Variability and How to Cope with It

1. Operations Management Dr. Mark P. Van Oyen Variability and How to Cope with It

2. Variability Sources • Variability = uncertainty, randomness, noise, statistical fluctuations. • 1. Infrastructure variability • task processing time variability due to equipment or labor • resource failures • labor absenteeism • raw material defects and supplier variability • defects and quality variability caused by workers, processes, resources, and the environment • IT failures • procedures that are interpreted with variation • 2. Demand variability • volume of customer demand • customer product selection (uncertainty in product mix) • level and type of customization required by customer

3. Variability’s Cost • Variability has a corrupting influence on the logistical efficiency of a PS - it negatively impacts key system performance measures such as • Cycle Time (CT) - shorter is better • Throughput (TH) - greater is better • Work in Process (WIP) - smaller is better • Example: variable product demand volume can be accommodated by a finished goods inventory (FGI). A safety stock level is selected to provide a good fill rate (probability that an ordered item is in stock). Provided the average TH is unchanged, inevitably greater WIP levels and longer CT’s will result and that costs the firm warehouse space & transportation overhead, longer quoted lead times, and less flexibility in responding to changes in customer demand.

4. Proactive Variability Reduction • Variability reductionis a strategic action that typically serves to improve logistical effectiveness, but some level of variability will always be present in a real-world system. • demand management + better forecasting (promotions, pricing, advertising, advanced forecasting) • improved worker training or Agile Worksharing • supply chain management efforts • delayed product differentiation (maximize use of standardized parts) (e.g. external HP power supplies for US/European voltage levels; language-sensitive decals; customization kits)

5. Proactive Variability Reduction • Selecting complementary product mix to consistently utilize resources based on anti-correlated demands (e.g. John Deere Christmas paper production; a firm could make both snow skis and water skis). • job release policies (CONWIP, KANBAN, other) Example: JIT uses supplier contracts with penalties for poor supplier quality or variability in delivery of goods or services (late & early deliveries) • maintenance, innovative processes with less variability in quality or processing time (better yields, fewer defects, faster & more reliable processes) • set up time reduction

6. Defenses Against Variability • There are three fundamentally distinct approaches to mitigate the corrupting influence of variability: • The system can buffer (or hedge) against variability using some combination of: • 1. Production Capacity • 2. Inventory • 3. Time • Aside: Workforce Agility is a clever way to increase production capacity, sometimes without the need for any additional resources or even training.

7. Examples: 3 Forms of Buffering • 1. Demand for emergency services such as firefighters and ambulances is highly variable, but long lead times do not provide acceptable service, so we typically buffer with capacity, which is reflected in their low utilization levels. • 2. Cheap ball-point pens are frequently needed in offices and their demand is variable. Replenishment on a per item basis is not cost effective, so pens are often bought by the box and stocked as inventory. Other examples include Gasoline, commodities, clothing, and processed foods. • 3. The demand for organs for transplantation is large relative to the supply. Organs cannot generally be stored for a long time, and it is difficult to increase the capacity (supply) other than to promote education for a long-term increase. Thus, we use time as the buffer and long waits are the reality. Sadly, this results in a brutal form of demand management.

8. 1. Production Capacity • To maintain the same logistical efficiency (TH, CT, WIP) in the presence of increased variability, the production capacity must be increased, ceteris paribus • Examples: • faster resources • better trained workers • workers with more skills (cross-training) • higher quality materials • better scheduling • superior processes and organization • effective use of information technology (IT)

9. 2. Inventory • To maintain a constant throughput level, increased variability typically requires increased inventory levels, ceteris paribus. • Examples: • Safety stock in a make-to-stock PS • Sophisticated inventory policies • Reengineering efforts may shift to the use of standardized parts or modular design to achieve a beneficial pooling of variability sources

10. 3. Time • When increased inventory or capacity are not appropriate alternatives, time can be used to buffer against variability so that the increased time allows greater effort to be expended. • To maintain the same logistical efficiency (TH, CT, WIP) in the presence of increased variability, the time allowed for production must be increased, ceteris paribus • Examples: • lead times for order fulfillment • scheduling resources over time so that the same infrastructure can be used for new products • sophisticated due-date quoting based on feedback information from the shop floor