BulletPoints summary with the 4th edition of Operations and supply chain management, the core by Jacobs and Chase

Super Short Summary on Operations and supply chain management

What is Operations and Supply Chain Management? - BulletPoint 1

• Operations and Supply Chain Management (OSCM) is the design, operation, and improvement of the systems that create and deliver the firm’s primary products and services. OCSM is concerned with the management of the entire system that produces a product or delivers a service.

• A process is made up of one or multiple activities that transform inputs into outputs. Operations and Supply Chain processes can be categorized as follows:
  Plan: Involves the processes that are needed to operate an existing supply chain strategically;
  Source: The selection of suppliers that will deliver the goods and services needed to create the firm’s product;
  Make: Where the product is produced or the service is provided;
  Deliver: Also logistics processes. Delivering products to warehouses and customers, contact with customers and information systems need to be managed;
  Return: Involves the processes for receiving worn-out, defective, and excess products back from customers and processes for supporting customers who have problems with the delivered product.

• The are five essential differences between goods and services:
  Intangibility: A service cannot be weighed or measured. This means that services innovations cannot be patented and customers cannot try the service beforehand;
  Interaction with the customer: To be a service, the process requires a degree of interaction with the customer;
  Heterogeneity: Services vary day to day between the customer and the servers, whereas variation in producing goods can be almost zero;
  Perishability and time dependency: services can’t be stored;
  Specification of a services can be defined as a package of features that affect the five senses, existing of supporting facility like location and layout, facilitating goods like variety, consistency and quantity, explicit services like training of the personnel and availability to the service, and implicit service like attitude of the personnel, waiting time and privacy.

• Efficiency is doing something at the lowest possible cost.
  Effectiveness is doing the things that will create most value for the customer.
  Value is the attractiveness of a product relative to its cost.

• An interesting relation between OCSM functions and profit is the direct impact of a cost reduction in one of these functions on the profit margin.
  There are two ratios that relate to the productivity of labour employed by the firm: net income per employee and revenue (or sales) per employee.
  The receivables turnover ratio measures the efficiency of a company in collecting its sales on credit:
  Receivable turnover = annual credit sales / average account receivable
  The lower the ratio, the longer receivables are being held and the higher the risk of them not being collected.
  Another ratio is the inventory turnover, which measures the average number of times inventory is sold and replaced during the fiscal year. This ratio measures how efficient the company turns its inventory into sales.
  Inventory turnover = costs of goods sold / average inventory value
  The asset turnover ratio is the amount of sales generated for every dollar’s worth of assets. This measures how efficient a firm is using its assets in generating sales revenue.
  Asset turnover = revenue (or sales) / total assets

How do sustainable business strategies relate to operations and supply chain management? - Bulletpoint 2

• Strategy describes how a firm creates and sustains value for its current shareholders. By adding sustainability, future generations are taken into account.
  Shareholders own one or multiple shares in the company.
  Stakeholders are indirectly and directly influenced by the activities of the firm.
  Firms focus more and more on stakeholders.

• The Triple Bottom Line captures an expanded spectrum of values by evaluating a firm against the following criteria:
  Social Responsibility: Pertains to fair and beneficial business practices toward labour, the community, and the region in which a firm conducts its business;
  Economic Prosperity: The firm’s obligation to compensate shareholders who provide capital via competitive returns on investment;
  Environmental Stewardship: The firm’s impact on the environment and society.

• If you want to integrate a Operations and Supply Chain Strategy with the operations capabilities of a firm, you must make decisions about the design of the process and infrastructure needed to support these processes.
  Process design is selecting the right technology, arranging the process over time, determining the role of inventory in the process and determining the location of the process.
  Infrastructure decisions involve the logic associated with the planning and control systems, quality assurance and control approaches, work payment structure and organization of the operations and supply functions.
  Operations capabilities is a portfolio best suited to adapting to the changing product and/or service needs of a firm’s customers.

• There are seven major competitive dimensions forming the competitive position of a firm:
  Cost or price: The choice to either make the product or deliver the service cheap;
  Quality: The firm’s definition of how the product or service is to be made;
  Delivery speed: The firm’s ability to make the product or deliver the service quickly;
  Delivery reliability: The firm’s ability to deliver the product when promised;
  Coping with changes in demand: The firm’s ability to respond to the change in demand;
  Flexibility and New-Product introduction speed: The firm’s ability to be flexible in order to offer a wide variety of production to its customers in a given time;
  Other product-specific criteria relate to specific products or situations: Special services can increase sales of manufactured products such as technical liaison and support, meeting a launch date, supplier after-sale support, environmental impact and other dimensions (e.g. color, size, weight).

• There are the three steps in the risk management process that can be applied to situations where disruptions are possible:
  Identify the sources of potential disruptions;
  Assess the potential impact of the risk;
  Develop plans to mitigate the risk.

• Productivity is a measure of how well resources are used. The formula:
  Productivity = outputs / inputs
  To increase productivity, this ratio must be as large as practical. However, productivity is a relative measure and should always be compared to something else. This could be competitors or the process over time.

How is forecasting essential to supply chain planning? - Bulletpoint 3

• There are four basic types of forecasting: qualitative, time series analysis, causal relationships and simulation. Qualitative techniques are subjective and based on estimates and opinions. Time series analysis (the focus of this chapter) is a forecast in which past demand data is used to predict future demand. For causal forecasting the linear regression technique is used, which assumes that demand is related to some underlying factor(s) in the environment. Simulation models allow the forecaster to run through a range of assumptions about the condition of the forecast.

• Demand for products/services can be broken down into six components in most cases: average demand for the period, a trend, seasonal elements, cyclical elements, random variation and autocorrelation.

• When the demand for a product is constant and there are no seasonal characteristics, the moving average can be used: a forecast based on average past demand. Selecting the period length should be dependent on how the forecast is going to be used.

• A weighted moving average allows any weights to be placed on each element, provided that the sum of all weights equals 1. By forecasting this way, more recent data is given more significance than older data.

• Exponential smoothing uses weights for past data that decrease exponentially (1 – α) for each past period. This is the most used technique for forecasting.

• An upward or downward trend in data collected over a sequence of time periods causes the exponential forecast to always lag behind (be above or below) the actual occurrence. By adding another constant, the smoothing constant delta (δ), this trend can be corrected somewhat. Both alpha and delta reduce the impact of the error that occurs between the actual and the forecast.

• Linear regression refers to a special class of regression where the relationship between variables forms a straight line. Form of the formula: Y = a + bt, where Y is the value of the dependent variable that we are solving for, a is the Y intercept, b is the slope and t is an index for the time period.

• Linear regression is useful for long-term forecasting of major occurrences and aggregate planning. The biggest drawback of using linear regression forecasting is that past data and future projections are assumed to fall in about a straight line. However, it can still be used for both time series forecasting and causal relationship forecasting.

• The linear least squares method tries to fit the line to the data that minimizes the sum of the squares of the vertical distance between each data point and its corresponding point on the line.

• The standard error of estimate shows how well the line fits the data.

• A time series is chronologically ordered data that may contain one or multiple components of demand: trend, seasonal, cyclical, autocorrelation and random.

• Decomposition of a time series means identifying and separating the time series data into these components. The trend and seasonal component are relatively easy to identify, while cycles, autocorrelation and random components are much harder to identify.

• There are two types of seasonal variation:
  Additive seasonal variation: assumes that the seasonal amount is a constant, no matter what the trend or average amount is.
  Forecast including trend and seasonal = Trend + Seasonal
  Multiplicative seasonal variation: the trend is multiplied by the seasonal factors.
  Forecasting including trend and seasonal = Trend x Seasonal factor

• There are two factors that need to be discussed:
  Sources of error: Errors can come from a variety of sources. Errors can be classified as bias or random. Bias errors occur when a consistent mistake is made, for example by using the wrong variables. Random errors cannot be explained by the forecast model being used.
  Measurement of error: There are terms to describe the degree of error: standard error, mean squared error (or variance) and mean absolute deviation. De mean absolute deviation (MAD) is the average of the absolute value of the actual forecast error. It measures the dispersion of some observed value from some expected value.

• Another measure of error is the mean absolute percent error (MAPE). This measures the average error as a percentage of average demand.
  MAPE = MAD / Average demand

• Next to these quantitative methods of forecasting, there are also qualitative forecasting techniques. The knowledge of experts is important, while it requires much judgement. Examples are market research, panel consensus, historical analogy and the Delphi method.

Why is capacity management strategically important? - Bulletpoint 4

• Capacity Management in Operations is the ability to hold, receive, store or accommodate a number of customers in a system. Capacity is the amount of resource inputs available relative to output requirements over a particular period of time. However, it does not imply the duration of its sustainability. When looking at capacity, Operations managers look at inputs and outputs. Also, Operations management focus on the time dimension of capacity.
  You can distinguish capacity planning in the following three time durations:
  Long range: Longer than one year;
  Intermediate range: Monthly or quarterly plans for the next 6 to 18 months;
  Short range: Less than one month.
  Strategic capacity planning is finding the overall capacity level of capacity-intensive resources to best support the firm’s long-term strategy.
  Capacity is the output that a system is capable of achieving to deliver over a period of time.
  The best operating level is a level of capacity for which the process was designed and thus is the volume of output the best operation level at the level where average unit cost is minimized. The determination of the minimum is difficult as it includes a complex trade-off between the allocation of fixed overhead costs and other costs.
  You can calculate the capacity utilization rate to reveal how close a firm is to its best operation level:
  Capacity utilization rate = Capacity used / Best operating level

• Capacity flexibility is the ability to rapidly increase or decrease production levels, or to shift production capacity quickly from one to another. Flexibility can be created by:
  Flexible plants: The ultimate in plant flexibility is the zero-changeover time plant. Such a plant can adapt to change by the use of movable equipment, knockdown walls, and easily accessible utilities;
  Flexible processes: Flexible manufacturing processes permit low-cost switching from one product to another and enable economies of scope (multiple products can be produced at lower cost in combination than they can be seperately);
  Flexible workers: Flexible workers have multiple skills and the ability to switch easily from one kind of task to another.

• Capacity planning in services knows several important differences with capacity planning in products:
  Time: Services cannot be stored for later use.
  Location: The service setting must be at the place where the customer needs it.
  Volatility of demand: The volatitility of demand for a service is much higher than the volatility of demand for a product. This is because of (1) services cannot be stored, so inventory cannot smooth the demand; (2) customers interact directly with the production system of a service, and because they differ from each other, there will be more variability; (3) demand is directly affected by consumer behaviour, and this can be influenced by a lot of different things.

• Planning capacity levels for services must consider the day-to-day relationship between service utilization and service quality. The best operating point is near 70 percent of the maximum capacity.

How are projects organized? - Bulletpoint 5

• Project management is planning, directing and controlling resources (people, equipment, material) to meet the technical, cost and time constraints of a project.

• There are three types of projects:
  Pure projects: A structure for organizing a project where a self-contained team works full time on the project.
  Functional project: A structure where team members are assigned from the functional units of the organization. The team members remain a part of their functional units and typically are not dedicated to the project.
  Matrix project: A structure that blends the functional and pure project structures. Each project uses people from different functional areas. A dedicated project manager decides what tasks need to be performed and when, but the functional manager control which people to use.

• A project starts out as a statement of work (SOW): a description of the objectives to be achieved, with a brief statement of the work to be done and a proposed schedule specifying the start and completion dates.

• The work breakdown structure (WBS) defines the hierarchy of project tasks, subtasks and work packages. Completion of one or multiple work packages results in the completion of a subtask; completion of one or multiple subtasks results in the completion of a task; and, finally, the completion of all tasks is required to complete the project.

• Earned Value Management (EVM) is a technique that combines measures of scope, schedule and cost for evaluating project progress. Essential features of an EVM implementation are:
  A project plan that identifies the activities to be accomplished;
  A valuation of each activity. If a project generates revenue, its called the Planned Value (PV) of the activity. If a project generates costs, its called the Budgeted Cost of Work Scheduled (BCWS);
  Predefined “earning or costing rules” (also “metrics”) to quantify the accomplishment of work, called Earned Value (EV) or Budgeted Cost of Work Performed (BCWP).

• The critical path method (CPM) can be used for scheduling a project. The following steps need to be taken:
  Identify each activity to be done in the project and estimate how long it will take to complete each activity.
  Determine the required sequence of activities and construct a network reflecting the precedence relationships. The easiest way to do this is by identifying immediate predecessors. These are activities that need to be completed immediately before another activity.
  Determine the critical path.
  Determine the early start/finish and late sart/finish schedule. For some activities, there can be slack time: the time that an activity can be delayed, without delaying the entire project. It is also the difference between the late and early start times of an activity.

• Time-cost models are an extension of the critical path models that consider the trade-off between the time required to complete an activity and the cost of that activity. This is often referred as “crashing” the project. The basic assumption is that there is a relationship between activity completion time and the cost of a project. Crashing means the time to complete the project is compressed or shortened.

• Costs that are associated with expediting activities are activity direct costs and add to the project direct cost. Costs that are associated with sustaining the project are project indirect costs: overhead, facilities and resource opportunity costs. Between these two costs, there is a trade-off and therefore also a optimum point.

What is a manufacturing process? - Bulletpoint 6

• What is required to process a product can be divided into three simple steps: (1) sourcing the parts needed, (2) making the item and (3) sending the item to the customer.
  Depending on the wishes of the customer, the lead time of products differs: the time needed to respond to a customer order.
  The different products can be classified in different groups, according to the customer order decoupling point (CODP). The COOP determines where inventory is positioned to allow processes or entities in the supply chain to operate independently. It separates order-driven activities from forecast-driven activities. The closer the decoupling point is to the customer, the quicker the customer can be served.
  The different groups are:
  Make-to-stock: Used by firms that serve customers from finished goods inventory. Essential issue in satisfying customers is to balance the level of inventory against the level of customer service. Firms applying make-to-stock use lean manufacturing (high customer service with minimum levels of inventory investment) to achieve higher service levels for a given inventory investment
  Assemble-to-order: Used by firms that combine a number of preassembled modules to meet a customer’s specification.
  Make-to-order: Used by firms that make the customer’s product from raw materials, parts and components.
  Engineer-to-order: Used by firms working with the customer to design the product, and then make it from purchased materials, parts and components.
  Manufacturing a assemble-to-order product results in customer specific products, assembled in a similar way. The total number of combinations that can be made can be calculate as follows:
  Total number of combinations = N1x N2x … x Nn

• Simple systems can be analysed quickly by using Little’s Law, which says there is a long-term relationship between the inventory, throughput, and flow time. Formula:
  Inventory = Throughput rate x Flow time
  Throughput rate is the average rate (units/days) that items flow through a process. Flow time is the time it takes one unit to completely flow through a process. Little’s law only works if the process is stabilized.

• Process selection refers to what kind of production process you use to produce a product or provide a service. There are different formats by which a facility can be arranged.
  The five basic structures are:
  Project layout: The product remains in a fixed location and manufacturing equipment is moved to the product rather than vice versa. Construction sites are an example.
  Workcenter: Similar equipment or functions are grouped together, such as all drilling machines in one area and all stamping machines in another. This process has much flexibility and can produce much different products, but mostly on a low-volume.
  Manufacturing cell: Dedicated area where products that are similar in processing requirements are produced. These cells are designed to perform a specific set of different cells in a production area, and the cells are dedicated to a limited range of products.
  Assembly line: Work processes are arranged according to the progressive steps by which the product is made. These steps are defined so that a specific production rate can be achieved. An example is automobile manufacturing.
  Continuous process: Similar to an assembly line in that production follows a predetermined sequence of steps, but the flow is continuous such as with liquids or drugs.
  The relation between layout structures is often illustrated on a product-process matrix. The vertical axis shows the product standardization, the horizontal axis shows the volume of the products. The diagonal shows the different forms. From upper left to down right is shown the following: project, workcenter, manufacturing cell, assembly line and continuous process.

• The most common assembly line is a moving conveyor that passes a series of workstations in a uniform time interval called the workstation cycle time, which is the time between successive units coming off the end of an assembly line. The work performed at each station is made up of many bits of work, called tasks. The total work to be performed at a workstation is equal to the sum of the tasks assigned to that workstation. The assembly-line balancing problem is the problem of assigning tasks to a series of workstations so that the required cycle time is met and idle time is minimized. The precedence relationship complicates this, because there is a required order in which tasks must be performed in an assembly process.
  The steps in balancing an assembly-line are:
  Specify the sequential relationships among tasks by using a precedence diagram;
  Determine the required workstation cycle time (C):
  Cycle time (C) = production time per day / required output per day (in units)
  Determine the theoretical minimum number of workstations (Nt):
  Theoretical minimum (Nt) = sum of task times (T) / cycle time (C)
  Select a primary and secondary assignment rule for tasks;
  Assign tasks to workstations until the sum of the task times is equal to the workstation cycle time or no other tasks are feasible because of time or sequence restrictions.
  Evaluate the efficiency of the balance:
  Efficiency = Sum of task times (T) / (actual number of workstations (Na) x workstation cycle time (C))
  Rebalance if needed.

What are the characteristics of service processes? - Bulletpoint 7

• Configuring services can be done with the help of a service-system design matrix. There are six different alternatives. The top of the matrix shows the degree of contact.
  There are different degrees of customer/server contact:
  Buffered core: Physically separated from the customer;
  Permeable system: Penetrable by the customer (telephone, face-to-face contact);
  Reactive system: Both penetrable and reactive to the customer’s requirements.
  The greater the amount of contact, the greater the sales opportunity is. The left side of the matrix shows this. The right side shows the impact on production efficiency as the customer gets more influence on the operation. The ways a service can be delivered are: contact via e-mail, Internet and on-site technology, phone contact, face-to-face tight specs, face-to-face loose specs and face-to-face total customization.
  The design matrix shows the changes in workers, operations and types of technical innovations as the degree of customer/service system contact changes.

• A Service Blueprint is a standard flowchart tool for service process design. It emphases what is visible and what is not visible to the customer. Blueprinting does not provide any direct guidance for how to make the process conform to that design. Therefore you can use poka-yokes: procedures that prevent mistakes from becoming defects.

• The Queuing System consists of three major components: (1) The source population and the way customers arrive in the system, (2) the servicing system, and (3) the condition of the customers exiting the system (back to the population or not).
  Customer arrivals
  Finite population: Limited-size customer pool that will use the service and at times form a line.
  Infinite population: Large enough in relation to the service system so that the population size caused by subtractions or additions to the population does not significantly affect the system probabilities.
  Distribution of arrivals
  Arrival rate: the expected number of customers that arrive each period. A constant arrival distribution is periodic, while variable (random) arrival distributions is much more common. There are two ways to look at service arrivals: (1) analyse the time between successive arrivals to see if the times follow some statistical distribution. Usually, this time is exponentially distributed. (2) Choose a time length and try to determine how many arrivals might enter the system within this time (T). Usually, this time is Poisson distributed.
  Exponential distribution: a probability distribution associated with the time between arrivals.
  F(t)= λ e-λt, where λ is the mean number of arrivals per time period.
  Poisson distribution: probability distribution for the number of arrivals during each time period. This is obtained by finding the probability of exactly n arrivals during T. If the arrival process is random, the distribution is the Poisson and the formula is:
  PT(n) = ((λT)ne-λT)/ n!
  The exponential and Poisson distributions can be derived from one another. The mean and variance of the Poisson are equal and denoted by λ. The mean of the exponential is 1/ λ and its variance is 1/ λ2.
  Arrival patterns: Another characteristic. The arrivals at a system are far more controllable than is generally recognized.
  Size of arrival units: A single arrival is one unit. A batch arrival is some multiple of the unit.
  Degree of patience: A patient arrival is one who waits as long as necessary. An impatient arrival is one who decides to leave after seeing the length of the line (balking) or joins the line but departs after a while (reneging).

• There are different line structures to distinguish. The choice depends on the volume of customers served and on the restrictions imposed by sequential requirements governing the order in which service must be performed. The opportunities:
  Single channel, single phase: Simplest type of waiting line, can be found in a one-person barbershop.
  Single channel, multiphase: Series of services; e.g. carwash.
  Multichannel, single phase: Teller’s window in a bank. The difficulty with this format is the uneven service time given each customer results in unequal speed/flow among the lines.
  Multichannel, multiphase: Same to the preceding one, except that two or more services are performed in sequence. Example: admission of patients in a hospital. Because several servers are available for this procedure, more than one patient at a time may be processed.
  Mixed: Multi-to-single channel and alternative path structures.

• Once a customer is served, two exit fates are possible:
  The customer returns to the source population and immediately become a competing candidate for service again;
  Low probability of reservice.

How do sales and operations planning coordinate manufacturing, logistics, service and marketing plans? - Bulletpoint 8

• Sales and operations planning is a process that helps firms to better manage demand of the customer. An aggregate operations plan translates annual and quarterly business plans into broad labor and output plans for the intermediate term, with the objective to minimize the cost of resources needed to meet demand over that period.

• The main purpose of an aggregate plan is to specify the optimal combination of production rate, workforce level and inventory on hand. Production rate is the number of units completed per unit of time. Workforce level refers to the number of workers needed for production (production = production rate x workforce level). Inventory on hand is unused inventory carried over from the previous period.

• Production planning strategies are plans for meeting demand that involve trade-offs in the number of workers employed, work hours, inventory and shortages. These strategies can be helpful in managing demand. There are three different strategies:
  Chase strategy: Match the production rate to the order rate by hiring and laying off employees as the order rate varies. The success of this strategy depends on having a pool of easily trained applicants to draw on as order volumes increase. This strategy influences the motivation of employees;
  Stable workforce – variable work hours: Vary the output by varying the number of hours worked through flexible work schedules or overtime. This strategy provides workforce continuity and avoids the motivational impacts on employees as with a chase strategy;
  Level strategy: Work with a stable workforce and a constant output rate. Shortages and surpluses are absorbed by fluctuating inventory levels, order backlogs and lost sales. Employees benefit from a stable environment, but there can be potentially decreased customer service levels and increased inventory costs.

• There are four costs relevant to the aggregate production plan:
  Basic production costs: The fixed and variable costs of producing a product; direct and indirect labour costs and compensation are included;
  Costs associated with changes in the production rate: Typical costs are hiring, training and laying off personnel. Hiring temporary help is a way of avoiding these costs;
  Inventory holding costs: The costs of inventory, storing, insurance, taxes, spoilage and obsolence;
  Backordering costs: Very hard to measure. Includes costs of expediting, loss of customer goodwill and loss of sales revenue resulting from backordering.

• Yield management is the process of allocating the right type of capacity to the right type of customer at the right price and time to maximize revenue or yield, given that capacity is limited. Yield management can be used to making demand more predictable. From an operational perspective, yield management is most effective when:
  Demand can be segmented by the customer;
  Fixed costs are high and variable costs are low;
  Inventory is perishable;
  Product can be sold in advance;
  Demand is highly variable.

• Yield management only works if pricing structures appear logic to the customer and justify the different prices. Such justification, also called rate fences, may have either a physical basis (a room with a view) or a nonphysical basis (unrestricted access to the Internet). Pricing also should relate to addressing specific capacity problems. A second issue in yield management is handling variability in arrival or starting times, durations and time between customers. This entails using forecasting methods. A third issue relates to managing the service process. A last and most critical issue is training workers and managers to work in an environment where overbooking and price changes are standard occurrences that directly impact the customer.

What is material requirements planning? - Bulletpoint 9

• Enterprise resource planning (ERP) is a computer system that integrates application programs in accounting, sales, manufacturing and the other functions in a firm. Different application programs share 1 database, which can significantly benefit a firm.

• The emphasis is on material requirements planning (MRP), which is the key piece of logic that ties the production functions together from a material planning and control view. The system is based on dependent demand. MRP is most valuable in industries where a number of products are made in batches using the same productive equipment.

• A master production schedule (MPS) is a time-phased plan specifying how many and when the firm plans to build each end item. MPS states when the end items need to be finished. This can be used as an input to the MRP process, except if the end item is quite large or expensive. Making a MPS is dependent on the pressures from various functional areas and deadlines that are set. To ensure a good MPS, the master scheduler (the person) must:
  Include all demands from product sales, warehouse replenishment, spares and interplant requirements;
  Never lose sight of the aggregate plan;
  Be involved with customer order promising;
  Be visible to all levels of management;
  Objectively trade off manufacturing, marketing and engineering conflicts;
  Identify and communicate all problems.

• The MRP system works as follows: the MPS states the number of items to be produced during specific time periods. A bill of materials (BOM) file identifies the specific materials used to make each item and the correct quantities of each. The inventory records file states the number of units on hand and on order. These three sources (MPS, BOM file and inventory records file) are input for the material requirements program.

• The following is a general description of the MRP explosion process, the process of calculating the exact requirements for each item managed by the system:
  The requirements for level 0 items ("end items") are retrieved from the master schedule. These items are referred to as "gross requirements" by the MRP program;
  The program uses the current on-hand balence together with the schedule of orders that will be received in the future to calculate the "net requirements";
  Using net requirements, the program calculates when orders should be received to meet these requirements;
  Next, a schedule for when orders are actually released needs to be found;
  After these steps have been completed for all the level zero items, the program moves to level 1 items;
  The gross requirements for each level 1 item are calculated from the planned-order release schedule for the parents of each level 1 item;
  Next, net requirements, planned-order receipts and planned-order releases are calculated as described in steps 2-4 above;
  This process is repeated for each level in the BOM.

• The determination of lot sizes in a MRP system is complex and difficult. Lot sizes are the part quantities issued in the planned order receipt and planned order release sections of an MRP schedule. There are different techniques. The different forms are:
  Lot-for-lot (L4L) is the most common technique. It sets planned orders to exactly match the net requirements, it produces exactly what is needed each week without carrying over into future periods, it minimizes carrying cost and it does not take into account setup costs or capacity limitations.
  Economic Order Quantity is discussed in Chapter 11. In an EOQ model there is either fairly constant demand or safety stock must be kept to provide for demand variability. The EOQ model uses an estimate of total annual demand, the setup/order cost and the annual holding cost.
  It assumes that parts are used continuously during the period. The generated lot sizes do not always cover the entire number of periods.
  EOQ = the root of 2DS/H, where D is the annual demand, H is the annual holding cost and S is the setup cost.
  Least Total Cost is a dynamic lot-sizing technique that calculates the order quantity by comparing the carrying cost and the setup/ordering costs for various lot sizes, and then selects the lot size in which these costs are almost the same.
  Least Unit Cost is a dynamic lot-sizing technique that adds ordering and inventory carrying cost for each trial lot size and divides by the number of units in each lot size, picking the lot size with the lowest unit cost.

What is the scope of total quality management in a firm? - Bulletpoint 10

• Total quality management (TQM) may be defined as ‘managing the entire organization so that it excels on all dimensions of products and services that are important to the customer’. It has two fundamental operational goals:
  Careful design of the product or service;
  Ensuring that the organization’s systems can consistently produce the design.

• Fundamental to any quality program is the determination of quality specifications and the costs of achieving or not achieving those specifications. Design quality refers to the inherent value of the product in the marketplace and is thus a strategic decision for the firm. The dimensions of design quality are:
  Performance: Primary product or service characteristics;
  Features: Added touches, bells and whistles, second characteristics;
  Reliability/durability: Consistency of performance over time;
  Serviceability: Ease of repair;
  Aesthetics: Sensory characteristics (sounds, feel, look..);
  Perceived quality: Past performance and reputation.

• Cost of Quality (COQ) analysis is one of the primary functions of the QC departments. Cost of quality means all of the costs attributable to the production of quality that is not 100 percent perfect. The COQ can be classified into four types:
  Appraisal costs: Inspection, testing;
  Prevention costs: Finding quality problems, training;
  Internal failure costs: Scrap, rework, repair in a company;
  External failure costs: Repair, loss of goodwill, warranty replacement.

• Six Sigma refers to the methods companies use to eliminate defects in their products and processes. It seeks to reduce variation in the processes that lead to product defects. Six-Sigma thinking allows managers to describe the performance of a process in terms of its variability and to compare it using the defects per millions opportunity (DPMO) metric. Defects per million opportunities (DPMO) requires three pieces of data:
  Unit: The item produced or being serviced;
  Defect: Any item/event that does not meet the customers’ requirements;
  Opportunity: A chance for a defect to occur.
  DPMO = (Number of defects/Number of opportunities for error per unit x Number of units) x 1.000.0000

• The methodology side of Six-Sigma are project-oriented through the Define, Measure, Analyse, Improve, and Control (DMAIC) cycle. It is used to set the focus on understanding and achievingw what the customer wants. By the integration of analytical tools for Six-sigma, DMAIC categories can be illustrated. These tools are flowcharts, run charts, Pareto charts, checksheets, cause-and-effect diagrams, opportunity flow diagram and process control charts. Other tools are failure mode and effect analyse and design of experiments (DOE).

• Statistical quality control (SQC) covers the quantitative aspects of quality management. Processes that provide goods and services usually exhibit some variation in their output. Assignable variation is the deviation in the output of a process that can be clearly identified and managed, e.g. workers are not trained. Common variation is the deviation in the output of a process that is random and inherent in the process itself, for example caused by the type of equipment used to complete a process. Statistical values involved by this are the mean and standard deviation.

• Process control is concerned with monitoring quality while the product or service is being produced. Statistical process control (SPC) involves testing a random sample of output from a process to determine whether the process in producing items within a preselected range. Attributes are quality characteristics that are classified as either confirming or not conforming to specification.

• A p-chart can be used to decide whether the item is good or bad. The upper and lower control limits need to be defined and be drawn on a graph. After that, the fraction defective of each individual sample tested need to be plotted.

• In the case of the p-chart, the item is either good or bad. There are times when the product/service can have more than one defect. A c-chart can be used to monitor the number of defects per unit. The c-chart is the Poisson. If c is the number of defects for a particular unit, than c bar is the average number of defects per unit, and the standard deviation is the square root of c bar.

• X-bar and R- (range) charts are widely used in statistical process control. No attribute sampling is used, but variables sampling: the actual weight/volume/number of inches or other variable measurements are measured. Based on these measurements, control charts are developed to determine the acceptability or rejection of this process. There are four important issues to address in creating a control chart: (1) the size of the samples, (2) the number of samples, (3) the frequency of samples and (4) the control limits.

How can inventory be analyzed? - Bulletpoint 11

• You should try to get down inventory as far as possible. There are three inventory models. The techniques described here are most appropriate when demand is difficult to predict with great precision:
  The single-period model: Used when a one-time purchase of an item is made, for example a T-shirt for a one-time sporting event.
  Fixed-order quantity model: Used when we want to maintain an item in-stock, and when the item is resupplied, a certain number of units must be ordered each time. Inventory is monitored until it gets down to a level where the risk of stocking out is great enough that we are compelled to order.
  Fixed-time period model: Also used when the item should be in-stock and ready to use, but the difference is that the item is ordered at certain intervals of time, for example each Thursday morning.

• Purposes of having a supply of inventory can be:
  To maintain independence of operations;
  To meet variation in product demand;
  To allow flexibility in production scheduling;
  To provide a safeguard for variation in raw material delivery time;
  To take advantage of economic purchase order size;
  Many other domain-specific reasons.

• In making decisions that affects inventory size, the following costs must be considered:
  Holding or carrying costs: All costs for holding goods and the storage facilities, taxes, insurance etc.;
  Setup (production change) costs: The costs of making each different product;
  Ordering costs: The managerial and clerical costs to prepare the purchase or production order;
  Shortage costs: The costs of having a stock out.

• In a single-period inventory model, a decision is just a one-time purchasing decision where the purchase is designed to cover a fixed period of time and the item will not be reordered. An example is the “newsperson” problem. The optimal stocking level occurs at the point where the expected benefits derived from carrying the next unit are less than the expected costs for that unit. Co is the cost per unit of demand overestimated, Cu is the cost per unit of demand underestimated. The expected marginal cost equation becomes:
  P(Co) ≤ (1 – P)Cu
  Where P is the probability that the unit will not be sold and 1 – P the probability of it being sold. P is:
  P ≤ Cu / (Co + Cu)

• Multiperiod inventory systems involve items that will be purchased periodically where inventory should be kept in stock to be used on demand. There are two types of systems. The fixed-order quantity model (EOQ/Q-model) is an inventory control model where the amount requisitioned is fixed and the actual ordering is triggered by inventory dropping to a specified level of inventory. The fixed-time period model (P-model) is an inventory control model that specifies inventory is ordered at the end of a predetermined time period. The interval of time between orders is fixed and the order quantity varies.

• The fixed-order quantity model tries to determine the specific point R, at which an order will be placed and the size of that order, Q. Order point R is always a specified number of units. The inventory position is the amount on-hand plus on-order minus backordered quantities. When inventory has been allocated for special purposes, the inventory position is reduced by these allocated amounts.

• In constructing any inventory model, the first step is to develop a functional relationship between the variables of interest and the measure of effectiveness. When you are concerned with cost, the following equation pertains:
  Total annual cost = annual purchase cost + annual ordering cost + annual holding cost
  TC = DC + (D/Q)S + (Q/2)H

• The point where the total cost is a minimum, Qopt, can be calculated as follows:
  TC = DC + (D/Q)S + (Q/2)H
  (dTC/dQ) = 0 + (-DS/Qsquare) + (H/2) = 0
  Qopt = the root of (2DS/H)

• If there is variety in demand, there needs to be safety stock (SS): the amount of inventory carried in addition to the expected demand.

• Inventory is managed directly and is related to the financial performance of the firm. The average inventory and the inventory turn for an individual item is:
  Average inventory value = (Q/2 + SS)C
  Inventory turn = costs of goods sold/average inventory value
  Inventory turn = DC / ((Q/2 + SS)C) = D / (Q/2 + SS)

• ABC inventory classification divides inventory into dollar volume categories that map into strategies appropriate for the category. A means high dollar volume, B moderate dollar volume and C low dollar volume. By using this classification, not every inventory needs to go through counting; the focus can be on the most important items in stock. This is related to the Pareto principle: the few having the greatest importance.

How can lean concepts be applied to supply chain processes? - Bulletpoint 12

• Lean production are the integrated activities designed to achieve high-volume, high-quality production using minimal inventories of raw materials, work-in-process, and finished goods. Lean production refers to a focus on eliminating as much waste as possible. Customer value is, in the context of lean production, something for which the customer is willing to pay. Waste is anything that doesn’t add value from the customer’s perspective.

• There are seven types of waste: production of defect products, waste of overproduction, inventory waste, waste of waiting time, unnecessary processing (repairs), waste of motion and transportation waste.

• The Toyota Production System was developed to improve quality and productivity and is predicated upon two philosophies that are central to the Japanese cultur: elimination of waste and respect for people.

• Value stream mapping (VSM) is a graphical way to analyze where value is or is not being added as material flows through a process. Value stream mapping is a two-part process: first depicting the “current state” of the process and second a possible “future state”. Kaizen is the Japanese philosophy that focuses on continuous improvement. The Kaizen bursts identify specific short-term projects that teams work on to implement changes in the process.

• Lean concepts:
  Group Technology (GT) is a philosophy in which similar parts are grouped into families, and the processes required to make the parts are arranged in a manufacturing cell;
  Quality at the source means do it right the first time and, when something goes wrong, stop the process or assembly line immediately;
  Just-in-time (JIT) is a philosophy of continuous and forced problem solving that drives out waste (storage, inspection, waiting etc.). It is typically applied to repetitive manufacturing. JIT exposes problems that are otherwise hidden by inventory.

• Lean production requires a stable schedule over a lengthy time horizon. This is accomplished by:
  Level schedule: A schedule that pulls material into final assembly at a constant rate and allows the various elements of production to respond to pull signals;
  Freeze window: The period of time during which the schedule is fixed and no further changes are possible. Backflush is calculating how many of each part were used in production and using these calculations to adjust actual on-hand inventory balances. This eliminates the need to actually track each part used in production;
  Underutilization and overutilization of capacity.

• Kanban is the Japanese translation for sign or instruction card. In Kanban production control systems, only cards or containers are used to make up the Kanban pull system and regulate JIT flows. Level scheduling requires material to be pulled into final assembly in a pattern, which is uniform enough to allow the various elements production to respond to pull signals. Kaban significantly reduces the setup costs and changeover times achieving a smooth flow.

• The following concepts are related to lean network design:
  Specialized plants: Small specialized plants rather than large vertically integrated manufacturing facilities are important. Speed and quick response to changes are keys to the success of a lean supply chain;
  Collaboration with suppliers: If a firm shares its projected usage requirements with its vendors, vendors have a long-run picture of the demands and the firm can further reduce their buffer inventories. Maintaining stock at a lean level requires frequent deliveries during the day;
  Building a lean supply chain: A supply chain is the sum total of organizations involved. To be lean, everyone’s got to be on the same page! Muda = waste.

Why do companies outsource processes? - Bulletpoint 13

• Strategic sourcing is the development and management of supplier relationships to acquire goods and services in a way that aids in achieving the immediate need of the business. Depending on the contract duration, transaction costs and specificity (how common the item is) of the product, a firm’s purchasing can be classified into these types of processes: strategic alliance, spot purchase, request for proposal (RFP), request for bid and reverse auctions, vendor managed inventory and electronic catalog.

• The Bullwhip Effect describes the phenomenon of variability magnification as we move from the customer to the producer in the supply chain. It indicates a lack of synchronization among supply chain members.

• Fisher has developed a framework to help managers understand the nature of demand for their products and then devise the supply chain that can best satisfy that demand. Because each category requires a distinctly different kind of supply chain, the root cause of supply chain problems is a mismatch between the type of product and type of supply chain.

• Hau Lee expands on Fisher’s ideas by focusing on the supply side of the supply chain. His framework is illustrated in a two by two matrix resulting from low/high uncertainty and low/high demand uncertainty. A stable supply process is one where the manufacturing process and the underlying technology are mature and the supply base is well established. An evolving supply process is where the manufacturing process and the underlying technology are still under early development and are rapidly changing.

• There are four types of supply chain strategies:
  Efficient supply chains utilize strategies aimed at creating the highest cost efficiency
  Risk-hedging supply chains utilize strategies aimed at pooling and sharing resources chains in a supply chain to share risk
  Responsive supply chains utilize strategies aimed at being responsive and flexible chains to the changing and diverse needs of the customers
  Agile supply chains utilize strategies aimed at being responsive and flexible to customer needs, while the risks of supply shortages or disruptions are hedged by pooling inventory and other capacity resources

• Outsourcing is the act of moving a firm’s internal activities and decision responsibility to outside providers. This allows a company to create a competitive advantage while reducing cost. Applying to this capability, an entire function (e.g. distribution, manufacturing) or some elements of an activity (e.g. producing parts) may be outsourced. Reasons to move firm’s activities outside the firm can be motivated by organizational and financial factors as well as the factor of improvement.

• Logistics is a term that refers to the management functions that support the complete cycle of material flow: from the purchase and internal control production materials to the planning and control of work-in-process to the purchasing, shipping and distribution of the finished product. Outsourcing logistics is for more common nowadays.

• Total Cost of Ownership (TCO) is a financial estimate of the cost of an item, which determines direct and indirect costs of a product or system. It includes all the costs related to the procurements and use of items, including any related costs in disposing of the item after it is no longer useful. It can be applied to internal costs or more broadly to costs throughout the supply chain.

How are locations, logistics and distributions determined in a supply chain? - Bulletpoint 14

• Logistics is a part of the supply chain process that plans, implements, and controls the efficient, effective flow and storage of goods/service. It is the art and science of obtaining, producing and distributing material and product in the proper place and in the proper quantities.

• International logistics is concerned with managing all functions of logistics internationally. Global and local supply chains can differ in distances and time differences, forecasting, exchange rates, infrastructure, variety of products and foreign rules.

• Third-party logistics companies are companies that manages all or part of another company’s product delivery operations.

• There are several techniques available to decide about the plant location. The first one is factor-rating system, which uses weights to assign importance of qualitative and quantitative factors. There are no exact results dues to subjectivity of weights.

• Transportation method is a special linear programming method that is useful for solving problems involving transporting products from several destinations. It estimates the costs of using a network of plants and warehouses.

• The centroid method is a technique for locating single facilities that considers the existing facilities, the distances between them and the volumes of goods to be shipped. In its simplest form, this method assumes there is no difference between inbound and outbound transportation costs, and it does not include special shipping costs for less than full loads. This technique begins by placing the existing locations on a coordinate grid system. Coordinates are usually based on longitude and latitude measures due to the rapid adoption of GPS.