10.4: Controlling the Supply Chain

10.4.1: Purchasing

Learning Objective

Explain the purchasing process

Key Points

• Purchasing directors and procurement directors guide and define the organization’s acquisition procedures and standards.
• Most organizations use a three-way check as the foundation of their purchasing programs. This involves three departments in the organization completing separate parts of the acquisition process.
• The purchasing process usually starts with a demand for a physical part (inventory) or a service. A requisition detailing the requirements is generated (and in some cases provides a requirements speciation) and passed to the procurement department.
• Purchase orders can be of various types: standard, one-time buy, planned (agreement with a specific item at an approximate date), and blanket (an agreement with non-specific date, quantity, and amount).
• Purchase orders are normally accompanied by terms and conditions, which form the contractual agreement of the transaction.

Key Term

Purchasing

Purchasing refers to a business or organization attempting to acquiring goods or services to accomplish the goals of its enterprise.

Example

• Successful supply chain management requires a shift from the management of individual functions to the integration of activities, such as purchasing, into key supply chain processes. For example, a purchasing department will place orders as requirements become known.

Purchasing is the formal process of buying goods and services. Purchasing managers/directors, and procurement managers/directors, guide the organization’s acquisition procedures and standards. The purchasing process can vary from one organization to another but usually involves certain key elements.

Most organizations use a three-way check as the foundation of their purchasing programs. This involves three departments in the organization, each of which completes a different part of the acquisition process. The three departments do not report to the same senior manager, which prevents unethical practices and lends credibility to the process. These departments may be designated as any of the following: purchasing, receiving, accounts payable or engineering, purchasing and accounts payable, or plant management. Combinations vary significantly, but a purchasing department and accounts payable are usually two of the three departments involved.

The purchasing process typically starts with a demand or specific requirements for a physical part (inventory) or a service. A requisition detailing the requirements is generated (and in some cases provides a requirements speciation) and passed to the procurement department. A Request for Proposal (RFP) or Request for Quotation (RFQ) is then produced. Suppliers respond to the RFQ with quotes, and a review is undertaken in order to determine the best offer (a judgment based on price, availability, and quality) and issue the purchase order.

Purchase orders (POs) can be of various types:

• Standard: a one time buy
• Planned: an agreement on a specific item at an approximate date
• Blanket: an agreement on specific terms and conditions (date and quantity and amount are not specified)

POs are normally accompanied by terms and conditions, which represent the contractual agreement of the transaction. The supplier delivers the product and/or service and the customer records the delivery (in some cases, the delivery is accompanied by a goods inspection process). The supplier then issues an invoice that is cross-checked with the purchase order and the record of the product and/or service received. Finally, payment is made.

Successful supply chain management requires an effective shift from the management of individual functions to the integration of activities, such as purchasing, into key supply chain processes. For instance, a purchasing department will place orders as requirements become known.

Acquisition Process

Model of the acquisition process for major systems in industry and defense: The process is defined by a series of phases, during which technology is defined and matured into viable concepts, which are subsequently developed and prepared for production.

10.4.2: Inventory Management

Learning Objective

Recognize the applications and benefits of inventory management

Key Points

• Inventory refers to a list compiled for some formal purpose, such as the details of an estate or the contents of a rented house.
• Inventory management is required at different locations within a facility or within many locations of a supply network in order to plan for the production and stock of materials.
• Inventory management addresses issues including: replenishment lead time; carrying costs of inventory; asset management; inventory forecasting; inventory valuation; inventory visibility; and future inventory price forecasting.
• Supply chain activities can be grouped into strategic, tactical, and operational categories.
• Supply chain activities can be grouped into strategic, tactical, and operational levels.

Key Terms

tactical planning

an organization’s process of determining how to optimize current resources and operations

supply chain

A supply chain is a system of organizations, people, technology, activities, information and resources involved in moving a product or service from supplier to customer.

In the United Kingdom, inventory typically refers to a list compiled for some formal purpose, such as one that itemizes an estate going to probate or the contents of a furnished house to be rented. In the U.S. and Canada, inventory has become the equivalent of the British term stock; that is, it refers to material that is available from and stocked by a business. In the context of accounting, inventory or stock is considered an asset.

Inventory Management

Inventory management tracks the shape and percentage of stocked goods. At different locations within a facility, or within many locations of a supply network, inventory management must precede the regular and planned course of production and stocking of materials .

Inventory Management

Inventory management is primarily concerned with specifying the shape and percentage of stocked goods.

Inventory management addresses a number of concerns, including: replenishment lead time; carrying costs of inventory; asset management; inventory forecasting; inventory valuation; inventory visibility; future inventory price forecasting; physical inventory; available physical space for inventory; quality management; replenishment; returns and defective goods; and demand forecasting. By effectively managing these issues, a business can achieve optimal inventory levels. However, the management process is on-going as a business and its needs shift and respond to the wider environment.

Inventory management often involves a retailer seeking to acquire and maintain a proper merchandise assortment while ordering, shipping, handling, and related costs are kept in check. It requires systems and processes that identify inventory requirements, set targets, provide replenishment techniques, report actual and projected inventory status, and handle all functions related to the tracking and management of material. These include the monitoring of material moved into and out of stockroom locations, as well as the reconciling of inventory balances. Processes may also include ABC analysis, lot tracking, and cycle counting support.

Management of inventories, aimed primarily at determining and controlling stock levels within the physical distribution system, serves to balance the need for product availability against the need for minimizing stock holding and handling costs. Reasons for keeping an inventory include:

• Time: The time lag in the supply chain from supplier to user requires the availability of a certain amount of inventory for use during this lead time. In practice, inventory is maintained for consumption during variations in lead time, and lead time itself can be addressed by ordering a specified number of days in advance.
• Uncertainty: Inventories are maintained as buffers to meet uncertainties in demand, supply, and movement of goods.
• Economies of scale: To deliver one unit of product at a time, and in response to the specific need and location of a given user, would be costly and logistically difficult. In contrast, bulk buying, movement, and storage translate into economies of scale and inventory.

Inventory and the Supply Chain

Supply chain activities can be grouped into strategic, tactical, and operational levels. Inventory considerations present at each level include:

Strategic: Network optimization, including the number, location, and size of warehousing, distribution centers, and facilities.

Tactical: Inventory decisions, including quantity, location, and quality of inventory.

Operational: Sourcing planning, including current inventory and forecast demand, done in collaboration with all suppliers; inbound operations, including transportation from suppliers and receiving inventory; outbound operations, including all fulfillment activities, warehousing, and transportation to customers; management of non-moving, short-dated inventory and avoidance of short-dated products.

10.4.3: Scheduling

Learning Objective

Explain the benefits of using modern scheduling tools

Key Points

• Production scheduling aims to maximize the efficiency of operations and reduce costs.
• Benefits of production scheduling include process change-over reduction; inventory reduction; leveling; reduced scheduling effort; increased production efficiency; labor load leveling; accurate delivery date quotes; and real time information.
• Minute-by-minute production scheduling for each manufacturing facility in the supply chain occurs at the operational level of supply chain activities.
• Benefits of production scheduling include process change-over reduction, inventory reduction, leveling, reduced scheduling effort, increased production efficiency, labor load leveling, accurate delivery date quotes and real time information.
• Production scheduling for each manufacturing facility in the supply chain (minute by minute) takes place at the operational level of supply chain activities.

Key Terms

Backward scheduling

Backward scheduling is planning the tasks from the due date or required-by date to determine the start date and/or any changes in capacity required.

Forward scheduling

Forward scheduling is planning the tasks from the date resources become available to determine the shipping date or the due date.

maturity date

the time of the final payment of a loan or other financial instrument, at which point the principal (and all remaining interest) is due to be paid

Example

• In order to reduce costs, an airline may want to minimize the number of airport gates required for its aircraft. Scheduling software allows planners to determine how this might be done, enabling them to analyze time tables, aircraft usage, or the flow of passengers.

Scheduling is an important tool in the manufacturing and engineering industries, where it can significantly impact the productivity of a particular process. In manufacturing, the purpose of scheduling is to minimize production time and cost by telling a production facility when to make a product and with which staff and equipment.

Production scheduling aims to maximize the efficiency of an operation and reduce its costs . Modern scheduling tools greatly outperform older, manual scheduling methods. Today’s tools provide the production scheduler with powerful graphical interfaces, which can be used to visually optimize real time work loads in various stages of production. Further, pattern recognition software reveals scheduling opportunities that might not be apparent without this view into the data.

Scheduling Visualization

This Gantt chart aids in scheduling by visualizing and relating phases of production.

For example, in order to reduce costs, an airline may want to minimize the number of airport gates required for its aircraft. Scheduling software allows planners to see how this might be done, enabling them to analyze time tables, aircraft usage, or the flow of passengers.

Companies use backward and forward scheduling to allocate plant and machinery resources, determine human resources and production processes, and purchase materials. Forward scheduling involves planning tasks from the date that resources become available in order to determine the shipping date or the due date. Backward scheduling involves planning tasks from the due date or required-by date in order to determine the start date and/or necessary changes in capacity.

Production scheduling has a number of benefits:

• Process change-over reduction
• Inventory reduction and leveling
• Reduced scheduling effort
• Increased production efficiency
• Labor load leveling
• Accurate delivery date quotes
• Real time information

Finally, minute-by-minute production scheduling occurs for each manufacturing facility in the supply chain at the operational level of supply chain activities.

10.4.4: Routing

Learning Objective

Explain the process of routing

Key Points

• Routing is performed for many kinds of networks, including the telephone network (circuit switching), electronic data networks (such as the Internet), and transportation networks.
• A transport network, (or transportation network in American English), is typically a network of roads, streets, pipes, aqueducts, power lines, or nearly any structure which permits either vehicular movement or flow of some commodity.
• Transport engineers use mathematical graph theory to analyze a transport network to determine the flow of vehicles (or people) through it.
• At the tactical level of supply chain activities, the transportation strategy of goods must be considered. This includes frequency, routes, and contracting.

Key Terms

transport network

A transport network, or transportation network in American English, is typically a network of roads, streets, pipes, aqueducts, power lines, or nearly any structure which permits either vehicular movement or flow of somecommodity.

routing

a method of finding paths from origins to destinations in a network such as the Internet, along which information can be passed

Routing is the process of selecting paths in a network along which to send network traffic. Routing is performed for many kinds of networks, including the telephone network (circuit switching), electronic data networks (such as the internet), and transportation networks. This chapter focuses on the role of routing in transportation networks.

Transport Networks

A transport network, (or transportation network in American English), is typically a network of roads, streets, pipes, aqueducts, power lines, or nearly any structure which permits either vehicular movement or flow of some commodity. Transport engineers use mathematical graph theory to analyze a transport network to determine the flow of vehicles (or people) through it. A transport network may combine different modes of transport.

Tactical Level

At the tactical level of supply chain activities, the transportation strategy of goods must be considered. This includes frequency, routes, and contracting of goods. A goal of a company when transporting goods is to ensure efficiency. Wear and tear of vehicles and the cost of gas can make some routes more expensive than others. In order to reduce costs, companies often look for ways to streamline routes and supply chain activities. GPS, or global positioning system, is a technological advancement that has helped companies determine which routes are the most expensive to maintain. These routes can be analyzed to determine if they can be eliminated, divided, and/or merged with other routes, or if finding a new route can help make the route more efficient. Sometimes transport is subcontracted to specialists or logistics partners.

Anycast Routing

A visual display of Anycast routing.

10.4.5: Outsourcing

Learning Objective

Analyze the effects of outsourcing on the supply chain

Key Points

• The specialization model creates manufacturing and distribution networks composed of multiple, individual supply chains specific to products, suppliers, and customers who work together to design, manufacture, distribute, market, sell, and service a product.
• Outsourcing involves not only the procurement of materials and components, but also the outsourcing of services that traditionally have been provided in-house.
• Managing and controlling a network of partners and suppliers requires a blend of both central and local involvement.
• Managing and controlling a network of partners and suppliers requires a blend of both central and local involvement. Hence, strategic decisions need to be taken centrally, with the monitoring and control of supplier performance and day-to-day liaison with logistics partners being best managed at a local level.

Key Term

supply chain

A supply chain is a system of organizations, people, technology, activities, information and resources involved in moving a product or service from supplier to customer.

Example

• In the early 21st century, businesses increasingly outsourced to suppliers outside their own country, sometimes referred to as offshoring or offshore outsourcing.

Outsourcing is the process of contracting an existing business process which an organization previously performed internally to an independent organization, where the process is purchased as a service.

Outsourcing

Outsourcing is the process of contracting an existing business process which an organization previously performed internally to an independent organization, where the process is purchased as a service.

The Rise of Outsourcing

In the 1990s, industries began to focus on “core competencies,” and adopted a specialization model. Companies abandoned vertical integration, sold off non-core operations, and outsourced those functions to other companies. This changed management requirements by extending the supply chain well beyond company walls and distributing management across specialized supply chain partnerships.

This transition also re-focused the fundamental perspectives of each respective organization. OEMs became brand owners that needed deep visibility into their supply base. They had to control the entire supply chain from above instead of from within. Contract manufacturers had to manage bills of material with different part numbering schemes from multiple OEMs and support customer requests for work -in-process visibility and vendor-managed inventory (VMI).

Outsourcing and the Supply Chain

The specialization model creates manufacturing and distribution networks composed of multiple, individual supply chains specific to products, suppliers, and customers who work together to design, manufacture, distribute, market, sell, and service a product. The set of partners may change according to a given market, region, or channel, resulting in a proliferation of trading partner environments, each with its own unique characteristics and demands.

Outsourcing involves not only the procurement of materials and components, but also the outsourcing of services that traditionally have been provided in-house. The logic of this trend is that the company will increasingly focus on those activities in the value chain where it has a distinctive advantage, and outsource everything else. This movement has been particularly evident in logistics, where the provision of transport, warehousing, and inventory control is increasingly subcontracted to specialists or logistics partners. Also, managing and controlling this network of partners and suppliers requires a blend of both central and local involvement. Hence, strategic decisions need to be taken centrally, with the monitoring and control of supplier performance and day-to-day liaison with logistics partners being best managed at a local level.

10.4.6: Logistics

Learning Objective

Differentiate between supply chain and logistics

Key Points

• Logistics involves the integration of information, transportation, inventory, warehousing, material handling, and packaging, and often security. Today, the complexity of production logistics can be modeled, analyzed, visualized, and optimized by plant simulation software but is constantly changing.
• Logistics applies to activities within one company involving distribution of the product, whereas the term “supply chain” also encompasses manufacturing and procurement and, therefore, has a much broader focus.
• Logistics as a business concept evolved in the 1950s due to the increasing complexity of supplying businesses with materials and shipping out products in an increasingly globalized supply chain, leading to a call for experts called “supply chain logisticians”.
• In business, logistics may have either internal focus (inbound logistics) or external focus (outbound logistics), covering the flow and storage of materials from point of origin to point of consumption (see supply chain management).
• There are two fundamentally different forms of logistics. One optimizes a steady flow of material through a network of transport links and storage nodes, and the other coordinates a sequence of resources to carry out some project.
• There are two fundamentally different forms of logistics: one optimizes a steady flow of material through a network of transport links and storage nodes; the other coordinates a sequence of resources to carry out some project.

Key Terms

inventory

The stock of an item on hand at a particular location or business.

supply chain

A system of organizations, people, technology, activities, information. and resources involved in moving a product or service from supplier to customer.

logistics

The process of planning, implementing, and controlling the efficient, effective flow and storage of goods, services, and related information from their point of origin to point of consumption for the purpose of satisfying customer requirements.

Logistics

The term Logistics Management or Supply Chain Management is the part of Supply Chain Management that plans, implements, and controls the efficient, effective, forward, and reverse flow and storage of goods, services, and related information between the point of origin and the point of consumption in order to meet customer’s requirements.

Distribution chain

Example of how companies may be supplied by the same distributor.

Logistics involves the integration of information, transportation, inventory, warehousing, material handling, and packaging, and often security. Today, the complexity of production logistics can be modeled, analyzed, visualized, and optimized by plant simulation software but is constantly changing. This can involve anything from consumer goods, such as food to IT materials, and aerospace and defense equipment.

There is often confusion over the terms “supply chain” and “logistics. ” It is now generally accepted that the logistics applies to activities within one company/organization involving distribution of product, whereas supply chain also encompasses manufacturing and procurement and, therefore, has a much broader focus as it involves multiple enterprises, including suppliers, manufacturers, and retailers, working together to meet a customer’s need for a product or service.

The Evolution of Logistics

Logistics as a business concept evolved in the 1950s due to the increasing complexity of supplying businesses with materials and shipping out products in an increasingly globalized supply chain, leading to a call for experts or supply chain logisticians. Business logistics can be defined as “having the right item in the right quantity at the right time at the right place for the right price in the right condition to the right customer,” and is the science of process and incorporates all industry sectors. The goal of logistics work is to manage the fruition of project life cycles, supply chains, and resultant efficiencies.

Starting in the 1990s, several companies chose to outsource the logistics aspect of supply chain management by partnering with a 3PL, third-party logistics provider. Companies also outsource production to contract manufacturers. Technology companies have risen to meet the demand to help manage these complex systems.

Logistic Focus

In business, logistics may have either an internal focus (inbound logistics) or external focus (outbound logistics).

Inbound logistics is one of the primary processes of logistics, concentrating on purchasing and arranging the inbound movement of materials, parts, and/or finished inventory from suppliers to manufacturing or assembly plants, warehouses, or retail stores.

Outbound logistics is the process related to the storage and movement of the final product and the related information flows from the end of the production line to the end user.

10.4.7: Quality Control

Learning Objective

Discuss the role of quality control in business

Key Points

• The purpose of quality control is to make sure that certain processes perform to a company’s set standards.
• Quality control in relation to customers involves the continuous act of making sure products, designed and manufactured, are produced to meet and exceed customer needs.
• Quality should be measured differently for products and services and judged by their own set of dimensions.
• Controls include product inspection, where every product is visually examined, often with a stereo microscope to perceive fine detail before the product is sold into the external market.
• Responsibility for overall quality lies with top management. Top management must establish strategies, institute programs for quality, and motivate managers and workers.

Key Terms

quality control

A control, such as inspection or testing, introduced into an industrial or business process to ensure quality.

organizational culture

Organizational culture is the collective behavior of humans who are part of an organization and the meanings that the people attach to their actions.

total quality management

A strategic approach to management aimed at embedding awareness of quality in all organizational processes.

Example

• Controls include product inspection, where every product is examined visually. Inspectors will be provided with lists and descriptions of unacceptable product defects such as cracks or surface blemishes.

Quality can be thought of as the degree to which performance of a product or service meets or exceeds expectations. Quality control is a process that evaluates output against a standard and takes corrective action when output doesn’t meet these predetermined standards. Therefore, quality control in relation to customers would be the continuous act of making sure products, designed and manufactured, are produced to meet and exceed the needs of customers. For contract work, particularly work awarded by government agencies, quality control issues are among the top reasons for not renewing a contract .

quality control

The purpose of quality control is to make sure that certain processes are performing up to a company’s set standards.

This approach places an emphasis on three aspects:

• Elements such as controls, job management, defined and well-managed processes, performance and integrity criteria, and identification of records
• Competence, such as knowledge, skills, experience, and qualifications
• Soft elements, such as personnel integrity, confidence, organizational culture, motivation, team spirit, and quality relationships

Controls include product inspection, where every product is examined visually, often using a stereo microscope for fine detail before the product is sold on the external market. Inspectors will be provided with lists and descriptions of unacceptable product defects such as cracks or surface blemishes.

An emphasis on quality control heightened during World War II. At that time quality control evolved to quality assurance and is now better known as a Strategic Approach, a tool for improving not only products but also processes and services. Quality should be measured differently for products and services, and judged by their own set of dimensions. Responsibility for overall quality lies with top management. Top management must establish strategies, institute programs for quality, and motivate managers and workers. Most of the time, managers aim to improve or maintain the quality of an organization as a whole; this is referred to as Total Quality Management (TQM). TQM involves a continual effort for quality improvement by everyone in an organization. The entire supply chain must be involved for an organization to meet and exceed goals of quality control.

10.4.8: Investment in Operations

Learning Objective

Examine the effect of technological advances on supply chain optimization

Key Points

• Supply chain optimization applies processes and tools that ensure the optimal operation of a manufacturing and distribution supply chain.
• Supply chain managers try to maximize the profitable operation of their manufacturing and distribution supply chain.
• Supply chain optimization may include refinements at various stages of the product lifecycle, and new, ongoing, and obsolete items are optimized in different ways.
• Optimization solutions are typically part of, or linked to, the company’s replenishment systems distribution requirements planning, so that orders can be automatically generated to maintain the model stock profile. The algorithms used are similar to those used in making financial investment decisions; the analogy is quite precise, as inventory can be considered to be an investment in prospective return on sales.
• Supply chain optimization may include refinements at various stages of the product lifecycle, so that new, ongoing and obsolete items are optimized in different ways: and adaptations for different classes of products, for example seasonal merchandise.

Key Term

supply chains

A supply chain is a system of organizations, people, technology, activities, information and resources involved in moving a product or service from supplier to customer.

Example

• Because the movement of product (called the stock transfer) needs to be in economic shipping units (i.e., complete unit loads or full truckloads), a series of decisions must be made. Many existing distribution planning systems round quantities up to the nearest full shipping unit. The creation of truckloads, for example, as economic shipping units requires optimization systems that ensure that axle constraints and space constraints are met, and that loading can be achieved in a damage-free way. These goals are generally achieved by adding time-phased requirements until loads meet a specified minimum weight or cube.

Supply chains have become faster, cheaper, and more reliable through investment in information technology, cost-analysis, and process-analysis.

Supply chain optimization applies processes and tools that ensure optimal operation of a manufacturing and distribution supply chain. These include the optimal placement of inventory within the supply chain and the minimizing of operating costs associated with manufacturing, transportation, and distribution. Optimization may also incorporate computer-based mathematical modelling techniques .

Supply Chain

Supply chain optimization applies processes and tools that ensure the optimal operation of a manufacturing and distribution supply chain.

Ongoing investment in a company’s operations is necessary in order for supply chain optimization to be achieved. Supply chain managers may employ optimization such as maximizing gross margin return on inventory invested (GMROII); balancing the cost of inventory at all points in the supply chain with availability to the customer; minimizing total operating expenses (e.g., transportation, inventory, and manufacturing); and maximizing gross profit of products distributed through the supply chain.

Supply chain optimization addresses the general supply chain problem of delivering products to customers at low cost and high profit. This involves balancing the costs of inventory, transportation, distribution, and manufacturing, and supply chain optimization has applications in all industries that manufacture and/or distribute goods (retail, industrial, and/or consumer packaged goods [CPG]).

The classic supply chain approach has been to forecast future inventory demand using statistical trending and “best fit” techniques, which are based on historic demand and predicted future events. The advantage of this approach is that it can be applied to data aggregated at a fairly high level (e.g., category of merchandise; weekly, by customer category), thus requiring modest database sizes and small amounts of manipulation. Unpredictability in demand is subsequently managed by setting safety stock levels; for example, a distributor might hold two weeks of supply for a steadily in-demand article but twice that supply for an article whose demand is more erratic.

Using this forecast demand, a supply chain manufacturing and distribution plan is created to manufacture and distribute products to meet the demand at low cost and/or high profit. This plan typically addresses several questions:

• How much of each product should be manufactured each day?
• How much of each product should be made at each manufacturing plant?
• Which manufacturing plants should re-stock which warehouses with which products?
• What transportation modes should be used for warehouse replenishment and customer deliveries?

The technical ability to record and quickly manipulate large databases has allowed for the emergence of a new breed of supply chain optimization solutions, which are capable of forecasting at a granular level (for example, per article per customer per day). Some vendors are applying “best fit” models to this data, to which safety stock rules are applied, while other vendors have started to apply stochastic techniques to the optimization problem.

Supply chain optimization may include additional refinements at various stages of the product lifecycle, and new, ongoing, and obsolete items are optimized in different ways. Finally, while most software vendors are offering supply chain optimization as a packaged solution and integrated in ERP software, some vendors are running the software on behalf of clients as application service providers.

10.5: Planning for Operations

10.5.1: New Product Development

Organizations put a lot of time and money into new products and thus deploy various methods in an attempt to mitigate the risks.

Learning Objective

Distinguish between minimum viable product, continuous deployment, split testing, vanity metrics, laboratory tests, expert evaluations and customer evaluations

Key Points

• Organizations use formal systems to evaluate new products.
• Product testing and sales forecasts are used to help diminish the risk of introducing a new product.
• It’s possible to eliminate some of the risks associated with introducing a new product by launching the smallest amount of the product possible to test demand.
• Several methods can be used to evaluate new products before they are launched.

Key Terms

product differentiation

perceived differences between the product of one firm and that of its rivals so that some customers value it more

product

Any tangible or intangible good or service that is a result of a process and that is intended for delivery to a customer or end user.

minimum viable product

The minimum viable product is a product stripped down to it’s most basic, necessary features in order to get that product into the consumer’s hands in the quickest, most affordable way.

product placement

a form of advertising where a brand, good, or service is placed in the media, for money

Example

• The birth of Zappos provides an example of how an organization can release the smallest amount of the product possible to collect the maximum amount of validated learning about customers with the least amount of effort (a minimum valuable product). Zappos founder Nick Swinmurn wanted to test the hypothesis that customers were ready and willing to buy shoes online. Instead of building a website and a large database of footwear, Swinmurn approached local shoe stores, took pictures of their inventory, posted the pictures online, bought the shoes from the stores at full price, and sold them directly to customers if they purchased the shoe through his website. Swinmurn deduced that customer demand was present, and Zappos would eventually grow into a billion dollar business based on the model of selling shoes online.

Introduction

Organizations invest a lot of money to create new products that perform effectively. Nonetheless, firms often struggle to convince people to incorporate these new products into their routines (Arts 2008). For example, it took 18 years for microwave ovens to gain acceptance in Greece (Tellis, Stremersch, and Yin 2003). The ultimate success of new products depends on consumers accepting them (Arts 2008). .

New product

Organizations invest a lot of money to create new products that perform effectively.

Product Evaluation

The term “product” refers to both goods and services. A product is anything that can be offered to a market to satisfy a want or need. When an organization adds a new product, there is both potential benefit and risk. As a result, organizations implement formal systems for evaluating new products. In particular, there is a concerted effort to forecast projected sales and thus reduce some of the financial risk.

While evaluating new products, there is also the possibility of generating innovative ideas that can later go through the testing process. Idea generation is an essential part of marketing strategy and is critical to the success of a company. When such product ideas move further along, a key step is to create a prototype or working version of the new offering. Again, market testing is crucial at every stage in the development process.

Minimum Viable Product

A minimum viable product (MVP) is the “version of a new product which allows a team to collect the maximum amount of validated learning about customers with the least effort. ” The goal of an MVP is to test fundamental business hypotheses (or leap-of-faith assumptions) and to help entrepreneurs begin the learning process as quickly as possible.

For example, Ries notes that Zappos founder Nick Swinmurn wanted to test the hypothesis that customers were ready and willing to buy shoes online. Instead of building a website and a large database of footwear, Swinmurn approached local shoe stores, took pictures of their inventory, posted the pictures online, bought the shoes from the stores at full price, and sold them directly to customers if they purchased the shoe through his website. Swinmurn deduced that customer demand was present, and Zappos would eventually grow into a billion-dollar business based on the model of selling shoes online.

Continuous Deployment

Continuous deployment is a process “whereby all code that is written for an application is immediately deployed into production,” resulting in a reduction of cycle times. Ries states that some of the companies he’s worked with deploy new code into production as often as 50 times a day. The phrase was coined by Timothy Fitz, one of Ries’s colleagues and an early engineer at IMVU.

Split Testing

A split test or A/B test is an experiment in which “different versions of a product are offered to customers at the same time. ” The goal of a split test is to observe changes in behavior between the two groups and to measure the impact of each version on an actionable metric. A/B testing can also be performed in serial fashion where a group of users one week may see one version of the product while the next week users see another.

Vanity Metrics

Vanity metrics are measurements which give “the rosiest picture possible” but do not accurately reflect the key drivers of a business. This is in contrast to actionable metrics, the measurement of which can lead to a business decision and subsequent action.

Laboratory Tests

Laboratory tests provide information regarding the performance of new products in extreme settings. For example, a new copy machine can be tested at various work loads, like numbers of copies and speed per minute to test the relationship between workload and paper jam.

Expert Evaluations

Expert evaluators can be used at all phases of the new product development process. For instance, experts can be used to estimate whether or not a new product idea will be accepted in the marketplace before a prototype even exists.

Customer Evaluations

In later stages of development, customers can be recruited to evaluate prototypes. There is an attempt to test new products under conditions that are relatively close to actual use.

10.5.2: Designing the Operation

Designing effective operations is critical, and can have both short-term and long-term impacts on an organization’s longevity.

Learning Objective

Explain the importance of operations management on the success of a business

Key Points

• Operations management is a strategic function within an organization.
• Operations decisions include elements needed to produce goods and services, and make them available to customers.
• Operations management touches upon multiple areas of a business, from engineering and research & development, to human resources and accounting.

Key Terms

operation

The method or practice by which actions are done.

Operations management

An area of management concerned with overseeing, designing, controlling the process of production, and redesigning business operations in the production of goods and/or services.

Designing the Operation

Operations management is a strategic function in organizations that adds value to customers and allows businesses to successfully produce goods and deliver services. Operational decisions determine how well these goods and services meet the needs of the organization’s target market, and consequently, whether the organization will be able to survive over the long-term .

Smooth Landing

Operations management plays a key role in the success in airline companies.

If the organization has made mostly good operational decisions in designing and executing its transformation system to meet the needs of customers, its prospects for long-term survival are greatly enhanced.

Operations management and planning are common in industries such as the airlines, manufacturing companies, service provider organizations, the military, and government. Some examples of management and planning include:

• Scheduling airlines, including both planes and crew
• Deciding the appropriate place to site new facilities such as a warehouse, factory, or fire station
• Managing the flow of water from reservoirs; identifying possible future development paths for parts of the telecommunications industry
• Establishing the information needs and appropriate systems to supply them within the health service
• Identifying and understanding the strategies adopted by companies for their information systems

Operational Decisions

As mentioned, operations decisions have both long-term and short-term impacts on the organization’s ability to produce goods and services, and can provide added value to customers and employees. Operations management touches upon multiple areas of a business, from engineering and research & development, to human resources and accounting. Likewise, the decisions management makes when parceling technological, monetary, and people resources across the organization typically falls under the following areas:

• Inventory decisions
• Capacity decisions
• Quality decisions
• Scheduling decisions
• Process decisions
• Technology decisions
• Location decisions

Most often when a company sets operational goals and objectives, they are considered relatively short term.

10.5.3: Capacity Planning

Capacity planning revolves around answering the question “How much? ” in both long-term and short-term situations.

Learning Objective

Compare and contrast long-term and short-term capacity decisions

Key Points

• Capacity planning takes place on a daily basis in some industries.
• Organizations must closely examine the services and the cost of services offered to their customers when making capacity decisions.
• In a grocery store or supermarket, managers must ensure that sufficient cash registers and employees are on-hand to meet check-out demand and provide good customer service.

Key Term

capacity

The maximum that can be produced on a machine or in a facility or group.

Introduction

When making capacity decisions, managers must answer the simple question, “How much?” Determining the organization’s capacity to produce goods and services involves both long-term and short-term decisions. Long-term capacity decisions involve facilities and major equipment investments .

capacity

The question managers must answer for capacity decisions is simply “How much?”

Long-term decisions

In 2007, Airbus introduced its Super Jumbo Jet that carries up to 850 passengers and costs USD 3 billion. The Super Jumbo Jet provides huge amounts of passenger carrying capacity, but before an airline purchases this jet, it needs to decide if it has enough passengers to generate the revenue to pay for the plane and earn profits for the airline. Buying a large single airplane like the Super Jumbo Jet may not be the right capacity decision for an airline that serves numerous medium-sized cities. On the other hand, an airline that serves passengers traveling between large cities like New York City, USA, and Shanghai, China might find the Super Jumbo Jet to be a perfect choice for meeting consumer demand.

Short-term decisions

Capacity decisions are also required in short-term situations. In a grocery store, the number of customers that need to pay for their groceries at any one point during the day will vary significantly. To provide good customer service, managers must make sure that sufficient cash registers and employees are on-hand to meet check-out demand at any given time.

Similarly, hotels must make sure that they have enough employees to register arriving guests, clean hotel rooms, and provide food and beverages to customers. These decisions must be made carefully to avoid excessive labor costs that result from having an excess of employees available for the number of customers being served.

10.5.4: Facilities Layout

Facility layout decisions are based on criteria aimed at creating an effective and efficient workflow and high standard production.

Learning Objective

Outline the key considerations in facility design

Key Points

• There are three types of workflow layouts that managers can choose from.
• Office and factory facilities are approached differently.
• A facility manager’s industry can also influence the facilities layout design.

Key Term

facilities layout

Facility layout is simply the way a facility is arranged in order to maximize processes that are not only efficient but effective towards the overall organizational goal.

Examples

• A paper mill is a good example of a repetitive process. The manufacturing requirements are well-understood, capital investment in automation is high, and production volume is extremely high to keep unit production costs as low as possible.
• Health care clinics provide a good example of an intermittent process. X-ray equipment and technicians are organized into an “X-ray Department”. Other departments are created for pediatrics, lab, gynecology, pharmacy, physical therapy, and many more. Patients are routed only to the departments that are needed for their particular treatment requirements.

Introduction

Facilities is defined as the workspace and equipment needed to carry out the operations of the organization. This includes offices, factories, computers, and trucks.

The location, design, and layout of an organizations’ facilities are central to maximising the efficiency of the overall operations system.

In this unit, we’re going to focus on facility design and layout.

Facilities Design and Layout

After choosing the facility’s location, the next stage in operations planning is to design the best physical layout for the facility. The avaliable space needs to be assessed with workstations, equipment, storage, and other amenities need to be arranged. The aim is to allow for the most efficient workflow without disruption. A workplace that has carefully arranged its layout will allow for a more effictive and efficient workflow and produce its good or services to a high standard.

There are three types of workflow layouts that managers can choose from:

• Process layout: arranged in departments (e.g., hospitals).
• Product layout: production line (e.g., a car assembly plant).
• Fixed-position layout: building a large item (e.g., jumbo jet).

Facility Layout Considerations

Facility managers should consider several factors when designing the layout of a facility to achieve maximum effectiveness.

• Does the design and layout allow for growth or change? Is there a chance that your company will experience significant growth? Could some other change come about that could influence the layout of your facility? In business, anything is possible. Make sure that same is true of your facilities layout. While making changes is a costly and undertaking them shouldn’t be taken lightly, your layout should be flexible enough to allow a redesign if the situation calls for it.
• Is the process flow smooth? If you are running a factory, for example, the flow should be such that the raw materials enter at one end and the finished product exits at the other. The flow doesn’t have to form a straight line, but there should be no backtracking. Backtracking creates confusion. Employees get confused (“Has that been done yet? “), parts get lost, and coordination is very difficult. You need to have a smooth process to be efficient.
• Are materials being handled efficiently? Here simplicity is best.
• Does the facility layout aid the business in meeting its production needs? Is there enough space and is it used efficiently? Have you allowed enough space for shipping and receiving? Can different areas of the business communicate effectively? Does the layout lend itself to promotional activities? (e.g., showing the facilites to potential customers)
• Does the layout contribute to employee satisfaction and moral? Numerous studies have linked employee moral to productivity. So managers should take this point into consideration when designing the layout of their facilities. How can this be done? Paint the walls light colors, allow for windows and space, include a cafeteria and a gym. Some of the options may cost lots of money, but if it increases productivity in the long run, it is probably worth making the investment.

Are the Facilities for an Office or a Factory?

Office Space

An office will have different layout requirements than a factory.

Office and factory facilities are approached differently.

Factories move materials from point A to point B to produce a final products. The process uses equipment and utilities. Minimizing transportation costs may be one of the criteria of planning the layout of a factory. Another important consideration for factories in the necessity for maintenance of machinery. As such, careful consideration of enabling access to technicians is critical to ensuring minimal workflow disruptions in a scenario of updating, repairing or replacing machinery.

Offices, on the other hand, produces information. The form may be physical, electronic, or oral, but the the final result is still information. Office facility layout is harder to quantify than factory facilities layout, but the goal should be to minimize communication costs and maximize productivity.

Your industry can also influence the facilities layout design. The facility layout for service industries will differ from that of retailers and manufacturers. It all depends on organization’s needs.

10.5.5: Location Choice and Site Planning

An organization’s location choice impacts its efficiency and effectiveness, so it is important for it to properly weigh the various factors.

Learning Objective

Outline the key considerations for deciding the location of facilities

Key Points

• There are many factors that can determine where an organization will locate its facilities. For any given situation, some factors become more important than others in how facility location affects an organization’s efficiency and effectiveness.
• The factors determining where a company chooses to locate its facilites include supply, customer, community, and labor considerations.
• An essential part of choosing a location is doing proper research to verity that the location matches an organization’s strategic requirements.

Key Term

facility

The physical means or contrivances to make something (especially a service) possible; the required equipment, infrastructure, location etc.

Example

• The following shows the importance of researching a location choice to make sure it is in line with strategic requirements. In the 1990s, MCI, a major US telecommunications company, decided to relocate its engineering services division from MCI’s headquarters in Washington DC to Colorado Springs, Colorado to reduce labor and facility costs. The decision was largely unsuccessful due to the high costs of employee relocation and the fact that much of the ethnically diverse engineering workforce did not want to live in Colorado Springs. Unlike Washington DC, Colorado Springs did not have cultural diversity to match with its diverse and highly educated workforce, it lacked employment options for spouses, and the work ethic was more relaxed due to the beautiful natural setting that provided unlimited options for outdoor recreation. In short, if MCI had put more effort into researching how well the Colorado Springs location matched its strategic requirements, it probably could have saved itself millions of dollars and a great deal of internal disruption to the organization.

Introduction

There are many factors that can determine where an organization will locate its facilities. For any given situation, some factors become more important than others in how facility location affects an organization’s efficiency and effectiveness.

Key Factors

• Proximity to sources of supply: Firms that process bulk raw materials usually locate close to the source of supply to reduce transportation costs. Paper mills locate close to forests, canneries are built close to farming areas, and fish processing plants are located close to the harbors where the fishing vessels dock.
• Proximity to customers: There are several reasons why an organization would locate close to end customers. Service firms need to be close to customers to be convenient, as is the case for grocery stores, gas stations, fast food restaurants, and hospitals. Transportation costs can also require proximity to customers, as in the case of concrete manufacturing. Perishable products often require that they be produced close to the final market, as is the case for bakeries and fresh flowers.
• Community factors: Communities may offer a number of incentives to entice companies, including waiving or reducing taxes, and providing access roads, water and sewer connections, and utilities. Community attitudes can also play a role in an organization’s location decision. Some communities may actively discourage companies that might bring more pollution, noise, and traffic to the area. Some communities may not want a prison to be located in their community. Other communities may welcome such firms because of the jobs, tax revenues, and economic diversity they promise.
• Labor factors: Research shows that the majority of location decisions are largely based on labor factors, since labor is a critical variable for many firms. Labor factors include the prevailing wage rate in a community for similar jobs, the supply of qualified workers, and the average education level of the local population (percentage of high school graduates, etc.). Other labor factors can include the degree of union organizing and the general work ethic of a community, as well as other measures of absenteeism, and worker longevity in a job can play a strong role when a firm makes a location decision.
• Other factors: Many other factors can play a role in the location decision, including quality of life (crime rates, good schools, climate, and recreation options), access to major transportation arteries, construction costs, proximity of the competition, and opportunities for future expansion.

As mentioned earlier, the importance of any location factor can vary greatly, depending on the circumstances of the decision.

Colorado river

Colorado is beautiful, but it might not be the best location for all organizations.

In the 1990s, MCI, a major US telecommunications company, decided to relocate its engineering services division from MCI’s headquarters in Washington DC to Colorado Springs, Colorado to reduce labor and facility costs. The decision was largely unsuccessful due to the high costs of employee relocation and the fact that much of the ethnically diverse engineering workforce did not want to live in Colorado Springs.

Unlike Washington DC, Colorado Springs did not have cultural diversity to match with its diverse and highly educated workforce, it lacked employment options for spouses, and the work ethic was more relaxed due to the beautiful natural setting that provided unlimited options for outdoor recreation.

In short, if MCI had put more effort into researching how well the Colorado Springs location matched its strategic requirements, it probably could have saved itself millions of dollars and a great deal of internal disruption to the organization.

10.5.6: Sustainability Initiatives

Sustainability initiatives consider every dimension of how a business operates in the social, cultural, and economic environment.

Learning Objective

Explain the principles of corporate sustainability

Key Points

• Transparency deals with the idea that having an engaging and open environment within the company, as well as the community, will improve performance and increase profits.
• Employee development involves the idea that people are the most important renewable resource and, therefore, are the strongest asset to any organization.
• Resource efficiency refers to that fact that companies must adapt to a rapidly changing environment by being prepared to change and implement new creative ideas related to sustainability.
• Essential principles of a sustainability initiative include triple top-line value production, nature-based knowledge and technology, products of service and products of consumption, renewable energy, local economies, and continuous improvement.

Key Terms

sustainability

The capacity to support, maintain, or endure.

stewardship

The act of caring for or improving with time.

geothermal

Pertaining to heat energy extracted from reservoirs in the earth’s interior.

Example

• The following shows the importance of researching a location choice to make sure it is in line with strategic requirements. In the 1990s, MCI, a major US telecommunications company, decided to relocate its engineering services division from MCI’s headquarters in Washington DC to Colorado Springs, Colorado to reduce labor and facility costs. The decision was largely unsuccessful due to the high costs of employee relocation and the fact that much of the ethnically diverse engineering workforce did not want to live in Colorado Springs. Unlike Washington DC, Colorado Springs did not have cultural diversity to match with its diverse and highly educated workforce, it lacked employment options for spouses, and the work ethic was more relaxed due to the beautiful natural setting that provided unlimited options for outdoor recreation. In short, if MCI had put more effort into researching how well the Colorado Springs location matched its strategic requirements, it probably could have saved itself millions of dollars and a great deal of internal disruption to the organization.

Sustainability, in a general sense, is the capacity to support, maintain, or endure. Since the 1980s, human sustainability has been related to the integration of environmental, economic, and social dimensions towards global stewardship and responsible management of resources .

Sustainability

Sustainability is related to the integration of environmental, economic, and social dimensions towards global stewardship and responsible management of resources.

Corporate sustainability is a business approach that creates long-term consumer and employee value by not only creating a “green” strategy aimed towards the natural environment, but taking into consideration every dimension of how a business operates in the social, cultural, and economic environment. It also involves formulating strategies to build a company that fosters longevity through transparency and proper employee development. Three key principles that should form the foundation of a corporate sustainability initiative are: transparency, employee development, and resource efficiency.

Transparency deals with the idea that having an engaging and open environment within the company, as well as the community, will improve performance and increase profits. An open culture promotes employee involvement in regards to the innovation and creative processes. Reaching out to the community creates a much bigger team and provides evaluation from all angles. Companies are looking inward and realizing changes must be made to fulfill environment needs such as energy efficiency, limiting product waste and toxicity, and designing innovative products.

Employee development involves the idea that people are the most important renewable resource and, therefore, are the strongest asset to any organization. A strong development program could be the underlying factor for a company’s success or failure. Employees are the concrete foundation for the company and must be thoroughly analyzed and evaluated to tap into their true motivations and desires. For a company that wants to reach its greatest potential, employees must work towards improvement rather than perfection. Programs should be implemented that reward star performers, foster the creative learning process, and provide comprehensive training and evaluating.

Resource efficiency refers to that fact that companies must adapt to a rapidly changing environment by being prepared to change and implement new creative ideas related to sustainability. Companies should not throw away old products and materials, but rather be prepared with upgraded technology that can transform the product. New solutions that improve recycling and waste redirecting can ultimately reduce costs and increase profits. For example, Wal-Mart Stores Inc. has redirected more than 64% of the waste generated by stores and Sam’s Club facilities. In 2009 alone, they recycled more than 1.3 million pounds of aluminum, 120 million pounds of plastics, 11.6 million pounds of mixed paper, and 4.6 billion pounds of cardboard. On an annual basis, they expect to save around $20 million and prevent 38 million pounds of waste being sent to landfills.

Essential Principles of a Sustainability Initiative

1. Triple top-line value production: This establishes three simultaneous requirements of sustainable business activities: 1) financial benefits for the company, 2) natural world betterment, and 3) social advantages for employees and members of the local community—with each of these three components recognized as equal in status.
2. Nature-based knowledge and technology: This biomimicry-based principal involves the conscious emulation of natural-world genius in terms of growing our food, harnessing our energy, construction, conducting business, healing ourselves, processing information, and designing our communities.
3. Products of service and products of consumption: Products of service are durable goods routinely leased by the customer that are made of technical materials and are returned to the manufacturer and re-processed into a new generation of products when they are worn out. Products of consumption are shorter lived items made only of biodegradable materials. This principal requires that we manufacture only these two types of products and necessitates the gradual but continual reductions of products of service and their replacement with products of consumption as technological advancements allow.
4. Solar, wind, geothermal, and ocean energy: This principal advocates employing only sustainable energy technology—solar, wind, ocean, and geothermal—that can meet our energy needs indefinitely without negative effects for life on Earth.
5. Local-based organizations and economies: This principle calls for durable, beautiful, and healthy communities with locally-owned and operated businesses and locally-managed non-profit organizations, along with regional corporations and shareholders working together in a dense web of partnerships and collaborations.
6. Continuous improvement process: This principle suggests that operational processes inside successful organizations include provisions for constant advancements and upgrade as the company does its business.