Introduction

Tuesday, October 24, 2017 12:29 AM

Basic concepts Challenges in Operations

- Business plan = What to do + How to make it successful - Global op & distribution:

○ Coordinate work & rel among diverse org
- Business ultimate goal: Sustainable + Profitable growth ○ Optimize global supply, production, distribution network

- Business model: Crucial activities → Achieve business goals - Global competition:

○ Trad & Emerging performance metrics
- Business model canvas: Include ○ Tech, innovation
○ Value propos ○ Social responsibility, work-life quality
○ Key partners, key activities, key res
○ Customer rel, customer seg, channels - Customer-centric op:
○ Cost structure, revenue stream ○ Eff vs Customer satisfaction
⇒ Help org discuss about new/existing business ○ Value-added service (VAT) as competitive weapon
Sales support, field support, …
- Core func of business:
○ Design & Development: Product/Service
○ Marketing: Manage customer
○ Operation: Utilize res, plan & Execute workflow

ISOM 2700 Page 1

Operations Strategy
Tuesday, October 24, 2017 12:29 AM

Strategy Hierachy

Basic Concepts

- Operation: Manu/Service proc

○ Transform res (employed by business) → products
(desired by customers
○ Analyze capac, labor & materials need over time

- Supply chain:
○ Move info/material to/from manu/service proc
○ 2 ends:
▪ Input ends: plants, warehouses
▪ Output end: customers
○ Components:
▪ Logistics: Move product
▪ Warehousing proc: Locate products for quick
delivery - Business strategy:
○ Define scope of each business unit by:
▪ Product attributes to offer
▪ Market seg to serve
○ Required analysis:
▪ Market cond (External)
▪ Distinctive competencies (Internal)
Operating Model
- Distinctive competencies: Company op capab (peo, proc, tech)
○ Contribute significant value to customers
- Goal: Align peo, proc & tech → Support business strategy → Max ○ Difficult to imitate by competitors
customer value
- Competitive prio: Critical op dim must executed → Satisfy customers
- Concerned components of business model canvas: cost, quality, flexibility, delivery performance, …
○ Key activities ○ Best match competitive pos + res + capab
○ Key resources ○ Types:
○ Key partners ▪ Order qualifier: Basic characteristics must presented by product/service
Restaurant service: hygiene
- Target operating model (TOM): ▪ Order winner: Characteristic stand out competition
○ Help deal with business changes over time
○ Provide foundation & flexibility for firm → Execute new initiatives - How to sustain competitive adv:
○ Continuously create new order winner
- Operating model canvas: POLISM elements ○ Achieve ≥ 2 order winners at once
○ Proc
○ Org
○ Loc (+ assets on loc)
○ Info sys
○ Suppliers (who + what rel)
Competitive advantages/Value disciplines
○ Management sys
⇒ Help design op & org → Deliver value propos to target customers
- Firm must achieve 1 + perform relatively well other 2
○ Product leadership: Differentiation

○ Customer intimacy: Focus product dev, manu around individual customers

Identify most profitable customers
→ Serve well + Build long-term rel (loyalty)
Strategic Fit
○
How well org match res & cap with market opportunities
○ Op excellence: Do same thing but more eff than competitors
→ Reliable products/services + Competitive prices

- ↑ Op cap → ↑ strategic impact: 4 stages

Walmart: "Everyday low price"

Source product from low cost producers globally
Sell products with little design changes, low demand uncertainty

Dell: Custom-made computer at reasonable price

Different marketing channels for retail vs business customer

ISOM 2700 Page 2

 Source product from low cost producers globally
Sell products with little design changes, low demand uncertainty

Dell: Custom-made computer at reasonable price

Different marketing channels for retail vs business customer
Responsive supply chain → ↓ Delay between ordering & fulfillment

- Require consistency between:

○ Competitve adv
○ Proc architecture + Managerial policies

- Decision maker ≠ Manager deriving overall strategies, due to delegation

→ Inconsistent Operations Frontier
Invest in Flexible Manu Sys (FMS), still produce limited product types, in large vol

- Curve, concave
- Cover ALL current industry positions
- Point on frontier represent tradeoffs

ISOM 2700 Page 3

Strategic Issues of Supply Chain Design
Tuesday, October 24, 2017 12:29 AM
Supply Chain Model: Push vs Pull

- Push (Eff based): Company don't know actual demand, only forecast

Bullwhip effect
In supply chain: Order variability amplified upstream

- Pull sys (Responsive based): Confirm sales → Pull other activities in supply chain

Supply chain integration

Establish params & boundaries for governing rel with supplier chain & customers

- Causes:
- Vertical integration:
○ Data sharing in supply chain not transparent
○ Forward: Gain ownership/control over (downstream) customers (distributors, retailers)
○ Inflated order (due to fear of insufficient fulfillment)
○ Backward: Gain owership/control over (upstream) suppliers
○ Retail promotion (↑ demand fluctuation)
○ Virtual: Integrate partnering suppliers through IT → Tigher supply-chain collaboration
○ Forward buying (due to vol, transport, … discount)
- Outsourcing: Allocate specific business proc to external service provider
- Solution: ○ NOT as:
○ Avoid multiple demand forecast ▪ Sub-contracting (Employ, not integrate specialized supplier)
→ Make decision based on end customers, NOT on immediate downstream partner ▪ Partnership sourcing (for key components/parts → Require strong cooperative rel)
Point-of-sale (POS) data ▪ Make-or-buy decision

○ Smaller batches in ○ Causes

▪ Order ▪ Limited knowledge/cap
▪ Logistics: Use third-party logistics (3PL) → Consolidate loads from multiple ▪ Financial driven
suppliers before shipping to customer
▪ Org driven: Outsource nonessential proc → Focus on core business proc
▪ ↓ Risk:
○ Eliminate gaming (excessive ordering) when shortage:
□ Transform fixed cost → variable cost
▪ Stringent cancellation policies
□ When uncertain market outlook
▪ Acceptable order amount based on past sale record
□ ↓ Need to hire in-house → ↓ Op cost
▪ Timely sharing of inventory info

○ Issues:
○ Stabilize prices & demand: Inform business partners before promotional activities
→ Better prepare ▪ Exposure of confidential data
▪ Complicated work coordination & rel
Difficult to deal with outsourcing provider when schedule not met
○ ↑ Integration (global optimization)
▪ Hidden costs
Work culture conflict, geo distance, …
- Challenges: Local optimization (Business partner make decision on own interest)
▪ Lack of customer focus: Outsourcing provider work with mutliple org

Mass customization
Supply chain operations reference (SCOR) model

- Def:
○ Mass production + Customization, without ↓ eff
○ Customized products with price ≈ Mass-produced
- How:
○ Modular design: Handle customized order without extra work
Computer = Monitor + RAM + Hard drive + …
○ Process postponement: Wait until POS → Last-minute
customization
Paint shop: Stock basic colors → Mix to create various colors
demanded
○ Adaptive customization: Customized features as part of
product design
Print multiple languages on packaging materials
- Usage:
○ Address & Communicate supply chain management decision
○ Describe business proc
○ Explain proc along supply chain → Help improvement
- Components:
○ SCOR proc: 4 lvl: General (1 - 3) + Company specific (4)
▪ 1: Process: Identify scope from major procs: Plan, Source, Make, Deliver, Return,
Enable
▪ 2: Process category: Identify major configuration within geographies, segments,
products
▪ 3: Process element: Identify key business activities within configuration for proc-
design purpose
▪ 4: Implementation: Company specific details of workflow & transaction

○ SCOR metrics
Lvl 1: Perfect order fulfillment (reliability), cycle time (responsiveness), cost of good sold
(cost), …

ISOM 2700 Page 4

 ○ SCOR best practices
Link order entry specifications to manu order, …

ISOM 2700 Page 5

Resource Allocation Decisions
Monday, October 23, 2017 12:29 AM

Strategic Capacity Planning

Capacity vs Capability

- Capac: How much can do - Objective:

- Capab: How well one can do Determine overall lvl of capital-intensive res (facilities, equipment, labour)
→ Best support long-range competitive strategy

- Critical impact on:

○ Response rate
○ Cost structure
Capacity utilization
○ Inventory policies
○ Management & staff support requirement

- Strategy:
○ Lvl strategy:
▪ Constant output → Build up capac ahead of demand
▪ Risk-taking: Company may not capture large market share
▪ When to use: Res lvl can't adjusted in short period

○ Chase strategy:
▪ Build capac only when demand develop
▪ Disadv: Firm can't meet demand → Other firms enter → ↑ Competition

○ Mixed strategy

- Best op lvl: Lvl of capacity for which proc designed

→ Output vol with min avg unit cost
Linear programming

- Min avg cost: Requires tradeoff between

○ Fixed overhead cost
- Characteristics:
○ Variable cost
○ Set of constraints
○ 1 objective func optimized
- Capac utilization rate = Capac used / Best op lvl
○ All linear func
○ Solution can be fractional
○ Static problem (const over time)

- 4 constraint types:
○ Limitation: X ≤ 10
Decision tree ○ Requirement: X ≥ 10
○ Equality: X = 10
○ Non-neg: X ≥ 0
- Result intepretation: Only meaningful
○ In long-term
○ When similar decision made many
times

- In uncertain, uncontrollable env: Only

provide guidance

ISOM 2700 Page 6

Process Design & Management
Tuesday, October 24, 2017 12:30 AM
Basic concept
- Proc:
○ Transform input → output, preferably add value
○ ↑ Importance:
▪ Core factor of business success:
Enhance core procs
→ ↑ Eff, quality, customer satisfaction
→ ↑ Competitive
▪ Differentiation factor:
Flexible, responsive proc
→ ↑ Customer experience
▪ Outsourcing:
Shift business to variable cost basis
→ Easily scale based on demands
- Customer-supplied inputs:
○ Customer themselves, their belongs, info
○ UNIQUE in service proc
- Outcome: What to get from output
- Experience: What to get during proc
Process types
Process focus (Job shop)
Output - Low vol
characteristics - High variety
Proc characteristics - Res: grouped by func
- Machine: General purpose type
- Highly-skilled labor
- Use tech → ↑ Eff + Handle
production variety
Example Product: machine tools, …
Services: consulting, marketing, …
ISOM 2700 Page 7
Batch focus (Flow shop)
Moderate - High variery
- Relatively stable product
lines, each produces
periodially
- Intermittent proc sys
- Jobs: Frequent setups,
changovers
Products: clothes, …
Services: commercial print, loan
Process Structure
- Def: Describe business logic + sequences + activities to
○ Manage res
○ Create products/services
- Design characteristics:
○ Demand profile:
▪ Variety (Standardized vs Customized)
▪ Vol (Large vs Small batches)
○ Facility layout → Optimize works (customers + materials) movement
▪ Params: department configs, work centers, res, …
▪ Types:
□ Production layout (Assembly line)
□ Proc/Functional layout (Job shop)
□ Cellular layout
□ …
○ Proc architecture: Task structure → Flexiblity
Modular architecture (Interchangable tasks), integral architecture, …
○ Tech (lvl of automation):
Major investment → Breakeven analysis to justify
○ Fulfillment strategy: How to locate inventory + satisfy customer needs
Make-to-stock (MTS), Assemble-to-order (ATO), Make-to-order (MTO),
Engineer-to-order (ETO), …
Repetitive focus (Line flow) Product focus (Continuous flow)
- Modest vol - High vol
- Limited variety - Low variety
- Well-defined assembly line: - Res arranged in sequence
Discrete parts move from 1
workstation to another - Integrated, highly automated
sys
- Semin-continuous sys
- No expensive startup &
shutdown cost
Products: automobiles, household oil refinery, chemicals, …
appliances, …
Service: fast food restaurants, …
Most common: Consumer product
Breakeven Analysis Process Performance Metrics

- Purpose: Determine POS vol with cost = revenue Op time = Setup time + Run time
→ Examine how unforeseen cost affect profitability
Throughput time = Avg(Time 1 unit moving through sys)
- Reason: Justify initial capital investment

Cycle time = Avg(Time between completion ò units)

Fixed cost: Cost independent of production vol

Initial investment in equipment, …
Variable cost: Cost dependent of production vol
Labor wage, raw material costs, …

(What to measure: Proc eff, res utlization, quality)

ISOM 2700 Page 8

Understanding Process Flow
Tuesday, October 24, 2017 12:30 AM

Process Flow Fundementals

Little's Law
- Flow = Enter proc
→ Pass through activities (value-added & non-valued added)
I=R×T
→ Exit proc

- Flow unit: Unit passing through proc

Process Flow Diagram (Process Flowchart)

Element Meaning Example

Task, op Give customer admission
ticket, install car engine, …

- Inventory (I): No of unit still within proc

Decision point What customer type is he?,
- Flow time/Throughput time/Lead time (T): (where flow splits) …
Time for 1 unit to pass through proc (entry → exit)

- Flow rate/Throughput (R) Queue, storage, Line of peo waiting in front

buffer of cashier, …

- Proc capacity = Max(Throughput)

Flow of materials, Customer moving to next
customers room
-

- Flow time = Value-added (Proc) time + Non-value added (Idle) time

ISOM 2700 Page 9

Flow Time Analysis
Tuesday, October 24, 2017 12:30 AM
Measuring Process Flow Time Performance

Importance of Flow Time Measurement - Proc flow time = Flow time of critical path (longest path)
(proc has parallel path)

- Delivery-reponse time: - Critical activities: Located on critical path

↓ Flow time
→ ↓ Customer's waiting time - Avg (REAL proc) flow time:
→ ↑ Product value ○ Measured through observing real op of proc

- Financial performance & cashflow: ○ Measurement steps:

↓ Flow time • Specify period
→ Customers get products & billed earlier • Randomly select flow units
→ Firm collect revenue ealier • For each unit: Measure time to flow entry → exit
• Compute avg flow time
⇒ Time: Important competitive dimension
- Theoretical (proc) flow time:
○ Min time for unit to flow entry → exit, ASSUMING NO interruptions

○ Computed from proc flowchart

Theoretical flow time
= Σ(Time spent in activity)
Reducing theoretical flow time
= Total flow time - Σ(Time waiting between 2 consecutive activities)
(Assumption: No extra res purchased)

- Move work off critical path

○ Perform critical actvities in parallel, not sequentially

○ Pre/Post-process critical activities (move to "outer loop")

Restaurant: Pre-cook ingredients
Hospital: Ask patient to self-verify insurance, sign consent
Critical path: A-C-D-F-G-H
form, … before showing up here
Theoretical flow time = 20 + 35 + 10 + 30 + 15 + 40 = 150 (min)

- Eliminate non-valued added activities

- Reduce rework amount (Do right first time) -

Statistical quality control, work-force training

- Change activity sequences: Do quickest thing first, modify product mix, …

Document transferred ≥ 2 times between 2 offices
→ Rearrange proc
Scheduling: Critical Path Method (CPM)
→ Document only transffered once

- ↑ Op speed: Work faster, ↓ interruption, ↓ task redundancy

- Defs:
○ Early start time (ES): Earliest time activity can begin
○ Early finish time (EF): Earliest time activity can end
EF = ES + Activity time

○ Late finish time (LF): Latest time activity can end without delaying project
○ Late start time (LS): Latest time activity can begin without delaying project
Scheduling: Time-Cost Tradeoff
LS = LF - Activity time

○ Slack time: Max time activity could be delayed without affecting project
- Crashing: When activity can accelerated
▪ Slack time = LS - ES = LF - EF
Overtime, subcontract, extra staff, …
▪ For critical activity: Slack time = 0

- Activity selection criteria for crashing:

- Method:
○ Critical
○ Forward scheduling: Compute ES & EF
○ Most economical (min crashing per/time unit)
▪ Starting activity: ES = 0
○ Control ≥ 2 critical paths
▪ Start → End: Schedule activity's ES as early as possible

○ Backward scheduling: Compute LS & LF

▪ Ending activity: Choose LF
▪ End → Start: Schedule activity's LF as early as possible

ISOM 2700 Page 10

Flow Rate & Capacity Analysis
Tuesday, October 24, 2017 12:30 AM
Improving Process Throughput

Fundamentals - Due to external bottleneck:

○ ↑ Sales effort
○ ↑ Input supply
- Theoretical capac = Max throughput when fully utilized
(no interruption, downtime, idle, …) - Due to internal bottleneck:
○ ↓ Res idleness:
▪ Sync flow → ↓ Starving
-
▪ Set buffer → ↓ Blocking
○ ↑ Res net availability
- Res pool: Collection of interchangeable res (each can perform same Preventive maintenance, ↓ absenteeism
set of activities) ○ ↓ Non-added value time (setup, changover, …)
○ ↓ Unit load
- Res unit = 1 unit of res pool ○ ↑ No of res unit of bottleneck res pool

- Bottleneck res pool: Slowest & most limiting res pool in proc

- Theoretical proc capac = Theoretical capac of bottleneck's res pool

Resource Pool & Effective Capacity

Factors affecting Process Capacity Unit load T = Time needed by res unit to process 1 flow unit

- Res unavail, ineff

Equipment downtime, absenteeism

- Waste time, delay: c = No of res unit in pool

Equipment setups, changeovers
Effective proc cap = Effective cap of bottleneck res pool
- Res idleness: Due to adequate inputs, space unavail
○ Blocking: No work from upstream
○ Starving: No work from downstream

ISOM 2700 Page 11

Managing Waiting Lines
Tuesday, October 24, 2017 12:30 AM
Psychology of waiting

Cause of feeling of "long" waiting Solution

Fundamentals Unoccupied time > Occupied time Distract customers → Feel time passes quickly
Promotional videos, music, …
Pre-process wait > in-process wait Server acknowledge customers have been noticed
- Why waiting: (Customer happier when feeling they "entered" proc)
○ Inflow rate > Outflow rate
Uncertain wait > Known, finite wait Inform customers expected waiting time
○ Manager try to balance:
Anxiety Customer-facing employees: Observe customer's
▪ Cost of servce = f(Res utlization)
(When customers don't know whether server forgot anxiety, reassure them
▪ Cost of waiting = f(Customer satisfaction, future return)
them: Wait for flight on-board annoucement, …)
Unexplained waits > Explained waits Provide customers reason for delay
- Queue: Line of waiting customer, but NOT necessarily:
○ Physical line Unfair waits > Equitable waits Single-queue, multi-server
○ 1 customer served at time First come first serve, … instead of multi-queue, multi-server
○ Customer request completed in 1 stage Customer willing to wait longer if they feel service is
valuable
Solo waiting > Group waiting
Uncomfortable wait > Comfortable wait Queue condition: ↑ Comfortable, distracting
New, infrequent user > Frequent user Identiy new users, provide info & reassure them

Waiting Line Model

Customer Pooling & Segregation

Pooling Segregation
- Aggergation of cap - Separation of cap
1 waiting line, 2 checkpoints 2 × (1 waiting line, 1 checkpoints)
(M/M/2) (2 × M/M/1)

- ↓ Waiting time
- When to use: Input have heterogenerous procesing
- When to use: All inputs have requirements
similar processing requirements Supermarket: Express checkout for customer
buying few items
- Components:
Hospital: Different waiting line for different lvl of
○ Calling pop: problem severity
▪ Finite: Potential arrivals limited
Maintenance work (pop) for 5 copy machines (service)
▪ Infinite: Potential arrivals very lage

○ Arrival proc: Assume Poisson distribution for pattern

Improving servce process performance

P(x): Prob of x arrivals per time unit

λ: Avg arrival rate - Manage capac utilization:
○ Manufacturing: ↓ Arrival rate
○ Queue/Channel config: Procure raw materials in small batches, only when needed
▪ No of lines: Single, multiple ○ Service:
▪ Line length: Might limited due to physical constraints ▪ Can't/Should't control arrival rate (↓ Revenue)
Gas station, loading docks ▪ Shift customers' arrival time → Utilize off-peak capacity
Reservation, differential pricing, …
⇒ 4 basic structures:
▪ Single channel, single phase (M/M/1 model) - ↑ Service rate:
▪ Multiple channel, single phase (MM/c model, c = No of servers) ○ ↑ No of server
▪ Single channel, multiple phase ○ ↓ Service time
▪ Multiple channel, multiple phases Simply proc, specialize worker, use tech, let customer self-serve some parts, …

○ Queue discipline: Prio rule, define order of serving customers - ↓ Arrival time variability:
First come, first serve ○ Manufacturing: Choose reliable suppliers
Shortest processing time first: ○ Service: Reservation
□ Min avg flow time
□ Easier to implement in manu op than service op - ↓ Service time variability: ↓ Variety of tasks
Fast food restaurant: Limited menu, standardized tasks
- Customers' waiting behavior:
○ Balking: Decide not enter waiting line - ↑ Capac sync (between demand & supply)
○ Reneging: Leave line before served Temporary personnel
○ Jockeying: Switch from 1 line to another
- ↑ Buffer capac:
- Model disadv: ○ Manufacturing: Build up inventory if high demand predicted
○ Can't cope with multi-phase, mixed characteristics ○ Service: Entertain customer while waiting
○ Ignore waiting behaviors Cocktail lounge: Customer drink while waiting for tables
⇒ Need do simulation → ↑ Insighs to real scenarios
- Pooling & Segregation

ISOM 2700 Page 12

Demand Management & Forecasting
Wednesday, December 6, 2017 12:57 AM

Demand Forecast

Demand Management - Benefits:

○ ↑ Fill rate
○ Free up operating capital tied up in inventory
- Def: Proc, with 4 elements: ○ ↓ Cancelled & Rushing orders
○ Planning demand: Forecast + Control over demand ○ ↑ Customer satisfaction
○ Communicating demand: Communicate demand plan to firm's ○ ↑ Sales revenue
op funcs & supply chain partners
○ Influencing demand: Marketing & Sales effort - Functions: Foundation of long-term planning
product positioning, pricing, promotion, … ○ Basis of budgetary planning & cost control
○ Managing & Prioritizing demand: Match customer orders to ○ Marketing: New product ideas, sales personnel compensation
avail supply ○ Op: Periodic decision involving:
▪ Proc selection
- Sales/Shipment history: Not consider actual customer requirements, ▪ Capac planning
especially when stock out ▪ Facility layout
⇒ Should NOT base demand forecast on this
- Principles:
○ No perfect
○ Assume continuity of causual rel
○ Forecast for product group (instead of individuals) more accurate
○ Time horizon ↑ → Forecast accuracy ↓
Forecasting techniques
○ Good forecast not always need complex models

- Qualitative:
○ Expert judgement, customer survey - Critical questions to ask when forecasting: Past vs Present difference:
○ What drive demand?
○ Used when no quantitative data exist
○ What is current competition?
Product's planning stage
○ What is overlook in past?
- Quantitative: ○ Any conditions changed?
○ Math model:
○ Types: - How to do forecasting in company: Sales & Op planning (SOP) group:
▪ Causual: Demand predictor = Extrinsic data ○ Representatives from different departments
▪ Time series: Demand predictor = Past data pattern ○ Demand forecast: Consensus of participants
Moving avg, Trend models, Simple/Linear/ Quadratic
regression, Seasonal exponential smoothing, ARIMA, …

Time Series Model Component

Component Classification Def Origin Duration

Cycle Systematic - Repeat over very long period Factors influencing economy 2 - 10 years

- Usually 4 phases: * NOTE: Often omitted from model:

• Peak (prosperity) • Long period data not avail
• Contraction (recession) • Market condition changed significantly from
• Trough (depression) past → Cycle not meaningful anymore
• Expansion (recovery, growth)
Trend Systematic Long-term upward/downward movement Changes in tech, pop, wealth, value Several years
Seasonal Systematic Fairly regular pattern, repeating ≥ 1/year Weather, holiday, religion, … Yearly, monthly, quarterly, weekly, …
Random Unsystematic Erratic fluctuation - Random variation Short, non-repeating
- Unforeseen events
strikes, floods, … * NOTE: Can't forecasted

How to choose time series model:

- Draw a graph → See if can visualize trend, seasonality
- OR: Initialize model with only random fluctuation → Progress to include trend, seasonality

ISOM 2700 Page 13

Time Series Forecasting Errors Exponential Smoothing Forecasting Model
(A: Actual value, F: Forecast value)

Ft = Ft-1 + α(At-1 - Ft-1)

- Error: Et = At - Ft 0 ≤ α ≤ 1: Smoothing const

- Mean Absolute Deviation: Drawback: Lagging changes in demand

- Mean Squared Error:

Exponential Smoothing with Trend Adjustment

- Mean Absolute Percentage Error:

Ft = FITt-1 + α(At-1 - FITt-1)
Tt = Tt-1 + δ(Ft - FITt-1)
FITt = Ft + Tt

○ Help compare series with different baseline value FIT: Forecast including trend
○ Must: At ≠ 0 0 ≤ α, δ ≤ 1: Smoothing const

- Tracking Signal: Reveal error's magnitude + direction

ISOM 2700 Page 14

Inventory Management Inventory cost
Wednesday, December 6, 2017 11:53 AM

Cost type Nature Characteristics

Inventory Holding/ - Variable Include cost of:
(Stock of goods awaiting consumption) Carrying - Major cost: 25 - 30% inventory value - Capital:
• Most significant: ≥ 20% interests on loans
• Opportunity cost (Tied up in inventory, can't invested somewhere
- Types: else)
○ Raw materials: Traced to specific product/order - Inventory service:
○ Supplies: Without traced to specific product/order material handling, taxes, insurance, …
- Storage & Warehousing: Risk of damage, obsolescence, …
○ Work in progress Shortage Variable - ↑ Shortage of material → ↑ Shortage cost
○ Finished good
- Origin: Product not avail
- Reasons to keep inventory: → Customer dissatisfaction: Go somewhere else & find substitute
○ Variation in product demand: Buffer → Absorb variation → Sales & Profit loss
○ Safeguard for variation in raw material delivery time
○ Advantage of quantity discount: - Eliminate shortage:
▪ ↑ Order size → ↓ No of order • Accelerate manufacturing, delivery
▪ ↑ Order size→ ↓ Shipping cost (per unit) • However: May incur expedition cost, penalty charge
○ Op independence (from suppliers) Ordering Fixed (Independent of order quantity) Include supplier selection cost (Competitive bidding)
○ Flexibility in production scheduling: / Setup Machinery setup cost: Same no matter
▪ ↓ Pressure to get goods out producing 100 - 10000 units
▪ ↑ Lead time
⇒ Large lot-size op → Planning for smoother flow, lower cost
○ High setup cost favor big batch production
Measuring Inventory Performance

- Return on Asset: ROA = Net profit / Asset

Financial Impacts of Inventory = Net profit margin × Asset turnover

Gross margin = Sales - Cost of Goods Sold

- Revenue: Net profit = Sales - Total Expenses
○ Loss: Suboptimal availability Net profit margin = Net profit / Sales
○ Slow cash flow: Asset turnover = Sales / Asset
▪ Poor order fulfillment
▪ Inventory liquidation at low price Inventory affects Asset turnover:
▪ High turnover (Sell fast), low profit margin
- Cost: Supermarket, …
○ ↑ Carrying, ordering cost: Volatile inventory buffer ▪ Slow turnover (Sell slow), high profit margin
○ Supply-chain crises Jewelry
○ Disposal of obsolete inventory
- Inventory turnover = Cost of Sales / Avg Inventory
- Capital Expenditure (CAPEX): ○ Interpretation:
○ Locked in inventory → Can't used to fuel growth ▪ High: Efficient inventory use
○ Inventory obsolescence → Write-offs Not always good: May due to low inventory lvl → ↑ Stockout
▪ Low: Slow-moving, obsolete inventories
- Working capital: ○ Improve turnover:
○ Volatile inventory → ↑ Working capital → ↑ Cost of short-term financing ▪ Sell finished good more quickly
○ Limited inventory + Inaccurate demand forecast → Budget difficulty marketing, merchandising, …
▪ Purchase materials more slowly

- Time in Inventory = Time period / Inventory turnover

Time period = 1 year, 365 days, 52 weeks, …
Inventory Plannig & Control: Cycle Counting
Count inventory physically & frequently → Ensure record accuracy
○ Meaning: No of times inventory sold/used in certain period
○ Prefer: Low value
- Type:
Physical count Cycle count
- Suspend op & Count every stock- - Regularly take random sample of
keeping unit (SKU) SKUs Inventory Systems

- Conducted 1/year (as op shutdown) - Conducted on rolling basis (op

unaffected)
System Continuous Periodic
(Fixed Order Quantity Inventory Model) (Fixed Time Period Inventory Model)
- Counting procedure design:
Order quantity (Q) Const Variable
○ ABC: Divide inventories into 3 groups based on pre-def criteria (dollar invested,
profit potential, …) When to place Even-triggered: When no of inventory Time-triggered: When review period
order items drop to reorder point (ROP) (T) arrive
▪ A: Small quantity, big importance
▪ B: Moderate quantity & importance Decision to make - Q = ? (when ROP reached) - Q = ? (when period ends)
▪ C: Big quantity, small importance - ROP = ? -T = ?
⇒ Distinguish important few from trivial many Record-keeping - Continuous: Each time item added/ - Periodic: Only count inventory when
removed review period arrive
○ XYZ: - Must use computer sys - Can manually maintained
▪ X: Stable demand ⇒ High maintenance time
▪ Y: Varied demand Inventory size Small High
▪ Z: Volatile demand
⇒ Used when concern about demand variability & predictably * NOTE: Continuous sys:
- Used with: High-priced, critical items
- Implementation example: Supermarket's POS sys
○ Scan purchased items, update inventory data immediately
○ Inventory lvl reach ROP: Announce manager to place new order

ISOM 2700 Page 15

 - Used with: High-priced, critical items
- Implementation example: Supermarket's POS sys
○ Scan purchased items, update inventory data immediately
○ Inventory lvl reach ROP: Announce manager to place new order

ISOM 2700 Page 16

Inventory Model
Wednesday, December 6, 2017 5:19 PM
EOQ with Quantity Discount (Price Break) Model

Economic Order Quantity (EOQ) Model - New assumption:

(A fixed order quantity model) Price breakpoint: Unit purchasing depends on Order quantity

- Determine Qopt: For each unit cost lvl k

- Assumption: Ck: Unit purchasing cost
○ Demand: Const, known Qreq(k): Must order at least Qreq(k)
○ Lead time (How long to wait order → received): Const, known
○ Each order: Receive all at once
○ No back order

- Formulation:
Demand D unit/[T]
Order quantity Q unit Select cost lvl with min TC(k)
Lead time L [T]

Unit purchasing cost C $/unit

Unit holding cost H $/unit
Cost of placing 1 order S $/order EOQ Model with Probabilistic Lead Time Demand

Frequency of placing order 1/[T] ≡ order

- Changed assumption: Demand varies

Purchase cost D×C $/[T]

- Formulation:
Holding cost $/[T]
○ Demand:
Ordering cost $/[T] ⇒ Demand during lead time:

Stocking cost Holding Cost + Ordering Cost $/[T]

Total cost TC = Holding cost + Ordering cost + Purchase cost $/[T] ○ Service lvl = 100% - P(Stock out during lead time)
5% chance of stock out during lead time
⇔ 95% service lvl
Optimal order quantity unit

○
Reorder point DL unit Find Z:

* NOTE: [T] can be any time unit (year, month, …)

○ Reorder point: R = Avg demand during lead time + Safety stock

Holding cost: ↑ Order → ↑ Material → ↑ Payment (to take care)

Ordering cost: ↑ Order → ↓ Order freq → ↓ Cost

Economic Production Quantity (EPQ) Model

(EOQ Extension)

- Changed assumption:
Company produce & sell own products (NOT resales)
→ Order received gradually over time (not all at once)

- Mechanism:
○ Build up inventory: When Production rate > Consumption rate
○ Stop production/Produce something else: When inventory reach Imax Fixed-time Period Model with Safety Stock

○ Production resumed: When inventory depleted

T = Review period ; L = Lead time

- Formulation:

ISOM 2700 Page 17

 ○ Stop production/Produce something else: When inventory reach Imax Fixed-time Period Model with Safety Stock

○ Production resumed: When inventory depleted

T = Review period ; L = Lead time

- Formulation:

-
⇒ Demand during (Lead time + Review period):
p: Production rate (unit/[T'])
d: Consumption rate (unit/[T'])

-
Find Z:

C: Unit production cost ($/unit) ⇔

- Order quantity:

Icurrent: Inventory lvl at time of placing order

* NOTE: Require more safety stock than Fixed Quantity Model

Need to protect against stockout during (Lead Time + Review period)

ISOM 2700 Page 18

Managing Short Life-cycle Products
Wednesday, December 6, 2017 5:37 PM
Single-period Inventory Model
Using Marginal analysis

- Preordering problems:
Introduction
↑ Order size to q
⇔ E(Marginal Cost) ≤ E(Marginal profit)
⇔ P(qth product not sold) × Co ≤ P(qth product sold) × Cu
Multi-period Inventory System Single-period Inventory System
⇔ P(Demand < q) × Co ≤ P(Demand ≥ q) × Cu
- Continuous order - One-time purchasing decision ⇔ P(Demand < q) × Co ≤ [1 - P(Demand < q)] × Cu
- Long time period - Purchase intends to cover fixed
time period ⇔

EOQ, EOQ-related models

Co = Cost per overestimated-demand-unit
Application of Single-period Inventory System: = Unit cost - Unit salvage value
- Seasonable/Perishable/One-time event products
Newsvendor problem: How many newspapers to purchase for relate Cu = Cost per underestimated-demand-unit
○ Too few: Some customers can't buy = Unit revenue - Unit cost
○ Too many:
▪ Leftover worth litte/nothing If Demand ~ N(μ, σ2):
▪ ↓ Profit (still need to pay for purchase)
- Time-sensitive capac → Revenue management (Yield management)
Airline seat, hotel room, …
- Overbooking problems:
Accept qth overbooking
⇔

Revenue Management Cu = Cost of underestimating no-show (Normal ticket price)

Apply single-period inventory model to manage capac→ Max revenue Co = Cost of overestimating no-show (Free lift ticket)

- Capac characteristics:
○ Customers can segmented based on price lvl they willing to pay
○ High fixed cost + Low variable cost
○ Inventory: Perishable, time-sensitive value
○ Product/Service can sold in advance (through reservation sys)
○ Demand: highly variable, price elastic

- Yield management:
○ Special case of revenue management
○ Applied when: Commodity/Service priced differently, based on:
▪ Timing of consumption
▪ Restriction
▪ Booking, cancellation, refund policies

- Price structure: Logical + Justified → Revenue management sys can work

ISOM 2700 Page 19

Quality Management
Thursday, December 7, 2017 12:15 AM
Who should define quality

Quality Definition - Customer:

Product quality
- Relatively universal
- Can captured by Garvin's 8-dimensions
• Performance:
How fast car can accelerate?
• Features:
Car items (belts, seats, …)
• Reliability:
Car always in working cond?
• Conformance:
Production exactly follow manu spec?
• Durability:
How long car last?
• Serviceability:
How easy to fix car?
• Aesthetics:
How car look?
• Perceived quality:
Individual' subjective opinion of quality
What used to define quality
f(Exception, Excellence, Perfection) Usually: Design quality
f(Consistency, Conformance)
f(Stakeholder-related concept)
Service quality
- Vary greatly among industries, hard to define
- In general:
• Reliability: Perform as promised
(dependably, accurately)
• Responsiveness: Help customers promptly
• Assurance: Employees' knowledge, courtesy
& trustiness
• Empathy: Caring, individualized attention
• Tangibles:
○ Appearance of facilities, personnel
○ Factor affecting sense
noise, temperature, …
Characteristics
- Usually: Quality of manu proc
- NOT imply: High conformance → High design quality
Quality depends on whom we ask
producers, users, …
○ End users ≠ Firm's direct customers
Actual customer of publisher is professor, not student
○ Need to meet/exceed expectation of REAL target customers
- Producers, Designers: Customers don't really know what they want
Apple: Define new product, exceed customer's expectation
- Competitors: Drive quality improvement
- Professional org, gov agencies: Certification examinations → Ensure quality
Accounting, medicine, architectures, …
Cost of Quality
- Cost of achieving good quality:
○ Appraisal cost: Inspection + Testing
○ Prevention cost: Quality planning, product design, employee training, maintenance
- Cost of poor quality:
○ Internal failure cost: Discover problems BEFORE shipping products to customers
Scrap, rework, …
○ External failure cost: Discover problem AFTER shipping products to customers
Warranty, recall, …
- Hidden cost of poor quality:
○ Customer dissatisfaction
○ Productivity loss (Time & resources for rework)

f(Performance / Price) Quality = Product/Service performance vs. Customer expectation ○ Brand equity loss → ↓ Profit potential
• Performance > Price: "Good" value (quality)
• Performance < Price: Need improvement

Major Concepts of Quality Management

Organizational Involvement in Quality Management

- Customer satisfaction:
Understand, evaluate, define & manage customer expectation
- Top management: → Create value for customer
○ Establish strategies for quality
○ Guide & Motivate lower managers & workers → ↑ Quality - Management responsibility:
○ Define, Design & Monitor sys
- Design: Consider quality in product features, manu proc, delivery services ○ Take full responsibility for any quality problems (NOT frontline workers)

- Procurement: Obtain goods & services adhering firm's defined quality - Continuous improvement:
○ Quality improvement is ongoing proc
- Op: Ensure products & service conform to design spec ○ Why: Market always changes
Monitor proc, correct problem's root cause, …
- Prevention over correction:
- Quality assurance: Gather, analyze data on problems → Work with op → Solve ○ Start from product design
○ Rule of thumb: Spending $1 in prevention can save $10 in failure & appraisal costs
- Packaging & Shipping: Good not damaged on transit, shipping done in time, …

- Marketing & Sales: Determine & Communicate customer needs to appropriate departments

- Customer service:
○ Communicate customers' problems to appropriate departments Quality as a Continuous Improvement Effort (Kaizen)
○ Deal with customer in responsibly Doing things right every time

- Quality at source:
○ Workers: Ensure their items at good quality before passing to anyone else
⇒ No quality problem + No need to hire inspectors
Quality Standards & Certification ○ Suppliers: Not deliver poor quality materials

- Poka-yoke (Mistake proofing): Prevention > Correction

- Total Quality Management (TQM): Octopus' bultin func: Ensure we not charge ≥ 2 times within certain period
○ Principles: Color codes
▪ Customer-focus: Customer determine quality lvl
▪ Total (All) employee involvement: - Zero defects: Very important for some occupation
□ Work toward common goal (satisfying customer) air traffic control
□ Empowering & cooperative environment
□ Self-managed work team - Jidoka (Automation with human touch):
▪ Continuous improvement Toyota: If any worker discover significant quality problem during automated
▪ Proc-centered: inspection proc, he/she can press button → Stop production line
□ Procs defined step-by-step
□ Performance measured & monitored - Plan-Do-Check-Act (PDCA) cycle (Edwards Deming):

ISOM 2700 Page 20

 □ Self-managed work team - Jidoka (Automation with human touch):
▪ Continuous improvement Toyota: If any worker discover significant quality problem during automated
▪ Proc-centered: inspection proc, he/she can press button → Stop production line
□ Procs defined step-by-step
□ Performance measured & monitored - Plan-Do-Check-Act (PDCA) cycle (Edwards Deming):
▪ Integrated sys: Plan → Implement on small scale → Check result
□ Quality determined by all procs → If good result: Institute practice
□ Work closely with suppliers & distributors Otherwise: Plan again
▪ Strategic & Systematic approach: Top-down, quality at core
▪ Fact-based decision making - Define, Measure, Analyze, Improve & Control (DMAIC) (General Electrics)
▪ Communication: Strategies, method & timeliness
- Benchmarking:
○ Benefits: Compare with best → Know large with competitors → Help define goal
▪ ↑ Competitiveness, Productivity, Customer satisfaction
▪ ↑ Profitability
▪ ↑ Innovative proc
▪ Eliminate defects & waste
Basic Quality Control Tools
- Malcom Baldrige National Quality Award (MBNQA):
Recognize US companies attaining pre-eminent quality leadership
- Pareto analysis: "20% causes determine 80% problems"
- ISO 9000 Quality Management: Small subset of problem types (20% types) appear very frequently (80% problems)
○ Series of standard → Address this subset first
○ Developed & Published by International Organization for Standardization (ISO)
○ Help define, establish & maintain effective quality insurance for manu & service industries - Flow chart:
○ Demonstrate how work done
○ Help identify failure points → Can build more control around that point

- Check sheet: Tally data according to identified problems

- Histogram

- Scatter diagram: Help realize correlation/rel between 2 variables

- Proc control chart:

○ Help ensure all proc observation within lower & upper control limits
○ False alarms:
○ Type I error: Observation outside limit, but nothing wrong
○ Type II error: All data inside limit, but not necessarily everything fine

- Fishbone diagram:
○ Fish head = Problem, Fish bone = Causes
○ Help analyze problem systematically
○ Should used in team approach: People from different departments brainstorm & contribute

ISOM 2700 Page 21

Statistical Quality Control Acceptance Sampling Plan
Thursday, December 7, 2017 1:27 AM

- Def: Check batches of items before/after proc

Quality control
→ Decide lot satisfy predetermined standards?

Assure proc perform in acceptable manner

- Params: n = Sample size
c = Acceptance no (No of defective items allowed in SAMPLE)
- Approaches:
- Decision proc: For item lot
○ Acceptance sampling: Inspect random product sample
→ Determine lot acceptable? ○ Take n samples

○ Statistical proc control: Monitor production proc ○ Find d = No of defective items

→ Prevent poor quality

d ≤ c → Accept lot
d > c → Reject lot
○ Capab analysis: Compare proc variability with design tolerance

- How to find n, c: Prepare 4 params:

- Development stage of quality control in firm:
○ AQL (Acceptance Quality Lvl):
○ 1: Acceptance sampling plan
▪ % Defective in WHOLE lot
○ 2: Quality inspection before (raw material) & after (finished products)
production proc ▪ Production target for producers, defined by customers in CONTRACT
○ 3: Proc control → Built-in quality
○ LTPD (Lot Tolerance Percent Defective):
▪ % Defective in WHOLE lot
▪ When receiving lots from producers, consumer randomly select 1 lot & check % defective
▪ % Defective ≤ LTPD → Still acceptable by customer

Process Variation & Control ⇒ AQL < LTPD

Problem = Non-conformance (not doing what asked to do)
○ α (Producer's risk):
- Source of non-conformance: ▪ Producer reject good lot (% Defective ≤ AQL)
○ Natural variation ▪ Due to its acceptance sampling plan
○ Culture: "Everything doesn't matter" attitude
○ Proc complexity: ↑ Complex → ↑ Mistake ○ β (Consumer's risk): Accept bad lot (% Defective >LTPD):
▪ Consumer accept bad lot (% Defective ≥ LTPD)
Specification limit Control limit ▪ Due to its own inspection
- "External" requirement - Used to monitor: Proc out of control?
* NOTE: α, β explanation:
- Determined by market & customer - Established using actual data from proc Null hypothesis H0: Product quality is good enough
(⇔ % Detective small enough)
Research hypothesis Ha: Product quality is NOT good enough
(⇔ % Detective small enough higher than accepted)

Statistical Process Control Procedure H0 is True H0 is False

Reject H0 Type I error (Prob = α) Correct decision (Prob = 1 - β)
- Procedure: (Producer risk)
○ 1: Establish 3 control params: Do not reject H0 Correct decision (Prob = 1 - α) Type II error (Prob = β)
▪ Center line: Proc's mean value (Consumer risk)
▪ Upper control limit: UCL = Mean + nσ
▪ Lower control limit: LCL = Mean - nσ
Vendor (Supplier): AQL = 2%, willing to run 5% risk of rejecting qualified lot
σ = Proc's std
Manufacturer: 8% defective unacceptable, will accept such poor quality at most 10% of time
For manufacturer: n = ? c= ?
Normally: n = 3

Given: Sampling plan table for α = 0.05; β = 0.1

○ 2: Monitor proc:
c LTDQ / AQL n × AQL
▪ Periodically sample from proc
▪ Plot sample points on control chart … … …
3 4.890 1.366
- Control charts can detect nonrandom/assignable cause, NOT random/natural 4 4.057 1.970
cause
5 3.549 2.613
○ Nonrandom variability ≡ Proc out-of-control (must defined by management)
… … …
○ HOWEVER: Out-of-control not necessarily mean something wrong

AQL = 0.02; α = 0.05 ; LTPQ = 0.08; β = 0.1

AQL / LTPQ = 0.08 / 0.02 = 4
⇒ c = 4 (4.057 > 4)
n = round(1.970 / 0.02) = 99

Control Charts

Type Def Graph construction (3σ control limits) Major development phases of control chart
& R chart - (Mean) chart: Measure proc's Given n samples - 1: Prepare
central tendency Sample k (1 ≤ k ≤ n) has c observations/subgroups: (a k1, … akc) ○ Choose variable/attribute to measure
○ Determine basis, size, sampling freq
- R (Range) chart: Measure
proc's dispersion - 2: Collect data

- 3: Determine control limits LCL, UCL:

○ Compute trial UCL, LCL
○ Recompute if necessary

ISOM 2700 Page 22

 - 2: Collect data

- 3: Determine control limits LCL, UCL:

○ Compute trial UCL, LCL
○ Recompute if necessary

A2, D3, D4 given from table - 4: Identify problems (if exist):

○ Collect & plot data continuously
P-chart - Control chart for attribute Given n samples
(used when proc Sample k (1 ≤ k ≤ n) has c observation; in which dk observation is defective (0 ≤ dk ≤ ck) ○ Take corrective action if necessary
characteristics counted, not
measured)
- 1: Calculate:

- Monitor % defective items in

sample

- 2: Check whether any sample j is out of control: dk ∉ (LCL, UCL)

Exclude that sample
Restart from 1, until ALL samples in-control

ISOM 2700 Page 23

Process Improvement
Saturday, December 9, 2017 5:03 PM
Capability Analysis

Quality & Capability Focus - Purpose: Based on design spec, determine proc output's inherent variability
acceptable?

- Proc capab index (for 3σ control limit)

Specification limits Control limit
○ μProc = μSpec:
- Define by engineering design/customer - Reflect how much sample statistics (μ, σ2) may
requirement vary due to randomness
○ μProc ≠ μSpec:
- Acceptable value range for output - Based on proc natural variability

* NOTE: No direct link between specification & control limits

Define quality: μ = 1.25 - Capable proc (within spec) ⇔ Cp ≥ 1
LSL (Lower Spec Limit) = 1.245 (⇔ 99.74% proc output within spec)
USL (Upper Spec Limit) = 1.255
Define proc's control limit: LCL = 1.244 - Improving proc quality:
UCL = 1.256 ○ Redesign proc
⇒ Although proc might in control, proc's output not meet spec limit ○ Use alternative proc
○ 100% inspection → Eliminate unacceptable output
- Proc capab: Variability of proc's output allowed by design spec ○ Relax spec without adversely affecting customer satisfaction

Six Sigma Quality Process Change Focus

- USL - LSL = 12σ - Proc improvement (Incremental innovations):

Or: USL - μProc = μProc - LSL = 6σ (μProc = μSpec)) ○ Gradual change
○ Targets: Small sub-procs (specific tasks)
- Almost defect free
Sigma lvl Defects per Million Opportunities (DPMO) - Proc redesign (Architectural innovations):
○ More significant change
1 690000
○ Targets: Midsize business proc (with many tasks)
2 308537
3 66807
- Proc reengineering (Discontinuous innovations):
4 6210 ○ Fundamental rethinking + Radical redesign
5 233 → Dramatic improvements
6 3.4 Company can do more with far fewer resources
○ Targets:
(For μProc ≠ μSpec)
▪ Most trouble proc
▪ Proc with greatest impact on customers
▪ Proc with higher chance of successful redesign

Constraints & Resource Utilization Focus Reengineering Continuous improvement

(Theory of Constraints (TOC)) Lvl of change Radical Incremental
Starting point Clean slate Existing proc
Participation Top-down Bottom-up
- Measurements:
Typical scope Broad, cross-functional Narrow, within functions
○ Financial: Net profit, Return on investment, Cash flow
○ Op: Throughput (rate of generating money through sales), Inventory, Op expenses Risk High Moderate
Primary enabler Info tech Statistical control
- Guidance for managing proc at 3 lvls: Type of change Cultural, structural Cultural
○ 1st (highest):
▪ Philosophy: Sys = Set of interdependent proc
Only few procs have limiting effect → Constraints
▪ How to manage & improve sys constraints:
□ 1: Identify constraints
□ 2: Decide how to exploit constraint Operational Risk & Compliance Focus
□ 3: Subordinate rest of sys to decisions made
□ 4: Elevate constraint
□ 5: Go back to step 1 - Op risk: Risk of loss resulting from:
○ 2nd (Op): ○ Internal event:
▪ Logical product structure ▪ Peo: Absenteeism, turnover, training…
▪ V-A-T analysis ▪ Tech: Sys uptime, network uptime, …
○ 3rd lvl (Detailed): Drum-Buffer-Rope (DBR) production scheduling method ▪ Proc:
▪ Drum: Bottleneck (Capac-constrained resource) □ Qualitative: Customer satisfaction survey, …
▪ Buffer: Inventory placed in front ò bottleneck □ Quantitative: Wait time, sales close rate, …
→ Ensure bottleneck will work at full capac ○ External event: Power failtures, flood, …
▪ Rope:
□ Comm & Coordination of work - Elements of risk management framework:

ISOM 2700 Page 24

 ▪ Drum: Bottleneck (Capac-constrained resource) □ Qualitative: Customer satisfaction survey, …
▪ Buffer: Inventory placed in front ò bottleneck □ Quantitative: Wait time, sales close rate, …
→ Ensure bottleneck will work at full capac ○ External event: Power failtures, flood, …
▪ Rope:
□ Comm & Coordination of work - Elements of risk management framework:
□ Signal work released from upstream when needed ○ Clear op risk & compliance strategy with management oversight
○ Strong internal op risk management & control culture
○ Contingency & business continuity plan
○ High standards of ethics & integrity as core business values
○ Effective corporate governance
Duty segregation, avoidance of conflicts of interests, …

Principles of Reengineering

Principle What it means What can achieve Example

Organize around outcomes, not single Combine specialized task performed by different peo ▪ Eliminate handoffs → ↑ Productivity, IBM's credit approval
tasks into single job performed by individual case responsiveness
worker/team ▪ Single knowledgeable point of contact
for customer
Have those who use proc output perform Who closest to proc should perform work Eliminate need to coordinate - Employee make purchase without
proc performers & proc users purchasing departments
- Customer do simple repair themselves
- Suppliers manage part inventory
Merge info-processing work into real Who collect info should also process it Minimize need for another group to Ford: Integrated database serve multiple
work producing info reconcile & process info function within company
→ Eliminate data duplication
Treat geographically dispersed resources Make use of info tech Facilitate parallel processing of work at
as though they were centralized separate org units doing same jobs
Link parallel activities instead of ONLY - Parallel activities should linked continually & coordinated Xeros: Concurrent engineering teams
integrating their results during proc participate in new product design &
- Only integrating outcomes → Rework, high costs development
Put decision point where work performed - Decision making should be part of work performed - Flatter, responsive org
+ Build control into proc - Possible with educated workforce & decision-aiding tech - Eliminate need for mid-management
nowadays
Capture info once, at source Info should collected & captured in company's online Avoid erroneous data entries & costly
info sys only once, at source reentries

* NOTE: Summary of outcomes:

- Eliminate job fragmentation
- Empower employees to make more decision
- Reorganize jobs → Give employees more understanding & responsibility
⇒ Org restructuring, workforce downsizing

ISOM 2700 Page 25

Benchmarking
Monday, December 11, 2017 10:56 PM

Balanced Scorecard
Benchmarking

- Contain 4 perspectives:
- Def: Measure org unit's performance ○ Financial: Lagging indicator (already know what happened in past)
→ Compare among each other ○ Customers: Relate to marketing
→ Identify best performing units: ○ Internal Business Process: Relate to op
□ Best practice → Standards ○ Learning & Growth: Human resources, R&D
□ Help poor performing unit recognize potential improvement
areas - For each perspective, specify:
○ Objective (What to achieve)
- Type: ○ Initiatives (How to get started)
○ Internal: Compare units' performance within org ○ Measures
○ External: Compare org with others in same industry ○ Target

- Problems: - Strategy map: Show how different variables linked together

○ No equal basis for comparison (apple vs orange)
○ Not forward looking enough: What compared is something already done Southwest Airlines

Data Envelopment Analysis (DEA)

- Defs:
○ Decision-making unit (DMU):
▪ Distinct business unit within org
Bank branch, restaurant in chain, …
▪ Consume input resources → Generate valuable output
○ Inputs: Employees, capac, floor space, …
○ Output: Sales vol, service quality, …

- DEA:
○ Analyze DMUs' overall performance by giving efficiency score for each
→ Useful in evaluating relative performance among DMUs
performing similar task & aiming for similar goals
RONA: Return on Net Asset
CAGR: Compound Annual Growth Rate
○ Efficiency: How well DMU utilize inputs to generate outputs

Ok: Output quantity

Ik: Input quantity

w1 + … + wn = 1 (Weights)
v1 + … + vm = 1 (Weights)

For each DMU: Select weights → Max its efficiency score

○ Usage:
▪ Best practice: DMUS with max scores
▪ For less efficiency shop: Just compare it with more efficient ones
under similar situations

ISOM 2700 Page 26

Lean Synchronization
Monday, December 11, 2017 11:53 PM
Just-in-time (JIT) in nutshell
Toyota case

Overview
- What is it: "Pull" sys
"Right quantity of right part, in right place, at right time, in right condition"

Push sys (Traditional sync) Pull sys (Lean sync)

- What it requires:
- Buffer inventory → Balance workflow between - Work initiate in response to actual
○ Employee participation:
workstations demand downstream
Toyota treats employees well & expect them to commit 100% effort to run sys
- Build up inventory along way
○ Industrial engineering basics:
- Problem with inventories built up: ⇒ ↑ Responsive to market changes
Product designs + Special equipment & tools
• Obsolete (especially short life-cycle products)
→ Help workers to job
• Hide quality problems - Requirements: ↑ Coordination, ↓ Lead
time ○ Continuous improvement (not breakthrough)
• Capital tied up
○ Total quality control:
▪ No quality, no JIT (High quality → No defect → ↓ Inventory)
▪ Need long time to set up faultless sys
Toyota: 5 - 7 years
○ Small lot sizes
Guiding Principles & Work Practices
- What it does:
○ Identify & Eliminate waste areas
- Elimination of waste: ○ Expose & Address bottlenecks
○ Quality at source: ○ Achieve streamlined productions:
▪ Build quality into every proc step Focus on only few best-selling items → ↑ Productivity
▪ Decentralize quality inspection responsibility
○ JIT production: - What it assumes:
▪ Produce just enough to meet market requirements ○ Stable env
▪ Heijunka (Uniform plant loading): No unplanned job enter sys → Stable schedule ○ Mass production of standard products:
▪ Kanban: Coordinate workflow → Keep inventory low Car = Set of pre-defined options (Mass customization)
▪ Min setup time: → No make-to-order, no high flexibility
□ Make small lot sizes economically feasible
□ Eliminate unnecessary inventory

- Respect for people:

○ Principles:
Waste Elimination
▪ Peo more flexible than machine
Waste (muda): Activity not adding value
▪ Robots only do what peo should not do
⇒ More flexible than competitors
- Sources of waste:
Daimler (Germany) uses advanced robots, but also spends much time programming
them ○ Excess inventory
○ Unneeded processing
○ Implementations: ○ Waiting (delay)
▪ Benefits → Workers happy & 100% committed ○ Excessive motion: People/Equipment action not adding value
Lifetime employment ○ Overproduction:
▪ Cooperative rel between labor & management ▪ More than customer requirements
▪ Manager willing to listen to frontline workers ▪ Unnecessary products, materials
Western companies: Separate management & workers → Not trust each other ○ Defective products
▪ Work well with suppliers ○ Transportation waste: Multiple, unnecessary handling → Delay, Potential damage

- Continuous improvement → Strong linkage between quality & JIT - Solution:

○ Streamline flow
○ Match demand exactly
○ ↑ Proc flexibility
○ ↓ Effect of variability

Basic Requirements for JIT Implementation - Approaches to problem solving:

○ Japanese: Intentionally ↓ inventory, equipment, …
→ Expose problem → Eliminate
- Redesign flow process: Pull sys ○ Western: "Just-in-case": Build up inventory, just in case of various problems
○ Link different ops → Not willing to face problem, just excessive inventory
○ Balance workstation capac
○ Redesign layout → Better flow
○ Preventive maintenance → Prevent unexpected malfunction

Work Flow Coordination with Kanban

- Improve proc quality:
○ Empower workers:
Teach statistical quality control
- Kanban:
Frontline workers can stop assembly line → Defects not pass through
○ Instruction card
○ Fail-safe method (Poka-yoke): Even dummies will not make mistakes
○ No one will do anything until they see cards
○ Automatic inspection

- Let workers know whether they should start making particular product
- Stabilize production schedules:
- ↑/↓ Inventories = Inject/Withdraw Kanban in sys
○ Lvl schedule: Workers have to do certain things, in predictable way
→ Get used to work patterns
- Prerequisite: Short lead time
○ Underutilize capac
→ Make workers busy, always work in "first come, first serve" order"
→ ↑ Flexibility

ISOM 2700 Page 27

 ○ Lvl schedule: Workers have to do certain things, in predictable way
→ Get used to work patterns
- Prerequisite: Short lead time
○ Underutilize capac
→ Make workers busy, always work in "first come, first serve" order"
→ ↑ Flexibility

- Create frozen windows (no changes in production schedules) → Stabilize inventory from
suppliers
Toyota: 2 weeks. Schedule already communicated with suppliers

- Improve vendor relationship → ↓ Lead time, ↑ Quality, ↑ Info sharing

- Improve product design:

○ Modular design → Standardize product configuration → Allow mass customization
○ Standardize & Reduce no of part
Toyota: Many products use same components

- Concurrent engineering:
○ Integrate product & proc design → Early feedback
○ Robust design for quality:
Minimum Production Lot Sizes
Car door's edge: Designed such that even if door not match car frame exactly, customers
can't notice

- Principles: If each time:

Deliver 1 material Deliver assortment of different materials
(Min lot size)
- Inventory lvl: Sudden ↑ at receipt + - ↓ Avg inventory
Slow ↓ at consumption - Prevent inventory become obsolete
- High avg inventory
JIT Goals & Building Blocks

Goals: Produce & deliver batches of (600 A + 200 B + 200 C)

Max production rate = 250 products/day
▪ Large-batch scheduling: Produce all A first, then B, then C
250 A → 250 A → (100A → Changeover → 150B) → (50 B → Changeover →
200 C) → Next batch
▪ Levelled scheduling: Everyday, product small quantities for each types
Every day: Setup → 150 A → Changeover → 50B → Changeover → 50C

- Prerequisite: Short Setup/Changeover

Toyota: 10 min setup
▪ Complete many tasks which can done ahead → ↓ 60-70% setup time
▪ Separate setups into:
□ External: Can done without machine shutdown
□ Internal:
 Must shut down machines
 Solution: Worker teams study machine very well → Perform
changeover very fast
Other companies: Hours setup (Management allows them to do so)

ISOM 2700 Page 28

Sustainability Issues of Business Operations
Monday, December 11, 2017 11:53 PM CSR in Supply Chain
Impact of CSR on ops & supply chain related decisions

Sustainability Issues - Product/Service design:

Customer safety, recyclability of materials, energy consumption, …

Dimension Def Example - Network design:

Economic Impact of CSR in business ops - Preserve profitability Environmental impact on location, reduce transport related energy, …
- Contribute to economic development
- Layout of facilities:
Social - Rel between business & society - Integrate social concerns in business
op Staff safety, disabled customer access, …

- Motivations: - Consider full scope of impact on

• Society's recognition → Good publicity
• Attract & retain talented employees
• Ethical sourcing: Customer pick producers
implementing CSR
Environmental - Natural env & sustainability of business
practices
- More companies go green due to competitive
pressure & financial/non-financial incentives
- New standards related to environmental issues
ISO 14000 Environmental Management
Standards
Stakeholder Consider all stakeholders/ stakeholder groups
communities
- Environmental stewardship
- Environmental concerns in business
ops
Interact with stakeholders
- Proc tech:
Staff safety, waste disposal, …
- Job design:
Workplace stress, transportation of staff to/from work, …
- Capac planning/control:
Employment policies, material utilization, …
- Inventory planning/control:
Price manipulation, energy management of replenishment transportation, …
- Supply chain planning/control:
Minimize energy consumption, …

Voluntariness - Actions not prescribed by law - Beyond legal obligations

- Quality planning/control:
- Do more than what you have to - Voluntary
Scrap materials, …

Factors affect CSR initiatives: - Failure prevention/recovery:

• Corporate image Environmental impact of proc failures, …
• Regulatory compliance
• Liability
• Community relations
• …

ISOM 2700 Page 29