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Slides for Chapter 1 Introduction (Instructors are welcome to change the style of the slides / delete my name)

McGraw-Hill/Irwin

Copyright 2009 by The McGraw-Hill Companies, Inc. All rights reserved

The Economic Consequences of the SupplyDemand Mismatch are Severe


Air travel Supply Seats on specific flight Travel for specific time and destination Emergency room Medical service Retailing Consumer electronics Consumers bu ying a new video system Iron ore plant Iron ore Pacemakers Medical equipment

Demand

Urgent need for medical service

Steel mills

Heart surgeon requires pacemaker at exact time and location Pacemaker sits i n inventory

Supply exceeds demand Demand exceeds supply

Empty seat

Doctors, nurses, and infrastructure are under-utilized Crowding and delays in the ER, potential diversion of ambulances Staffing to predicted demand; priorities

High inventory costs; few inventory turns

Prices fall

Overbooking; customer has to take different flight (profit loss) Dynamic pricing; booking policies

Foregone profit opportunity; consumer dissatisfaction Forecasting; quick response

Prices rise

Foregone profit (typically not associated with medical risk) Distribution system holding pacemakers at various locations Most products (valued $20k) spend 4-5 months waiting in a trunk of a sales person before being used 1-3

Actions to match supply and demand Managerial importance

If prices fall too low, production facility is shut down Prices are so competitive that the primary emphasis is on reducing the cost of supply

About 30% of all seats fly empty; a 12% increase in seat utilization makes difference between profits and losses

Delays in treatment or transfer have been linked to death;

Per unit inventory costs for consumer electronics retailing commonly exceed net profits.

Who Cares About Inventory?

Apparently no one. Thats why there is $1.16 trillion of it in the US economy.


Picture from MOHI

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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.

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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 (inventory=waiting customers)

Supply waits for demand (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
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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

Tradeoff

Low Low labor productivity

Long waiting times, yet operators are almost fully utilized

High labor productivity

Labor 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
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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 Low labor productivity

Competitor B High labor productivity Labor Productivity (e.g. $/call)

Example: Benchmarking shows the pattern above Dont just manage the current system Change it!
OM helps: Provides tools to identify and eliminate inefficiencies
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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 productivity

High labor productivity

Labor 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
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Operations Management: An Overview

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Operations Management: 30,000 Ft Overview


For physical goods

Product Design

Purchasing / Sourcing

Production

Fulfillment

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

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Example of Target Costing: P&Gs 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)

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Operations Management: 30,000 Ft Overview


For physical goods

Product Design

Purchasing / Sourcing

Production

Fulfillment

Define user needs Translate to specs Generate concepts Select concepts Engineer / develop Project management Design-to-cost

Define product Obtain quotes Work with suppliers Streamline supply base Evaluate total cost of ownership

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Cost Structure of an Automotive Company


100%
90% 80% 70% 60% 50% 40% 30% Purchased parts and assemblies Parts and material costs Assembly and other Labor costs Other Overhead Warranty Quality

Logistics costs

20%
10% 0% Final Assemblers cost Including Tier 1 Costs Including Tier 2 Costs Rolled-up Costs over ~ 5 Tiers Material costs

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
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Operations Management: 30,000 Ft Overview


For physical goods

Product Design

Purchasing / Sourcing

Production

Fulfillment

Define user needs Translate to specs Generate concepts Select concepts Engineer / develop Project management Design-to-cost

Define product Obtain quotes Work with suppliers Streamline supply base Evaluate total cost of ownership

Design and Improve internal processes Manage throughput Improve efficiency Quality Lean operations Toyota

Deliver goods to the customer Forecasting of demand Dealing with demand uncertainty Risk reduction and management Design of supply chain

For services

Product Design

Purchasing / Sourcing

Production and fulfillment

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Operations Management Differs Across Industries


Product Design Purchasing / Sourcing Production Fulfillment

Automotive

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Steel

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Hospital

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Medical devices / Pharmaceuticals

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Retailer

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Financial services

IT

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Very different challenges and skill-sets are required across industries


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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
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