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MGT 301 (1)
Lecture 1

MGT 301 Lecture 1: Supply chain notes

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MGT 301
Paul C Vanderspek

What is supply chain management? 1/18/2017 7:55:00 PM Benefits of a good supply chain -AMR research-survey of top supply chain management firms: • Carry less inventory • Faster to market • More perfect orders than their competitors • Shorter cash cycle = days of inventory + AR + AP • Faster growth in sales Why companies do some things themselves -Quality control -Cost effective Vertical integration -Do something yourself in your distribution -Insourcing Horizontal integration -Outsourcing -Trend among a lot of companies -More specialization What is supply chain? -Consists of the flow of products and services from: • Raw materials manufacturers • Component and intermediate manufacturers • Final product manufacturers • Wholesalers, distributors, retailers to end customers -Connected by transportation and storage activities -Integrated through information, planning, coordination activities -Many large firms are moving away from in-house vertically integrated structures in SCM -DRAW -Tier 1 supplier sells directly to focal, manages tier 2 suppliers • Supply side is upstream -Tier 1 customer buys from focal • Customer side is downstream -Old paradigm • Vertically integrated companies • Limited IT • Single site, in house production • Focal firm owned/controlled most activities in the SC • Mass production • ST focus • Poor quality • Limited customer choice -New paradigm • Horizontally integrated • Focus on areas of specialization-core competencies • Voluntary, trust-based relationships with partners • All participants in the supply chain benefit • Boundaries between firms are blurry • Global, high quality, customer options Define SCM -Encompasses the planning and management of all activities involved in sourcing, conversion, logistics activities • Includes coordination and collaboration with channel partners -Design and management of seamless, value-added processes across organizational boundaries to meet the real needs of the end customer Importance of SCM -Who benefits most? firms with: • Large inventories • Large number of suppliers • Complex products • Customers with large purchasing budgets Foundations of SCM -Supply management -Operations -Logistics -Integration What is sourcing? -Goal: to ensure the reliable supply of materials and services to the firm at the lowest total cost What is operations? -Goal: the effective and efficient transformation of these materials and services into products What is logistics? -Goal: the effective and efficient flow and storage of these goods and services Important elements of SCM -Purchasing trends: • LT relationships • Supplier management o Supplier evaluation, selection, supply base optimization • Strategic partnerships -Operations trends: • Demand management: match demand to available capacity • Linking buyers and suppliers via MRP and SRP systems • Use JIT to improve the “pull” of materials to reduce inventory levels • Employ TQM to improve quality compliance among suppliers -Distribution trends: • Transportation management: tradeoff decisions between cost and timing of delivery/customer service via trucks, rail, water, air • Customer relationship management: strategies to ensure deliveries, resolve complaints, improve communications, determine service requirement • Network design: creating distribution networks based on tradeoff decisions between cost and sophistication of distribution system -Integration trends: • Supply chain process integration, performance measurement, risk management Current trends in SCM -Expanding the supply chain • US firms are expanding partnerships and building facilities in foreign markets • The expansion involves: o Breadth: foreign manufacturing, office and retail sites, foreign suppliers and customers o Depth: 2 , 3d rdtier suppliers and customers -Increasing supply chain responsiveness • Firms will increasingly need to be more flexible and responsive to customer needs • Supply chains will need to benchmark industry performance and meet and improve on a continuous basis • Responsiveness improvement will come from more effective and faster product and service delivery systems -The greening of supply chains • Producing, packaging, moving, storing, delivering and other supply chain activities can be harmful to the environment • Supply chains will work harder to reduce environmental degradation • 75% of US consumers influenced by a firm’s environmental friendliness reputation • Recycling and conservation are a growing alternative in response to high cost of natural resources -Reducing supply chain costs • Cost reduction achieved through: o Reduced purchasing costs, waste, excess inventory, non- value added activities • Continuous improvement through o Benchmarking: improve over competitor’s performance o Trial and error o Increased knowledge of supply chain processes Supply chain strategy 1/18/2017 7:55:00 PM Driving shareholder value with your supply chain -DRAW A SC view -Each activity in a process should add value to the preceding activities • Waste and unnecessary cost should be eliminated -DRAW Operations strategy -DRAW Market analysis -Understand what the customers want and how to provide it • Market segmentation • Needs assessment Competitive priorities and capabilities -Competitive priorities: • The critical dimensions that a process or SC must possess to satisfy its internal or external customers, both now and in the future -Competitive capabilities: • The cost, quality, time and flexibility dimensions that a process or supply chain actually possesses and is able to deliver Order winners and qualifiers -Order winners • A criterion customers use to differentiate the services or products of one firm from those of another -Order qualifiers • Minimum level required from a set of criteria for a firm to do business in a particular market segment -Low-cost operations • Delivering a service or a product at the lowest possible cost • Processes must be designed and operated to make them efficient -Top quality • Delivering an outstanding service or product • May require a high level of customer contact and may require superior product features -Delivery speed • Quickly filling a customer’s order • Design processes to reduce lead time -On-time delivery • Meeting delivery-time promises • Planning processes used to increase percent of customer orders shipped when promised -Development speed • Quickly introduced a new service or a product • Cross-functional integration and involvement of critical external suppliers -Customization • Satisfying the unique needs of each customer by changing service or product designs • Low volume, close customer contact, easily reconfigured -Variety • Handling a wide assortment of services or products efficiently • Capable of larger volumes than processes supporting customization -Volume flexibility • Accelerating or decelerating the rate of production of services or products quickly to handle large fluctuations in demand • Processes must be designed for excess capability and excess inventory Production and inventory strategies and uncertainty -DRAW -ETO: engineer to order • Expensive, takes a long time -MTO: make/manufacture to order • Some SC decisions based on forecasts (like buying materials) -ATO: assemble to order • Ex: electronics -MTS: make/manufacture to stock • Basic products (it is what it is) • Fast and cheap -Mass customization • Achieving both economy of scale (price and short amount of time) and economy of scope (customization) • Postponement: delaying differentiation • Have lead time and cost of MTS with customization of MTO • Trying to delay customization as long as possible (ex: painting cars) -Gets traded off: Customization, time, cost Process structure in services -DRAW Manufacturing process layout (external process environment) -Product layout (MTS) • Continuous, repetitive -Process layout (MTO) • Intermittent -Project layout Characteristics of product layout -Limited flexibility, product offerings -Fixed routings -Low WIP -Short manufacturing cycle times -Dedicated equipment -High volume manufacturing Characteristics of process layout -High WIP, mix-low volume, variety of products -Long queue times, manufacturing cycle times -Variable routings -Multi-purpose equipment -Job shop Service and manufacturing processes -DRAW An overview of service operations -Some of the differences between goods and services are reviewed here: • Services can’t be inventoried, often unique, high customer- service interaction (hard to automate/standardize services), decentralized (can’t keep inventory or transport products) Aggregate production planning for MTO firms (including service firms) -Chase strategy (chase after demand) • Adjusts capacity to match the demand pattern • Firms hires and lays off workers to match production to demand • Workforce fluctuates but finished goods inventory remains constant • Works well for MTO firms • DRAW Aggregate production plan for MTS firms -Level strategy • Relies on a constant output rate and capacity • Vary inventory and backlog levels according to fluctuating demand pattern • Workforce levels stay constant and firm relies on fluctuating finished goods inventories and backlogs to meet demand • Works well for MTS manufacturing firms • DRAW Equations -Total production = total demand + ending inventory – beg. inventory -EI = beg. inventory + production – sales -Beg. inventory = ending inventory – 1 Process structure in services -Customer contact: the extent to which the customer is present, is actively involved, and receives personal attention during the service process -Customization: service level ranging from high customized to standardized -Process divergence: the extent to which the process is highly customized with considerable latitude as to how its tasks are performed -Flow: how the work progresses through the sequence of steps in a process Customer-contact matrix -DRAW Service process structuring -Front office -Hybrid office -Back office Process structure in manufacturing -Process choice: a way of structuring the process by organizing resources around the process or organizing them around the products • Job process • Batch process (small or large) • Line process • Continuous-flow -DRAW Production and inventory strategies -Engineer-to-order -Make-to-order -Assemble-to-order • Postponement • Mass customization -Make-to-stock • Mass production Strategic implications -Efficient SCs • Build-to-stock -Responsive SCs • Assemble-to-order • Make-to-order • Engineer-to-order Functional products characteristics -Low cost, profit margin, forecast variability -Long life cycle -Staple items -Limited product options and variety -Stable demand -Physical costs Innovative products characteristics -High cost, profit margin, forecast variability -Short life cycle -Fashion items -Many product options and variety -Season demand -Market mediation costs: supply doesn’t equal demand (excess, shortages) Matching the SC to the product -DRAW Environments Factor Efficient (functional) Responsive SCs (innovative) SCs Demand Predictable, low forecast Unpredictable, high errors forecast errors Competitive priorities Low cost, consistent Development speed, quality, on-time delivery fast delivery times, customization, volume flexibility, variety, top quality New-service/product Infrequent Frequent introduction Contribution margin Low High Product variety Low High Design features Factor Efficient SCs Responsive SCs Operation strategy MTS or standardized ATO, MTO, customized services or products, service or products, emphasize high emphasize variety volumes Capacity cushion Low High Inventory investment Low, enable high As needed to enable inventory turns fast delivery time Lead time Shorten, but don’t Shorten aggressively increase cost Supplier selection Emphasize low prices, Emphasize fast delivery consistent quality, on- time, customization, time delivery variety, volume flexibility, top quality SC design link to processes -DRAW Process strategy decisions -Customer involvement • Advantages o Increased net value to the customer o Better quality, faster delivery, greater flexibility, lower cost o Reduction in product, shipping, inventory costs o Coordination across the SC • Disadvantages o Can be disruptive o Managing timing and volume can be challenging o Quality measurement can be difficult o Requires interpersonal skills o Multiple locations may be necessary -Resource flexibility • Workforce: flexible • Equipment: general-purpose, special-purpose • DRAW? -Capital intensity Sourcing decisions: the make-or-buy decision -Buy: horizontal integration • Outsourcing: buying materials and components from suppliers instead of making them in-house o Trend has moved toward outsourcing • Reasons for buying/outsourcing o Cost advantage: especially for components that are non- vital to organization’s operations o Insufficient capacity: a firm may be at or near capacity o Lack of expertise: firm may not have the necessary tech and expertise o Quality: suppliers have better tech, process, skilled labor, advantage of economy of scale -Make: vertical integration • Insourcing: producing item in house • Backward integration: acquiring sources of supply • Forward integration: acquiring customer’s operations • Reasons for making/insourcing: o Protect proprietary tech o No competent supplier o Better quality control o Use existing idle capacity o Control of logistics: lead-time transportation, warehousing cost o Lower cost Lean 1/18/2017 7:55:00 PM First, traditional mass production -Goal is lowest unit cost -Large batch sizes -Push method of material flow • Make the amount that’s efficient and “push” it down the SC -Quality often seen as secondary to efficiency -Fragmented or “silo” production What is “lean”? -Lean is a systematic approach to identifying and eliminating waste or non- value added activity in business processes -Value added: any activity that increases market form or function of the product • Things that the consumer is willing to pay for -Non-value added Lean principles -Produce: • Only the product the customer wants, as quickly as the customer wants, with the features the customer wants • Perfect quality • Minimum lead time • No wasted resources • Methods that develop workers Lean philosophy -Precisely specify value for each product -ID the value stream -Make value flow without interruption -Let the customer pull value from the producer -Pursue perfection What’s waste? -Excess inventory: supply of items held by the firm to meet demand • Symptoms: o Excess storage and handling o High disposal costs o Extra rework • Causes: o Poor quality o Unbalanced workload o Poor suppliers o Long set up times -Overproduction: processing more units than are necessary • Symptoms: o Extra inventory o Excess floor space for storage o High utility costs • Causes: o Complexity o Long set up times o Poor forecast -Defects: waste due to unnecessary scrap and rework • Symptoms: o Rework, scrap, repairs o Customer returns o Impact to brand identity • Causes: o Poor process controls o Insufficient maintenance o Poor training o Bad product design o Don’t understand customer requirements -Waiting: resources wasted waiting for work • Symptoms: o Underutilized resources o Low productivity o Idle equipment o Large waiting rooms • Causes: o Unbalanced workload o Long set up times o Poor layout -Over-processing: excessive or unnecessary operations • Symptoms: o Extra equipment o Long lead times o Extra material movement o Poor productivity • Causes: o Just in case logic o Lack of communication o Redundant approvals and inspections o Poorly defined customer requirements -Unnecessary movement: excessive activity • Symptoms: o Long walking distances o Excess handling o Waiting o Ergonomic issues • Causes: o Poor layout and organization -Unnecessary transportation: moving an input without changing its characteristics • Symptoms: o Extra handling equipment o Large storage areas o Overstaffing o Product damage • Causes: o Poor layout and organization o Unlevel schedules -Underutilized people Characteristics of lean systems -Pull method of materials flow • Customer or system signals production -Quality at the source • Poka yoke-mistake proofing o Tool to help us build quality at the source -Small lot sizes (batch) • Ultimate goal is a batch size of one -Uniform workstation loads • Takt time -Preventative maintenance • Low inventory increases importance of reliability -Close supplier ties • Frequent, small deliveries -Flexible workforce -Line flows -Automated production -Standardized components and work methods The Toyota Way -DRAW 14 principles -Base your management decisions on a LT philosophy, even at the expense of ST financial goals -Create continuous process flow to bring problems to the surface • Design work processes to achieve high value-added, continuous flow • Takt-time planning • One-piece flow o Benefits: builds in quality, creates flexibility, creates higher productivity, frees up floor space, improves safety, improves morale, reduces cost of inventory o Requires the ability to change from one part/SKU to another quickly (setup) o SMED: single minute exchange of dies ▪ Or single-digit setup: Change from one part to another in less than 10 minutes o Long setups from one product another inspire large batches -Use “pull” systems to avoid overproduction: system dictates production • Provide your downstream customers with what they want, when they want and in the quantity they want • Minimize WIP and warehouse inventory, restock more frequently based on customer demand • Be responsive to day-to-day shifts in customer demand rather than relying on computer schedules and systems to track wasteful inventory • Kanban systems help control inventory • Pull is better than push • Pull system: work is released or moves based on the status of the system o Places a natural limit on WIP inventory -Level out the workload (Heijunka) • 3 M’s: o Muda waste o Muri overburden o Mura unevenness • Take your time -Build a culture of stopping to fix problems, to get quality right the first time • Quality for the customer drives your value proposition • Use all of the modern quality methods available • Build into your equipment the capability of detecting problems and stopping itself • Build into your organization the ability to quickly solve problems • Build into your culture the philosophy to slow down or stop to get quality right the first time -Standardized tasks are the foundation for continuous improvement and employee empowerment • Use stable/repeating methods everywhere to maintain the predictability, regular timing, and regular output of your processes o Foundation for flow and pull • Capture the accumulated learning about a process up to a point in time by standardizing today’s best practices -Use visual control so that no problems are hidden • Use simple visual indicators to help people determine immediately whether they are in standard condition or deviating from it • Avoid using computer screens if they draw the worker’s attention away from the work • Reduce your reports to one piece of paper wherever possible, even for you most important financial decisions -Use visual control so that no problems are hidden • 5 S’s o Sort o Straighten (orderliness) o Shine (cleanliness) o Standardize (create rules) o Sustain (self-discipline) • Red tag system -Use only reliable, thoroughly tested technology that serves your people and processes • Use technology to support, not replace people • New tech is often unreliable and difficult to standardize and endangers “flow” • Reject technologies that conflict with your culture • Nevertheless, encourage your people to explore new technologies when looking for new ways to do work -Grow leaders who thoroughly understand the work, live the philosophy, teach it to others • Grow leaders from within • Leaders must be the role model for the organization’s philosophy (not just good people skills and task managers) • A good leader must understand the daily work in great detail -Develop exceptional people and teams who follow your company’s philosophy • Create a strong, stable culture in which your company’s values and beliefs are widely shared and lived out over many years • Train exceptional individuals and teams to work within corporate philosophy • Use cross-functional teams • Teach teamwork skills (teamwork is learned) -Respect your extended network of partners and suppliers by challenging them and helping them improve • Treat partners and suppliers as an extension of your business • Challenge your outside partners to grow and develop -Go and see for yourself to thoroughly understand the situation (genchi genbutsu) • Solve problems by personally going to the source and observing and verifying data rather than theorizing on the basis of what others tell you • Think and speak based on personally-verified data -Make decisions slowly by consensus, thoroughly considering all options (implement decisions rapidly) • Don’t pick a single solution and proceed down that path until you have explored all of the options thoroughly -Become a learning organization through relentless reflection (hansei) and continuous improvement (kaizen) • Once you have established a stable process, use continuous improvement tools to identify and correct the root cause of problems • Design processes that require almost no inventory • Develop the organizational knowledge base by developing stable personnel, slow promotion, and very careful succession systems • The 5 reasons why: o DRAW Basic steps in a changeover -Preparation, checking materials, etc. -Removing tools, mounting tools, etc. -Measurements, settings, calibration -Trial runs and adjustments Value stream mapping -Value stream: all steps (value added and non-value added) required to complete a product or service from beginning to end -Value stream maps allow us to “see the waste” by documenting inventory, capacity or production imbalances, waiting, overproduction, etc. Operational benefits of lean -Reduce space requirements, inventory investment, lead times, paperwork with simple planning systems -Increase labor productivity, equipment utilization, product quality -Valid priorities for scheduling -Workforce participation Popular lean methodology -Define value from the customer’s view, the value stream and eliminate waste -Make it “flow” -“Pull” from the customer back -Strive for perfection Quality, statistical process control, 6 sigma 1/18/2017 7:55:00 PM The Effects of Poor Quality -If one sets an acceptable quality level of 99%, the results are (examples): • At least one misspelled word on every page of a book • Unsafe drinking water almost 4 days each year The origins of 6 sigma quality -Near quality perfection (the statistical likelihood of non-defects 99.99966% of the time) (3.4 defects per million-DPM) -Pioneered by Motorola in 1987 -A statistics-based decision-making framework designed to make significant quality improvements in value-adding processes -PPM=parts per million Impact of quality improvement (simple view) -DRAW Definitions of quality -“A company with a firmly established total quality mindset is totally dedicated to the customer’s satisfaction in every way possible” Garvin’s 8 dimensions of quality-goods -Quality of design • Performance • Features • Serviceability • Aesthetics • Perceived quality -Quality of process conformance to design specs • Reliability • Conformance • Durability TQM (total quality management) wheel -DRAW Tools and techniques for TQM -Key to good quality is good management -In order to create the change, management needs to train people in the tools and techniques to improve quality 7 basic TQM tools -Pareto analysis • 80% of wealth is controlled by 20% of people • Juran applied to business activities o The “vital few and the trivial many” • A small number of causes (20%) is responsible for a large portion (80%) of the effect -Flow charts (or value stream maps) • Allow team members to see the actual flow of a process, not perceived flow • Able to capture all steps rather than just what can be seen from one spot • Block diagrams are similar -Checklists • Structured lists or frameworks of likely causes which can be worked through systematically • When new issues are found they are added to the list -Cause and effect diagrams • Categories: material, machinery, methods, manpower -Histograms • Used to represent this information in visual form -Scatter diagrams • Used to plot variables against each other and help identify where there is a correlation or other pattern -Control charts (SPC) Statistical process control (SPC) -The application of statistical techniques to determine whether the output of a process conforms to the product or service design (what the customer wants) Stuff happens -Defects and errors will occur -SPC is about understanding and controlling those defects -Goal: build quality in at the source 2 types of variation -Common cause variation: due to the process itself • These errors are unassignable, chance, random, common causes o Ex: driving to work, some days take longer o Process capability determined by inherent common causes of variation (ex: poor hiring and training) o Unless a change is made in the process by management, the process’s capability will remain the same • DRAW -Special or assignable cause variation: due to events external to the usual functioning of the system • Ex: driving to work and there’s construction • Change of operator, procedures, new type of raw materials and breakages • Uncontrolled variation leads to high costs and unknown quality o Also makes it impossible to evaluate any attempts to improve a system • DRAW Control charts -DRAW -UCL: upper control limit -LCL: lower control limit SPC control charts for variables -X (bar) chart: used to measure the mean of the process output • Ex: average ounces in a 12 oz. soda is likely very close to 12 oz. -R chart: measures output variability • Ex: range of fill in a 12 oz. soda sample might be 11.85-12.05 SPC-process capability -A: Cp < 1 (unacceptable), 2 sigma -B: Cp = 1 (barely acceptable), 3 sigma -C: 5-6 sigma, ideal outcome • If it’s 6 sigma the Cp=2 -D: Unacceptable, fairly high likelihood of getting a bad outcome SPC-control vs. capability -DRAW 6 sigma=TQM + SPC + aggressive goals -6-sigma quality = 3.4 defects per million transactions -Typical processes generate about 35,000 defects per million (about 3.5 sigma) -Created by Motorola and adopted by major corporations 6 sigma-focuses on reducing spread and centering the process -DRAW 6 sigma -DRAW -2 sigma: Cp < 1 -4 sigma: Cp = 1.33 (minimum you want) -6 sigma: Cp = 2 Quality Gurus -W. Edwards Deming • Widely credited with leading Japanese quality revolution after being ignored by US companies • Quality as management responsibility that required fundamental change and a LT (3-5 years) time horizon • Focused on reduction of variation through tools and techniques (Statistical process control) • Quality as an organization-wide activity, rather than technical task for quality specialists • 14 points-How many are management issues vs. worker issues o Create consistency of purpose towards improvement of service and product o Adopt the new philosophy and institute leadership o Cease dependence on mass inspection o End the practice of awarding business on the basis of price tag along o Improve constantly and forever the system of production (find problems) o Institute modern methods of on-the-job training and a vigorous program of education and self-improvement o Drive out fear o Break down barrier between departments o Eliminate numerical goals/slogans/exhortations and work standards/numerical quotas o Remove barriers that rob people of pride of workmanship o Structure top management to empower them to achieve the above 13 points • Approach to CI: o Since variation decreases customer’s ability to rely on the dependability and uniformity of outputs, managers must understand how to reduce and control variation ▪ Differentiate between common and special causes of variation ▪ Resolve special causes of variation ▪ Common variation can only be resolved by management action o Use continuous improvement (CI) methodology: PDCA cycle ▪ DRAW • View of quality o Common variation is an inherent part of any process o Managers are responsible for the common variation in a system-they set the policies and procedures o Workers aren’t responsible for the problems of the system (common causes of variation) ▪ The system primarily determines the performance of workers o Only management can change the system o Assumes that lack of competitiveness is a result of “failure of top management to manage” -Joseph Juran • Problems with the implementation of quality control resulted in Juran’s invitation to Japan in 1954 • This led to a shift from the statistics-based QC approaches to an overall management principle incorporating the previous ideas • Focused arguments on the cost of quality and used data to shock management into action • Defines quality as “fitness for use”, not just conformance to specifications • All aspects must be managed and analyzed • Categorize costs of quality o DRAW -Philip Crosby • Defined quality as conformance to requirements • No such thing as quality problem • Quality is free • “Quality management leads to savings which pays for itself, this “quality is free”” • Goal of quality improvement is “0 defects” • Believed that impact could be made in a few months and stir management action • DRAW -Genichi Taguchi • Cost of quality isn’t good part = free or bad part = costly (spectrum of quality costs) • Further a part is from perfect, more likely it is to cost us money at some point • DRAW Important SCM principle -Variability in a SC will be buffered by inventory, capacity, time -Many quality programs and tools are focused on reducing variability SPC-process capability -Use process capability ratio or index measures to determine if our process is capable of meeting our expectations -Process capability ratio: EQUATION -Process capability index: EQUATION 6 sigma process -DMAIC: • Define the problem or project based on customer needs and priorities • Measure the process, output, defects (SPC) • Analyze the data collected to discover and verify causes of the problem (hypothesis testing, correlation) • Improve the process using quality tools • Control the process going forward to maintain progress Statistical process control -Allows firms to visually monitor process performance -Compare the performance to desired levels or standards -Take corrective steps quickly before process variability gets out of control and damages products, services, customers -Firms gather process performance data, create control charts to monitor process variability, then collect sample measurements of the process over time -Variance: in process are either natural variation or assignable variations • Natural variation: random environmental noise that’s expected • Assignable variation: traced to a specific cause and fixed -Samples: samples measures are either variable or attribute data • Variable data: continuous (weight, time, length) • Attribute data: indicate the presence of some attribute (color, satisfaction, workability, beauty) -Control charts • X-chart: used to track the central tendency of the sample means • R-chart: used to track sample ranges • Gather data if the process is already in control • Calculate the overall mean of all the samples and the average range of all the samples o Use x means to calculate the UCL and LCL • Use the means and control limits to construct control charts • EQUATIONS Facility Location Decisions 1/18/2017 7:55:00 PM Introduction -Facility location has a LT impact on the SC and must be part of the firm’s strategy • Facility location must be part of the firm’s SC strategy • Companies can locate anywhere in the world due to increased globalization, tech, transportation and open markets • Location still matters-industry clusters show that innovation and competition are geographically concentrated • Global location decisions involve location of the facility, defining its strategic role, and identifying the markets it serves Location strategies -Dr. Kasra Kerdows suggests 6 locations strategy roles: • Offshore factory: low cost investment and labor costs • Source factory: plant management involved in supplier selection and production planning • Server factory: firm uses government incentives and low exchange risk and tariff barriers to reduce taxes and logistics cost • Contributor factory: firm involved in product development, production planning, procurement decisions, developing suppliers • Outpost factory: embedded network of suppliers, competitors, research facilities for materials, components and products • Lead factory: Firm is source of product and process innovation and competitive advantage of the entire organization Critical location factors -Competitiveness of nations: degree to which a country produces goods and services which meet the needs of international markets, while maintaining or expanding personal real income over time • Made up of 323 criteria, grouped into 4 factors: o Economic performance o Government efficiency o Business efficiency o Infrastructure -Government taxes and incentives • Several levels of government must be considered when evaluating potential locations • Countries with high tariffs discourage companies from importing goods into the country • High tariffs encourage multinational corporations to set up factories to produce locally • Many countries have set up foreign trade zones (FTZs) where materials are imported duty-free as long as the imports are used as inputs to production of goods -Current stability • Impacts business costs and consequently location decisions -Access and proximity to markets/customers • In the service industry, proximity to customers is even more critical • “Trend in manufacturing is to be within delivery proximity of your customers, logistics timelines and costs are concerns (reinforces a clustering effect of suppliers and producers to places that offer lower cost labor and real estate)” -Environmental issues • Global warming, air pollution, acid rain are increasingly debated as the price of industrialization • Trade liberalization creates need for environmental cooperation -Labor issues • Labor availability, productivity, skill • Unemployment and underemployment rates • Wage rates, turnover rates, labor force competitors -Right-to-work laws • Right of employees to decide whether or not to join or support a union -Access to suppliers and cost • Supplier proximity influences the delivery of materials and effectiveness of the SC -Utility availability and cost • Supply of electricity hasn’t kept pace with the high speed of development • In heavy industries the availability and cost of energy are critical considerations • Telecommunication costs have dropped dramatically o Many organizations now have back office operations and call centers internationally to serve the US market -Quality-of-life issues: defined as “a feeling of well-being, fulfillment, or satisfaction resulting from factors in the external environment” • Education, economy, natural environment, social environment, culture/recreation, health, government/politics, mobility, public safety -Land availability and costs • As land and construction costs in big cities continue to escalate, the trend is to locate in the suburbs and rural areas Facility location models -Weighted-factor rating model: method used to compare the attractiveness of several locations along a number of quantitative and qualitative dimensions • Identify the factors • Assign weights to each factor (weights add to 1) 37.5 • Determine a score for each factor • Multiply the factor score by the weight, then sum the weighted scores • Location with the highest total weighted score is the recommended location -Break-even model: useful location analysis technique when fixed and variable costs can be determined • Identify locations to be considered • Determine the fixed cost of land, property taxes, insurance, equipment, buildings • Determine the unit variable cost, materials, utilities, transportation costs • Construct the total cost lines • Determine the break-even points on the graph • Identify the range over which each location has the lower cost -Center-of-gravity model: involves mapping all the market locations on an x, y-coordinate grid and then finding a central location that’s closest to the markets with the highest demand • Add sales, use that number to find weights Purchasing law and ethics 1/18/2017 7:55:00 PM What is the law of agency? -Purchasing agent -Employer -Act in best interest of employer Purchasing ethics -Fiduciary duty -Acting as an agent • What’s required by law • What’s your company policy and your own standard What happens if you violate your fiduciary responsibility? -Civil and legal consequences Elements of contract law -Offer: a proposal by one person that he/she is willing to do something for certain terms • An RFQ (request for quote) is NOT an offer-it’s a solicitation for bids o Response to an RFQ by the suppliers is an offer -Acceptance: contract doesn’t exist until the offer is formally accepted • Meeting of the minds-very consistent -Consideration: a form of mutual obligation Contract law -Essential elements of a contract • Offer, acceptance, consideration -Competent parties/mutual assent • Principal or qualified agent • Own free will • Willingness to enter into agreement and be bound by terms • Not fraudulent -Legal subject matter Breach of contract -Any failure to perform to the terms of the contract Contract acceptance -Agree -Meeting of minds -Not counteroffer -Terms and conditions Common examples of breach -Supplier: quantity not right, late, quality failing -Buyers: pay late Types of damages allowed -Restitution: money the plaintiff actually paid to the defendant -Reliance: money the plaintiff lost because he/she relied on defendant’s commitment to contractual obligations -Expectancy: money the plaintiff was hoping to gain from the contract Legal and ethical key contract terms -Price: most important part -FOB (free on board) • Origin • Destination -Severability -Force majeure -Patent indemnification -Assignment Acceptance or rejection of goods -Not contract acceptance Types of unethical behavior -Reciprocity: forcing supplier to also be buyer -Personal buying: theft -Accepting supplier favors -Sharp practices: lying, deception, phantom quotes (made up to get a better price) -Financial conflicts of interest Buyers’ Ethics -Lots of pressure to perform on buyers and sellers How companies support ethical behavior -Training -Incentives -Look at how they’re putting pressure on employees -Hotlines to report unethical behavior Forecasting 1/18/2017 7:55:00 PM Introduction -Provides an estimate of future demand -Goal is to minimize forecast error -Identify facts that influence demand • What are they? • Will these factors continue? -Improved forecasts benefit all trading partners with • Lower inventories • Reduced stock-outs • Smoother production plans • Reduced costs • Improved customer service -Lead time: need time to make forecast decisions Matching supply and demand -Companies must accurately forecast demand to: • Produce and deliver the right quantities • Satisfy customers • Optimize costs -Goal: better matching of supply and demand to: • Optimal levels of cost, quantity, customer service -Problems that affect product and delivery will have ramifications throughout the chain Key decisions -Deciding what to forecast • Level of aggregation • Units of measure -Choosing the type of forecasting technique • Judgment methods: qualitative • Causal methods: quantitative • Time-series analysis: quantitative • Trend projection using regression: quantitative General forecast accuracy relationships -DRAW -Sometimes companies need to make LT forecast decisions (ex: new building) Forecasting techniques -Qualitative forecasting: based on opinion and intuition • Generally used when data are limited, unavailable, not currently relevant • Forecast depends on skill and experience of the forecaster and available information • 4 qualitative models used are: o Jury of executive opinion o Delphi method o Sales force composite o Consumer survey -Quantitative forecasting: mathematical models and historical data • Time series models are the most frequently used o Historical data is used to predict future demand o Assumes that the future is an extension of the past o Data should be plotted to detect for these components: ▪ Trend variations: either increasing or decreasing ▪ Cyclical variations: wavelike movements that are >1 year ▪ Seasonal variations: show peaks and valleys that repeat over a consistent interval (hours, days, weeks, months, seasons) ▪ Random variations: due to unexpected/unpredictable events ▪ Irregular variability/outliers: something that’s far out of line compared to other data points • Associative (cause and effect) o Regression analysis o One or more factors (independent variables) predict future demand -Generally recommended to use a combination of quantitative and qualitative techniques Demand patterns -DRAW Product life cycle and forecasting -DRAW Time series forecasting models -Naïve forecasting model: last period’s actual demand is used as this period’s forecast • EQUATION -Simple moving average forecasting model: simple moving average forecasting method uses historical data to generate a forecast • Works well when demand is fairly stable over time o Forecast for period t+1 = average of prior end months (n) of actual sales data • Smoothing model: example Simple Moving Average lag behind trend o Bias: under forecasting -Weighted moving average: based on an n-period weighted moving average • Ex: F4 = 1/3 (A1 + A2 + A3) -Exponential smoothing: A weighted moving average in which the forecast for the next period’s demand is the current period’s forecast adjusted by a fraction of the difference between the current period’s actual demand and its forecast • Only 2 data points are needed -Trend-adjusted exponential smoothing: trend component in the time series shows a systematic upward/downward trend in the data over time -Linear trend: trend can be estimated using simple linear regression to fit a line to a time series Linear regression -Dependent variable (Y) is related to 1+ independent variables (X) by a linear equation -Independent variables are assumed to “cause” the results observed in the past -Determines slope and intercept -Simple linear regression model is a straight line -Sample correlation coefficient, r • Measures the direction and strength of the relationship between the independent variable and the dependent variable • -1
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