System Slack and Related Concepts

Supply Chain Foundations Chapter 3 System Slack and Related Concepts

Key questions • What is system slack? • Why does it exist, & should it be eliminated? • What do Little’s law & the trumpet of doom mean, & how are these principles relevant for system slack? • What are the origins, principles, & practices of TQM & JIT? • How does a pull approach answer when & how much to order? • How does a push approach answer when & how much to order? • What are the advantages & disadvantages of each approach? • How is industry changing to make pull more attractive? • How is industry changing to make push more attractive?

Road map • System Slack • TQM and JIT • Pull versus Push • Summary

System Slack What is system slack? • Idle, underutilized, or non-value adding resources • Inventory (e.g., material, cash) • Building space • People • Equipment • Rework Highly relevant for managing flows (transformation, usage, movement) of resources, i.e., SCM

System Slack Why does it exist? Quantity uncertainty • Inputs • e.g., raw material quality, quantity, & delivery timing, absenteeism • Outputs • e.g., varying yield rates • Demand

System Slack Why does it exist? Time lags • About 30 days to cross Atlantic & get through customs • about 30 days worth of inventory in transit • PON: Little’s law – time is proportional to inventory, e.g., 2 gallons of milk in your refrigerator generally last twice as long as 1 gallon • Often made worse by the trumpet of doom (picture on next slide) • less certainty in demand 30 days from now than tomorrow • time lags increase demand uncertainty  more safety stock

System Slack PON: The trumpet of doom

System Slack Why does it exist? Scale economies • E.g., unit price/cost gets smaller as volume increases Changing supply & demand (e.g., seasonality) • E.g., restaurant kitchen or dining space underutilized during lunch Conflicting objectives across departments or firms • E.g., shift more volume to slow, low cost transportation mode to hit budget to the detriment of system performance High market standards • Opportunity to enter niche market?

System Slack How can slack be reduced? Quick examples – to help illuminate the causes Input uncertainty • penalties (e.g., K-Mart), supplier partnering or certification Output uncertainty • preventative maintenance, training, ownership Demand uncertainty • topic of Chapter 4

System Slack How can slack be reduced? Quick examples – to help illuminate the causes Time lags • EDI, air express, closer suppliers, AI to reduce training time • Hot area for investment due to IT advances, i.e., reduce information delays

System Slack Time lag reduction at Calvin Klein Now Calvin’s three-button, $550 crepe suit is blowing out of stores more than twice as fast as the rest of his cK suits. . . . Retailers love the suit too, because it always sells at full price, which keeps margins up. In fact, they’ve asked Calvin to resupply them via what’s known as ‘quick response,’ an electronic inventory system that automatically replenishes stock weekly—a common method of ordering staples like white dress shirts, but one that’s still relatively new for suits. Quick-response orders now make more than half of cK’s total suit business. Goldstein, L., “Clever Calvin Sells Suits Like Socks,” Fortune

System Slack How can slack be reduced? Quick examples – to help illuminate the causes Scale economies • Online purchasing (e.g., via EDI), quick changeover techniques • Another hot area for investment due to IT advances • Cost to process a purchase order (Mary Meeker of Morgan Stanley Dean Witter) Manually: $125 to $175 Online: $10 to $15 Changing supply & demand • Incentives, e.g., matinee discounts, off season discounts

TQM & JIT A little history Industrial Revolution: late 1700’s – early 1900’s • Interchangeable parts • Beginning of shift from artisan economy to mass production • Low education & literacy levels • Management approach that reflected the times • Hierarchical command & control • Expanded role of low skill labor – “interchangeable labor” • Tasks mastered with little education or training

TQM & JIT A little history Formative years of TQM & JIT • Post WWII Japan – almost a clean slate • Limited resources, low volumes  new approach • Influences • TWI – employees involved in process improvement • Deming & Juran • Poor quality is responsibility of management • Tools for process improvement

TQM & JIT Total quality management In brief… TQM is an organization-wide effort directed towards the continuous improvement of quality • One simple definition of high quality is: “exceeds customers’ expectations” • Key point—quality is tied to view of customer (e.g., not specifications)

TQM & JIT Putting TQM principles into practice Continuous improvement in quality – how? Customer focus Employee empowerment Data-based decision making – “management by fact”

TQM & JIT Guiding principle of just-in-time Produce & deliver just when needed • Requires high & consistent reliability • Production & delivery synchronized with market • E.g., producing some of everything every day in quantities that match average demand

TQM & JIT Putting JIT into practice Produce & deliver just when needed – how? • Employee empowerment & data-based decision making – high overlap with TQM • Jidoka – designing processes to help sense & correct problems • Identify instantly & change to eliminate the root cause • E.g., “andon” board on assembly line • a.k.a. autonomation - automatically and autonomously sense and correct problems

TQM & JIT Putting JIT into practice Produce & deliver just when needed – how? • Setup reduction • Stamping machine: 1 day to 3 minutes • High cost setups mean large batches  market demand • Kanban • Signaling device in a pull production system • What is pull? A question we’re about to consider • More on kanban in Chapter 9

Key questions • What is system slack? • Why does it exist, & should it be eliminated? • What do Little’s law & the trumpet of doom mean, & how are these principles relevant for system slack? • What are the origins, principles, & practices of TQM & JIT? • How does a pull approach answer when & how much to order? • How does a push approach answer when & how much to order? • What are the advantages & disadvantages of each approach? • How is industry changing to make pull more attractive? • How is industry changing to make push more attractive?

Pull versus Push Two approaches for answering... 1. When to order or begin work at a stage in the supply chain 2. How much to order or make • Differences between pull & push center on the answer to when

Pull versus Push Pull approach • Pull approach: actual inventory level (or equivalently, actual demand) is used to answer when • Example: whenever inventory gets down to 2 or fewer bins of material, request 3 new bins of material • “bin reserve” • Some signaling devices: kanban, golf balls, voice, . . .

Pull versus Push Pros & cons of pull • Pro • Simple • Con • Reactive • Need stable environment or • lots of flexibility (e.g., excess capacity) or • lots of inventory to achieve high service

Pull versus Push Push approach • Push approach: projected inventory level (or equivalently, projected demand) is used to answer when • Pros/Cons + Proactive - Complex & only as good as quality of projections

Pull versus Push Examples for comparison Example 1 • McDonalds versus caterer Example 2 • Kanban system versus material requirements planning Many organizations combine elements of pull & push E.g., reorder points set proactively, reactive to answer when

Pull versus Push Some trends • Lead times shortening, faster setups  • improved responsiveness  pull becoming more viable • Increasing product variety, shorter product life-cycles, IT advances  • demand ramps up & tails off  • benefits from planned build-up or draw-down of inventory while data & planning IT tools improving  push becoming more viable

Back to key questions • What is system slack? • Why does it exist, & should it be eliminated? • What do Little’s law & the trumpet of doom mean, & how are these principles relevant for system slack? • What are the origins, principles, & practices of TQM & JIT? • How does a pull approach answer when & how much to order? • How does a push approach answer when & how much to order? • What are the advantages & disadvantages of each approach? • How is industry changing to make pull more attractive? • How is industry changing to make push more attractive?

Chapter 10 Chapter 10S-A Chapter 10S-B Chapter 6 Chapter 7 Chapter 8 Chapter 9 Make Store Sell Buy Move Buy Buy Make Sell Move Make Sell Move Move Store Chapter 5 Chapter 4 Chapter 11 Chapter 11S Chapter 12 Where to next? Done with part I – foundations . . . on to principles & tools

Course road map-overview Part I – Foundation Scope, Information Technology, Core Supply Chain Concepts: Introduction to themes that will be present throughout the course Part II – Principles & ToolsDemand Management (sell): Nearly all decisions are based to some degree on future expectations. A natural place to begin is to consider how to influence, process, & predict demand. Supply Management (buy): Sourcing concerns the management of inputs to an organization. Purchased materials & services often make up the majority of a firm’s total expenses. Inventory Management (store): A highly relevant issue for retailers & wholesalers where most inventory is held. Capacity Management (make): What influences how much capacity is appropriate, what tools can be used for analysis, & how does psychology play a role? Production Management (make): An opportunity area in a number of industries due to increasing demands for variety/customization, increasing emphasis on timely & accurate response to market, & favorable developments in technology. Transportation Management (move): A wide array of resources, tactics, & strategies are available for getting product to market & for receiving raw materials. Quality Management (buy, move, make, store, sell): Tools & creative problem solving principles useful for process improvement. Part III – SynthesisSupply Chain Strategy(buy, move, make, store, sell): How can supply chain strategy be aligned with the overall business strategy & with the market & competitive environment, & how should supply chains be designed to improve performance? This topic draws on all of the earlier topics.

Foundation Scope & motivation Information technology System slack TQM & JIT Pull vs. push Topics Demand Management Supply Management Inventory Management Capacity Management Production Management Transportation Management Quality Management Supply Chain Strategy Fundamental Problems Balance scale economies Number guessing Sequencing Principles · Benford’s Law · Bullwhip Effect · Central Limit Theorem · Curse of Utilization · Curse of Variability · Fat Head Effect · Hockey Stick Effect · It’s Hard to Play Catch Up Ball · Khintchine’s Limit Theorem · Law of Large Numbers · Little’s Law  · Obligation to Reciprocate · Pareto Phenomenon · Recency Effect · Satisfaction = Perception - Expectation · Time Distortion · Trumpet of Doom  · Winner’s Curse Course road map-specifics Tools Moving average Winters method Focus forecasting Pareto analysis EOQ Single period model Base stock (Q, R) & (I, S) policies DCA Queueing theory Simulation Kanban MRP POLCA Scheduling rules GOMA SPC CPS Process-product matrix Supply chain-product matrix SCOR model

System Slack and Related Concepts