Introduction to Logistics & Supply

Chain Management (OMGT2085)

Topic 4
Production & Operations Management
Outline

• Role of Production Operations

 Production Strategies
 Production Planning
 Production Process Layout
 Production Metrics
 Production Technology

• Supply Chain Process Integration

• Barriers to Process Integration

• Bullwhip Effect

• Managing Supply Chain Risk & Security

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 Role of Production Operations
• Manufacturing and service production (contract manufacturing) provide an
economic utility called form utility through processes that change the
appearance or composition of the product

 Component fabrication

 Product assembly

 Service request execution

• Form utility drives the need for supply chain capabilities (time & place utilities)
• A production operation requires the support from different players in a supply
chain in order to effectively support the production demands from customers
• To operate to optimal efficiency, supply chain tradeoffs must be understood and
made
Can you think of a tradeoff?

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 Role of Production Operations
Production Process Functionality

• No two processes are organized exactly alike or perform to the same level
 Product strategies drive the process design and assembly methods
• Burger King (assemble-to-order) vs McDonald’s (made-to-stock)
• Assemble-to-order methods tend to be more complex, be more labor
intensive, and require longer processing time than the mass-
production-oriented, make-to-stock operations.

• Process functionality helps the success of an organization

 Unique products and services can be created from processes that are
performed differently than those from competitors (competitive advantage)
 Finding the way to perform processes better than the competitor

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Production Process

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 Role of Production Operations
Production Tradeoffs
• Volume-variety tradeoff is a primary issue of production
 High variety/low volume (economies of scope – flexible to demand)
 Low variety/high volume (economies of scale – cost effective)

• Fundamental tradeoffs between responsiveness (R) and efficiency (E)

 Centralized (E) versus decentralized (R) production facilities
 Larger (R) versus smaller (E) production facilities
 Operating methodology used by the facility - many (R) v few (E) functions

• Tradeoffs between production processes for goods and the costs involved in
manufacturing them must also be understood

• Production and supply chain costs vary for make-to-stock,

assemble-to-order, and build-to-order product

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 Role of Production Operations
• Made-to-stock (MTS)
 Traditional production method where finished items are usually produced
before receipt of customers orders (anticipated demand)

 Customers orders filled with finished good inventories

 Accurate forecasting and inventory control are critical

 Works well for chemical, pharmaceutical, and energy end products

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Role of Production Operations
• Assemble-to-order (ATO)
 Production method combining of standard components and options or
accessories specified by customer
 Finished goods not assembled until customer demand is known
 Useful in repetitive manufacturing situations where a large number of end
products (based on the selection of options and accessories) can be
assembled from common components
 Works well for automobiles and computers end products

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 Role of Production Operations
• Build-to-order (BTO)
 Production method also called make-to-order (MTO) by which assembly is
delayed until a confirmed order is received for the product
 The end product is a combination of standard and custom-designed
components that meet the unique needs of a specific customer
 Higher level of customization and lower volume than ATO
 A good choice for uniquely configured products like computer servers or
where holding inventories in anticipation of demand is expensive (e.g.
aircraft)

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Role of Production Operations
• Engineer-to-order (ETO)
 Production method focusing on the creation of highly tailored products for
customers whose specifications require unique engineering design or
significant customization
 Requires detailed cost estimates and tailored pricing
 Customers involved throughout the entire design and production process
 Works well for capital equipment, industrial machinery, and highly technical
items

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Role of Production Operations
Total Cost of Manufacturing

Source: Adapted from Bowersox, Closs & Cooper, Supply Chain Logistics Management, 3rd ed. (2010)

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Role of Production Operations
Production Tradeoffs

• Make versus Buy decision

 Complex and involves sacrifice

 Internal production processes are more visible and better controlled for quality
output

 Outsourced production processes should lead to lower product costs and

allow the focal company to focus its resources on more strategic needs

• Production operations cannot strive to be all things to all people and

tradeoffs must be made

 Focus should go to one or two competitive dimensions

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Role of Production Operations
Production challenges
Success depends on
• Increased competition how companies can
address these
• More demanding customers through process
innovation
• Improved efficiency as well as adaptability
• Competitive pressures for many established manufacturers and service
providers to constantly innovate in a dynamic business environment
reached by many global supply chains
• Changes in Customers’ demand

 Customization over mass production

 Shrinking life cycle of products

 Leanness and adaptability to succeed nowadays

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Reflective Exercise 1

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 Production Strategies
• Mass Production
 Operations strategy focuses on cost efficiency and large scale production
(economies of scale)
 Push-based system* that relies on long-term forecast for production planning and
decision making
 Works well if demand is somewhat constant
 Production backlogs are used to accommodate variations of demand
 Works well for supply chains that focus on the immediate delivery of off-the-shelf,
low cost, standardized goods
 Visibility of inventory is important to manage demand changes in the market
 Ex. school supplies, toys, traditional clothing, household items
 Process option to use: make-to-stock (MTS)

* Product is not based on the real customer demand

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 Production Strategies
• Lean Production
 Operations strategy focuses on improved quality and waste reduction
 The goal is to have materials arrive at the needed location just in time for rapid
processing and flow through the system
 Relies on pull-based systems* to coordinate production and distribution with actual
customer demand
 No need for the manufacturer to build inventory in anticipation of demand
 Difficult for achieving economies of scale as well as lack of technological capabilities
makes it difficult to achieve visibility and system synchronization
 Ex. Toyota production system, Dell computers
 Process option to use: assemble-to-order (ATO)

YouTube link: https://www.youtube.com/watch?v=XsXeuj6PYQI

* Product will enter the supply chain by the customer demand

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Toyota Production System (TPS)
Seven Deadly Wastes
TPS Seven Deadly Waste

http://www.youtube.com/watch?v=Tc9IQLJl4AU

Source: Ohno, Toyota Production System: Beyond Large Scale Production

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 Production Strategies
• Flexible Manufacturing
 Operations strategy focuses on leveraging production resources (e.g., time and
efforts) in support of different transformation processes (economies of scope)
 Relies on strong suppliers and information technology
 Main flaw of this strategy is cost (purchase of multipurpose or adjustable equipment;
labour skills)
 Outsourcing and offshoring gives manufacturers other ways to be flexible as well as
be more cost effective, gain more capacity, and improve quality
 Ex. automobiles, plastic bottles, custom parts, apparel
 Process option to use:
• build-to-order (BTO)
• engineer-to-order (ETO)
https://www.youtube.com/watch?v=Br2eEpiiwvU

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 Production Strategies
• Adaptive Manufacturing

 Operations strategy focuses on greater velocity and real-time execution

 Provides companies with the ability to replace planning and replanning with
execution based on-real time demand

 Custom orders are captured in an automated manner, sequenced, and then

executed by the factory with little to no intervention from personnel

 Technology, such as ERP, is key to an adaptive strategy serving to seamlessly link

factory processes, production equipment, and production systems to supply chain
operations

 Ex. electronic components, automobile parts, cosmetics, medical equipment

 Process option to use: hybrids (combination of many)

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 Production Planning
• Long-Range Plan

 Covering a year or more, focus on major decisions regarding capacity and

aggregate production.

• Medium-Range Plan

 Span 6 to 18 months and involve tactical decisions regarding employment

levels and similar issues.

• Short-Range Plan
 Ranging from a few days to a few weeks

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 Production Process Layout
• Manufacturing Cell
 Process-focused layout that dedicates production areas to a narrow range
of products that are similar in processing requirements

• Assembly Line
 Product-focused layout in which machines and workers are arranged
according to the progressive sequence of operations

• Continuous Process Facilities

 Similar to assembly lines, with product flowing through a predetermined
sequence of stops

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 Production Metrics
• Total Cost

 All money spent on manufacturing must be summarized and the total

compared to the previous period

• Total Cycle Time

 Total cycle time is a measure of manufacturing performance that is

calculated by studying major purchased components and determining the
total days on hand of each one

• Delivery Performance
 Is the percentage of customer orders shipped when the
customer requested them to be shipped

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 Production Metrics
• Quality

 This may vary by company but it must focus on quality from the perspective
of the customer

• Safety

 The standard metrics of accident/incident frequency, severity, and cost are

important to monitor, with continuous improvement (i.e., reduction) as the
goal

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 Production Technology
• Manufacturing Execution Systems (MES)

 Central software used to monitor and control production operations

 Linked to other enterprise tools like ERP systems, product life cycle
management tools, and scheduling and planning systems to ensure
manufacturing operations are being managed in real time without
interruptions and delays https://www.youtube.com/watch?v=lLyBV5qgAB0

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 Supply Chain Process Integration
• The ultimate goal of supply chain management is to create value for end
customers and firms in the supply chain

• Firms in supply chain must integrate processes to achieve this goal

• Process integration requires:

 Training

 Willing and competent partners

 Trust

 Organizational culture change

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Barriers to Process Integration
• The Silo Mentality
 ”I win, you lose”
 Using cheapest suppliers
 Ignoring customer
 Assigning few resources to new products and service design

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Barriers to Process Integration
• Lack of Trust
 Successful process integration requires trust and trust is earned over
time
 Collaboration and trust are based on;
 Start small
 Face-to-face meeting
 Go for win-to-win
 Some information should remain proprietary
 Just do it: Simple start – sharing information

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Barriers to Process Integration
• Lack of knowledge
 Technologies enables the integration process cross extended supply
chains
 Successful supply chain management is relies on significant time
influencing and increasing the capabilities of the firms and their
partners
 Training of supply chain partner employees is also known as
collaborative education, and can result in more successful supply
chain

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Barriers to Process Integration
• Activities Causing the Bullwhip Effect
 Forecasting and their corresponding orders along the supply chain can
become amplified and accumulate, causing the bullwhip effect
 Variations in demand lead to problem in capacity planning, inventory
control, workforce and production scheduling resulting in reduced
customer service, increase safety stock, and higher supply chain costs
 Higher variability in orders placed by retailer to manufacturer than
actual sales

https://www.youtube.com/watch?v=JgLkDbiwTX0

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Bullwhip

“It is so-called because small order variability at the customer level

amplifies the orders for upstream players, such as wholesalers and
manufacturers, as the order moves up along a supply chain. The
increase in the variability of orders at each stage in a supply chain is
often called the bullwhip effect”

Paik, S.K. and Bagchi, P. K. (2007),"Understanding the causes of the bullwhip effect in a supply chain", International Journal of
Retail & Distribution Management, Vol. 35 Iss 4 pp. 308 - 324

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Bullwhip
• Impacts
 Order variability is amplified up the supply chain
 Upstream echelons face higher variability

• Causes
 Promotional sales
 Volume and transportation discounts
 Inflated orders
 E.g. IBM Aptiva orders increase by 2-3 times when retailers thought that
IBM would be out of stock over Christmas

 Demand Forecast
 Long cycles times

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Bullwhip
• Consequences

 Increased safety stock

 Reduced service level

 Inefficient allocation of resources

 Increased transportation costs

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Bullwhip
• Reducing Bullwhip
 Make actual demand data available to suppliers

• Vendor-managed inventory (VMI)

 Reduce the length of supply chain
 Reduce the lead times from order to delivery

• Order batching
 Order batching occurs when sales reps fill end-of-period sales quotas,
or when buyers spend end-of-year budgets
 Solution is to use frequent and smaller order size. Firms can order
smaller quantities of a variety of items from a supplier or use a freight
forwarder to consolidate small shipments

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Bullwhip
• Price fluctuations
 Reduce price fluctuations through forward buying activities to take
advantage of the low price offers between:
 Retailers and consumers
 Distributers and retailers
 Manufacturers and Distribution
 Eliminate price discounting – Many retailers have adopted everyday
low prices
 E.g. Bunnings, Jetstar, VietJet Air

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Bullwhip
• Rationing and shortage gaming
 Rationing – When demand exceeds the availability, supplier provides
partial supply to customers, who also tend to inflate orders
 Shortage gaming – When production capacity equals demand,
demand then drops, as the buyers try to unload excess inventories

Solution – Sellers should allocate short suppliers based the demand

histories of their customers. Sharing future order plans with suppliers
allows suppliers to increase capacity if needed.

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 Managing Supply Risk & Security
• Managing Risk

 Increase safety stocks also known as stockpiling and forward buying

 Identify backup suppliers & logistics services which may emergency

sourcing and multiple sourcing

 Diversify the supply base

 Utilize a supply chain IT system

 Develop a formal risk management program

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 Managing Supply Risk & Security
• Managing Supply Chain Security

 Reducing the risk of intentionally created disruptions in supply chain

operations

 A supply chain is only as secure as its weakest link

 Security management collaboration should include, for example,

contractual requirements for secure systems

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