Instructor: Spyros Reveliotis

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IE3104 Supply Chain ModelingManufacturing
WarehousingSpring 2013

• Instructor Spyros Reveliotis
• e-mail spyros_at_isye.gatech.edu
• homepage www.isye.gatech.edu/spyros

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Course Logistics

• TAs Li Hao and Seunghan Lee
• Office Hours TBA
• Course Prerequisites Some background on
  deterministic optimization (IE 3133) and
  stochastic modeling (IE 3232).
• Course policies
• Homework 25
• Midterm I 20
• Midterm II 20
• Final 35
• Exams closed-book, with 2 pages of notes per
  midterm exam and 6 pages for the final
• Academic Honor Code must be respected in all
  facets of the course
• Make-up exams and incompletes only in case of
  officially documented emergencies
• Reading Materials
• Course Textbook R. Askin and J. Goldberg, Design
  and Analysis of Lean Production Systems, John
  Wiley Sons, Inc.
• Course slides and any other material posted at my
  homepage or circulated in class.

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Reading Assignment

• Read Chapters 1, 2 and Section 4.1 from your
  textbook.

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Course Objectives(What is this course all about?)

• How to design and operate manufacturing and
  warehousing facilities (and more)
• A conceptual description and classification of
  modern production and warehousing environments
  and their operation
• An identification of the major issues to be
  addressed during the design, planning and control
  of the production and warehousing activity
• Decomposition of the overall production planning
  and control problem to a number of sub-problems
  and the development of quantitative methodologies
  for addressing the arising sub-problems
• Emerging trends, including the implications of a
  globalized and internet-based economy

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Our abstraction of the Production System

• Production System A transformation process
  (physical, locational, physiological,
  intellectual, etc.)

• The production system as a process network

Suppliers
Customers
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Productivity Basic Organizational Performance
Measure
Productivity Value produced / Input used
Output / (Labor Material Capital Energy
Miscellaneous)

• Remarks
• Typically both the numerator and the denominator
  are measured in . If the output corresponds to
  actual sales, then productivity measures both
  effectiveness (doing the right thing) and
  efficiency (in the right way).
• From an economic standpoint, major emphasis is
  placed on the annual percentage change (hopefully
  increase) of productivity.
• For the entire US economy, the annual increase
  in productivity is higher than 2.5 (38 of this
  increase is due to capital improvements, 10 to
  labor improvements and 52 to management
  improvements).
• For the Chinese economy, this number has been
  more than 6 lately!

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Major Productivity Variables and their
contribution to productivity increase

• Labor
• Better basic education
• Better diet
• Better social infrastructure like transportation
  and sanitation
• Better labor utilization and motivation
• Capital
• Steady and well-planned investments on equipment
  and its timely maintenance
• Research Development
• Controlling of the cost of capital
• Management
• Exploitation of new (information) technologies
• Utilization of accumulated knowledge
• Education

Knowledge Society
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Operations Management (OM)
Definition The study and improvement /
optimization of the set of activities that create
goods and services in an organization.

• Typical issues addressed
• Service and product selection and design
• Quality Management
• Process and capacity design
• Facility design
• Facility Location
• Human resources and job design
• Inventory management
• Production planning and control
• Maintenance
• Supply-chain management

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The major functional units of a modern
organization
Strategic Planning defining the organizations
mission and the required/perceived core
competencies
Production/ Operations product/service creation
Finance/ Accounting monitoring of the
organization cash-flows
Marketing demand generation and order taking
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Examples (borrowed from Heizer Render)
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Fit Between Corporate and Functional Strategies
(Chopra Meindl)
Corporate Competitive Strategy
Supply Chain or Operations Strategy
Product Development Strategy
Marketing and Sales Strategy
Information Technology Strategy
Finance Strategy
Human Resources Strategy
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Corporate Mission

• The mission of the organization
• defines its purpose, i.e., what it contributes to
  society
• states the rationale for its existence
• provides boundaries and focus
• defines the concept(s) around which the company
  can rally
• Functional areas and business processes define
  their missions such that they support the overall
  corporate mission in a cooperative and
  synergistic manner.

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Corporate Mission Examples

• Merck The mission of Merck is to provide society
  with superior products and services-innovations
  and solutions that improve the quality of life
  and satisfy customer needs-to provide employees
  with meaningful work and advancement
  opportunities and investors with a superior rate
  of return.
• FedEx FedEx is committed to our
  People-Service-Profit philosophy. We will produce
  outstanding financial returns by providing
  totally reliable, competitively superior, global
  air-ground transportation of high-priority goods
  and documents that require rapid, time-certain
  delivery. Equally important, positive control of
  each package will be maintained utilizing real
  time electronic tracking and tracing systems. A
  complete record of each shipment and delivery
  will be presented with our request for payment.
  We will be helpful, courteous, and professional
  for each other, and the public. We will strive to
  have a completely satisfied customer at the end
  of each transaction.

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Defining the Corporate Strategy
Responsiveness (Reliability Quickness
Flexibility e.g., Dell, Overnight Delivery
Services)
Competitive Advantage through which the company
market share is attracted
Cost Leadership (Price e.g., Wal-Mart,
Southwest Airlines, Generic Drugs)
Differentiation (Quality Uniqueness e.g.,
Luxury cars, Fashion Industry, Brand Name Drugs)
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The operations frontier, trade-offs, and the
operational effectiveness
Responsiveness
Cost Leadership
Differentiation
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Defining the Corporate Strategy

• Corporate Strategy The organizations
  positioning in terms of
• responsiveness,
• cost leadership and
• product differentiation
• requirements, i.e., the sought competitive
  advantage(s).
• The corporate strategy dictates the detailed
  strategies for each functional area (i.e.,
  Operations, Finance, Marketing) but it is also
  affected by those areas.
• Collectively, all these strategies seek to
  exploit (external) opportunities and (internal)
  strengths, neutralize (external) threats, and
  address (internal) weaknesses

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Factors affecting Corporate Strategy

• External
• Emerging strengths and weaknesses of competitors
  gt new threats and opportunities, respectively
• New industry entrants
• Development of substitute products
• Development of new technologies
• Legal developments (e.g., environmental concerns
  and regulations)
• Economic and political developments (e.g., new
  international agreements, political crises)
• Internal
• Company politics and restructuring
• Modified relationships with customers and
  suppliers
• Product Life Cycle

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Strategy and Issues during a Products Life(J.
Heizer B. Render, Operations Management,
Prentice Hall)
Growth
Maturity
Decline
Introduction

• Poor time to change image, price or quality
• Competitive costs become critical
• Defend market position

• Cost control critical

• Practical to change price or quality image
• Strengthen niche

• Best period to increase market share
• RD engineering critical

Sales
Time

• Frequent product and process changes
• Short production runs
• High production costs
• Limited models
• Attention to quality

• Forecasting critical
• Products and process reliability
• Increase capacity
• Shift towards product focus
• Enhance distribution

• Little product differentiation
• Overcapacity in the industry
• Reduce capacity and eventually prune line to
  eliminate items not returning good margin

• Standardization - minor product changes
• Optimum capacity
• Process stability
• Long production runs

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The primary drivers for achieving strategic fit
in Operations Strategy(adapted from Chopra
Meindl)
Corporate Strategy
Operations Strategy
Efficiency
Responsiveness
Market Segmentation
Facilities
Inventory
Transportation
Information
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The role of Facilities

• Facilities The locations where inventory is
• processed and transformed into another state
  (manufacturing) or
• staged before being shipped to the next stage
  (warehousing)
• In general, centralization boosts efficiency,
  while decentralization boosts responsiveness
• Primary decisions
• Location
• Proximity to the customer
• Proximity to resources
• Access to markets (ability to circumvent quotas
  and tariffs)
• Infrastructure
• Operational costs and tax incentives
• Capacity
• Capital cost vs. responsiveness
• Operations Methodology for Manufacturing
  Facilities
• Product vs. functional focus
• Flexible vs. dedicated capacity
• Warehousing methodology
• Storage modes and material flow organization
• Cross-docking

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The role of Inventory

• Primary inventory components
• Raw Material
• Work In Process (WIP)
• Finished Goods
• It exists because of the finiteness of the
  production and transportation rates (Littles
  Law ITHT)
• Types of Inventory
• Cycle Inventory It is incurred in an effort to
  control the impact of fixed ordering and set-up
  costs.
• Safety Inventory It is used to deal with the
  randomness in the experienced demand it is set
  so that it helps the supply chain meet some
  service level (i.e., control the probability
  that no stock-out will be experienced at any
  replenishment cycle).
• Seasonal Inventory It is used to help the supply
  chain deal with predictable variability in
  demand.
• Opportunistic Inventory Takes advantage of
  bargains.
• Sourcing Determine the set of suppliers /
  subcontractors to be used, and develop the
  contracts that will govern the relationship.

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The role of Transportation

• Transportation The SC element that moves product
  between its different stages.
• Primary decisions
• Mode(s) of Transportation
• Air fastest but most expensive
• Truck Relatively quick, inexpensive and very
  flexible mode
• Rail Inexpensive mode to be used for large
  quantities
• Ship Slowest but often the most economical
  choice for large overseas shipments
• Pipeline Used (primarily) for oil and gas
• Electronic transportation for goods as music and
  movies
• Route and Network Selection
• In-house or Outsource to some 3PL provider

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The role of Information

• Information exchange is necessary for the most
  extensive modes of coordination sought in
  contemporary supply chains. It allows the supply
  chain to improve simultaneously its efficiency
  and responsiveness.
• Information-related decisions
• Produce-to-stock vs. produce-to-order (also
  assemble-to-order)
• Extent and modes of information sharing and
  coordination
• Forecasting and Aggregate Planning schemes
• Pricing and revenue management policies
• Enabling Technologies
• Electronic Data Interchange (EDI) Enables
  paperless transactions, primarily for backend
  operations of the SC.
• The Internet and the WWW.
• Enterprise Resource Planning (ERP) enables
  transactional tracking and global visibility of
  information in the SC.
• Supply Chain Management (SCM) software decision
  support tools.

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Characterizing the information and material flow
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Case StudyExpanding the Operations Frontier
-Dells revolution in the PC market

• Dells competitive advantage Provide customized
  PC configurations, with short delivery times and
  affordable prices.
• Dells success in PC market

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PC SUPPLY CHAINS
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The Critical Success Factors underlying Dells
competitive advantage

• Very high product (configurable) variety mass
  customization!
• Direct fulfillment - no intermediaries
• No production launch until customer order booked
  (pure pull!)
• Very low finished goods inventory (costs) high
  inventory turns (raw material inventory
  influenced by recommended configurations)
• High velocity material flows fulfillment

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Supporting Dells competitive advantage through a
new operational model

• Focused on strategic partnerships suppliers down
  from 200 to 47
• Suppliers maintain nearby ship points delivery
  time 15 minutes to 1 hour
• Suppliers own inventory until used in production
• Demand pull throughout value chain information
  for inventory substitution
• Demand forecasting is critical changes are
  shared immediately within Dell and with supply
  base
• Customers frequently steered to recommended
  configurations with high availability to balance
  supply and demand
• External logistics supplier used to manage
  inbound supply chain

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Emerging factors and trends enabling Dells
strategy

• The commoditization of the PC industry
• Standardized and interchangeable components
• Emergence of reliable manufacturing service
  providers
• Recent advances in Supply Chain Management
• Information Technology (IT) platforms that allow
  the effective and efficient information exchange
  and coordination across the entire supply chain
• 3rd party logistics service providers
• Emerging emphasis on virtual rather than vertical
  company integration

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The role of Market Segmentation

• Need to develop different strategies for
  different geographical or market segments that
  align to the preferences and attitudes of the
  corresponding customer bases.
• Need to align the provided products and services,
  as well as the deployed production and business
  functions, to the local culture and ethics.
• Supporting practices
• broader product lines
• globalized operations
• (mass-)customization
• Need to manage the resulting complexity.
• Modularity
• Combinatorial customization
• Design for postponement

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Course Outline
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Course Outline (cont.)