Slides for Chapter 1

(Instructors are welcome to

change the style of the
slides / delete my name)

Prof. Christian Terwiesch Slide 1 OPIM631, The Wharton School

 The Economic Consequences of the Supply-
Demand Mismatch are Severe
Air travel Emergency room Retailing Iron ore plant Pacemakers

Supply Seats on specific Medical service Consumer Iron ore Medical equipment
flight electronics

Demand Travel for specific Urgent need for Consumers buying a Steel mills Heart surgeon
time and destination medical service new video system requires pacemaker
at exact time and
location

Supply Empty seat Doctors, nurses, and High inventory costs; Prices fall Pacemaker sits in
exceeds infrastructure are few inventory turns inventory
demand under-utilized

Demand Overbooking; Crowding and delays Foregone profit Prices rise Foregone profit
exceeds customer has to take in the ER, potential opportunity; (typically not
supply different flight (profit diversion of consumer associated with
loss) ambulances dissatisfaction medical risk)

Actions to Dynamic pricing; Staffing to predicted Forecasting; quick If prices fall too low, Distribution system
match supply booking policies demand; priorities response production facility is holding pacemakers
and demand shut down at various locations

Managerial About 30% of all Delays in treatment or Per unit inventory Prices are so Most products
importance seats fly empty; a 1- transfer have been costs for consumer competitive that the (valued $20k) spend
2% increase in seat linked to death; electronics retailing primary emphasis is 4-5 months waiting in
utilization makes commonly exceed on reducing the a trunk of a sales
difference between net profits. cost of supply person before being
profits and losses used

Prof. Christian Terwiesch Slide 2 OPIM631, The Wharton School

Who Cares About Inventory?

Apparently no one…. That’s why there is $1.16 trillion of it in the US economy.

Picture from MOHI

Prof. Christian Terwiesch Slide 3 OPIM631, The Wharton School

And the Real Economic Impact is Worse

In service environments inventory (flow times) are even more important, but
inventory never shows up on the financial records.
Prof. Christian Terwiesch Slide 4 OPIM631, The Wharton School
 The Dilemma of Almost Every Firm:
Supply Does Not Match Demand
• Inventory results from a mismatch between supply and demand

• Mismatch can take one of the following two forms

Demand waits for supply Supply waits for demand

(inventory=waiting customers) (inventory=goods or resources)

• Mismatch reflects the fact that capacity is more rigid than demand

• Analyzing processes helps us to create a better match

- if processes were instantaneous (Flow Time=0)
- and had unlimited capacity (Flow Rate=infinity)
Supply would always be able to meet demand
Prof. Christian Terwiesch Slide 5 OPIM631, The Wharton School
What Can Ops Management (This Course) Do to Help?
Step 1: Help Making Operational Trade-Offs
Responsiveness
High

Very short waiting times,

Comes at the expense of
Frequent operator idle time

Trade-
off Long waiting times,
yet operators are almost
fully utilized
Low

Low labor High labor Labor Productivity

productivity productivity (e.g. $/call)

Example: Call center of Deutsche Bundesbahn

- objective: 80% of incoming calls wait less than 20 seconds
- now (early 2003): 30% of incoming calls wait less than 20 seconds
- Problem: staffing levels of call centers / impact on efficiency

OM helps: Provides tools to balance responsiveness with efficiency

Prof. Christian Terwiesch Slide 6 OPIM631, The Wharton School
What Can Ops Management (This Course) Do to Help?
Step 2: Overcome Inefficiencies
Responsiveness

High
Current frontier
In the industry
Competitor A

Eliminate
inefficiencies
Competitor C

Low
Competitor B

Low labor High labor Labor Productivity

productivity productivity (e.g. $/call)

Example:
• Benchmarking shows the pattern above
• Don’t just manage the current system… Change it!

OM helps: Provides tools to identify and eliminate inefficiencies

Prof. Christian Terwiesch Slide 7 OPIM631, The Wharton School
What Can Ops Management (This Course) Do to Help?
Step 3: Evaluate Proposed Redesigns/New Technologies
Responsiveness

High

Redesign
process

New frontier
Current frontier
In the industry
Low

Low labor High labor Labor Productivity

productivity productivity (e.g. $/call)
Example:
• What will happen if we develop / purchase technology X?
• Better technologies are always (?) nice to have, but will they pay?

OM helps: Evaluates system designs before they occur

Prof. Christian Terwiesch Slide 8 OPIM631, The Wharton School

 Operations
Management:
An Overview

Prof. Christian Terwiesch Slide 9 OPIM631, The Wharton School

Operations Management: 30,000 Ft Overview
For physical goods

Product Purchasing /
Production Fulfillment
Design Sourcing

• Define user needs

• Translate to specs
• Generate concepts
• Select concepts
• Engineer / develop
• Project management
• Design-to-cost: 80% of
costs are determined
in design

Prof. Christian Terwiesch Slide 10 OPIM631, The Wharton School

 Example of Target Costing: P&G’s SpinBrush

• Four entrepreneurs who had developed a

lollipop that spins powered by batteries

• Took a trip to Wal-Mart looking for products

that are “too expensive” for
what they do

• Typically price point at that time: $50

• Target cost set at $5.00 retail

• Focus group results: 23 out of 24 “definite buy”

• Business sold to P&G after 2 years for $475 Million

• Best selling toothbrush in the US (manual or electric)

Prof. Christian Terwiesch Slide 11 OPIM631, The Wharton School

Operations Management: 30,000 Ft Overview
For physical goods

Product Purchasing /
Production Fulfillment
Design Sourcing

• Define user needs • Define product

• Translate to specs • Obtain quotes
• Generate concepts • Work with suppliers
• Select concepts • Streamline supply
• Engineer / develop base
• Project management • Evaluate total cost
• Design-to-cost of ownership

Prof. Christian Terwiesch Slide 12 OPIM631, The Wharton School

Cost Structure of an Automotive Company
100% Other
90% Overhead
Warranty
80% Quality
70%
60% Assembly and other
Labor costs
50% Purchased Parts and
40% parts and material
assemblies costs Logistics costs
30%
20%
10% Material costs
0%
Final Including Including Rolled-up
Assembler’s Tier 1 Tier 2 Costs over
cost Costs Costs ~ 5 Tiers

• Vast majority of costs are driven by purchasing (design determines purchasing costs)
• Understand cost structures
• Economic tools of negotiations / auctions
• Streamline supply base
• Help suppliers develop their processes: by working with suppliers and sub-suppliers,
costs can be improved (link to lean) Source: Whitney / DaimlerChrysler

Prof. Christian Terwiesch Slide 13 OPIM631, The Wharton School

Operations Management: 30,000 Ft Overview
For physical goods

Product Purchasing /
Production Fulfillment
Design Sourcing

• Define user needs • Define product • Design and Improve • Deliver goods
• Translate to specs • Obtain quotes internal processes to the customer
• Generate concepts • Work with suppliers • Manage throughput • Forecasting of demand
• Select concepts • Streamline supply • Improve efficiency • Dealing with demand
• Engineer / develop base • Quality uncertainty
• Project management • Evaluate total cost • Lean operations • Risk reduction and
• Design-to-cost of ownership • Toyota management
• Design of supply chain

For services

Product Purchasing /
Production and fulfillment
Design Sourcing

Prof. Christian Terwiesch Slide 14 OPIM631, The Wharton School

Operations Management Differs Across Industries

Product Purchasing /
Design Sourcing Productio Fulfillment
n

Automotive +++ +++ +++ +++

Steel - - +++ -

Hospital - - +++ +++

Medical devices / +++ - - +++

Pharmaceuticals

Retailer - +++ - +++

Financial services - IT +++ +++

Very different challenges and skill-sets are required across industries

Prof. Christian Terwiesch Slide 15 OPIM631, The Wharton School

Overview of OPIM
OPIM631: Process Management / Toyota / Lean
- Introduction, Key performance measures
- Understanding a business process
- Link between operations and finance
- Labor costs / productivity / cost estimates
- Quality Problems and learning
- Lean operations / Toyota
- Service examples
- Waiting time problems
- Dealing with Throughput loss due to variability

OPIM632: Supply Chain Management

- Dealing with uncertain demand and forecasts
- Placing smart bets
- Understanding supply chains end-to-end
- Risk Management
- Revenue Management

OPIM654: Product Design and Development

OPIM650: Valuing Operational Performance
Prof. Christian Terwiesch Slide 16 OPIM631, The Wharton School