UNIT 1

Operations management refers to the administration of business practices to create the

highest level of efficiency possible within an organization.
Need for Operations Management
 To stay in the market in the competitive business environment,
 reduce manufacturing costs
 Optimize productivity
 Improve product quality
 Customers are more demanding
 So there is a need for automation, optimisation of scheduling, proper inventory
management system, total quality management and total quality control
 Operations management in a business deals with the complex set of management
process involved.

GOODS SERVICE
Tangible Intangible
Low customer involvement High customer
Low quality control involvement
problem High quality control
Easy to evaluate Hard to evaluate
Inventories No inventories
No time criteria Strict time criteria

OBJECTIVES OF PRODUCTION AND OPERATIONS MANAGEMENT

 Customer satisfaction
 Quality of product
 Reliability
 Functionality as required
 Profitability
 Minimise cost
 Optimal pricing
 Timeliness
SCOPE OF OM

 Product selection and development

 Product selection
 Facilities location
 Layout planning
 Material planning
 Manufacturing system
 Production planning and production control
 Work studies
 Quality
 Safety management
  Material management

OPERATIONS MANAGEMENT INCLUDE

 Forecasting
 Capacity planning
 Scheduling
 Managing inventories
 Assuring quality
 Motivating employees
 Deciding where to locate facilities
 Supply chain management

TYPES OF OPERATIONS
 Goods producing
 Storage and transportation
 Exchanges
 Entertainment
 Communications

FORECASTING: A statement about the future value of a variable of interest such as demand.
FEATURES
 Assumes casual systems
 Rarely perfect because of randomness
 More accurate for group of items than individual items
 Accuracy decreases as time horizon increases

ELEMENTS OF GOOD FORECAST

 Timely in nature
 Reliable
 Accurate
 Meaningfully written
 Easy to use
 Cost effective

TYPES OF FORECAST
• Judgemental forecasts:
• uses subjective inputs
• executive opinions
• sales force opinions
 • consumer opinions
• outside opinion
• DELPHI METHOD
• Time series forecasts: on the basis of past data
• Trend
• Seasonality
• Cycle
• Irregular variations
• Random variations

AVERAGING METHODS
• Moving average method : https://youtu.be/ani837rfylQ

• Weighted average method: https://youtu.be/ani837rfylQ

• Exponential smoothing: https://youtu.be/tFurCZbQkYw

• Associative forecasts: techniques on identification of related variables that can be

used to predict values of the variable of interest.

UNIT 2
PROCESS SELECTION AND FACILITY LAYOUT
PROCESS SELECTION: Deciding on the way production of goods or services will be
organized
Major implications
 Capacity planning
 Layout of facilities
 Equipment
 Design of work systems

Process Strategy
Key aspects of process strategy
 Capital intensive – equipment/labor
 Process flexibility
 Technology
 Adjust to changes
 Design
 Volume
 Technology
PARAMETERS OF PROCESS SELECTION
 Variety
 Flexibility
 Volume

TYPES
• JOB SHOP
• Small scale
• Low volume of high variety goods or services
• Skilled workers and general purpose equipment with high flexibility
• Eg-Doctor
• BATCH PRODUCTION
• Moderate skills
• Moderate volume
• Moderate variety and flexibility

• Eg- movie theatre, Bakeries

• REPETITIVE/ ASSEMBLY LINE
• Standardized goods are produced
• High volume
• Low skilled workers
• Low variety
• Slight flexibility of equipments
• Eg- Automobiles
• CONTINOUS
• High volume of non discrete products
• High standardized goods
• No variety
• No flexibility

AUTOMATION: Machinery that has sensing and control devices that enables it to operate
automatically
Eg- ATMs, automated heating and cooling
Fixed automation

Programmable automation
Flexible

automation FACILITY

LAYOUT
Layout: the configuration of departments, work centers, and equipment, with particular
emphasis on movement of work (customers or materials) through the system.
Importance of Layout Decisions
 Require substantial investment of money and effort
 Involve long term commitments
 Significant effect on cost and efficiency of operations

TYPES
• Product layouts: Layout that uses standardized processing operations to achieve
smooth, rapid, high-volume flow.
U-SHAPED

• Process layouts: Layout that can handle varied processing

requirements DEPARTMENTS FOR DIFFERENT WORKS

• Fixed-Position layout: Layout in which the product or project remains stationary, and
workers, materials, and equipment are moved as needed.
• Combination layouts
• Cellular layouts
• Service layouts
• Warehouse and storage
• Retail layouts
• Office layouts

LINE BALANCING METHOD: it is the process of assigning tasks to workstation in such a

way that the workstations have approximately equal time requirements.
Cycle Time: Cycle time is the maximum time allowed at each workstation tocomplete its set
of tasks on a unit. CT= OT/CT
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UNIT 3
LOCATION PLANNING AND
ANALYSIS
Need for Location Decisions
Marketing Strategy
Cost of Doing
Business Growth
Depletion of Resources

Strategic Importance of location decisions

 Location decisions are closely related to an organization’s strategies.
 Eg.- low cost producer will locate near market of raw material
 Strategy of increasing profits by increasing market share may result in high-
traffic areas.
 Strategy for convenience to customers may result in many locations where
customers can make purchases.

Strategic Importance of location decisions

 Long term commitment/costs
 Impact on investments, revenues, and operations

 Supply chains
Objectives of location decisions
 Profit potential
 No single location may be better than others
 Identify several locations from which to choose
 Location critieria may depend upon where a business is in the supply chain.
Location Options
 Expand existing facilities
 Add new facilities
 Move
 Doing nothing

Location Decision Factors

 Regional factors
 Community considerations
 Multiple plant strategy
 Site related factors

Evaluating Locations
  Factor rating method
 Center of gravity
 Cost profit value analysis

UNIT 4
********Management of quality***************

Defining Quality: The Dimensions of Quality

One way to think about quality is the degree to which performance of a product or
service meets or exceeds customer expectations. The difference between these two,
that is Performance – Expectations, is of great interest. If these two measures are
equal, the difference is zero, and expectations have been met. If the difference is
negative, expectations
have not been met, whereas if the difference is positive, performance has exceeded
customer expectations.
Customer expectations can be broken down into a number of categories, or
dimensions, that customers use to judge the quality of a product or service.
Understanding these helps organizations in their efforts to meet or exceed customer
expectations. The dimensions used
for goods are somewhat different from those used for services.

Product Quality. Product quality is often judged on eight dimensions of quality:1

Performance—main characteristics of the product.
Aesthetics—appearance, feel, smell, taste.
Special features—extra characteristics.
Conformance—how well a product corresponds to design specifications.
Reliability—dependable performance.
Durability—ability to perform over time.
Perceived quality—indirect evaluation of quality (e.g., reputation).
Serviceability—handling of complaints or repairs.

• Performance Everything works: fit and finish, ride, handling, acceleration

• Aesthetics Exterior and interior design
• Features Convenience: placement of gauges High tech:
GPS system Safety: anti-skid,
• Conformance Car matches manufacturer’s specifications
• Reliability Infrequent need for repairs
• Durability Useful life in miles, resistance to rust
• Perceived quality Top-rated
• Serviceability Ease of repair

Service Quality. The dimensions of product quality don’t adequately describe

service quality. Instead, service quality is often described using the following
dimensions:2 Convenience—the availability and accessibility of the service.
Reliability—the ability to perform a service dependably, consistently, and accurately.
Responsiveness—the willingness of service providers to help customers in unusual
situations and to deal with problems.
Time—the speed with which service is delivered.
Assurance—the knowledge exhibited by personnel who come into contact
with a customer and their ability to convey trust and confidence.
Courtesy—the way customers are treated by employees who come into contact
with them.
Tangibles—the physical appearance of facilities, equipment, personnel, and
communication materials.
Consistency—The ability to provide the same level of good quality repeatedly.

• Convenience Was the service center conveniently located?

• Reliability Was the problem fixed and will the ―fix‖ last?
• Responsiveness Were customer service personnel willing and able to
answer questions?
• Time How long did the customer have to wait?
• Assurance Did the customer service personnel seem knowledgeable
about the repair?
• Courtesy Were customer service personnel and the cashier friendly and
courteous?
• Tangibles Were the facilities clean? Were personnel neat?
• Consistency Was the service quality good, and was it consistent with previous
visits?

This is the sort of detailed information that is needed to both design and
produce highquality goods and services.
Information on customer wants in service can sometimes be difficult to pin down,
creating challenges for designing and managing service quality. For example,
customers may use
words such as friendly, considerate, and professional to describe what they expect
from service providers. These and similar descriptors are often difficult to translate
into exact service
specifications. Moreover in many instances, customer wants are often industry
specific. Thus,
the expectations would be quite different for health care versus dry cleaning.
Furthermore,
customer complaints may be due in part to unrelated factors (e.g., customer’s
mood or general

health, the weather).

Other challenges with service quality include the reality that customer expectations
often change over time and that different customers tend to have different
expectations, so what one
customer might view as good service quality, another customer might not be
satisfied with
at all. Couple these with the fact that each contact with a customer is a ―moment
of truth‖ in
which service quality is instantly judged, and you begin to understand some of the
challenges
of achieving a consistently high perception of service quality.
If customers participate in a service system (i.e., self-service), there can be increased
potential for a negative perception of quality. Consequently, adequate care must be
taken to make
the necessary customer acts simple and safe, especially since customers
cannot be trained. So
error prevention must be designed into the system.
It should also be noted that in most instances, some quality dimensions of a product
or service will be more important than others, so it is important to identify customer
priorities,
especially when it is likely that trade-off decisions will be made at various
points in design
and production. Quality function deployment (described in Chapter 4) is a tool that
can be
helpful for that purpose.

The Costs of Quality

Any serious attempt to deal with quality issues must take into account the costs
associated
with quality. Those costs can be classified into three categories: appraisal,
prevention, and
failure.
Appraisal costs relate to inspection, testing, and other activities intended to
uncover defective products or services, or to assure that there are none. They
include the cost of inspectors,
testing, test equipment, labs, quality audits, and field testing.
Prevention costs relate to attempts to prevent defects from occurring. They include
costs such as planning and administration systems, working with vendors, training,
quality control
procedures, and extra attention in both the design and production phases to decrease
the

probability of defective workmanship.

Failure costs are incurred by defective parts or products or by faulty services.
Internal failures cost are those discovered during the production process;
External failures cost are those discovered after delivery to the customer.
Internal failures occur for a variety of reasons, including defective material
from vendors,
incorrect machine settings, faulty equipment, incorrect methods, incorrect processing,
carelessness, and faulty or improper material handling procedures. The costs of
internal failures include lost production time, scrap and rework, investigation costs,
possible equipment damage, and possible employee injury. Rework costs involve
the salaries of workers and the additional resources needed to perform the rework
(e.g., equipment, energy, raw materials). Beyond those costs are items such as
inspection of reworked
parts, disruption of schedules, the added costs of parts and materials in inventory
waiting for reworked parts, and the paperwork needed to keep track of the items until
they can be reintegrated into the process. External failures are defective products or
poor service that go
undetected by the producer. Resulting costs include warranty work, handling of
complaints,
replacements, liability/litigation, payments to customers or discounts used to offset
the inferior quality, loss of customer goodwill, and opportunity costs related to lost
sales. External failure costs are typically much greater than internal failure costs on a
per unit basis. Table 9.3 summarizes quality costs.
Internal and external failure costs represent costs related to poor quality, whereas
appraisal
and prevention costs represent investments for achieving good quality.
An important issue in quality management is the value received from expenditures
on prevention. There are two schools of thought on this. One is that prevention
costs will be outweighed by savings in appraisal and failure costs. This is espoused
by such people as Crosby
and Juran, discussed in further detail later in this chapter. They believe that as the
costs of defect prevention are increased, the costs of appraisal and failure decrease
by much more. What this means, if true, is that the net result is lower total costs,
and, thus, as Crosby suggests, quality is free. On the other hand, some managers
believe that attempting to go beyond
a certain point, such expenditures on quality reduce the funds available for other
objectives
such as reducing product development times and upgrading technology.
The return on quality (ROQ) approach focuses on the economics of quality efforts.
In this approach, quality improvement projects are viewed as investments, and, as
such, they

are evaluated like any

other investment, using metrics related to return on investment (ROI)

QUALITY TOOLS
Flowcharts. A flowchart is a visual representation of a process. As a problem-
solving tool,
a flowchart can help investigators in identifying possible points in a process where
problems
occur

Check Sheets. A check sheet is a simple tool frequently used for problem
identification. Check sheets provide a format that enables users to record and
organize data in a way that facilitates collection and analysis. This format might be
one of simple checkmarks. Check sheets are designed on the basis of what the users
are attempting to learn by collecting data.
Histograms. A histogram can be useful in getting a sense of the distribution of
observed values. Among other things, one can see if the distribution is symmetrical,
what the range of values is, and if there are any unusual values. Figure 9.8 illustrates
a histogram. Note the two
peaks. This suggests the possibility of two distributions with different centers.
Possible causes
might be two workers or two suppliers with different quality

Pareto Analysis. Pareto analysis is a technique for focusing attention on the most
important problem areas. The Pareto concept, named after the 19th-century Italian
economist Vilfredo Pareto, is that a relatively few factors generally account for a
large percentage of the
total cases (e.g., complaints, defects, problems). The idea is to classify the cases
according to
degree of importance and focus on resolving the most important, leaving
the less important.
Often referred to as the 80–20 rule, the Pareto concept states that
approximately 80 percent of
the problems come from 20 percent of the items. For instance, 80 percent of machine
breakdowns come from 20 percent of the machines, and 80 percent of the product
defects come
from 20 percent of the causes of defects.

Scatter Diagrams. A scatter diagram can be useful in deciding if there is a

correlation between the values of two variables. A correlation may point to a cause
of a problem.
Figure 9.10 shows an example of a scatter diagram. In this particular diagram, there is
a positive (upwardsloping) relationship between the humidity and the number of
errors per hour. High values of
humidity correspond to high numbers of errors, and vice versa. On the other hand, a
negative
(downward-sloping) relationship would mean

Control Charts. A control chart can be used to monitor a process to see if the
process output is random. It can help detect the presence of correctable causes of
variation.
Figure 9.11
illustrates a control chart. Control charts also can indicate when a problem occurred
and give
 insight into what caused the problem.

TOTAL QUALITY MANAGEMENT

A primary role of management is to lead an organization in its daily operation and to
maintain
it as a viable entity into the future. Quality has become an important factor in
both of these
objectives.
Total quality management A philosophy that involves everyone in an
organization in a continual effort to
improve quality and achieve customer satisfaction.

We can describe the TQM approach as follows

• Find out what customers want. This might involve the use of surveys, focus
groups, interviews, or some other technique that integrates the customer’s voice in
the decisionmaking process. Be sure to include the internal customer (the next
person in the process) as
well as the external customer (the final customer)

• Design a product or service that will meet (or exceed) what customers want.
Make it easy to use and easy to produce

• Design processes that facilitate doing the job right the first time. Determine where
mistakes are likely to occur and try to prevent them. When mistakes do occur, find out
why

so
that they are less likely to occur again. Strive to make the process ―mistake-proof.‖ This
is sometimes referred to as a fail-safing: Elements are incorporated in product or service
design that make it virtually impossible for an employee (or sometimes a customer) to do
something incorrectly. The Japanese term for this is pokayoke. Examples include parts
that fit together one way only and appliance plugs that can be inserted into a wall outlet
the correct way only. Another term that is sometimes used is foolproofing, but use of this
term may be taken to imply that employees (or customers) are fools—not a wise choice!
• Keep track of results, and use them to guide improvement in the system.
Never stop trying to improve.
• Extend these concepts throughout the supply chain.
Many companies have successfully implemented TQM programs. Successful
TQM programs are built through the dedication and combined efforts of
everyone in the organization.

• Continuous improvement. The philosophy that seeks to improve all factors

related to the process of converting inputs into outputs on an ongoing basis is called
continuous improvement. It covers equipment, methods, materials, and people.
• Competitive benchmarking. This involves identifying other
organizations that are the best at something and studying how
they do it to learn how to improve your operation. The
company need not
be in the same line of business. For example, Xerox used the mailorder company
L.L. Bean to benchmark order filling.
• Employee empowerment. Giving workers the responsibility for improvements and
the authority to make changes to accomplish them provides strong motivation for
employees. This puts decision making into the hands of those who are closest to the
job and have considerable insight into problems and solutions.
• Team approach. The use of teams for problem solving and to achieve consensus
takes advantage of group synergy, gets people involved, and promotes a spirit of
cooperation and shared values among employees.
• Decisions based on facts rather than opinions. Management gathers and analyzes
data as a basis for decision making.
• 6. Knowledge of tools. Employees and managers are trained in the use of quality tools.
• Supplier quality. Suppliers must be included in quality assurance and quality
improvement efforts so that their processes are capable of delivering quality
parts and materials in a timely manner.
• Champion. A TQM champion’s job is to promote the value and importance of
TQM principles throughout the company.

Six Sigma
The term six sigma has several meanings. Statistically, six sigma means having no
more than
3.4 defects per million opportunities in any process, product, or service.
Conceptually, the
term is much broader, referring to a program designed to reduce the occurrence of
defects to achieve lower costs and improved customer satisfaction
Obstacles to Implementing TQM
Companies have had varying success in implementing TQM. Some have been
quite successful, but others have struggled. Part of the difficulty may be with the
process by which it is
implemented rather than with the principles of TQM. Among the factors cited
in the literature
are the following:
• Lack of a companywide definition of quality: Efforts aren’t coordinated; people
are working at cross-purposes, addressing different issues, and using different
measures of success.
• Lack of a strategic plan for change: Without such a plan the chance of
success is lessened
and the need to address strategic implications of change is ignored.
• Lack of a customer focus: Without a customer focus, there is a risk of
customer dissatisfaction.
• Poor intraorganizational communication: The left hand doesn’t know what the
right hand
is doing; frustration, waste, and confusion ensue.
• Lack of employee empowerment: Not empowering employees gives the
impression of not
trusting employees to fix problems, adds red tape, and delays solutions.
• View of quality as a ―quick fix‖: Quality needs to be a long-term, continuing
effort.
• Emphasis on short-term financial results: ―Duct-tape‖ solutions often treat
symptoms; spend a little now—a lot more later

******************Quality
Control*************** INSPECTION
Inspection is an appraisal activity that compares goods or services to a standard.
Inspection is
a vital but often unappreciated aspect of quality control

Inspection can occur at three points: before production, during production, and after
production. The logic of checking conformance before production is to make sure that
inputs are
acceptable. The logic of checking conformance during production is to make sure
that the conversion of inputs into outputs is proceeding in an acceptable manner. The
 logic of checking conformance of output is to make a final verification of
conformance before passing
goods on to customers.
Inspection before and after production often involves acceptance sampling
procedures; monitoring during the production process is referred to as process
control.

The basic issues are

• How much to inspect and how often.
• At what points in the process inspection should occur.
• Whether to inspect in a centralized or on-site location.
• Whether to inspect attributes (i.e., count the number of times something occurs) or
variables (i.e., measure the value of a characteristic).
Consider, for example, inspection at an intermediate step in the manufacture of personal
computers. Because inspection costs are often significant, questions naturally arise on
whether one needs to inspect every computer or whether a small sample of computers will
suffice.
Moreover, although inspections could be made at numerous points in the production process,

Approaches to quality assurance

Inputs Transformation Outputs

Acceptance Process sampling acceptance

sampling control

How Much to Inspect and How Often

The amount of inspection can range from no inspection whatsoever to inspection of
each item
numerous times. Low-cost, high-volume items such as paper clips, roofing
nails, and wooden
pencils often require little inspection because (1) the cost associated with
passing defective
items is quite low and (2) the processes that produce these items are usually
highly reliable, so
that defects are rare. Conversely, high-cost, low-volume items that have large
costs associated
with passing defective products often require more intensive inspections. Thus,
critical components of a manned-flight space vehicle are closely scrutinized
because of the risk to human
safety and the high cost of mission failure. In high-volume systems, automated
inspection is
one option that may be employed.
The majority of quality control applications lie somewhere between the two extremes.
Most
require some inspection, but it is neither possible nor economically feasible to
critically examine
every part of a product or every aspect of a service for control purposes

Where to Inspect in the Process

Many operations have numerous possible inspection points. Because each
inspection adds
to the cost of the product or service, it is important to restrict inspection efforts
to the points
where they can do the most good. In manufacturing, some of the typical inspection
points are
• Raw materials and purchased parts. There is little sense in paying for goods
that do not
meet quality standards and in expending time and effort on material that is bad to
begin with. Supplier certification programs can reduce or eliminate the need for
inspection.
• Finished products. Customer satisfaction and the firm’s image are at stake
here, and repairing or replacing products in the field is usually much more costly
than doing it at the factory. Likewise, the seller is usually responsible for shipping
costs on returns, and payments for goods or service may be held up pending
delivery of satisfactory goods or remedial service. Well-designed processes,
products and services, quality at the source,

and process monitoring can reduce or eliminate the need for inspection.
• Before a costly operation. The point is to not waste costly labor or machine
time on items that are already defective.
• Before an irreversible process. In many cases, items can be reworked up to a
certain point; beyond that point they cannot. For example, pottery can be reworked
prior to firing. After that, defective pottery must be discarded or sold as seconds at
a lower price.
• Before a covering process. Painting, plating, and assemblies often mask defects.

Control Charts: The Voice of the Process

Control chart A time-ordered plot of sample statistics, used to distinguish between random
and nonrandom variability
It is used to distinguish between random variability and nonrandom variability.
It has upper and lower limits, called control limits, that define the range of
acceptable (i.e., random) variation for the sample
statistic.
The purpose of a control chart is to monitor process output to see if it is random.
The basis for the control chart is the sampling distribution, which essentially describes
random variability. There is, however, one minor difficulty relating to the use of a
normal sampling
distribution
Control limits The dividing lines between random and nonrandom deviations from the
mean of the distribution.
Type I error Concluding a process is not in control when it actually is.
Type II error Concluding a process is in control when it is not.

Variables Generate data that are measured.

Attributes Generate data that are counted

Control Charts for Variables

Mean control chart- control chart used to monitor central tenency
Range control chart Control chart used to monitor process dispersion.

Control Charts for Attributes

p-chart Control chart for attributes, used to monitor the proportion of defective items in a
process
c-chart Control chart for attributes, used to monitor the number of defects per unit.

Run Tests

Run test A test for patterns in a sequence.

Run Sequence of
observations with a
certain characteristic
A run is defined as a sequence of observations with a certain characteristic,
followed by one or more observations with a different characteristic. The
characteristic can be anything
 that is observable. For example, in the series A A A B, there are two runs: a run of
three As followed by a run of one B. Underlining each run helps in counting them. In
the series A A B B B A, the underlining indicates three runs.
Two useful run tests involve examination of the number of runs up and down and
runs above and below the median.2 In order to count these runs, the data are
transformed into a series of Us and Ds (for up and down ) and into a series of As and
Bs (for above and below the
median). Consider the following sequence, which has a median of 36.5. The
first two values
are below the median, the next two are above it, the next to last is below, and the
last is above.
Thus, there are four runs:
25 29 42 40 35 38
B B A A B A
In terms of up and down, there are three runs in the same data. The second value
is up from
the first value, the third is up from the second, the fourth is down from the third,
and so on:
25 29 42 40 35 38
— U U D D U
(The first value does not receive either a U or a D because nothing precedes it.)

UNIT 5
***********inventory management***************

THE NATURE AND IMPORTANCE OF

INVENTORIES
The different kinds of inventories include the following:

• Raw materials and purchased parts.

• Partially completed goods, called work-in-process (WIP).
• Finished-goods inventories (manufacturing firms) or merchandise (retail stores).
• Tools and supplies.
• Maintenance and repairs (MRO) inventory.
• Goods-in-transit to warehouses, distributors, or customers (pipeline inventory).
Both manufacturing and service organizations have to take into consideration the space
requirements of inventory. In some cases, space limitations may pose restrictions on
inventory storage capability, thereby adding another dimension to inventory decisions

Functions of Inventory

• To meet anticipated customer demand. A customer can be a person who walks in

off the street to buy a new stereo system, a mechanic who requests a tool at a tool crib, or
a manufacturing operation. These inventories are referred to as anticipation stocks
because they are held to satisfy expected (i.e., average ) demand.

• To smooth production requirements. Firms that experience seasonal patterns in

demand often build up inventories during preseason periods to meet overly high
requirements during seasonal periods. These inventories are aptly named seasonal
inventories. Companies that process fresh fruits and vegetables deal with seasonal
inventories. So do stores that sell greeting cards, skis, snowmobiles, or Christmas trees.

• To decouple operations. Historically, manufacturing firms have used inventories as

buffers between successive operations to maintain continuity of production that would
otherwise be disrupted by events such as breakdowns of equipment and accidents that
cause a portion of the operation to shut down temporarily. The buffers permit other
operations to continue temporarily while the problem is resolved.

• To protect against stockouts. Delayed deliveries and unexpected increases in demand

increase the risk of shortages. Delays can occur because of weather conditions, supplier
stockouts, deliveries of wrong materials, quality problems, and so on. The risk of
shortages can be

reduced by holding safety stocks, which are stocks in excess of expected demand to
compensate for variabilities in demand and lead time.

• To take advantage of order cycles. To minimize purchasing and inventory costs, a

firm often buys in quantities that exceed immediate requirements. This necessitates
storing some or all of the purchased amount for later use. Similarly, it is usually
economical to produce in large rather than small quantities. Again, the excess output
must be stored for later use. Thus, inventory storage enables a firm to buy and produce
in economic lot sizes without having to try to match purchases or production with
demand requirements in the short run. This results in periodic orders or order cycles.

• To hedge against price increases. Occasionally a firm will suspect that a substantial
price increase is about to occur and purchase larger-than-normal amounts to beat the
increase. The ability to store extra goods also allows a firm to take advantage of price
discounts for larger orders.

• To take advantage of quantity discounts. Suppliers may give discounts on large orders

Little’s Law The average amount of inventory in a system is equal to the product of the
average demand rate and the average time a unit is in the system.

Inventory Counting Systems

Periodic system Physical count of items in inventory made at periodic intervals (weekly, monthly).

Perpetual inventory system System that keeps track of removals from inventory
continuously, thus monitoring current
levels of each item.

Two-bin system Two containers of inventory; reorder when the first is empty.

Universal product code (UPC) Bar code printed on a label that has information about the item
to which it is attached.The zero on the left of the bar code identifies this as a grocery item,
the first five numbers (14800) indicate the Manufacturer (Mott’s), and the last five numbers
(23208) indicate the specific item (natural-style applesauce). Items in small packages, such
as candy and gum, use a six-digit number.

Point-of-sale (POS) systems electronically record actual sales. Knowledge of actual

sales can greatly enhance forecasting and inventory management: By relaying
information about actual demand in real time, these systems enable management to
make any necessary changes
to restocking decisions. These systems are being increasingly emphasized as an important
input to effective supply chain management by making this information available to
suppliers.

Lead time Time interval between ordering and receiving the order.

Inventory Costs
Purchase cost The amount paid to buy the inventory.
Holding (carrying) cost Cost to carry an item in inventory for a length of time, usually a year.

Ordering costs Costs of ordering and receiving inventory.

Setup costs The costs involved in preparing equipment for a job.

Shortage costs Costs resulting when demand exceeds the supply of inventory; often unrealized
profit per unit.

Classification System
A-B-C approach Classifying inventory according to some measure of importance, and
allocating control efforts accordingly.

A (very important), B (moderately important), and C (least important).

A items generally account for about 10 to 20 percent of the number of items in

inventory but about 60 to 70 percent of the annual dollar value. At the other end of the
scale, C items might account for about 50 to 60 percent of the number of items but only
about 10 to 15 percent of the dollar value of an inventory. These percentages vary from
firm to firm

INVENTORY ORDERING POLICIES

Cycle stock The amount of inventory needed to meet expected demand.

Safety stock Extra inventory carried to reduce the probability of a stockout due to demand
and/or lead time variability.

ECONOMIC ORDER QUANTITY MODELS

Economic order quantity (EOQ) The order size that minimizes total annual cost.

Three order size models are described here:

• The basic economic order quantity model.

The basic EOQ model is the simplest of the three models. It is used to identify a fixed order
size that will minimize the sum of the annual costs of holding inventory and ordering
inventory. The unit purchase price of items in inventory is not generally included in the total
cost

because the unit cost is unaffected by the order size unless quantity discounts are a
factor. If holding costs are specified as a percentage of unit cost, then unit cost is
indirectly included in the total cost as a part of holding costs.

The optimal order quantity reflects a balance between carrying costs and ordering costs:
As order size varies, one type of cost will increase while the other decreases. For
example, if the order size is relatively small, the average inventory will be low, resulting
in low carrying costs. However, a small order size will necessitate frequent orders, which
will drive up annual ordering costs.

• The economic production quantity model.

• The quantity discount model. are price reductions for larger orders offered to
customers to induce them
to buy in large quantities.

Safety stock Stock that is held in excess of expected demand due to variable demand and/or lead
time.

Service level Probability that demand will not exceed supply during lead time.

*********************inventory management over*****************************

******************* Buying and sourcing in e-commerce ********************

E-purchasing

Electronic purchasing (e-purchasing), automates and extends manual buying

and selling processes, from the creation of the requisition through to
payment of the suppliers. The term e-purchasing encompasses back-office
ordering systems, e- marketplaces and supplier websites.
Relevance to trade facilitation
In the emerging digital era, businesses increasingly use electronic systems for
more efficient, predictable, transparent and secure management of their supply
chains. E- purchasing systems provide up-to-date information on the status of
buyers' needs.
They allow the establishment of an agreement with a seller to automatically ship
materials when a buyer's stock reaches a low point. This also applies to the
solicitation phase where buyers can track incoming offers prior to supplier
selection. Electronic purchasing provides predictability as sellers know what to
expect and can review an order's progress, often in real time. Also, the status
of the goods can be followed in real time. A product will show as having been
delivered, accepted and processed for payment without the seller having to call
and request information from accounting staff. Transparency and accuracy are
facilitated, with data exchanged and stored electronically instead of through
paper-based documents.

E-Sourcing
E-Sourcing refers to internet-enabled applications and decision support tools
that facilitate interactions between buyers and suppliers through the use of
online negotiations, online auctions, reverse auctions and similar tools. E-
Sourcing is especially associated with online auctions, which enable prices
reductions by introducing the element of competition. They are visible,
clearly structured and make the procurement process transparent
(Engelbrecht-Wiggans and Kotak, 2006).

E-Sourcing cycle

eSourcing is the process of obtaining bids from different suppliers via a single
online portal. the purpose is to collect and compare information about several
suppliers to select a preferred provider. eSourcing systems support mainly
steps 4 and 5 in the classical strategic sourcing process.

It covers online support for defining supplier selection criteria (Request for
Information, RFI), inviting potential suppliers to tender, performing tender
processes (Request for Proposal, RFP and/or Request for Quotation, RFQ)
running e-Auctions, analysing and evaluating responses, and finally, awarding
contracts.

E-Sourcing Process Steps

Creating a questionnaire
Assess the suitability of a supplier, often referred to as creating a Request for
Information (RFI). Create the questions you need to be answered in order to do
business with a supplier, financial stability, compliance requirements, Code of
Conduct, etc. The questionnaire can be set up with shall and should
requirements, and answering formats for the supplier can range from free text,
yes/no, multi- selections, and more.

Request for quotation (RFQ)

Supplier that fulfils your criteria in the RFI may be invited to quote. The buyer
creates forms asking the prices of products or services they can render. Also,
you can run a Request for Proposal (RFP) when these two steps are combined
into one, i.e., the supplier both answer questions and quote a price.

In the past, procurement teams would have to manually fill out these questions
and their quotes in Microsoft Word or Excel. With eSourcing, the process is
streamlined, as supplier's login and upload their answers into the eSourcing
software.

Supplier buyer communication during the tendering process is performed and

logged inside the eSourcing platform. AP automation removes additional
manual work for the buyers connected to supplemented tenders and questions
and answers sessions.

Evaluation
Once the requested evaluation formats have been sent and received, an
evaluation process takes place, where the prospective buyers evaluate whether
the information, they’ve been provided with makes them a viable supplier or
not. The evaluation step is where you see the main savings in terms of
efficiency. This process used to involve manually sorting through stacks of
paperwork supplied by the suppliers invited to tender. Comparing apples to
apples was almost impossible as all suppliers used different formats to
answer. eSourcing changes this – and provides a sophisticated suite of
analytics, dashboards, and tools like automated scoring – allowing users to
automate elements of the evaluation process, and therefore, save time.

E-Auction
In the e-Auction, suppliers compete on price on a set time frame. Depending
on set-up and configuration, you can choose to be transparent with for
example, ―best price‖, the suppliers own ―price and rank‖ or different
combinations of these for example, ―top three,‖ etc.

E-Auctions can be run at any point in the eSourcing process, but best practice
is to make sure it follows a tender, at least if the category is more complex, as
most suppliers like to know they have been compared in a fair way before
competing on price. If the product or service is less complex and standardized,
and specifications are clear, the bidding process can start with an e-Auction.
Most eSourcing software can handle a couple of different types of auctions,
each with unique benefits, for example, English auctions, Dutch auctions,
Vickrey auctions, etc.

Auctions are designed to encourage prospective suppliers to compete with one

another and, as such, deliver the best possible deal for procurement
professionals. To put it simply, by using the e-Auction, the buyer can
negotiate price with more suppliers compared to a manual process where
buyers go from a long list of suppliers to a shortlist because they don’t have
the capacity to run negotiations with one or two suppliers, and at the best, a
handful.

Award business
The final step is awarding business to the winning supplier(s). Elements of this
process can be automated by automatically sending the winning bidder a
contract.

Benefits of e-Sourcing
The benefits eSourcing bring to the process are reduced cost, efficiency,
transparency, and compliance.

• Because eSourcing allows you to evaluate a broader range of suppliers

and leveraging different e-Auction strategies, you keep competition
longer in the process, which can present significant cost savings.
• Electronic sourcing reduces the amount of time procurement
specialists spend on the tendering process, and therefore, freeing up
time to increase

spend under management and negotiating more spend volumes on to

favourable agreements.
• eSourcing improves transparency between buyers and suppliers. A
portal is typically used, where suppliers can see deadlines, status, and
other key information.
• With all procurement-related documents stored in one place, auditing
is made simpler, and therefore, so is compliance with regulatory
procedures.

BARRIERS OF E-SOURCING

There are many different ways to approach a topic which is trying to address
the most burning issues in today’s eSourcing landscape. Things like
international attitudes and restrictive policies, true spend visibility, lack of
strategic teams and decentralization all can impact the effectiveness of
eSourcing, if not properly addressed. Here are my Top Three Issues facing the
sourcing world today – Adoption, Adoption, Adoption! In this post, I wanted
to examine the more basic issue of technology adoption and organizational
penetration. It is also one of the easier problems to fix, if dealt with
methodically and productively. The following list of adoption barriers are
sand in the gears of any sourcing organization that wishes to maximize
efficiency and drive significant cost savings.
• Choose the Right Application: As simple as this sounds, it is important
to understand what you are trying to accomplish with an eSourcing tool.
Will success be measured by running 2 or 3 auctions per year or are you
attempting to automate and improve your sourcing process? Can you
grow within the application to take on new and important functionality
after the initial gold rush for savings? Finally, make sure that you pick
an application that the team feels comfortable with the ease-of-use and
meshing with the current sourcing process. The lower the bar for
learning and training, the more people will be willing to tackle more
aspects of the tool itself (and doit independently).

• Executive Endorsement: Make sure the executive team is behind the

process of eSourcing. Internal transparency and evangelism will help
produce an atmosphere that the software is not a pet-project but a real
initiative that has approval from the top. However, do not expect this
process to stop once you have selected an eSourcing suite, be prepared
to measure savings both created and implemented. Look at those areas
not participating and ask the questions why – it may require
evangelizing to a whole new set of stakeholders.
• Structured Roll-out Program: Develop a plan, with or without your
eSourcing vendor, that includes milestones and goals. It is also
important to identify who are the most likely internal champions and
give them stake a in keeping the process rolling and improving. It is
important to have a good understanding what specific issues delay
projects. Reviewing this regularly will speed up future adoption. Above
comments also relevant here.
• Lack of Training/Preparation: Get a core group of super-users
―super- trained‖. This will build momentum and help enforce best
practices from the inside-out. Generally, the worst thing that can
happen is an ill-planned auction that fails early in the application’s
deployment and leaves a sour taste behind. When all the users
understand what happens in eSourcing projects, they will take care to
make them work properly. Also, one short hour of training can give
massive returns on usage by breaking down the basic barriers to
usage. Most procurement people are pretty smart and can start
utilizing advanced features once they have a little momentum.
• Organization and Recognition: eSourcing usage should be strongly
encouraged but not mandated and eSourcing teams should be
recognized for achievements and goals accomplished. The corporate
culture should reflect that this is a tool that should require strong
arguments for not using, not the opposite. Some companies tie bonus
measures to quality and usage of the eSourcing applications. If used
properly, other bonuses should occur due to more cost savings from a
multitude of factors.
• Centralized Data and Process: These programs work best when
resources are centrally structured and enforced. This makes tracking,
measuring and accountability easier to manage. Additionally, the
eSourcing application should have a central data repository which
consolidates all documents for consistency. Templates are a big part of
helping people get their bids out to suppliers faster, to the template
library should be robust and an integral part of everyone’s interaction
with the software.

• Utilize the Whole Application: It is not realistic to think every

companywill automatically just adopt 100% of the available
functionality. However, each group should periodically analyse what is
available and what is actually being used. Goals should be set to
increase the breadth of the utilization and build a deeper understanding
of the holistic nature of the application. All the different functions exist
for a reason, use them and experience how it helps. For instance, if your
tool includes optimization or contract management, why are no
contracts being loaded in or no scenarios being built? There may be
good reasons, but it is important to understand if those perceptions are
valid.
• Promote Supplier Benefits: Explain to suppliers why this is important
for them to participate and embrace. eSourcing vendors should have
plenty of documentation to communicate this. In many cases, using the
eSourcing application correctly can allow procurement to give suppliers
better information for adjusting their original bids which could increase
the amount of business they will receive.
• Drive Continuous Improvement/KPIs: It should be very clear that
there are some primary benefits from implementing eSourcing into the
procurement process. Create internal metrics to track success in
 categories such as savings, efficiency and knowledge transfer/risk
mitigation. Like going on a diet, once you see a little progress the
motivation is easier and the momentum grows organically. By tracking
these items (again your eSourcing provider likely has many ideas for
measuring these), teams will always be making improvements and
increasing the ROI.
I believe adoption and usage is one of the most preventable and addressable
problems that face eSourcing deployments today. For that reason, I chose to
go into detail on ways to fix these problems rather than to fragment into three
separate issues, as was requested by Michael for the Sourcing Innovation roll-
up. If not properly addressed, lack of adequate adoption can rob your sourcing
organization of millions of dollars from non-strategically sourced spend,
inappropriately run projects and lack of usage. The morale of the story is to
keep your eye on the ball, once the evaluation is over, the process of
managing the eSourcing application has just begun. If resources are thin, let
the provider map out a good plan for deployment, best practices and growth.
Any one that says Adoption/Penetration is not one of the primary issues in
eSourcing today, has their head in the clouds and does not understand the
tactical problems that come with any software application.

UNIT 6
******************* Buying and sourcing in e-commerce ends********************

SCM

What Is Supply Chain Management (SCM)?

Supply chain management is the management of the flow of goods and

services and includes all processes that transform raw materials into final
products. It involves the active streamlining of a business's supply-side
activities to maximize customer value and gain a competitive advantage in
the marketplace.
SCM represents an effort by suppliers to develop and implement supply chains
that are as efficient and economical as possible. Supply chains cover everything
from production to product development to the information systems needed to
direct these undertakings.

Typically, SCM attempts to centrally control or link the production, shipment,

and distribution of a product. By managing the supply chain, companies are
able to cut excess costs and deliver products to the consumer faster. This is
done by keeping tighter control of internal inventories, internal production,
distribution, sales, and the inventories of company vendors.

SCM is based on the idea that nearly every product that comes to market
results from the efforts of various organizations that make up a supply chain.
Although supply chains have existed for ages, most companies have only
recently paid attention to them as a value-add to their operations.

In SCM, the supply chain manager coordinates the logistics of all aspects
of the supply chain which consists of five parts:

• The plan or strategy

• The source (of raw materials or services)
• Manufacturing (focused on productivity and efficiency)

• Delivery and logistics

• The return system (for defective or unwanted products)
The supply chain manager tries to minimize shortages and keep costs down.
The job is not only about logistics and purchasing inventory. According to
Salary.com, supply chain managers, ―make recommendations to improve
productivity, quality, and efficiency of operations.‖

Improvements in productivity and efficiency go straight to the bottom line of

a company and have a real and lasting impact. Good supply chain
management keeps companies out of the headlines and away from expensive
recalls and lawsuits.

Example of SCM
Understanding the importance of SCM to its business, Walgreens Boots
Alliance Inc. placed focused effort on transforming its supply chain in 2016.
The company operates one of the largest pharmacy chains in the United States
and needs to efficiently manage and revise its supply chain so it stays ahead of
the changing trends and continues to add value to its bottom line.

As of July 5, 2016, Walgreens has invested in the technology portion of its

supply chain. It implemented a forward-looking SCM that synthesizes relevant
data and uses analytics to forecast customer purchase behaviour, and then it
works its way back up the supply chain to meet that expected demand.

For example, the company can anticipate flu patterns, which allow it to
accurately forecast needed inventory for over-the-counter flu remedies,
creating an efficient supply chain with little waste. Using this SCM, the
company can reduce excess inventory and all of the inventories' associated
costs, such as the cost of warehousing and transportation.

NEED FOR SUPPLY CHAIN MANAGEMENT

We have an increased reliance on suppliers. Procurement happens in each and

every aspect of an organization, from business needs to IT needs. Everything
needed in a corporation is tied to suppliers and there will be a long list of
suppliers in no time. The need to manage supplier relations, information,
contracts and more grows rapidly while the need to follow regulations persists.

Organizations need a SCM system such as IBM Emptoris Supplier Lifecycle

Management to establish streamlined supply chain management processes in
order to realize the very best value from their spending through supplier
analysis of cost, risk and performance. They need a SCM system to realize a
360-degree visibility into their supplier ecosystem.

An effective SCM system helps accomplish the following:

• Managing contractual obligations to assure a continuous supply and
avoid a service company’s delivery disruptions.
• Strengthening supplier relations for systematic synergy with suppliers
and different lines of business.
• Enterprise spending management to assure procurement happens
through the right suppliers and reduces costs.
• Managing risk and compliance to abide by organizational as well as
industry specific regulations and compliances.
• Establishing a single comprehensive supplier view and
derivinginsightful procurement analytics.
Procurement was one of the most crucial processes that helped IBM’s
business transformation during the 1990s, as explained in the Harvard
Business School study ―IBM’s Decade of Transformation: Turnaround to
Growth‖. According to this study, procurement was standardized and
streamlined to succeed with the
―One IBM‖ strategy, along with logistics and fulfilment processes.

IBM recognizes the importance of a supply chain management system for IT

procurement processes. IBM acquired Emptoris, Inc in 2012, which is now
our flagship platform for supply chain, category spend and contract
management solutions. With IBM Emptoris Supplier Lifecycle Management,
organizations can develop, qualify and maintain their supplier lists. These
supplier lists can be

categorized by the organization, business or functional category and profile, so

they can identify high impact suppliers and optimize supplying capabilities. It
provides the ability to identify supplier risks such as quality discrepancies,
procurement interruptions and pricing fluctuations, which are all of equal
importance. I encourage you to learn more about the platform and see how you
can benefit from this comprehensive SCM solution.

8 key benefits of effective supply chain management

Today’s global supply chains are increasingly complex, making a data-driven
approach to supply chain management a must. Data-driven SCM provides
visibility from end to end for monitoring the flow of information, services and
goods from procurement to manufacturing and delivery to the end consumer.
Data isn’t the only driver of effective supply chain management; other factors
such as good vendor and supplier relationships, effective cost control, securing
the right logistics partners and adopting innovative supply chain technologies
make a big impact, too.

Supply chain optimization isn’t a simple undertaking, but effective SCM offers
numerous benefits that improve the bottom line. Here’s a look at eight of the
most important benefits of effective supply chain management.

Better collaboration
Information flow is a prominent challenge for companies. According to
Oracle, 76% of companies lack an automated flow of information across the
supply chain, and half of companies say fragmented information results in lost
sales opportunities. Integrated software solutions remove bottlenecks and
allow for the seamless sharing of information, providing a big-picture view of
the supply chain from end to end. Thanks to improved access to data, supply
chain leaders have the information they need, in context, to make more
informed decisions.

Improved quality control

Quality control issues follow the rule of 10, explains Arshad Hafeez, Global
Expert for Supply Chain Management and Quality Control, SCM-Group
Function (GF) in an article for CIO Review. According to the rule of 10, the cost
to replace or repair an item increases by tenfold at each step of the progression,
resulting in significant costs for companies when quality issues arise.

Companies that have greater control over not only their direct suppliers but
also their suppliers’ suppliers benefit from improved quality control.
Implementing standard minimum quality criteria, for instance, enables direct
suppliers to identify and partner with secondary suppliers that meet those
requirements. Likewise, process guidelines can help suppliers comply with
your company’s quality requirements. Some companies go beyond simply
providing criteria, conducting periodic audits or requesting documentation
verifying suppliers’ compliance steps. Hafeez recommends implementing a
Management Operating System (MOS) for monitoring key performance
indicators including:

• On-time delivery
• Scrap rates, reworks and similar issues at suppliers
• Final product quality (as received by end customers)
• Time for complaint resolution
• Findings from supplier quality assessments
By analysing performance data, companies can partner with the
highest- performing vendors and suppliers to maintain strict quality
control.

Higher efficiency rate

Having real-time data on the availability of raw materials and manufacturing
delays allows companies to implement backup plans, such as sourcing
materials from a backup supplier, preventing further delays. Without real-
time data, companies often don’t have time to initiate plan B, resulting in
issues such as out- of-stock inventory or late shipments to end consumers.

Implementing smart automation solutions also results in higher efficiency.

Healing Hands Scrubs, for example, implemented 6 River Systems’
collaborative mobile robots, doubling productivity and reducing unnecessary
walking by 75%. Investing

in the right automation solutions and leveraging data to minimize delays

supports a positive customer experience and boosts your company’s
reputation.

Keeping up with demand

―If consumer sales increase by 5 percent in a given week, a retailer could end
up ordering 7 percent more product in response to the increase and a feeling that
demand will continue,‖ according to a report by VISA. ―The next link in the
chain, observing what appears to be a 7 percent increase in demand, then orders
a larger increase on his supplier. Eventually the factory may observe an inflated
20 percent increase in orders.‖

Known as the bullwhip effect, this phenomenon often results from delays in
communicating supply and demand changes. Supply chain leaders with
access to real-time, accurate information and integrated data can better
predict demand and readily respond to changing market conditions to avoid
challenges like the bullwhip effect.

Shipping optimization
According to Logistics Management’s the State of Logistics Report, freight
transportation costs increased by 7% from 2016 to 2017, while private and
dedicated trucking costs increased by 9.5%. Less-than-truckload costs rose by
6.6%, and full truckload costs rose by 6.4%. Due to rising costs, shipping
optimization is a priority for supply chain leaders. Identifying the most
efficient shipping methods for small parcels, large bulk orders and other
shipping scenarios helps companies get orders to customers faster while
minimizing costs. Not only do those cost savings boost the company’s bottom
line, but savings can be passed on to consumers as well to improve customer
satisfaction.

Reduced overhead costs

With more accurate demand predictions, companies can reduce the overhead
costs associated with storing slow-moving inventory by stocking less low-
velocity inventory to make room for higher-velocity, revenue-producing
inventory.
Warehouse fulfilment costs contribute significantly to overhead. Reduce these
costs by optimizing your warehouse layout, adopting the right
automationsolutions to improve productivity and implementing a better
inventory management system.

Identifying unnecessary spend is another way to achieve leaner

operations. If you’re facing high logistics costs, for instance, switching to
another provider offering the same service level and quality at a lower
cost is a quick win.
Improved risk mitigation
Analysing big-picture and granular supply chain data can reveal potential risks,
enabling companies to put backup plans in place to readily respond to
unexpected circumstances. By taking proactive action, rather than reacting to
supply chain disruptions, quality control issues or other concerns as they arise,
companies can avoid negative impacts. Understanding risks also helps
companies achieve leaner operations. For instance, 87% of companies believe
they could reduce inventory by 22% if they had a better understanding of risks
in their supply chains.

Improved cash flow

The benefits discussed above allow companies to make smarter decisions,
choose the right partners, accurately predict and respond to market and
demand changes and reduce supply chain disruptions, but that’s not all: they
also improve the company’s bottom line. For example, working with reliable
suppliers not only means fewer disruptions and more satisfied customers, but
it also improves cash flow by allowing you to invoice (and get paid for
products and services) sooner. Implementing more cost-effective solutions to
eliminate wasteful spend and reducing overhead costs also contribute to
positive cash flow.

Supply chain disruptions have a domino effect, impacting every juncture

throughout the supply chain, but the same is true for the positives: effective
supply chain management has direct and secondary effects that support the
efficient, seamless flow of information, goods and services from procurement
through final delivery.

LOGISTICS AND REVERSE LOGISTICS

Logistics typically refers to activities that occur within the boundaries of a

single organization and Supply Chain refers to networks of companies that work
together and coordinate their actions to deliver a product to market. Also,
traditional
logistics focuses its attention on activities such as procurement,
distribution, maintenance, and inventory management. Supply Chain
Management (SCM) acknowledges all of traditional logistics and also
includes activities such as marketing, new product development, finance,
and customer service" - Michael Hugos

What is Logistics Management?

"Logistics Management deals with the efficient and effective management of
day- to-day activity in producing the company's finished goods and services"
- Paul Schönsleben

What is Supply Chain?

"Supply Chain is the network of organizations that are involved, through
upstream and downstream linkages, in the different processes and activities
that produce value in the form of products and services in the hands of the
ultimate consumer" - Martin Christopher

What is Supply Chain Management?

Each researcher defines supply chain management differently. However, we
would like to provide the simple definition as below,
What is the Difference Between Inbound and Outbound Logistics?
"Inbound Logistics refers to movement of goods and raw materials from
suppliers to your company. In contrast, Outbound Logistics refers to
movement of finished goods from your company to customers"

To illustrate this term, we make a small graphic as below,

As you can see, purchasing and warehouse (distribution centre) communicates

with suppliers and sometimes called "supplier facing function". Production
planning and inventory control function is the centre point of this chart.
Customer service and transport function communicates with customers and
sometimes called "customer- facing functions.

What is Transport and Logistics?

"Transport and Logistics refers to 2 types of activities, namely, traditional
services such as air/sea/land transportation, warehousing, customs clearance
and value- added services which including information technology and
consulting"
What is International Logistics?
These are one of the most ambiguous groups of terms in international business
out there. They are used interchangeably with international supply chain or
international production and transportation activities. However, the most
concise definition is as below,

"International Logistics focuses on how to manage and control overseas

activities effectively as a single business unit. Therefore, companies should try
to harness the value of overseas product, services, marketing, R&D and turn
them into competitive advantage"

What is Third Party Logistics or 3PL?

The concept of 3PL appeared on the scene in the 1980s as the way to reduce
costs and improve services which can be defined as below,

"Third Party Logistics or 3PL refers to the outsourcing of activities, ranging

from a specific task, such as trucking or marine cargo transport to broader
activities serving the whole supply chain such as inventory management, order
processing and consulting."
In the past, many 3PL providers didn't have adequate expertise to operate
in complex supply chain structure and process. The result was the
inception of another concept.

What is Fourth Party Logistics or 4PL?

The 4PL is the concept proposed by Accenture Ltd in 1996 and it was defined
as below,

"Fourth Party Logistics or 4PL refers to a party who works on behalf of the
client to do contract negotiations and management of performance of 3PL
providers, including the design of the whole supply chain network and
control of day-to-day operations"
You may wonder if a 4PL provider is really needed. According to the research
by Nezar Al-Mugren from the University of Wisconsin-Stout, the top 3
reasons why customers would like to use 4PL providers are as below,

• Lack of technology to integrate supply chain processes

• The increase in operating complexities

• The sharp increase of the operations in the global supply chains

What is Supply Chain Network?

Many companies have the department that controls supply chain activity so
they believe that SCM is a "function". Some companies think SCM is a kind
of

management system under IT (information system or enterprise resource

planning.) In fact, SCM is actually a "network" consists of many players as
below,

A generic supply chain structure is as simple as Supplier, Manufacturer,

Wholesaler and Retailer (it's more complex in the real world but a simple
illustration serves the purpose.)

The word "management" can be explained briefly as "planning,

implementing, controlling". Supply Chain Management (in supply chain
education context) is then the planning, implementing and controlling the
networks.
What is Information Sharing?
Another important attribute of supply chain management is the flow of
material, information, and finance (these are thing that can be found in lean
manufacturing and six sigma projects too). Even though there are 3 types of
flow, the most

important one is information flow aka information sharing. Let's see the
example of this through the simplified version of the bullwhip effect as below,

When customer demand data is not shared, each player in the same supply chain
must make some sort of speculation and this can become the management
issues. According to the above graphic, the retailer has a demand for 100 units,
but each player tends to keep stock more and more at every step of the way.
This results in higher costs for everyone in the same supply chain.
When information is shared via demand management from retailer down to
supplier, everyone doesn't have to keep stock that much. The result is a lower
cost for everyone. This is sometimes called the extended supply chain or
supply chain visibility.

Information sharing will also reduce the needs to use the digital transformation
solution such as supply chains systems, digital supply chain, predictive
analytics or artificial intelligence.

What is Supply Chain Coordination?

Information sharing requires a certain degree of "coordination" (it's also
referred to as collaboration or integration in scholarly articles). Do you wonder
when people started working together as a network? In 1984, companies in the
apparel business worked together to reduce overall lead-time. In 1995,
companies in the automotive industry used Electronic Data Interchange to
share information. So, working as a "chain" is the real-world practice.
What are Conflicting Objectives?
Working as a network requires the same objective, but this is often not the
case (even with someone in the same company). "Conflicting Objectives" is
the term used to describe the situation when each function wants something
that won't go well together. For example, purchasing people always place the
orders to the cheapest vendors (with a very long lead-time) but production
people or project manager need material more quickly.

To avoid conflicting objectives, you need to decide if you want to adopt a

time- based strategy, low-cost strategy or differentiation strategy. A clear
direction is needed so people can make the decisions accordingly.

What is the Cost/Service Trade-off?

The concept of Cost/Service Trade-off appeared as early as in 1985 but it
seems that people really don't get it.

When you want to improve service, the cost goes up. When you want to cut
cost, service suffers. It's like a "seesaw", the best way you can do is to try to
balance both sides.

Real-world example is that a "new boss" asks you to cut costs by 10%, improve
service level by 15%, double inventory turns so the financial statement looks
good. If you really understand the cost/service trade-off concept, you will agree
that you can't win them all. The most appropriate way to handle this is to
prioritize your

KPIs.

What is Supply Chain Relationship?

To work as the same team, long-term relationship is key. Otherwise, you're
just a separate company with a different strategy/agenda. So, academia keeps
preaching about the importance of relationship-building but is not for
everyone.

Since there are too many suppliers to deal with, a portfolio matrix is often used
to prioritize the relationship-building to create supply chain partners. Focus
your time and energy to create a long-term relationship with suppliers of key
products and items with limited sources of supply (or items with high supply
chain risk.) Because people and human resource are the factors that can make
or break your supply chain.
What is Reverse Logistics?
Reverse logistics stands for all operations related to the reuse of products and
materials. It is ―the process of planning, implementing, and controlling the
efficient, cost effective flow of raw materials, in-process inventory, finished
goods and related information from the point of consumption to the point of
origin for the purpose of recapturing value or proper disposal. More precisely,
reverse logistics is the process of moving goods from their typical final
destination for the purpose of capturing value, or proper disposal.
Remanufacturing and refurbishing activities also may be included in the
definition of reverse logistics.‖ The reverse logistics process includes the
management and the sale of surplus as well as returned equipment and
machines from the hardware leasing business. Normally, logistics deal with
events that bring the product towards the customer. In the case of reverse
logistics, the resource goes at least one step back in the supply chain. For
instance, goods move from the customer to the distributor or to the
manufacturer.

When a manufacturer’s product normally moves through the supply chain

network, it is to reach the distributor or customer. Any process or management
after the sale of the product involves reverse logistics. If the product is
defective, the customer would return the product. The manufacturing firm
would then have to organise shipping of the defective product, testing the
product, dismantling, repairing, recycling or disposing the product. The
product would travel in reverse through the supply chain network in order to
retain any use from the defective product. The logistics for such matters is
reverse logistics.

Reverse logistics presents one of the biggest operational challenges in the

world of eCommerce freight logistics due to the sheer volume and cost of
processing returns. Effective reverse logistics is believed to result in direct
benefits, including improved customer satisfaction, decreased resource
investment levels, and reductions in storage and distribution costs. The
amount of returned goods going backwards along the supply chain from the
end point (customers) is usually much more than people normally think. As an
example, the sheer volume of returns generated in many companies, ranged
from 3% to as high as 50% of total shipments across all industries. Many other
studies indicated the real costs of the returns take up roughly 3%-5% of total
revenue. Surprisingly, for the traditional bricks-and-mortar retail operations,
returns are 3 to 4 times more expensive than

forward (outbound) shipments. In some industries such as book publishing,

catalog retailing, and greeting card, over 20% of all products sold are
eventually returned to the vendor. What’s more surprising is that some
industries are estimated to have return rates in the range of 30 percent to 50
percent with other estimates are as high as 60 percent. Given the status quo of
the reverse logistics, the neglect of the importance to the reverse part of the
logistics flow opens an opportunity to create and manage customer
relationships and build customer loyalty to the retailer.

What is Reverse Logistics Flow vs. Traditional Logistics

Flow?
For reference, the traditional logistics flow is defined by the Council of
Supply Chain Management Professionals glossary, as:
―The process of planning, implementing, and controlling the efficient, cost
effective flow of raw materials, in-process inventory, finished goods and
related information from the point of origin to the point of consumption for
the purpose of conforming to customer requirements‖

The same glossary defines reverse logistics as:

―The process of planning, implementing, and controlling the efficient, cost

effective flow of raw materials, in-process inventory, finished goods and
related information from the point of consumption to the point of origin for
the purpose of recapturing value or proper disposal.‖

Reverse logistics is quite different from the traditional logistics, or forward

logistics, activities. The below figure is a traditional logistics flow:
Traditional Logistics Flow

Sales forecast is used to project sale requirement, when certain amount

product is required, they will be shipped to the DC (distribution centre) and
then shipped to the retail stores from DC. At every single level of the supply
chain, ASNs (Advanced Shipping Notices) will be assisting the useful
information as the products flow.

Reverse logistics flow, however, is a different story. Shippers generally do not

initiate reverse logistics activity as a result of planning and decision making on
the part of the firm, but in response to actions by consumers or downstream
channel members. Here is the figure outlining what is reverse logistics flow:

Reverse Logistics Flow

When a return occurs, the returned product will be collected (in many different
ways) and sent to the
distribution centre. At the same time the relevant information about the return
item description, condition at return, customer information etc., will be
transferred to the return processing centre, but unfortunately, given the current
state of the reverse logistics status quo, this information capture process rarely
occurs, or occurs with less accuracy.

Do you currently have a reverse logistics program? Do you have anything to

add to this ―What is Reverse Logistics?‖ article? Let us know in the comments
below!
The 5 essential stages in developing a successful supply chain
Supply chain management encompasses such a wide range of functions that it
can seem daunting, even to the most experienced international businessperson.

However, the process can be effectively modelled by breaking it down into

several main strategic areas. One common and very effective model is the
Supply Chain Operations Reference (SCOR) model, developed by the Supply
Chain Council to enable managers to address, improve and communicate
supply chain management practices effectively. The SCOR model runs
through five supply chain stages: Plan, Source, Make, Deliver, Return

Stage 1: Plan
Planning involves a wide range of activities. Companies must first decide on
their operations strategy. Whether to manufacture a product or component or
buy it from a supplier is a major decision. Companies must weigh the benefits
and disadvantages of different options presented by international supply chains.
Options include: Manufacturing a product component domestically
Manufacturing a component in a foreign market by setting up international
production facilities Buying a component from a foreign supplier Buying a
component from a domestic supplier If companies are manufacturing
products, they must decide how they will be produced. Goods can be: Make to
stock (produced and stored, awaiting customer orders); Make to order
(constructed in response to a customer order); Configure to order (partially
manufactured the product and completed it after a firm customer order is
received); or Engineer to order (manufactured a product to unique
specifications provided by a customer). Sometimes, goods can be produced by
a combination of these methods. Companies must also decide whether they
will outsource manufacturing. This operations planning is essential because
these decisions influence the supply chain. Planning also involves mapping
out the network of manufacturing facilities and warehouses, determining the
levels of production and specifying transportation flows between sites. It also
involves assessing how to improve the global supply chain and its
management processes. When planning, companies should ensure that their
supply chain management strategies align to business strategies, that
communication plans for the entire supply chain are decided and that methods
of measuring performance and gathering data are established before planning
begins.

Stage 2: Source
This aspect of supply chain management involves organizing the procurement
of

raw materials and components. Procurement is the acquisition of goods and

services at the best possible price, in the right quantity and at the right time.
When sources have been selected and vetted, companies must negotiate
contracts and schedule deliveries. Supplier performance must be assessed and
payments to the suppliers made when appropriate. In some cases, companies
will be working with a network of suppliers. This will involve working with
this network, managing inventory and company assets and ensuring that
export and import requirements are met.

Stage 3: Make
This stage is concerned with scheduling of production activities, testing of
products, packing and release. Companies must also manage rules for
performance, data that must be stored, facilities and regulatory compliance.

Stage 4: Deliver
The delivery stage encompasses all the steps from processing customer inquiries
to selecting distribution strategies and transportation options. Companies must
also manage warehousing and inventory or pay for a service provider to manage
these tasks for them. The delivery stage includes any trial period or warranty
period, customers or retail sites must be invoiced and payments received, and
companies must manage import and export requirements for the finished
product.

Stage 5: Return
Return is associated with managing all returns of defective products, including
identifying the product condition, authorizing returns, scheduling product
shipments, replacing defective products and providing refunds. Returns also
include ―end-of-life‖ products (those that are in the end of their product
lifetime and a vendor will no longer be marketing, selling, or promoting a
particular product and may also be limiting or ending support for the product).
Companies must establish rules for the following: Product returns Monitoring
performance and

costs Managing inventory of returned product

**************SCM ends****************

BUILDING BLOCKS
• Product Design
Four elements of product design are important for a lean production system:
• Standard parts.
• Modular design.

• Highly capable production systems with quality built in.

• Concurrent engineering.
The first two elements relate to speed and simplicity.
The use of standard parts means that workers have fewer parts to deal with, and training
times and costs are reduced. Purchasing, handling, and checking quality are more
routine and lend themselves to continual improvement. Another important benefit is the
ability to use standard processing.
Modular design is an extension of standard parts. Modules are clusters of parts treated
as a single unit. This greatly reduces the number of parts to deal with, simplifying
assembly, purchasing, handling, training, and so on. Standardization has the added
benefit of reducing the number of different parts contained in the bill of materials for
various products, thereby simplifying the bill of materials.
Lean requires highly capable production systems. Quality is the sine qua non
(―without which not‖) of lean. It is crucial to lean systems because poor quality can
create major disruptions. Quality must be embedded in goods and processes. The
systems are geared to a smooth flow of work; the occurrence of problems due to poor
quality creates disruption in this flow. Because of small lot sizes and the absence of
buffer stock, production must cease when problems occur, and it cannot resume until
the problems have been resolved.
Obviously, shutting down an entire process is costly and cuts into planned output
levels, so it becomes imperative to try to avoid shutdowns and to quickly resolve
problems when they do appear.
Lean systems use a comprehensive approach to quality. Quality is designed into the
product and the production process. High quality levels can occur because lean systems
produce standardized products that lead to standardized job methods, employ workers
who are very familiar with their jobs, and use standardized equipment. Moreover, the
cost of product design
quality (i.e., building quality in at the design stage) can be spread over many units,
yielding a low cost per unit. It is also important to choose appropriate quality levels in
terms of the final

customer and of manufacturing capability. Thus, product design and process design must
go hand in hand.
Engineering changes can be very disruptive to smooth operations. Concurrent
engineering practices (described in Chapter 4) can substantially reduce these
disruptions.

2. Process Design
Eight aspects of process design are particularly important for lean production systems:
• Small lot sizes.
• Setup time reduction.
• Manufacturing cells.
• Quality improvement.
• Production flexibility.
• A balanced system.
• Little inventory storage.
• Fail-safe methods.
Small Lot Sizes. In the lean philosophy, the ideal lot size is one unit, a quantity that
may not always be realistic owing to practical considerations requiring minimum
lot sizes (e.g., machines that process multiple items simultaneously, heat-treating
equipment that processes multiple items simultaneously, and machines with very
long setup times). Nevertheless, the goal is still to reduce the lot size as much as
possible. Small lot sizes in both the production process and deliveries from
suppliers yield a number of benefits that enable lean systems to operate effectively.
First, with small lots moving through the system, in-process inventory is
considerably less than it is with large lots. This reduces carrying costs, space
requirements, and clutter in the workplace. Second, inspection and rework costs are
less when problems with quality occur, because there are fewer items in a lot to
inspect and rework.
Small lots also permit greater flexibility in scheduling. Repetitive systems typically
produce a small variety of products. In traditional systems, this usually means long
production
runs of each product, one after the other. Although this spreads the setup cost for a run
over many items, it also results in long cycles over the entire range of products. For
instance, suppose a firm has three product versions, A, B, and C. In a traditional
system, there would be a
long-run of version A (e.g., covering two or three days or more), then a long-run of
version B, followed by a long-run of version C before the sequence would repeat. In
contrast, a lean system, using small lots, would frequently shift from producing A to
producing B and C.
This
flexibility enables lean systems to respond more quickly to changing customer demands
for output: lean systems can produce just what is needed, when it is needed. The
contrast between
small and large lot sizes is illustrated in Figure 14.2 . A summary of the benefits of small
lot

sizes is presented in Table 14.1 .

It is important to note that the use of small lot sizes is not in conflict with the economic
order quantity (EOQ) approach. The fact is that two aspects of the lean philosophy
support small EOQ lot sizes. One is that inventory holding cost is deemed to be high,
but
because this cost is based on the average inventory, inventory costs can be lowered
by reducing the lot size, which reduces average inventory. Second, reducing the
setup cost is emphasized. Thus, both higher holding costs and lower setup costs act
to reduce the optimal lot size.
Setup Time Reduction. Small lots and changing product mixes require frequent
setups. Unless these are quick and relatively inexpensive, the time and cost to
accomplish them can be prohibitive. Moreover, long setup times require holding more
inventory than with short setup times. Hence, there is strong emphasis on reducing
setup times. In JIT, workers are often
trained to do their own setups. Moreover, programs to reduce setup time and cost are
used to achieve the desired results; a deliberate effort is required, and workers are usually
a valuable part of the process.

Shigeo Shingo made a very significant contribution to lean operation with the
development of what is called the single-minute exchange of die (SMED) system for
reducing changeover time. It involves first categorizing changeover activities as either
―internal‖
or ―external‖ activities. Internal activities are those that can only be done while a
machine is stopped (i.e., not running). Hence, they contribute to long changeover
times. External activities are those that do not involve stopping the machine; they can
be done before or after the changeover. Hence, they do not affect changeover time.
After activities have been
categorized, a simple approach to achieving quick changeovers is to convert as many
internal activities as possible to external activities and then streamline the remaining
internal activities.
The potential benefits that can be achieved using the SMED system were
impressively illustrated in 1982 at Toyota, when the changeover time for a machine
was reduced from 100 minutes to 3 minutes! The principles of the SMED system
can be applied to any changeover operation.
Setup tools and equipment and setup procedures must be simple and standardized.
Multipurpose equipment or attachments can help to reduce setup time. For instance, a
machine with
multiple spindles that can easily be rotated into place for different job requirements can
drastically reduce job changeover time. Moreover, group technology (described in
Chapter 6) may
be used to reduce setup cost and time by capitalizing on similarities in recurring
operations. For instance, parts that are similar in shape, materials, and so on, may
require very similar setups. Processing them in sequence on the same equipment can
reduce the need to completely

change a setup; only minor adjustment may be necessary.

Manufacturing Cells. One characteristic of lean production systems is multiple
manufacturing cells. The cells contain the machines and tools needed to process
families of parts having similar processing requirements. In essence, the cells are highly
specialized and efficient
production centers. Among the important benefits of manufacturing cells are reduced
changeover times, high utilization of equipment, and ease of cross-training operators.

Quality Improvement. The occurrence of quality defects during the process can
disrupt the orderly flow of work. Consequently, problem solving is important when
defects occur. Moreover, there is a never-ending quest for quality improvement,
which often focuses on finding and eliminating the causes of problems so they do not
continually crop up.
Lean production systems sometimes minimize defects through the use of autonomation
(note the extra syllable on in the middle of the word). Also referred to as jidoka, it
involves the automatic detection of defects during production. It can be used with
machines or manual operations. It consists of two mechanisms: one for detecting defects
when they occur and another for a human stopping production to correct the cause of the
defects. Thus, the halting of production forces immediate attention to the problem, after
which an investigation of the problem is conducted, and corrective action is taken to
resolve the problem.

Quality Improvement. The occurrence of quality defects during the process can
disrupt the orderly flow of work. Consequently, problem solving is important when
defects occur. Moreover, there is a never-ending quest for quality improvement,
which often focuses on finding and eliminating the causes of problems so they do not
continually crop up.
Lean production systems sometimes minimize defects through the use of autonomation
(note the extra syllable on in the middle of the word). Also referred to as jidoka, it
involves the automatic detection of defects during production. It can be used with
machines or manual operations. It consists of two mechanisms: one for detecting defects
when they occur and another for a human stopping production to correct the cause of the
defects. Thus, the halting of production forces immediate attention to the problem, after
which an investigation of the problem is conducted, and corrective action is taken to
resolve the problem.

Takt time The cycle time needed to match customer demand for final product

Autonomation Automatic detection of defects during production.

Single-minute exchange of die (SMED) A system for reducing changeover time.

Inventory Storage. Lean systems are designed to minimize inventory storage. Recall
that in the lean philosophy, inventory storage is a waste. Inventories are buffers that tend
to cover up recurring problems that are never resolved, partly because they aren’t
obvious and partly because the presence of inventory makes them seem less serious.
When a machine breaks down, it won’t disrupt the system if there is a sufficient
inventory of the machine’s output to

feed into the next workstation. The use of inventory as the ―solution‖ can lead to
increasing amounts of inventory if breakdowns increase. A better solution is to
investigate the causes of machine breakdowns and focus on eliminating them. Similar
problems with quality, unreliable vendors,
and scheduling also can be solved by having ample inventories to fall back on. However,
carrying all that
extra inventory creates a tremendous burden in cost and space and allows problems to go
unresolved.

• Personnel/Organizational Elements
There are five elements of personnel and organization that are particularly
important for lean
systems:
• Workers as assets.
• Cross-trained workers.
• Continuous improvement.
• Cost accounting.
• Leadership/project management.
Workers as Assets. A fundamental tenet of the lean philosophy is that
workers are assets.
Well-trained and motivated workers are the heart of a lean system. They are given
more authority to make decisions than their counterparts in more traditional systems,
but they are
also expected to do more.

Cross-Trained Workers. Workers are cross-trained to perform several

parts of a process
and operate a variety of machines. This adds to system flexibility because
workers are able
to help one another when bottlenecks occur or when a coworker is absent. It also
helps line
balancing.

Continuous Improvement. Workers in a lean system have greater responsibility

for quality than workers in traditional systems, and they are expected to be
involved in problem solving and continuous improvement. Lean system workers
receive extensive training in statistical
process control, quality improvement, and problem solving.

Activity-based costing Allocation of overhead to specific jobs based on their

percentage of activities.
4. Manufacturing planning and control.-

• Level loading.
• Pull systems.
• Visual systems.
• Limited work-in-process (WIP).
• Close vendor relationships.
• Reduced transaction processing.
• Preventive maintenance and housekeeping

Push system Work is pushed to the next station as it is completed.

Pull system A workstation pulls output from the preceding station as it is needed.

Kanban Card kanban card or other device which signals the need of work or material
to the preceding station