Operations and

Importance of
Materials management
Anil Sathe

Page 1
Operations
management

Page 2
 Introduction
Operations management is to manage transformation
from inputs to finished goods (products or services) using
processes.
Two kinds of resources used are:
 Facilities including machines buildings etc.
 Human beings including staff in support services
Inputs can be:
 Raw materials
 Information and
 Customers ( for service industries like hotels, airlines etc.)

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 Operations Management includes:
• Forecasting
• Capacity planning
• Scheduling
• Assuring quality
• Motivating employees
• Deciding where to locate facilities
• And more . . .

In short Operations management controls inputs and processes to give

desired output of products /services

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 Operations Interfaces
Industrial
Engineering
Maintenance
Distribution

Purchasing Public
Operations Relations

Legal
Personnel

Accounting MIS

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Business Operations overlap

Operations

Marketing Finance

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 Goods-service Continuum

Steel production Home remodeling Auto Repair Painting Teaching

Automobile fabrication Retail sales Appliance repair Car Servicing Courier

High percentage goods Low percentage goods

Low percentage service High percentage service

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 What is operations strategy?
Operations strategy is concerned with reconciliation of
market requirements and operations resources. It is
done by:
• Satisfying market requirements by setting appropriate
performance objectives for operations
• Taking decisions on the deployment of operations resources
which effect the performance objectives of operations

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 What is Operations strategy?
Operations strategy is total pattern of decisions which shape the
long term capabilities of any type of operation and their
contribution to business strategy, through reconciliation of market
requirements with operational resources (Slack and Lewis, 2011)

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Understanding the Value-added
The difference between the cost of inputs
and the value or price of outputs
Value added
Inputs
Transformation/ Outputs
Land
Conversion Goods
Labor
process Services
Capital
Feedback

Control
Feedback Feedback

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Examples : Food Processor

Inputs Processing Outputs

Raw Vegetables Cleaning Canned
Metal Sheets Making cans vegetables
Water Cutting
Energy Cooking
Labor Packing
Equipment Labeling

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Examples : Hospital processes

Inputs Processing Outputs

Doctors, nurses Examination Healthy

Hospital Surgery people
Medical Supplies Monitoring
Equipment Medication
Laboratories Therapy

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 Operations strategy V/s efficiency
Companies often do not understand the differences
between operational strategy and efficiency
• Operational efficiency is performing tasks well, even
better than competitors
• Strategy is a plan for competing in the marketplace

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 What is Operations strategy?
Please note the following in video “Operations strategy
made easy”
• What is the operations strategy?
• How is it different than corporate strategy?
• Key elements
• Any other observation

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 Strategic role of technology

• Technology should support competitive priorities

• Three Applications: product technology, process technology,
and information technology
 Products – Pen drives, fiber optic cable
 Processes – flexible automation, CAD, online payment services
 Information Technology – EDI, ERP, Analytical services

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 Developing operations strategy..
• Defining a primary task
 What is the firm in the business of doing?
• Assessing core competencies
 What does the firm do better than anyone else?
• Determining order winners and order
qualifiers
 What wins the order?
 What qualifies an item to be considered for
purchase?
• Positioning the firm
 How will the firm compete?

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 Operations strategy : Products and
services
• Make-to-Order
 Products and services are made to customer
specifications after an order has been received
• Make-to-Stock
 Products and services are made in anticipation of
demand
• Assemble-to-Order
 Products and services add options according to
customer specifications

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 Operations strategy : Capacity
and Facility
• Capacity strategic decisions include:
 When, how much, and in what form to alter capacity
• Facility strategic decisions include:
 Whether demand should be met with a few large
facilities or with several smaller ones
 Whether facilities should focus on serving certain
geographic regions, product lines, or customers
 Facility location can also be a strategic decision

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 Operations strategy : Human Resources
Key considerations:
• What are the skill levels and degree of autonomy
required to operate production system?
• What are the training requirements and selection
criteria?
• What are the policies on performance evaluations,
compensation, and incentives?
• Will workers be salaried, paid an hourly rate, or paid a
piece rate?
• How many levels of management will be required?
• Should workforce be cross-trained?
• What efforts will be made in terms of retention?

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 Operations strategy : Sourcing
• Vertical Integration
 degree to which a firm produces parts that go into its
products
• Strategic Decisions
 How much work should be done outside the firm?
 On what basis should particular items be made in-
house /outsourced?
 How should suppliers be selected?
 What type of relationship should be maintained with
suppliers?
 How can suppliers be encouraged to collaborate?

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Competitive priorities

• Cost
• Quality
• Flexibility
• Speed

All of the above ?

Some ? Trade offs?

2-21
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Operations strategy at Wal-Mart

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 Example: Nestle
Transforming Nestle from a set of far-flung operations into a single global
machine.
Brabeck's inked a $200 million deal with SAP to link its facilities and permit
Nestle's headquarters in Vevey, Switzerland, to know for the first time how
many raw materials its subsidiaries buy, in total, from around the world.
The company then will be able to negotiate better contracts with suppliers
and centralize production.
Result was closure of 38 different factories, lower costs all round. All told,
he has slashed $1.6 billion in costs.

http://www.businessweek.com/magazine/content/01_24/b3736644.htm?chan=search

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Sales and Operations
planning

Page 24
 Introduction
• It is a formal process,
consisting of series of
meetings, where data
from various areas of
business is discussed and
decisions are made
• The goal is agreement
between various
departments on the best
course of action to achieve
the optimal balance
between supply and
demand and to meet
profitability goals

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 What does it involve?
• Responding to predictable variability in a supply chain
• Managing supply
• Managing demand
• Implementing solutions – Sales and Operations Planning – to
predictable variability in practice

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 Introduction
Demand Actual Supply Resources/
Forecasts Orders Inventory Orders Capacity

Demand Supply

S&OP
Process

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Typical S & OP process

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 Inputs to the process
Strategic Capacity Levels
 Existing buildings
 Processes
Demand Management
 Forecasts of customer
demand
 Need for spares, etc.
 Pricing

S&OP

External Capacities
 Suppliers
 Subcontractors

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 Inventory / Capacity trade-off
• Leveling capacity forces inventory to build up in anticipation of
seasonal variation in demand
• Carrying low levels of inventory requires capacity to vary with
seasonal variation in demand or enough capacity to cover peak
demand during season

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 Type of data considered
• Current plan for each product group
• Current finished goods inventory
• Sales forecasts
• Purchase Orders received
• Materials available
• Manufacturing plans and capacity
• Distribution capacity
• Shipping capacity
• Performance measures
• Customer Service

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 Overall planning cycle
Decisions Time Frame
Product and process 18+ months
Long-Range
“Bricks and Mortar”
Plans
Employment and overall 2 to 18 months
S&OP inventory levels
What demand to meet?
Specific products and times Less than 2 months
Short-Range Scheduling of people and
Plans equipment

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 Time horizon view..
Short-Range Plan S&OP Long-Range Plan
(days, weeks out) (months out) (years out)

Capacity levels Changes in Changes in

considered adjustable fixed
“frozen” in the capacity capacity
short-term possible possible

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Explaining bottoms-up approach

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 Creating template for S & OP decisions
Please note the following in attached template:
1. Structure
2. Parameters considered
3. Decision Variables
4. Measurement of impact
5. Graphical presentation
6. Any other observations

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 Target benefits..
• Increase plan accuracy
• Increase product margins
• Improve customer satisfaction
• Reduce costs through efficient use of resources
• Drive organizational flexibility
• Reduce inventory and obsolescence costs
• Better communication between groups
• Improved cash flow and Shorter lead times
• Reduced transportation costs

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Importance of
Materials Management
Anil Sathe

Page 37
 Defining Supply Chain
Commonly accepted definitions of supply-chain management
include:
• The management of upstream and downstream value-added flows
of materials, final goods, and related information among suppliers,
company, distributors, and final consumers

• A customer-focused definition is given by Hines (2004:p76): "Supply

chain strategies require a total systems view of the links in the chain
that work together efficiently to create customer satisfaction at the
end point of delivery to the consumer. The main focus is turned to
efficiency and added value, or the end user's perception of value.
The supply-chain system must be responsive to customer
requirements."

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 Defining Supply Chain
Commonly accepted definitions of supply-chain management
include:
• The integration of key business processes across the supply chain for
the purpose of creating value for customers and stakeholders

• According to the Council of Supply Chain Management Professionals

(CSCMP), supply-chain management encompasses the planning and
management of all activities involved in sourcing, procurement,
conversion, and logistics management. Supply-chain management
integrates supply and demand management within and across
companies.

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 Supply Chain value add
• Competitiveness
• Effectiveness
• Sustainability
• Responsiveness
• Cost-efficiency
• Stability
• Quality
• Flexibility

And hence Profitability

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Alignment to Corporate Strategy
Responsiveness (Reliability; Quickness; Flexibility;
e.g., Dell, Overnight Delivery Services)

Competitive Advantage through which

the company market share is attracted

Cost Leadership (Price;

e.g., Wal-Mart, Southwest
Airlines, Generic Drugs)

Differentiation (Quality; Uniqueness; e.g., Luxury

cars, high end flats, Branded Drugs)

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 Aligning with external environment
Changes in external environment constantly changes priorities,
strategies and methodology in supply chain. Few examples are:
• Contactless delivery
• Focus on e business
• Boosting individual mobility
• Second hand cars market support
• E vehicle development
• BS 6 range of vehicles
• Local development /Restrictions on Chinese imports

Apart from this there is also an impact of some long term changes that
we see like demographic changes to GDP growth..

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India after a decade…
3.5X ~4.5 X
~
~7tn
(3rd)
~18
~2 tn
Nominal GDP (10th) Mega cities
($ Trillion,Rank) 4 (No.)

Manufacturing 1.5 x
Economy Consumers
15% 31% 38% (Population)
hub (1.6 X) 25%
Manufacturing Urbanization
(%GDP) (%)

2.2% 54%

Contribution to Middle income

World Trade (%) (HH%)
70%
6%
1.3x
2.7 X
(Households)

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 Supply Chains will align by
• Using technology to create value for customers
• Removing constraints related to office, fixed time/location etc.
• Empowering customers to make choices
• Creating solutions which can be customized, scaled up/down as
required
• Using analysis of all structured /unstructured data to make future
decisions
• Bringing in real time visibility for quick decisions
• Being very concerned about impact on health, environment and
sustainability

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Important question to answer :

What can increase

attractiveness and
competitiveness of
company products and
services?

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