You will learn
Describe why logistics is important and discuss the major decision areas that make up logistics.
List the strengths and weaknesses of the various modes of transportation and discuss the role of multimodal solutions.
Identify the major types of warehousing solutions and their benefits.
Discuss the purpose of a logistics strategy.
Identify design options for a distribution network
Introduction (2 of 2)
Logistics Management Activities:
Transportation
Warehousing
Material handling
Packaging
Inventory management
Logistics information systems
4
Why Logistics is Critical
Challenges and opportunities in managing logistics
Advances in information systems
Globalization of markets
Push toward sustainability
Significant impact on delivery speed and reliability
5
Logistics Decision Areas (1 of 19)
Five Transportation Modes:
Highway
Water
Air
Rail
Pipeline
Source: cststudy.blogspot.com
Source: asia.nikkei.com
6
Logistics Decision Areas (2 of 19)
Table 8.1 Modal Shares of U.S. Domestic Freight for 2012 (% Change, 2002 – 2012)
Transportation Mode Value (Billion $) Tons (Millions) Ton-Miles (Billions)
Highway (trucking) $10,132 (+63%) 8,060 (+3%) 1,248 (−1%)
Rail $473 (+52%) 1,629 (−13%) 1,211 (−4%)
Water $302 (+238%) 576 (−15%) 193 (−32%)
Air $451 (+70%) 5 (29%) 6 (0%)
Pipeline $543 (+264%) 636 (−7%) Not available
Multimodal $1,951 (+81%) 357 (+65%) 272 (+20%)
Source: U.S. Department of Transportation, National Transportation Statistics, April 2017, Washington, DC, Table 1-58, www.rita.dot.gov/bts/sites/rita.dot.gov.bts/files/publications/national_transportation_statistics/html/table_01_58.html.
7
Logistics Decision Areas (3 of 19)
Highway
Dominates the U.S. logistics infrastructure due to:
Geographic extension of supply chains
Greater emphasis on delivery speed and flexibility
Continues to grow because it is one of the most flexible modes of transportation
Very few goods are moved without highway transportation at some point in transit
8
Logistics Decision Areas (4 of 19)
Highway
Has become more cost effective over time due to:
Better scheduling and use of vehicle capacity
More efficient and reliable vehicles
Increased cost competition due to deregulation
Involves different types of shipments
Direct truck – Shipment made with no stops
Less than truckload (LTL) – Smaller shipment combined with other loads
9
Logistics Decision Areas (5 of 19)
Water
Ideal for materials with high weight-to-value ratio, especially if delivery speed is not critical.
Examples of these materials include farm produce, timber, petroleum-based products.
Has one of the lowest ton-mile rates of any mode which helps to keep costs down.
10
Logistics Decision Areas (6 of 19)
Air
Ideal for customers with a low weight-to-value ratio, especially if delivery speed or delivery reliability is critical.
Is the least-used mode in terms of tons and ton-miles
11
Logistics Decision Areas (7 of 19)
Rail
Has characteristics similar to water transportation but is somewhat more flexible.
To accommodate growth, rail carriers have doubled the number of lines along busy corridors, changed the physical configuration of the trains, and utilized multimodal solutions.
12
Logistics Decision Areas (8 of 19)
Table 8.2 Strengths and Weaknesses of the Major Transportation Modes
Transportation Mode Strengths Weaknesses
Highway Flexibility to deliver where and when needed.
Often the best balance among cost, flexibility, and reliability/speed of delivery. Neither the fastest nor the cheapest option.
Water Highly cost-effective for bulky items.
Most effective when linked to a multimodal system. Limited locations.
Relatively poor delivery
reliability/speed.
Rail Highly cost-effective for bulky items.
Can be most effective when linked to a multimodal system. Limited locations, although less so than with water.
Not as fast as highway, but improving over time.
Air Quickest mode of delivery.
Flexible, especially when linked to the highway mode. Often the most expensive mode on a per-pound basis
13
Logistics Decision Areas (9 of 19)
Multimodal solution – A transportation solution that seeks to exploit the strengths of multiple transportation modes through physical, information, and monetary flows that are as seamless as possible
Roadrailer – A specialized rail car the size of a standard truck trailer that can be quickly switched from rail to ground transportation without changing the wheels.
Source: trovestar.com
14
Logistics Decision Areas (10 of 19)
Warehousing – Any operations that stores, repackages, stages, sorts, or centralizes goods or materials.
Warehousing can be used to:
Reduce transportation costs
Improve operational flexibility
Shorten customer lead times
Lower inventory-related costs.
15
Logistics Decision Areas (11 of 19)
Reducing Transportation Costs
Consolidation warehousing – A form of warehousing that pulls together shipments from a number of sources in the same geographic area and combines them into larger and more economical loads.
16
Logistics Decision Areas (12 of 19)
Reducing Transportation Costs
2. Cross-docking – A form of warehousing in which large incoming shipments are received and then broken down into smaller outgoing shipments to demand points in a geographic area.
17
Logistics Decision Areas (13 of 19)
Reducing Transportation Costs
3. Hub-and-spoke system – A form of warehousing in which strategically placed hubs are used as sorting or transfer facilities.
18
Logistics Decision Areas (14 of 19)
Improving Operational Flexibility
Postponement warehousing – A form of warehousing that combines classic warehouse operations with light manufacturing and packaging duties to allow firms to put off final assembly or packaging of goods until the last possible moment.
19
Logistics Decision Areas (15 of 19)
Shortening Customer Lead Times
Assortment warehouses – A form of warehousing in which a wide array of goods is held close to the source of demand in order to ensure short customer lead times.
Spot stock warehouses – A form of warehousing that attempts to position seasonal goods close to the marketplace.
20
Logistics Decision Areas (16 of 19)
Lowering Inventory-Related Costs
Using inventory pooling can enable firms to reduce inventory-related costs.
Consolidating safety stock for stores into one centralized location can provide same-day service to all the stores and would reduce the amount of inventory needed to protect the stores against demand surges.
21
Logistics Decision Areas (17 of 19)
Logistics Information Systems
Decision support tools
Cost and travel time estimations
Simulation and optimization
Planning systems
Selecting carriers
Scheduling deliveries
Execution systems
Monitor logistics systems and identify problems before they get out of hand
22
Logistics Decision Areas (18 of 19)
Material handling system – A system that includes the equipment and procedures needed to move goods within a facility, between a facility and a transportation mode, and between different transportation modes.
Packaging – The way goods and materials are packed in order to facilitate physical, informational, and monetary flows through the supply chain.
Source: cisco-eagle.com
23
Logistics Decision Areas (19 of 19)
Inventory Management
Implications for transportation:
Using slower and cheaper transportation modes will cause inventory levels within the supply chain to rise.
Using faster and more expensive transportation modes will enable firms to lower inventory levels.
Implication for warehousing:
Warehousing and inventory managers must work closely to achieve the desired business outcome.
24
Amazon’s Logistics System
Questions:
Can other retailers such as Walmart and Target compete with Amazon for one-day shipping? How?
Amazon is not working with FedEx anymore. Does this mean Amazon will let go all shipping partners one day?
What are the advantages and disadvantages of building their own distribution network?
Logistics Strategy (1 of 7)
Logistics strategy – A functional strategy which ensures that an organization’s logistics choices are consistent with its overall business strategy and support the performance dimensions that targeted customers most value.
27
Logistics Strategy (2 of 7)
Owning versus Outsourcing
Does the firm have the volume needed to justify a private logistics system?
Would owning the logistics system limit the firm’s ability to respond to changes in the marketplace or supply chain?
Is logistics a core competency for the firm?
Common carriers
Contract carriers
Third-party logistics providers
28
Logistics Strategy (3 of 7)
Table 8.3 The Linkage between Key Performance Measures and Transportation and Warehousing Choices
Performance Dimension Transportation Mode Warehousing System
Delivery reliability—Deliver on time consistently Highway None (direct ship)
Blank Air Assortment
Blank blank Spot stock
Delivery speed—Minimal time from order to delivery Air None (direct ship)
Blank Highway Assortment
Blank blank Spot stock
Mix flexibility—Support a wide range of different products/delivery needs Highway Assortment
Blank Air Spot stock
Blank Rail blank
Design flexibility—Support design changes/unique customer needs Highway Postponement
Blank Air blank
Volume flexibility—Provide products/delivery services in whatever volume the customer needs Highway None (direct ship)
Blank Air Assortment
Blank blank Spot stock
Cost—Minimize the cost of transportation Rail Consolidation
Blank Water Cross-docking
Blank Pipeline Hub-and-spoke
Blank Highway blank
29
Logistics Strategy (4 of 7)
Measuring Logistics Performance
The perfect order represents the timely, error-free provision of a product or service in good condition that is:
Delivered on time (according to buyer’s delivery dates)
Shipped complete
Invoiced correctly
Undamaged in transit
30
Logistics Strategy (5 of 7)
Landed cost – The cost of a product plus all costs driven by logistics activities, such as transportation, warehousing, handling, customs fees, etc.
Freight forwarder – An agent that serves as an intermediary between an organization shipping a product and the actual carrier, typically on international shipments.
Customs broker – An agent who handles customs requirements on behalf of another firm.
Logistics Strategy (7 of 7)
Challenges:
Firms have less control over the timing, transportation modes used, and packaging for goods flowing back up the supply chain. Reverse logistics systems often need to be designed to be more flexible and less cost efficient than forward-based systems.
Goods can flow back up the supply chain for a variety of reasons and a reverse logistics system needs to be able to sort and handle these different flows.
Forward logistics systems typically aren’t set up to handle reverse logistics flows.
33
Distribution Network Design in the Supply Chain
Distribution – the steps taken to move and store a product from the supplier stage to the customer stage in a supply chain
Drives profitability by directly affecting supply chain cost and the customer value
Image source: A supply chain distribution network design model: An interactive fuzzy goal programming-based solution approach
Hasan Selim, Irem Ozkarahan
Published 2008
DOI:10.1007/s00170-006-0842-6
Source: ttnews.com
Design Options for a Distribution Network (1 of 2)
Distribution network choices from the manufacturer to the end consumer
Two key decisions
Will product be delivered to the customer location or picked up from a prearranged site?
Will product flow through an intermediary (or intermediate location)?
Design Options for a Distribution Network (2 of 2)
One of five designs may be used
Manufacturer storage with direct shipping
Manufacturer storage with direct shipping and in-transit merge
Distributor storage with carrier delivery
Distributor storage with last-mile delivery
Retail storage with customer pickup
1. Manufacturer Storage with Direct Shipping
Source: shop.nordstrom.com
2. In-Transit Merge Network
Source: hsn.com
3. Distributor Storage with Carrier Delivery
Source:pymnts.com
4. Distributor Storage with Last Mile Delivery
Source: wikimarketing.vn
5. Retail Storage with Customer Pickup
Source: corporate.homedepot.com
The customer service and cost components listed earlier are the primary measures used to
evaluate different delivery network designs. In general, no distribution network will outperform
others along all dimensions. Thus, it is important to ensure that the strengths of the distribution
network fit with the strategic position of the firm.
In the next section, we discuss various distribution networks and their relative strengths
and weaknesses.
4.3 DESIGN OPTIONS FOR A DISTRIBUTION NETWORK
In this section, we discuss distribution network choices from the manufacturer to the end consumer.
When considering distribution between any other pair of stages, such as supplier to manufacturer or
even a service company serving its customers through a distribution network, many of the same
options still apply. Managers must make two key decisions when designing a distribution network:
1. Will product be delivered to the customer location or picked up from a prearranged site?
2. Will product flow through an intermediary (or intermediate location)?
Based on the firm’s industry and the answers to these two questions, one of six distinct
distribution network designs may be used to move products from factory to customer. These
designs are classified as follows:
1. Manufacturer storage with direct shipping
2. Manufacturer storage with direct shipping and in-transit merge
3. Distributor storage with carrier delivery
4. Distributor storage with last-mile delivery
5. Manufacturer/distributor storage with customer pickup
6. Retail storage with customer pickup
Manufacturer Storage with Direct Shipping
In this option, product is shipped directly from the manufacturer to the end customer, bypassing
the retailer (who takes the order and initiates the delivery request). This option is also referred to
as drop-shipping. The retailer carries no inventory. Information flows from the customer, via the
retailer, to the manufacturer, and product is shipped directly from the manufacturer to customers
as shown in Figure 4-6. Online retailers such as eBags and Nordstrom.com use drop-shipping to
deliver goods to the end consumer. eBags holds few bags in inventory. Nordstrom carries some
products in inventory and uses the drop-ship model for slow-moving footwear. W.W. Grainger
also uses drop-shipping to deliver slow-moving items to customers.
The biggest advantage of drop-shipping is the ability to centralize inventories at the manufac-
turer who can aggregate demand across all retailers that it supplies. As a result, the supply chain is
Chapter 4 • Designing Distribution Networks and Applications to Online Sales 73
Manufacturers
Customers
Retailer
Product Flow
Information Flow
FIGURE 4-6 Manufacturer Storage with Direct Shipping
Given its performance characteristics, manufacturer storage with direct shipping is best
suited for a large variety of low-demand, high-value items for which customers are willing to
wait for delivery and accept several partial shipments. Manufacturer storage is also suitable if it
allows the manufacturer to postpone customization, thus reducing inventories. It is thus ideal for
direct sellers that are able to build-to-order. For drop-shipping to be effective, there should be
few sourcing locations per order.
Manufacturer Storage with Direct Shipping and In-Transit Merge
Unlike pure drop-shipping, under which each product in the order is sent directly from its
manufacturer to the end customer, in-transit merge combines pieces of the order coming from
different locations so that the customer gets a single delivery. Information and product flows for
the in-transit merge network are shown in Figure 4-7. In-transit merge has been used by Dell and
can be used by companies implementing drop-shipping. When a customer orders a PC from Dell
along with a Sony monitor, the package carrier picks up the PC from the Dell factory and the
monitor from the Sony factory; it then merges the two at a hub before making a single delivery
to the customer.
As with drop-shipping, the ability to aggregate inventories and postpone product
customization is a significant advantage of in-transit merge. In-transit merge allows Dell and
Sony to hold all their inventories at the factory. This approach has the greatest benefits for
products with high value whose demand is difficult to forecast, particularly if product
customization can be postponed.
Although an increase in coordination is required, merge in transit decreases transportation
costs relative to drop-shipping by aggregating the final delivery.
Facility and processing costs for the manufacturer and the retailer are similar to those for
drop-shipping. The party performing the in-transit merge has higher facility costs because of
the merge capability required. Receiving costs at the customer are lower because a single
delivery is received. Overall supply chain facility and handling costs are somewhat higher than
with drop-shipping.
A sophisticated information infrastructure is needed to allow in-transit merge. In addition
to information, operations at the retailer, manufacturers, and the carrier must be coordinated.
The investment in information infrastructure is higher than that for drop-shipping.
Response times, product variety, availability, and time to market are similar to drop-
shipping. Response times may be marginally higher because of the need to perform the merge.
Customer experience is likely to be better than with drop-shipping, because the customer
receives only one delivery for an order instead of many partial shipments. Order visibility is an
important requirement. Although the initial setup is difficult because it requires integration of
manufacturer, carrier, and retailer, tracking itself becomes easier given the merge that occurs at
the carrier hub.
76 Chapter 4 • Designing Distribution Networks and Applications to Online Sales
inventory than a retail network. Amazon achieves about 10 turns of inventory annually using
warehouse storage, whereas Barnes & Noble achieves about 3 turns using retail stores.
Transportation costs are somewhat lower for distributor storage compared to manufacturer
storage because an economic mode of transportation (e.g., truckloads) can be employed for
inbound shipments to the warehouse, which is closer to the customer. Unlike manufacturer
storage, under which multiple shipments may need to go out for a single customer order with
multiple items, distributor storage allows outbound orders to the customer to be bundled into a
single shipment, further reducing transportation cost. Distributor storage provides savings on the
transportation of faster moving items relative to manufacturer storage.
Compared to manufacturer storage, facility costs (of warehousing) are somewhat higher
with distributor storage because of a loss of aggregation. Processing and handling costs are
comparable to manufacturer storage unless the factory is able to ship to the end customer directly
from the production line. In that case, distributor storage has higher processing costs. From a
facility cost perspective, distributor storage is not appropriate for extremely slow-moving items.
The information infrastructure needed with distributor storage is significantly less
complex than that needed with manufacturer storage. The distributor warehouse serves as a
buffer between the customer and the manufacturer, decreasing the need to coordinate the two
completely. Real-time visibility between customers and the warehouse is needed, whereas
real-time visibility between the customer and the manufacturer is not. Visibility between the
distributor warehouse and manufacturer can be achieved at a much lower cost than real-time
visibility between the customer and manufacturer.
Response time under distributor storage is better than under manufacturer storage because
distributor warehouses are, on average, closer to customers, and the entire order is aggregated at
the warehouse before being shipped. Amazon, for example, processes most warehouse-stored
items within a day and then it takes three to five business days using ground transportation for
the order to reach the customer. W.W. Grainger processes customer orders on the same day and
has enough warehouses to deliver most orders the next day using ground transport. Warehouse
storage limits to some extent the variety of products that can be offered. W.W. Grainger does not
store very low-demand items at its warehouse, relying on manufacturers to drop-ship those
products to the customer. Customer convenience is high with distributor storage because a
single shipment reaches the customer in response to an order. Time to market under distributor
storage is somewhat higher than under manufacturer storage because of the need to stock
another stage in the supply chain. Order visibility becomes easier than with manufacturer storage
because there is a single shipment from the warehouse to the customer and only one stage of the
supply chain is involved directly in filling the customer order. Returnability is better than with
manufacturer storage because all returns can be processed at the warehouse itself. The customer
also has to return only one package, even if the items are from several manufacturers.
The performance of distributor storage with carrier delivery is summarized in Table 4-3.
Distributor storage with carrier delivery is well suited for slow- to fast-moving items.
Warehouse Storage by Distributor/
Retailer
Factories
Customers
Product Flow
Information Flow
FIGURE 4-8 Distributor Storage with Carrier Delivery
78 Chapter 4 • Designing Distribution Networks and Applications to Online Sales
(including transportation and processing) can be more than $20 per home delivery in the
grocery industry. Last-mile delivery may be somewhat less expensive in large, dense cities.
Transportation costs may also be justifiable for bulky products for which the customer is
willing to pay for home delivery. Home delivery of water and large bags of rice has proved
quite successful in China, where the high population density has helped decrease delivery
costs. Transportation costs of last-mile delivery are best justified in settings where the
customer is purchasing in large quantities. This is rare for individual customers, but
businesses such as auto dealerships purchase large quantities of spare parts on a daily basis
and can thus justify daily delivery. Home delivery to individual customers can be justified
for bulky items such as five-gallon jugs of water in the United States and large bags of rice
in China. In each instance, last-mile delivery is cheaper and more convenient than customers
picking up their own bottles or bags.
Using this option, facility costs are somewhat lower than for a network with retail stores
but much higher than for either manufacturer storage or distributor storage with package carrier
delivery. Processing costs, however, are much higher than for a network of retail stores because
all customer participation is eliminated. A grocery store using last-mile delivery performs all the
processing until the product is delivered to the customer’s home, unlike a supermarket, where the
customer does a lot more work.
The information infrastructure with last-mile delivery is similar to that for distributor
storage with package carrier delivery. However, it requires the additional capability of scheduling
deliveries.
Response times are faster than using package carriers. Kozmo and Urbanfetch tried to
provide same-day delivery, whereas online grocers typically provide next-day delivery. Product
variety is generally lower than for distributor storage with carrier delivery. The cost of providing
product availability is higher than for every option other than retail stores. The customer
experience can be good using this option, particularly for bulky, hard-to-carry items. Time to
market is even higher than for distributor storage with package carrier delivery because the new
product has to penetrate deeper before it is available to the customer. Order visibility is less of an
issue given that deliveries are made within 24 hours. The order-tracking feature does become
important to handle exceptions in case of incomplete or undelivered orders. Of all the options
discussed, returnability is best with last-mile delivery, because trucks making deliveries can also
pick up returns from customers. Returns are still more expensive to handle than at a retail store,
where a customer can bring the product back.
The performance characteristics of distributor storage with last-mile delivery are
summarized in Table 4-4. In areas with high labor costs, it is hard to justify last-mile delivery to
individual consumers on the basis of efficiency or improved margin. It can be justified only if
there is a large enough customer segment willing to pay for this convenience. In that case, an
effort should be made to couple last-mile delivery with an existing distribution network to exploit
economies of scale and improve utilization. An example is Albertsons’ use of existing grocery
Distributor/Retailer Warehouse
Factories
Customers
Product Flow
Information Flow
FIGURE 4-9 Distributor Storage with Last-Mile Delivery
80 Chapter 4 • Designing Distribution Networks and Applications to Online Sales
Chapter 4 ◆ Designing Distribution Networks and Applications to Omni-Channel Retailing 85
Examples of companies that offer multiple options of order placement include Home Depot and
Tesco. In either case, customers can walk into the store or order online. A B2B example is
W.W. Grainger: Customers can order online, by phone, or in person and pick up their order at one
of W.W. Grainger’s retail outlets.
Local storage increases inventory costs because of the lack of aggregation. For fast- to
very-fast-moving items, however, there is little increase in inventory, even with local storage.
Home Depot uses local storage for its fast-moving products while delivering a wider variety of
products from a regional location for pickup at the store. Similarly, W.W. Grainger keeps its
inventory of fast-moving items at pickup locations, whereas slow-moving items are stocked at a
central warehouse.
Cost Factor Performance
Inventory Can match any other option, depending on the location of inventory.
Transportation Lower than the use of package carriers, especially if using an existing
delivery network.
Facilities and handling Facility costs can be high if new facilities have to be built. Costs are
lower if existing facilities are used. The increase in handling cost at the
pickup site can be significant.
Information Significant investment in infrastructure is required.
Service Factor Performance
Response time Similar to package carrier delivery with manufacturer or distributor
storage. Same-day pickup is possible for items stored at regional DC.
Product variety Similar to other manufacturer or distributor storage options.
Product availability Similar to other manufacturer or distributor storage options.
Customer experience Lower than other options because of the lack of home delivery.
Experience is sensitive to capability of pickup location.
Time to market Similar to other manufacturer or distributor storage options.
Order visibility Difficult but essential.
Returnability Somewhat easier, given that pickup location can handle returns.
TABLE 4-5 Performance Characteristics of Network with Customer Pickup Sites
You will learn
Describe the rationale for outsourcing and discuss when it is appropriate.
Identify and describe the various steps of the strategic sourcing process.
Discuss some of the longer-term trends in supply management and why they are important.
Introduction
Critical questions:
When a business needs to team up with an outside manufacturer?
With whom it should partner?
what steps are required to formally establish and then manage the relationship?
Supply Management – The broad set of activities carried out by organizations to analyze sourcing opportunities, develop sourcing strategies, select suppliers, and carry out all the activities required to procure goods and services.
Source: industrytoday.com
Why Supply Management is Critical (1 of 5)
Several factors have worked together to push supply management activities into the focus of attention:
Increased levels of global sourcing
Financial impact of sourcing
Impact of sourced goods and services on other performance metrics, including quality and delivery performance
4
Why Supply Management is Critical (2 of 5)
Global Sourcing
Firms do not compete only against global competitors, but against their competitors’ supply chains.
To keep up with global competition and tap into the abilities of world-class suppliers, many companies have put in place global sourcing systems.
Advances in information systems have served as a catalyst for global sourcing efforts.
Global sourcing applies to services and business processes, as well as manufactured goods.
Source: projexportserve.com
Why Supply Management is Critical (3 of 5)
Table 7.1 Top 10 First-Tier Suppliers in Global Automotive Industry
Company Home
Country 2015 Sales
($ Billions) Products
Bosch Germany $45 Gasoline & diesel systems, chassis system controls
Denso Japan 36 Powertrain control, electronic & electric Systems
Magneti Marelli Canada 32 Body, chassis, exterior, seating, powertrain, electronic, vision,
Continental Germany 31 Driver assistance systems, electronic brakes, stability systems
ZF Friedrichshafen AG Germany 39 Transmissions, chassis components and systems, steering
Hyundai Mobis Korea 26 Chassis, cockpit & front-end modules;
stability control steering
Aisin Seiki Co. Japan 26 Body, brake & chassis systems, electronics, drivetrain,
Starbucks Global Supply Chain
7
Why Supply Management is Critical (4 of 5)
Financial Impact
Cost of goods sold – The purchased cost of goods from outside suppliers.
Merchandise inventory – A balance sheet item that shows the amount a company paid for the inventory it has on hand at a particular point in time.
Profit margin – The ratio of earnings to sales for a given time period.
Return on assets (ROA) – A measure of financial performance generally defined as Earnings/Total Assets
Example 7.1 – Target Corporation (1 of 3)
Table 7.3 Selected Financial Data for Target Corporation (all figures in $ millions)
Earnings and Expenses, 2010 Blank
Sales $65,786
Cost of goods sold (COGS) $45,725
Pretax earnings $4,629
Selected Balance Sheet Items (As of January 29, 2011) Blank
Merchandise inventory $7,596
Total assets $17,213
Example 7.1 – Target Corporation (2 of 3)
Financial Impact
Every dollar saved in purchasing lowers COGS by $1 and increases pretax profit by $1.
Profit leverage effect – A term used to describe the effect of $1 in cost savings increasing pretax profits by $1 and a $1 increase in sales increasing pretax profits only by $1 multiplied by the pretax profit margin.
Every dollar saved in purchasing lowers the merchandise inventory figure – and as a result, total assets – by $1.
Example 7.1 – Target Corporation (3 of 3)
3% purchasing reduction in COGS
Earnings and Expenses Current Reflecting Savings
Sales $65,786 $65,786
COGS $45,725 $44,353
Pretax earnings $4,629 $6,001
Selected Balance Sheet Items Blank Blank
Merchandise inventory $7,596 $7,368
Total assets $17,213 $16,985
Why Supply Management is Critical (5 of 5)
Performance Impact
Cost is not the only consideration.
Purchased goods and services can have a major effect on other performance dimensions including quality and delivery performance.
Source: istockphoto.com
Example 7.2 – Springfield Hospital (1 of 3)
Springfield Hospital has two dialysis machines, each with a special valve that is normally replaced every two weeks when the machines are idle. As a result, Springfield uses about 50 valves per year. The hospital has two alternative sources for the valves. The purchase price and quality for these two suppliers are as follows:
Blank Supplier A Supplier B
Price per valve $10 $2
% Good 99.8% 95%
Source: AcuteDialysisServicesInc
Example 7.2 – Springfield Hospital (2 of 3)
Effect of defective valve
Interruption in patient treatment
Rescheduling difficulties
Reduction in the effective capacity for dialysis
Possible medical emergencies
Estimated cost of a failed valve = $1,000 per incident
Example 7.2 – Springfield Hospital (3 of 3)
Sourcing 50 dialysis machine valves (Total Costs)
Yearly Costs Supplier A Supplier B
Valves 50 × $10 = $500 50 × $2 = $100
Failure costs 0.2% of all valves fail:
0.2% × 50 valves
× $1,000 = $100 5% of all valves fail:
5% × 50 valves
× $1,000 = $2,500
Total cost $600 $2,600
The Strategic Sourcing Process (1 of 16)
Strategic Sourcing
Identifying ways to improve long-term business performance by better understanding sourcing needs, developing long-term sourcing strategies, selecting suppliers, and managing the supply base.
Figure 7.1 The Strategic Sourcing Process
The Strategic Sourcing Process (2 of 16)
Step 1: Assess Opportunities
Spend Analysis – The application of quantitative techniques to purchasing data in an effort to better understand spending patterns and identify opportunities for improvement.
What categories of products or services make up the bulk of company spending?
How much are we spending with various suppliers?
What are our spending patterns like across different locations?
The Strategic Sourcing Process (3 of 16)
Step 2: Profile Internally and Externally
Two approaches to creating profiles:
Category profile – Understanding all aspects of a particular sourcing category that could ultimately have an impact on the sourcing strategy.
Industry Analysis – Profiling the major forces and trends that are impacting an industry, including pricing, competition, regulatory forces, substitution, technology changes, and supply/demand trends.
The Strategic Sourcing Process (4 of 16)
Step 3: Develop the Sourcing Strategy
The Make-or-Buy Decision – A high-level, often strategic, decision regarding which products or services will be provided internally and which will be provided by external supply chain partners.
Insourcing – The use of resources within the firm to provide products or services.
Outsourcing – The use of supply chain partners to provide products or services.
The Strategic Sourcing Process (5 of 16)
Table 7.7 Advantages and Disadvantages of Insourcing and Outsourcing
Insourcing Blank
Advantages Disadvantages
High degree of control Reduced strategic flexibility
Ability to oversee the entire process Required high investment
Economies of scale and/or scope Potential suppliers may offer superior products and services
Outsourcing Blank
Advantages Disadvantages
High strategic flexibility Possibility of choosing a bad supplier
Low investment risk Loss of control over the process and core technologies
Improved cash flow Communication/coordination challenges
Access to state-of-the-art products and services Increased risk of supply chain disruption, corporate social responsibility (CSR) risks
20
The Strategic Sourcing Process (6 of 16)
Table 7.8 Factors that Affect the Decision to Insource or Outsource
Blank Favors
Insourcing Favors
Outsourcing
Environmental uncertainty Low High
Competition in the supplier market Low High
Ability to monitor supplier’s performance Low High
Relationship of product/service to buying firm’s core competencies High Low
The Strategic Sourcing Process (7 of 16)
Step 3: Develop the Sourcing Strategy
Total cost analysis – A process by which a firm seeks to identify and quantify all of the major costs associated with various sourcing options.
Direct costs – Costs tied directly to the level of operations or supply chain activities.
Indirect costs – Costs that are not tied directly to the level of operations or supply chain activity.
The Strategic Sourcing Process (8 of 16)
Table 7.9 Insourcing and Outsourcing Costs
Blank Insourcing Outsourcing
Direct Costs Direct material
Direct labor
Freight costs
Variable overhead Price (from invoice)
Freight costs
Indirect Costs Supervision
Administrative support
Supplies
Maintenance costs
Equipment depreciation
Utilities
Building lease
Fixed overhead Purchasing
Receiving
Quality control
The Strategic Sourcing Process (9 of 16)
Step 3: Develop the Sourcing Strategy
Portfolio analysis – A structured approach used by decision makers to develop a sourcing strategy for a product or service, based on the value potential and the relative complexity or risk represented by a sourcing opportunity.
The Routine Quadrant – Readily available products or services representing a relatively small portion of a firm’s purchasing expenditures. Examples: office supplies, cleaning services
The Leverage Quadrant – Standardized and readily available products or services representing a significant portion of spend.
The Strategic Sourcing Process (10 of 16)
Step 3: Develop the Sourcing Strategy
The Bottleneck Quadrant – Products or services with unique or complex requirements that can be met only by a few potential suppliers – involve carrying extra inventory and contracting with multiple vendors to protect against interruptions
The Critical Quadrant – Products or service with unique or complex requirements coupled with a limited supply base which has a substantial level of expenditure – involves negotiating favorable deals and building partnerships with suppliers
The Strategic Sourcing Process (11 of 16)
Step 3: Develop the Sourcing Strategy
Single sourcing – The buying firm depends on a single company for all or nearly all of a particular item or service.
Multiple sourcing – The buying firm shares its business across multiple suppliers.
Cross sourcing – The buying firm uses a single supplier for one particular part or service and another supplier with the same capabilities for a different part or service.
Dual sourcing – The buying firm uses two suppliers for the same purchased product or service.
The Strategic Sourcing Process (12 of 16)
Step 4: Screen Suppliers and Create Selection Criteria
Qualitative criteria to evaluate suppliers include:
Process and design capabilities
Management capability
Financial condition and cost structure
Longer-term relationship potential
The Strategic Sourcing Process (13 of 16)
Step 5: Conduct Supplier Selection
Weighted-point evaluation system
Assign weights to performance dimensions.
Rate the performance of each supplier with regard to each dimension.
Calculate the total score.
Example 7.6 – Electra Company (1 of 5)
Electra Company is looking to award a new contract for 500,000 integrated circuit boards. The table below summarizes the expected performance of three possible suppliers with regard to price, quality, and delivery.
Table 7.12 Summary Data for Three Possible Suppliers
Performance
Dimension Aardvark
Electronics Beverly Hills Inc. Conan the
Electrician
Price $4/unit $5/unit $2/unit
Quality 5% defects 1% defects 10% defects
Delivery Reliability 95% on-time 80% on-time 60% on-time
Example 7.6 – Electra Company (2 of 5)
Criteria Weights
WPrice = 0.3
WQuality = 0.4
WDelivery = 0.3
TOTAL = 1.0
Scoring Scheme
5 = excellent
4 = good
3 = average
2 = fair
1 = poor
Example 7.6 – Electra Company (3 of 5)
Table 7.14 Values for the Three Suppliers
Performance
Dimension Aardvark
Electronics Beverly Hills Inc. Conan the
Electrician
Price 4 3 5
Quality 3 5 1
Delivery Reliability 4 2 1
Example 7.6 – Electra Company (4 of 5)
Total Scores for Alternative Suppliers
Aardvark should improve their quality.
Beverly Hills should improve their delivery and price.
Conan is out of the running as a potential supplier.
Example 7.6 – Electra Company (5 of 5)
Options for choosing between Beverly Hills and Aardvark
Award the contract to Aardvark, after a detailed negotiation in which it asks Aardvark to provide details on how it will improve its quality.
Award the contract to Beverly Hills, after a detailed negotiation in which it asks Beverly Hills to reduce its price and explain how it will improve delivery performance.
Award a dual-source contract, in which the volumes are split between two suppliers. The contract might state that future volumes will be assigned according to which supplier improves its performance more quickly.
The Strategic Sourcing Process (14 of 16)
Step 6: Negotiate and Implement Agreements
Competitive bidding – A request for bids from suppliers with whom a buyer is willing to do business.
Request for quotation – A formal request for the suppliers to prepare bids, based on the terms and conditions set by the buyer.
Description by market grade/industry standard
Description by brand
Description by specification
Description by performance characteristics
The Strategic Sourcing Process (15 of 16)
Step 6: Negotiate and Implement Agreements
Negotiating – A more costly, interactive approach to final supplier selection. This is used best when:
The item is a new or technically complex item with only vague specifications.
The purchase requires agreement about a wide range of performance factors
The buyer requires the supplier to participate in the development efforts.
The supplier cannot determine risks and costs without additional input from the buyer.
The Strategic Sourcing Process (16 of 16)
Step 6: Negotiate and Implement Agreements
Contracting – The process of creating a detailed purchasing contract to formalize the buyer-supplier relationship.
Fixed-price contract – Stated price does not change.
Cost-based contract – Price of the good or service is tied to the cost of some other key input(s) or other economic factors.
Trends in Supply Management (1 of 2)
Sustainable Supply
Becoming more conscious of the importance of being environmentally friendly and using environmental performance in selecting suppliers.
Ensuring compliance with regulations.
Reducing packaging, promoting recycling, and reducing costs while being good for the environment.
Source: sustainable.org.nz
Trends in Supply Management (2 of 2)
Supply Chain Disruptions
Caused by natural disasters, economic or political events.
Cause a big threat to revenue streams.
Risk of disruptions has increased due to companies outsourcing processes to global suppliers.
You will learn
Explain what capacity is, how firms measure capacity, and the difference between theoretical and rated capacity.
Describe three different capacity strategies: lead, lag, and match.
Apply a wide variety of analytical tools for choosing between capacity alternatives, including expected value and break-even analysis, decision trees, and learning curves.
Introduction (1 of 2)
Strategic decisions that managers face about capacity:
How much capacity do we need?
When do we need it?
What form should the capacity take?
Source: managementstudyguide.com
Introduction (2 of 2)
Important points about capacity:
Capacity can take many different forms
capacity planning is an important activity in both service and manufacturing organizations.
While there are many quantitative tools to help managers make informed capacity decisions, there is some degree of risk inherent in nearly all such decisions.
Capacity (3 of 4)
Table 6.1 Examples of Capacity in Different Organizations
Organization Capacity Measure Factors Affecting Capacity
Law firm Billable hours available each Month Number of lawyers and paralegals;
education and skill levels; supporting software
Textile-spinning
plant Spinning hours per shift; number of spindles produced per week Number of machines running; quality of raw materials; maintenance
Automatic car wash Cars per hour Availability of water and chemicals;
reliability of the car wash (Is it frequently down for repairs?)
Airline (Seats) × (miles flown) Number of jets, pilots, and terminals
Capacity (4 of 4)
Factors that Affect Capacity
Many factors affect capacity and many assumptions must be made
Example: capacity for an assembly plan
Number of lines used
Number of shifts operating
Number of temporary workers used
Number of public storage facilities used
Product variations
Conformance quality
Quality improvement
Three Common Capacity Strategies (1 of 2)
Question: how quickly to increase capacity to accommodate expected growth in demand?
Three strategies for timing capacity expansions
Lead capacity strategy – capacity is added in anticipation of demand.
Lag capacity strategy – capacity is added only after demand has materialized.
Match capacity strategy –strikes a balance between the lead and lag capacity strategies by avoiding periods of high under or overutilization.
Three Common Capacity Strategies (2 of 2)
Figure 6.1 When to Add Capacity: Lead, Lag, and Match Strategies
Methods of Evaluating Capacity Alternatives (1 of 8)
Various choices to meet the capacity needs: building their own facilities or leasing capacity from other firms.
Factors to evaluating capacity alternatives
Cost
Demand Considerations
Expected Value
Decision Trees
Break-Even Analysis
Learning Curves
Methods of Evaluating Capacity Alternatives (2 of 8)
Cost
Fixed costs – The expenses an organization incurs regardless of the level of business activity.
Variable costs – Expenses directly tied to the level of business activity.
12
Example 6.1 – Ellison Seafood Company (1 of 4)
Ellison Seafood Company ships fresh seafood to customers in a nearby city. The logistics manager has identified three shipping alternatives:
Common Carrier
Contract Carrier
Leasing own refrigerated trucks
Example 6.1 – Ellison Seafood Company (2 of 4)
Table 6.2 Capacity Alternatives and Costs
Blank Common Carrier Contract Carrier Leasing
Fixed cost None $5,000 $21,000
Variable cost $750 $300 $50
Figure 6.2 Total Cost of Three Capacity Alternatives, Ellison Seafood Company
Example 6.1 – Ellison Seafood Company (3 of 4)
Figure 6.3 Total Cost per Shipment of Three Capacity Alternatives
Example 6.1 – Ellison Seafood Company (4 of 4)
Table 6.3 Total Cost of Three Capacity Alternatives at Different Demand Levels
Total Cost Equation 15 Shipments
(Low Demand) 40 Shipments
(Medium Demand) 75 Shipments
(High Demand)
Common carrier: $0 + $750X $11,250 $30,000 $56,250
Contract carrier: $5,000 + $300X $9,500 $17,000 $27,500
Leasing: $21,000 + $50X $21,750 $23,000 $24,750
Methods of Evaluating Capacity Alternatives (3 of 8)
Demand Consideration
Managers must know about the expected demand levels.
Otherwise, how will they know which capacity alternative will provide the best financial result?
Demand forecasting is needed – develop multiple estimates of demand that capture a range of possibilities
Methods of Evaluating Capacity Alternatives (4 of 8)
Expected value – A calculation that summarizes the expected costs, revenues, or profits of a capacity alternative, based on several demand levels, each of which has a different probability.
The major steps of the expected value approach are as follows:
Identify several different demand-level scenarios. These scenarios intent is to approximate the range of possible outcomes.
Assign a probability to each demand-level scenario.
Calculate the expected value of each alternative. The equation is:
Example 6.2 – Ellison Seafood Company (1 of 2)
Suppose Ellison Seafood wants to know the expected cost of one of the options, contracting. The management has identified some potential demand scenarios and assigned probabilities to each.
Low demand → 30 shipments per year
Medium demand → 50 shipments per year
High demand → 80 shipments per year
Low demand → 30 shipments per year → 25%
Medium demand → 50 shipments per year → 60%
High demand → 80 shipments per year → 15%
blank blank Total blank 100%
Example 6.2 – Ellison Seafood Company (2 of 2)
Methods of Evaluating Capacity Alternatives (5 of 8)
Decision tree – A visual tool that decision makers use to evaluate capacity decisions and to enable users to see the interrelationships between decisions and possible outcomes.
Draw the tree from left to right starting with a decision point or an outcome point and develop branches from there.
Represent decision points with squares.
Represent outcome points with circles.
For expected value problems, calculate the financial results for each of the smaller branches and move backward by calculating weighted averages for the branches based on their probabilities
Example 6.3 – Ellison Seafood Company
Figure 6.4 Decision Tree for Transportation Decision
Methods of Evaluating Capacity Alternatives (6 of 8)
Break-even analysis
Break-even point – The volume level for a business at which total revenues cover total costs.
Example 6.4 – Ellison’s Seafood Company
Ellison makes a $1,000 profit on each shipment before transportation costs are considered.
What is the break-even point for each shipping option?
Methods of Evaluating Capacity Alternatives (7 of 8)
Learning curve theory – A body of theory based on applied statistics which suggests that productivity levels can improve at a predictable rate as people and even systems “learn” to do tasks more efficiently.
For every doubling of cumulative output, there is a set percentage reduction in the amount of inputs required.
Example 6.5 – Service Call Center (1 of 2)
A video game producer has hired a new service technician to handle customer calls. The time it takes the new service technician to help the first, second, fourth, and eighth callers and the resulting productivity figures are shown below:
Learning Rate 4/5 = 80% or .80
Call Time for Call Productivity
1 5.00 minutes 0.20 calls per minute
2 4.00 minutes 0.25 calls per minute
4 3.20 minutes 0.31 calls per minute
8 2.56 minutes 0.39 calls per minute
Example 6.5 – Service Call Center (2 of 2)
Estimate the time it will take her to handle her 25th call:
Figure 6.6 Eighty Percent Learning Curve for Service Technician
Methods of Evaluating Capacity Alternatives (8 of 8)
Other Considerations:
The strategic importance of an activity to a firm
The desired degree of managerial control.
The need for flexibility.
Understanding and Analyzing Process Capacity (1 of 6)
Theory of Constraints – An approach to visualizing and managing capacity which recognizes that nearly all products and services are created through a series of linked processes, and in every case, there is at least one process step that limits throughput for the entire chain.
Figure 6.7 Throughput of a “Pipeline” is Determined by the Smallest “Pipe”
Understanding and Analyzing Process Capacity (2 of 6)
Figure 6.8 Throughput is Controlled by the Constraint, Process 3
Understanding and Analyzing Process Capacity (3 of 6)
Theory of Constraints
Identify the constraint
Exploit the constraint
Subordinate everything to the constraint
Elevate the constraint
Find the new constraints and repeat the steps
Example 6.6 – Tracy’s Hair Salon (1 of 4)
Tracy’s Hair Salon follows a three-step process in serving its customers.
First the customer is shampooed, next a stylist cuts and styles the customer’s hair. Finally, the customer pays $25 to the cashier.
There is one shampooer, one stylist, and one cashier.
Table 6.5 Capacity and Cost Data for Workers at Tracy’s Hair Salon
blank Shampoo Cut and Style Collect Money
Average processing time per customer 10 minutes 15 minutes 3 minutes
Effective capacity per worker 6 per hour 4 per hour 20 per hour
Labor cost per worker $15 per hour $20 per hour $10 per hour
Example 6.6 – Tracy’s Hair Salon (2 of 4)
Current Process
Figure 6.9 Tracy’s Hair Salon, Current Process
Example 6.6 – Tracy’s Hair Salon (3 of 4)
Adding a Second Stylist
Figure 6.10 Tracy’s Hair Salon, Adding a Second Stylist
Example 6.6 – Tracy’s Hair Salon (4 of 4)
Adding One Shampooer and Two Stylists
Figure 6.11 Tracy’s Hair Salon, Adding One Shampooer and Two Stylists
Understanding and Analyzing Process Capacity (4 of 6)
Waiting Line Theory – A body of theory based on applied statistics that helps managers evaluate the relationship between capacity decisions and important performance issues such as waiting times and line lengths.
Figure 6.12 Single-Channel, Single-Phase System
Understanding and Analyzing Process Capacity (5 of 6)
Waiting Line Concerns at a Drive-up Window:
What percentage of the time will the server be busy?
On average, how long will a customer have to wait in line? How long will the customer be in the system (i.e., waiting and being served) ?
On average, how many customers will be in line?
How will these averages be affected by the arrival rate of customers and the service rate of the drive-up window personnel?
Understanding and Analyzing Process Capacity (6 of 6)
Arrivals: The probability of n arrivals in T time periods
Service Times: Assume that they will be constant or vary. When varying they use a specific distribution
You will learn
Various definitions and dimensions of quality and why quality is important to operations and supply chains.
The different costs of quality, including internal and external failure, appraisal, and prevention costs.
What TQM is, along with its seven core principles.
Some of the important issues associated with managing quality across the supply chain.
2
Quality Defined (1 of 6)
Quality – The characteristics of a product or service that bear on its ability to satisfy stated or implied needs; a product or service that is free of deficiencies.
Value perspective – A quality perspective that holds that quality must be judged, in part, by how well the characteristics of a particular product or service align with the needs of a specific user.
Example: Fast-food meal
Did you get what you thought you would get?
How long does it take to get served?
Was the food fresh?
Was the price reasonable for the food?
Source: mirror.co.uk
Quality Defined (2 of 6)
Quality – The characteristics of a product or service that bear on its ability to satisfy stated or implied needs; a product or service that is free of deficiencies.
Value perspective – A quality perspective that holds that quality must be judged, in part, by how well the characteristics of a particular product or service align with the needs of a specific user.
Conformance perspective – A quality perspective that focuses on whether or not a product was made or a service was performed as intended.
Quality Defined (3 of 6)
Eight dimensions on which users evaluate the quality of a product or service:
Performance: What are the basic operating characteristics of the product or service?
Features: What extra characteristics does the product or service have, beyond the basic performance operating characteristics?
Reliability: How long can a product go between failures or the need for maintenance?
Durability: What is the useful life for a product? How will the product hold up under extended or extreme use?
Quality Defined (4 of 6)
Eight dimensions on which users evaluate the quality of a product or service:
5. Conformance: Was the product made or service performed to specifications?
6. Aesthetics: How well does the product or service appeal to the senses?
7. Serviceability: How easy is it to repair, maintain, or support the product or service?
8. Perceived quality: What is the reputation or image of the product or service?
Quality Defined (5 of 6)
Table 5.1 Dimensions of Quality for a Good and a Service
Quality Dimension New Car Tax Preparation Service
Performance Tow capacity; maximum number of passengers Cost and time to prepare taxes
Features Accessories; extended warranty Advance on refund check; automatic filing
Reliability Miles between required major service visits Not applicable
Durability
Expected useful life of the engine, transmission, body Not applicable
Conformance Number of defects in the car Number of mistakes on the tax return
Aesthetics Styling, interior appearance, look and feel of instrumentation Neatness of the return; manner of
presentation to the customer
Serviceability Are there qualified mechanics in the area? What are the times and costs for typical maintenance procedures? Will the tax preparation firm talk with
the IRS in case of an audit?
Perceived quality How do prices for used vehicles hold up? What is the reputation of the firm?
Quality Defined (6 of 6)
Steps an organization must do to provide high-quality products and services to users:
Understand what dimensions of quality are most important to users.
Develop products and services that will meet the users’ requirements.
Put in place business processes capable of meeting the specifications driven by the users’ requirements.
Verify that the business processes are indeed meeting the specifications.
Case Study: Decatur Trust Bank
The manger decided to keep the bank open on Saturdays and offering a wide range of customer services
One Saturday morning, Steve arrived at the bank, wanted to
(1) cash in a $2,000 CD, (2) withdraw $1,000 from his checking account; and (3) roll the combined $3,000 into an IRA.
No sign in the bank to show who can help! Waited for 10 minutes in a wrong line.
Finally a staff is assigned to help him. He didn’t know how to open an IRA!
Understand what dimensions of quality are most important to users.
Develop products and services that will meet the users’ requirements.
3. Put in place business processes capable of meeting the specifications driven by the users’ requirements.
4. Verify that the business processes are indeed meeting the specifications.
Total Cost of Quality (1 of 7)
Internal failure costs:
Costs caused by defects that occur prior to delivery to the customer.
Including money spent on repairing or reworking defective products (or scrapping them if they are completely ruined), as well as time wasted on these activities.
Typical American factory spent 20% to 50% of its operating budget on finding and fixing mistakes -BusinessWeek
Total Cost of Quality (2 of 7)
External failure costs:
Costs incurred by defects that are not detected until a product or service reaches the customer.
Difficult to estimate – but large since they include not only the cost of fixing the problem, but also the costs of lost future business.
Cost of mishandling a single bag by the airlines carriers is $100.
Total Cost of Quality (3 of 7)
Appraisal costs:
Costs a company incurs for assessing its quality levels.
Costs for inspections, the sampling of products or services, and customer surveys.
Unless the manufacturer improves the processes defect levels will not change.
Prevention costs:
Costs an organization incurs to actually prevent defects from occurring to begin with.
Costs for employee training, supplier certification efforts, investment in new processes, and equipment maintenance
Total Cost of Quality (4 of 7)
Figure 5.2 Total Cost of Quality (Traditional View)
Total Cost of Quality (5 of 7)
In Figure 5.2:
The level of defects is reduced from 100% to 0%
Internal and external failure costs fall to zero
Prevention costs rise exponentially
Reason: as the defect level drops, it becomes even harder to find and resolve the remaining quality problems
Appraisal costs are flat across the various defect levels
There is no direct relationship between appraising quality and defect levels
Appraisal by itself will not improve quality
Total Cost of Quality (6 of 7)
Figure 5.3 Total Cost of Quality (Zero Defects View)
Total Cost of Quality (7 of 7)
In Figure 5.3:
If a business’s processes is improved and defect level became zero
The cost of appraisal fell: No need to inspect
Prevention costs held steady (or even decreased) as managers and employees became more skillful at identifying and resolving problems.
The lowest total cost of quality occurs at the 0% defects level.
To achieve that:
All individuals within an organization must address quality within all of an organization’s business processes
Quality Defined (Reminder)
Steps an organization must do to provide high-quality products and services to users:
Understand what dimensions of quality are most important to users.
Develop products and services that will meet the users’ requirements.
Put in place business processes capable of meeting the specifications driven by the users’ requirements.
Verify that the business processes are indeed meeting the specifications.
Total Quality Management (1 of 4)
Total Quality Management – A managerial approach in which an entire organization is managed so that it excels in all quality dimensions that are important to customers.
TQM, as a business philosophy, centered around seven core principles:
Customer focus
Leadership involvement
Continuous improvement Employee empowerment
Quality assurance
Strategic partnerships
Strategic quality plan
Total Quality Management (2 of 4)
Customer focus
Employees are willing to place themselves in the customers’ shoes to understand how customers really feel about a product or service
Every employee has a customer whose expectations must be met whether internal or external to the company.
Leadership involvement
Change must begin at the top to adopt a TQM mind-set
Managers should carry the message that quality counts to everyone in the company.
Continuous improvement
There will always be room for improvement no matter how well an organization is doing.
Total Quality Management (3 of 4)
Employee empowerment
In a TQM organization, quality is everybody’s job, from the CEO to the entry-level employees.
Giving employees the responsibility, authority, training, and tools necessary to manage quality.
Quality assurance
The specific actions firms take to ensure that their products, services, and processes meet the quality requirements of their customers.
Quality Function Deployment (QFD)- during product design phase
Statistical Quality Control (SQC)- uses statistics to measure quality levels
Total Quality Management (4 of 4)
Supplier Partnerships
The commitment between companies and supply chain partners must be the same.
Suppliers’ materials and services ultimately become part of the company’s product or service – Quality should be assured
Strategic Quality Plan
An organizational plan that provides the vision, guidance, and measurements to drive the quality effort forward and shift the organization’s course when necessary.
Quality Defined (Reminder)
Steps an organization should must do to provide high-quality products and services to users:
Understand what dimensions of quality are most important to users.
Develop products and services that will meet the users’ requirements.
Put in place business processes capable of meeting the specifications driven by the users’ requirements.
Verify that the business processes are indeed meeting the specifications.
Statistical Quality Control (1 of 15)
Statistical Quality Control (SQC):
The application of statistical techniques to quality control.
Makes sure that a business’s current processes are meeting the specifications
Statistical Quality Control (2 of 15)
Popular SQC applications:
Process Capability
How does an organization know whether or not its business processes are capable of meeting certain quality standards?
Comparing the requirements placed on a process to the actual outputs of the process
Measuring the process capability by process capability ratio (Cp):
Statistical Quality Control (3 of 15)
Figure 5.4 Normal Distribution
Suppose that the output values of a process are normally distributed.
Statistical theory says that individual observations should fall within of the process mean, 99.7% of the time.
FIGURE 5.5 Cp Values for Different Tolerance Limits
Statistical Quality Control (4 of 15)
Now suppose that the difference between the upper and lower tolerance limits (UTL – LTL) just happens to equal
Then, the process is capable of producing within the tolerance limits 99.7% of the time and Cp = 1.
Process Capability Example
Source: eschooltoday.com
Statistical Quality Control (5 of 15)
Popular SQC applications:
2. Six Sigma Quality
Reduce the variability of a process to such a point that the process capability ratio is greater than or equal to 2:
This translates into around 2 defects per billion.
Six Sigma Quality Example
Statistical Quality Control (6 of 15)
Popular SQC applications:
3. Control Charts
In contrast to the process capability ratio and index, control charts are specialized run charts that help organizations track changes in key measures over time.
By using control charts, an organization can quickly determine whether a process is “in control” and take action if it is not.
Statistical Quality Control (7 of 15)
Sampling – Using carefully selected samples to get a fairly good idea of how well a process is working.
In general, a good sample is one in which:
Every outcome has an equal chance of being selected into the sample. This is typically accomplished by taking a random sample from the entire population.
The sample size is large enough to not be unduly swayed by any single observation.
Continuous variables are variables that can be measured along a continuous scale, such as weight, length, height, or temperature.
Attributes refer to the presence or absence of a particular characteristic.
Example: a pizza delivery chain promises to deliver a “hot, 16-inch, thick crust pizza in 30 minutes or less.”
Statistical Quality Control (8 of 15)
Statistical Quality Control (9 of 15)
Control chart types:
X̅ chart – A specific type of control chart for a continuous variable that is used to track the average value for future samples.
R chart – A specific type of control chart for a continuous variable that is used to track how much the individual observations within each sample vary.
p chart – A specific type of control chart for attributes that is used to track sample proportions.
Source: asprova.jp
When firms take samples of a continuous variable, two key measures of interest are:
Sample average
The range of values
The sample average () and the range (R) for a continuous variable are defined as follows:
Statistical Quality Control (10 of 15)
Control Charts
Have a center line showing the expected value for a sample measure
Have upper and lower control limits
The process is considered “in control” if a sample result falls inside the control limits.
Statistical Quality Control (11 of 15)
Source: byjus.co
Control Charts
Should not be employed until the process is capable of providing acceptable performance on a regular basis.
By themselves will not result in improved quality levels.
Are used to catch quality problems early, before they get out of hand.
Use of control charts falls under the appraisal activities of a firm’s quality efforts.
Statistical Quality Control (12 of 15)
Statistical Quality Control (13 of 15)
Popular SQC applications:
4. Acceptance Sampling
The process of sampling a portion of goods for inspection rather than examining the entire lot.
Even under the best circumstances, defects can occur and be sent to the customers
Determine the quality levels is through 100% inspection (blood donations)
Expensive
Time-consuming
Impossible (Wooden matches)
Statistical Quality Control (14 of 15)
Acceptance Sampling
Acceptable quality level (AQL) – The maximum defect level at which a consumer would always accept a lot.
Lot tolerance percent defective (LTPD) – The highest defect level a consumer is willing to tolerate.
Consumer’s risk – The probability of accepting a lot with quality worse than the LTPD level.
Producer’s risk – The probability of rejecting a lot with quality better than the AQL level.
Operating characteristics (OC) curve – The probability of accepting a lot given the actual fraction defective in the entire lot and the sampling plan being used
Statistical Quality Control (15 of 15)
Figure 5.10 Producer’s and Consumer’s Risk
Managing Quality across the Supply Chain (1 of 2)
Quality management must extend beyond the four walls of an organization!
Organizations manage quality across the supply chain:
1. ISO 9000 – A family of standards supported by the International Organization for Standardization representing an international consensus on good quality management practices.
Goals:
Meet the customer’s quality requirements
Satisfy regulatory requirements
aiming to enhance customer satisfaction, and
Achieve continual improvement of their performance in pursuit of these objectives.
Managing Quality across the Supply Chain (2 of 2)
Since 1987, the ISO 9000 family of standards has been regularly updated to reflect developments in managerial thought
ISO9001:2015 – Establishing a quality management system that provides confidence in the conformance of their products and services to established or specified requirements
ISO9004:2009 – Extension of 9001 to all parties interested or affected by a particular business’s operations
What Will You Get?
We provide professional writing services to help you score straight A’s by submitting custom written assignments that mirror your guidelines.
Premium Quality
Get result-oriented writing and never worry about grades anymore. We follow the highest quality standards to make sure that you get perfect assignments.
Experienced Writers
Our writers have experience in dealing with papers of every educational level. You can surely rely on the expertise of our qualified professionals.
On-Time Delivery
Your deadline is our threshold for success and we take it very seriously. We make sure you receive your papers before your predefined time.
24/7 Customer Support
Someone from our customer support team is always here to respond to your questions. So, hit us up if you have got any ambiguity or concern.
Complete Confidentiality
Sit back and relax while we help you out with writing your papers. We have an ultimate policy for keeping your personal and order-related details a secret.
Authentic Sources
We assure you that your document will be thoroughly checked for plagiarism and grammatical errors as we use highly authentic and licit sources.
Moneyback Guarantee
Still reluctant about placing an order? Our 100% Moneyback Guarantee backs you up on rare occasions where you aren’t satisfied with the writing.
Order Tracking
You don’t have to wait for an update for hours; you can track the progress of your order any time you want. We share the status after each step.
From brainstorming your paper's outline to perfecting its grammar, we perform every step carefully to make your paper worthy of A grade.
Preferred Writer
Hire your preferred writer anytime. Simply specify if you want your preferred expert to write your paper and we’ll make that happen.
Grammar Check Report
Get an elaborate and authentic grammar check report with your work to have the grammar goodness sealed in your document.
One Page Summary
You can purchase this feature if you want our writers to sum up your paper in the form of a concise and well-articulated summary.
Plagiarism Report
You don’t have to worry about plagiarism anymore. Get a plagiarism report to certify the uniqueness of your work.
Free Features $66FREE
Most Qualified Writer
$10FREE
Plagiarism Scan Report
$10FREE
Unlimited Revisions
$08FREE
Paper Formatting
$05FREE
Cover Page
$05FREE
Referencing & Bibliography
$10FREE
Dedicated User Area
$08FREE
24/7 Order Tracking
$05FREE
Periodic Email Alerts
$05FREE
Our Services
Join us for the best experience while seeking writing assistance in your college life. A good grade is all you need to boost up your academic excellence and we are all about it.
On-time Delivery
24/7 Order Tracking
Access to Authentic Sources
Academic Writing
We create perfect papers according to the guidelines.
Professional Editing
We seamlessly edit out errors from your papers.
Thorough Proofreading
We thoroughly read your final draft to identify errors.
Thorough Proofreading
We thoroughly read your final draft to identify errors.
Delegate Your Challenging Writing Tasks to Experienced Professionals
Work with ultimate peace of mind because we ensure that your academic work is our responsibility and your grades are a top concern for us!
We Analyze Your Problem and Offer Customized Writing
We understand your guidelines first before delivering any writing service. You can discuss your writing needs and we will have them evaluated by our dedicated team.
Clear elicitation of your requirements.
Customized writing as per your needs.
We Mirror Your Guidelines to Deliver Quality Services
We write your papers in a standardized way. We complete your work in such a way that it turns out to be a perfect description of your guidelines.
Proactive analysis of your writing.
Active communication to understand requirements.
We Handle Your Writing Tasks to Ensure Excellent Grades
We promise you excellent grades and academic excellence that you always longed for. Our writers stay in touch with you via email.
Thorough research and analysis for every order.
Deliverance of reliable writing service to improve your grades.
