Introduction To Operations and Supply Chain Management

Operations and supply
chain management
Nguyen Van Vien

Email: viennv@ueh.edu.vn
Mobile: 0973.225.589
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1. The challenge
• Changing market conditions

• Rate of change is faster
• Global competition
• Need to be proactive
• Increased customer focus
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Source: Srinivasan (2010)
Changing customer
• Once satisfied with a black car

• Availability
• Price
• Quality
• Variety
• Wants to buy frequently
• Absolutely impatient customer
• Wants more value for money
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2. Requirements of manufacturing
• Today’s customer requirements are to have products with:

• High volume
• Large variety
• Less cost
• High quality
• New products
• Quick delivery
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Requirements of manufacturing
• Make an increasing variety of products, on shorter lead times with smaller runs and
flawless quality.
• Improve ROI by automating and introducing new technology on process and materials so
that price can be reduced to meet local and foreign competition.
• Mechanize, but keep schedules flexible, inventories low, capital costs minimal and
workforce contented (Skinner, 1985).
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3. History of manufacturing systems
• The war - Resource Availability

• Computers - Cost and information control
• Quantitative methods - Doing things well
• Communication - Personal touch
• Electronic commerce - Doorstep
• Home offices
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Some more history
• Adam Smith and James Watt

• Up and down motion to rotary motion
• Desirability of a factory system (capital and labor)
• Watt showed how to do it
• Carnegie and Scale
• Steel industry with a large stable output
• Concept of cost control to increase profits
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Some more history
• Ford and Speed

• Take the work to the man and not man to the work
• The moving assembly line
• Did not concentrate on variety
• Scientific Management
• Concentrate on Efficiency
• Work standards are the rate of work by a “first class man”
• Carrot and stick - The worker who is fast and efficient is rewarded while the inefficient is
discharged
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4. Improvements based on manufacturing methodologies
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4. Methodology - Traditional approaches
• Line layout - Product layout continuous high volume production

• Process layout - Batch production, Middle volume Middle variety - focus on utilization of
resources
• Quality - SQC focus on measurement and conformance to specifications
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Methodology - Process improvement
• Group technology, Cellular manufacturing - Reorganizing machines, grouping of parts

to families - Ownership and Responsibility
• Japanese Management System - JIT (Just-in-time manufacturing) - Waste elimination,
Inventory reduction
• Flexible manufacturing - Automation - High volume - Focus on technological solutions
- Reducing production time
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Cellular manufacturing
• Fundamental principle: similar “things” should be done similarly.

• Similar things: product design, process planning, fabrication and assembly, production
control, administrative functions.
• Cellular manufacturing: divide the manufacturing facility into small groups or cells of
machines. Here machines are grouped into cells and parts into families such that the
parts are manufactured completely within the assigned cells.
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The advantages of cellular manufacturing
• Reduced material handling time

• Reduced changeover times
• Better quality and better throughput
• Less space
• Increased ownership and responsibility
E.g: Set-up time reduction of 41%, throughput time reduction of 24$, an increase in number
of machines 10%.
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The disadvantages of cellular manufacturing
• Increased number of machines

• Less machine utilization
• Inability to address fluctuating demands and sudden increase in demand
• Less flexibility
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Just-in-time manufacturing systems
• Philosophy of manufacturing: planned elimination of all waste, continuous

improvement of productivity.
• Primary elements:
• to have only the required inventory;
• to improve quality to zero defects;
• to reduce lead times by reducing set-up times, queue lengths and batch sizes;
• to improve the operations themselves;
• to accomplish these at minimum cost.
• Policy of “make daily - sell daily”
E.g: set-up time reduction of 20%, finished goods inventory reduction of 30%, scrap
reduction of 20%, and work in progress inventory of over 50%.
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Potential benefit of just-in-time manufacturing systems
• Reduced inventory
• Improved quality
• Lower costs
• Reduced space requirements
• Shorter lead time
• Increased productivity
• Greater flexibility
• Better relations with suppliers
• Simplified scheduling and control activities
• Increased capacity
• Better use of human resources and more product variety
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Flexible manufacturing systems
• Philosophy of manufacturing: effectively controlling material flow through a

network of versatile production stations using an efficient and versatile material
handling and storage system.
• Workstation: capable of processing a variety of part types with relatively small change
over times.
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Advantages of flexible manufacturing systems
• Inherent flexibility, meeting demand fluctuations, changes in product mix

• Readjusting part routing and adjusting workstation capacity
• Shorter lead time, enhanced market competitiveness
• Reduction of set-up times, reduction of delivery times
• Reduction in work in process (WIP) inventory, corresponding reduction in floor space and
carrying costs
• Automation of work cells, elimination of human handling, better quality
• Entire production organization structured, better real-time control
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5. Improvements based on human resources and processes
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5. Methodology - Human Resources and Processes
• Total Quality Management - Focus on people, employee empowerment, quality circles

• Business Process Reengineering, Management Reengineering
• ISO 9000 - Certificate and recognition of a system in place
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Quality?
• Traditional: “fitness for purpose”, “conformance to specifications”

• ISO 8402-1994: “the totality of characteristics of an entity that bear on its ability to
satisfy the stated and implied needs of the customer”.
• Recently: “ability of a set of inherent characteristic of a product, system or process to
fulfill requirements of customers and other interested parties”.
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TQM implementation would:
• Develop deep understanding and conviction that quality is important.

• Develop a vision and promote it.
• Set clear directions based on data and analysis.
• Practice QC way of thinking.
• Provide continuing education for all.
• Ensure participation.
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Organization started defining:
• Vision (long-term goals)

• Mission (purpose of existence)
• Quality policy (ways to achieve the vision and mission)
• Core values
 Synchronizing the goals of the individuals towards the goal of the organization.
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6. Improvements based on information systems and decisions
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6. Methodology - Information Systems and Decisions
• Materials Resources Planning (MRP) - Inventory reduction, Consistency in BOM, Lot

sizing, pull systems
• Enterprise Resource Planning (ERP) - Integrating the various functions
• Customer Relationship Management (CRM) - Demand, real-time shopping
• Recommendation system (RS) - AI algorithm, machine learning, additional products
• Supply Chain Management - Decision making, integrating of production and
distribution
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7. Methodology - Business Perspective
• Business Process Reengineering

• Synchronous Manufacturing - Theory of Constraints, “The Goal” (Goldratt, 1984)
• Agility - Empowering the customer, cooperate and compete
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Business Process Reengineering
• “The FUNDAMENTAL rethinking and RADICAL redesign of business PROCESSES

to achieve DRAMATIC improvements in critical, contemporary measures of
performance, such as cost, quality, service, and speed”. (Hammer & Champy)
• Important aspects:
1. Customers take charge and are well informed.
2. Competition intensifies and technology creates opportunity for competition.
3. Change becomes constant due to increased need for new products and reduced time in
developing these.
E.g: E-commerce, smart cards, CRM websites, online educational portals, ATMs…
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Synchronous Manufacturing
• The goal of every organization if “to make money both now and in the future” (Goldratt,
1984).
• Measures of performance:
1. Throughput: Quantity of money generated by a firm through sales over a period of
time.
2. Inventory: Quantity of money invested in materials that the firm intends to sell.
3. Operating expenses: Quantity of money spent by the firm to convert inventory to
throughput over a period of time.
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Statistical fluctuations and Random events
• Statistical fluctuations: predictable

• Random events: unpredictable
• The lead time: the time between the release of material and the transformation of these
into finished goods.
• Work in process inventory: any material processed by some facility
• Throughput: the amount of product produced and sold.
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Principles in Synchronous Manufacturing
• Type of resources: bottlenecks (be utilized fully), non-bottlenecks (excess capacity)

• SM 1: Do not focus on balancing capacities, focus on balancing the flow.
• Bottleneck: Any resource whose capacity is less than or equal to the demand placed on it.
• Idle time: Time not used for set-up or processing
• Waste time: Time spent on processing materials that cannot be converted to throughput
• At a bottleneck resource (X), all the time available should be used in set-up or
production. Lost time in bottleneck is time lost in production for the entire plant. It is
necessary to reduce number of change overs in bottleneck machines and work with
buffers so that production increases.
• Non-bottlenecks (Y) have more capacity than demand. Time gained in these does not
contribute much and are in fact idle times.
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• SM 2: Marginal value of time at a bottleneck resource is equal to the throughput of the

product.
• SM 3: Marginal value of time at a non-bottleneck is negligible.
• SM 4: Level of utilization of a non-bottleneck resource is controlled by other constraints
in the system.
• SM 5: Resources should be utilized and not simply activated. Activation refers to
employment of a resource to process material, while utilization is activation that increases
throughput
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Capacity Constrained Resource (CCR)
• Any resource which if not properly scheduled and managed is likely to cause the actual
flow of the product through the plant to deviate from the planned product flow. A CCR
may or may not be a bottleneck.
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A Systematic Approach to Improve Performance
• It is necessary to understand the role of constraints in system performance and to build logically a
framework for improving the system performance. Goldratt suggested a five-step approach, which is
given below:
1. Identify the constraints in the system.
2. Determine how to exploit the constraints to improve the performance
3. Subordinate all the parts of the manufacturing system to support step 2.
4. Carry out steps necessary to improve the performance of the system.
5. If in the previous step, a constraint has been broken and a new constraint develops, go to step
1.
• The above five-step approach emphasizes the fact that there are only a few constraints that primarily
limit the firm's performance at any given time.
• This approach also provides a basic structure that can be used to implement synchronous manufacturing.
It is necessary to obtain a single unit flow in manufacturing where every piece moves to the next
machine immediately after completion in a machine. If this is not possible, small batches are to be
produced and transported. The production batch size can be more than the transfer batch size so that
material is fed continuously
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• SM 6: Transfer batch need not and should not be equal to process batch.
• SM 7: Process batch should be variable along its route and over time.
• It may be observed that the transfer batch is similar to the transporation kanban in the
just-in-time (JIT) environment and some of the ideas are common to both JIT and SM. It
may be noted that JIT is ideal for repetitive manufacturing, while SM can be used
anywhere. JIT solves problems as they come, while SM plans and eliminates problems.
• Synchronous Manufacturing is an all encompassing management philosophy that
includes a consistent set of principles, procedures and techniques where every action is
evaluated in terms of the common goal of the organization.
• SM is a currently evolving manufacturing philosophy that is being practiced by many
industries. An appropriate combination of SM, JIT and MRP will help organizations in
achieving their ultimate goal.
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Agility Principles
• The concept of agile manufacturing was coined to look beyond current best practice towards the enterprise of the
future.
• Agility is being used as an all-in-one phrase to describe the various changes and ideas being promoted, such as
lean production, business process re-engineering, time compression and so on.
• Agility is a dynamic, context-specific, aggressively changed embracing and growth-oriented in the concept. It is
about succeeding and about winning profits, market share and customer in the very centre of competitive storms
that many companies now fear. (Goldman, Nagel and Preiss, 1995)
• Agility is the capability of an organization to respond rapidly and effectively to unanticipated opportunities and to
proactively developed solutions for potential needs. It is the result of an organization and the people who comprise
it working together in ways which benefit the individual, the organization, and their customers.
• The important principles in agility are:
• Enriching the customer
• Leveraging human resources
• Cooperate to compete
• Create virtual organizations
• Organizations are increasingly practicing agility principles to make themselves more competitive and customer
oriented.
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Supply chain management
• Cost, quality, delivery and flexibility: traditional requirements from the products of a
firm. The firm leveraged on one of them, mostly at the expense of the others. (e.g. luxury
products or services)
• Firms do not trade off one priority against another, by try to simultaneously prioritize all
of them.
• A supply chain is defined as a network of facilities and distribution options that performs
the functions of procurement of materials, transformation of these materials into
intermediate and finished products, and the distribution of these finished supply chain
management (Lee & Billington, 1992).
• A supply chain is the sequence or network organizations - their facilities, functions, and
activities - that are involved in producing and delivering a product or service. The
facilities in a supply chain are factories, warehouse, processing centres, distribution
centres, retail outlets, offices…
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Supply chain management
• A typical supply chain would consist of three stages:

1. Purchase
2. Production
3. Distribution
• Internal supply chain
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Supply chain management: reasons
• Improve operations
• Increasing levels of outsourcing
• Increasing transportation costs
• Competitive pressures
• Increasing globalization
• Increasing importance of e-commerce
• Complexity of operations
• Managing inventories
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Supply chain decision
• Location decisions: geographic placement of production facilities, stocking points and

sourcing points.
• Production decisions: products? plants? allocation of suppliers to plants? plants to
distribution centres? distribution centres to customers? production scheduling?
construction of master production schedules? scheduling on machines? equipment
maintenance? workload balancing? quality control?
• Inventory decisions: amount of stock of raw material, semifinished and finished goods,
the quantities in process between locations, control policies, optimal level of order
quantities, reorder levels and safety stock levels.
• Transportation decisions: shipment sizes, routing and scheduling of equipment
(Ganeshan & Harrison, 1995)
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Types of supply chain
• Fisher (1997) categorized supply chains into two:

1. Efficient supply chain
2. Responsive supply chain
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Supply chain metrics
• On-time delivery
• Order fulfillment lead time
• Fill rate (fraction of demand met from stock)
• Service level (perfect order fulfillment)
• Supply chain management costs
• Total inventory days of supply
• Cash realization time
• Value added per employee
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Supply chain stages
• A typical supply chain may involve a variety of stages, including the following:
• Customers
• Retailers
• Wholesalers/distributors
• Manufacturers
• Component/raw material suppliers
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Source: Chopra, Meindl & Vir Kalra (2017)
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The objective of a supply chain
• The objective of every supply chain should be to maximize the overall value generated.
The value (also known as supply chain surplus) a supply chain generates is the difference
between what the value of the final product is to the customer and the costs the supply
chain incurs in filling the customer’s request.
• Consumer surplus
• Supply chain profitability
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Decision phases in a supply chain
1. Supply chain strategy or design

2. Supply chain planning
3. Supply chain operation
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Process views of a supply chain
1. Cycle View of Supply Chain Processes

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2. Push/Pull View of Supply Chain Processes
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Supply Chain Macro Processes in a Firm
• All supply chain processes discussed in the two process views and throughout this book
can be classified into the following three macro processes:
1. Customer Relationship Management (CRM): All processes at the interface between
the firm and its customers
2. Internal Supply Chain Management (ISCM): All processes that are internal to the
firm
3. Supplier Relationship Management (SRM): All processes at the interface between
the firm and its suppliers
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Delays - Raw materials
• Knowing that ROL has been reached

• Delays in placing orders
• Lead time
• Transportation
• Inspection
• Issue of items
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Delays - WIP
• Machine busy
• Machine breakdown
• Set up
• Processing
• Inspection and quality
• Rejects and rework
• Transportation
• Waiting for assembly
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Delays - Finished goods
• Assembly busy
• Line imbalance
• Finished goods inventory
• Delay in transportation
• Delay in selling the products
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Supply chain: trade-offs
• Inventory - transportation costs

• Lead time - transportation costs
• Product variety - inventory
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Bullwhip effect
• Bullwhip effect: phenomenon of variability magnification as we move from the customer

to the producer in the supply chain
• A slight change in consumer sales ripples backward as magnified oscillations upstream,
like the result of a flick of a bullwhip handle.
• Continuous replenishment: inventory is replaced frequently, as part of an ongoing
process
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Source: Jacobs & Chase (2018)
Bullwhip effect
Consumer sales Retailer orders start to show

are predictable variability as lot sizes and other
and steady. factors have an impact.
Farther up the supply chain

variability increases.
Source: Jacobs &

Chase (2018) 62
Bullwhip effect
• The process of redistribution of the extra inventory from upstream to downstream and
back results.
• Reducing excess inventory and bullwhip effect: information sharing.
• Reduce overall cost of the supply chain: coordination.
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Logistics
• The movement of materials and information within a facility and to incoming and
outgoing shipments of goods and materials.
• Logistics is the process of planning, implementing and controlling the efficient, effective
flow and storage of goods, services and related information from point of origin to point
of consumption for the purpose of conforming to customer requirements” - Council of
Supply Chain Management Professionals (CSCMP)
• Including transportation, warehousing, packaging, distribution planning and coordination,
data exchange on material movement and position, tracking.
• Challenges in designing and executing a good supply chain management system:
• Different organizations work together: size, culture, practices, trust, risk-taking ability,
governance, ownership models…
• Variability and uncertainty
• Time-consuming activity
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Role of logistics
• Inbound logistics: activities between external suppliers and the organization

• Outbound logistics: activities between external customers and the organization
• Operations within the organization: activities between internal suppliers and internal
customers.
• Link: https://www.youtube.com/watch?v=V4JRH3e4xrg
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Aim of logistics
• To achieve high customer satisfaction (time, product quality, quantity..) with low or
acceptable costs.
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Logistics activities
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Case studies
• Nike logistics center: https://www.youtube.com/watch?v=NkfHVYv5nUo

• How UPS Cargo Containers Work: https://www.youtube.com/watch?v=MyeqlieHhi4
• Logistics 3D Simulation - Samsung Cello Loading Optimizer:
https://www.youtube.com/watch?v=ymvpAo2tNnY
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Importance of logistics
Stock, money… Current Assets
ASSETS
Property,
Equipment, Fixed Assets
Plant…
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Importance of logistics
𝑃𝑟𝑜𝑓𝑖𝑡 𝑒𝑎𝑟𝑛𝑒𝑑
𝑅𝑒𝑡𝑢𝑟𝑛𝑜𝑛𝐴𝑠𝑠𝑒𝑡𝑠=
Customer
Sales
Satisfaction
𝐴𝑠𝑠𝑒𝑡𝑠𝑒𝑚𝑝𝑙𝑜𝑦𝑒𝑑
Operating Costs Profit Margin PROFIT
Product Features Price
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Example
ABC currently has sales of $ 20 mil. a year, with a stock level of 35% of sales. Annual
holding cost for the stock is 20% of value. Operating costs are $8 mil./ year and other assets
are valued at $15 mil. What is the current return on assets? How does this change if stock
levels are reduced to 25% of sales?
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Current trends in logistics: challenges
• Real-time sales management

• Transaction control
• Delivery visibility
• Changes of Customers.
• Changes of Competition
• Other changes in retail markets
• International trade continues to grow
• Organizations become to outsource peripheral activities and concentrate on their core
operations (3PL, 4PL Providers).
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Current trends in logistics: improving communication
• Electronic data interchange (EDI)

• Electronic point-of-sales data (EPOS)
• e-purchasing of e-procurement
• Support of EDI:
• Item coding (often bar-coding, QR codes)
• Electronic Fund Transfer (EFT)
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Current trends in logistics: improving customer service
• Lower lead-times
• Synchronized material movement
• Mass customization
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Current trends in logistics: other significant tendencies
• Globalization
• Reduced number of suppliers
• Concentration of ownership
• Outsourcing
• Make or Buy
• Cross-docking
• Direct delivery
• Stock reduction methods
• Increasing environmental concerns
• More collaboration along the supply chain
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Role of manufacturing and operations management
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Regular time
capacity (RT)
New
Products Capacity Overtime
products Demand capacity (OT)
forecasting
Production plan Outsourcing
(each period)
Time allocated to
Rus h
Disaggregation Machines
various products
order
s
Quality Maintenance
Materials Shift,
Scheduling weak
Inventory
Production
Use
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What Is Operations and Supply Chain Management?
Operations and supply chain management (OSCM) is defined as the design, operation,
and improvement of the systems that create and deliver the firm’s primary products
and services. Like marketing and finance, OSCM is a functional field of business with
clear line management responsibilities. OSCM is concerned with the management of the
entire system that produces a product or delivers a service.
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Distinguishing Operations versus Supply Chain Processes
• The terms operations and supply chain take on special meaning. Operations refers to
manufacturing and service processes used to transform the resources employed by a firm
into products desired by customers.
• Supply chain refers to processes that move information and material to and from the
manufacturing and service process of the firm. These include the logistics processes that
physically move product and the warehousing and storage processes that position
products for quick delivery to the customer. Supply chain in this context refers to
providing products and service to plants and warehouses at the input end and also the
supply of products and service to the customer on the output end of the supply chain.
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Categorizing Operations and Supply Chain Processes
Source: Jacobs & Chase (2018) 81

1. Planning consists of the processes needed to operate an existing supply chain

strategically. Here a firm must determine how anticipated demand will be met with
available resources. A major aspect of planning is developing a set of metrics to monitor
the supply chain so that it is efficient and delivers high quality and value to customers.
2. Sourcing involves the selection of suppliers that will deliver the goods and services
needed to create the firm’s product. A set of pricing, delivery, and payment processes
are needed, along with metrics for monitoring and improving the relationships between
partners of the firm. These processes include receiving shipment, verifying them,
transferring them to manufacturing facilities, and authorizing supplier payments.
3. Making is where the major product is produced or the service provided. The step
requires scheduling processes for workers and the coordination of material and other
critical resources such as equipment to support producing or providing the service.
Metrics that measure speed, quality, and worker productivity are used to monitor these
processes.
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4. Delivering is also referred to as logistics processes. Carriers are picked to move

products to warehouses and customers, coordinate and schedule the movement of goods
and information through the supply network, develop and operate a network of
warehouses, and run the information systems that manage the receipt of orders from
customers and the invoicing systems that collect payments from customers.
5. Returning involves processes for receiving worn-out, defective, and excess products
back from customers and support for customers who have problems with delivered
products. In the case of services, this may involve all types of follow-up activities
required for after-sales support.
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Differences Between Services and Goods
1. The first is that a service is an intangible process that cannot be weighed or measured,
whereas a good is a tangible output of a process that has physical dimensions.
2. The second is that a service requires some degree of interaction with the customer for
it to be a service.
3. The third difference is that services, with the big exception of hard technologies (such
as ATMs) and information technologies (such as answering machines and automated
Internet exchanges) are inherently heterogeneous—they vary from day to day and even
hour to hour as a function of the attitudes of the customers and the servers.
4. The fourth difference is that services as a process are perishable and time dependent,
and unlike goods, they can’t be stored.
5. And fifth, the specifications of a service are defined and evaluated as a package of
features that affect the five senses.
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Four features are:
1. Supporting facility (location, decoration, layout, architectural appropriateness,

supporting equipment)
2. Facilitating goods (variety, consistency, quantity of the physical goods that go with the
service; for example, the food items that accompany a meal service)
3. Explicit services (training of service personnel, consistency of service performance,
availability and access to the service, and comprehensiveness of the service)
4. Implicit services (attitude of the servers, atmosphere, waiting time, status, privacy and
security, and convenience)
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The Goods - Services Continuum
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The Goods - Services Continuum
• Pure goods industries have become low-margin commodity businesses, and in order to
differentiate, they are often adding some services.
• Core goods providers already provide a significant service component as part of their
businesses.
• Core service providers must integrate tangible goods.
• Pure services, such as those offered by a financial consulting firm, may need little in the
way of facilitating goods, but what they do use—such as textbooks, professional
references, and spreadsheets—are critical to their performance.
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Product - Service Bundling
• Product - service bundling refers to a company building service activities into its
product offerings for its customers. Such services include maintenance, spare part
provisioning, training, and, in some cases, total systems design and R&D.
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The Major Concepts That Define The OSCM Field
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The Major Concepts That Define The OSCM Field
• Manufacturing strategy paradigm

• Lean Manufacturing, JIT, and TQC
• Service Quality and Productivity
• Total Quality Management and Quality Certification
• Business Process Reengineering
• Six Sigma Quality
• Supply Chain Management
• Electronic Commerce
• Sustainability and the Triple Bottom Line
• Business Analytics
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Current Issues in Operations and Supply Chain Management
• Adapting to rapidly changing global business relationships: China and other Asian
suppliers, low-cost products, economic trade imbalances.
• Accommodating the shift to online retail purchasing: online shopping and purchasing
practices; physical reconfiguration of retail stores, warehouses, and other facilities.
• Optimizing global supplier, production, and distribution networks: real-time data and
artificial intelligence.
• The speedy adoption of new technology and automation: work from home, automatic
trucks, robots…
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Efficiency, Effectiveness, and Value
• Efficiency means doing something at the lowest possible cost.

• Effectiveness means doing the right things to create the most value for the company.
• Related to efficiency and effectiveness is the concept of value, which can be abstractly
defined as quality divided by price.
• A common set of financial indicators to benchmark companies are called management
efficiency ratios. Benchmarking is a process in which one company studies the
processes of another company (or industry) to identify best practices.
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Efficiency Measures
• Income per employee

• Revenue (or sales) per employee
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Receivables turnover ratio
• The receivables turnover ratio measures a company’s efficiency in collecting its sales on
credit. Accounts receivable represent the indirect interest-free loans that the company is
providing to its clients. A higher receivables ratio implies either that the company operates
on a cash basis or that its extension of credit and collection methods are efficient. Also, a
high ratio reflects a short lapse of time between sales and the collection of cash, while a low
number means collection takes longer. The lower the ratio, the longer receivables are being
held and the higher the risk of them not being collected.
• A ratio that is low by industry standards will generally indicate that the business needs to
improve its credit policies and collection procedures. If the ratio is going up, either
collection efforts are improving, sales are rising, or receivables are being reduced. From an
operations and supply chain perspective, the firm may be able to impact this ratio by such
things as the speed of delivery of products, accuracy in filling orders, and amount of
inspection the customer needs to do. Factors such as the outgoing quality of the product and
how customer orders are taken, together with other order-processing activities, may have a
huge impact on the receivables turnover ratio. This is particularly true when Internet
catalogs are the main interface between the customer and the firm.
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Inventory turnover ratio
• This ratio measures the company’s efficiency in turning its inventory into sales. Its
purpose is to measure the liquidity or speed of inventory usage. This ratio is generally
compared against industry averages. A low inventory turnover ratio is a signal of
inefficiency, because inventory ties up capital that could be used for other purposes. It
might imply either poor sales or excess inventory relative to sales. A low turnover ratio
can indicate poor liquidity, possible overstocking, and obsolescence, but it may also
reflect a planned inventory buildup in the case of material shortages or in anticipation of
rapidly rising prices. A high inventory turnover ratio implies either strong sales or
ineffective buying (the firm may be buying too often and in small quantities, driving up
the buying price). A high inventory turnover ratio can indicate better liquidity, but it can
also indicate shortages or inadequate inventory levels, which may lead to a loss in
business. Generally, a high inventory turnover ratio when compared to competitors’ is
good. This ratio is controlled to a great extent by operations and supply chain processes.
Factors such as order lead times, purchasing practices, the number of items being stocked,
and production and order quantities have a direct impact on the ratio.
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Asset turnover ratio
• Asset turnover measures a firm’s efficiency at using its assets in generating sales revenue
- the higher the number, the better. It also indicates pricing strategy: Companies with low
profit margins tend to have high asset turnover, while those with high profit margins have
low asset turnover. This ratio varies significantly by industry, so comparisons between
unrelated businesses are not useful. To a great extent, the asset turnover ratio is similar to
the receivables turnover and the inventory turnover ratio since all three involve the
investment in assets. Asset turnover is more general and includes the plants, warehouses,
equipment, and other assets owned by the firm. Since many of these facilities are needed
to support the operations and supply chain activities, the ratio can be significantly
impacted by investments in technology and outsourcing, for example.
97
Discussion
98
Question
Consider the following financial data from the past year for Midwest Outdoor Equipment
Corporation.
Annual sales 24,324,000
Net income 2,975,000
Cost of goods sold 12,600,000
Total assets 10,550,000
Inventory 2,875,000
Receivables 3,445,000
a. Compute the profit margin.

b. Compute the asset turnover ratio.
c. Compute the return on assets ratio.
99
Question
The Midwest Outdoor Equipment Corporation (see above question) has entered into a new
contract with a major supplier of raw materials used in the manufacturing process. Under
the new arrangement, called vendor managed inventory, the supplier manages its raw
material inventory inside the manufacturer’s plant and bills only the manufacturer when the
manufacturer consumes the raw material. This is expected to reduce total assets by $2
million. What is the expected change in return on assets?
100
Question
A company has recently implemented an automated online billing and payment processing
system for orders it ships to customers. As a result, it has reduced receivables by $500,000.
What would be the expected directional change in the asset turnover ratio?
101
Question
Consider the following financial data from the past year for Midwest Outdoor Equipment
Corporation. Gross income $25,240,000
Total sales $24,324,000
Total credit sales 18,785,000
Net income 2,975,000
Cost of goods sold 12,600,000
Total assets 10,550,000
Average inventory 2,875,000
Average receivables 3,445,000
a. Compute the receivable turnover ratio.

b. Compute the inventory turnover ratio.
c. Compute the asset turnover ratio.
102
Question
A manufacturing company has entered into a new contract with a major supplier of raw
materials used in the manufacturing process. Under the new arrangement, called vendor
managed inventory, the supplier manages its raw material inventory inside the
manufacturer’s plant, and only bills the manufacturer when the manufacturer consumes the
raw material. How is this likely to affect the manufacturer’s inventory turnover ratio?
103
Question
A company has recently implemented an automated online billing and payment processing
system for orders it ships to customers. As a result, it has reduced the average number of
days between billing a customer and receiving payment by 10 days. How will this affect the
receivables turnover ratio?
104
Homework 1
• Collecting financial data of four listed companies in the same industry in Vietnam.
• Computing below criteria for each company:
• Profit margin
• Income per employee
• Revenue (or sales) per employee
• Receivable turnover ratio
• Inventory turnover ratio
• Asset turnover ratio
• What are your comments on efficiency measures of those companies?
105
The Supply Chain Improvement Model (SCIM)
• The SCIM uses base data from a company’s income statement and the balance sheet. The
focus here is on data that is largely dependent on OSCM functions in the firm. From the
income statement: Annual sales, Labor, Material, Overhead, and Other costs (typically
Sales and Administrative cost) accounts are used. From the balance sheet: Cash,
Inventory, Receivables, Fixed assets (these are typically Plant, Equipment, and other
assets needed to support OSCM functions), are used.
• The following are equations that relate these accounts:
 Cost of good sold = Labor + Material + Overhead
 Total costs = Cost of goods sold + Other costs
 Net income = Annual sales − Total costs
 Current assets = Inventory + Receivables + Cash
 Total assets = Current assets + Fixed assets
 Profit margin = Net income/Annual sales
 Asset turnover = Annual sales/Total assets
 Return on assets (ROA) = Profit margin × Asset turnover
106
Example
1. Calculate the profit margin, asset

turnover, and return on assets of
the company as presented in
Exhibit 1.6.
107
Example
2. Assume that the change suggested is only to the single account, and the other accounts
are the same as presented in Exhibit 1.6. The change can be described in simple “up,”
“down,” or “does not change” terms.
Profit Asset Return on

Change
Margin Turnover Assets
Automotive sales increase by 25% (no changes in
other costs).
Research and development costs decrease by 50%.
The investment in inventory is reduced by 50%.
The company builds a new plant that cost $3 billion.
Receivables are reduced.
108
Example
3. Analyze the impact of the increase in sales over the next year: eCar expects that
automobile sales will increase significantly over the next year. During the year covered
by the data in Exhibit 1.6, eCar produced and delivered about 370,000 cars. eCar
expects that sales will increase to about 450,000 cars next year. Consider the following
questions related to the impact of this increase in sales.
a. Using your spreadsheet, calculate the average revenue (sales price) and cost of each car
produced last year. Base the cost estimate on the automotive sales COGS (this reflects
the variable cost for each car).
b. Assume that the relationships between average revenue and cost stay the same next year
(revenue/ car and variable cost/car stay the same) and that nothing else changes in the
financials. If sales do improve to 450,000 cars, what would be the expected profit
margin, asset turnover, and return on assets if it were possible for the company to do
this?
c. What questions might you explore with management to evaluate the assumptions that
were made in your calculations?
109
Example
4. Analyze the impact of building a more efficient manufacturing plant: eCar recognizes
that their current manufacturing plant is not very efficient. Investing in their plant
would allow greater use of robots and other automation, thus reducing the cost to
produce cars. This would be a major change for the company and would have broad
implications for their financials. They anticipate that they could use their current cash to
pay for the investment. Management also expects to raise the average revenue on each
car to $65,000 by offering more options. They expect the average cost to build the cars
to go down to $40,000 per car. This reduction is due to the reduction of some labor and
better integration of the electronics in the car. They expect to be able to sell 450,000
cars next year.
110
Example
a. Return to the original data given in Exhibit 1.6. Assume that they use $2 billion of their
cash and invest it in new equipment. Also, assume that they can raise the average
revenue and lower the average cost as stated previously. What would be the expected
profit margin, asset turnover, and return on assets for the company after the change?
b. Looking at different worst- and best-case scenarios is often good. What if eCar can only
increase the revenue per car to $58,000 and only reduce the cost to $42,000? What
would be the expected profit margin, asset turnover, and return on assets if this
happened (assume they make the investment in the equipment)?
c. What questions might you explore with management to evaluate the assumptions that
were made in your calculations?
111
Homework 2
• Replicating above example for a listed companies in Vietnam.
112

Introduction To Operations and Supply Chain Management

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Introduction To Operations and Supply Chain Management

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Operations and supply

Nguyen Van Vien

• Changing market conditions

• Once satisfied with a black car

• Today’s customer requirements are to have products with:

• The war - Resource Availability

• Adam Smith and James Watt

• Ford and Speed

• Line layout - Product layout continuous high volume production

• Group technology, Cellular manufacturing - Reorganizing machines, grouping of parts

• Fundamental principle: similar “things” should be done similarly.

• Reduced material handling time

• Increased number of machines

• Philosophy of manufacturing: planned elimination of all waste, continuous

• Philosophy of manufacturing: effectively controlling material flow through a

• Inherent flexibility, meeting demand fluctuations, changes in product mix

• Total Quality Management - Focus on people, employee empowerment, quality circles

• Traditional: “fitness for purpose”, “conformance to specifications”

• Develop deep understanding and conviction that quality is important.

• Vision (long-term goals)

• Materials Resources Planning (MRP) - Inventory reduction, Consistency in BOM, Lot

• Business Process Reengineering

• “The FUNDAMENTAL rethinking and RADICAL redesign of business PROCESSES

• Statistical fluctuations: predictable

• Type of resources: bottlenecks (be utilized fully), non-bottlenecks (excess capacity)

• SM 2: Marginal value of time at a bottleneck resource is equal to the throughput of the

• A typical supply chain would consist of three stages:

• Location decisions: geographic placement of production facilities, stocking points and

• Fisher (1997) categorized supply chains into two:

1. Supply chain strategy or design

Source: Chopra, Meindl & Vir Kalra (2017)

• Knowing that ROL has been reached

• Inventory - transportation costs

• Bullwhip effect: phenomenon of variability magnification as we move from the customer

Consumer sales Retailer orders start to show

Farther up the supply chain

Source: Jacobs &

• Inbound logistics: activities between external suppliers and the organization

• Nike logistics center: https://www.youtube.com/watch?v=NkfHVYv5nUo

Stock, money… Current Assets

Product Features Price

• Real-time sales management

• Electronic data interchange (EDI)

Source: Jacobs & Chase (2018) 81

1. Planning consists of the processes needed to operate an existing supply chain

4. Delivering is also referred to as logistics processes. Carriers are picked to move

1. Supporting facility (location, decoration, layout, architectural appropriateness,

• Manufacturing strategy paradigm

• Efficiency means doing something at the lowest possible cost.

• Income per employee

a. Compute the profit margin.

a. Compute the receivable turnover ratio.

1. Calculate the profit margin, asset

Profit Asset Return on

• Replicating above example for a listed companies in Vietnam.

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