Transcript Class-6a

Operations Management & Performance Modeling
1 Operations Strategy
2 Process Analysis
3 Lean Operations
4 Supply Chain Management
– Class 5a: Inventories & Economies of Scale
– Class 5b: Dealing with Uncertainty & role of Centralization
– Class 6a: Supply Chain Design
» Multi-product Pooling: Postponement & Commonalities
» Benetton
» Accurate Response
5 Capacity Management in Services
6 Total Quality Management
7 Business Process Reengineering
OM&PM/Class 6a
1
Postponement & Commonality:
HP Laserjet
Generic Power
Production
Unique Power
Production
Transportation
Europe
Process I:
Unique
Power Supply
N. America
Europe
Process II:
Universal
Power Supply
Make-to-Stock
OM&PM/Class 6a
N. America
Push-Pull Boundary
Make-to-Order
2
HP LaserJet: European DC Safety Stocks
(2 month Lead time)
European
Options
A
Monthly
Mean
42.3
Monthly SD Safety Stock
32.4
92
AA
420.2
203.9
577
AB
15830.1
5624.6
15909
AQ
2301.2
1168.5
3305
AU
4208.0
2204.6
6236
AY
306.8
103.1
292
OM&PM/Class 6a
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HP LaserJet:
The Effect of Aggregation
 Total
European safety stock with 2 month lead time
= 26,409 units.
 Total European safety stock with 2 month lead time
on aggregation = 17,661 units.

Reduction
OM&PM/Class 6a
= 8,749 units (33%).
4
United Colors
of Benetton
Production Process
OM&PM/Class 6a
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Benetton
Extra Cost of Postponement
 factory
shipments woolen items
– $311M x 60% = $186.6M

Labor and O/H costs woolen items
– 6.6% + 21.8% (assuming half of O/H from Exh. 1) = 28.4%
– $186.6M x 28.4% = $53.0M

If 10% of items are dyed to order at 10% extra cost
– $53.0M x 10% x 10% = $0.53M
OM&PM/Class 6a
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Benetton
Inventory Benefits of its Strategy
Benetton
Sales
$305,000
Margins
37%
COGS
$192,150
Avg. Store Inv.
$40,000
Inv. Turns
4.80
Cost of Woolen Items $186.6m
Avg. Inv.
$38.875m



European Store
$150,000
45%
$82,500
$30,000
2.75
$186.6m
$67.9m
Inv. Turns = Avg. Throughput (COGS)/Avg. Inventory
Inventory Reduction = ($67.9-$38.875)M = $29.025M
Savings in inventory carrying costs (@25%) = $7.256M
OM&PM/Class 6a
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Benetton
Profitability of Agents
 Commissions
(FY 81)
(4% on shipments)
– $311M * 4% / 70 agents = $178K / agent

Earnings on Shop Sales (10% ownership)
– Sales = $311M * 180% (markup) * 37/44 (realized markup)
= $471M
– NIBT = $471M*19% = $89M
– 10% ownership = $8.9M/70 agents = $128K / agent

Total = $306K / agent
OM&PM/Class 6a
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Benetton
Profitability of Retailers/Franchisees (FY 81)
 Store
Sales = $305K
 NIBT = 19% * $305K = $58K
 Less agent’s share ($5.8K) = $52K
OM&PM/Class 6a
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Postponement and Re-assortment:
The Advantage to Forecasting
Actual total sales
4000
4000
4000
3500
3500
3500
3000
3000
3000
2500
2500
2500
2000
2000
2000
1500
1500
1500
1000
1000
1000
500
500
500
0
0
0
0
500
1000 1500 2000 2500 3000 3500 4000
Initial Forecast
0
500
1000 1500 2000 2500 3000 3500 4000
0
Updated Forecast after observing 20% of sales
500 1000 1500 2000 2500 3000 3500 4000
after 80%
Each data point represents the forecast and the actual
season sales for a particular item (at the style-color level).
OM&PM/Class 6a
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Take-Away’s: Benetton is an example of how
to manage an entire supply chain and
 make
it profitable for all entities in the chain (suppliers,
Benetton, agents, retailers)
 by tailoring its operational response very carefully:
– Step 1. Reduce S, L, variability:
» the basics: implement everywhere in supply chain: highest pay-back
– Step 2. Centralization
» intermediate: trick is in the implementation: medium pay-back
– Step 3. Partial postponement flexibility
» last step: need this on only a small set of products & processes
 and
OM&PM/Class 6a
meshing it with financial and marketing response.
12
Accurate Response to Demand Uncertainty
when you can order only once: L.L. Bean

L.L. Bean is planning the order size for winter parkas. Each parka costs the
company $70 and sells for $140. Any unsold parkas at the end of the
season are disposed off by a sale at $40. Using historical data and a feel for
the market, L.L. Bean forecasts the winter season demand:
Demand:
21
Probability: 3%
22
4%
23
5%
24
8%
25
10%
26
15%
27
12%
28
10%
Demand:
Probability:
29
9%
30
6%
31
5%
32
4%
33
4%
34
3%
35
2%
How many parkas should L.L. Bean plan (make/order)?
OM&PM/Class 6a
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Accurate Response:
Find optimal order level Q with Excel
Order size Q
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
Purchase price =
Retail Price =
Sale price =
OM&PM/Class 6a
Probability
Demand = Q
0.03
0.04
0.05
0.08
0.10
0.15
0.12
0.10
0.09
0.06
0.05
0.04
0.04
0.03
0.02
Cumulative
P (Demand < Q )
0.03
0.07
0.12
0.20
0.30
0.45
0.57
0.67
0.76
0.82
0.87
0.91
0.95
0.98
1.00
$
$
$
Expected
Payoff
1470.0
1537.0
1600.0
1658.0
1708.0
1748.0
1773.0
1786.0
1789.0
1783.0
1771.0
1754.0
1733.0
1708.0
1680.0
70.00
140.00
40.00
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Accurate response:
Find optimal Q from formula

Cost of overstocking by one unit = Co
– the out-of-pocket cost per unit stocked but not demanded
– “Say demand is one unit below my stock level. How much did the one unit
overstocking cost me?”
E.g.: purchase price - salvage price.

Cost of understocking by one unit = Cu
– The opportunity cost per unit demanded in excess of the stock level provided
– “Say demand is one unit above my stock level. How much could I have saved
(or gained) if I had stocked one unit more?” E.g.: retail price - purchase price.
Given an order quantity Q, increase it by one unit if and only if the
expected benefit of being able to sell it exceeds the expected cost of having
that unit left over.

At optimal Q, do not order more if
Prob( Demand > Q ) < Co /(Co + Cu ).
OM&PM/Class 6a
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Wal-Mart

– Provide customers access to quality
good, when and where needed at
competitive prices

Operations strategy
– Short cycle times
– Low inventory levels

Logistics structure
Strategic goals
Logistics strategy
– Accurate information availability
– Rapid transportation
OM&PM/Class 6a
–
–
–
–
–
–
Electronic data interchange
Communication between retail stores
Bar coding
Cross docking
Fast responsive transportation system
Long lead time items
» Stored at DC and shipped as needed
– Stable demand items
» Continuous replenishment programs
– Short lead time items
» Made to order and cross-docked at DC
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Class 6a: Learning Objectives

Pooling of stock reduces the amount of inventory
– physical
– information
Single product
– specialization
– substitution
– commonality/postponement
Multi product

Benetton: Tailored response (e.g., partial postponement) can be
used to better match supply and demand

Accurate Response in one-shot inventory management under
uncertainty
– trade-off cost of over and understocking
OM&PM/Class 6a
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