments: same container on boats, trains, and trucks

 Convenient (Less handling)

 Extensive network

 Optimal cost
  Increased security

Shipping Strategies

 Consolidation
 Having all suppliers deliver to all retail locations would be inefficient
 Have a distribution centre consolidate shipments to retail locations
 Cross-docking: Remove the intermediate step of storage by distributing them
immediately after they are received.
 Reduces: product handling, inventory, facility costs
 Requires: tight scheduling, extensive information technology
 Example: Wal-mart
 Drop Shipping
 Assume a retailer does not have item you want in stock, and then must order it
from their supplier for you.
 Retailer can tell their supplier to “drop ship” it directly to you.
 Saves both time and reshipping costs

Logistics management

 Postponement
o Intentionally “delay” supply chain activities
o Purpose:
o improve flexibility
o reduce inventory costs (shortage, holding, etc.)
 Postponement of Place Utility
o avoid committing (e.g.. positioning inventory down the supply chain) for as long as
possible
 If inventory is held at retail stores and one has high demand while another has
low demand, inventory must be “pulled back” to warehouse, then shipped to
retail store that needs it
 Labeling Postponement: products are completed with the exception of labeling.
o This is applicable when a manufacturer produces a generic product that is sold under
multiple labels.
 Packaging Postponement: products are completed but stored in bulk without packaging.
o Reduces storage space (in warehouse or on a truck)
o Provides flexibility for demand fluctuations of different package sizes.
o Examples: batteries, diapers, toilet paper, etc.
Third Party Logistics (3PL)

 Outsourcing allows each partner to concentrate on what they do best and assign other aspects
of their business process to another organization who has expertise in that aspect of the
business.

 3PL services:

 transportation, warehousing, distribution, order fulfillment , kitting and final assembly of

modular products (mass customization), pick and pack, compliance labeling, product
inspection and testing, product packaging, and reverse logistics.

Matching Supply Chains Design with Function

 The "right” supply chain function/design will support the product & market characteristics.
 

Humanitarian Supply Chains

 “Humanitarian Supply Chains are the processes and systems involved in mobilizing people,
resources, skills and knowledge to help vulnerable people affected by disaster’’ (Van
Wassenhove 2006, p. 476).
 The poor international response (and media coverage) for two natural disasters drove increased
efforts on humanitarian supply chains:

 Distribution is the most difficult link in the humanitarian supply chain:

o Infrastructure often significantly damaged

o Coordination: “want 4-5 supply chains operating in an emergency, not 200”

 Pre-positioning resources:

o The Red Cross has multiple warehouses around the world that hold enough food and
other resources for about 20,000 families or 100,000 people.

 Some Differences to Commercial Supply Chains:

o Cost not as critical as speed

o High inventory levels

o Perishable items expire  replaced

o Many stakeholders to coordinate with

o High visibility of performance

 o Job satisfaction:

 According to the World Disasters Report 2016

 Disaster = one or more criteria met:

o 10+ people killed

o 100+ people affected

o Declaration of a state of emergency

o Call for international assistance

o Note: does not include wars, conflict-related famines, diseases

 Disasters Triggered by Natural Hazards (DTNH)

o Flood, earthquake, drought, volcano, storm, etc.

 Disasters Triggered by Technical Hazards (DTTH)

o Chemical spill, infrastructure collapse, explosion, etc.

Reverse Supply Chain

 Refers to the series of activities required to retrieve a product from a customer and either
dispose or reuse it

 Used products (recycling) goods

 New products (returns)

 Includes:

1. Product Acquisition: Obtain products from end-users

2. Reverse Logistics: Move products from point of use to point of disposition

3. Testing, Sorting, Disposition: Determine product condition and most economically attractive
re-use option

4. Refurbishing: Direct re-use, repair, remanufacture, recycle, disposal

 5. Remarketing: Create and exploit markets for refurbished goods

Product Design & Supply Chain

1. Design for Manufacturability

1. Use standard materials and parts of known quality

2. Design to the process capability and set tolerances and specifications that won’t strain
the current system

3. Minimize number of distinct components:

2. Shipping and Handling Considerations

1. Handling

1. During production / assembly

2. Openings for lifting, etc.

3. Often irrelevant for eventual use of product

2. Packing / Shipping

3. Consider Eventual Reuse & Recycling

1. Xerox had warehouses full of old photocopiers (lease returns)

2. 38,000 metric tons of equipment per year

3. Xerox’s disposal considerations for product design:

4. Easy to disassemble

5. Minimal number of materials

6. Was 500 types of plastics per machine, now only 50

7. Mark parts for easy identification (reuse or recycle)

8. Eventual reuse / remanufacturing (ex. frame platform)

9. Now only 2% of returned equipment goes to landfills, saving Xerox hundreds of

millions of dollars per year.

4. Modular Design Flexibility

 1. The creation of products (goods and services) from some combination of basic, pre-
existing subsystems (or modules)

2.

5. Design to “Target Cost”

1.

6. Compress the Design Process (Concurrent Engineering)

1. Reduce the time needed to introduce new products. Why?

2. Concurrent Engineering

1. Team approach to design, rather than a sequential, functional approach

7. Formalize for Production (BOM & Routing)

1. When product design is complete, it is then formalized for production purposes:

 2.

Supply Chain & New Technologies

 Radio Frequency IDentification (RFID)

o An inexpensive “chip tag” attached to items that stores information and enables live
tracking
o How does RFID impact Supply Chain Management?
 Improved inventory visibility and accuracy (customer service)
 Ability to stock a wider variety of products (low admin per item)
 3D Printing
o Uses additive manufacturing processes to build 3D objects ‘layer upon layer’
o Used in manufacturing prototyping for at least 20 years
o Becoming so refined and low cost that “game changing” applications already
occurring (ex. Children’s prosthetics, NASA ‘printing tools’, etc.)
o Economic influence by 2025 could be $230-550 billion per year
o Benefits:
o Reduces lead time (batch manufacturing & transportation)
o Reduces transportation costs and carbon footprint (print near use)
 Blockchain
o Not owned by any single company or government
o Provides all partners in a transaction with a secure, distributed ledger that allows
them to see the same information at the same time
o Can significantly increase transparency from product origin, through the shipping
process, and to customer delivery.
o Potential Supply Chain Benefits:
o Proof of sustainability tracing
o Lower administration costs
o Food Safety Recalls
Quality Management & Control

Quality management process

The Cost of Quality

 “The cost of quality is significant – as high as 25% of revenues for goods and 40% of operating
expenses in services.”
  "Quality is free" P. Crosby

Inspection vs Prevention

 “Cold Chain”?

 Maintaining the integrity of refrigerated/ frozen products throughout the supply chain

 Example: frozen seafood can have up to a 12-week journey from Asia to the U.S.

 Inspection Approach
  Incoming products can be checked for “temperature abuse” (max temp measured)

 “If a container comes with 45,000 pounds of seafood and it hit 45F for more than 30
minutes, it can cause all kinds of problems. If we refuse that load, it is another 12 weeks
for us to replace that load.”

 In the past, they would order more seafood than necessary during the summer to
compensate for spoiled loads (expensive).

 Prevention Approach

 Employ cold chain real-time monitoring and satellite tracking devices that can set off
alarms

 If the temperature begins to rise, the driver is contacted to check on the shipment

Hondo Failsafes and Checklist

 Doors taken off at start of assembly process

 Plastic “film” placed on car exterior at start of assembly process
 Materials used in design of product
 Magnetic “Label” template for location / level
 Ring & watch guards

Prevention- Process Failsafes

 Failsafing: Creating a control condition where the customer or employee can only take the
correct action while performing the process.

Prevention – Checklists

 Checklists are effective and efficient

  Formalize previous `lessons learned`

 Shares Best Practices

 Improvement is typically immediate and significant

Defining Quality

 Design quality vs Conformance Quality

 Design Quality
o Design (product) quality – the inherent value of the product in the market
place (the level of performance targeted by the design).
 Mercedes, Palliser hotel
 Conformance quality
o Conformance (process) quality – the degree to which the service or product
design specifications are met.
 Toyota, super 8
 Typically, organizations that target design quality also incorporate conformance
quality:

Quality as Fitness for Use

 According to Juran, the quality of a product is defined as fitness for use, consisting of 5
components:

 Quality of design

 Quality of conformance

 Availability

 Safety

 Field use

 Examples of “quality” products that might not meet the “fitness for use” criteria?

Technical Quality vs. Functional Quality

 Technical Quality
o Core element of the good or service
 Dentists medical knowledge and ability
 Functional quality
o Customers perception of how the good functions or the service is delivered
 Dentists manner/ people skills

Customer satisfaction

 Customers’ prior expectations and perception of performance affect their satisfaction:

 Satisfaction = (Perception of Performance) – (Expectation)
Service Guarantees

 Even after a service or product failure, a service guarantee can increase the customer’s
perception of performance.

 Effective Service Guarantees:

 Unconditional

 Easy to understand

 Meaningful

 Easy and painless to invoke

 Easy and quick to collect on

Quality management philosophies

 Six Sigma
o Goal: to reduce process variation to the point where only 3.4 defects per million are
produced by a process that involves a high volume of manufactured units or service
transactions.
o Provides a framework and methodologies to analyze and evaluate business processes
and reduce waste.
o “DMAIC” – Define, Measure, Analyze, Improve, Control
 PDCA cycle
o Developed by Walter Shewhart (1891-1967)
o Principle of continuous improvement

Quality certification

 ISO 9000
o A series of international “generic management system standards”
o Purpose: to facilitate international trade by providing a single set of standards that
people everywhere will recognize and respect.
o They are process standards (not product standards)
o they indicate how processes should be measured and documented from a quality view,
but do not prescribe specific tolerances for individual products
o ISO 9001:2015 (revised every 5 years), has been implemented by over 1.1 million
organizations worldwide.
 o Requires thorough documentation of processes and procedures - can be expensive and
time consuming:
o Registration audit: $10K – $30K, may take 2 years
 ISO 14000
o Primarily concerned with "environmental management“ regarding what the
organization does to
o minimize harmful effects on the environment caused by its activities
o achieve continual improvement of its environmental performance
o Over 324,000 organizations worldwide have achieved ISO 14001 certification
o This standard has several advantages:
 Positive public image and reduced exposure to liability
 Good systematic approach to pollution prevention through the minimization of
ecological impact of products and activities
 Compliance with regulatory requirements and opportunities for competitive
advantage
 ISO 26000
o Guidance on social and environmental responsibilities.
o Not intended as a certification standard (like ISO 9000 and ISO 14000), but rather a
voluntary guidance tool to help move organizations from “good intentions to good
actions” by:
 Developing an international consensus on what social responsibility means
 Providing guidance on translating principles into effective actions
 Refining and disseminating the information worldwide
o Organizational Governance
o Human Rights
o Labour Practices
o The Environment
o Fair Operating Practices
o Consumer Issues
o Community Involvement and Development

Quality graphical control tools

 Pareto Analysis
o Distinguishing the vital few (“80/20 rule”)
o Gather data on the frequency of various events
o Events are ranked in decreasing order of importance
o Graph displays:
o Histogram (bar chart) of frequencies
o Line graph of cumulative percentage
 Scatter diagrams
o Plot data points and visually interpret the results
 Root cause analysis- Fishbone diagram
 o Also know as cause and effect diagram and Ishikawa Diagram
o Keep asking ‘why?’ to determine the root cause of a problem

Overview of SQC

Measure of central tendency

Measure of dispersion

Sampling Errors
Control charts

 We use control charts to make inferences about the state (in control versus out of control) of
the process on the basis of one or more statistics of samples drawn from the on-going process

 First we must estimate the central value and likely range of variation of each statistic being
plotted (when the process is in control)

In control vs out of control

 In a state of control:

 The process is operating in its usual fashion

 The variations are only by random fluctuations (common causes)

 Out of control:

 The process is not operating in its usual way

 The variation is not purely random - assignable (or special) causes for the variability are
present

 Note: “Out of control” does not mean that a process is producing goods or services that
are bad
  it merely indicates that the process is not behaving in the way it is expected,
given what is known about the process.

Control chart types

Control charts-measurement by attributes (count)

1. Setting up the p-Chart (proportion defective)

a) Determine the average proportion defective from a number of samples.

total number of defectives from all samples

p
number of samples  sample size
b) Using the average and standard deviation, find the upper and lower control limits for the
process in question.

p (1  p )
sp 
n
n  sample size
UCL (upper control limit )  p  zs p
LCL (lower control limit )  p  zs p
 If the calculated LCL is a negative number, the LCL is equal to zero.

Control charts: measurement by variables

 Two charts used in tandem:

1. A chart for central tendency (x-chart )

 Average
 UCLX  X  3s X  X  A2 R
LCLX  X  3s X  X  A2 R
2. A chart for variability (we'll use R-chart).

 Range

 Both the process variability and process average must be in control before the
total process is said to be in

Additional reasons to investigate

Other Issues in the Use of SPC

 How Often to Sample? Depends on:

 Cost of sampling

 Variability of process

 Cost of quality faults (ex. pencils vs. pacemakers)

 Where to Monitor (Control) in a Multistage Process:

 Before “costly” stages in the process

 At the end, to ensure customer satisfaction

 At historically unreliable stages

 Near beginning to isolate supplier problems

 Why not monitor at almost every stage of the process?

  Too expensive

 Too slow

Process Capability

 Process capability measures whether or not the output will routinely (i.e., when the process is in
control) meet the design specifications.

 Specification limits:

 The upper (USL) and lower (LSL) specification limits are externally set and are not
affected by improving the process or sampling.

 Examples: -

 CSA (helmets, fire / electrical safety, etc.)

 NTSB Automobile crash-test ratings, emissions, etc.

 Measured by the relationship of the variation of individual values of the process with
the USL and LSL

 Each individual product must meet the specification

Process capability analysis

Process Analysis
Process Analysis

 Why chart the flow of customers, information and/or products through the stages of the
conversion process?
o Easier to understand (communication & training)
o Helps identify improvement opportunities

Process Improvement

 Recognize the need for change

o There are many “warning signs” that the business processes at your organization may
need improvement

 Benchmarking
o Benchmarking is the formal process of comparing an organization’s processes and
performance measures against top performers. (“How do they do it?”)
o The results can be used as targets for process improvement
o Categories of benchmarking:
 Internal
 Appropriate for organizations with multiple locations
 Competitive
 Often difficult to get information
 Functional
 E.g. LL. Bean (order entry)
 o John Deere (service parts logistics)
 Process Improvement
o Continuous process improvement (CPI)
o Never-ending process of achieving incremental improvements
 Tinker

 Employee Involvement
 Collaborative, cross-functional teams
 Need for training in problem / opportunity identification and resolution
 Adequate time to be creative
 Company culture is key:
 Willingness to invest in employees
 Willingness to delegate decision-making
 Disciplined approach to managing change
 Just in time/ lean production
 A coordinated approach that continuously reduces waste while also
improving quality.


 Just in time “Pull” Kanban System
 A manual, self-regulating system for controlling the flow of material.
Workers produce only when the Kanban ahead of them is empty,
thereby creating a “pull” system through the factory.


 “Pull” system minimizes unnecessary inventory that would accumulate
in a “push” system
 Inventory hides problems:
 “Just grab another one” attitude instead of “We need to fix the
problem”
 
Philosophy: “expose the rocks” hidden by the water (inventory)
o Once the rocks are exposed they can be fixed (continuous
improvement)
 Business Process Reengineering (BPR)
o Short term radical process improvement
o Reengineering is the process of rethinking and restructuring. It requires discontinuous
thinking.
o What causes the need for BPR?
 Typically a combination of:
 Technological advancements (Disruptive Technologies)
 Drastic improvement at a competitor
 Changing customer desires
o Tear down

Six Sigma at a Utility Service

 Employees in the field involved

o Better solutions
o Buy in/ pride
o Respect= empowering them
 Benefits of standardizing their utility trucks
o Employee safety
o Efficiency
o New employee training
o Employee satisfaction

Comparison of BPR and CPI