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MBA 401 Operations Management Introduction to Operations Management

University of Gloucestershire Business School

Introduction to Module

Look at Operations Management from an international perspective Emphasis is on operations from a global logistics and supply chain management angle Underpinning knowledge of Operations theory and concepts is assumed Core text
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What is Operations Management ?

Operations Management is about the way organisations produce goods and services

MBA 401 10-11 HP Intro v0.2 ppt

Source: Slack et al (2007)

Examples of Operations
Back office operation in a bank Kitchen unit manufacturing operation

They are all operations


Retail operation Take-out / restaurant operation

MBA 401 10-11 HP Intro v0.2 ppt

Source: Slack et al (2007) Pearson

Concept of Operations Management


The best way to start understanding the nature of operations is to look around you Everything you can see around you has been processed by an operation Every service you consumed today (radio station, bus service, lecture, etc.) has also been produced by an operation Operations Managers create everything you buy, sit on, wear, eat, and throw away
MBA 401 10-11 HP Intro v0.2 ppt

Source: Slack et al (2007) Pearson

Operations Management at IKEA


Design a store layout which gives smooth and effective flow

Design elegant products which can be flat-packed efficiently

Ensure that the jobs of all staff encourage their contribution to business success

Site stores of an appropriate size in the most effective locations


Maintain cleanliness and safety of storage area

Continually examine and improve operations practice

Arrange for fast replenishment of products

Monitor and enhance quality of service to customers

MBA 401 10-11 HP Intro v0.2 ppt

Source: Slack et al (2007) Pearson

The Activities of Operations Management


INPUT TRANSFORMED RESOURCES MATERIALS INFORMATION CUSTOMERS

INPUT
FACILITIES STAFF INPUT TRANSFORMING RESOURCES

Transformation

GOODS OUTPUT AND SERVICES

MBA 401 10-11 HP Intro v0.2 ppt

Source : Slack et al Operations Mgmt Pearson 2001

At Prt a Manger
Transformed resources Ingredients Packaging Customers Input resources Transforming resources Equipment Fittings Staff
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Served and satisfied customers

Source: Slack et al (2007) Pearson

Operations Managements Remit


Operations is not just concerned with what goes on at the point of production, but is also directly concerned with supplying the materials, the location and layout of facilities, the programming of operations and the motivation of employees.

MBA 401 10-11 HP Intro v0.2 ppt

CIPS Study Guide Pg 2

Some interfunctional relationships between the operations function and other core and support functions
Engineering/ technical function
Analysis of new technology options Provision of relevant Accounting data Understanding of the capabilities and constraints of the operations process

Product/service development function

Understanding of process technology New product and needs service ideas


Understanding of the capabilities and constraints of the operations process Market requirements

and finance function

Financial analysis for performance and decisions Understanding of human resource needs Recruitment development and training

Operations function

Marketing function
Understanding of infrastructural and system needs Provision of systems for design, planning and control, and improvement

Human Resources function


MBA 401 10-11 HP Intro v0.2 ppt

Information Technology (IT) function


Source: Slack et al (2007) Pearson
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Operations Management
Restricted sense
Planning organising and controlling production process and management of interface with support functions

Broader sense
Relevant to every sphere of organisational activity

Operations Management regarded as one of key functions of enterprise such as Finance, Marketing, HRM and sometimes Purchasing Management

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The Five Competitive Objectives

Quality

Being RIGHT

Responsiveness / Speed

Being FAST

Dependability

Being ON TIME

Flexibility

Being ABLE TO CHANGE

Cost

Being PRODUCTIVE

MBA 401 10-11 HP Intro v0.2 ppt

Source : Slack et al 2001

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What is Logistics?
Logistics involves getting
o o o o o o o o the right product in the right way in the right quantity and right quality to the right place at the right time for the right customer at the right cost

Its not just trucks and sheds


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Retail Logistics Typical Physical Infrastructure


Physical Flows e.g. Product, equipment, display material

Head Office

Home Delivery

Suppliers

Store
Customer

Store

Information Flows e.g. Orders, Forecasts, Sales


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Meeting Essential Criteria


Effectively manage distribution function Select most suitable transport modes Plan routes and schedule deliveries

Examine, monitor and control distribution costs


Design efficient internal flows of goods within the warehouse Comply with complex legal transport requirements within and outside EU Waste disposal and recycling to meet environmental standards

Control inventory
Measure and control performance

Use of Information Technology


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Source : CIPS Store & Distn Study Guide p 5

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Managing the Supply Chain

Second-tier suppliers

First-tier suppliers

First-tier customers

Second-tier customers

The operation

Purchasing and Supply Management

Physical Distribution

Management

Materials Management Supply Chain Management Logistics


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Source : Slack et al, 2001 Ops Mgmt Chap 13

Applications to Manufacturing and Services


Logistics and SCM can be used to generate both cost savings and service enhancements
e.g. after sales service and delivery add-ons

Robust logistics strategies enable the entire supply chain to compete


e.g. Dell
relatively cheap PCs, plus online sales and fast delivery

e.g. Triage
rapid assessment of patient needs, matching patients with the right care stream as early as possible

MBA 401 10-11 HP Intro v0.2 ppt

2008 John Wiley & Sons Ltd. www.wileyeurope.com/college/Mangan

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MBA 401 Operations Management Determining an Operations Strategy


University of Gloucestershire Business School

What is Strategy?
Strategic decisions means those decisions which Are widespread in their effect on the organisation to which the strategy refers Define the position of the organisation relative to its environment Move the organisation closer to its long-term goals.

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Source: Slack et al (2007) Pearson

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What is the role of the operations function?

Operations as an Implementer

Operations as Supporter Strategy

Operations as Driver Ops

Strategy

Ops Ops

Strategy Operations drives strategy

Operations implements strategy


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Operations supports strategy

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The Four Perspectives on Operations Strategy


Top-down perspective
What the business wants operations to do

Operations resources perspective


What operations resources can do

Operations strategy

Market requirement perspective


What the market position requires operations to do

What day-to-day experience suggests operations should do

Bottom-up perspective
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Source: Slack et al (2007) Pearson

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How Operations Strategies are put Together

Identify what is wanted in the marketplace

Establish how well the operation performs vs. its competitors

Identify what the operation needs to do better

Identify how the operation could do these things better

Implement the strategy


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The Benefits of Excelling

Minimum price, highest value Cost

Quick delivery
Speed Fast throughput

Minimum cost, maximum value Ability to change Reliable operation

Dependable delivery Dependability

Quality

Error-free processes

Ability to change

Flexibility Frequent new products, maximum choice


Source: Slack et al (2007) Pearson
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Error-free products and services

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Relative Importance of Performance Objectives


The influence of the organisations customers The influence of the organisations competitors

The relative importance of each performance objective to the operation

The stage of the organisations products and services in its life cycle

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Order Winning and Order Qualifying Criteria


Order Winners Offer features attractive to customers but not available from competition Secure orders in market place May become order qualifiers Order Qualifiers Feature necessary to enter a market Do not win orders May prevent loss of orders
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Order Loser
Both Order Winners and Qualifiers can become Order Losers, if: Quality Delivery Speed Reliability Any other factors that made customers look to you,

suddenly become unacceptable


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The four-stage model of Operations contribution

(Hayes and Wheelwright)

Redefining industry expectations Increasing strategic impact Clearly the best in the industry
STAGE 3 Link strategy with operations
STAGE 2 Adopt best practice STAGE 1

STAGE 4 Give an operations advantage

As good as the competitors


Holding the Correct worst organization back problems
Internally neutral

Externally neutral

Internally supportive

Externally supportive

Increasing operations capabilities

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Source: Slack et al (2007) Pearson

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How can the contribution of the operations function be assessed?

Neutral

Supportive

Stage 1

Stage 3 Objective is for operations to provide credible support for the business strategy. Stage 4

Internally

Objective is to minimise the negative impact of operations. Stage 2

Externally

Objective is for operations Objective is for operations to help the business to provide a source of maintain parity with its competitive advantage. competitors.

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Impact of Competitor Activity


Original Strategy Order winners Qualifiers Competitors Strategy Order winners Qualifiers Performance objectives Fast delivery Range Price Speed and Flexibility Performance objectives Fast delivery Range, Price Speed

Alternative Strategy 1 Order winners Qualifiers Performance objectives Fast delivery Range Price Speed and Flexibility

Alternative Strategy 2 Order winners Qualifiers Performance objectives Faster delivery Range, Price Speed

Alternative Strategy 3 Order winners Qualifiers Performance objectives Price Fast delivery Range Cost

The Hill Methodology of Strategy Formulation


Step 1 Corporate objectives Step 2 Marketing strategy Step 3 How do products or services win orders? Step 4 Step 5

Operations Strategy

Process choice

Infrastructure

Growth

Profit

ROI

Other financial measures


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The Hill Methodology of Strategy Formulation


Step 1 Corporate objectives Step 2 Marketing strategy Step 3 How do products or services win orders?
Price Quality Delivery speed Delivery dependability Product /service range Product /service design Brand image Technical service
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Step 4

Step 5

Operations Strategy

Process choice
Process technology Trade offs embodied in process Role of inventory Capacity, size, timing, location.

Infrastructure
Functional support Operations planning and control systems Work structuring Payment systems Organisational structure

Growth

Product/Service markets & segments Range Mix

Profit

ROI

Volumes Standardisation or customisation

Other financial measures

Innovation Leader or follower

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Growth in international trade


Considerable growth in recent decades in world trade;
World exports grew from $62 billion in 1950 to $9,000 billion by 2004

Facilitated by reduction of trade barriers between countries and region Hence more freight is moving around world
Logistics systems are thus having to play an increasingly important role in the global economy

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Total World Merchandise Exports 19502004 Figure 2.1

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2008 John Wiley & Sons Ltd. www.wileyeurope.com/college/Mangan

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Globalisation
The path towards globalisation
Establish a presence in an overseas markets to become a multinational company

Trade across many borders, with operations in multiple countries to become a transnational corporation

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Globalisation
Ethnocentricity: a company when doing business abroad thinks and acts as if they were still operating in their home country Polycentricity: a company adopts the host country perspective Geocentricity: a company acts completely independent of geography and adopts a global perspective, and will tailor to the local environment as appropriate (i.e. glocalisation)
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Overseas Site Selection Factors


Table 2.4 Site Selection Factors

Labour costs
Employment regulations Available skills Land costs and availability of suitable sites

Political stability
Environmental regulations Taxation rates Government supports

Energy costs
Availability of suitable suppliers Transport and logistics costs Transport linkages Communications infrastructure and costs
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Currency stability
Benefits of being part of a cluster of similar companies Preferred locations of competitors Access to markets Community issues and quality of life
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Outsourcing
The transfer to a third party of the management and delivery of a process previously performed by the company itself
To reduce costs To increase flexibility To focus on core competences To gain access to the latest technologies
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Offshoring
The transfer of specific processes to lower cost locations in other countries
Not the same as outsourcing
Outsourcing involves handing process ownership over to a third party In offshoring, the company may still own and control the process itself in the lower cost location

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MBA 401 Operations Management


Purchasing & Supply
University of Gloucestershire Business School

Where does the Business get its Competitive Advantage?

The technological specification of its product / service?

Product / Service Technology

The way it positions itself in its market?

Marketing

Operations

The way it produces its goods and services?

BMN 201 10-11 Wk 3 HP Design v0.2 ppt

Source : Slack et al Operations Mgmt Pearson 2001

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The Purchasing Cycle

Vendor Rating / Performance Review

Identification of Need

Defining the Specification

Payment Contract Award Negotiating VFM

Defining Contractual Terms

Sourcing the Market Supplier Appraisal

Analysing Quotes / Tenders

Inviting Quotes / Tenders

CIPS 10-11 Lev 4 P&S Relns Wk 3 v 0.1.ppt

Source : CIPS Study Guide P 113

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Reasons for Buying Abroad


Availability of products and raw materials

Features & technical specifications


Decline of manufacturing base High cost of Research & Development

Domestic capacity cant meet demand


Strategic reasons - secondary source Favourable prices due to:

Exchange rates, low wage costs, higher productivity


Reciprocal deal with foreign firm or government
MBA 401 10-11 P&S v0.2 Source: CIPS T&O Guide 2003 p 160 42

Perceptions of Lead Time


Origin of Need Requisition Sellers lead time Makers lead time Order sent Order received Manufacture commenced Manufacture completed Despatch Receipt Available In users possession Use or consumption
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True lead time

Users view of lead time

Purchasing lead time

Source Baily Farmer Jessop Jones 1998 CIPS P 43

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General Problems of Overseas Sourcing


Longer and more variable lead times
Greater buffer stocks

Uncertainty reduced by improvements in


Containerisation Information and Communications Technology (ICT) Real cost of airfreight

Specifications
Differences in international standards Differences in nomenclature (Standards of measurement)
MBA 401 10-11 P&S v0.2 Source: CIPS T&O Guide 2003 p 171 44

Outsourcing
A contractual relationship between an external vendor

and an enterprise in which the vendor assumes


responsibility for one or more business functions of the enterprise White & James 1993

Outsource non core activities

Focus on distinctive or core competences

MBA 401 10-11 P&S v0.2

Source: CIPS T&O Guide 2003 p 67

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Make In House
Internal capacity:
Is spare capacity available ?

Cost:
Is it cheaper to make internally?

Quality:
Will internal manufacture allow closer quality control?

Timescale:
Is continuous supply available as required?

Confidentiality:
Is it necessary to keep data and info secret?
MBA 401 10-11 P&S v0.2 Source: CIPS T&O Guide 2003 p 75 46

Trends in the Manufacturing Sector emerging from Globalisation


Global markets Global competition Competitors, partners and customers from around the world Global sourcing Global presence Global value chains resulting in increasing complexity and competition Global access to knowledge and new technologies High level of customer awareness and expectations Rapid pace of technological change Fast rate of product commoditisation SCM expertise and innovation are preconditions for business success

MBA 401 10-11 P&S v0.2

2008 John Wiley & Sons Ltd. www.wileyeurope.com/college/Mangan

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Relative Costs in a Do vs Buy Decision


In-source

opportunity
indirect

Out-source

supplier profit
allocated

direct

market price coordination risk coordination risk Buyer Costs

coordination risk

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Process for Outsourcing


Strategic Analysis of current position Identify Core Business Identify Target areas for Outsourcing

Define clear & unambiguous Specifications

Selection of Supplier

Implementation & Review

Development of Relationship

MBA 401 10-11 P&S v0.2

Source: Based on CIPS Slide Set (2006)

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Outsourcing Matrix
Low

Outsource / Buy in

Develop Contracting

Core

Collaboration

In-house

High High

Competence of Contractors

Low

MBA 401 10-11 P&S v0.2

Source: CIPS T&O Guide 2003 p 68

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Specification of Requirement
Be clear and unambiguous Include measurable performance criteria

Recognise & highlight remaining problems


Describe relationships sought Refer to confidentiality and security Identify licensing issues Consider terms and conditions of contract Include processes for change & development
MBA 401 10-11 P&S v0.2
Source: CIPS Study Guide (2006: 233)

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The Service Cycle Continuous Improvement


Specification

Improvement

Selection

Appraisal

Performance

MBA 401 10-11 P&S v0.2

Source: CIPS T&O Guide 2003 p 70

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Figure 5.1 Most frequently reported Problems leading to failure in outsourcing (Pandit, 2005)

MBA 401 10-11 P&S v0.2

2008 John Wiley & Sons Ltd. www.wileyeurope.com/college/Mangan

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Regular Contact with Contractor to ensure...


Terms of contract met

Customer orders passed efficiently & correctly to contractor


Deliveries are made as scheduled (on time) Adequate reports of incidents, delays, shortfalls etc..

Costs and budgets regularly monitored


Relevant statistical information feedback
MBA 401 10-11 P&S v0.2
Source : CIPS Store & Distn Study Guide p 42

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Risk Minimisation for Outsourcing


Retain some expertise in-house Partially outsource and measure results Measure effect on customer service & delivery quality Does 3rd party work for competitors and how prioritise work? Ensure Service Level Agreement covers range of needs Consider effect on total distribution costs Consider specialist company with sector expertise
MBA 401 10-11 P&S v0.2
Source CIPS Study Guide P 170

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Classifying Logistics Companies


Own account transportation: when a company provides its own transport services Logistics service providers:
Freight carriers: e.g. hauliers, trucking companies, train companies, airlines, shipping companies Freight forwarders: make transportation arrangements Couriers: immediate delivery of products Integrators: offer a seamless (i.e. integrated) end-to-end service from consignor to consignee Agencies: companies combine buying power to gain reduced freight transport rates

MBA 401 10-11 P&S v0.2

2008 John Wiley & Sons Ltd. www.wileyeurope.com/college/Mangan

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MBA 401 Operations Management Capacity and Demand Management

University of Gloucestershire Business School

Capacity Planning and Control

Capacity planning and control

Operations strategy

The market requires the availability of products and services


Design The operation supplies ... the capacity to deliver products and services

Operations management Improvement

Planning and control

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Source: Slack et al (2007) Pearson

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Objective
To provide an appropriate amount of capacity at any point in time

The appropriateness of capacity planning in any part of the operation can be judged by its effect on
Costs Revenue Working capital Service level
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Source: British A
Source: Slack et al (2007) Pearson 59

How is Capacity Defined ?


Capacity is the ability to hold, receive, store or accommodate a certain volume (Van Looy , 1998 p 282) People
Man Hours per shift

Equipment
Litres delivered per day

Facilities
Seats available per day

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How Capacity and Demand are Measured

Efficiency =

Planned loss of 59 hours

Actual output Effective capacity

Design capacity
168 hours per week Effective capacity 109 hours per week

Avoidable loss - 58 hours per week Actual output 51 hours per week

Utilisation =

Actual output Design capacity

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The Nature of Aggregate Capacity

Aggregate capacity of a hotel:


rooms per night ignores the numbers of guests in each room

Aggregate capacity of an aluminium producer: tonnes per month ignores types of alloy, gauge and batch variations

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Source: Slack et al (2007) Pearson

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Finite Loading
Loading Basis Hours, weight or throughput

Capacity
200 180 160 140 120 100 80 60 40 20 0 1
Work Centre

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Infinite Loading
Loading Basis Hours, weight or throughput

Capacity
250 200 150 100 50 0 1
Work Centre

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Causes of Seasonality

Climatic

Festive

Behaviour al

Politica l

Financi al

Soci al

Source: Alamy/Medical-on-li

Construction Beverages (beer, materials Foods cola) (ice-cream, Christmas Clothing (swimwear, shoes) cake) Gardening items (seeds, Fireworks fertilizer)

Travel services Holidays Tax processing Doctors (influenza epidemic) Sports services Education services

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Source: Slack et al (2007) Pearson

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Demand Fluctuations in Four Operations

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Source: Slack et al (2007) Pearson

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Adjust output to match demand

Hire Temporary labour Overtime Subcontract

Fire

Source: Corbis/Photocuisine

Lay-off
Short time Third-party work

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Source: Slack et al (2007) Pearson

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Moving a peak in demand can make capacity planning easier

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Coping Strategies
Absorb demand

Have excess capacity


Make to stock
Part finished, Finished Goods, or Customer Inventory
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Keep output level Make customer wait


Queues Backlogs
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Capacity Decision Factors


Do we need to do it ourselves?

Size/scale of operations unit(s)


Increment of capacity additions

Cycle time of operation


Location of capacity

Flexibility/cost balance
Skill and labour requirements
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Flexing Demand
Pricing by Time

Pricing by Segment
Advertising / Promotions Co-promotions with other products to shift demand Introduce reservation systems New location delivery points Sales Force incentives
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Ways of Reconciling Capacity and Demand

Demand Capacity

Demand Capacity

Demand Capacity

Level capacity

Chase demand

Demand management

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MBA 401 Operations Management

Materials Management

University of Gloucestershire Business School

Inventory is created to compensate for differences in timing between supply and demand
Rate of supply from input process

Source: Alamy/Van Hilversum

Inventory

Rate of demand from output process

Input process Inventory


MBA 401 Wk5 Mats Mgmt v 0.2.ppt

Output process

Source: Slack et al (2007) Pearson

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Single-stage and two-stage inventory systems

Single-stage inventory system

Two-stage inventory system

Stock

Sales operation

Central depot

Distribution

Sales Local distribution operation point

Suppliers

Suppliers

e.g. Local retail store


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e.g. Automotive parts distributor


Source: Slack et al (2007) Pearson 76

Inventory Management
How much to order :
Balance cost of holding stock and cost of purchasing items

When to order :
Balance early delivery / cost of stock holding and late delivery / cost of stock-out

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A multi-echelon Inventory System

Garment manufacturers
Cloth manufacturers Yarn producers

Regional warehouses
Retail stores

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Source: Slack et al (2007) Pearson 78

The Forrester or Bullwhip Effect

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Source : CIPS Study Guide P 49

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Generic warehouse functions

Figure 7.3

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The Throughflow Warehouse

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The Crossflow Warehouse Flow

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Inverted T Warehouse Flow

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Storage Equipment

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Using warehouses to add value


(after Jessop & Morrison, 1994) Figure 7.2

MBA 401 Wk5 Mats Mgmt v 0.2.ppt

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The Decoupling Point


Martin Christopher

Lean

Agile

Forecast at generic level Economic Batch Quantities Maximise Efficiencies

Demand Driven Localised Configuration Maximise Effectiveness

Strategic Inventory
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Process Types in Manufacturing

High

Project Jobbing

Variety

Batch

Mass

Continuous

Low Low Volume High

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The Four Dimensions of Operations


Process Focus
Low

Repetitive Focus
Volume

Product Focus
High

Variety
High Low

Variation (in Demand)


High
Low

Visibility
High Low

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