Portland State University Operations Management BA 339 Instructor: Scott Culbertson Jan 7 th, 2002.
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Transcript of Portland State University Operations Management BA 339 Instructor: Scott Culbertson Jan 7 th, 2002.
Portland State University
Operations Management BA 339 Instructor: Scott Culbertson
Jan 7th, 2002
Portland State University
General Information
Very full agenda - only have 10 class sessions.
• Class time: 1) Lecture, 2) Case Discussion, 3) Industry Speaker.
• Students take a large part of responsibility for learning the material. This is especially true for material that is required reading but may not be covered in lecture.
• Syllabus Review
• Hand Outs:• Class Syllabus• Varsity Subs - Questions due 1/14.
• Prepare to discuss on 1/14: Akron Zoological Park - p. 128
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What is Operations Management?
• Finance: How to manage (raise, invest) the money.
• Accounting: How to keep track of the money.
• Marketing: How to convince customers to give you the money.
• Operations: ?
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Operations Management: Process View
Transformation(business flow)
Energy
Materials
Labor
Capital
Outputs(goods and services)
Management of business processes to build capabilities that optimally convert inputs to outputs.
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Operations Management Flows
A business process flow is a collection of recurring economic activities that takes one or more kinds of inputs and creates an output that is of valued to the customer.
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Process View: Examples
Enterprise Process
Fed Ex
McDonalds
Quick Lub
Hospital
Bank
PSU
Package Delivery
Food Delivery
Oil Change
Patient care
Money LendingCheck Processing
EducationResearch
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Dimensions of Operations Strategy& Competitive Advantage
•Time
•Price
•Quality
•Variety
Goal of this course: How can you structure/change an operation so that these operational capabilities are best achieved?
ProfitMeans to best satisfy the customer
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Strategic Operational Audit
Business Strategy
Operations StructureProcess & Resources
Finance StrategyOperations StrategyMarketing Strategy
Price, QualityTime, Variety
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Cycle Time
InventoryCapacity
The OPSTriangle
Key Elements
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Key elements & Competitive Advantage
Time
Price
Quality
Variety
Dimensions of Competitive AdvantageKey Elements of OPS
Inventory
Capacity
Cycle Time
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PartSuppliers
AssemblySites
Distribution Centers
RawMaterial
Components
Finished Goods
Orders onthe Factory
PartOrders
Cycle Time Cycle Time
SalesChannel
FinishedGoods
DemandInformation
Cycle Time
Information Flow
Physical Flow
A supply chain involves a sequence of information flows, decisions, and physical flows,in order to meet a dynamic set of customer needs.
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Supply chain responsiveness refers to your system’s ability to respond to, and recover from, a demand surprise.
Supply Chain ResponseApparent Responsiveness
To a demand increase
time
Inventory
Responsetime
(~Flow time)
Recoverytime
Initial BuildRate
New DemandRate
Demand = BuildItarget
Demand>Build(Inventory Falls)
Demand
Initial Demand Rate
New Build Rate
Demand <Build(Inventory Recovers)
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Responsiveness of a supply chain is manifest in the height and duration of inventory excursions.
Shorter supply chains are more robust to demand surprises.
How much is this robustness worth?
Supply Chain ResponseApparent Responsiveness
To a Demand Decrease
time
Inventory
Responsetime
(~Flow time)
Recoverytime
BuildRate
DemandRate
Demand Rate = BuildRate
Itarget
Demand<Build(Inventory Climbs)
Build < Demand(Inventory Recovers)
New Demand Rate
New Build Rate
Demand
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Financial impact: Inventory excursions create incremental cost and lost opportunity.
Inventory’s Financial Impact
• Stockouts begin to occur before inventory hits zero. Lost sales occur until SC adjusts.• Channel dries up, marketing momentum is lost.
timeProduct Life Cycle
Inventory Profile over Product Life Cycle
Inve
nto
ry L
evel
- W
.O.S
.
Initial Desired Inventory Level (ex: 4 WOS)
• Very high inventory.• High carrying costs (component depreciation, capital cost).• Very high inventory risk (time-to-consumption is high).
A
C
B
• Excess inventory at end-of-life creates clearance discounts, price protection.• Impacts pricing of next product.• Impacts time-to-market of next product.
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Shorter supply chains are more robust to demand surprises. How much is that worth?
Impact of Flow Time
Inventory Excursions vs. Demand Shifts:The Impact of Long Flow Times
0k
200k
400k
600k
800k
1,000k
1,200k
1,400k
-30% -20% -10% 0% 10% 20% 30%Demand / Forecast Delta
FG
I In
vent
ory
at D
C (k
un
its)
(Min
or
Max
for
Dem
and
Del
ta)
Inventory Target= 4 WOS
DC StockoutsOccur Below 2 WOS
5 WeekFlow time
30 WeekFlow time
20 WeekFlow time
10 WeekFlow time
Supply > DemandInventory profilesover life cycle:
Supply < Demand
Peak Inv. Peak@ 20% Delta
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Business goal: maximize total contribution margin over the life-cycle of a product.
Cumulative Contribution
Line B: Actual Results
Product Lifecycle Contribution Margin Profile(conceptual example)
Cum
ulat
ive C
ontr
ibut
ion
Mar
gin
time
End of Life Discounts
(inventory clearance,price protection)
Stock-out
InventoryCarrying Costs
No End-of-Life Costs
No Missed Demand
No Inventory Costs
ProductIntro
End ofLife
Line A: Theoreti
cal Maximum
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How much should I invest in supply chain flexibility?
What could it be worth?
Profit Impact of Supply Chain Length
50
60
70
80
90
100
110
120
130
140
150
160
170
-30% -20% -10% +0% +10% +20% +30%Forecast Error
(Actual - Forecast)/Forecast
5 Weeks
10 Weeks
20 Weeks
30 Weeks
Modeling Inputs for a Hypothetical ProductNet Revenue per unit $500Variable Cost per unit $300Contribution Margin per unit $200
Planned Product Life Cycle 52 weeksPlanned Avg. Volume 12k per week
Flow Time
Example2: Responding to a 20% demand increase in 10 weeks instead of 30 weeks adds up to $10M of life-cycle contribution margin.
Impact of Supply-Chain Lengthon Contribution Margin Earned over a Product Life Cycle
for Unexpected Demand Shifts
$M C
ontr
ibut
ion
Mar
gin
earn
ed o
ver
Pro
duct
Lif
e C
ycle
Example 1: Responding to a 20% demand decrease in 10 weeks instead of 30 weeks adds up to $11M to life-cycle contribution margin.
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Cycle Time - Average time through a process flow
Capacity:• Design Capacity - Maximum theoretical output• Effective Capacity - The Capacity a firm expects to achieve
Inventory• Turns = Throughput/inventory• WOS = 52/turns
Measures:• Throughput = Inventory/Cycle Time• Capacity Utilization = Actual Output/Design Capacity• Efficiency = Actual Output/Effective Capacity
Element Definitions
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The Picante Company
The Picante Company produces Tabasco Sauce from peppers only harvested on Avery Island in the Gulf of Mexico. The bulk of the process flow of the production process is in storing the sauce in wood barrels for 2 years. The plant ships 1,000 barrels per week.
•What quantity of Tabasco Sauce does Picante have in WIP inventory?
Answer: if throughput = inventory/cycle time then cycle time * throughput = inventory
CT = 2 years Throughput = 1K cases per week
So: WIP is 52K/year * (2 years) = 104,000 cases
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The Picante Company
The Picante Company produces Tabasco Sauce from peppers only harvested on Avery Island in the Gulf of Mexico. The bulk of the process flow of the production process is in storing the sauce in wood barrels for 2 years. The plant ships 1,000 barrels per week.
• What is Picante’s WIP inventory?
• How many turns does Picante achieve?
Answer: Turns = through-put/inventory
Throughput = 52,000/year barrels
Inventory = 104,000 barrels
Turns = 52,000/104,000 or .5 turns per year
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The Picante Company
The Picante Company produces Tabasco Sauce from peppers only harvested on Avery Island in the Gulf of Mexico. The bulk of the process flow of the production process is in storing the sauce in wood barrels for 2 years. The plant ships 1,000 cases per week.
• What is Picante’s WIP inventory?
• How many turns does Picante achieve?
• How many weeks of supply does Picante carry?
Answer: WOS = 52/turns Turns = .5 so WOS = 52/.5 = 104 Weeks of supply
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Portland International
At Portland international airport it is estimated that up to 60 planes can take off per hour. However, a plane taxis for 20 minutes on average after pushing off from the gate until finally taking off. Over the course of a day, on average 30 planes per hour actually take off.
• What is the design capacity of PDX in terms of take-offs?
• What is the effective capacity of PDX in terms of take-offs?
• What is the average cycle time for a plane?
Answer: Design capacity = 60 planes, Effective capacity = 30 planes, average cycle time per plane = 20 minutes
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Portland International
At Portland international airport it is estimated that up to 60 planes can take off per hour. However, a plane taxis for 20 minutes on average after pushing off from the gate until finally taking off. Over the course of a day, on average 30 planes per hour actually take off.
• What is the average inventory of planes trying to take off?
• What is PDXs utilization?
Answer: if throughput = inventory/cycle time then cycle time * throughput = inventory
CT = 1/3 hour Throughput = 30 planes per hour, So: 1/3 * 30 = 10 planes
Utilization = actual output/design capacity = 30/60 planes = 50%
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Emergency Room
Patients arrive to OHSU Emergency at an average rate of 40 per hour. There are two types of patients: Those who enter the system and eventually see a doctor, and those that balk immediately without entering the system (line is perceived to be too long). Patients who enter the system first delay in a wait area before seeing a doctor. Consider the following:
Wait area = 80 ChairsAve Patients in wait area = 50Ave delay before seeing the doctor = 2 hoursDoctors on staff = 15, of which 80% are utilized on average.
• What is the average rate (patients per hour) at which potential patients balk? Total throughput total = throughput balk + throughput seen by doctorSeen by Dr. (throughput actual) = inventory/CT or 50 people / 2 hours = 25 per hourSo: 40 = X + 25 X = 15 people/hour who balk.
• What is the average cycle time (in hours) spent seeing a doctor?CT = inventory/throughput. throughput = 25 people/hour, inventory of Dr.s = .8*15So CT seeing a Dr = 12/25 or .48 Hours