Summary of the OM lectures. During lecture 5 we had the mid-term exam, hence there is no summary of lecture 5. If figures in this summary are unreadable (too small), they can be found in the lecture slides. I strongly recommend watching the pre-recorded lectures (lecture 3 and 4).
Summary Operations Management
Lecture 1 – Introduction to OM
Operations Management = (OM & SCM are interchangeable/~ same thing)
- Managing the process of production
- Ensuring efficient & effective business operations
- Using as few resources as needed (to minimise cost)
- Meeting customer requirement
Supply Chain Management (SCM) = product is produced and distributed at the right quantities, to the right locations, and at
the right time, in order to minimise system-wide costs while satisfying service level requirements
→ The 5R’s of SCM: Right product, Right quantity, Right place, Right time, Right price
→ Figure: supplier supplies raw material transported to manufacturers that manufacture products products
transported to warehouses/distribution centres transported to retailers customers buy product from retailer
→ Costs: raw material costs, transportation costs, manufacturing costs, transportation costs, inventory costs
Everyone has inventory costs: suppliers, manufacturers (?), warehouse/distribution centre, retailer
To have low operations costs, supply chain partners (e.g. supplier) also need to have low costs
Competition between 2 supply chains, instead of between 2 companies
Supply chain is only as strong as its weakest points
→ Reduce operations cost: higher profit margin or lower pricing (to destroy competition)
→ SC – left to right: material flow, value-added services
SC – right to left: funds/demand flow
SC – both directions: information flow, reuse/maintenance/after sales service flow
Example – Pfizer vaccine: manufacturing process requires 280 components and relies upon 25
suppliers located in 19 different countries
Figure – example of cereal supply chain: ----------------------------------------------------------------------->
Flows: Material flow | Finance flow | Information flow
Supply chain decisions – Operation strategy:
- Who do you want to select as supplier? – depends on: Product design, Customer value
proposition & Quality requirements
- Who do you want to select as manufacturer? – depends on: Quality management
- How often do you want to ship your product to distribution centres
- Where do you want to sell it? – retail store or online (= Channels to market), Revenue management, Technology
Challenges in OM:
1. Identify the appropriate operations strategy
Different products, channels or customers require different types of SCs
Different product characteristics suggest different strategies
Conflicting objectives: cost, time and service levels
2. Match supply and demand
Raw material shortages, supply disruption, productivity inefficiencies
Sales shortfall, larger-than-anticipated inventories, cannibalisation of old product by the new product
Proactive inventory management: don’t keep lots of inventory (reduce cost), but keep some at the right time
3. Inventory and back-order levels fluctuate considerably across the supply chain
Back-order = order is more than you supplied (not enough inventory)
→ Bullwhip effect = a distribution channel phenomenon in which distorted
information from one end of the supply chain to the other leads to
tremendous inefficiencies
Causes of bullwhip effect: demand forecast updating, order batching, price fluctuation, rationing and shortage
gaming
How to counteract the bullwhip effect: information sharing, break order batches, stabilise prices, eliminate
gaming in shortage situations, risk sharing
4. Forecasting is not a solution Forecasts are always wrong
5. Demand is not the only source of uncertainty
Production capacity, transportation times, component availability, natural disaster, regulation
6. Recent trends on cost reduction increase risks significantly
Lean manufacturing, outsourcing, offshoring
E.g. Failed implementation of Lidl’s new inventory management system implementation took 7 years & €500m
Key issues in OM:
Customer Value
What does the customer value? How to measure it? How does it influence the operations strategy?
Distribution Strategies
How much should a firm centralise or decentralise its distribution system?
Distribution Network Configuration
, How to select warehouse locations and capacities, determine production levels for each product at each plant, and
set transportation flows between facilities?
Production Sourcing
Where to buy raw materials? Where to produce each component? And where to assemble?
Inventory Control
Decide at what point to reorder a new batch of the product and how much to order?
Supply Contracts
How to use supply contracts to optimise the entire supply chain performance?
Supply Chain Integration and Strategic Partnering
What level of integration is needed? How can integration be achieved successfully? What type of partnerships
should be implemented?
Smart Pricing
How to use pricing to influence demand and improve the bottom line?
Underlying all of these foundations is technology well-used technology keeps a firm ahead of the curve
2 types of distribution network configuration:
a. Small number of centrally located warehouses
+ Risk pooling to increase service levels and decrease inventory costs
- Higher outbound transportation costs and longer delivery lead time
b. Large number of warehouses closer to the end customers/retailers
+ Closer to end customers to decrease outbound transportation costs and delivery lead times
- Higher inventory levels, decreased economies of scale, increased warehousing expense, and potentially increased
inbound transportation expenses
KFC case – switched from Bidvest (multiple small distribution sites) to DHL warehouse (single large warehouse) ran out of
fresh meat cannot use same model to deliver different products (DHL model for car parts ≠ model for food-distribution)
Lecture 2 – Customer Value & Matching Products, Markets and Strategies
Customer Value = the way customers perceive the company’s offerings, including products, services and other intangibles
Requires learning: Why customers purchase? Why customers continue to purchase? Why customers defect from a
company? What are their preferences and needs and how can they be satisfied? Which customers are profitable and
having potential for revenue growth, and which customers may lead to losses?
The operations strategy that a company deploys must be driven by the value proposition that the firm provides to its
customers
What should the operations strategy be if the customer values low prices more than choice/wants superior customer
support service/prefers next day delivery?
Example: Dell vs. Hewlett Packard
- In Dell’s business model, customer experience is the value proposition Dell deploys an assemble-to-order strategy
- HP’s business model emphasizes a competitive pricing strategy operations strategy must focus on cost and efficiency
5 Dimensions of Customer Value:
Product innovation speed Functional products vs. Innovative products
- Functional products = slow innovation speed (e.g. groceries)
- Innovative products = high innovative speed – 1 year (e.g. smartphone)
Can also be both: e.g. clothing: fast fashion = innovative (1 season), basics
Product selection and availability why customers purchase from you
- Sales channel: online OR physical retail store depends on width of product selections
- “the long tail” phenomena = no matter the size of your product selection, only 20% of the
products you sell will be ‘hits’ and will make 80% of your total sales & 80% are niche
products and will only make up 20% of your total sales
Only sell hits – retail store | Also sell long tail products – online
Niche product often have lower profit margins, but no retail store
- Omni channel = single transactions have to utilise both channels (buy online, pick up in
store)
The Halo effect = physical retail helps online and vice versa
Price and brand going for cheaper or buying from your favourite brand
- Competition on price requires tight control of operations cost
- Customer utility: u=m s−p m = consumer taste (explore market) s = quality/brand p = product price
Company can increase quality/brand (s) or decrease price (p)
Value-added services
- After-sales service, preventative maintenance
- Traditional supply chain = sell physical products
- Service supply chain = offers service
, Relationship and experiences (very difficult dimension; intangible/unmeasurable)
- Reducing the likelihood that customers will switch
- Building specific user profiles
- Offering tailored solutions
Operations Strategy:
- Push, Pull or Push-Pull strategy (push is cheaper than pull)
- Pull SC processes: execution is initiated in response to a customer order (Responsive Strategy)
- Push SC processes: execution is initiated in anticipation of a customer order (Efficient Strategy)
- Locating the Push-Pull boundary: it is always a combination between Push & Pull
Push-Pull strategy can either start with Push or Pull & can have multiple boundaries
(pushes and pulls)
- Example – Walmart: focus on everyday low price minimise cost large portion of operations must be Push strategy
Example – Dell: focus on PC customisation maximise service level large portion of operations must be Pull strategy
Case study – Made to Measure
Tal Apparel (shirt manufacturer in Hong Kong) works closely with JC Penney (retailer/customer of Tal) in the US have a
computer programme in which they can specifically estimate how many shirts are required in their inventory based on the
sales data Tal apparel directly orders shirts and sends them to each store in the US lower cost & more efficient
J.C. Penney’s customers value: fast fashion, low price
J.C. Penney’s operations strategy: previous – more push-based strategy
Problem: operations strategy not in line with customer value proposition J.C. Penney focuses on innovative products
no good demand forecast cannot act quickly / wait for order to arrive
Solution – to add value to offering: vendor-managed inventory (VMI; = make-to-order) = responsive strategy
pull strategy: more expensive, but more responsive to customer orders (innovative product – can’t sell it next season)
Benefits of VMI for J.C. Penney: less likely a good will become out of stock | reducing inventory costs significantly (can’t
sell it next season) | less likely goods will have to sell at a discount
Benefits for Tal: decreasing the magnitude of the bullwhip effect | more efficient manufacture planning | stand out
from the competition
Potential risks for J.C. Penney: relying too much on supplier what is left of your value in the SC (can be replaced)
What can Tal do by using VMI?: use J.C. Penney as their outlet/retailer, to sell their own clothes without physical shop
Matching Products, Channels and Strategies – identify appropriate strategy for a particular product/channel
3 factors when evaluating what is the most appropriate strategy for product/channel: (constraints and/or opportunities)
1. Impact of Uncertainty:
- Locating the Push-Pull boundary based on uncertainty
- Low uncertainty use Push strategy (save production & delivery cost)
- High uncertainty use Pull strategy (you don’t know what demand will be)
2. Impact of Economies of Scale (EoS):
- Locating the Push-Pull boundary based on economics of scale (EoS)
- Low EoS use Pull strategy
- High EoS use Push strategy
3. Impact of Lead Time: (= allowed response time)
- Locating the Push-Pull boundary based on Lead Time
- Short Lead Time Pull strategy
- Long Lead Time Push strategy
Identifying the Appropriate Strategy for a Particular Product
Figure: product A – Pull | product B – Push | product C – Push-Pull | product D – Pull-Push
Product C & D: transport it with sth you know will sell to utilise the EoS in transportation
Figure – lead time: product A – Pull | product B – Push | product C – Pull-Push | product D – Push-Pull
Identifying the Appropriate Strategy for a Particular Channel: ---------------------------------------------->
- Retail channel: Push strategy – functional products, low demand uncertainty, long lead time
- Online channel: Pull strategy – niche products, high product variety, low forecast accuracy,
short lead time (responsive SC)
Different portion of the SC may require different strategies and identifying the appropriate one
requires a holistic, global view of the entire chain
When the same product is offered through multiple channels, different strategies may apply
Case study – Dell
More costly path in manufacturing causes Dell to take less advantage of contract manufacturers & rely more on third party
integrators causes lower quality due to lack of testing & difficulty in forecasting for capacity for third party integrators
Contract manufacturers: strategy that reduces labour costs of manufacturing
Dell wants customers to be able to customise their products 2 different methods: completion up to manufacturing level 5
(US) & manufacturing level 6 (China) level 5 manufacturing = more expensive (US labour cost & transportation costs higher)
Dell’s value proposition = customers experience & Dell’s operations strategy = responsiveness through configure-to-order
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