OM

CperaLlons and roducLlvlLv CperaLlons and roducLlvlLv
roducLlon ls Lhe creaLlon of aoods and servlces

CperaLlons manaaemenL (CM) CperaLlons manaaemenL (CM) ls Lhe seL of ls Lhe seL of
acLlvlLles LhaL creaLes value ln Lhe form of aoods acLlvlLles LhaL creaLes value ln Lhe form of aoods
and servlces bv Lransformlna lnpuLs lnLo ouLpuLs and servlces bv Lransformlna lnpuLs lnLo ouLpuLs
ssenLlal funcLlons
MarkeLlna aeneraLes demand
roducLlon/operaLlons creaLes Lhe producL
llnance/accounLlna Lracks how well Lhe oraanlzaLlon ls
dolna pavs bllls collecLs Lhe monev
JhaL CperaLlons JhaL CperaLlons
Manaaers uo Manaaers uo
lannlna
Craanlzlna
SLafflna
Leadlna
ConLrolllna
8aslc ManaaemenL luncLlons 8aslc ManaaemenL luncLlons
@avlor's rlnclples @avlor's rlnclples
MaLchlna emplovees Lo rlahL [ob
rovldlna Lhe proper Lralnlna
rovldlna proper work meLhods and Lools
sLabllshlna lealLlmaLe lncenLlves for work Lo
be accompllshed
ManaaemenL Should @ake More ManaaemenL Should @ake More
8esponslblllLv for 8esponslblllLv for
CharacLerlsLlcs of Coods CharacLerlsLlcs of Coods
@analble producL @analble producL
ConslsLenL producL ConslsLenL producL
deflnlLlon deflnlLlon
roducLlon usuallv roducLlon usuallv
separaLe from separaLe from
consumpLlon consumpLlon
Can be lnvenLorled Can be lnvenLorled
Low cusLomer Low cusLomer
lnLeracLlon lnLeracLlon
CharacLerlsLlcs of Servlce CharacLerlsLlcs of Servlce
lnLanalble producL lnLanalble producL
roduced and consumed aL roduced and consumed aL
same Llme same Llme
CfLen unlque CfLen unlque
Plah cusLomer lnLeracLlon Plah cusLomer lnLeracLlon
lnconslsLenL producL lnconslsLenL producL
deflnlLlon deflnlLlon
CfLen knowledae CfLen knowledae based based
lrequenLlv dlspersed lrequenLlv dlspersed
Coods versus Servlces Coods versus Servlces
@able 13 @able 13
Can be resold Can be resold
Can be lnvenLorled Can be lnvenLorled
Some aspecLs of quallLv Some aspecLs of quallLv
measurable measurable
Selllna ls dlsLlncL from Selllna ls dlsLlncL from
producLlon producLlon
roducL ls LransporLable roducL ls LransporLable
SlLe of faclllLv lmporLanL for cosL SlLe of faclllLv lmporLanL for cosL
CfLen easv Lo auLomaLe CfLen easv Lo auLomaLe
8evenue aeneraLed prlmarllv 8evenue aeneraLed prlmarllv
from Lanalble producL from Lanalble producL
ALLrlbuLes of Coods ALLrlbuLes of Coods
(@analble roducL) (@analble roducL)
ALLrlbuLes of Servlces ALLrlbuLes of Servlces
(lnLanalble roducL) (lnLanalble roducL)
8eselllna unusual 8eselllna unusual
ulfflculL Lo lnvenLorv ulfflculL Lo lnvenLorv
CuallLv dlfflculL Lo measure CuallLv dlfflculL Lo measure
Selllna ls parL of servlce Selllna ls parL of servlce
rovlder noL producL ls rovlder noL producL ls
ofLen LransporLable ofLen LransporLable
SlLe of faclllLv lmporLanL for SlLe of faclllLv lmporLanL for
cusLomer conLacL cusLomer conLacL
CfLen dlfflculL Lo auLomaLe CfLen dlfflculL Lo auLomaLe
8evenue aeneraLed prlmarllv 8evenue aeneraLed prlmarllv
from Lhe lnLanalble servlce from Lhe lnLanalble servlce
-ew @rends ln CM -ew @rends ln CM
Clobal focus
!usLlnLlme performance
Supplv chaln parLnerlna
8apld producL developmenL
Mass cusLomlzaLlon
mpowered emplovees
nvlronmenLallv senslLlve producLlon
Lhlcs
roducLlvlLv Challenae roducLlvlLv Challenae
roducLlvlLv ls Lhe raLlo of ouLpuLs (aoods and roducLlvlLv ls Lhe raLlo of ouLpuLs (aoods and
servlces) dlvlded bv Lhe lnpuLs (resources such as servlces) dlvlded bv Lhe lnpuLs (resources such as
labor and caplLal) labor and caplLal)
@he ob[ecLlve ls Lo lmprove producLlvlLv! @he ob[ecLlve ls Lo lmprove producLlvlLv!
lmporLanL -oLe!
roducLlon ls a measure of ouLpuL onlv and noL a
measure of efflclencv
leedback leedback loop loop
CuLpuLs CuLpuLs
Coods and
servlces
rocesses rocesses
@he uS economlc svsLem
Lransforms lnpuLs Lo ouLpuLs aL
abouL an annual 23 lncrease ln
producLlvlLv per vear @he
producLlvlLv lncrease ls Lhe resulL
of a mlx of caplLal (38 of 23)
labor (10 of 23) and
manaaemenL (32 of 23)
@he conomlc SvsLem @he conomlc SvsLem
lnpuLs lnpuLs
Labor
caplLal
manaaemenL
llaure 17 llaure 17
Measure of process lmprovemenL Measure of process lmprovemenL
8epresenLs ouLpuL relaLlve Lo lnpuL 8epresenLs ouLpuL relaLlve Lo lnpuL
Cnlv Lhrouah producLlvlLv lncreases can Cnlv Lhrouah producLlvlLv lncreases can
our sLandard of llvlna lmprove our sLandard of llvlna lmprove
roducLlvlLv roducLlvlLv
unlLs produced unlLs produced
lnpuL used lnpuL used
roducLlvlLv CalculaLlons roducLlvlLv CalculaLlons
unlLs produced unlLs produced
Labor Labor hours used hours used
4 unlLs/labor 4 unlLs/labor hour hour
1000 1000
230 230
Labor roducLlvlLv Labor roducLlvlLv
Cne resource lnpuL Cne resource lnpuL slnale slnale facLor producLlvlLv facLor producLlvlLv
MulLl MulLl lacLor roducLlvlLv lacLor roducLlvlLv
CuLpuL CuLpuL
Labor + MaLerlal + nerav + Labor + MaLerlal + nerav +
CaplLal + Mlscellaneous CaplLal + Mlscellaneous
Also known as LoLal facLor producLlvlLv Also known as LoLal facLor producLlvlLv
CuLpuL and lnpuLs are ofLen expressed ln CuLpuL and lnpuLs are ofLen expressed ln
dollars dollars
MulLlple resource lnpuLs MulLlple resource lnpuLs mulLl mulLl facLor producLlvlLv facLor producLlvlLv
roducLlvlLv varlables roducLlvlLv varlables
Labor Labor conLrlbuLes abouL conLrlbuLes abouL
10 of Lhe annual 10 of Lhe annual
lncrease lncrease
CaplLal CaplLal conLrlbuLes abouL conLrlbuLes abouL
38 of Lhe annual 38 of Lhe annual
lncrease lncrease
ManaaemenL ManaaemenL conLrlbuLes conLrlbuLes
abouL 32 of Lhe annual abouL 32 of Lhe annual
lncrease lncrease
Lhlcs and Soclal 8esponslblllLv Lhlcs and Soclal 8esponslblllLv
Challenaes faclna Challenaes faclna
operaLlons manaaers operaLlons manaaers
ueveloplna and produclna safe quallLv ueveloplna and produclna safe quallLv
producLs producLs
MalnLalnlna a clean envlronmenL MalnLalnlna a clean envlronmenL
rovldlna a safe workplace rovldlna a safe workplace
Ponorlna communlLv commlLmenLs Ponorlna communlLv commlLmenLs
roducL SLraLeav CpLlons roducL SLraLeav CpLlons
Differentiation Differentiation
Shouldice Hospital Shouldice Hospital
Low cost Low cost
Taco Bell Taco Bell
Rapid response Rapid response
Toyota Toyota
roducL Llfe Cvcles roducL Llfe Cvcles
egative
cash flow
ntroduction ntroduction Growth Growth Maturity Maturity Decline Decline
S
a
l
e
s
,

c
o
s
t
,

a
n
d

c
a
s
h

f
l
o
w
S
a
l
e
s
,

c
o
s
t
,

a
n
d

c
a
s
h

f
l
o
w
Cost of development and production Cost of development and production
Cash Cash
flow flow
et revenue (profit) et revenue (profit)
Sales revenue Sales revenue
Loss Loss
Figure 5.1 Figure 5.1
roducL Llfe Cvcle roducL Llfe Cvcle
ntroduction ntroduction
Fine tuning may warrant Fine tuning may warrant
unusual expenses for unusual expenses for
Research Research
Product development Product development
Process modification and Process modification and
enhancement enhancement
Supplier development Supplier development
Growth Growth
Product design begins to Product design begins to
stabilize stabilize
Effective forecasting of capacity Effective forecasting of capacity
becomes necessary becomes necessary
Adding or enhancing capacity Adding or enhancing capacity
may be necessary may be necessary
Maturity Maturity
Competitors now established Competitors now established
High volume, innovative High volume, innovative
production may be needed production may be needed
mproved cost control, reduction mproved cost control, reduction
in options, paring down of in options, paring down of
product line product line
Decline Decline
&nless product makes a special &nless product makes a special
contribution to the organization, contribution to the organization,
must plan to terminate offering must plan to terminate offering
-ew roducL CpporLunlLles -ew roducL CpporLunlLles
1. 1. &nderstanding the &nderstanding the
customer customer
2. 2. Economic change Economic change
3. 3. Sociological and Sociological and
demographic change demographic change
4. 4. Technological change Technological change
5. 5. Political/legal change Political/legal change
6. 6. Market practice, professional Market practice, professional
standards, suppliers, distributors standards, suppliers, distributors
CuallLv luncLlon ueplovmenL CuallLv luncLlon ueplovmenL
ldenLlfv cusLomer wanLs
ldenLlfv how Lhe aood/servlce wlll saLlsfv cusLomer
wanLs
8elaLe cusLomer wanLs Lo producL hows
ldenLlfv relaLlonshlps beLween Lhe flrm's hows
uevelop lmporLance raLlnas
valuaLe compeLlna producLs
Compare performance Lo deslrable Lechnlcal aLLrlbuLes
lssues for roducL uevelopmenL lssues for roducL uevelopmenL
8obusL deslan
Modular deslan
CompuLeralded deslan (CAu)
CompuLeralded manufacLurlna (CAM)
vlrLual reallLv Lechnoloav
value analvsls
nvlronmenLallv frlendlv deslan
8obusL ueslan 8obusL ueslan
Product is designed so that small Product is designed so that small
variations in production or assembly variations in production or assembly
do not adversely affect the product do not adversely affect the product
Typically results in lower cost and Typically results in lower cost and
higher quality higher quality
Modular ueslan Modular ueslan
roducLs deslaned ln easllv seamenLed
componenLs
Adds flexlblllLv Lo boLh producLlon and
markeLlna
lmproved ablllLv Lo saLlsfv cusLomer
requlremenLs
uslna compuLers Lo deslan
producLs and prepare
enalneerlna
documenLaLlon
ShorLer developmenL
cvcles lmproved accuracv
lower cosL
lnformaLlon and deslans
can be deploved
worldwlde
CompuLer Alded ueslan (CAu) CompuLer Alded ueslan (CAu)
CompuLer CompuLer Alded ManufacLurlna Alded ManufacLurlna
(CAM) (CAM)
&tilizing specialized computers and &tilizing specialized computers and
program to control manufacturing program to control manufacturing
equipment equipment
Often driven by the CAD system Often driven by the CAD system
(CAD/CAM) (CAD/CAM)
1 roducL quallLv
2 ShorLer deslan Llme
3 roducLlon cosL reducLlons
4 uaLabase avallablllLv
3 -ew ranae of capablllLles
8eneflLs of CAu/CAM 8eneflLs of CAu/CAM
CapaclLv CapaclLv
The throughput, or the number of units The throughput, or the number of units
a facility can hold, receive, store, or a facility can hold, receive, store, or
produce in a period of time produce in a period of time
Determines Determines
fixed costs fixed costs
Determines if Determines if
demand will demand will
be satisfied be satisfied
Three time horizons Three time horizons
ueslan and ffecLlve CapaclLv ueslan and ffecLlve CapaclLv
Design capacity is the maximum Design capacity is the maximum
theoretical output of a system theoretical output of a system
ormally expressed as a rate ormally expressed as a rate
Effective capacity is the capacity a firm Effective capacity is the capacity a firm
expects to achieve given current expects to achieve given current
operating constraints operating constraints
Often lower than design capacity Often lower than design capacity
uLlllzaLlon and fflclencv uLlllzaLlon and fflclencv
&tilization is the percent of design capacity &tilization is the percent of design capacity
achieved achieved
Efficiency is the percent of effective capacity Efficiency is the percent of effective capacity
achieved achieved
&tilization = Actual output/Design capacity &tilization = Actual output/Design capacity
Efficiency = Actual output/Effective capacity Efficiency = Actual output/Effective capacity
CapaclLv and SLraLeav CapaclLv and SLraLeav
Capacity decisions impact all 10 Capacity decisions impact all 10
decisions of operations management decisions of operations management
as well as other functional areas of the as well as other functional areas of the
organization organization
Capacity decisions must be integrated Capacity decisions must be integrated
into the organization's mission and into the organization's mission and
strategy strategy
Manaalna uemand Manaalna uemand
Demand exceeds capacity Demand exceeds capacity
Curtail demand by raising prices, scheduling longer lead time Curtail demand by raising prices, scheduling longer lead time
Long term solution is to increase capacity Long term solution is to increase capacity
Capacity exceeds demand Capacity exceeds demand
Stimulate market Stimulate market
Product changes Product changes
Adjusting to seasonal demands Adjusting to seasonal demands
Produce products with complementary demand patterns Produce products with complementary demand patterns
@acLlcs for MaLchlna CapaclLv Lo @acLlcs for MaLchlna CapaclLv Lo
uemand uemand
1. 1. Making staffing changes Making staffing changes
2. 2. Adjusting equipment Adjusting equipment
Purchasing additional machinery Purchasing additional machinery
Selling or leasing out existing equipment Selling or leasing out existing equipment
3. 3. mproving processes to increase throughput mproving processes to increase throughput
4. 4. Redesigning products to facilitate more throughput Redesigning products to facilitate more throughput
5. 5. Adding process flexibility to meet changing product preferences Adding process flexibility to meet changing product preferences
6. 6. Closing facilities Closing facilities
8reak 8reak ven Analvsls ven Analvsls
Technique for evaluating process and Technique for evaluating process and
equipment alternatives equipment alternatives
Objective is to find the point in dollars Objective is to find the point in dollars
and units at which cost equals and units at which cost equals
revenue revenue
Requires estimation of fixed costs, Requires estimation of fixed costs,
variable costs, and revenue variable costs, and revenue
Fixed costs are costs that continue Fixed costs are costs that continue
even if no units are produced even if no units are produced
Depreciation, taxes, debt, mortgage Depreciation, taxes, debt, mortgage
payments payments
Variable costs are costs that vary with Variable costs are costs that vary with
the volume of units produced the volume of units produced
Labor, materials, portion of utilities Labor, materials, portion of utilities
Contribution is the difference between Contribution is the difference between
selling price and variable cost selling price and variable cost
Costs and revenue are linear Costs and revenue are linear
functions functions
Generally not the case in the real Generally not the case in the real
world world
We actually know these costs We actually know these costs
Very difficult to accomplish Very difficult to accomplish
There is no time value of money There is no time value of money
Assumptions Assumptions
BEP BEP
xx
== break break- -even point in even point in
units units
BEP BEP
$ $
dollars dollars
PP == price per unit (after all price per unit (after all
discounts) discounts)
xx == number of units produced number of units produced
TR TR == total revenue = Px total revenue = Px
FF == fixed costs fixed costs
VV == variable cost per unit variable cost per unit
TC TC == total costs = F + Vx total costs = F + Vx
TR = TC TR = TC
or or
Px = F + Vx Px = F + Vx
Break Break- -even point occurs even point occurs
when when
BEP BEP
xx
==
FF
P P - - VV
8reak 8reak ven xample ven xample
BEP BEP
$ $
==
FF
55 1 1 - - x ( x (WW
i i
) )
VV
i i
PP
i i
Multiproduct Case Multiproduct Case
where where VV = variable cost per unit = variable cost per unit
PP = price per unit = price per unit
FF = fixed costs = fixed costs
WW = percent each product is of total dollar sales = percent each product is of total dollar sales
i i = each product = each product
MulLlproducL xample MulLlproducL xample
Annual Forecasted Annual Forecasted
tem tem Price Price Cost Cost Sales &nits Sales &nits
Sandwich Sandwich $2.95 $2.95 $1.25 $1.25 7,000 7,000
Soft drink Soft drink .80 .80 .30 .30 7,000 7,000
Baked potato Baked potato 1.55 1.55 .47 .47 5,000 5,000
Tea Tea .75 .75 .25 .25 5,000 5,000
Salad bar Salad bar 2.85 2.85 1.00 1.00 3,000 3,000
Sandwich $2.95 $1.25 .42 .58 $20,650 .446 .259
Soft drink .80 .30 .38 .62 5,600 .121 .075
Baked 1.55 .47 .30 .70 7,750 .167 .117
potato
Tea .75 .25 .33 .67 3,750 .081 .054
Salad bar 2.85 1.00 .35 .65 8,550 .185 .120
$46,300 1.000 .625
Annual Weighted
Selling Variable Forecasted % of Contribution
tem (i) Price (P) Cost (V) (V/P) 1 - (V/P) Sales $ Sales (col 5 x col 7)
Fixed costs = $3,500 per month Fixed costs = $3,500 per month
BEP BEP
xx
units units
BEP BEP
$ $
dollars dollars
PP == price per unit (after all price per unit (after all
discounts) discounts)
xx == number of units produced number of units produced
TR TR == total revenue = Px total revenue = Px
FF == fixed costs fixed costs
VV == variable cost per unit variable cost per unit
TC TC == total costs = F + Vx total costs = F + Vx
BEP BEP
$ $
= BEP = BEP
x x
PP
= P = P
==
= =
FF
(P (P - - V)/P V)/P
FF
P P - - VV
FF
1 1 - - V/P V/P
Profit Profit = TR = TR - - TC TC
= Px = Px - - (F + Vx) (F + Vx)
= Px = Px - - F F - - Vx Vx
= (P = (P - - V)x V)x - - FF
-eL resenL value (-v) -eL resenL value (-v)
where where FF = future value = future value
PP = present value = present value
i i = interest rate = interest rate
= number of years = number of years
P = P =
FF
(1 + i) (1 + i)

-v uslna lacLors -v uslna lacLors
P = = FX P = = FX
FF
(1 + i) (1 + i)

where where XX == a factor from Table S7.1 defined as = a factor from Table S7.1 defined as =
1/(1 + i) 1/(1 + i)

and F = future value and F = future value
Year Year 5% 5% 6% 6% 7% 7% .. 10% 10%
1 1 .952 .952 .943 .943 .935 .935 .909 .909
2 2 .907 .907 .890 .890 .873 .873 .826 .826
3 3 .864 .864 .840 .840 .816 .816 .751 .751
4 4 .823 .823 .792 .792 .763 .763 .683 .683
5 5 .784 .784 .747 .747 .713 .713 .621 .621
Portion of Portion of
Table S7.1 Table S7.1
resenL value of an AnnulLv resenL value of an AnnulLv
An annuity is an investment which An annuity is an investment which
generates uniform equal payments generates uniform equal payments
S = RX S = RX
where where XX == factor from Table S7.2 factor from Table S7.2
SS == present value of a series of uniform annual present value of a series of uniform annual
receipts receipts
R R == receipts that are received every year of the life receipts that are received every year of the life
of the investment of the investment
resenL value JlLh ulfferenL luLure resenL value JlLh ulfferenL luLure
8ecelpLs 8ecelpLs
Year Year
Investment A's Investment A's
Present Values Present Values
Investment B's Investment B's
Present Values Present Values
1 1 $9,260 = $9,260 = (.926)($10,000) (.926)($10,000) $8,334 = $8,334 = (.926)($9,000) (.926)($9,000)
2 2 7,713 = 7,713 = (.857)($9,000) (.857)($9,000) 7,713 = 7,713 = (.857)($9,000) (.857)($9,000)
3 3 6,352 = 6,352 = (.794)($8,000) (.794)($8,000) 7,146 = 7,146 = (.794)($9,000) (.794)($9,000)
4 4 5,145 = 5,145 = (.735)($7,000) (.735)($7,000) 6,615 = 6,615 = (.735)($9,000) (.735)($9,000)
Totals Totals $28,470 $28,470 $29,808 $29,808
Minus initial Minus initial
investment investment
- -25,000 25,000 - -26,000 26,000
Net present Net present
value value
$3,470 $3,470 $3,808 $3,808
rocess volume and varleLv rocess volume and varleLv
Process Focus
projects, job shops
(machine, print,
carpentry)
Standard Register
Repetitive
(autos, motorcycles)
Harley-Davidson
Product Focus
(commercial
baked goods,
steel, glass)
ucor Steel
High Variety High Variety
one or few units one or few units
per run, high per run, high
variety variety
(allows (allows
customization) customization)
Changes in Changes in
Modules Modules
modest runs, modest runs,
standardized standardized
modules modules
Changes in Changes in
Attributes (such Attributes (such
as grade, quality, as grade, quality,
size, thickness, size, thickness,
etc.) etc.)
long runs only long runs only
Mass Customization
(difficult to achieve, but
huge rewards)
Dell Computer
Poor Strategy Poor Strategy
(Both fixed and (Both fixed and
variable costs are variable costs are
high) high)
Low Low
Volume Volume
Repetitive Repetitive
Process Process
High High
Volume Volume
Volume Volume
rocess SLraLeales rocess SLraLeales
How to produce a product or provide a How to produce a product or provide a
service that service that
Meets or exceeds customer Meets or exceeds customer
requirements requirements
Meets cost and managerial goals Meets cost and managerial goals
Has long term effects on Has long term effects on
Efficiency and production flexibility Efficiency and production flexibility
Costs and quality Costs and quality
rocess SLraLeales rocess SLraLeales
Four basic strategies Four basic strategies
Process focus Process focus
Repetitive focus Repetitive focus
Product focus Product focus
Mass customization Mass customization
Within these basic strategies there are Within these basic strategies there are
many ways they may be implemented many ways they may be implemented
rocess locus rocess locus
Facilities are organized around specific Facilities are organized around specific
activities or processes activities or processes
General purpose equipment and skilled General purpose equipment and skilled
personnel personnel
High degree of product flexibility High degree of product flexibility
Typically high costs and low equipment Typically high costs and low equipment
utilization utilization
Product flows may vary considerably Product flows may vary considerably
making planning and scheduling a making planning and scheduling a
challenge challenge
8epeLlLlve locus 8epeLlLlve locus
Facilities often organized as assembly Facilities often organized as assembly
lines lines
Characterized by modules with parts Characterized by modules with parts
and assemblies made previously and assemblies made previously
Modules may be combined for many Modules may be combined for many
output options output options
Less flexibility than process Less flexibility than process- -focused focused
facilities but more efficient facilities but more efficient
roducL locus roducL locus
Facilities are organized by product Facilities are organized by product
High volume but low variety of High volume but low variety of
products products
Long, continuous production runs Long, continuous production runs
enable efficient processes enable efficient processes
Typically high fixed cost but low Typically high fixed cost but low
variable cost variable cost
Generally less skilled labor Generally less skilled labor
Mass CusLomlzaLlon Mass CusLomlzaLlon
The rapid, low The rapid, low- -cost production of cost production of
goods and service to satisfy goods and service to satisfy
increasingly unique customer desires increasingly unique customer desires
Combines the Combines the
flexibility of a flexibility of a
process focus process focus
with the efficiency with the efficiency
of a product focus of a product focus
Mass CusLomlzaLlon Mass CusLomlzaLlon
Mass Customization
Effective Effective
scheduling scheduling
techniques techniques
Rapid Rapid
throughput throughput
Repetitive Focus Repetitive Focus
Flexible people Flexible people
and equipment and equipment
Process Process- -Focused Focused
High variety, low volume High variety, low volume
Low utilization (5% to 25%) Low utilization (5% to 25%)
General General- -purpose equipment purpose equipment
Product Product- -Focused Focused
Low variety, high volume Low variety, high volume
High utilization (70% to 90%) High utilization (70% to 90%)
Specialized equipment Specialized equipment
Modular techniques Modular techniques
Supportive Supportive
supply supply
chains chains
Comparlson of rocesses Comparlson of rocesses
Process Process
Focus Focus
(Low volume, (Low volume,
high variety) high variety)
Focus Focus
(Modular) (Modular)
Product Focus Product Focus
(High (High- -volume, volume,
low low- -variety) variety)
Mass Mass
Customization Customization
high high- -variety) variety)
Small Small
quantity, large quantity, large
variety of variety of
products products
Long runs, Long runs,
product made product made
from modules from modules
Large Large
quantity, small quantity, small
products products
Large Large
quantity, large quantity, large
products products
General General
purpose purpose
equipment equipment
Special Special
equipment equipment
aids in use of aids in use of
assembly line assembly line
Special Special
purpose purpose
equipment equipment
Rapid Rapid
changeover changeover
on flexible on flexible
equipment equipment
Table 7.2 Table 7.2
Process Process
Focus Focus
Focus Focus
(Modular) (Modular)
Mass Mass
Operators are Operators are
broadly broadly
skilled skilled
Employees Employees
are modestly are modestly
trained trained
Operators are Operators are
less broadly less broadly
skilled skilled
Flexible Flexible
operators are operators are
trained for the trained for the
necessary necessary
customization customization
Many job Many job
instructions instructions
as each job as each job
changes changes
Repetition Repetition
reduces reduces
training and training and
changes in job changes in job
Few work Few work
orders and job orders and job
because jobs because jobs
Custom Custom
orders require orders require
many job many job
Table 7.2 Table 7.2
Process Process
Focus Focus
Focus Focus
(Modular) (Modular)
Mass Mass
Raw material Raw material
inventories inventories
high high
JIT JIT
procurement procurement
used used
are low are low
are low are low
Work Work- -in in- -
process is process is
high high
JIT inventory JIT inventory
used used
process process
inventory is inventory is
low low
process process
inventory inventory
driven down driven down
by JIT, lean by JIT, lean
production production
Table 7.2 Table 7.2
Process Process
Focus Focus
Focus Focus
(Modular) (Modular)
Mass Mass
Units move Units move
slowly slowly
through the through the
plant plant
Movement is Movement is
measured in measured in
hours and hours and
days days
Swift Swift
movement of movement of
unit through unit through
the facility is the facility is
typical typical
Goods move Goods move
swiftly swiftly
through the through the
facility facility
Finished Finished
goods made goods made
to order to order
Finished Finished
to frequent to frequent
forecast forecast
Finished Finished
to forecast to forecast
and stored and stored
Finished Finished
goods often goods often
build build- -to to- -order order
(BTO) (BTO)
Table 7.2 Table 7.2
Process Process
Focus Focus
Focus Focus
(Modular) (Modular)
Mass Mass
Scheduling is Scheduling is
complex, complex,
trade trade- -offs offs
between between
inventory, inventory,
availability, availability,
customer customer
service service
Scheduling Scheduling
based on based on
building building
various various
models from models from
a variety of a variety of
modules to modules to
forecasts forecasts
Relatively Relatively
simple simple
scheduling, scheduling,
establishing establishing
output rate to output rate to
meet forecasts meet forecasts
Sophisticated Sophisticated
scheduling scheduling
required to required to
accommodate accommodate
custom orders custom orders
Table 7.2 Table 7.2
Process Process
Focus Focus
Focus Focus
(Modular) (Modular)
Mass Mass
Fixed costs Fixed costs
low, variable low, variable
costs high costs high
dependent on dependent on
flexibility of flexibility of
the facility the facility
high, variable high, variable
costs low costs low
high, variable high, variable
costs must be costs must be
low low
Costing Costing
estimated estimated
before job, before job,
known only known only
after the job after the job
Costs usually Costs usually
known due to known due to
extensive extensive
experience experience
High fixed High fixed
costs mean costs mean
costs costs
dependent on dependent on
utilization of utilization of
capacity capacity
High fixed High fixed
costs and costs and
dynamic dynamic
variable costs variable costs
make costing make costing
a challenge a challenge
Table 7.2 Table 7.2
Servlce 8lueprlnL Servlce 8lueprlnL
Focuses on the customer and Focuses on the customer and
provider interaction provider interaction
Defines three levels of interaction Defines three levels of interaction
Each level has different management Each level has different management
issues issues
dentifies potential failure points dentifies potential failure points
LocaLlon and CosLs LocaLlon and CosLs
Location decisions based on low cost Location decisions based on low cost
require careful consideration require careful consideration
Once in place, location Once in place, location- -related costs related costs
are fixed in place and difficult to are fixed in place and difficult to
reduce reduce
Determining optimal facility location is Determining optimal facility location is
a god investment a god investment
LocaLlon and lnnovaLlon LocaLlon and lnnovaLlon
Cost is not always the most important Cost is not always the most important
aspect of a strategic decision aspect of a strategic decision
Four key attributes when strategy is Four key attributes when strategy is
based on innovation based on innovation
High High- -quality and specialized inputs quality and specialized inputs
An environment that encourages An environment that encourages
investment and local rivalry investment and local rivalry
A sophisticated local market A sophisticated local market
Local presence of related and supporting Local presence of related and supporting
industries industries
lacLors @haL AffecL lacLors @haL AffecL
LocaLlon ueclslons LocaLlon ueclslons
Labor productivity Labor productivity
Wage rates are not the only cost Wage rates are not the only cost
Lower production may increase total cost Lower production may increase total cost
Labor cost per day Labor cost per day
Production (units per day) Production (units per day)
= Cost per unit = Cost per unit
Connecticut Connecticut
= $1.17 per unit = $1.17 per unit
$70 $70
60 units 60 units
Juarez Juarez
= $1.25 per unit = $1.25 per unit
$25 $25
20 units 20 units
Exchange rates and currency risks Exchange rates and currency risks
Can have a significant impact on cost structure Can have a significant impact on cost structure
Rates change over time Rates change over time
Costs Costs
Tangible Tangible - - easily measured costs such as utilities, labor, easily measured costs such as utilities, labor,
materials, taxes materials, taxes
ntangible ntangible - - less easy to quantify and include education, less easy to quantify and include education,
public transportation, community, quality public transportation, community, quality- -of of- -life life
Political risk, values, and culture Political risk, values, and culture
ational, state, local governments attitudes toward private ational, state, local governments attitudes toward private
and intellectual property, zoning, pollution, employment and intellectual property, zoning, pollution, employment
stability may be in flux stability may be in flux
Worker attitudes towards turnover, unions, absenteeism Worker attitudes towards turnover, unions, absenteeism
Globally cultures have different attitudes towards punctuality, Globally cultures have different attitudes towards punctuality,
legal, and ethical issues legal, and ethical issues
Proximity to markets Proximity to markets
Very important to services Very important to services
JT systems or high transportation costs may make it JT systems or high transportation costs may make it
important to manufacturers important to manufacturers
Proximity to suppliers Proximity to suppliers
Perishable goods, high transportation costs, bulky products Perishable goods, high transportation costs, bulky products
Proximity to competitors Proximity to competitors
Called clustering Called clustering
Often driven by resources such as natural, information, Often driven by resources such as natural, information,
capital, talent capital, talent
Found in both manufacturing and service industries Found in both manufacturing and service industries
lacLor lacLor 8aLlna MeLhod 8aLlna MeLhod
Popular because a wide variety of factors Popular because a wide variety of factors
can be included in the analysis can be included in the analysis
Six steps in the method Six steps in the method
1. 1. Develop a list of relevant factors called critical success factors Develop a list of relevant factors called critical success factors
2. 2. Assign a weight to each factor Assign a weight to each factor
3. 3. Develop a scale for each factor Develop a scale for each factor
4. 4. Score each location for each factor Score each location for each factor
5. 5. Multiply score by weights for each factor for each location Multiply score by weights for each factor for each location
6. 6. Recommend the location with the highest point score Recommend the location with the highest point score
lacLor lacLor 8aLlna xample 8aLlna xample
Critical Critical Scores Scores
Success Success (out of 100) (out of 100) Weighted Scores Weighted Scores
Factor Factor Weight Weight France France Denmark Denmark France France Denmark Denmark
Labor Labor
availability availability
and attitude and attitude .25 .25 70 70 60 60 (.25)(70) = 17.5 (.25)(70) = 17.5 (.25)(60) = 15.0 (.25)(60) = 15.0
People People- -to to- -
car ratio car ratio .05 .05 50 50 60 60 (.05)(50) = 2.5 (.05)(50) = 2.5 (.05)(60) = 3.0 (.05)(60) = 3.0
Per capita Per capita
income income .10 .10 85 85 80 80 (.10)(85) = 8.5 (.10)(85) = 8.5 (.10)(80) = 8.0 (.10)(80) = 8.0
Tax structure Tax structure .39 .39 75 75 70 70 (.39)(75) = 29.3 (.39)(75) = 29.3 (.39)(70) = 27.3 (.39)(70) = 27.3
Education Education
and health and health .21 .21 60 60 70 70 (.21)(60) = 12.6 (.21)(60) = 12.6 (.21)(70) = 14.7 (.21)(70) = 14.7
Totals Totals 1.00 1.00 70.4 70.4 68.0 68.0
Table 8.4 Table 8.4
LocaLlonal 8reak LocaLlonal 8reak ven Analvsls ven Analvsls
xample xample
Three locations: Three locations:
Akron Akron $30,000 $30,000 $75 $75 $180,000 $180,000
Bowling Green Bowling Green $60,000 $60,000 $45 $45 $150,000 $150,000
Chicago Chicago $110,000 $110,000 $25 $25 $160,000 $160,000
Fixed Fixed Variable Variable Total Total
City City Cost Cost Cost Cost Cost Cost
Total Cost = Fixed Cost + (Variable Cost x Volume) Total Cost = Fixed Cost + (Variable Cost x Volume)
Selling price = $120 Selling price = $120
Expected volume = 2,000 units Expected volume = 2,000 units
LocaLlonal 8reak LocaLlonal 8reak ven Analvsls ven Analvsls
xample xample
$180,000 $180,000
$160,000 $160,000
$150,000 $150,000
$130,000 $130,000
$110,000 $110,000
$80,000 $80,000
$60,000 $60,000
$30,000 $30,000
$10,000 $10,000
A
n
n
u
a
l

c
o
s
t
A
n
n
u
a
l

c
o
s
t
| | | | | | |
0 0 500 500 1,000 1,000 1,500 1,500 2,000 2,000 2,500 2,500 3,000 3,000
Volume Volume
Akron Akron
lowest lowest
cost cost
Bowling Green Bowling Green
lowest cost lowest cost
Chicago Chicago
lowest cost lowest cost
CenLer CenLer of of CravlLv MeLhod CravlLv MeLhod
Finds location of distribution center Finds location of distribution center
that minimizes distribution costs that minimizes distribution costs
Considers Considers
Location of markets Location of markets
Volume of goods shipped to those Volume of goods shipped to those
markets markets
Shipping cost (or distance) Shipping cost (or distance)
Place existing locations on a Place existing locations on a
coordinate grid coordinate grid
Grid origin and scale is arbitrary Grid origin and scale is arbitrary
Maintain relative distances Maintain relative distances
Calculate X and Y coordinates for Calculate X and Y coordinates for
'center of gravity' 'center of gravity'
Assumes cost is directly proportional Assumes cost is directly proportional
to distance and volume shipped to distance and volume shipped
x x - - coordinate = coordinate =
5d 5d
ix ix
QQ
i i
5Q 5Q
i i
i i
i i
5d 5d
iy iy
QQ
i i
5Q 5Q
i i
i i
i i
y y - - coordinate = coordinate =
where where d d
ix ix
== xx- -coordinate of location i coordinate of location i
d d
iy iy
== yy- -coordinate of location i coordinate of location i
QQ
i i
== Quantity of goods moved to or from Quantity of goods moved to or from
location i location i
SLraLealc lmporLance of LavouL SLraLealc lmporLance of LavouL
ueclslons ueclslons
The objective of layout strategy is to The objective of layout strategy is to
develop a cost develop a cost- -effective layout that effective layout that
will meet a firm's competitive needs will meet a firm's competitive needs
LavouL ueslan ConslderaLlons LavouL ueslan ConslderaLlons
Higher utilization of space, equipment, and Higher utilization of space, equipment, and
people people
mproved flow of information, materials, or mproved flow of information, materials, or
people people
mproved employee morale and safer mproved employee morale and safer
working conditions working conditions
mproved customer/client interaction mproved customer/client interaction
Flexibility Flexibility
@vpes of LavouL @vpes of LavouL
1. 1. Office layout: Positions workers, their Office layout: Positions workers, their
equipment, and spaces/offices to equipment, and spaces/offices to
provide for movement of information provide for movement of information
2. 2. Retail layout: Allocates shelf space and Retail layout: Allocates shelf space and
responds to customer behavior responds to customer behavior
3. 3. Warehouse layout: Addresses trade Warehouse layout: Addresses trade- -
offs between space and material offs between space and material
handling handling
4. 4. Fixed Fixed- -position layout: Addresses the position layout: Addresses the
layout requirements of large, bulky layout requirements of large, bulky
projects such as ships and buildings projects such as ships and buildings
5. 5. Process Process- -oriented layout: Deals with oriented layout: Deals with
low low- -volume, high volume, high- -variety production variety production
(also called job shop or intermittent (also called job shop or intermittent
production) production)
6. 6. Work cell layout: Arranges machinery Work cell layout: Arranges machinery
and equipment to focus on production and equipment to focus on production
of a single product or group of related of a single product or group of related
products products
7. 7. Product Product- -oriented layout: Seeks the best oriented layout: Seeks the best
personnel and machine utilizations in personnel and machine utilizations in
repetitive or continuous production repetitive or continuous production
rocess rocess CrlenLed LavouL CrlenLed LavouL
Minimize cost = Minimize cost = 5 5 5 5 XX
ij ij
C C
ij ij
n n
i = 1 i = 1
n n
j = 1 j = 1
where where n n == total number of work centers or departments total number of work centers or departments
i, j i, j == individual departments individual departments
XX
ij ij
== number of loads moved from department i to number of loads moved from department i to
department j department j
C C
ij ij
== cost to move a load between department i and cost to move a load between department i and
department j department j
Jork Cells Jork Cells
Reorganizes people and machines Reorganizes people and machines
into groups to focus on single products into groups to focus on single products
or product groups or product groups
Group technology identifies products Group technology identifies products
that have similar characteristics for that have similar characteristics for
particular cells particular cells
Volume must justify cells Volume must justify cells
Cells can be reconfigured as designs Cells can be reconfigured as designs
or volume changes or volume changes
AdvanLaaes of Jork Cells AdvanLaaes of Jork Cells
1 8educed worklnprocess lnvenLorv
2 Less floor space requlred
3 8educed raw maLerlal and flnlshed aoods
lnvenLorv
4 8educed dlrecL labor
3 PelahLened sense of emplovee
parLlclpaLlon
6 lncreased use of equlpmenL and
machlnerv
7 8educed lnvesLmenL ln machlnerv and
equlpmenL
8equlremenLs of Jork Cells 8equlremenLs of Jork Cells
1. 1. dentification of families of products dentification of families of products
2. 2. A high level of training, flexibility and A high level of training, flexibility and
empowerment of employees empowerment of employees
3. 3. Being self Being self- -contained, with its own contained, with its own
equipment and resources equipment and resources
4. 4. Test (poka Test (poka- -yoke) at each station in the yoke) at each station in the
cell cell
SLafflna and 8alanclna Jork Cells SLafflna and 8alanclna Jork Cells
Determine the takt time Determine the takt time
Takt time = Takt time =
Total work time available Total work time available
&nits required &nits required
Determine the number Determine the number
of operators required of operators required
Workers required = Workers required =
Total operation time required Total operation time required
Takt Takt time time
8epeLlLlve and roducL 8epeLlLlve and roducL CrlenLed CrlenLed
LavouL LavouL
1. 1. Volume is adequate for high equipment utilization Volume is adequate for high equipment utilization
2. 2. Product demand is stable enough to justify high investment in Product demand is stable enough to justify high investment in
specialized equipment specialized equipment
3. 3. Product is standardized or approaching a phase of life cycle that Product is standardized or approaching a phase of life cycle that
justifies investment justifies investment
4. 4. Supplies of raw materials and components are adequate and of Supplies of raw materials and components are adequate and of
uniform quality uniform quality
Organized around products or families of similar Organized around products or families of similar
high high- -volume, low volume, low- -variety products variety products
roducL roducL CrlenLed LavouLs CrlenLed LavouLs
Fabrication line Fabrication line
Builds components on a series of machines Builds components on a series of machines
Machine Machine- -paced paced
Require mechanical or engineering changes to balance Require mechanical or engineering changes to balance
Assembly line Assembly line
Puts fabricated parts together at a series of workstations Puts fabricated parts together at a series of workstations
Paced by work tasks Paced by work tasks
Balanced by moving tasks Balanced by moving tasks
Both types of lines must be balanced so that the time to perform the work Both types of lines must be balanced so that the time to perform the work
at each station is the same at each station is the same
roducL roducL CrlenLed LavouLs CrlenLed LavouLs
1. 1. Low variable cost per unit Low variable cost per unit
2. 2. Low material handling costs Low material handling costs
3. 3. Reduced work Reduced work- -in in- -process inventories process inventories
4. 4. Easier training and supervision Easier training and supervision
5. 5. Rapid throughput Rapid throughput
Advantages Advantages
1. 1. High volume is required High volume is required
2. 2. Work stoppage at any point ties up the whole operation Work stoppage at any point ties up the whole operation
3. 3. Lack of flexibility in product or production rates Lack of flexibility in product or production rates
Disadvantages Disadvantages
G F
C
D
H
B
E
A
10
11 12
5
4
3
7 11 3
Figure 9.13
Performance Performance Task Must Follow Task Must Follow
Time Time Task Listed Task Listed
Task Task (minutes) (minutes) Below Below
AA 10 10
BB 11 11 AA
C C 5 5 BB
D D 4 4 BB
EE 12 12 AA
FF 3 3 C, D C, D
GG 7 7 FF
H H 11 11 EE
3 3 G, H G, H
Total time 66 Total time 66
Jlna ComponenL xample Jlna ComponenL xample
480 available mins
per day
40 units required
Cycle time =
Production time available
per day
&nits required per day
= 480 / 40
= 12 minutes per unit
Minimum
number of
workstations
=
5 Time for task
Cycle time
n
i = 1
= 66 / 12
= 5.5 or 6 stations
Performance Performance Task Must Follow Task Must Follow
Time Time Task Listed Task Listed
Task Task (minutes) (minutes) Below Below
AA 10 10
BB 11 11 AA
C C 5 5 BB
D D 4 4 BB
EE 12 12 AA
FF 3 3 C, D C, D
GG 7 7 FF
H H 11 11 EE
3 3 G, H G, H
Total time 66 Total time 66
Jlna ComponenL xample Jlna ComponenL xample
480 available mins
per day
40 units required
Cycle time = 12 mins
Minimum
workstations
= 5.5 or 6
Efficiency =
5 Task times
(Actual number of workstations) x (Largest cycle time)
= 66 minutes / (6 stations) x (12 minutes)
= 91.7%
@he Supplv Chaln's SLraLealc @he Supplv Chaln's SLraLealc
lmporLance lmporLance
Supply chain management is the Supply chain management is the
integration of the activities that procure integration of the activities that procure
materials and services, transform them materials and services, transform them
into intermediate goods and the final into intermediate goods and the final
product, and deliver them to customers product, and deliver them to customers
Competition is no longer between Competition is no longer between
companies; it is between supply chains companies; it is between supply chains
Supplv Chaln ManaaemenL Supplv Chaln ManaaemenL
1. 1. Transportation vendors Transportation vendors
2. 2. Credit and cash transfers Credit and cash transfers
3. 3. Suppliers Suppliers
4. 4. Distributors Distributors
5. 5. Accounts payable and receivable Accounts payable and receivable
6. 6. Warehousing and inventory Warehousing and inventory
7. 7. Order fulfillment Order fulfillment
8. 8. Sharing customer, forecasting, and production Sharing customer, forecasting, and production
information information
mportant activities include determining mportant activities include determining
Clobal Supplv Chaln lssues Clobal Supplv Chaln lssues
React to sudden changes in parts availability, React to sudden changes in parts availability,
distribution, or shipping channels, import duties, distribution, or shipping channels, import duties,
and currency rates and currency rates
&se the latest computer and transmission &se the latest computer and transmission
technologies to schedule and manage the technologies to schedule and manage the
shipment of parts in and finished products out shipment of parts in and finished products out
Staff with local specialists who handle duties, Staff with local specialists who handle duties,
freight, customs and political issues freight, customs and political issues
Supply chains in a global environment Supply chains in a global environment
must be able to must be able to
Pow Supplv Chaln ueclslons Pow Supplv Chaln ueclslons
lmpacL SLraLeav lmpacL SLraLeav
Low Low- -Cost Cost
Strategy Strategy
Response Response
Strategy Strategy
Strategy Strategy
Supplier's Supplier's
goal goal
Supply demand Supply demand
at lowest at lowest
possible cost possible cost
(e.g., Emerson (e.g., Emerson
Electric, Taco Electric, Taco
Bell) Bell)
Respond quickly Respond quickly
to changing to changing
requirements requirements
and demand to and demand to
minimize minimize
stockouts (e.g., stockouts (e.g.,
Dell Computers) Dell Computers)
Share market Share market
research; research;
jointly develop jointly develop
products and products and
options (e.g., options (e.g.,
Benetton) Benetton)
Primary Primary
selection selection
criteria criteria
Select primarily Select primarily
for cost for cost
for capacity, for capacity,
speed, and speed, and
flexibility flexibility
for product for product
development development
skills skills
Table 11.1 Table 11.1
Low Low- -Cost Cost
Strategy Strategy
Response Response
Strategy Strategy
Strategy Strategy
Process Process
charact charact- -
eristics eristics
Maintain high Maintain high
average average
utilization utilization
Invest in excess Invest in excess
capacity and capacity and
flexible flexible
processes processes
Modular Modular
processes that processes that
lend lend
themselves to themselves to
mass mass
customization customization
Inventory Inventory
charact charact- -
eristics eristics
Minimize Minimize
inventory inventory
throughout the throughout the
chain to hold chain to hold
down cost down cost
Develop Develop
responsive responsive
system with system with
buffer stocks buffer stocks
positioned to positioned to
ensure supply ensure supply
Minimize Minimize
inventory in the inventory in the
chain to avoid chain to avoid
obsolescence obsolescence
Low Low- -Cost Cost
Strategy Strategy
Response Response
Strategy Strategy
Strategy Strategy
Lead Lead- -time time
charact charact- -
eristics eristics
Shorten lead Shorten lead
time as long as time as long as
it does not it does not
increase costs increase costs
Invest Invest
aggressively to aggressively to
reduce reduce
production lead production lead
time time
Invest Invest
aggressively to aggressively to
reduce reduce
development development
lead time lead time
Product Product- -
design design
charact charact- -
eristics eristics
Maximize Maximize
performance performance
and minimize and minimize
costs costs
Use product Use product
designs that designs that
lead to low lead to low
setup time and setup time and
rapid rapid
production production
ramp ramp- -up up
Use modular Use modular
design to design to
postpone postpone
product product
differentiation differentiation
as long as as long as
possible possible
Make Make or or 8uv ueclslons 8uv ueclslons
1. 1. Maintain core competence Maintain core competence
2. 2. Lower production cost Lower production cost
3. 3. &nsuitable suppliers &nsuitable suppliers
4. 4. Assure adequate supply (quantity or delivery) Assure adequate supply (quantity or delivery)
5. 5. &tilize surplus labor or facilities &tilize surplus labor or facilities
6. 6. Obtain desired quality Obtain desired quality
7. 7. Remove supplier collusion Remove supplier collusion
8. 8. Obtain unique item that would entail a prohibitive Obtain unique item that would entail a prohibitive
commitment for a supplier commitment for a supplier
9. 9. Protect personnel from a layoff Protect personnel from a layoff
10. 10. Protect proprietary design or quality Protect proprietary design or quality
11. 11. ncrease or maintain size of company ncrease or maintain size of company
Reasons for Making Reasons for Making
Make Make or or 8uv ueclslons 8uv ueclslons
1. 1. Frees management to deal with its core competence Frees management to deal with its core competence
2. 2. Lower acquisition cost Lower acquisition cost
3. 3. Preserve supplier commitment Preserve supplier commitment
4. 4. Obtain technical or management ability Obtain technical or management ability
5. 5. nadequate capacity nadequate capacity
6. 6. Reduce inventory costs Reduce inventory costs
7. 7. Ensure alternative sources Ensure alternative sources
8. 8. nadequate managerial or technical resources nadequate managerial or technical resources
9. 9. Reciprocity Reciprocity
10. 10. tem is protected by a patent or trade secret tem is protected by a patent or trade secret
Reasons for Buying Reasons for Buying
CuLsourclna CuLsourclna
Transfers traditional internal activities Transfers traditional internal activities
and resources of a firm to outside and resources of a firm to outside
vendors vendors
&tilizes the efficiency that comes with &tilizes the efficiency that comes with
specialization specialization
Firms outsource information Firms outsource information
technology, accounting, legal, logistics, technology, accounting, legal, logistics,
and production and production
verLlcal lnLearaLlon verLlcal lnLearaLlon
Developing the ability to produce goods or Developing the ability to produce goods or
service previously purchased service previously purchased
ntegration may be forward, towards the ntegration may be forward, towards the
customer, or backward, towards suppliers customer, or backward, towards suppliers
Can improve cost, quality, and inventory but Can improve cost, quality, and inventory but
requires capital, managerial skills, and requires capital, managerial skills, and
demand demand
Risky in industries with rapid technological Risky in industries with rapid technological
change change
vlrLual Companles vlrLual Companles
Rely on a variety of supplier relationships to Rely on a variety of supplier relationships to
provide services on demand provide services on demand
Fluid organizational boundaries that allow Fluid organizational boundaries that allow
the creation of unique enterprises to meet the creation of unique enterprises to meet
changing market demands changing market demands
Exceptionally lean performance, low capital Exceptionally lean performance, low capital
investment, flexibility, and speed investment, flexibility, and speed
lssues ln an lnLearaLed Supplv lssues ln an lnLearaLed Supplv
Chaln Chaln
Local optimization Local optimization - - focusing on local profit focusing on local profit
or cost minimization based on limited or cost minimization based on limited
knowledge knowledge
ncentives (sales incentives, quantity ncentives (sales incentives, quantity
discounts, quotas, and promotions) discounts, quotas, and promotions) - - push push
merchandise prior to sale merchandise prior to sale
Large lots Large lots - - low unit cost but do not reflect low unit cost but do not reflect
sales sales
Bullwhip effect Bullwhip effect - - stable demand becomes lumpy orders through stable demand becomes lumpy orders through
the supply chain the supply chain
rocuremenL rocuremenL
&ses the internet to facilitate &ses the internet to facilitate
purchasing purchasing
Electronic ordering and funds Electronic ordering and funds
transfer transfer
Electronic data interchange (ED) Electronic data interchange (ED)
Advanced shipping notice Advanced shipping notice
rocuremenL rocuremenL
Online catalogs Online catalogs
Catalogs provided by vendors Catalogs provided by vendors
Catalogs published by Catalogs published by
intermediaries intermediaries
Exchanges provided by buyers Exchanges provided by buyers
vendor SelecLlon vendor SelecLlon
egotiations egotiations
Cost Cost- -Based Price Model Based Price Model - - supplier opens supplier opens
books to purchaser books to purchaser
Market Market- -Based Price Model Based Price Model - - price based price based
on published, auction, or indexed price on published, auction, or indexed price
Competitive Bidding Competitive Bidding - - used for infrequent used for infrequent
purchases but may make establishing purchases but may make establishing
long long- -term relationships difficult term relationships difficult
CosL of Shlpplna AlLernaLlves CosL of Shlpplna AlLernaLlves
Value of connectors = $1,750.00 Value of connectors = $1,750.00
Holding cost = 40% per year Holding cost = 40% per year
Second carrier is 1 day faster and $20 more expensive Second carrier is 1 day faster and $20 more expensive
Daily cost of holding Daily cost of holding
product product
== xx /365 /365
Annual Annual
holding cost holding cost
Product Product
value value
= (.40 x $1,750)/ 365 = $1.92 = (.40 x $1,750)/ 365 = $1.92
Since it costs less to hold the product one day longer than it does for the
faster shipping ($1.92 < $20), we should use the cheaper, slower shipper
Measurlna Supplv Chaln Measurlna Supplv Chaln
erformance erformance
Typical Firms Typical Firms
Benchmark Benchmark
Firms Firms
Lead time (weeks) Lead time (weeks) 15 15 8 8
Time spent placing an order Time spent placing an order 42 42 minutes minutes 15 15 minutes minutes
Percentage of late deliveries Percentage of late deliveries 33% 33% 2% 2%
Percentage of rejected material Percentage of rejected material 1.5% 1.5% .0001% .0001%
Number of shortages per year Number of shortages per year 400 400 4 4
Assets committed to inventory Assets committed to inventory
Percent invested Percent invested
in inventory in inventory
= x 100 = x 100
Total inventory Total inventory
investment investment
Total assets Total assets
nvestment in inventory = $11.4 billion nvestment in inventory = $11.4 billion
Total assets = $44.4 billion Total assets = $44.4 billion
Percent invested in inventory = (11.4/44.4) x 100 = 25.7% Percent invested in inventory = (11.4/44.4) x 100 = 25.7%
nventory turnover nventory turnover
nventory nventory
turnover turnover
==
Cost of goods sold Cost of goods sold
nventory investment nventory investment
et revenue et revenue $32.5 $32.5
Cost of goods sold Cost of goods sold $14.2 $14.2
nventory: nventory:
Raw material inventory Raw material inventory $.74 $.74
Work Work- -in in- -process inventory process inventory $.11 $.11
Finished goods inventory Finished goods inventory $.84 $.84
Total inventory investment Total inventory investment $1.69 $1.69
nventory: nventory:
nventory turnover =
Cost of goods sold
nventory investment
= 14.2 / 1.69 = 8.4
nventory: nventory:
nventory turnover = turnover =
Cost of goods sold
nventory investment
= 14.2 / 1.69 = 8.4 = 14.2 / 1.69 = 8.4
Weeks of supply =
nventory investment
Average weekly cost of goods sold
= 1.69 / .273 = 6.19 weeks
Average weekly cost of
goods sold
= $14.2 / 52 = $.273
CuLsourclna CuLsourclna
Outsourcing can replace entire Outsourcing can replace entire
purchasing, information systems, purchasing, information systems,
marketing, finance, and operations marketing, finance, and operations
department department
Applicable to firms throughout the Applicable to firms throughout the
world world
Making the right decision may be the Making the right decision may be the
difference between success and difference between success and
failure failure
JhaL ls CuLsourclna? JhaL ls CuLsourclna?
Procuring from external suppliers service Procuring from external suppliers service
or products the firms used to provide for or products the firms used to provide for
itself itself
Offshoring is moving processes to a Offshoring is moving processes to a
foreign country but retaining control foreign country but retaining control
Firms that outsource are called clients, the Firms that outsource are called clients, the
actual work is done by the outsourcing actual work is done by the outsourcing
provider provider
Extension of the long Extension of the long- -standing practice of standing practice of
subcontracting subcontracting
JhaL ls CuLsourclna? JhaL ls CuLsourclna?
Outsourcing has become a major Outsourcing has become a major
strategy as firms move toward strategy as firms move toward
specialization specialization
ncreasing expertise ncreasing expertise
Reduced cost of reliable transportation Reduced cost of reliable transportation
Rapid deployment of telecommunications Rapid deployment of telecommunications
and computers and computers
the nternet the nternet
xamples of CuLsourclna xamples of CuLsourclna
Call centers in French Angola Call centers in French Angola
Legal and finance service in the Philippines Legal and finance service in the Philippines
EDS handling information EDS handling information
technology for extel technology for extel
BM providing travel and BM providing travel and
payroll for P&G payroll for P&G
Solectron producing Solectron producing
BM computers BM computers
@vpes of CuLsourclna @vpes of CuLsourclna
Common processes outsourced are Common processes outsourced are
Purchasing Purchasing
Logistics Logistics
R&D R&D
Operations Operations
Service management Service management
Human resources Human resources
Finance/accounting Finance/accounting
Customer relations Customer relations
Sales/marketing Sales/marketing
Training Training
Legal processes Legal processes
Outsourcing implies a legally binding Outsourcing implies a legally binding
contract contract
@heorv of ComparaLlve AdvanLaae @heorv of ComparaLlve AdvanLaae
f an external outsourcing provider can f an external outsourcing provider can
perform activities more productively than perform activities more productively than
the client firm, the outsourcing provider the client firm, the outsourcing provider
should do the work should do the work
8lsks ln CuLsourclna 8lsks ln CuLsourclna
Outsourcing can be risky Outsourcing can be risky
As many as half of all outsourcing As many as half of all outsourcing
agreements fail because of inappropriate agreements fail because of inappropriate
planning and analysis planning and analysis
Erratic power grids, government difficulties, Erratic power grids, government difficulties,
inexperienced managers, and unmotivated inexperienced managers, and unmotivated
labor can create problems labor can create problems
Failure to achieve unrealistic goals Failure to achieve unrealistic goals
sometimes create the impression of failure sometimes create the impression of failure
Outsourcing Outsourcing Examples of Examples of
Process Process Possible Risks Possible Risks
Identify non Identify non- -core core
competencies competencies
Can be incorrectly identified as a Can be incorrectly identified as a
non non- -core competency core competency
Identify non Identify non- -core core
activities that should be activities that should be
outsourced outsourced
Just because the activity is not a Just because the activity is not a
core competence for your firm core competence for your firm
does not mean an outsource does not mean an outsource
provider is more competent and provider is more competent and
efficient efficient
Identify impact on Identify impact on
existing facilities, existing facilities,
capacity, and logistics capacity, and logistics
May fail to understand the May fail to understand the
change in resources and talents change in resources and talents
needed internally needed internally
Establish goals and Establish goals and
draft outsourcing draft outsourcing
agreement agreement
specifications specifications
Goals can be set so high that Goals can be set so high that
failure is certain failure is certain
Identify and select Identify and select
outsource provider outsource provider
Can select the wrong outsource Can select the wrong outsource
provider provider
Negotiate goals and Negotiate goals and
measures of measures of
outsourcing outsourcing
performance performance
Can misinterpret measures and Can misinterpret measures and
goals, how they are measured, goals, how they are measured,
and what they mean and what they mean
Monitor and control Monitor and control
current outsourcing current outsourcing
program program
May be unable to control product May be unable to control product
development, schedules, and development, schedules, and
quality quality
Evaluate and give Evaluate and give
feedback to outsource feedback to outsource
provider provider
May have non May have non- -responsive responsive
provider (i.e., one that ignores provider (i.e., one that ignores
feedback) feedback)
Evaluate international Evaluate international
political and currency political and currency
risks risks
County's currency may be County's currency may be
unstable, a country may be unstable, a country may be
politically unstable, or cultural politically unstable, or cultural
and language differences may and language differences may
inhibit successful operations inhibit successful operations
Evaluate coordination Evaluate coordination
needed for shipping and needed for shipping and
distribution distribution
May not understand the timing May not understand the timing
necessary to manage flows to necessary to manage flows to
different facilities and markets different facilities and markets
Employment Employment
Changes in facilities and processes Changes in facilities and processes
needed to receive components in a needed to receive components in a
different state of assembly different state of assembly
Vastly expanded logistics issues Vastly expanded logistics issues
Outsourcing brings other issues: Outsourcing brings other issues:
First define total cost in First define total cost in- -house house
TC TC
in in
= F = F
in in
+ (V + (V
in in
x X x X
in in
) )
where where
TC TC
in in
is the total cost of an item produced in is the total cost of an item produced in- -house house
FF
in in
is the total in is the total in- -house fixed cost house fixed cost
VV
in in
is the variable cost/unit produced in is the variable cost/unit produced in- -house house
XX
in in
is the total number of units produced in is the total number of units produced in- -house house
The total cost under outsourcing is The total cost under outsourcing is
TC TC
out out
= F = F
out out
+ (V + (V
out out
x X x X
out out
) )
At break At break- -even X even X
in in
= X = X
out out
and TC and TC
in in
= TC = TC
out out
FF
in in
+ (V + (V
in in
x X) = F x X) = F
out out
+ (V + (V
out out
x X) x X)
Solving for X Solving for X
X = X =
FF
in in
FF
out out
VV
out out
VV
in in
CuLsourclna 8reak CuLsourclna 8reak ven xample ven xample
Fixed cost at Toledo plant = $2 million Fixed cost at Toledo plant = $2 million
Variable cost/toy = $3 Variable cost/toy = $3
Fixed cost at Fixed cost at Astro Astro plant = $1 million plant = $1 million
Variable cost/toy = $4 Variable cost/toy = $4
Annual demand = 1.1 million toys Annual demand = 1.1 million toys
2,000,000 2,000,000 1,000,000 1,000,000
4 4 3 3
X = = X = =
FF
in in
FF
out out
VV
out out
VV
in in
= 1,000,000 units = 1,000,000 units
Since
demand > break-even point, produce in
Toledo
AdvanLaaes of CuLsourclna AdvanLaaes of CuLsourclna
Cost savings Cost savings
Gaining outside experience Gaining outside experience
mproving operations and service mproving operations and service
Focusing on core competencies Focusing on core competencies
Gaining outside technologies Gaining outside technologies
Other advantages Other advantages
ulsadvanLaaes of CuLsourclna ulsadvanLaaes of CuLsourclna
ncreased transportation costs ncreased transportation costs
Loss of control Loss of control
Creating future competition Creating future competition
egative impact on employees egative impact on employees
Longer Longer- -term term
impact impact

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roducLlon ls Lhe creaLlon of aoods and servlces

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