What is Operations and Supply Chain Management about? - Chapter 1

How are activities (operations) and the supply chain structured?

Operations and supply chain management (OSCM) contain the activities within a company and the supply chain management. It is the design, implementation and improvement of the systems that create and deliver the primary products of a company. The OSCM is responsible for the entire system that produces products and services. This can be about any product or service whatsoever.

Operations and Supply Chain both have special meanings within OSCM:

• Operations is about converting sources into products or services that are wanted by customers.
• Supply chain is about the transport of information and materials.

Materials and information flow through a supply chain network. The pipeline contains key locations where material and information are stored for future use. Often every part of the network is controlled by different companies.

If the network has a global dimension, the different components can be located in different countries. Due to the dynamic and competitive nature of global companies and the constant evolution in information technologies, the required activities and supply chain management can change quickly. Indeed, today's success - in a global market - requires a business strategy that matches customer preferences.

Processes in a supply chain

Supply chain processes address the activities that convert input into output. This process can be subdivided into 5 activities:

1. Planning: The planning consists of the processes required to strategically implement the supply chain. The company determines here how they meet the demand with the available sources. It is important that the supply chain is monitored so that it is efficient and delivers high quality to its customers.
2. Sourcing: The company hereby selects suppliers that provide the goods and services that the company needs to produce its products.
3. Making: This activity is about where the product is produced or the service is offered. It is also about monitoring processes such as speed, quality and employee productivity.
4. Delivering: This is also linked to the logistical process of picking up and transporting products to department stores and customers. The transport of products must be coordinated and the movement of goods and information must take place via the supply network.
5. Returning: Is about the process of receiving goods that are not good and supporting customers who have problems with the products or services received.

In a supply chain, therefore, there are various participants and activities that must be coordinated.

Difference between a product and service

There are 5 essential differences between a product and a service:

1. A service is not tangible, a product is.
2. A service requires interaction with the customer. Products are produced separately from the customer.
3. Services are heterogeneous; they vary from day to day. Products, on the other hand, can be produced without variability.
4. Services have a limited shelf life and time, they cannot be stored like goods.
5. A service is formed by a number of characteristics that influence the service, such as the attitude of employees, the speed of work, etc. These characteristics define the service.

Product-service ratio

There are "pure goods" and "pure services" that consist solely of goods and services. A "pure good" is, for example, chemicals and a "pure service" is, for example, a university. However, almost every product offering is a combination of goods and services, these are also called "core goods" or "core services". Core goods also contain a service component, such as car dealers who also offer car repairs as a service. Core services integrate tangible goods, such as telephone companies that offer cables in addition to offering cable repairs.

In total there are therefore 4 types of product-service relationships:

1. Pure goods: Only focus on the products (chemicals).
2. Core goods: Products that also contain a service component as part of the company (cars).
3. Pure services: Focus only on services (University).
4. Core services: Services that integrate tangible products such as (telephone cables).

Bundling of products and services

Product service bundling takes place when a company incorporates service activities into its products, such as maintenance, training etc.

How do efficiency, effectiveness and value relate to each other?

Managers try to stimulate growth. Efficiency and effectiveness are important here. Efficiency means that you do something for the lowest possible costs. You therefore use as few sources as possible. Effectiveness means that you do the right things to create as much value as possible for the customer. The two goals for maximizing efficiency and effectiveness are often conflicting; a trade-off takes place. To determine which amount of efficiency and effectiveness is the best, you need to look at the concept of value. Value is the attractiveness of a product given its price. This can be calculated by dividing the quality by the price.

How do you evaluate efficiency?

Investors compare the activities and supply chain of companies with each other because the relative costs of goods and services are essential for high returns. Profit increases due to an increase in sales or a reduction in costs. Companies that are efficient can still make a profit in times of recession due to their low cost structure. As a result, companies are assessed on the basis of their efficiency ratios.

Benchmarking is used. This is the process in which a company identifies the process of another company (or industry) in order to assess the "best approach". The activities and supply chain processes of a company have an impact on these efficiency ratios.

The most important 4 efficiency ratios are as follows:

1. Cash conversion cycle = Days outstanding + Days inventory - Payable period

The cash conversion cycle is about the time that the company needs to convert the money, that they have spent on raw materials, into profit from the products sold. The less the number of days this takes, the better.

2. Reiceivable turnover = Annual credit sales / Average accounts receivable

This ratio measures how often money is received in a year. This is about the efficiency in collecting their sales.

3. Inventory turnover = Cost of good sold / Average inventory value

This ratio is about how efficient a company is in converting its inventory into sales. It shows the speed of use of its stock.

4. Asset turnover = Revenue (or sales) / Total assets

This ratio measures the efficiency of the company when using its resources in general. The higher the ratio, the better.

What does a job in supply chain management look like?

People who pursue a career in OSCM specialize in managing the planning, production and distribution of goods and services. Every company depends on effective results that strive for long-term success, so there are always jobs in this field. As an employee you then have to find out how you can best tackle matters; which location, buyers and how you can best implement things.

Which concepts are mainly used within OCM?

Since the Industrial Revolution in 1800, concepts have been developed within the OSCM field that is still being used. This book focuses primarily on the concepts developed since 1980. These concepts are as follows:

• Manufacturing strategy: Looks at how the capabilities of a company can be used strategically in order to gain an advantage.
• Just-in-time (JIT): Integrated set of activities to achieve high volume production with minimal stocks. This is achieved by having parts delivered exactly when they are needed.
• Total Quality Control (TQC): this is a way that aggressively searches for a way to eliminate causes of production errors.
• Lean manufacturing: Refers to a set of concepts that are related to Just in Time (JIT) and Total quality control (TQC).
• Total quality management (TQM): The company is organized in such a way that it excels on all dimensions of products and services that are important to the customer.
• Business process reengineering (BPR): Approach to improve business processes that want to make revolutionary changes instead of small changes
• Six Sigma: this is a statistical term to describe the quality of the goal. It also refers to a quality improvement philosophy and program.
• Mass Customization: The ability to create unique products that meet customer requirements.
• Electronic commerce: Internet is used as an essential element for business activities.
• Sutainability: Using the necessary resources without compromising the ability of future generations to meet their needs.
• Triple bottom line: This implies a business strategy that contains social, economic and environmental criteria.
• Business analytics: Here, current business data is used to solve business problems through mathematical analysis.

If the network has a global dimension, the different components can be located in different countries. Due to the dynamic and competitive nature of global companies and the constant evolution in information technologies, the required activities and supply chain management can change quickly. Indeed, today's success - in a global market - requires a business strategy that matches customer preferences.

When is a business strategy sustainable? - Chapter 2

A sustainable strategy creates value for the shareholders of the company and for all individuals and organizations that are influenced by the company's actions. Shareholders are the owners of the company, people and organizations that are influenced by a company are called stakeholders. A sustainable strategy means that a company not only focuses on economic profit, but is also concerned with the social and environmental impact of their actions. As a result, they use raw materials without reducing the possibilities for future generations with regard to raw materials.

Companies can be assessed on the basis of the triple bottom line. The triple bottom line evaluates a company based on social, economic and environmental criteria.

The criteria are as follows:

• Social responsibility: Fair and beneficial business practices with regard to labor, the community and the region in which a company operates.
• Economic prosperity: A company is required to compensate shareholders for providing capital. They must do this by delivering a positive result on the investment they have made.
• Environmental stewardship: This refers to the impact of the company on the environment. The company must try to protect the environment as good as possible.

Most business planners agree with the goals to improve society and prevent further environmental damage, but others disagree. Arguments for this are the loss of efficiency and that it is only feasible for rich societies, that only they can afford to think of society and the environment.

How is a strategy defined within OSCM?

Operations and supply chain strategy is concerned with setting up broad laws and plans for the use of raw materials of a company. This must then be integrated into the business strategy. This is related, for example, to the environment and corporate social responsibility. The Operations and Supply chain strategy must take these goals into account; operational goals are coordinated with those of the entire organization.

A major focus of this strategy is on the effectiveness of the activities. Operations effectiveness is related to the core business processes that are needed to run the business. This involves the implementation of activities in such a way that the strategic priorities can best be implemented at the lowest possible costs. As a result, it directly reflects the costs associated with the execution of business activities.

Competitive dimensions on which a company can distinguish itself

Today, customers can choose between many products and services. How do you, as a company, ensure that your products or services are purchased? There are a number of competitive dimensions in which a company can achieve a competitive position compared to other providers:

• Costs: Make sure your product or service is the cheapest: The market buys it because it is cheap. The company must then produce for the lowest possible costs.
• Quality: delivering a great product or service: You have two types of quality:
  1. Quality of the design: the set of characteristics that the product or service has. The more features, the more chic and expensive.
  2. Process quality: this is directly related to the reliability of the product or service. Customers want a product without errors.
• Speed ​​of delivery: delivering the product or service quickly: In some markets, delivering faster than your competitors is critical.
• Reliability of delivery: Delivering a product or service on the agreed date.
• Volume changes: A company must be able to respond to increased or decreased customer demand.
• Flexibility and the speed with which new products are introduced: Flexibility refers to the ability of a company to offer a wide variety of products. An important part of this is that a company can offer new products on time.
• Other product specific criteria: There may also be other dimensions that are related to specific products or situations.

Companies must compromise between different competitive dimensions

A company cannot excel in all competitive dimensions. Management must decide which parameters of results are critical to the success of the company and then focus on those parameters. Example: if a company wants to focus on delivering its products very quickly, it cannot be very flexible in its ability to offer many different products. A strategic position is not sustainable unless they compromise with other positions. Such a compromise occurs when activities are incompatible.

Straddling arises when a company tries to do the same as a competitor; adding new features, services or technologies to existing activities. This often causes problems because certain compromises have to be made. It is risky to fight by wanting to use a strategy that is better than the strategy of the competitor.

The link between marketing and Operations

A well-designed link between business activities (operations) and marketing is of great importance. The terms order winner and order qualifier describe marketing-oriented dimensions that are of great importance for the competitive success of a company.

• Order winner: This is one or more marketing-oriented dimensions that ensure that a product is clearly differentiated from its competing products. This can be the price, quality, reliability or other dimensions.
• Order qualifier: These are dimensions that are used to assess a product or service. In doing so, the decision is made as to whether the product or service is worth buying. These are crucial for consumers to purchase a product or service. It is therefore necessary to look at the dimensions that a product or service must have as a result of which the consumer chooses that product or service and not that of the competitor.

How are strategies implemented within OSCM?

Strategies are implemented through a set of activities. These activities are developed and designed in such a way that they deliver products and services in a way that is in line with the business strategy. You can use Activity-system maps for this; diagrams that show how a company's strategy is delivered through a set of support activities.

What implications can OSCM strategies have?

Due to the uncertainty in the (global) environment in which companies operate, the risks in the OSCM strategies must be evaluated. Supply chain risk reflects the possibility that a disruption has an impact on the ability of a company to deliver products or services continuously. Disruptions in the supply chain are unplanned and have not been anticipated, this interrupts the normal flow of goods and materials within the supply chain. This can lead to financial risks. this requires strategies to include such risks in their supply chains and to develop initiatives to deal with potential disruptions.

3 steps to manage risks

The three-step risk management framework contains the identification of potential disruptions, the possible impact of these risks and the developed plans to deal with these risks. The three steps are as follows:

1. The sources of the possible disruptions must be identified.
2. The potential impact of these risks must be assessed.
3. Develop a plan or plans to mitigate the impact of these risks.

The identification of risks is important to determine whether some risks are acceptable or not. If it turns out that this is not the case, a company can insure itself against possible losses with certain risks.

How is productivity evaluated within OSCM?

Productivity is a common measure of how well a country, industry or company uses its resources. Because OSCM focuses on making the best possible use of the available resources of a company, productivity measurement is of fundamental importance to be able to assess the results of a company.

Productivity is defined as:

• Productivity = Outputs / Inputs

Productivity is a relative measuring instrument; it only makes sense if it is compared to something else such as another company. It shows how well a company uses its raw materials.

Companies can be assessed on the basis of the triple bottom line. The triple bottom line evaluates a company based on social, economic and environmental criteria.

The criteria are as follows:

• Social responsibility: Fair and beneficial business practices with regard to labor, the community and the region in which a company operates.
• Economic prosperity: A company is required to compensate shareholders for providing capital. They must do this by delivering a positive result on the investment they have made.
• Environmental stewardship: This refers to the impact of the company on the environment. The company must try to protect the environment as good as possible.

How do you predict the demand? - Chapter 3

Why is forecasting essential in supply chain planning?

Forecasting is about making predictions. It is essential for every company and for every management decision. It forms the basis for business planning and controls. Before you make a forecast you must check what the purpose of the forecast is. For example, some forecasts aim to determine future demand, where others will discuss how the demand can be achieved with the current strategy. This allows a distinction to be made between different forecasts (forecasts).

These are as follows:

• Strategic forecasts: These predictions are aimed at the medium or long term. They are used to make decisions about strategy and to estimate aggregate demand.
• Tactical forecasts: These are short-term forecasts. These are used as input for making day-to-day decisions, aimed at meeting demand.

How can you evaluate demand based on quantitative forecasting models?

Forecasts can be made on the basis of 4 basic types: qualitative, time series analysis, causal relationships and simulation. In this book the focus is mainly on the time series analysis techniques.

• Time series analysis: A prediction in which data from the past is used to predict future demand.

Components of the demand

In most cases, the demand for products or services can be divided into 6 components:

1. Average demand for the period: Here the average over a certain time is displayed.
2. A trend: This is often the starting point in the development of a forecast. These lines are adjusted for other effects like seasonal effects or cyclical elements and any other event so that a final prediction can be made.
3. Seasonal element: This is about changes that are caused by seasonal influences.
4. Cyclical ements: These are the most difficult to determine because the time span is unknown, as is the cause of the cycle.
5. Random variation: These are caused by changing events.
6. Autocorrelation: The expected value at a certain point is highly correlated with its value from the past.

Time Series Analyses

Time series Analysis models try to predict the future based on data from the past. Here you can use 3 different data from the past:

1. Short term: Under 3 months.
2. Medium term: This varies from 3 months to 2 years.
3. Long term: This is about a span of time longer than 2 years.

The short-term models are mainly good at measuring current variation in demand. The medium term models are useful for overcoming seasonal influences and the long term models focus more on the general trends.

Which model a company chooses for its prediction depends on:

• The time available for the forecast
• The available data
• The required accuracy
• The size of the budget for the forecast
• The availability of qualified personnel

Simple moving average

The moving average is a useful model if the demand for a product does not increase or decrease rapidly and if it does not contain any seasonal characteristics. The random fluctuations can be removed from the forecast based on the moving avarage.

• Moving average: A forecast based on the average demand in the past.

The idea is simple: the average demand over the most recent periods is calculated. Every time a new prediction is made, the oldest period in the average is deleted and replaced with the newest period.

The calculation is as follows:

Ft = At-1 + At-2 + At-3 + ... + At-n / n

• Ft = Forecast for the coming period
• N = The number of periods to be averaged
• At-1 = The actual occurrence in the past period
• At-2, At-3 and At-n = Actual occurrence in two periods ago, three periods ago and so on. Up to n periods ago.

Weighted Moving Average

Where the moving average assigns the same weight to each component, the weighted moving average assigns different weights to each component. The sum of all weights is equal to 1. The most recent data is assigned the most weight. The older the data, the less heavy it counts in the average. For example, more recent data is more significant than older data.

• Weighted moving average: A prediction based on data from the past in which more recent data is given more weight than older data.

Experience and trial and error are the simplest ways to assign weights. The general rule is that the most recent indicator is the most important indicator, this says the most about what you can expect in the future. This should give this a higher weight.

Exponential smoothing

When predicting the future based on the simple and weighted moving average, the biggest disadvantage is that you have to do research based on a large amount of data from the past. With each new item of data, the oldest observation is deleted and a new prediction must be calculated. If it is assumed that the importance of data decreases if it is deleted in the past, then exponential smoothing is perhaps the most logical and easy method to use.

Exponential smoothing is a prediction based on time series in which each step of data from the past is reduced by (1- α). This is the most used technique of all forecasting techniques. It is an integral part of virtual or computerized forecasting programs. It is very useful, for example for keeping track of stocks.

• Exponential smoothing: This is a prediction based on time series in which each step of data from the past is reduced by (1- α).

Exponential smoothing techniques are generally accepted for 6 important reasons:

1. Exponential models are surprisingly accurate
2. Formulating an exponential model is relatively easy
3. The user can understand how the model works
4. Little calculation is required with this model
5. Computer storage only needs to be small due to the limited use of historical data
6. Tests to see how well the model is doing are easy to calculate

With exponential smoothing, only 3 parts of data are needed to predict the future: the most recent prediction, the actual demand that took place for the prediction and the smoothing constant alpha (α). The smoothing constantly determines the degree of smoothing and the speed with which there is a response to the differences between predictions and current demand.

• Smoothing constant alpha (α): The parameter in the exponential smoothing equation that controls the speed of the response to differences in the forecast and actual demand.

Example: If a company produces a standard item with a relatively stable demand, the response speed to the difference between the current demand and the forecast will be fairly narrow (think 5 to 10%). However, if the company is experiencing growth, the response speed will be higher, say 15 to 30%. The higher the growth, the higher the response time should be.

The comparison for one exponential smoothing prediction is as follows:

• Ft = Ft-1 + α (At-1 - Ft-1)

Here the components are about the following:

• Ft = The exponential smoothed forecast (for period t)
• Ft-1 = The exponential smoothed forecast made for the prior period
• At-1 = the demand in the prior period
• α = The desired answer; the smoothing constant

This comparison states that the new prediction is equal to the old prediction plus a part of error (the difference between the previous prediction and that which actually took place).

Example:

• Suppose the smoothing constant α is 0.05
• Suppose there was a prediction last month with (Ft-1) 1,050 units.
• If the actual demand is 1,000 units, instead of 1,050, then the forecast for next month will be as follows:
• Ft = Ft-1 + α (At-1 - Ft-1)
• = 1,050 + 0.05 (1,000 - 1,050)
• = 1.050 + 0.05 (-50)
• = 1,047.5 units

Because the smoothing coefficient is small, the response to an error of 50 units is a reduction of 2.5 units for next month. The higher the value of the alpha, the closer the prediction comes to the actual demand. The rule is that the closer you are to the actual demand with your prediction, the faster you will notice a trend. This helps if the alpha is adjusted, this is also called adaptive forecasting.

Exponential Smoothing with Trend

Exponential smoothed forecasts can be corrected by making trend adjustments. You need two smoothing constants to adjust the trend. In addition to the smoothing constant of alpha (α), the trend comparison also uses smoothing constant delta (δ). Both the alpha and the delta reduce the impact of an error that occurs between the actual question and the predicted question. If both the alpha and the delta are not used, the trend reacts too strongly to errors.

• Smoothing constant delta (δ): An additional parameter that is used in an exponential smoothing equation that adjusts the trend.

The comparison where the prediction also includes the trend looks like this:

• Ft = FIT t-1 + α (At-1 - FITt-1)
• T1 = Tt-1 + δ (Ft - FITt-1)
• FITt = Ft + Tt
• Ft = the exponentially smoothed forecast without the trend for that period
• Tt = the exponentially smoothed trend for period t
• FITt = the forecast including trend for period t
• FITt-1 = the forecast including trend of the current period
• At-1 = the actual demand for the prior period
• α = smoothing constant (alpha)
• δ = smoothing constant (delta)

Linear Regression Analysis

Regression can be defined as a functional relationship between two or more correlating variables. It is used to predict a variable from the other variable that is given. The data must first be plotted to see if parts of the data or the entire data is linear.

Linear regression refers to a special class of regression. This is because the relationship between the variables is a straight line. The linear regression line has the form of Yt = a + bt. Yt is the value of the dependent variable. a is the interception of Y, b is the slope and t is the index for the time period. A line is linear if the data forms a straight line.

• Linear regression forecasting: A forecasting technique that assumes that data from the past and future projections come together in approximately a straight line.

Linear regression is useful for long-term forecasting of major accurences. It is also useful for aggregate planning. Linear regression can be used in forecasts for both time series and causal relationships. If the dependent variable changes as a result of time, then it is a time series analysis. If a variable changes due to the change in another variable, then it is a causal relationship.

Decomposition of time series

A time series can be defined as chronologically ordered data that can contain one or more components of the question. This may include trends, seasonal, cyclical, or auto-correlation and random components.

• Time series: Chronologically ordered data that contains one or more components of the question.

You can de-compile Time series. This means that you identify and disassemble the data in the time series so that components are created.

• Decomposition: The process by which data is identified in time series and is split into fundamental components such as trends and seasonal correlations.

If the demand contains both seasonal and trend effects at the same time, it must be investigated how these relate to each other. There are 2 types of variation:

1. Additive Seasonal Variation: This assumes that the season factor is constant no matter what the trend or average is. The forecast is then as follows: Forecast including trend and seasonal = Trend + Seasonal factor
2. Multiplicative Seasonal Variation: Here the trend is multiplied by the season index. The forecast is then as follows: Forecast including trend and seasonal = Trend x Seasonal index

Predicting errors

If there is a forecast error, this is about the difference between the forecast and the actual demand.

Forecast error: The difference between the actual question and the predicted question.

Reasons for errors

Errors can arise in different ways. It often stems from the fact that forecasts do not include past trends in their predictions for the future. Errors can be classified into Bias errors and Random errors.

These mean the following:

• Bias errors: these occur when consistent errors are made. Example: if the wrong variables, relationships among variables, etc. are used.
• Random errors: these are errors that cannot be explained by the prediction model that is used.

How are errors measured?

Many terms can be used to describe the degree of error. Common terms are as follows:

• Mean absolute deviation (MAD): This is the average error in the prediction where the absolute values ​​of each error are used in every previous prediction. It is the average of the absolute variance of the predicted error.
• Mean absolute percent error (MAPE): This is the average error, measured as a percentage of the average demand.
• Tracking signal (TS): This measures whether the forecast is in line with rising or falling changes in demand. It can be used to track forecast bias.

Causal relationships in predictions

Causal relationship forecasting involves the use of independent variables, other than time as a variable, to predict future demand. The independent variable must be a leading indicator in this regard. Example: just as rain can be a leading factor in the prediction of the demand for umbrellas.

• Causal relationship forecasting: Predictions where independent variables are used, other than the variable time, to predict the future.

Multiple regression analysis

Another method for making predictions is the multiple regression analysis. This contains several variables where the effect of this on the examined item is determined.

How can qualitative techniques be used to predict demand?

Compared to quantitative techniques, qualitative techniques depend more on assessments and opinions of experts. These can be useful if there is no data about demand in the past. Qualitative techniques often have to do with structured processes so that experience can be acquired and work can be done accurately.

How can you apply collaboration techniques to predict demand?

Collaborative Planning, Forecasting, and Replenishment (CPFR) is a web-based activity to coordinate demand predictions, production and purchase planning, inventory additions and suppply chain partners. It is used to integrate all members. It can synchronize all predictions in different areas.

• Collaborative Planning, Forecasting, and Replenishment (CPFR): An internet-based handling to coordinate the predictions of production, purchases and the supply chain of a company.

CPFR often provides many benefits for all participants by sharing information about future schedules and making it visible throughout the system.

Forecasts can be made on the basis of 4 basic types: qualitative, time series analysis, causal relationships and simulation. In this book the focus is mainly on the time series analysis techniques.

• Time series analysis: A prediction in which data from the past is used to predict future demand.

How do you determine the required capacity? - Chapter 4

What does capacity management entail and why is this strategically important?

Capacity is the ability to keep something in custody; store. It is often seen as the amount of output that a system can achieve over a specific period of time. This may include the amount of customers that a company can serve or the number of cars that can be produced within a certain time. When assessing capacity, both input of raw materials and output of products must be considered. Management also looks at the time dimensions of capacity.

Generally there are 3 time units when planning capacity:

1. Long range: Longer than one year. These are productive resources (such as buildings). For this you need the cooperation and approval of top management. It is therefore a question of planning long-term products.
2. Intermediate range: These are monthly or quarterly schedules. The capacity can vary in such things as looking at the required personnel and materials.
3. Short range: These last less than one month. This involves the daily or weekly schematic process and it has to do with making adjustments and eliminating variance between the planned and the current output.

In this chapter, the focus is on capacity planning that is related to long-term decisions. These have to do with the purchase of capital-intensive items such as buildings. Capacity is a relative term. In the context of operations and management it is defined as follows:

• Capacity: This is the amount of input to raw materials that is available, relative to the output requirements over a certain period of time.

The purpose of strategic capacity planning is to provide an approach to determine the overall capacity or capital intensive resources that best support a company's long-term competitive strategy. The capacity level that is ultimately selected has an impact on issues such as the cost structure and stock laws.

• Strategic capacity planning: Here you will find the general capacity level of capital-intensive raw materials that best supports a company's long-term strategy.

Concepts of capacity planning

The term capacity implies a certain output but says nothing about the duration that that quantity is preserved.

• Capacity: The output that a system can reach over a certain period of time.

As a result, we do not know how long a certain capacity level is used. To avoid this problem there is the concept of best operating level.

• Best operating level: The level of output where the average costs per item are minimized.

At the best operating level, the volume of output ensures minimal costs per item. Another important measurement is the capacity utilization rate, which shows how close a company is to its best operating level.

• Capacity utilization rate: This measures how close the current output of a company is to its operating level.

The formula here is as follows:

• Capacity utilization rate = Capacity used / Best operating level
• So suppose the best operating level is 500 and you now have 480 then your capacity utilization rate is 96% (480/500 = 96%)

The capacity utilization rate is expressed as a percentage.

Economies of scale

Economies of scale is about the fact that as a company grows in volume, the average costs per item fall. This is partly due to the lower operating costs and partly due to the lower capital costs.

• Economies of scale: As the company gets larger and volume increases, the average cost per item drops. At some point, if the company continues to grow, it gets too large and cost per item increases.

If a company becomes too large and the price per item increases again, we speak of diseconomies or scale.

Capacity focus

The concept of a focused factory means that production works best when the focus is only on a number of production goals. This means that a company does not expect to excel in every aspect of the operational process. It is better for a company to choose a limited set of tasks to which they link goals (either costs or delivery speed, etc.).

• Focused factory: The actions are then built around a limited set of production goals. The focus is often on a specific product or specific product group.

The capacity focus can be operationalized through the mechanism of a plant within a plant, also known as PWP. A focused factory can have different PWPs, all of which contain different sub organizations (think of different laws, production controls, etc.).

• Plant within a plant (PWP): an area in a larger facility that focuses on a specific production goal. This can be used to apply the focused factory concept.

Capacity flexibility

Capacity flexibility means the ability to quickly reduce or increase production or to quickly move production capacity from one product or service to another. Such flexibility can be achieved through things like flexible processes and employees, but also through strategies that use the capacity of other organizations. More and more companies are incorporating the idea of ​​flexibility in their supply chain design. They can thus build capacity into the entire system.

Flexible handling of capacity can be done on various fronts:

• Flexible factories: A factory is flexible when there is zero change over time. This can be achieved by rotating machines (walls that you can pull down and so on). Everything in the factory is then designed so that changes can easily be made.
• Flexible processes: This is about economies or scope; different products can be produced cheaper than if they were produced separately. This concerns flexible executive systems in which different products are combined so that they can be produced at low costs.
• Flexible employees: Flexible employees have multiple skills and have the ability to easily switch from one task to another.

How can you plan capacity?

If you are going to increase or decrease the capacity, this can cause problems. If you want to change the capacity level you have to take several things into account. There are 4 important ones that keep the system in balance:

1. The balance in the system: A balance must be maintained between the input and output. There are various options for dealing with an imbalance (additional buffers can be built in to stock or part of it can be outsourced). You can change or adjust the supply chain in such a way that the balance is maintained.
2. Frequency of capacity increases: There are two types of costs that you have to take into account if you are going to increase capacity: the costs of upgrading capacity too often and the costs of increasing capacity too little. If you increase capacity too often, then you always buy too much, if you increase your capacity too little, large purchases must always be made. Both are precious.
3. Frequency of capacity reductions: Reducing capacity in response to falling demand can cause major problems for a company. Temporary strategies, such as less scheduling of hours, are often used. More permanent reductions in capacity often require the sale of items such as machines and other facilities.
4. The use of external capacity and supply capacity: Sometimes it is cheaper not to increase capacity but to use existing sources of external capacity. Here companies can share capacity or a company can opt for outsourcing (more about this in Chapter 13).

Determining capacity requirements

If you are going to determine the requirements for a capacity, then you have to look at the demand for each individual product, individual factory capacities and how the production is used by the factory network. This is usually done through the following 3 steps:

1. By using predictive techniques (see chapter 3) to predict sales for individual products within each production line.
2. Calculate the requirements for labor and equipment to meet the production line predictions.
3. Make the availability of work and company equipment visual in the planning.

Often a company decides to switch to capacity cushion.

• Capacity cushion: More capacity than the expected demand.

If a company has less capacity than the required capacity to be able to meet the demand, it is referred to as a negative capacity cushion.

How can you evaluate capacity?

A useful way to solve capacity problems is to use decision trees. You can evaluate capacity alternatives on the basis of decision trees. A decision tree is a schematic model, made up of steps. The steps are structured in a sequence of decisions that a company must make. The potential consequences of these decisions can be evaluated. Based on this you can estimate how much capacity is needed.

How can capacity planning in the service and production sector be compared?

The difference between capacity schedules for services and products

Capacity schedules in the service industry face the same problems as capacity schedules in the manufacturing industry, both have to do with estimating the right capacity. Nevertheless, there are also a number of important differences between the capacity schedules for services and products. Capacity schedules in the services industry have to do with the following:

• Time: Unlike products, services cannot be stored. As a result, managers must see time as an offer. The capacity must be present when the service is needed.
• Location: In face-to-face situations, the service must be placed close to the customer. With products, production can take place somewhere else and the products are transported to customers. This is not possible with services. The capacity to deliver the service must first be distributed to the customer, either physically or via e-mail or telephone.
• Difference in demand: The difference in demand is much greater in a service system than in a production system. This is because services cannot be stored, customers interact directly with the production system and they often also have different needs that may cause the expected service to differ.

The use of capacity and the quality of a service

Capacity schedules for services must take into account the day-to-day relationship between the use of a service and its quality. It is very context dependent when optimal use occurs (some companies have more freedom than others). A company's strategy is a good guideline for long-term capacity planning.

Capacity is the ability to keep something in custody; store. It is often seen as the amount of output that a system can achieve over a specific period of time. This may include the amount of customers that a company can serve or the number of cars that can be produced within a certain time. When assessing capacity, both input of raw materials and output of products must be considered. Management also looks at the time dimensions of capacity.

Generally there are 3 time units when planning capacity:

1. Long range: Longer than one year. These are productive resources (such as buildings). For this you need the cooperation and approval of top management. It is therefore a question of planning long-term products.
2. Intermediate range: These are monthly or quarterly schedules. The capacity can vary in such things as looking at the required personnel and materials.
3. Short range: These last less than one month. This involves the daily or weekly schematic process and it has to do with making adjustments and eliminating variance between the planned and the current output.

What do projects look like? - Chapter 5

What do we mean by projects and how are they organized?

This chapter focuses primarily on the technical aspects of project management; structuring a project network and calculating the critical paths. Nevertheless, the management part around projects is just as important.

Success in project management is an activity that requires secure controls and critical resources. In this book, much attention is paid to non-human resources, such as machines and materials. In projects, however, the time of employees are key assets. Human resources are often expensive and the people involved in a project are crucial to the succes of a business and are often the most valuable employees.

Within the highest level in the organization, management is often concerned with the portfolio of projects. There are many different types of projects: from the development of totally new products to reducing costs or improving the service offered.

It is important for a company to see which mix of projects is best for an organization. A company must have the right mix of projects to be able to support the company's strategy. Projects can be divided into 4 major parts:

1. Product change
2. Process change
3. Research and development (R&D)
4. Collaborations and partnerships

All projects have to do with teamwork and managing the team.

• Project: A series of related jobs, often aimed at achieving a certain output. Achieving this goal often requires a significant amount of time.
• Project management: Planning, controlling and controlling resources (people, materials, etc.) to meet the technical costs and time constraints of a project.

Before a project starts, senior management must determine which of the 3 organizational structures will be used for the project:

1. Pure Project

Pure Project is a structure for a project where a self-managing team works full time on a project. Here innovation and speed are the priority; a small focus team is used. Members of the team are only put together during the project. This pure project structure is a self-managing team working full time on the project.

• Pure project: A structure for organizing a project in which a self-managing team works full time on a project.

Benefits

• The project manager has full authority over the project
• Team members respond to one boss, so they don't have to worry about their loyalty being questioned by one of the bosses to whom they should report
• The lines of communication are shortened; decisions can be made quickly
• Team pride, motivation and dedication are high.

Cons

• You have to double your resources. This is because different projects do not share or exchange people and materials.
• Organizational goals and rules are ignored, team members are often physically and psychologically removed from headquarters.
• The organization then has a lack of knowledge and new technologydue to the weakened functional divisions
• Because the team members do not have a functional "home base", they often have concerns about their lives "after the project", which means that the end date of the project is often delayed.

2. Functional Project

Functional Project uses employees from the organization who are selected from their functional unit. They remain part of this functional unit during the project and are therefore often not committed to the project.

• Functional project: A structure in which team members are designated from the functional units of the organization. The team members remain part of their functional unit and are often not committed to the project.

Benefits

• A team member can work on multiple projects
• Technical expertise is retained in the functional area, even if the team members leave the project or the organization
• The functional area is still a "home base", even if the project is already completed. Functional specialists can move vertically.
• A large amount of specialized functional-area experts can create synergies if the project encounters technical problems.

Cons

• Aspects of the project that are not directly related to the functional area will be changed in the short term
• The motivation of the team members is often weak
• The needs of the customer are in second place and they are reacting slowly

3. Matrix Project

Matrix Project a structure that merges the functional and pure project structures. Each project uses people from different functional areas. A motivated project manager decides which tasks must be performed and when this should be done, but the functional manager checks which people should be used for this.

• Matrix project: A structure that merges the functional and project structures. Each project uses people from different functional areas. A project manager is appointed who decides which tasks must be performed and when they should be ready. The functional managers, however, check which people are used for this project.

Benefits

• Communication between functional divisions is being strengthened
• The project manager is held responsible for the successful completion of the project
• The doubling of sources is minimized
• Team members have a functional "home base" after the project is completed, so they don't have to worry about what happens after the project is completed.
• The rules of the company are adhered to, this stimulates support for the project

Cons

• There are 2 bosses. Often people first listen to the functional manager and then to the project manager. Because they simply give you promotion etc.
• It is doomed to fail unless the project manager has strong negotiation skills
• Sub-optimization is a danger, as a project manager you use resources for your own project, reducing the resources of other projects

Whatever form is chosen for a project, the project manager is the main point of contact between the organization and the customer. Communication and flexibility are greatly enhanced because one person is responsible for the (successful) completion of a project.

How can project tasks be organized?

A project starts from a statement of work (SOW). The SOW is a written description of the goals that must be achieved. It can also contain results provisions such as the budget and other steps that must be made.

• A task is a further sub-division of a project. It is often no longer than a few months and it is carried out by one group or organization.
• A work package is a group of activities that are bundled and handed over to a specific organizational unit. The package describes what needs to be done, when it starts, when it needs to be finished, which events have to be done at what time in time etc. These specific events are called milestones.
• Project milestone: This is a specific event / event in a project. You can think of the production of a prototype, for example.
• Work breakdown structure (WBS): This defines the hierarchy of project tasks, sub-tasks and bundled activities (work package). When a sub-task is done and completed, this results in the completion of another task and ultimately the completion of all bundled tasks. The WBS is important for a project because it breaks up the project into different pieces. The number of levels varies per project. How many details or how many levels you have depends on:
• To what extent an individual or an organization can be held responsible for the completion of a work package.
• The level in which budget and cost data are collected during a project
• Activities: Work parts within a project that take time. The completion of all activities in a project marks the end of the project.

How can projects be evaluated?

We are now going to look at how projects are actually managed. There are different types of standard shapes that can be useful when visualizing a project. Computer programs can quickly generate graphs that can serve as the standard form. A frequently used type is the Gantt chart.

• Gannt chart: This graphically shows how much time each task takes and the order in which the activities can be performed. The Gantt chart is also called a bar chart.

In this graph all activities must be performed from top to bottom.

Value management

• There are different types of standard shapes that can be useful when visualizing a project. Computer programs can quickly generate graphs that can serve as the standard form. A frequently used type is the Gantt chart.
• Earned value management (EVM): This is a technique that combines the measurements of the scope and scheme costs for a project in order to evaluate the progress of a project. This can measure the success of the project at any time in time.

The measurements of earned value management can be applied to projects that focus on either the generation of profits or the costs. The assessments can therefore be based on a value measurement (turnover or profit) or on the costs.

How can projects be analyzed?

You can analyze projects through network-planning models. The 2 best-known network planning models are the critical path method (CPM) and the program Evaluation and Review Technique (PERT).

Critical path method (CPM): This uses a procedure to enter a project in a schedule. It is assumed that the times for the activities are known. The activities in a project are split up and it is estimated how long it will take before each activity is completed. It is then determined in which order the activities must be carried out by means of a network in which the mutual relationships are displayed. This can be done by immediate pedecessors who are associated with an activity. The critical path can then be determined.

• Critical path: A project can be analyzed based on this. This is done based on the sequence of activities in a project that forms the longest link. This means that it is the activities that take the longest time before they are completed.
• Immediate predecessors: Activities that must be completed before another activity can begin.

The step-by-step plan for the critical path method then looks like this:

• Identify each activity that needs to be done in a project and estimate how long it takes for this task to be completed.
• Determine the order of the activities and establish a network in which the relationships of the different activities to each other are displayed. An easy way to do this is to identify the immediate predecessors: these are the activities that must be completed before another activity can start.
• Determine the critical paths: Determine the order in which the activities go through a project from start to finish.
• Determine the early start / finish and the late start / finish schedules. To be able to schematize the project you must know when an activity must start and end.

For some activities in a project there is some room as to when an activity should start and when it should be ready. This is called slack time of an activity.

• Slack time: The time that an activity can be delayed without delaying the entire project; it is the difference between the late and early start time of an activity.

For each activity in a project you calculate 4 points in time:

1. Early start
2. Early finish
3. Late start
4. Late finish

The early start and the early finish are the earliest times that an activity can start and end. Just as the late start and the late finish are the last times that an activity can begin and end.

To calculate the late finish and late start times, work from the back to the front (the diagram shows the early start and late finish times). The difference between the early start times and early finish times and the late start times and finish times is the slack that has an activity.

• Early start schedule: This is a schedule that lists all activities with their early start times. Activities that are not in the critical path have slack between the completion of an activity and the start of the next activity.
• Late start schedule: This is a schedule that lists all activities with their last possible start times (without delaying the entire project).

3 activity estimates with a CPM method

If a single time estimate of an activity is not reliable then it is best to make 3 estimates. These 3 estimates ensure that it is possible to determine how long an activity lasts and when the entire network is ready. The activities are calculated by attaching a weight: minimum, maximum and 'most likely' estimates.

The solution is then as follows:

• Identify every activity that needs to be done in a project
• Determine the order in which the activities must be carried out
• The 3 estimates for the time per activity are:
  • A = Optimistic time: the minimum period of time in which the activity can be carried out. There is only a small chance that the activity can also be carried out within this time.
  • M = Most likely time: the best guess about the time required.
  • B = Pessimistic time: the maximum time that an activity takes up before it is completed.
  • Calculate the expected time (ET: expected time) for each activity. The formula for this is: ET = (A + 4m + B) / 6
  • Determine the critical paths
  • Calculate the variances (σ2) of the times per activity à σ2 = ((b-a) / 6)) 2
  • Determine the possibility of completing the project with the given data
  • Calculate Z: the standard deviations for a project
  • Use the Z to predict that the project is ready on that date.

Time-cost models and project crashing

In practice, project managers are just as concerned about the costs of the entire project as the time needed to complete the project. The time-cost model has been drawn up for this reason.

Time-Cost models: These models develop a minimum-cost scheme for an entire project where they want to monitor the expenditure during the project. It is about the trade-off between the time needed to complete an activity and the costs of that activity. This is often referred to as "crashing" a project.

Minimum costs schematics

The schematization of minimum costs is also known as 'crashing'. There is a relationship between the time during which an activity is completed and the costs of a project. 'Crahsing' reflects on shortening the time needed to execute a project.

It costs money to shorten an activity and these costs are 'activity direct costs' and are added to the direct costs of a project. Some costs may be employee related, such as overtime, hiring more employees, and transferring employees to other jobs. Others may be related to sources, such as purchasing or leasing more mechanical materials. The costs associated with maintaining the project are called project indiretc costs: overhead costs, opportunity costs and so on.

Because activity direct costs and project indirect costs are opposite costs, it is difficult to process these costs in a scheme. It is therefore essential to find the optimum point in time-cost trade-off.

Crashing a project consists of the following 5 steps:

1. Set up a CPM-type network diagram
   • Normal cost (NC): the lowest expected activity costs
   • Normal time (NT): the time associated with each normal cost item
   • Crash time (CT): the shortest possible time per activity
   • Crash costs (CC): the costs associated with each crash time
2. Determine the costs per unit or time
3. Calculate the critical paths
4. Shorten the critical paths at the lowest costs.
5. Plot the direct, indirect and total cost curves of the project and find the minimum costs.

How can network planning models and earned value management be implemented in commercial software packages?

Due to the increased interest in project management, the amount of software surrounding project management has also increased. The techniques and concepts described in this chapter can be implemented in commercially available software packages. The most used packages today are those of Microsoft Project and Oracle's Primavera Project planner. These packages enable managers to manage multiple projects at the same time and can contribute to resolving conflicts about resources in competing projects.

Success in project management is an activity that requires secure controls and critical resources. In this book, much attention is paid to non-human resources, such as machines and materials. In projects, however, the time of employees are key assets. Human resources are often expensive and the people involved in a project are crucial to the succes of a business and are often the most valuable employees.

How do you design a production process? - Chapter 6

The production process

This chapter looks at how processes are used to make tangible goods. Production processes are used to make everything you can buy, from an apartment to the ink with which we write. Production processes are used to produce tangible items.

Production processes can be subdivided into 3 steps:

1. Purchasing the required parts
2. Making the items
3. Sending the items to the customer

These activities are organized in such a way that costs are minimized while the competitive priorities (needed to attract customers) are met. In doing so, account must be taken of the strategy of a company, its possibilities to produce and the needs of the customer.

The time a company needs to respond to a customer's request is called the lead time. This differs from company to company. For example, an airline needs years to respond to the demand for a new aircraft, while in a supermarket this is minutes. A key concept in the production process is the customer order decoupling point, this determines where the stock is placed to allow the various processes in the supply chain to move independently of each other.

• Customer order decoupling point: This indicates where the inventory is located in the supply chain.
• Lead time: The time required to respond to an order from a customer.

The selection of the customer decoupling point is a strategic decision that determines the lead time for customers. The positioning of this point has, among other things, an impact on the speed with which a customer is served and the flexibility with which a company can respond to a specific customer demand. The closer this point is to the customer, the faster the customer is helped. It is often the case that the faster the response to the customer, the greater the stock of investments. Positioning the customer order decoupling point is important to understand the production environment.

Companies that serve customers from their stock of end products are make-to-stock companies. Companies that combine assembled modules to meet the specific customer demand are assemble-to-order companies. Companies that make the customer's desired product from raw materials, parts and components are characterized as make-to-order. Finally, you also have companies that, together with the customer, draw up a design to which the company will purchase the necessary materials, parts and components. These companies are called engineer-to-order.

• Make-to-stock: There is a production environment in which customers can be helped immediately because goods are delivered from the warehouse (stock).
• Assemble-to-order: Here a number of pre-assembled modules are combined to meet the specific demand of customers.
• Make-to-order: This is a production environment where a product is built from raw materials and components in response to a customer's specific demand. It is therefore made on the basis of a specific question.
• Engineer-to-order: Here the company works together with the customer to display the product. When this is done, the product is made based on purchased materials, parts and components.

Satisfying the customer in the make-to-stock production environment revolves around the balance between the amount of stock used and the amount of service that you provide to the customer. Maintaining more inventory increases costs. Because of this, a compromise must be made between the costs of inventory and the amount of service provided. This trade-off can be improved by better estimates, knowledge of customer demand, more flexible production processes, faster transport alternatives and so on. As a result, many make-to-stock companies invest in lean manufacturing programs, so that higher levels of service can be achieved with any amount of stock.

• Lean manufacturing: This is about achieving a high customer service with a minimum level of stock investments.

Regardless of the compromise that must be made, the focus of a make-to-stock company is always to provide end products at the desired place and time by the consumer. To achieve this, it is important that there is flexibility and that different components can be put together. It is easier to estimate the demand for components (which you can assemble quickly) than to estimate the demand for an entire product. If you do this, you will quickly get a number of different combinations of components that are possible to achieve a high customer service with minimal inventory investments. The calculation of this is as follows:

• Total number of combinations = N1 x N2 x… x Nn

How can you map the production process and what does Little’s law entail?

It is useful if you can quickly create a map of the supply chain process in which you can see how the materials flow through the process and where the stock is kept. This helps you to understand the process. This is called "process mapping"; drawing up a diagram that shows the flow of materials and the stock in the process.

Materials in a process occur in one or two ways. The first way is when the material is in motion or transit and in the second way the material is stored as a buffer in the stock. Material that is used in the production process is the material that is in motion. This is also seen as work in progress. A common measuring instrument in the process is the total average value inventory. This is the sum of the value (costs) of the raw materials, the work in export and the end products in stock. It is a useful tool for accounting purposes, but it is not very useful to evaluate the results of the process. A better measurement to assess the value of the inventory is through inventory turn. If you want to calculate the number of days in stock per item, then the days-of-supply is a handy measuring instrument.

• Total average value of inventory: The total investment in stock by the company. This contains raw materials, work in progress and the end products in stock.
• Inventory turn: This is an efficient measurement where the costs of the goods sold are divided by the total average value of the stock. For example, an inventory turn of 6 times a year is better than one of 2 times a year. This makes it easier to compare companies of different sizes.
• Days-of-supply: a measuring instrument for the number of days in stock per item. Suppose you have a new stock 6 times a year, the calculation is as follows: 1 year / 6 times = 365/6 = 60.8 days.

Simple systems can be analyzed on the basis of Little’s Law. This says that there is a long-term relationship between stock, the throughput rate and the throughput time (flow time) of a production system in a stable state.

The relationship is as follows:

• Inventory = throughput rate x throughput time (flow time)

The transit speed is the long-term average that items flow through the process: items / days. The lead time is the time it takes for an item to flow through the process from start to finish.

• Little’s law: This stock assessed in a mathematical way through the throughput speed and throughput time.
• Throughput: This is the long-term average with which items flow through the process (units / days)
• Flow time: The time that it takes for a unit to complete the process.

Raw materials are brought to a company, where they are transformed into end products and then be stored (stock). This analysis assumes that this process is done in a stable state. This means that, in the long term, the quantity of goods produced is equal to the quantity of goods sent to customers. The throughput rate is then equal to the average demand and the production process produces no shortage or surplus.

Example of Little's Law: If the average demand is 1000 units per day and it takes 20 days for a unit to flow through the company, the expected work in progress is 20,000 units. You can therefore think of Little's Law through the relationship between units and time. Stock is hereby measured in numbers, flow time in days and the throughput rate in numbers per day. This means that if you share the stock through the throughput you get the flow time: 20,000 / 1,000 per day = 20 days. You can also take the stock and divide it by the flow time to get the throughput rate: 20,000 / 20 days = 1000 units per day.

How are production processes organized?

Selecting a production process is a strategic decision in which it is decided which type of production process is used to produce a product or to provide a service. The way in which a facility is arranged is defined by a general flow pattern to work. There are 5 basic structures for this: project, work center, manufacturing cell, assembly line and continuous process.

These 5 structures look like this:

1. Project Layout: This is for large or massive products that are produced at a specific location. Labour, materials or equipment are brought to the product rather than the other way around.
2. Workcenter: A process with great flexibility to produce a wide variety of products. There are often several work centers; for example one with drilling machines and the other with stamping machines and per work center the right machines are placed for that product.
3. Manufacturing cell: This is an area where a group of similar products is produced. These cells have been developed in such a way that they have a specific set of processes and they can produce a limited range of products. A company can have multiple cells in their production area, each cell to produce a specific product or a group of similar products. Often this does apply to a limited amount of products.
4. Assembly line: This is an area where an item is produced by a fixed order of work stations, developed to achieve a specific production percentage. Products are made because they move from workstation to workstation.
5. Continuous process: A process that converts raw materials into ready-made products in a continuous process. This also follows a sequence of steps, but the flow is continuous. These structures are often very automated.

The relationship between structures is often represented in a product-process matrix. There are two dimensions here; a horizontal dimension that is related to the volume of a certain product or group of standardized products and a vertical dimension that shows the degree of variation in the product produced. It is a model that depicts the different process types, the aforementioned basic structures, depending on product volume and the degree of product standardization.

• Product-process matrix: A model that shows when the different production processes are usually used, depending on the product volume and degree of product standardization.

Designing a production system

There are several techniques available to determine the actual production classifications of the production process. Production classifications are based on the nature of the product, the volume required to meet demand and the costs of the tool / tool.

Continuous process layouts

An assembly line is a design layout with the aim of building a product based on a progressive step-by-step plan. The steps are done in areas called stations. These stations are linked to each other by means of a material negotiating device.

• Assembly line: This is an area where an item is produced through a fixed order of workstations. They are developed in such a way that a specific production percentage can be achieved.

How can you design and analyze the conveyor belt?

The best known conveyor belt is a moving conveyor belt that passes through a series of workstations in a specific time, also known as workstation cycle time. Work is done on the product at every workstation; the small activities concerning the product per workstation can be seen as tasks. The total number of work performed per workstation is equal to the sum of the tasks per workstation. The assembly-line balancing problem is assigning tasks to workstations in such a way that cycle time is no longer possible and useless time is minimized per workstation. This problem is complicated by the relationship of tasks between the product design and the process technologies. This is called the precedence relationship, this specifies in which order which tasks must be performed in the assembly line process.

• Workstation cycle time: This is the time between consecutive units, up to the end of the conveyor. At every workstation work is done to complete the product, in this every workstation has its own task. The total number of work at a station is the sum of all tasks from that workstation.
• Assemby-line balancing: This is the problem of assigning tasks from the series to tasks at a workstation. This is difficult because you want as little useless time as possible during the entire cycle; you want to minimize this.
• Precedence relationship: This is the required order in which tasks must be performed in the process of the assembly line.

The steps to be taken to ensure a balance in the assembly line process are as follows:

1. Make a diagram that shows how long each step lasts and how they follow each other (the order of the steps)
2. Determine each time per workstation (cycle time, C). C = production time per day / required output per day in units
3. Calculate the minimum number of workstations (N). N = sum of the time of the tasks / cycle time
4. Select a rule that assigns tasks to workstations. Also select a second line, if the first line does not apply.
5. Assign tasks to workstations one by one. Do this until the sum of the tasks time equals the cycle time.
6. Evaluate the efficiency of the balance based on a formula
   1. Efficienty = (Sum of task times (T)) / ((Actual number of workstations (Na) x Work station cycle time (C))
   2. Nt = Sum of task times T / Cycle time
   3. C = Production time per day / Required output per day in units
7. If the efficiency is not good then you use a different decision rule

Splitting tasks

If you want to produce a product faster, there are 6 things you can do:

1. Splitting tasks: using more workstations
2. Distributing tasks: distributing tasks between workstations
3. Use parallel workstations
4. Hiring employees with more skills
5. Overtime: producing more through overtime
6. Creating a new schedule

Flexible and U-shaped layouts

Assembly line balances often result in odd time at the different workstations. Flexible conveyor belt layouts are a common way to deal with this problem. This also applies to the U-shaped conveyor line in which work is shared. In this way, the times at different workstations can be set the same.

This chapter looks at how processes are used to make tangible goods. Production processes are used to make everything you can buy, from an apartment to the ink with which we write. Production processes are used to produce tangible items.

Production processes can be subdivided into 3 steps:

1. Purchasing the required parts
2. Making the items
3. Sending the items to the customer

What does a service process look like? - Chapter 7

The nature of services

A service is the output, the result, of a process that is not tangible. This means that it has no physical dimensions that can be weighed or measured. In contrast to product innovations, a patent cannot be applied for a service. This requires a company to quickly expand a new concept before competitors can copy the procedures.

Services naturally contain a certain interaction with the customer. The degree of interaction often depends on the needs of the customer. Every service has its own service package; a bundle of goods and services that is offered in a specific environment.

• Service package: A bundle of goods and services that is offered in a specific environment.

This bundle contains 5 features:

1. Supporting facilities: These are the physical sources that must be in order before a service can be offered. Examples are: a ski lift, an airport and so on.
2. Facilitating goods: The materials that are purchased or consumed by the buyer or the items that are offered to customers. Parts are: Golf poles, car parts and so on.
3. Information: Information that is offered to the customer so that they can use the services efficiently.
4. Explicit services: The benefits that can be observed and that consist of essential or intrinsic characteristics of a service. Examples: response time of an ambulance, air conditioning in a hotel room and so on.
5. Implicit services: Psychological benefits that a customer can only vaguely experience or the extrinsic characteristics of a service. Examples: the status of a diploma, the privacy of an office and so on.

The classification of a service

Service companies are often classified according to their customers and the services they offer. These groups are useful in presenting aggregated economic data, but not specifically for OSCM purposes because they say little about the process. It is important that information is collected about the involvement of the customer in the production system.

Customer contact refers to the physical presence of the customer in the system and the creation of the service refers to the work process involved in providing the service itself. Extent of contact is the percentage of time the customer must be in the system, relative to the total time it takes to perform the service. With this conceptualization you have a high degree of customer contact and a low degree of customer contact. High degree of customer contact systems are more difficult to rationalize than the low degree of customer contact systems. In high contact systems, the customer can influence matters such as the nature of the service, the quality, the expected quality of the service and so on. They can exert influence because they are involved in the process.

• High and low degree of customer contact: A concept that is related to the physical presence of customers in the system.

Shaping service organizations

When designing service organizations, we must keep in mind that services cannot be kept in stock. You must therefore be able to meet the demand when it occurs. It is sometimes difficult to determine the capacity because too much capacity leads to high costs and too low a capacity means that you lose customers. Marketing is a means to influence the demand so that it matches your capacity.

The structuring: Services-System design matrices

Services can be configured in different ways. The Service-system design matrix identifies 3 possibilities of customer / service contact:

1. Buffered core: This is physically separated from the customer.
2. Permeable system: This can be entered by the customer through telephone or face-to-face contact.
3. Reactive system: This is both approachable and reactive towards the customer's questions.

The left side of the matrix shows a logical marketing possibility, namely: the greater the amount of contact with the customer, the greater the sales possibilities when the service is offered. The right-hand side of the matrix shows the impact of production efficiency as the customer gets more and more influence on the performance of the service. Product efficiency decreases as the customer has more influence on the system.

Product efficiency decreases as the customer has more influence on the system. To compensate for this, face-to-face contact can be made. This provides the opportunity to generalize high sales and to be able to sell additional products. On the other hand, low contact (such as email only) ensures that the system can work more efficiently because the customer does not have the ability to actually influence the system. However, there is little opportunity to sell additional products.

Web Platform companies

The service-system design matrix has been developed from the perspective focused on the use of resources by a company in its production system. Nowadays there are also many virtual services that are entirely based on the internet. A web platform business is a company that creates value by enabling the exchange of information between two or more groups. Often these are the customers and providers of a service or product. The platform is located on the internet and can be used on request. It provides the resources needed for information exchange and transaction execution. Examples: Facebook and Uber.

• Web platform business: A company that creates value by facilitating the exchange of information and transactions between customers and providers of a product or service.

How can simple service systems be analyzed?

A standard tool for creating a design for a service process is through a flowchart. With services, a flowchart is also called a service blueprint, in order to approach the importance of a process design.

• Service blueprint: A flowchart of a process that emphasizes what is visible to the customer and what is not.

A distinction is made here between the aspects of a service where there is a high degree of customer contact and the activities that the customer does not see. This distinction is clarified in the flow chart by means of a "line of visibility" in the flow chart.

Basic blueprints describe the characteristics of a service design but do not provide a direct guide to what the process of that design should look like. One approach to dealing with this problem is the application of poka-yokes: procedures that block inevitable mistakes so that the service does not become defective.

• Poka-yokes: Procedures that ensure that errors become defects.

These ensure that errors do not become defects. They are common in companies and make sure that parts are made correctly, that electronic parts turn off automatically and so on.

What do "queue" analyzes look like?

A major problem for many service companies is the waiting time management. Management must make a trade-off between increasing the costs to be able to deliver services faster and the inherent costs of waiting. This therefore has to do with a cost trade-off. Queues are not a fixed condition of a productive system, it is largely within the control of the management system.

A practical look at queues

There are a number of suggestions for managing queues. These are as follows:

• Segment the customer: If a group of customers need something that can be done very quickly, place them in a special line so they don't have to wait for slow customers.
• Be friendly: If you are nice, customers will respect the queue sooner.
• Inform customers: why does it take so long? Explain it. This is especially important if the waiting time is longer than normal.
• Distracts the customer while waiting: Provide music, a video, and so on, to distract them from waiting
• Encourage customers to come in quiet times: Inform customers about the times / moments when they probably don't need help.

The queue system

The queuing system consists of 3 large, essential components:

1. The population and the way in which customers enter the system.
2. The service system.
3. The condition of the customers leaving the system.
   • Queuing system: A process where customers wait in line for a service.

Customers who enter the service system can come from a finite or infinite population. This distinction is important because analyzes are based on different promises and require different comparisons to come to a solution.

• Finite population: This refers to a limited size of customers who use the service and who are sometimes in the queue. It depends on the amount of space and resources available. It is important to keep an eye on whether the size increases or decreases. Example: if you have 5 machines and one fails, this will affect the quantity.
• Infinite population: This population is large enough, in relation to the service system. The size of the population has no significant effect on the system. If something goes wrong, then the system options are not significantly affected. Example: if you have 100 machines and one machine fails, this will not have such a big effect.

If a waiting system is described then it must be defined in which ways customers are set up in the waiting system in order to ultimately receive their service. Formulating queue formulas requires the arrival rate, or the numbers per period. A constant arrival distribution is periodic, with the same amount of time between all (successful) arrivals.

• Arrival rate: The expected number of customers who arrive during each period.

In productive systems, the only arrivals that actually have a constant interval period are those subject to machine controls. More often you have to deal with variable, random arrival distributions.

When observing arrivals you look at 2 things:

1. You analyze the time between successful arrivals to see if time is a statistical distribution between arrivals. You often assume that the time between arrivals is exponentially distributed.
2. You can set a time period (T) and try to determine how many arrivals enter the system within the time period (T). It is assumed that the number of arrivals per time unit of Poisson is distributed.

If arrivals in the service system are based on random raids, it is best to use exponential distribution.

• Expontential distribution: A possible distribution associated with the time between arrivals.

If you are interested in the number of arrivals per time period T and the entry process is random then it is best to use the Poisson distribution.

• Poisson distribution: A possible distribution for the number of entries per time period.

The curve becomes softer as n becomes larger.

Other entry characteristics include entry patterns, size of units upon entry, and the degree of patience.

• Entry patterns: The entry into a system is easier to control than is often thought. For example, you can reduce the number of arrivals at a hijacker on Saturday by making a haircut 1 euro more expensive on Saturday.
• Size of units upon arrival: One unit may arrive at a time, or several units.
• Degree of patience: A patient's entry is one that waits long enough for the service to be available to serve him or her.

Queues and services

The queue system consists mainly of queues and the amount of available services. Factors that must be included in queues are the length, the number of rows and the queue discipline.

• Length: A queue can be infinite if the capacity of the service system is very large. For example, think of the rows that take up an entire street. However, you also have limited rows, such as at gas stations. The actual arrivals are shaped by the limitation.
• Number of rows: You can have one row, but also several rows. A disadvantage of multiple rows is that it gets very busy.
• Queue discipline: This is a priority rule or set of rules that determine the order in which customers receive their service. These rules can have a dramatic effect on the overall results of the system.

Another important feature of the structure of a queue is the time that customers actually spend on a service as soon as they receive it. For this, the service rate is specified as the capacity of the service in the number of units per time period. This is therefore not about the service time, but it is for example stated how many people have been helped per hour.

• Service rate: The number of customers who can handle a service during a certain period. this is about the capacity of the service and the number of units per time period and therefore not about the service time.

A constant service time states that each service task must take exactly the same length. If service times are random, then an exponential distribution can be made.

There are different line structures that can be maintained with a service. The choice of a certain format depends on the volume of customers, the limitations of, for example, the government and the order in which the service must be performed. You have the following different line structures:

1. Single channel, single phase: this is the simplest type of a waiting line structure. If the distribution is not standard, then the problem can easily be solved with a computer simulation. An example of a single channel is a one-person hairdressing salon.
2. Single channel, multiphase: a car wash is an example of this, because it provides a series of services (washing, drying, etc.).
3. Multichannel, single phase: Here there is one service but several lines. Such as a bank where people can both raise money, disturb them, and go to their safe c.
4. Multichannel, multiphase: two or more services are then performed in order. For example, a hospital uses this because specific steps are followed.
5. Mixed: we distinguish 2 subcategories:
   1. Multiple-to-single channel structures: here we find either lines that come together in one line or lines that come together for multiphase service
   2. Alternative path structure: here there are two structures that differ in direct flow requirements.

There are several problems with queues. 3 problems are mainly important, these are as follows:

1. Customers in the queue: some systems, such as banks, want to know exactly how many customers are in the queue and how long they have to wait and so on. They want more insight into the system.
2. Selection of machines and equipment: It must be decided which materials are purchased and used as a result.
3. Determining the number of services: For example, a car company must decide how many employees they want to hire. More employees means more costs, but savings can also be made because technicians can focus less on their task and therefore waste less time.

A service is the output, the result, of a process that is not tangible. This means that it has no physical dimensions that can be weighed or measured. In contrast to product innovations, a patent cannot be applied for a service. This requires a company to quickly expand a new concept before competitors can copy the procedures.

Services naturally contain a certain interaction with the customer. The degree of interaction often depends on the needs of the customer. Every service has its own service package; a bundle of goods and services that is offered in a specific environment.

What do we mean by sales and execution plans? - Chapter 8

What do sales and executive plans entail?

The purpose of planning is to create a balance between supply and demand through coordination. Sales and executive schedules are a process that helps a company to provide better customer services, lower inventory levels, shorten customer waiting times, stabilize production percentages, and provide top management tools to handle business operations. The process has been developed to coordinate the key activities of a company and it is related to marketing, sales and supply chain activities that are required to meet demand on time. The end result of the planning is to reach an agreement between the various departments about the action that ensures an optimal balance between supply and demand.

Overview of the planning activities in the field of sales and implementation

Companies use sales and operations planning (S&OP) to balance supply and demand. This is often referred to as an aggregated schedule. The goal of sales and operations planning is to find a balance between supply and demand through coordination.

• Sales and operations planning (S&OP): The purpose of planning is to create a balance between supply and demand by means of coordination. This coordination coordinates executive activities, distribution, marketing and financial plans.

By focusing on aggregated product and sales volumes, marketing and executive functions can develop plans in such a way that demand can be met.

A distinction can be made between different schedules. Long-range planning is mainly done annually and focuses on a horizon larger than one year. Intermediate-range planning often involves a period of 3 to 18 months, with time intervals that are weekly, monthly or quarterly. Short range planning covers a duration of one day to 6 months, with daily or weekly time steps.

• Long-range planning: one year or longer
• Intermediate range planning: 3 to 18 months
• Short-range planning: one day to 6 months

Long term plan activities are done in two major areas. First, it's about designing the processes that make a company's product. Secondly, it is about the design of the logistics activities that the products deliver to the customer. Strategic plans determine the long-term capacity of the production system. Network schedules determine the logistics side; the supply system that determines how the product reaches the customer.

Aggregated activities plan

The goal of an aggregated plan is to determine the optimum production rate, workforce level and inventory on-hand.

• Production rate: Number of units made per time unit.
• Workforce level: Number of employees required per period.
• Inventory on-hand: Stock that is taken from a previous period.

The input of the process is the sales plan, prepared by the marketing team. The aggregated plan varies from company to company.

Production planning environment

In general, the external environment is outside the direct control of the production planners but with some companies the demand for a product can be managed. This can be achieved by responding to demand, for example: if demand rises, promotional activities can be curtailed and prices raised to maximize the revenues. The internal factors, however, differ in the extent to which they can be monitored. Current physical capacities (plant and machines) are often fixed in a short period. The physical capacity often cannot be increased. Nonetheless, there is a certain flexibility in managing these factors, allowing production planners to implement one or more production planning strategies.

• Production planning strategies: Plans to meet demand. It has to do with compromises in the number of employees, working hours, stock and shortages.

Strategies for production schedules

There are essentially 3 production plan strategies. These strategies include compromises in work size, work hours and inventory.

1. Chase strategy: The production rate matches to the order rate by hiring and laying off employees. The order rate varies. This creates fear among employees because they know they may be fired if demand is low.
2. Stable work pressure - Variable work hours: The working hours are adjusted to the demand. This prevents people from being fired and hired.
3. Level strategy: This is when there is always the same amount of output and employees. This can cause surpluses or shortages.

If only one of these variables is used to deal with demand fluctuations, we speak of a pure strategy. If two or more are used, in combination, you speak of a mixed strategy. These are used more often in an industry.

• Pure strategy: a simple strategy that uses only one option. This may include the hiring and firing of employees only to meet demand in this way.
• Mixed strategy: a more complex strategy that combines multiple options to meet demand.

A manager can also choose to enter into sub-contracts; contracts for part of the production. This strategy is similar to the chase strategy, but here it is about drafting a contract or not instead of hiring an employee or not.

Relevant costs

There are 4 costs relevant to the aggregated production plan:

1. Basic production costs
2. Costs associated with changes in production number
3. The costs of maintaining stock
4. Back-up costs (such as a loss of goodwill and gains through back-recovery)

Managers are often obliged to adhere to certain budgets. The aggregated plan is usually the key to success in budgeting the process. After all, the aim of the aggregated plan is to minimize the total production-related costs by determining the optimal combination of the work level and the stock.

How can you prepare plans to meet demand?

Many companies use the cut-and-try method to prepare aggregate plans. This means that different production planning alternatives are prepared and the best is selected. All alternatives are listed in a graphical way and the best option is chosen. It can therefore be seen as a "trial-and-error" technique for analyzing problems regarding aggregate schedules.

Strategies often depend on the situation in which a company finds itself. Plans are often based on costs, nevertheless it is important to consider whether the plan can actually be implemented in the time ahead, etc.

Why is yield management important?

Sometimes you pay less money, for example, for a plane ticket or hotel room than you would have had to pay if you had booked at a different time. How is this possible? The answer is in the implementation of yield management. This can be defined as the process of using the right type of capacity for the right type of customer for the right price. This is to maximize the profits.

• Yield management: Given the limited capacity, this is the process of offering a product or service to customers for the right price at that time in order to maximize profits.

Yield management can be a powerful approach to make demand more predictable. This is very important for the aggregate planning. From an operational perspective, yield management is effective if the following issues occur:

• The demand can be segmented per customer
• The fixed costs are high and the variable costs low
• The stock has an expiration date (also applies to flights; these go on a certain date)
• The product can be paid with an advance
• The demand is highly variable

Hotels, airlines and car rental are good examples of this. For them, yield management can be a solution to increase profits. Different price schemes can prevent such things as transfers, cancellations etc.

There are also four difficulties associated with yield management:

1. The different prices must also be justified
2. Good predictions must be made regarding variable customers (transfers, cancellations, etc.)
3. Service processes must be managed, especially during peak periods
4. Customers who have overbooked or have paid too much must be compensated and satisfied.

The purpose of planning is to create a balance between supply and demand through coordination. Sales and executive schedules are a process that helps a company to provide better customer services, lower inventory levels, shorten customer waiting times, stabilize production percentages, and provide top management tools to handle business operations. The process has been developed to coordinate the key activities of a company and it is related to marketing, sales and supply chain activities that are required to meet demand on time. The end result of the planning is to reach an agreement between the various departments about the action that ensures an optimal balance between supply and demand.

How do you plan material requirements? - Chapter 9

What does material requirements planning (MRP) entail?

Schedules regarding material requirements

Enterprise resource planning (ERP) is a computer system that integrates programs such as accounting, sales, production and other functions in a company.

• Enterprise resource planning (ERP): a computer system that integrates application programs. It integrates the various functions in a company.

This integration is achieved through the sharing of data by all application programs; a shared database. This can provide a significant advantage for a company. If ERP is implemented correctly, it links all areas of a company together. At the production area they know everything about the new orders; they just have to open the system and immediately have all the information. The sales area knows the exact status of the customer's orders, etc. It is therefore one large information system with many advantages. Sales and distribution, production and planning, quality management, material management, factory maintenance, etc., it's all in the ERP.

The material requirement planning (MRP) is the key component that links the production functions to the material planning and controls.

• Material requirement planning (MRP): The logic behind determining the number of parts, components and materials needed to produce a product.

MRP is installed in almost all production companies. The reason for this is that MRP is logically easy to understand when it comes to determining the number of parts, components, and materials needed to produce an item. MRP is based on the dependent demand. Because of this, you have to look carefully at the dependent demand of a product. What do you produce in parts yourself and what do you purchase? It is most commonly used when multiple products are produced with the same materials. It is most valuable for companies that make products that use the same equipment.

Production schematics

Master production schedule (MPS) deals with end products; the items that are actually sold to the consumer. This is important input for the MRP (material requirement planning) process.

• Master production schedule (MPS): A time based plan that specifies how many end items a company plans to build and when.

MPS goes one step further than aggregate schedules. It is a time-related plan that specifies exactly when and how much a company must produce. This therefore concerns items that are already fully completed and ready; end products. This is difficult because demand has to be considered, all systems have only limited capacity and much has to be arranged. The flexibility in an MPS depends on various factors such as production time, relationship between the customer and maker, quantity of capacity, possibilities to implement changes from management and so on.

Time fences

The purpose of the time fence is to maintain control over the flow in the production system. Regardless of implementing rules, the system can be chaotic when there are too many orders and things are speeding up. Management defines time fences as time periods in which customers have the ability to make changes.

Every company has its own time fences. However, a certain time can also be frozen: absolutely no change can then be made. This can also be a slushy: it allows changes to specific products, as long as the parts of those products are available. Finally, you have liquid: this allows almost any variation in a product, as long as the capacity remains the same.

Some companies use the characteristic known as available to promise for items that are in the master scheme. This attribute identifies the difference between the number of products currently in the master schedule and customer orders.

• Available to promise: a feature of the MRP system that identifies the difference between the number of units currently in the master schedule and the actual customer orders.

How are material requirements (MRP) schedules structured?

The schedules regarding material requirements interact with the master schedule, inventory provisions, output reports and so on. There are 3 sources that serve as data source for the program that determines the material requirements (MRP), these are:

1. Master production schedule: The number of end products produced in a specific time period.
2. Bill of Materials (BOM): This file gives a complete product description, it contains a list on which all material parts are listed, which components are needed and in which order the product must be created.
   • A modular bill-of-materials: This is the term used for constructible items that can be produced and stored. They are standard items.
   • A super bill-of-materials: These contain items with fractional options, whereby for example 30% of an end item is fixed. This can, for example, serve to simplify the planning process.
3. Stock files: These files show how much is still in stock. The stock status can be kept up-to-date by posting stock transactions as they occur.

The MRP system therefore uses 3 sources of information: 1. The master scheme from which the demand is determined, 2. The bill of materials that identifies what is needed to make an end product and finally 3. The current stock status to items that are managed by the system. By using these 3 sources of information, the MRP system can draw up schedules for each item.

The MRP Computer program

The material required planning program (MRP) uses information from the stock files, the master scheme and the bill of materials. The process of calculating the exact requirements for each item is sometimes difficult. Often the calculations are performed in the master schedule every week, or every time there is change. Some MRP programs have options for generating direct schedules, these are called net change systems.

• What do MRP techniques look like? Net change systems: An MRP system that directly calculates the impact of changes in the MRP data (the stock status, BOM or master scheme).

Net changes ensure that the system reflects the "real time": the exact status of each item in the system.

How can the problem of material planning (MRP) be analyzed?

The logic behind MRP is often expressed as explosion calculations. This is because the requirements in the MPS are broken down into detailed schedules for each item that is managed in the system. The MRP uses clear logic. It takes the balance of the previous period and deducts the requirements for this period. Based on this, they add schedules and planned requirements. The result is then the available balance for this period.

What do MRP techniques look like?

The determination of lot sizes in an MRP system is a complicated problem. Lot sizes are the part quantities that can be included when ordering and delivering. This therefore concerns the production or purchase of parts used by the MRP system. This is possible in 4 ways:

1. Lot - for - lot: This is the most used technique. Here the planned orders exactly match the net requirements. So exactly what is needed is produced every week. This minimizes inventory costs and does not take into account capacity limitations or installation costs (setup costs).
2. Economic order quantity: Every period, a large quantity is ordered for the coming period. In an EOQ model there must either be a constant demand or a safety stock must be kept behind. This as a buffer if there is a variety in demand.
3. Least total costs: compares the inventory costs and the purchase costs and takes the cheapest option (total price).
4. Least unit costs: Looks at the lowest costs per unit

Lot-for-lot is the simplest way of lot sizes in an MRP system and is used if the system precisely diagrams what is needed in a certain period. Once you are dealing with installation costs or other restrictions on different quantities, this method is not the most convenient method to use. Lot-sizing techniques are used to balance the fixed and variable costs.

MRP calculation:

Projected available balance = (Projected available balance t-1) - (Gross requirements) + (Scheduled recipes) + (Planned order receipts)

• Projected available balance = the amount of inventory that is expected at the end of the period
• Gross requirements = the gross requirements
• Planned order receipts = this is the planned order receipts

The material requirement planning (MRP) is the key component that links the production functions to the material planning and controls.

• Material requirement planning (MRP): The logic behind determining the number of parts, components and materials needed to produce a product.

MRP is installed in almost all production companies. The reason for this is that MRP is logically easy to understand when it comes to determining the number of parts, components, and materials needed to produce an item. MRP is based on the dependent demand. Because of this, you have to look carefully at the dependent demand of a product. What do you produce in parts yourself and what do you purchase? It is most commonly used when multiple products are produced with the same materials. It is most valuable for companies that make products that use the same equipment.

What is quality management and Six Sigma? - Chapter 10

What does total quality management look like?

Total quality management (TQM) can be defined as managing an entire organization in such a way that it excels on all dimensions of the product and the services that are important to the customer.

This has 2 fundamental goals, namely:

1. The design of the product or service
2. The assurance that the organization's system can consistently produce that design

These two goals can only be achieved if the entire organization is focused on achieving them (total quality management). Maintaining quality is so important that the Malcolm Baldrige National Quality Award was established in 1987 to help companies assess their structure and quality programs.

• Total quality management (TQM): Managing the entire organization so that it excels on all product and service dimensions that are important to the customer.
• Malcolm Baldrige National Quality Award: A prize that companies can win every year. Companies win these if they excel in quality.

Quality specifications and Quality costs

Fundamental to every quality program is the determination of quality specifications and the costs of whether or not these specifications are achieved. The quality specifications of a product or service arise from decisions and actions regarding the quality of the design and the quality of conformity to the design. A company makes a design for a product or service with certain characteristics and these characteristics are based on expected market aspects. They try to keep the costs for this acceptable.

Design quality refers to the inherent value of a product in its marketplace and is therefore about the strategic decision of the company. These dimensions of quality refer to the characteristics of the product or service that can be directly linked to design characteristics. Conformance quality refers to the extent to which the design specifications of a product or service are achieved. Often this has to do with tactical and day-to-day decisions. Quality at the source is a much-discussed design in the context of quality. This means that the person who carries out the work takes responsibility for guaranteeing that the output specifications are achieved. This mainly occurs with services, the local manager is responsible for this. Ultimately the quality can be determined on the basis of the dimensions of quality.

These are the criteria with which quality is measured:

• Design quality: The inherent value of a product in its marketplace.
• Conformance quality: The extent to which a product or service reaches its design specifications.
• Quality at the source: The person who carries out the work is held responsible for the outcome.
• Dimensions of quality: The criteria with which quality is measured.

Both the quality of the design and the quality of conformity must produce products that achieve the customer's goals with it. A quality program can be used to ensure that this is met.

Management often needs hard figures to determine how many activities are involved in maintaining quality. Today, cost of quality (COQ) are common analyzes in the industry. There are many different definitions and interpretations about the costs of quality, but in general this is about the costs that have to do with the production of quality that is not 100% perfect.

• Cost of quality (COQ): These are expenses that are related to achieving product or service quality, such as the costs of internal and external errors, the prevention of errors and so on.

3 basic assumptions justify the analysis of the costs of quality:

1. Errors occur
2. Preventing this is cheaper
3. Results can be measured

The costs of quality can generally be classified into 4 types:

1. Appraisel costs: There are costs associated with inspections, tests and other tasks to ensure that the product or process is acceptable
2. Prevention costs: The prevention of errors: the sum of all costs that prevent errors
3. Internal failure costs: The costs for errors that occur in the system and that must be resolved
4. External failure costs: The costs for errors moving through the system: loss of goodwill, dealing with complaints, repairing products and so on.

What are recognized quality benchmarks?

There are international standards for quality management and insurance. The standards have been developed to help companies to document their efficient quality systems. ISO 9000 has become an international frame of reference for quality management requirements. The idea behind the standards is that mistakes can be prevented by planning and applying the best practices at every level of a company. These standards focus on identifying criteria with which every company can guarantee that the requirements of the consumer are met.

• ISO 9000: Formal standards for quality certification, developed by the International Organization for Standardization.

The ISO 9000 standards are based on seven quality management principles. These principles focus on the business processes that are related to different areas in a company. These areas contain:

• Customer focus
• Leadership
• Involvement of people
• Process approach
• Continuous improvements
• Actual approach to making decisions
• Relationship between providers and their mutual benefits

External benchmarking

So far we have mainly talked about quality approaches that are internally focused. An attempt is made to make improvements by analyzing current activities in detail. External benchmarking, on the other hand, focuses on what is outside the organization. We look here at industry competitors and excellent companies outside the industry. It is analyzed what it is that they do. Bechmarking often has to do with 2 steps:

1. Identifying the processes needed to make improvements
2. Analyzing data: looking at the difference between what the company does and what the benchmarking company does
   • External benchmarking: Determine what excellent companies within and outside the industry of that company do to deliver such quality.

What do we mean by Six Sigma?

Six Sigma refers to the philosophy and methods that companies use to eliminate errors in their products and processes. An error is any component that does not fall within the specifications of the customer. Every step or activity of a company is a possibility that an error will occur. Six Sigma programs try to reduce the variation in the processes that lead to errors.

One of the benefits of Six Sigma thinking is that it enables managers to describe the results of a process in terms of its variability. You can also compare different processes if you use defects per million opportunities (DPMO). this is a metric that can be used to describe the variability of a process.

The DPMO calculation contains 3 data items:

1. Unit: The item being produced
2. Defect: Any item or activity that does not meet the customer's requirements
3. Opportunity: The chance that an error will occur

The calculation is then as follows:

DPMO = (Number of defects) / (Number of opportunities for error per unit x number of units) X 1000,000

• Six Sigma: A static term to describe the quality objectives. No more than 3.4 errors may occur in every million units. It also refers to the philosophy of quality improvements and programs.
• Defects per million opportunities (DPMO): A metric to describe the variability of a process.

Six Sigma methodology

In addition to the fact that Six Sigma methods contain many static handles that can also be used in other quality flows, the Six Sigma also contains a systematic project-oriented form through the definition, measurement, analysis, improvement and checking of the ( DMAIC) cyclic.

• DMAIC: This is an acronym for defining, measuring, analyzing, improving and controlling improvement methodologists, followed by companies involved in Six Sigma programs.

A standard approach for Six Sigma projects is therefore the DMAIC methodology. This is described as follows:

1. Define
   • Identifies the customers and their priorities
   • Identifies whether a project is applicable to the Six Sigma
   • Identifies the characteristics that have the greatest impact on quality
2. Measure
   • Determines how you should measure a process and what the results are
   • Identifies the internal key processes that influence the critical quality characteristics and it measures the errors that are currently being generated
3. Analysis
   • Determines the most common causes of errors
   • Understands how errors are generated by identifying key variables that are most likely to cause process variation
4. Improve
   • Identifies the means to eliminate the causes of the errors
   • Modifies the process so that they remain within an acceptable range
   • Identifies the key variables and a system to measure deviations from these variables
5. Control
   • Determines how you can keep improvements
   • Uses tools to ensure that the key variables remain within the maximum acceptable range

Analytical tools for Six Sigma

The analytical aids for Six Sigma have been used for years in traditional quality improvement programs. These tools are applied in the management system. Examples of such aids are as follows:

• Flowcharts: this shows the steps of the process
• Run charts: these show trends in data over time, whereby companies can define the extent of the problem at every stage
• Pareto charts: these help to bring down a problem in components.

How is process variation measured?

Statistical quality control (SQC) contains the quantitative aspects of quality management. SQC are the number of different techniques that have been developed to evaluate quality. We look at how well certain specifications are achieved. The management of quality by using SCQ often relates to the periodic sampling of a process or the analysis of, for example, data. It is therefore an evaluation technique that examines how well the specifications - that have been established when designing the product or service - are met.

• Statistical quality control (SQC): A number of different techniques designed to evaluate quality.

Processes that provide goods and services often have some variation in their output. This variation can occur due to various factors. Some factors can be controlled, other cannot. Variation that arises from factors that can be clearly identified and perhaps even managed are called assignable variation. This is, for example, variation that arises because not all employees have received the same training. Variation inherent in the process itself is called common variation. This is often referred to as random variation.

• Assignable variation: This is a deviation in the output of a process that can be identified and managed.
• Common variation: This is also called random variation. This is inherent in the process itself.

A normal distribution uses the definition of the mean and the standard deviation. The average can be displayed with an X and is the average value of a number of numbers. Mathematically this looks like this:

• X = observed value
• N = total number of observed values

Following this, the standard deviation can be calculated:

When monitoring the process, using SQC, samples are taken from the output of the process and these are used to make static calculations.

Understanding measurements regarding process variation

If the variation diminishes, the quality improves. However, it is impossible to have 0 variation. You can reduce the variation and keep it to an acceptable amount. These design limits are often expressed as the upper and lower specification limits. It therefore consists of an upper and lower limit between which deviations are acceptable.

• Upper and lower specification limits: The range of values ​​associated with a process that is acceptable in view of the product or service.

The process limits are the standard deviations and the specification limits are the upper and lower specification limits. The process is acceptable if the standard deviations fall between the upper and lower limits. The goal is to keep the process within three standard deviations from the mean.

Process capacities

The capability index (Cpk) is a process that measures the ability to produce within specific limits. The CPC shows how close the produced goods are to the specifications. If the specification limits are greater than 3 sigma (standard deviation), then the average must be adjusted. The greater the difference, the greater the chance that faulty parts will be produced.

• Capability index (Cpk): The ratio of the range of values ​​(allowed by the design specifications) divided by the range of values ​​produced by the process.

You calculate it as follows: Cpk min = (X - LSL) / 3 standard deviations

Cpk min = (USL - X) / 3 standard deviations

This way you both calculate the limits within which it may lie.

• LSL = the point where there are 3 standard deviations from the mean (X) to the left
• USL = 3 standard deviations from the mean to the right

The Z score is the standard deviation on the right or left side. You calculate the limits as follows:

• (LSL - X) / standard deviation and
• (USL - X) / standard deviation

You then get 1 lower limit and a positive limit.

How can the quality of the process be analyzed?

Process controls are related to quality monitoring while the product or service is being produced. Statistical process control (SPC) is about testing random samples on output to determine if the process produces the items within the set range. Attributes are the qualitative characteristics that are taken into account. It is determined whether they are in accordance with the specifications.

• Statistical process control (SPC): Techniques for testing random samples on output to determine if the output of the process falls within the set range.
• Attributes: Quality characteristics that are classified based on whether or not they meet the specifications.

Process controls with attribute measurements: p-chart

Measurement based on attributes means that samples are taken and used to determine whether an item is good or bad. Because it is a "yes" or a "no" decision, a p-chart can be drawn up with an upper process control limit (UCL) and a lower process control limit (LCL). These control limits can be displayed in a graph and then the fraction of errors can be tested for each individual sample. This process is assumed to work correctly if the samples remain within the control limits. However, the number of samples must be large enough to get a good picture and to be able to process the data in a p-chart. A c-chart can be created for attributes that represent more than one error.

Process controls with attribute measurements: c-chart

If you use a p-chart then the item is either good or bad. However, you can also use a c-chart, which is based on Poisson's theory that an error occurs randomly at each unit.

Process controls with variable measurements: X-chart and R-chart

Attribute sampling determines whether something is good or bad; it is a "go" or "no-go" situation. With variables sampling, however, the actual weight, volume, etc., is measured and a control table is drawn up to determine whether the process is acceptable or should be deteriorated (based on the measurement results). With attribute sampling, for example, it is decided that everything below 10 kilos is accepted and everything above 10 kilos is rejected. With variable sampling the weights are recorded as they actually are, such as for example 9.8 and 10.2 kilos. These are then placed in a control chart and then it is checked whether they fall within acceptable limits.

• Variables: qualitative characteristics that are measured in their actual weight, volume, centimeters or other geometric units.

How do you measure the quality of items?

Acceptance sampling is used on the basis of goods that already exist. This is used to determine the percentage of these goods that meet the specifications. This may concern products that have been received by other companies and need to be evaluated or, for example, about components that have just come out of a process step. With this the risks can be calculated. An acceptance sampling plan is defined by a sample size and the number of acceptable errors in that sample. Because the plan is drawn up on the basis of statistics, there is a possibility that a bad item is still accepted, this is called consumer's risk. There is also the possibility that a good item has been rejected, this is called producer's risk.

Total quality management (TQM) can be defined as managing an entire organization in such a way that it excels on all dimensions of the product and the services that are important to the customer.

This has 2 fundamental goals, namely:

1. The design of the product or service
2. The assurance that the organization's system can consistently produce that design

What does stock management look like? - Chapter 11

How is stock used and what are the costs?

Understanding inventory management

There is an economic benefit in reducing inventory. Stocks make up a large part of the costs of a company. This is partly due to the money invested in it, but also due to costs such as insurance, opportunity costs and so on. These costs can be reduced by handling less inventory and reducing waste.

• Inventory: the inventory of each item or commodity used in an organization.

It is therefore important to estimate how much and when items must be purchased. There are 3 models that can be used if it is difficult to estimate demand and therefore determine the amount of stock. These 3 stock models are as follows:

1. Single-period model: this is used when you make a one-off purchase of an item. Eample: buying a shirt for a one-off sporting event.
2. Fixed-order quantity model: this is used if you want to keep an item in stock. It applies here that for every order that is placed the same number of that item must be ordered. The stock of that item is monitored until it reaches a certain level where the risk of not having enough of that item is large enough to place a new stock.
3. Fixed-time period model: this is used when an item must be in stock and must be ready for use. The item is then ordered at certain interval levels of time.

An inventory system is the set of rules and controls that determine stocks and when the stock needs to be refilled and how large the orders should be. Manufacturing inventory is often classified as raw materials, end products, component parts and so on. For services, the inventory usually refers to goods that are tangible and the supply that is necessary to be able to deliver the service.

The main purpose of a stock analysis is 1.) to specify when an item must be ordered and 2.) how large the order order should be. Many companies prefer long-term relationships with sellers to ensure that they have enough supply throughout the year.

The purpose of stocks

The reasons why companies keep a stock are as follows:

• To keep different projects independent.
• To cope with variation within demand (one week more demand than the other)
• To have flexibility within production planning.
• To have a buffer of raw materials.
• To benefit from lower costs with large purchases.
• And many other company-specific reasons.

Keeping stock involves a lot of costs.

• Holding (carrying) costs; costs for having stock, such as insurance, depreciation, taxes, etc.
• Setup (or production change) costs; product changes entail costs. You must have the required materials, machines, etc. for each product.
• Ordering costs; management costs for ordering. You can think of costs such as preparing a product for shipment.
• Shortage costs; for example: when it is sold out and there is backordering. The item must then wait until the stock is refilled or the order must be canceled. If the question is not met and the order has to be canceled, this is called a "stock out".

Independent versus dependent demand

In the case of stock management it is important to understand the compromises with different stock controls. With regard to the question, it is important whether the question arises from an end product or is related to the product itself. To determine this, you work with the independent and dependent demand.

• Independent demand: this is when the demand for different items is not related to each other. Example: a workstation can produce different parts that are not related to each other, but where the external demand requirements are the same.
• Dependent demand: the need for each item is a direct result of the need for another item. This is often an item that it is part of.

How do different stock control systems work?

A stock system provides an organizational structure and the rules for keeping and checking goods that are in stock. The system is responsible for organizing and ordering goods. It is also responsible for follow-up questions, such as whether the customer has received the order and if not, whether it has already been sent.

You have different systems in which a distinction can be made between single-period systems and multiple-period systems. These 2 systems are as follows:

1. Single-Period inventory model: This system can be used if an item is only purchased once and the expectation is that it will not be purchased again. This system uses the single-period problem: this answers the question how much should be ordered if an item is only ordered once. The expectation is that the item will be used and not be re-ordered.
2. Multiperiod Inventory systems: This system is suitable if an item is re-ordered and it is the intention that the item remains in stock. There are two general types of multiperiod inventory systems: 1.) fixed-order quantity models (also called economic order quantity, Q-model) and 2.) fixed-time period models (also called periodic system, P-model) . Multi periodic stock systems are designed to guarantee that an item is available throughout the year. An item is often ordered multiple times during the year and the logic in the system determines the actual quantity that is ordered each time.

• Fixed-order quantity model (Q-model): A stock control model where the required quantity is fixed and the actual order is stimulated by a decrease in a specific level of stock.
• Fixed-time period model (P-model): A stock control model that specifies that stock is ordered at the end of a predetermined time period. The interval time between the orders is ast and the order quantity varies.

The difference between the 2 types of multiple-period models is the difference in what determines the timing of the order placement. With the fixed-order quantity model an order is placed if the stock drops below a certain level, this is called the reorder point. With the fixed-time period model orders are placed at fixed times, for example every 2 weeks. The quantity that is ordered differs per order.

Fixed-order quantity models

Fixed-order quantity models try to determine the specific point at which an order must be placed and thereby determine the size of this order. For this, they use inventory positon and optimal order quantity.

• Inventory position: The quantity at hand + that which has been ordered - reclaimed quantities. If stock is used for special purposes, then the stock position is reduced by these quantities.
• Optimal order quantity: This is the order size whereby the total annual costs, related to the stock, are minimized.

As soon as the stock drops to a certain level, a new order is placed. This is also called a reorder point.

Handling of safety stock

The demand is often not constant, but varies from day to day. Because of this, safety stock must be built in. This can serve as protection that the stock never runs out.

• Safety stock: The amount of stock that is held on top of the expected demand.

You can determine the safety stock on the basis of the probability approach: it is assumed that the demand is normally distributed over a certain period with an average and a standard deviation. This approach focuses on the possibility that you can run out of inventory. To determine what the possibility is that you run out of inventory, you can set up a normal distribution for the expected demand and note where the amount of inventory (that you should have immediately available) is on the curve.

Example: You expect a demand of 100 units the following month and you know that the standard deviation is 20 units. If you enter the month with 100 units you know that the chance that your stock runs out is 50 percent. If this is not acceptable then you want to have some extra stock to reduce this risk. It may then be an idea to purchase 20 extra units.

Fixed-order quantity model with safety stock

A fixed-order quantity system monitors the stock level and places a new order when the stock reaches a certain level. The danger of running out of stock in this model only occurs during the lead time; the time between placing an order and receiving an order.

Stock calculations

It is important for managers to realize that the way they perform inventory controls is directly related to the financial results of a company. Inventory turn is a key measurement that is linked to the results of a business. This is a calculation of the expected quantity of stock that will be replaced in a year. The calculation of this is as follows:

• Inventory turn = Cost of goods sold / Average inventory value

Price-break model

The price-break model is concerned with the fact that the selling price of an item varies with the size of the order.

• Price-break model: This model is useful for determining the order quantity of an item if the price varies with the order size.

How can inventory be analyzed?

Keeping stocks takes time and money. As a result, an attempt is made to make use of the available sources to check stocks as good as possible. In other words: there must be a focus on the most important items in the stock.

Many inventory control systems are so big that it is not practical to put all of them in a model and to give them individual attention. In such cases, it is useful to categorize them based on their annual value. A simple, A, B, C, categorization can be useful here. Type A items have a high annual value, type B are the items that have a medium value and type C are the items that have a low value. This categorization can be used as a measuring instrument for the relative value of an item.

• ABC inventory classification: This divides the inventory into categories based on their value and associated strategies for that category.

Another way to guarantee accuracy is to count the stock frequently. A widely used method for this is cycle counting. This is a handy way to schematize each item in the stock. Companies do this at least annually to guarantee the accuracy of the overview.

• Cycle counting: This is a physical stock technique where the stock is counted on a frequent basis. This takes place more than once or twice a year.

There is an economic benefit in reducing inventory. Stocks make up a large part of the costs of a company. This is partly due to the money invested in it, but also due to costs such as insurance, opportunity costs and so on. These costs can be reduced by handling less inventory and reducing waste.

• Inventory: the inventory of each item or commodity used in an organization.

It is therefore important to estimate how much and when items must be purchased. There are 3 models that can be used if it is difficult to estimate demand and therefore determine the amount of stock. These 3 stock models are as follows:

1. Single-period model: this is used when you make a one-off purchase of an item. Eample: buying a shirt for a one-off sporting event.
2. Fixed-order quantity model: this is used if you want to keep an item in stock. It applies here that for every order that is placed the same number of that item must be ordered. The stock of that item is monitored until it reaches a certain level where the risk of not having enough of that item is large enough to place a new stock.
3. Fixed-time period model: this is used when an item must be in stock and must be ready for use. The item is then ordered at certain interval levels of time.

What does "lean" mean in supply chain management? - Chapter 12

What is lean production?

The most significant approach within operations and supply management is lean production. This refers to the focus of eliminating as much waste as possible. All actions (steps, stock, etc.) that are not required are input for the lean process. The basis for lean thinking comes from just-in-time (JIT) production, designed in Japan. This philosophy is about eliminating waste. Customer value is also an important concept within lean. It refers to what the customer is willing to pay for. Finally, waste is important for lean management, this is something that adds no value. This could include matters such as overproduction, waiting etc. According to Lean, this should be minimized as much as possible.

• Lean production: Integrated activities designed to achieve high volumes and high production quality (with minimum stocks of raw materials, products that are not yet finished and end products).
• Customer value: In the context of lean production, customer value is what the customer is willing to pay for.
• Waste: Everything that adds no value from the customer's perspective.

Eliminating waste can be done more easily at a production company than at a service company. Services companies have to deal with many uncertainties, such as:

• Uncertainty about task times; every service is unique
• Uncertainty in demand; no prediction about demand is 100% perfect
• Uncertainty about the role of the customer in production: variability exists, depending on how well the service provider performs his or her role

Value-adding activities transform materials and information into something the customer wants. Non-value-adding activities do not deliver what the customer wants. Waste is therefore also not of value to the customer.

How can lean concepts be applied in the supply chain process?

Lean in a supply chain is about eliminating waste and maximizing value for customers. This is because maximizing the value for customers also means that what they are willing to pay for a product or service is maximized.

The value stream consists of value adding and non value adding activities that are required to produce, design and ultimately deliver to the customer. If this is added to a supply chain, then the waste reduction is related to the optimization of value adding activities and the elimination of non value adding activities as part of the value stream.

• Value stream: The value adding and non value adding activities that are necessary for the design, the orders and the offering of the product. It is all about the process from concept to launch, order to placement and raw materials to customers.
• Waste reduction: The optimization of value adding activities and elimination of non value adding activities that are part of the value stream.

How can supply chain processes be analyzed?

Value stream mapping is a tool to visualize flows through the process. Features are the identification of value adding and non value adding activities, along with a timeline for each activity and the process as a whole. This tool can be used in the production, logistics and distribution process. The goal is to identify the ways in which the process can be made lean, thereby reducing waste and maximizing value for the customer.

• Value stream mapping (VSM): A graphical way to analyze where in the process value is added or not added.

Kaizen is a well-known Japanese way of performing value stream mapping. This focuses on continuous improvements. It focuses primarily on short-term projects.

• Kaizen: A Japanese philosophy that focuses on continuous improvement.

What are lean design principles?

There are a number of key principles that can guide and support the design of supply chains. These can be divided into 3 broad categories. The first 2 are related to internal production processes, the processes that actually create the goods and services in the company. These categories are Lean concepts and Lean production schedules. The 3rd category applies lean concepts throughout the supply chain, this is also called Lean supply chains.

The 3 categories are as follows:

1. Lean Concepts: Lean requires a factory to be designed in such a way that the flow of work suffers from a minimal "work-in-process" stock. Every workstation is part of the production line. There must be a logical flow in the system. This first category uses a number of applications and actions:
   • Preventive maintenance is applied to ensure that the flow is not disrupted. These are periodic inspections and repairs.
   • Group technology is a philosophy whereby similar parts are grouped in families. The processes that are needed to make these parts are put together in a work cell.
   • Quality at the source means that something is done right the first time. If something goes wrong, the process stops immediately. This is a philosophy whereby employees become their own inspectors and where they are personally responsible for their own output. They must do a good job and immediately ring the bell if something goes wrong.
   • JIT Production (JIT) means that what is needed is produced when it is needed and no more than that. This minimizes waste, because nothing extra is produced. There is therefore no stock. This makes problems easier to see. However, it is therefore advisable to only use JIT for companies that do not produce very large volumes in one go.
2. Lean Production Schedules: Lean production requires a stable schedule over a long time horizon. This can be achieved by making schedules, using capacity, etc. This category uses the following applications and actions:
   • Level schedule: This is a schedule that leads material to the final goal, at a constant pace.
   • Freeze window refers to the period of time in which the schedule is fixed and no further changes are possible. Here the concept of backflush is used whereby the parts that goes into each unit of the product are periodically removed from the stock. This means that it is calculated how many parts are used for production and these calculations are used to adjust the stock balance. This eliminates the need to record every action made in the production process.
   • Uniform plant loading is about softening production flow. They do this by weakening the response waves that normally occur in response to variation in the scheme.
   • Kanban production control systems use signaling devices to regulate just-in-time flows. Kanban means "sign" and is used as a signaling device to control production. Kanban pull system is a stock or production control system that uses signaling devices to regulate the flow.
3. Lean Supply Chains: building a lean supply chain has to do with the integration of the different partners. the supply must be coordinated where there is a need for different production facilities and the production must be directly linked to the demand for products from the customer. This last category also uses a number of actions and applications:
   • Specialized plants: They prefer to work with small, specialized factories than with large, vertically integrated factories. This is because small factories can more easily adapt to changes in the market.
   • Collaboration with suppliers: it is important that there are frequent deliveries, so that a good stock remains. To achieve this, a good relationship with providers is important.
   • Building of a lean supply chain: a supply chain is the sum of all the organizations involved. To be lean as a whole supply chain, everyone must be set the same! The entire chain must have the same value. They must all pay attention to waste, want to add value and have the same expectations. So they must all think lean.

How can lean concepts be applied in service processes?

Lean concepts can also be successfully applied at service companies. As with production processes, eliminating waste and creating value for the customer are also goals of service companies. However, services companies often operate in an environment with more uncertainty, which makes it more difficult to control everything.

Many techniques can be developed that can lead to success at service companies:

1. Organize groups that are aimed at solving groups
2. Ensure an upgrade of the "housekeeping": a well-organized and clean working environment ensures a better motivation and working atmosphere
3. Ensure an upgrade of quality: create reliable production processes
4. Clarify how the process works: clarifying the process can improve the results
5. Adjust the materials to the process in which they have to work: this ensures better agreement
6. Synchronize production with demand: this can reduce waiting times and so on.
7. Eliminate unnecessary activities: this can add value
8. Reorganize physical configurations: make workplaces more logical, for example by putting the same activities together
9. Introduce consumer-oriented schemes: this can cause demand to rise. You adapt the production to the customer and turn it around
10. Develop networks around providers: it is important to have a good and reliable network around you.

The most significant approach within operations and supply management is lean production. This refers to the focus of eliminating as much waste as possible. All actions (steps, stock, etc.) that are not required are input for the lean process. The basis for lean thinking comes from just-in-time (JIT) production, designed in Japan. This philosophy is about eliminating waste. Customer value is also an important concept within lean. It refers to what the customer is willing to pay for. Finally, waste is important for lean management, this is something that adds no value. This could include matters such as overproduction, waiting etc. According to Lean, this should be minimized as much as possible.

Why do companies outsource processes? - Chapter 13

What does strategic sourcing mean?

Strategic sourcing is the development of a good relationship with suppliers, so that you can obtain goods and services that contribute to the immediate needs of a company. Today, sourcing is the basis for competitive change. A company is no longer dependent on its own capacities, it is about being able to make the most of their available capacities, whether or not they are owned by the company. When companies outsource, it is mainly about products that are of strategic importance to the company.

• Strategic sourcing: The development and management of relationships with providers to obtain goods and services in a way that meets the immediate needs of the company.
• Sourcing: a process that is suitable for purchasing products that are of strategic importance to the company.

Sourcing is not only about purchasing things, the associated relationships (which are connected to this) are also important. The relationships depend on various factors. First, the specificity must be looked at; how much of a particular item is available and whether there are many substitutes for this item. When purchasing products, you make a request for proposal (RFP). You mainly use this if there are a number of potential buyers. This is a detailed information package that describes what can be purchased and how it should be prepared and distributed. It is a kind of application between buyer and seller. Finally, you also have to deal with vendor managed inventory, this is when a customer has the supplier who manages the stock. The provider is then given the freedom to supplement items when they think it's necessary.

• Specificity: This refers to the amount that is available for an item and, in a relative sense, how many substitutes are available.
• Request for proposal (RFP): An application that asks for a detailed request from a buyer who is interested in delivering an item.
• Vendor managed inventory: If a customer enables a provider to manage the inventory of an item or a group of items.

The bullwhip effect

In many cases you have to deal with opposite relationships between supply chain partners and dysfunctional industry practices such as price promotions. If there is a price decrease (promotion), then suppliers will develop stocks. This is called forward buying. This can also take place with customers if they start buying a lot in response to a price promotion. They then buy the product before they actually use it.

• Forward buying: a term that refers to customers who, in response to a promotion, buy before they actually need or use the item.

The phenomenon of variety, as we go from the customer to the producer in the supply chain, is referred to as the bullwhip effect. This effect shows the lack of synchronization among supply chain members. If the supply patterns do not match the demand patterns, the stock accumulates at different levels and a shortage or delay may occur on other components. To counter this, and to make the flow of materials through the supply system more equal, some companies use the program called continuous replenishment. This is a program that automatically completes groups of items at the customer on a regular basis.

• Bullwhip effect: the variety of demand is increased when we go from the customer to the producer in the supply chain.
• Continuous replenishement: a program for automatically offering groups of items to the customer. This on a regular basis.

Supply chain uncertainty framework

The supply chain uncertainty framework has been developed to help managers understand the nature of the demand of their products and then set up the supply chain in such a way that they can meet demand. Many aspects of the demand of a product are important here, such as: the life cycle of the product, to what extent the demand can be predicted, product variety, market standards and so on. Products can be categorized into either primary functions or primary innovations. Because each category requires a different supply chain, the basis of a supply chain problem is a mismatch between the type of problem and the type of supply chain. Fisher has established a framework that can help managers predict demand and fill in the supply. 2 types of classifications can be used, focused on demand (functional products and innovative products) and 2 types of classifications, focused on supply (stable supply chain process and envolving supply process).

The 2 divisions based on demand are as follows:

1. Functional products: these are products that people buy in a wide range at stores, such as the greengrocer or gas stations. They are the basic needs that always remain approximately constant. Because of this there is a lot of competition and it is in the low profit margin.
2. Innovative products: these are products such as the latest clothing and high-end personal computers that usually only have a cyclic of a few months. They are products that follow the trend such as technological gadgets and the latest fashion often only last a few months. This entails an uncertain demand, but a higher profit margin.

The above 2 types of classification revolve around demand characteristics. However, there are also uncertainties around the supply side that are just as important for the supply side strategy. These are as follows:

1. Stable supply process: A process in which the underlying technology is stable and easy to understand.
2. Envolving supply process: A process where the underlying technology changes quickly, they are difficult to understand and uncertain.

By linking the supply and demand to each other and looking at the underlying uncertainties, a supply chain can be developed:

• Efficient supply chain: A chain must be developed with as little waste as possible. They want to achieve the highest levels of cost efficiency.
• Risk-hedging supply chain: Run as little risk as possible in the processes, through partner relationships. They do this by sharing raw materials and sources in the supply chain.
• Responsive supply chain: These are supply chains that use strategies aimed at responding quickly and flexibly to changes in customer needs.
• Agile supply chain: These are supply chains that use strategies aimed at responding quickly and flexibly to customer demand, but thereby reducing the risk of supply or disruptions by sharing inventories and other capacity sources.

Therefore, 4 types of supply chains can be categorized, based on supply and demand uncertainties: 1.) efficient, 2.) risk hedging, 3.) responsive and 4.) agile.

Why do companies outsource processes?

Outsourcing is the act of moving internal activities and decision-making powers to providers outside the organization. The agreements that are drawn up are expressed in a contract. Not only the activities are outsourced, but also the people, factories, technology and other resources. The decisions about making uncertain elements are also outsourced.

• Outsourcing: transferring the internal activities and decisions of a company to providers outside the organization.

Logistics outsourcing

There has been an enormous growth in outsourcing within logistics areas. Logistics is a term that refers to management functions that support the complete cycle of material flow.

• Logistics: Management functions that support the complete cycle of material growth: from the purchase and internal controls of production materials to the planning and controls of the production of goods and the sale and distribution of end products.

Whether or not an activity is outsourced often depends on criteria such as 1.) coordination requirements, 2.) strategic controls and 3.) intellectual property issues.

Green sourcing

Environmental awareness of a company is increasing in popularity and many companies are therefore looking for ways to make their supply chain "greener". A focus area is to save money and at the same time help the environment. There is a 6-step process to convert traditional business processes into green outsourcing processes:

1. Assess the options: all relevant costs must be included
2. Start a conversation with internal supply chain providers: encourage functional ownership in the process.
3. Approach the supply basis: involve existing and new sellers in the process
4. Develop a strategy for outsourcing: set objectives
5. Implement the sourcing strategy: select sellers and products based on the established criteria
6. Institutionalize the sourcing strategy: develop quantitative criteria on which you can measure how things are going with the traditional model

How can you analyze the total costs of ownership?

The total cost of ownership (TCO) is an estimate of the costs of an item that includes all costs related to the purchase and use of the item (including the removal of the item after its usable loan). So it's the total cost of an item; buying, making, using and the after-costs. It influences the profit that you end up with.

• Total cost of ownership (TCO): An estimate of the costs of an item. It contains all the costs of an item during its useful life and beyond.

This is an approach to understand the total costs of an item: purchase, use and after-costs.
How can you evaluate the results of outsourcing?

It is important to measure how efficient the supply chain is. There are 2 measuring instruments for this: inventory turnover and weeks of supply.

1. Inventory turnover: This is a measuring instrument to calculate the supply chain efficiency. The calculation is as follows:
   • Inventory turnover = Cost of goods sold / Average aggregate inventory value
     • Cost of goods sold are the annual costs for a company to produce the goods or services.
     • Aggregate inventory value is the average total value of all items that are held in stock for a company. Valued based on the costs.
2. Weeks of supply: This is also a measuring instrument to measure the efficiency of the supply chain. This is mathematically the reverse of inventory turnover. The calculation is as follows:
   • Weeks of supply = (Average aggregate inventory value / Cost of goods sold) x 52 weeks

These two measuring instruments are used most often to calculate the efficiency of a supply chain. However, these measurements may differ based on the industry in which they are applied.

Outsourcing is the act of moving internal activities and decision-making powers to providers outside the organization. The agreements that are drawn up are expressed in a contract. Not only the activities are outsourced, but also the people, factories, technology and other resources. The decisions about making uncertain elements are also outsourced.

• Outsourcing: transferring the internal activities and decisions of a company to providers outside the organization.

What do we mean by location, logistics, and distribution? - Chapter 14

What are logistics?

Logistics deals with the entire picture concerning the coordination and relocation of materials and other sources from one location to another. The focus here is on the relocation of materials and on the location of department stores and factories. This is important for the costs of moving materials. With international logistics, these functions are managed on a global scale. There are certain logistics companies that specialize in such logistics operations, such as DHL. These transport organizations are also called third-party logistics companies. They provide their services to companies.

• Logistics: The process of coordinating and moving materials and other sources from one location to another.
• International logistics: all functions related to the relocation of materials and end products on a global scale.
• Thirt-party logistics company: a company that manages all (or parts of) delivery operations of another company.

What are alternatives for logistics and department store designs?

How the product must be transported from factory to customer is a complex problem that affects the cost of a product. Many compromises can be made in this regard in terms of speed, flexibility in responding to changes in demand and so on. Information systems play a major role in coordinating activities.

You have different transport alternatives that are also called "modes". These include: water, railway, delivered personally and thrugh pipelines and so on. Often multiple modes are used to move the product through the supply chain.

Department stores and other distribution centers are used to store shipments from different sources, thereby improving the efficiency of the supply chain. Cross-docking is an approach at department stores where shipments are broken up in local deliveries in a specific area. This is often coordinated in such a way that the goods never have to be stored as stock. This means that department stores only have to handle a minimum level of stock. Hub-and-spoke systems, on the other hand, combine the idea of ​​consolidation and that of cross-docking. Here a department store is seen as a "hub" with the sole purpose of sorting goods. Incoming goods are immediately sorted and assigned to the correct area. These hubs are placed at strategic locations, close to geographical centers so that the goods have to travel as little as possible.

Finding the optimal logistics design system consisting of factories, distribution centers, department stores and ultimately delivery to the customer, is a complex task.

How can you analyze logistics-driven location decisions?

There is a wide variety of criteria, which go beyond costs, to determine a suitable location for the different facilities that together form the supply chain of an organization. Criteria that influence the location of a factory or department store include: proximity to the customer, business climate, total costs, infrastructure, quality of work, providers, the free trade zone, political risks and trading blocks.

• Free trade zone: A zone where products can be transported without having to pay for it (as is the case with normal import products).
• Trading blocks: Agreements between certain countries that positively influence trade. These are special agreements between countries that make use of market opportunities.

Methods to determine the location of a factory

The factor-rating system is an analytical tool that ensures that different types of criteria can be considered. A scale measurment is used, based on points for each criteria. It is a widely used tool to determine the location because it combines various factors and is easy to understand.

• Factor-rating system: An approach to select a location for a facility, by combining different sets of factors. Each option is evaluated based on the various criteria and ultimately a calculation is made.

The transportation method is a special linear programming method. Linear programming, especially with transport methods, can be used if the transport costs have a major influence on the decision. This often involves either minimizing the costs of transport or maximizing the profits from shipping units.

• Transportation method: a special linear programming method that is useful for solving problems related to the transport of products from different sources to different destinations.

A third technique is the centroid method; this is useful for finding the desired geographical coordinations for each facility. This technique is often used to locate distribution department stores. It is a simple method that assumes that inbound and outbound transportation costs must be the same.

• Centroid method: A technique for locating facilities that already exist, the difference between them and the volumes of goods being shipped.

The localization of service companies is often highly dependent on how close the contact with the customer should be. Example: an automatic bank counting machine must be placed close to existing and potential customers.

Logistics deals with the entire picture concerning the coordination and relocation of materials and other sources from one location to another. The focus here is on the relocation of materials and on the location of department stores and factories. This is important for the costs of moving materials. With international logistics, these functions are managed on a global scale. There are certain logistics companies that specialize in such logistics operations, such as DHL. These transport organizations are also called third-party logistics companies. They provide their services to companies.