CH-6 Operations—Producing Good and Services – Supply Chain Management: A Logistics Perspective : Book Guide

CHAPTER 6 OPERATIONS—PRODUCING GOOD AND SERVICES LEARNING OBJECTIVES After reading this chapter, you should be able to do the following: • Discuss the strategic value-adding role operations plays in the supply chain. • Explain the concept of a transformation process and its application to goods and services. • Appreciate the tradeoffs and challenges involved in production operations. • Understand the primary production strategies and types of planning. • Discuss the primary assembly processes and production methods for goods creation. • Describe the various production process layouts. • Explain the role of productivity and quality metrics for improving operations performance. • Know how information technology supports efficient production of goods and services. CHAPTER OVERVIEW Introduction Operations focus on the “make/build” portion of the supply chain. They focus on production of goods and services needed to fulfill customer requirements. Production involves the transformation of inputs into outputs that customers demand. In the execution of these processes, production facilities must interact with various supply chain functions and operations create the outputs that are distributed through supply chain networks. All activities in the purchase, production, and delivery of goods and services need to be synchronized to ensure consistent, efficient product and service flow. The Role of Production Operations in Supply Chain Management (SCM) Many of the supply chain and logistics activities discussed in previous chapters focus on operations—procurement operations that provide access to materials, transportation operations that support the flow of goods, distribution operations that streamline order fulfillment, and so on. Collectively, they create time and place utilities. However, the potential contributions of goods manufacturing and service production to supply chain effectiveness are often overlooked because they focus on a different, but also important, dimension of economic utility called form utility. Form utility drives the need for supply chain capabilities (i.e., time and place utilities). It takes a great deal of effort and coordination to run an effective production operation that is supported by and also supports the supply chain. Processes must be effectively designed and flawlessly executed, supply chain tradeoffs must be understood and made, and economies of scale need to be achieved, all while the organization addresses competitive challenges and other problems. Production Process Functionality Manufacturers, contract assemblers, and service providers all engage in production processes. The production process also uses resources such as facilities, equipment, knowledge, labor, and capital to support the transformation. Feedback of key information is used to make adjustments within the process in an attempt to synchronize production more closely to demand. Ignoring these feedback signals will lead to excess inventory of unpopular products or inventory shortages of hot items. The basic principles of production processes, no two processes are organized exactly alike or perform to the same level. Process functionality also plays a role in the success of an organization. The ability to perform different processes from those of competitors to create unique products and services can create a competitive advantage. On the other hand, the ability to perform common processes better than the competition can also generate efficiencies and lower costs for the organization. Production Tradeoffs One of the most important issues for supply chain professionals to understand is the tradeoffs involved within production operations and between production operations, other supply chain functions, and corporate strategy. All decisions are interrelated and can impact costs, productivity, and quality in other areas. In the next few paragraphs, common tradeoffs are discussed. Higher volume leads to lower cost per unit of output, according to the long-established economies of scale principle. In situations where production processes have high fixed costs and equipment like chemical production or paper manufacturing, it makes sense to pursue volume. In contrast, processes that can produce a range of products are said to have economies of scope. Fundamental tradeoffs between responsiveness and efficiency arise when production facility decisions are made. Centralized production facilities provide operating cost and inventory efficiencies, while regional production facilities allow companies to be closer to customers and more responsive. Tradeoffs between production processes for goods and the costs involved in manufacturing them must also be understood. Production and supply chain costs vary for make-to-stock, assemble-to-order, and build-to-order products Another consideration is whether to conduct your own production operations or to outsource production to external suppliers. The make versus buy decision can be very complex and involves sacrifice whichever way the company chooses to go. Finally, traditional wisdom suggests that production operations cannot strive to be all things to all people and tradeoffs must be made. When designing and executing production processes, they should focus on the following competitive dimensions: low cost, high quality (features and reliability), fast delivery speed, high delivery reliability, ability to cope with demand change, or the flexibility to offer variety. Production Challenges Operations managers face numerous challenges and tradeoffs that must be managed successfully if the organization and supply chain are to achieve their performance goals. Competitive pressures are a major challenge for many established manufacturers and service providers. Customers’ demand for choice and rapidly changing tastes make life difficult for product makers. While mass-production processes (and their economies of scale) are losing relevance in many customer-driven industries, company executives are no less demanding on the productivity and efficiency fronts. Operations managers face many other operations challenges. Labor availability and productivity issues, synchronization of activities with the supply chain, and capital costs are just a few of the additional obstacles that must be overcome. Operations Strategy and Planning Production Strategies A great deal of planning, preparation, and engagement of multiple parties is required for production operations to make a positive contribution to supply chain effectiveness. Over the last 30 years, significant development and shifts have occurred in production strategy. Organizations have advanced from forecast-driven production strategies to demand-driven approaches. In the era of mass production, operations strategy focused on reduction, efficiency, and scale. The strategy of choice for mass production is a push-based system that relies on long-term forecasts for production planning and decision making. In reality, few companies enjoy perfectly stable demand for their products and the related opportunity to maintain level production that is quickly consumed. More often, organizations must deal with demand variation. The push-based strategy works well for supply chains that focus on the immediate delivery of off-the-shelf, low-cost, standardized goods. Operating from forecasts that are derived from supply chain partners’ predictions may limit the producer’s responsiveness. Without visibility to actual end-consumer demand, the producer will be slow to react to changes in the marketplace. The result may be continued production of items whose demand is dropping and may soon be obsolete. Alternatively, the producer may fail to recognize changing customer requirements and ramp up production of desired goods. The ultimate impact will be missed opportunities, unrecoverable costs, and/or missed revenues. Lean production is an integrated set of activities designed to minimize the movement and use of raw materials, work-in-process, and finished goods inventories during production. A principal focus of lean manufacturing is to minimize all forms of waste and to produce quality products without the need for rework and production relies on pull-based systems to coordinate production and distribution with actual customer demand rather than a potentially error-laden forecast of demand. In a pull system, the producer only responds to customer demand. No action is taken until an order is placed or a purchase is made. One of the main benefits of a lean, pull-based system is the reduction of waste. There are a few challenges inherent in the pull-based strategy, such as customers who want immediate access to products and don’t want to wait for production and delivery, and it can be difficult to achieve economies of scale in assemble-to-order and build-to-order product operations, making them more expensive to produce. Finally, a lack of technological capabilities makes it difficult to achieve the supply chain visibility and synchronization needed in pull-based systems. Although many companies have made significant gains during the evolution from mass production to lean production processes, perfection has not been achieved. Flexible manufacturing emerged in the early 1990s in response to the production challenges and the purpose is to build some flexibility into the production system in order to react effectively to change, whether predicted or unpredicted. One type of reactive capability is machine flexibility. Under this strategy, general purpose machines and equipment staffed by cross-trained workers provide the ability to produce different types of products as well as change the order of operations executed on a product. Another type of reactive capability (there are eight in all) is called routing flexibility, which provides managers with production options and the ability to adapt to changing needs. In its simplest terms, routing flexibility provides managers with a choice between machines for a part’s next operation. A primary advantage of the flexible manufacturing strategy is the ability to leverage production resources but, the flexible strategy is not perfect. Its main flaw is cost so should the activity be relocated to a contract manufacturer in another country, it is commonly called offshoring. Today, a popular location for offshore production is China due to its low labor costs. The business case for outsourcing varies by situation, but reasons for outsourcing often focus on cost and capacity issues. Other reasons for production outsourcing include the following: • The ability to focus on core competencies by getting rid of peripheral ones • Lack of in-house resources • Getting work done more efficiently or effectively • Increased flexibility to meet changing business and commercial conditions • Tighter control of budget through predictable costs • Lower ongoing investment in internal infrastructure • Access to innovation and thought leadership While outsourcing has proven to be a valuable strategy whose popularity has grown dramatically, it is important to conduct a full analysis of the benefits and drawbacks of offshoring. Moving production offshore raises transportation costs, inventory carrying costs of goods in transit, customs costs, and some hidden expenses. As production spreads out among multiple facilities in different countries, it becomes more difficult to maintain visibility and synchronize activities. Finally, companies may lose control over quality, intellectual property rights, and customer relationships. Given these challenges, many manufacturers are pursuing the concepts of on-shoring and nearshoring. On-shoring seeks to return production to the home country while nearshoring focuses on production in nearby or neighboring countries. A relatively new development in the evolution of production strategy is adaptive manufacturing. The goal of this strategy is to provide companies with the ability to replace planning and replanning with execution based on real-time demand. Technology is a key driver of the adaptive strategy. The main concern regarding adaptive manufacturing is limited adoption of the strategy. Production Planning This section briefly discusses two types of planning: capacity planning and materials planning. Three planning timeframes are covered: long-range, intermediate-range, and short-range. Long-range plans, covering a year or more, focus on major decisions regarding capacity and aggregate production plans. Medium-range plans span 6 to 18 months and involve tactical decisions regarding employment levels and similar issues. Short-range plans, ranging from a few days to a few weeks, deal with specific issues and the details of production, quantities of items to be produced, schedules, and sequences. Capacity planning focuses on determining the appropriate production levels that the company is capable of completing. Capacity is the maximum amount of work that an organization is capable of completing in a given period of time. Resource requirements planning (RRP) is a long-run, macro-level planning tool. It helps the operations leaders determine whether aggregate resources are capable of satisfying the aggregate production plan. The next step is to create a rough-cut capacity plan (RCCP) to check the feasibility of the master production schedule. Capacity requirements planning (CRP) is used to check the feasibility of the materials requirement plan. This short-range capacity planning technique determines, in detail, the amount of labor and equipment resources required to accomplish production requirements. The aggregate production plan (APP) is a long-range materials plan that translates annual business plans, marketing plans, and forecasts into a production plan for all products produced by a facility. The master production schedule (MPS) is a medium-range plan that is more detailed than the APP. The MPS breaks down the APP, listing the exact end items to be produced within a specific period. The materials requirement plan (MRP) is a short-range materials plan that converts information regarding end-items in the MPS into a set of time-phased component and part requirements. MRP to provide effective planning knowledge, the following three sets of information are needed: 1. Independent demand information 2. Parent-component relationship 3. Inventory status of the final product and all components Production Execution Decisions The production strategy and planning outcomes, along with product characteristics, influence the execution methods used for day-to-day operations. Organizations must also establish facility layouts and production flows that are well matched to the demand volume and product variation. Assembly Processes Earlier in the chapter, we alluded to products that are built either according to plan or demand. Their production occurs via one of four manufacturing methods: make-to-stock (MTS), assemble-to-order (ATO), build-to-order (BTO), and engineer-to-order (ETO). MTS is the traditional production method where end-item products are usually finished before receipt of a customer order. ATO production commences after receipt of a customer’s order. The finished ATO product is generally a combination of standard components and options or accessories specified by the customer. ATO production commences after receipt of a customer’s order. The finished ATO product is generally a combination of standard components and options or accessories specified by the customer. The BTO (also called make-to-order) production approach also delays assembly until a confirmed order is received for the product. The end-item finished product is generally a combination of standard and custom-designed components that meet the unique needs of a specific customer. It differs from ATO in the higher level of customization and lower volume level of production. The main advantage of the BTO approach is its ability to handle variety and supply customers with the exact product specification required. ETO production focuses on the creation of highly tailored products for customers whose specifications require unique engineering design or significant customization. In this manufacturing environment, no two products are identical, and each order requires detailed cost estimates and tailored pricing. Also known as project manufacturing, successful ETO initiatives depend on effective collaboration between all supply chain participants. Given the widespread proliferation of products, a number of manufacturers take a hybrid approach, where some items are built to stock and others are built to order. Delayed differentiation is one hybrid strategy in which a common product platform is built to stock. Production Process Layout One of the key drivers of how production activities will be carried out is facility layout. Facility layout involves the arrangement of machines, storage areas, and other resources within the four walls of a manufacturing or an assembly facility. An appropriate, successful layout is one that does the following: • Reduces bottlenecks in moving people or materials • Minimizes materials-handling costs • Reduces hazards to personnel • Utilizes labor efficiently • Increases morale and ease of supervision • Utilizes available space effectively and efficiently • Provides flexibility • Facilitates coordination and face-to-face communication Production process layouts generally fit into a spectrum that moves from projects to continuous processes. Projects consist of a series of discrete steps that lead to a unique product, like building a bridge. As firms move from project to continuous process layout, the following may occur • Labor skill requirements decrease. • Material requirements become better known. • High capacity utilization becomes more important to controlling costs. • Product flexibility declines. • Ability to adapt rapidly to changing market conditions diminishes. A project layout is a fixed location layout where the product remains in place for the duration of production. A work center is a process-focused layout that groups together similar equipment or functions. The materials move from department to department for completion of similar activities and tasks. This layout provides flexibility in that equipment, and personnel can be used where they are needed, lower equipment investment is needed, and supervisors gain expertise in their functions. The downsides of the work center layout are related to the materials-handling and movement costs, worker idle time between tasks, and the cost of training and developing a highly skilled workforce that can move between areas. The manufacturing cell is another process-focused layout that dedicates production areas to a narrow range of products that are similar in processing requirements. Setting up a manufacturing cell involves four activities: (1) identifying families of parts with similar flow paths, (2) grouping machines into cells based on part families, (3) arranging cells so materials movement is minimized, and (4) locating large shared machines at the point of use. An assembly line is a product-focused layout in which machines and workers are arranged according to the progressive sequence of operations need to make a product. An assembly line can begin as many different lines, each devoted to a different component of a product, with the lines converging upon one another, becoming fewer until only one line is left for the final product. Continuous process facilities are similar to assembly lines, with product flowing through a predetermined sequence of stops. The main difference is the continuous, rather than discrete, nature of the flow. Packaging As product comes off the assembly line, the handoff from production operations to logistics begins. Packaging plays important roles in the smooth transfer of finished goods and design issues can affect labor and facility efficiency. Well-designed packaging facilitates efficient handling and shipping of the products, keeping landed costs in check. Package design impacts an organization’s ability to use space and equipment. A major packaging concern is the ease of handling in relation to materials handling and transportation. Handling ease is quite important to the production manager, whose labor must be used to place the goods in the packages. Another primary concern is protecting the goods in the package. Packaging plays a key role in providing information about the package contents. Barcodes, RFID tags, and other auto-ID tools can be attached to or built into the packaging to make product information more readily accessible. When selecting packaging materials, companies today must consider environmental protection as well as product protection and transportation efficiency. Consumer advocates and government regulators are pushing manufacturers to alter their packaging practices. Sustainability in packaging is being driven by increased awareness about environmental hazards related to disposal and recycling of packaging wastes, government initiatives to minimize greenhouse gasses, and stringent regulations. According to the Sustainable Packaging Coalition, sustainable packaging meets several criteria: • It is beneficial, safe, and healthy for individuals and communities throughout its lifecycle • It meets criteria for performance and cost • It is sourced, manufacture, transported, and recycled using renewable energy • It optimizes the use of renewable or recycled source materials • It is manufactured using clean production technologies and best practices • It is made from materials healthy in all probable end of life scenarios • It is physically designed to optimize materials and energy • It is effectively recovered and utilized in biological and/or industrial closed loop cycles Production Metrics The use of measurements and key performance indicators (KPIs) that do not support operational strategies, organizational objectives, or customer requirements should avoid the following mistakes when establishing production metrics for the organization: • Using KPIs that are too narrow—Limit the use of metrics that focus on discrete events and isolated points as indicators of overall success of the process. • Encouraging wrong outcomes—Eliminate measurements that promote activity rather than needed output. • Focusing on issues that are not key priorities—Avoid the development of internally focused, myopic production goals that are disconnected from the overall strategy of the organization. Total Cost The most meaningful measurement of total cost is on a cash basis. All money spent on manufacturing must be summarized and the total compared to the previous period, rather than to a flexible budget or a plan. Total Cycle Time Total cycle time is a measure of manufacturing performance that is calculated by studying major purchased components and determining the total days on hand of each one. Delivery Performance Delivery performance is the percentage of customer orders shipped when the customer requested them to be shipped. Quality The definition of quality will vary by company, but it must focus on quality from the perspective of the customer. Safety The standard metrics of accident/incident frequency, severity, and cost are important to monitor, with continuous improvement (i.e., reduction) as the goal. Production Technology The enterprise resource planning systems don’t provide detailed visibility within the four walls of the production facility or ensure that operations are being managed proactively. World-class manufacturers understand the importance of sharing real-time information across their extended manufacturing and supply chain network. Firms are employing a new generation of manufacturing execution systems (MES) that link to ERP and supply chain applications to ensure that operations are being managed in real time. The MES is a control system for managing and monitoring work-in-process on a factory floor. It keeps track of all manufacturing information in real time, receiving up-to-the-minute data from robots, machine monitors and employees.31 MES derives its name from its inherent purpose of providing intelligent process control through an electronic system designed to execute instructions to control manufacturing operations. The goal is to supply a continuous flow of meaningful instructions, and most importantly, for those instructions to be carried out correctly and reliably. The primary functions of MES include: • Resource Allocation and Status • Operation/Detail Scheduling • Dispatching production Unit • Document control • Data Collection • Labor Management • Quality Management • Process Management • Exception management • Maintenance • Management • Product Tracking and Genealogy • Performance Analysis32 A supply chain solutions provider suggests that MES can make strategic contributions to the organization beyond the factory floor. This will only occur if the following improvements are achieved in the near future: • MES must become more agile and capable of dealing with product and process customization to the shop floor level than is possible today. • MES must be capable of orchestrating suppliers across a global industry landscape. • MES must optimize resources and constraints far beyond the four walls of the manufacturing plant to drive more rapid time-to-market and better cost controls. • MES needs to scale up and support multi-site, globally deployed production planning, supplier coordination, compliance and quality management initiatives that span the entire value chain. • The MES-level data must support the extraction of metrics that drive overall business performance and profitability.34 SUMMARY The key concept from this chapter is the critical and codependent link between production operations and logistics. Just as your heart and arteries need to work together to move blood through your circulatory system, production and logistics must work in concert to move product through the supply chain. For their part, production managers must coordinate demand information, inputs, and resources to transform them into outputs (products and materials) that are desired by customers. The faster and more flexible the transformation processes are, the more responsive the production operation can be to changing conditions and disruptions. This in turn makes the supply chain more dynamic and competitive. Additional topics from the chapter include the following: • Production operations include all activities and processes involved in changing the composition of a good or service—component fabrication, product assembly, and service request execution—for the purpose of creating form utility. • Numerous tradeoffs must be made regarding production: volume versus variety, responsiveness, or efficiency; make or outsource; and focusing on a few versus many competitive dimensions. • Intensified competition, more demanding customers, and relentless pressure for efficiency as well as adaptability are driving significant changes across many manufacturing industry settings. • There have been significant developments and shifts in production strategy. Organizations have advanced from forecast-driven mass production to demand-driven, lean, flexible, adaptive, and smart manufacturing approaches. • Capacity planning and materials planning are used to balance inputs, capacity (resources), and outputs so that customer demand can be fulfilled without creating waste. • Most manufacturers use a combination of make-to-stock and make-to-order production methods to satisfy demand for their products. • Within the make-to-order method, companies can leverage assemble-to-order, build-to-order, or engineer-to-order options, based on product complexity and uniqueness. • Facility layout involves the arrangement of machines, storage areas, and other resources within the four walls of a manufacturing or an assembly facility. • Facility layout is influenced by the product characteristics, production strategy, and assembly process employed by the organization. • Packaging plays important roles in the smooth, safe, and economical transfer of finished goods from the plant to the distribution center and customer locations. • Sustainability is a key consideration in packaging selection, and companies are turning to recyclable and reusable materials for exterior and interior packaging. • Production KPIs must be linked to corporate goals and objectives, customer requirements, and overall performance of the production operation. • Critical production KPIs address total cost, total cycle time, delivery performance, quality, and safety. • Manufacturing execution systems software solutions improve an organization’s ability to manage production operations and make them more responsive to disruptions, challenges, and changing marketplace conditions. ANSWERS TO STUDY QUESTIONS 1. Discuss the role of production operations in the supply chain. Provide examples of how effective/ineffective production operations impact supply chain performance. When you think about it, many of the supply chain and logistics activities focus on operations—procurement operations that provide access to materials, transportation operations that support the flow of goods, distribution operations that streamline order fulfillment, and so on. Collectively, they create time and place utilities. However, the potential contributions of goods manufacturing and service production to supply chain effectiveness are often overlooked because they focus on a different, but also important, dimension of economic utility called form utility. All the activities and processes involved in changing the appearance or composition of a good or service—component fabrication, product assembly, and service request execution— focus on creating form utility. The goal is to make the product or service more attractive to potential and actual users so that demand is created. Of course, a great product design or form utility is important, but not enough to guarantee success. Form utility drives the need for supply chain capabilities (i.e., time and place utilities). It is imperative to procure key materials quickly, marshal production resources and capacity to assemble the components, and move the finished goods to retailers in sufficient quantities to meet demand. Otherwise, the door opens for competitors to hijack potential customers. It takes a great deal of effort and coordination to run an effective production operation that is supported by and also supports the supply chain. Processes must be effectively designed and flawlessly executed, supply chain tradeoffs must be understood and made, and economies of scale need to be achieved, all while the organization addresses competitive challenges and other problems. Consider the success of the Apple iPod. A great product design, procurement-assembly-distribution synchronization, and savvy marketing all contributed to the success of this commercial juggernaut. It could not have gained such immense popularity without rapid execution of the “plan/buy/ make/move” supply chain processes to meet demand. 2. Describe the major challenges faced by production managers in the current environment. To say that production is a dynamic field would be a severe understatement. Operations managers face numerous challenges and tradeoffs that must be managed successfully if the organization and supply chain are to achieve their performance goals. Long-term profitable growth is dependent on manufacturing and supply chain organizations’ abilities to address these challenges through process innovation according to the authors. Competitive pressures are a major challenge for many established manufacturers and service providers. As the global reach of supply chains makes it possible to source product from nearly anywhere in the world, companies need to continually update their production capabilities and develop innovative responses to upstart competitors. A “business as usual” approach will lead to further deterioration of market share and supply chain woes for these organizations. Customers’ demand for choice and rapidly changing tastes make life difficult for product makers. For many products, it is no longer possible to focus on mass production and the Henry Ford approach to customization: “People can have the Model T in any color—so long as it’s black.” The expectation today of customized products that meet the specifications of individual buyers requires far different production processes than the assembly methods needed for standardized goods. The shrinking life cycle of products today also renders long production runs of these common goods obsolete. In response, companies have developed responsive capabilities and some production advantages by building their supply chains around assemble-to-order and build-to-order production capabilities. While mass-production processes (and their economies of scale) are losing relevance in many customer-driven industries, company executives are no less demanding on the productivity and efficiency fronts. They expect operations managers to employ processes that are both financially efficient and responsive to demand. Leanness and adaptability are requirements for success, though many organizations struggle to make the transition from traditional production methods and strategies to more contemporary ones that can better balance product quality, process flexibility, fulfillment speed, and execution costs. Certainly, operations managers face many other operations challenges. Labor availability and productivity issues, synchronization of activities with the supply chain, and capital costs are just a few of the additional obstacles that must be overcome. The next section discusses planning methods and strategies used for product and service operations. Thoughtful, advanced preparation of production processes that consider these difficult challenges and tradeoffs will elevate an organization’s prospects for growth and profitability. 3. Compare and contrast push-based production strategies with pull-based production strategies. What are the primary capabilities, advantages, and disadvantages of each? The push-based strategy works well for supply chains that focus on the immediate delivery of off-the-shelf, low-cost, standardized goods. Operating from forecasts that are derived from supply chain partners’ predictions may limit the producer’s responsiveness. Without visibility to actual end-consumer demand, the producer will be slow to react to changes in the marketplace. The result may be continued production of items whose demand is dropping and may soon be obsolete. Alternatively, the producer may fail to recognize changing customer requirements and ramp up production of desired goods. The ultimate impact will be missed opportunities, unrecoverable costs, and/or missed revenues. Lean production is an integrated set of activities designed to minimize the movement and use of raw materials, work-in-process, and finished goods inventories during production. A principal focus of lean manufacturing is to minimize all forms of waste and to produce quality products without the need for rework and production relies on pull-based systems to coordinate production and distribution with actual customer demand rather than a potentially error-laden forecast of demand. In a pull system, the producer only responds to customer demand. No action is taken until an order is placed or a purchase is made. One of the main benefits of a lean, pull-based system is the reduction of waste. There are a few challenges are inherent in the pull-based strategy such as customers who want immediate access to products and don’t want to wait for production and delivery and , it can be difficult to achieve economies of scale in assemble-to-order and build-to-order product operations, making them more expensive to produce. Finally, a lack of technological capabilities makes it difficult to achieve the supply chain visibility and synchronization needed in pull-based systems. Although many companies have made significant gains during the evolution from mass production to lean production processes, perfection has not been achieved. 4. Outsourcing has been a popular supply chain strategy. Discuss the reasons for and against an organization outsourcing its production processes. The push-based strategy works well for supply chains that focus on the immediate delivery of off-the-shelf, low-cost, standardized goods. Operating from forecasts that are derived from supply chain partners’ predictions may limit the producer’s responsiveness. Without visibility to actual end-consumer demand, the producer will be slow to react to changes in the marketplace. The result may be continued production of items whose demand is dropping and may soon be obsolete. Alternatively, the producer may fail to recognize changing customer requirements and ramp up production of desired goods. The ultimate impact will be missed opportunities, unrecoverable costs, and/or missed revenues. Lean production is an integrated set of activities designed to minimize the movement and use of raw materials, work-in-process, and finished goods inventories during production. A principal focus of lean manufacturing is to minimize all forms of waste and to produce quality products without the need for rework and production relies on pull-based systems to coordinate production and distribution with actual customer demand rather than a potentially error-laden forecast of demand. In a pull system, the producer only responds to customer demand. No action is taken until an order is placed or a purchase is made. One of the main benefits of a lean, pull-based system is the reduction of waste. There are a few challenges are inherent in the pull-based strategy such as customers who want immediate access to products and don’t want to wait for production and delivery and , it can be difficult to achieve economies of scale in assemble-to-order and build-to-order product operations, making them more expensive to produce. Finally, a lack of technological capabilities makes it difficult to achieve the supply chain visibility and synchronization needed in pull-based systems. Although many companies have made significant gains during the evolution from mass production to lean production processes, perfection has not been achieved. 5. Discuss the reasons why U.S. based organizations are considering a nearshoring or re-shoring strategy. While outsourcing has proven to be a valuable strategy whose popularity has grown dramatically, it is important to conduct a full analysis of the benefits and drawbacks of offshoring. A basic concern is tradeoff between lower production costs and higher supply chain costs. Moving production offshore raises transportation costs, inventory carrying costs of goods in transit, custom costs, and some hidden expenses. As production spreads out among multiple facilities in different countries it become more difficult to maintain visibility and synchronize activities. Finally, companies may lose control over quality, intellectual property rights, and customer relationships. Given these challenges, many manufacturers are pursuing the concepts of on-shoring and nearshoring. On-shoring seeks to return production to the home country while nearshoring focuses on production in nearby or neighboring countries. 6. Describe the difference between capacity planning and material planning Capacity planning focuses on determining the appropriate production levels that the company is capable of completing. Capacity is the maximum amount of work that an organization is capable of completing in a given period of time. It will help the company determine if changing customer demand can be met or if a discrepancy exists. A discrepancy between capacity and demands results in an inefficiency, either in underutilized resources or unfulfilled customer requirements. The goal of capacity planning is to minimize this discrepancy. Capacity planning focuses on determining the appropriate production levels that the company is capable of completing. Capacity is the maximum amount of work that an organization is capable of completing in a given period of time. Materials planning, in general, focuses on balancing of future supply and demand. It involves managing sales forecasts, creating master schedules, and running materials requirement planning tools. 7. Discuss the concept of delayed differentiation and why it is considered to be a hybrid approach to product assembly. What types of products can benefit from delayed differentiation? Delayed differentiation is a hybrid strategy in which a common product platform is built to stock. It is later differentiated by assigning to it certain customer-specific features, only after demand is realized. Hence, manufacturing occurs in two stages: (1) an MTS stage, where one or more undifferentiated platforms are produced and stocked, and (2) an ATO stage, where product differentiation takes place in response to specific customer orders. For example, a technology company like Motorola has all the components for a Moto X on hand but waits until a customer order is placed. Then, the phone is assembled based on the casing color, accent color, memory, and engraving preferences of the customer (ATO stage). Delayed differentiation carries several benefits. Maintaining stocks of semifinished goods reduces order cycle time relative to BTO or ETO production. Since many different end products have common parts, lower levels of semifinished goods inventory are needed. Furthermore, investment in semifinished inventories is smaller when compared with the option to maintain a similar amount of finished goods inventory. There is also the benefit of having better demand information before committing generic semifinished products to unique end products. Additional benefits from delayed differentiation include streamlining the MTS segment of the production process and simplification of production scheduling, sequencing, and raw materials purchasing. However, implementing delayed differentiation also carries extra materials costs due to the need for redundant or more expensive parts. 8. 5. Using the Business and Company Resource Center (http://academic.cengage.com/bcrc) and company websites, compare the supply chain and contract manufacturing services provided by the following organizations: a. Flextronics (http://www.flextronics.com) and Ditan Corporation (http://www.ditan.com) b. Accupac (http://www.accupac.com) and Jabil Circuit (http://www.jabil.com) c. ModusLink (http://www.moduslink.com) and Cott Corporation (http://www.cott.com) Evaluate the students’ work on its own merits. 9. 6. Identify and discuss the most appropriate assembly process and facility layout for each of the following products: a. Coke Zero concentrate b. Harley-Davidson motorcycle c. Apple iPhone Evaluate the students’ work on its own merits. 10. Discuss how packaging affects manufacturing and supply chain operations. As product comes off the assembly line, the handoff from production operations to logistics begins. Packaging plays important roles in the smooth transfer of finished goods from the plant to the distribution center and customer locations. Package design issues can affect labor and facility efficiency. Well-designed packaging facilitates efficient handling and shipping of the products, keeping landed costs in check. Proper packaging protects the integrity and quality of the goods just produced. And customized packaging can provide another level of product differentiation sought by the customer. These packaging-focused links between production operations and logistics, along with the materials used, are worthy of a brief discussion. Package design impacts an organization’s ability to use space and equipment. The design must promote effective space utilization in the production facility and distribution centers. Package shape, strength, and materials impact the ability to use the full cubic capacity (both horizontal and vertical space) of facilities. Hence, it is common to use square or rectangular boxes or containers with adequate strength to support stacking. The physical dimensions of products and packaging must fall within the capabilities of existing materials-handling equipment at the factory, distribution centers, and customer locations. Poor package design leads to costly and potentially dangerous manual handling of products. A major packaging concern is the ease of handling in relation to materials handling and transportation. Handling ease is quite important to the production manager, whose labor must be used to place the goods in the packages. It is also important to logistics managers who need product to be handled quickly and without wasted effort. Large packages, for example, may be desirable from a production perspective, but the size and weight of the contents might cause problems when transferring product into and out of transportation equipment. Also, packaging design should take pallet and transportation vehicle capacity into account, so as to fully utilize these assets. Failure to do so will lead to the costly consequence of “shipping air” rather than product, driving up the cost of goods. Another primary concern is protecting the goods in the package. In the production facility, adequate packaging is needed to protect goods as they move through the facility. Products falling off conveyor lines or packages being hit with a forklift are just two examples of dangers that must be factored into the design process. Protection is important when logistics service providers transport products. Protection can also mean protecting products from contamination resulting from contact with other goods, water damage, temperature changes, pilferage, and shocks in handling and transport. Packaging must support the weight of products stacked above it or provide even weight distribution within the package to facilitate manual and automatic materials handling. With customer service playing an ever-increasing role in the supply chain, companies need to integrate their packages with customers’ materials-handling equipment. A special package that can interface with a customer’s innovative equipment will help move product quickly through the supply chain, keeping costs down, product availability strong, and customer satisfaction high. In contrast, incompatible packaging and equipment will lead to inefficient receiving and storage. It may also increase the potential for product damage. In these situations, customer service value may be lost. Also, packaging plays a key role in providing information about the package contents. Information provision is also important to production and logistics personnel in their day-to-day execution responsibilities. Properly identified packages and reusable containers make it easier for production personnel to locate goods needed by the work center or assembly line. Goods stored in a distribution center must bear the proper identification so that order pickers can locate them easily and correctly for customer orders. Barcodes, RFID tags, and other auto-ID tools can be attached to or built into the packaging to make product information more readily accessible. Accomplishing these key goals is dependent upon finding the right materials for exterior packaging and interior cushioning materials. It is important to use materials that are economical, strong, and sustainable. Durable packaging materials like wood and metal—which are expensive and add excess weight to the product—are instead being replaced by softer packaging materials—recycled cardboard, polyethylene bags, and biodegradable cushioning materials made from cornstarch and soy—in an effort to reduce cost and waste. 11. Describe how organizations can be more environmentally conscious in their use of packaging. The sustainability mantra of reduce, reuse, recycle is not lost on other manufacturers who are embracing these new packaging materials and technologies. In fact, the global market for sustainable packaging is projected to reach $244 billion by 2018. Sustainable packaging programs are viewed as a source of innovation that can help in differentiating a company by appealing to the consciences of consumers.26 According to the Sustainable Packaging Coalition, sustainable packaging meets several criteria: • Is beneficial, safe & healthy for individuals and communities throughout its life cycle • Meets market criteria for performance and cost • Is sourced, manufactured, transported, and recycled using renewable energy • Optimizes the use of renewable or recycled source materials • Is manufactured using clean production technologies and best practices • Is made from materials healthy throughout the life cycle • Is physically designed to optimize materials and energy • Is effectively recovered and utilized in biological and/or industrial closed loop cycles27 12. Describe the characteristics of good production metrics and the types of KPIs that companies should monitor. The use of measurements and key performance indicators (KPIs) that do not support operational strategies, organizational objectives, or customer requirements should avoid the following mistakes when establishing production metrics for the organization: • Using KPIs that are too narrow—Limit the use of metrics that focus on discrete events and isolated points as indicators of overall success of the process. • Encouraging wrong outcomes—Eliminate measurements that promote activity rather than needed output. • Focusing on issues that are not key priorities—Avoid the development of internally focused, myopic production goals that are disconnected from the overall strategy of the organization. The types of KPIs that companies should monitor are the following: • Total Cost - The most meaningful measurement of total cost is on a cash basis. All money spent on manufacturing must be summarized and the total compared to the previous period, rather than to a flexible budget or a plan. • Total Cycle Time - Total cycle time is a measure of manufacturing performance that is calculated by studying major purchased components and determining the total days on hand of each one. • Delivery Performance - Delivery performance is the percentage of customer orders shipped when the customer requested them to be shipped. • Quality - The definition of quality will vary by company, but it must focus on quality from the perspective of the customer. • Safety - The standard metrics of accident/incident frequency, severity, and cost are important to monitor, with continuous improvement (i.e., reduction) as the goal. 13. Using the Business and Company Resource Center (http://academic.cengage.com/bcrc) and search engines, identify two MES solutions providers. Describe the capabilities and supply chain impact that their tools promise. Evaluate the students’ work on its own merits. Case Studies CHAPTER CASE 6.1 Hudson Guitars 1. Given the description of the product and the work that will occur in the guitar factory, which production process layouts could be considered? Which do you recommend? Explain. Based on the desire to have some standardized products and some semi-custom products, the production process layout must be capable of supporting both make-to-stock guitars and assemble-to-order guitars. Hudson has already stated that he doesn’t want to make them one at a time, which effectively limits the project layout. Guitars are also not reasonable candidates for a continuous process layout. Hence, students should consider only the workcenter, manufacturing cell, and assembly line options. Given the need to produce both semi-custom and standard products, production flexibility is needed. That would likely rule out an assembly line, as would Hudson’s lack of interest in mass production guitars. Students should recommend the workcenter layout with its process-focused layout and highly skilled labor. The manufacturing cell layout could also be effectively justified as a viable option. 2. What types of software should be used to help manage the scheduling and operations of the guitar factory? What benefits will they provide? The most obvious software application is a manufacturing execution system. The MES is a control system for managing and monitoring work-in-process on a factory floor. It keeps track of all manufacturing information in real time, receiving up-to-the-minute data from robots, machine monitors and employees. A properly implemented MES will supply a continuous flow of meaningful instructions, and most importantly, for those instructions to be carried out correctly and reliably. It will also provide manufacturing planning information, support the day-to-day execution of operations, and provide production process control. The MES should be supported with planning tools. These tools will help Hudson Guitars balance inputs, capacity (resources), and outputs so as to not create waste. Effective planning tools such as Materials Requirements Planning software provide important information regarding scheduled receipts, on-hand inventories, net requirements, and planned order releases is necessary for effective execution of assembly operations and timely fulfillment of customer orders. 3. How should the VP evaluate performance of the factory? Discuss the metrics that must be balanced to achieve Saul’s goals. Performance of the factory should focus on balancing operational efficiency goals, customer requirements, and organizational objectives. It’s not strictly about making guitars on the cheap. The products must also meet specifications, balancing those competing goals of low cost versus high quality. Students should discuss the importance of adopting the “five golden metrics” of manufacturing that impact an organization’s bottom line. KPIs for each category should also be discussed: (1) total cost – total cash spent on manufacturing. (2) total cycle time - total days on hand for a component divided by the planned shipments per day for all products that require that component. (3) delivery performance – percentage of customer orders shipped on schedule. (4) quality – defect rates, first pass yield, waste percentage (5) safety - accident/incident frequency, severity, and cost 4. What roles will packaging play in the success of Saul’s guitar company? Packaging plays multiple roles in supporting the future success of Hudson Guitars. First, proper packaging protects the integrity and quality of components and finished goods which is critical for a high value, electronic instrument like an electric guitar. Next, well-designed packaging facilitates efficient handling and shipping of the materials and products, keeping landed costs of the guitars in check. Finally, packaging plays a key role in providing information about the package contents. This information is needed to facilitate production and logistics activities. CHAPTER CASE 6.2 Elvis Golf Ltd 1. In terms of production strategy, should Boone stuck with mass production or try something else? Explain. The mass production strategy is logical for the current single undifferentiated model of the golf club. It does allow them to be highly productive in the current manufacturing environment. However, the organization would be wise to adopt a lean manufacturing or flexible manufacturing process to adapt to the demand for semi-customized clubs. This will allow the company to adopt a pull-based supply chain that relies upon demand rather than a forecast to drive production. 2. Is the make-to-stock assembly process well-suited to Parker’s desire to make semi-customized clubs? What other assembly options could be considered? The make-to-stock process does not align well with the anticipated shift to offering semi-customized clubs and packages. In that situation, it would be better to use a postponement strategy and establish an assemble-to-order process that relies upon a relatively standard set of components. This will avoid a buildup of finished goods inventory that may or may not be needed. 3. What do you think of Parker’s idea to outsource the manufacturing of the King? The company is small and likely does not have enough demand to warrant the attention of a contract manufacturer. The prime opportunity to outsource assembly of semi-customized golf clubs would be to have specialty golf retailers do the work. They could hold the components and assemble based on individual customer design. Of course, this will require retailer expertise and they will want to be compensated for the work. 4. Develop a brief proposal for the production plan requested by Parker. Discuss your recommended production strategy, assembly process, other considerations, and the benefits/drawbacks of your proposal. Student responses to this question will vary. The primary criteria for evaluating the proposal are the logic of the argument, the consistency between production strategy, assembly process, and production process layout, and the inclusion of benefits/drawbacks. Solution Manual for Supply Chain Management: A Logistics Perspective John J. Coyle, John C. Langley, Robert A. Novack, Brian J. Gibson 9781305859975