INTRODUCTION
IE5107 Operations Analysis and Management
Overview
• Production strategies
• Inventory
• Course overview
Production Strategies
1. Make-to-stock: Serve customers from finished goods inventory.
2. Assemble-to-order: Combine a number of finished modules to meet a
customer’s specifications.
3. Make-to-order: Make the customer’s product from raw materials, parts, and
components.
4. Engineer-to-order: Work with the customer to design and then make the
product. (not clear the product specification and need to check with customer)
service level
Make-to-stock
• Examples:
• Television
• Clothing
• Packaged Sushi inventory
• Essential issue in satisfying customers is to balance the level of inventory
against the level of customer service (i.e. satisfy customer demand) (0<=x<=1).
• Why don’t we keep unlimited inventory?
• Expiry
Inventory Inventory is We will
• Space constraints holding undesirable, but discuss this
• Operating cost cost often necessary. later.
• Opportunity cost
• Manpower cost
Assemble-to-order
• Examples:
• Computers
• Subway sandwiches
• Ice-cream
• Products are assembled from finished components only after the order has
been placed based on customer specification.
• An advantage of the assemble-to-order strategy is that it allows for a wide
product line using a small amount of inventory.
Assemble-to-order
• Suppose you have 5 different flavors of ice-cream and 2 different types of cones, how many
different types of 3 unique flavor ice-cream cones can you offer?
=5C3 * 2 cones
= 5!/3!*(5-3)! * 2 cones
= 5!/3!*2! * 2 cones
= 5*4*3!/ 3!*2! Cones
= 20/2 *2 cones = 20
• Observe that number of different combinations can be computed as follows:
This will be revisited when
we review the binomial
distribution in Week 2.
Risk Pooling (2nd advantage of assemble to order)
• Risk pooling allows companies to keep less inventory. (= 1 inventory allow to serve multiple
types of products)
• Suppose average daily demand (and safety stock) is as follows:
• McChicken: 300 (+50)
• Double Cheeseburger: 500 (+100)
• If we used the same type of bun, our starting inventory can be less than:
We will illustrate this
in HW1.
Make-to-order and Engineer-to-order
• Make-to-order: make the customer’s product from raw materials, parts, and
components.
• Commercial aircraft (due t high operating cost)
• Steak (due to expiry factor)
• Engineer-to-order: work with the customer to design and then make the product.
= customization
• Private villa
• Space rockets
Production Strategies
Customer order decoupling point: Point in the process where customer order is linked to the product.
Source Make Finished
Make-to-stock
Assemble-to-order We will discuss the
analysis of production
Make-to-order processes in Weeks
8 and 9.
Engineer-to-order
Lead time is one way
Customer lead time: Time taken for customer to to evaluate the
receive product from the time the order is initiated. production process.
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Inventory
Why carry inventory?
Why carry 600 beef patties when average burger sales is 200 per day?
Why carry 12,000 rubber tires when production rate is 1,000 cars a week?
Reasons:
A. Quality variability (e.g., unserviceable stock)
B. Supply variability (e.g., delay in delivery)
Next, we discuss how to
C. Ordering costs (e.g., transportation costs) reduce these variabilities.
D. Demand variability (e.g., varying customer orders)
E. Production variability (e.g., varying process time)
Inventory is helps us
accommodate these variabilities.
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A. & B. Quality/Supply Variability
The following approaches can help reduce quality and supply variability:
Select suppliers with strong quality programs to ensure minimal defects. (quality variability)
Share information with suppliers.
Demand forecast
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P&G Case Study
Babies consume diapers at a relatively steady rate... Month to month, the number of babies and the
number of diapers that their parents purchase from Kmart, Safeway, or the local convenience store
remain roughly the same.
Despite the steady rate of demand among babies, [there were] dramatic fluctuations in retailers' orders to
wholesalers.
Excerpts from: Whang and Lee: Eliminating the Bullwhip Effect in Supply Chains
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P&G Case Study
Wholesaler
Image from: The Bullwhip Effect in Supply Chains
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P&G Case Study
Babies consume diapers at a relatively steady rate... Month to month, the number of babies and
the number of diapers that their parents purchase from Kmart, Safeway, or the local convenience
store remain roughly the same.
Despite the steady rate of demand among babies, [there were] dramatic fluctuations in retailers'
orders to wholesalers.
If the variability in demand among babies was small, why was there such a marked
variability in demand from retailers?
And why was it even more extreme among wholesalers placing orders to manufacturers?
Excerpts from: Whang and Lee: Eliminating the Bullwhip Effect in Supply Chains
15
Increased Variability
Increase in sales observed
Increased demand (e.g., more residents having babies)
One off thing (e.g., random fluctuation)
Do a survey to understand the sales variability in an objective way
I Don’t Know!
When will this
consumer be buying
Should I increase my order quantity?
toilet papers again?
Cost of holding inventory
Cost of loss sales Balance between each other Increase order quantity
What happens if it turns out that there is no increase in subsequent sales?
Delay my next order
Reduce next order quantity
Individual actors making rational
decisions at a local level can lead
to a suboptimal system.
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P&G Case Study
Sales estimates and forecasting are usually done separately by
retailers, manufacturers, and suppliers.
When retailers notice a slight increase in demand for diapers,
say, besides putting in an order with the wholesaler to replace
the diapers sold, they may order extra in case the small upturn
in sales indicates a trend.
The wholesaler gets the order, sees an uptick in diaper orders,
and makes its own forecasts.
When a manufacturer tries to interpret orders coming from the
wholesaler, the perceived increase in demand can become
further exaggerated: the bullwhip effect.
Excerpts from: Whang and Lee: Eliminating the Bullwhip Effect in Supply Chains
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Whang and Lee (1995)
Instead of having each company myopically optimize its own inventory, companies need
to look at the whole supply chain."
Companies have to start cooperating and sharing data that has traditionally been
considered proprietary.
Retailers must tell manufacturers exactly how various items are selling.
This gives the manufacturers necessary data for making sound plans for the future.
Excerpts from: Whang and Lee: Eliminating the Bullwhip Effect in Supply Chains
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A. & B. Quality/Supply Variability
The following approaches can help reduce quality and supply variability:
Select suppliers with strong quality programs to ensure minimal defects.
Share information with suppliers.
Demand forecast
Production schedule
Form a long-term business relationship with suppliers.
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C. Ordering Costs
The following approaches can help reduce ordering costs:
Locate manufacturing facility near supplier -> transport cost (account major portion for
ordering cost)
Streamline ordering process (e.g., online ordering system) -> admin costs
Form a long-term business relationship with suppliers.
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Partnership with Suppliers
Is having one supplier or multiple suppliers desirable?
What are the advantages of having only one supplier?
Economies of scale
Cost (ordering cost, item unit cost)
Customer service (e.g., troubleshooting, urgent request)
Standardized process
Standardized parts
What are the disadvantages of having only one supplier?
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Renesas Case Study
One of the largest custom-made microchip makers in the world.
One of its main plant was damaged in the tsunami of March 2011.
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Renesas Case Study
A typical car is equipped with 50 to 100 micro chips, which control many parts ranging
from the brakes, engines, steering, airbags, air conditioning equipment, navigation and
audio systems, to a number of sensors inside the vehicles.
Some 20,000 to 30,000 different auto parts make up a car and even if one single auto
part is missing, production has to be stopped until that particular part arrives at the
assembly line.
There was a severe shortage [of particular microchips] when Renesas shut down one of
its main plants near Tohoku.
Excerpts from: [Link]
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Renesas Case Study
For the first time ever, almost all the Japanese carmakers had to idle most of their plants,
not only in Japan but also globally, and stay that way for months.
Even after restarting production, capacity utilization has been staying - and will be staying
- at less than 50% for more than six months, or until the end of 2011. For some plants, it is
less than 20%.
Based on the extremely tight "just-in-time" production system, a typical Japanese
carmaker has an inventory of certain parts for up to about six hours, and sometimes for
just six minutes.
Excerpts from: [Link]
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Renesas Case Study
Why was Renesas the sole supplier?
Matsuo (2015) Section 4.3.3. offers two possible reasons:
High requirements (quality, price, security)
Non-standardized products (embedded software is company specific)
Multi-supplier Sourcing from multiple
system is generally suppliers may not be
suboptimal. straightforward.
Strengthening Singapore’s Supply Chain Resilience
• First, we uphold Singapore’s reputation
as a reliable and trusted partner among
businesses and the international
community.
• Second, Singapore practises
diversification to ensure a reliable supply
of critical goods.
• Third, we continue to invest in new and
existing connectivity infrastructure as we
reinforce Singapore’s status as a major
logistics and trading hub.
[Link]
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D. Demand Variability
The following approaches can help reduce demand variability:
Understand your clients (e.g., just in case argument).
Improve demand forecast
Data collection system Stopping panic buying
Demand forecasting Purchase limits
Restore confidence
Look at your pricing strategy.
Peer pressure
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Whang and Lee (1995) – pricing strategy
When manufacturers offer bargains, retailers stockpile inventory
and don't order again for months.
This is not the way to keep the supply chain running smoothly.
The logic behind an "everyday low price" is that it promotes steady,
regular purchases at all levels, from the retailer to the wholesaler to
the manufacturer, rather than sporadic shopping binges, which are
at the root of the bullwhip effect.
Excerpts from: Whang and Lee: Eliminating the Bullwhip Effect in Supply Chains
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E. Production Variability
The following approaches can help reduce production variability:
Have a strong preventive maintenance program to reduce breakdowns.
Have a strong quality improvement program to reduce rework.
Ensure employees are well-trained.
Ensure employees are equipped with the right tools.
Course Overview
Submit Pre-lecture Assignment 1 before Inventory Review.