OLM Lecture Notes Week 1, 2, 3 for Mid-term Exam
Lecture Week 1
Operations & Supply Chain Management is the management of the transformation processes to create value
for the company, and creates and delivers a firm’s primary products and services. (Design, Operation, and
Improvement à DOI)
Logistics management optimizes the transportation and storage of goods within the supply chain, focusing on
timely, cost-effective delivery to enhance customer satisfaction and business efficiency.
Process View of Organizations: Inputs à (transformation process) à Outputs
Example: Automobile factory (system) has purchased parts and raw materials as primary (inputs). The
(transformation) process is fabrication and assembly. Result is the primary (output) automobiles.
Effective supply chain management is the management of flows between and among supply chain stages to
maximize total supply chain surplus.
People involved
Suppliers Supplies raw materials, semi-finished products and finished products to downstream
customers. 2 key strategies: (1) Supplying demand at the lowest possible costs, and (2)
Responding quickly to changing requirements and demand to minimise stockouts.
Manufacturer Make-or-Buy decisions concerning producing an item internally (in-house) or buying it
externally (from an outside supplier).
Distributor Distribution of products from manufacturers to retailers and customers. Activities are,
for example: Temporary storage of products in warehouses to balance fluctuations in
production and demand. Transportation of products by trucks, trains, airplanes, ships or
pipelines.
Retailer Sell products and services to customers. Perform marketing activities.
Customers Buy products and services. Customers are the only source of revenue!
How to maximize total supply chain surplus? Four performance dimensions for OM:
(1) Quality (2) Delivery (3) Flexibility (4) Cost
Conformance, Performance, Speed & Reliability Volume, Mix, Labor, Material,
Reliability (CPR) (S&R) Changeover (VMC) Engineering, Quality-
related (LMEQ)
▪Performance Quality: basic ▪Delivery Speed: ▪Mix Flexibility: The ▪ Labor costs
operating characteristics of a How quickly the ability to produce a wide ▪ Material costs
product or service. operations or range of products or ▪ Engineering costs
supply chain services. ▪ Quality-related
▪Conformance Quality: function can fulfill costs
whether a product was made or a need once it has ▪Changeover
a service performed to been identified. Flexibility: The ability
specifications. to produce a new
▪Delivery product with minimal
▪Reliability Quality: whether Reliability: The delay.
a product will work for a long ability to deliver
time without failing or products or services ▪Volume Flexibility:
requiring maintenance. when promised. The ability to produce
whatever volume the
customer needs.
Trade-offs among Performance Dimensions:
▪ Generally very difficult to excel at all four performance dimensions. Some common conflicts:
o Low cost versus high quality
1
, o Low cost versus flexibility
o Delivery reliability versus flexibility
o Conformance quality versus product flexibility
Trends: sustainability (triple bottom line)
› Environment: Green supply chain, reduction of carbon emission
› Society: Social responsibility
› Economy: Maintain competitive advantages and profitability
Reasons for globalization:
▪ Attract and retain global talent
▪ Attract new markets
▪ Reduction of costs
▪ Learn to improve operations
Trends: Outsourcing
› Third party logistics (e.g., PostNL)
› Vendor managed inventories (e.g., Ford)
› Original equipment/design manufacturers (e.g., Foxconn)
Efficient consumer response: Extensive collaboration between firms to respond faster/better/cheaper to the
fluctuating demands of customers
Cycle time reduction: The cycle time of a supply chain equals the total time required to complete the total
process from raw materials to the delivery of the finished product to the customers
Just-in-time: Philosophy of continuous and forced problem solving that drives out waste
Lecture Week 2
For any given description of a production or service facility, using the assumption that all values are
deterministic, you should be able to calculate the following performance metrics:
1. Throughput time
2. Work-in-progress inventory
3. Location and maximum capacity of the bottleneck
4. Departure rate
5. Utilisation, efficiency
Capacity
Definition Capacity is “the amount of output that a system is capable of achieving
over a specific period of time”
Importance of capacity › Cost implications (idle capacity, excess inventory, higher operating
planning costs)
› Revenue implications (unfulfilled customer demand)
› Uncertainty associated with future demand (forecasting à
uncertainties)
› Customer dissatisfaction (unfulfilled customer demand)
Frequency of Capacity Cost of upgrading too frequently vs. cost of upgrading too infrequently
Additions
› Cost of upgrading too frequently:
- removing and replacing old equipment
- training employees on new equipment
- purchase of new equipment is more costly than selling old equipment.
› Cost of upgrading too infrequently
- infrequent expansion means that capacity is purchased in larger
chunks. The possibility of excess capacity is higher.
2
, Capacity Planning Time › Long range: Longer than one year (productive resources including
Durations buildings, equipment and facilities)
› Intermediate range: Monthly or Quarterly (capacity variation by
hiring, layoffs, new tools, and minor equipment purchases, and
subcontracting)
› Short range: Shorter than one month (personnel transfers)
We must incorporate a time dimension à producing 24,000 liters per
day, processing 80 calls per hour, and treating 57 patients per session
Capacity response to demand Respond to changing demand by adjusting production capacity à
operations performance metrics (flexibility)
Deterministic (certain) vs. Stochastic (uncertain)
Deterministic: No random input. Everything is known in advance (certainty)
Stochastic: Under similar circumstances, different outcomes may occur. For example, throwing a dice
(uncertainty)
Concept: Arrivals
Inter-arrival time: Time between two subsequent arrivals of products/customers at their entrance in the
process
Arrival rate: number of products that arrive per unit of time (e.g. number of products that arrive per hour)
Throughput time: Time that passes between the moment at which the customer/product enters the system and
the moment at which the customer/product is ready
Note: Throughput is not throughput time; Throughput refers to the amount of items passing through a system
or process
› Deterministic throughput times can be estimated by adding up the expected processing times of the
different (sub)processes. Deterministic means that you ignore any probability distributions and just use the
average value (mean or expected value), ignore waiting-line effects in the system.
› If a production/service time follows a normal distribution à Normal (μ,σ), then the mean = μ and the
standard deviation = σ
Deterministic throughput times with multiple paths
In calculating deterministic throughput times, you need to follow the following four steps:
1. Estimate deterministic throughput time for one of the paths
2. Multiply resulting deterministic throughput time with the probability that the path will be followed
3. Repeat 1 and 2 until all paths are handled
4. Compute the total deterministic throughput time = sum of results from step 2 for all paths
Deterministic throughput times for different types of products/customers
› Different types of products/customers in one system
› In case that different types of products/customers follow processes in the same environment, you might be
asked to calculate a throughput time for each type of product/customer.
Concepts: design vs. effective capacity
› Design capacity: Theoretical maximum output of a system or process in a given period.
3
, › Effective capacity: Actual capacity that can be expected given the product mix, methods of scheduling,
maintenance, and standards of quality.
Concepts: Serial and parallel processing
› Serial means that steps are performed consecutively (one after the other)
› Parallel means that steps can be performed simultaneously
Concept: Parallel servers
› If a single process consists of x parallel servers (machines or operators), then each product only needs to be
treated by one of the servers and the other server(s) can simultaneously treat other product(s).
Sufficiency of design capacity
› Is design capacity sufficient to handle the expected number of products that arrive at the various
processes? Follow a three-step procedure:
1. Calculate design capacity of each process
2. Calculate the expected number of products arriving at that process (use percentages in systems with
multiple paths)
3. Compare answers from steps 1 and 2
Concept: Bottleneck
Bottleneck: a process that limits output of the system.
If none of the processes (e.g., machines, workers) in the system is a bottleneck, then the arrival process is to
be the bottleneck.
Determining the bottleneck
1. Calculate the design capacity of each process
2. Calculate the arrival rate of the system
3. If design capacity of all processes is sufficient, arrival process is the bottleneck
a. Otherwise, the process with the smallest design capacity (rate) is the bottleneck
Determining a bottleneck in a system with multiple paths
1. Calculate design capacity of each process
2. Calculate arrival rate
3. If design capacity in all processes is sufficient, then arrival process is the bottleneck
a. Otherwise, check each path if there is one or more processes with insufficient design
capacity: process with the smallest design capacity is the bottleneck.
Concept: Departure rate
› Departure rate: the number of products that leaves the system per time unit.
› The departure rate is determined by the capacity of the bottleneck.
› Only if the arrival process is the bottleneck, then the departure rate = the arrival rate.
Question: What if arrival rate > capacity of any process? When the arrival rate exceeds the capacity of a
process, a backlog of tasks forms, leading to increased waiting times, potential resource saturation, and a
higher likelihood of errors. This imbalance can result in reduced efficiency, compromised quality, and
operational disruptions if not addressed promptly.
Concepts: Utilisation rate and efficiency (Always locate the bottleneck before you start calculating)
› Utilisation rate: fraction of the total time in which a resource or asset is actively engaged or utilized for its
intended purpose, often expressed as a percentage, providing insights into efficiency and productivity levels.
› Utilisation rate = total operating time / total time = actual output/design capacity
› The utilisation rate r for a workstation consisting of n identical, parallel servers can be computed by
r = l/(nµ)
l = arrival rate
µ = production rate per station (only if the arrival process is the bottleneck!)
› Efficiency = actual output/effective capacity
4
Lecture Week 1
Operations & Supply Chain Management is the management of the transformation processes to create value
for the company, and creates and delivers a firm’s primary products and services. (Design, Operation, and
Improvement à DOI)
Logistics management optimizes the transportation and storage of goods within the supply chain, focusing on
timely, cost-effective delivery to enhance customer satisfaction and business efficiency.
Process View of Organizations: Inputs à (transformation process) à Outputs
Example: Automobile factory (system) has purchased parts and raw materials as primary (inputs). The
(transformation) process is fabrication and assembly. Result is the primary (output) automobiles.
Effective supply chain management is the management of flows between and among supply chain stages to
maximize total supply chain surplus.
People involved
Suppliers Supplies raw materials, semi-finished products and finished products to downstream
customers. 2 key strategies: (1) Supplying demand at the lowest possible costs, and (2)
Responding quickly to changing requirements and demand to minimise stockouts.
Manufacturer Make-or-Buy decisions concerning producing an item internally (in-house) or buying it
externally (from an outside supplier).
Distributor Distribution of products from manufacturers to retailers and customers. Activities are,
for example: Temporary storage of products in warehouses to balance fluctuations in
production and demand. Transportation of products by trucks, trains, airplanes, ships or
pipelines.
Retailer Sell products and services to customers. Perform marketing activities.
Customers Buy products and services. Customers are the only source of revenue!
How to maximize total supply chain surplus? Four performance dimensions for OM:
(1) Quality (2) Delivery (3) Flexibility (4) Cost
Conformance, Performance, Speed & Reliability Volume, Mix, Labor, Material,
Reliability (CPR) (S&R) Changeover (VMC) Engineering, Quality-
related (LMEQ)
▪Performance Quality: basic ▪Delivery Speed: ▪Mix Flexibility: The ▪ Labor costs
operating characteristics of a How quickly the ability to produce a wide ▪ Material costs
product or service. operations or range of products or ▪ Engineering costs
supply chain services. ▪ Quality-related
▪Conformance Quality: function can fulfill costs
whether a product was made or a need once it has ▪Changeover
a service performed to been identified. Flexibility: The ability
specifications. to produce a new
▪Delivery product with minimal
▪Reliability Quality: whether Reliability: The delay.
a product will work for a long ability to deliver
time without failing or products or services ▪Volume Flexibility:
requiring maintenance. when promised. The ability to produce
whatever volume the
customer needs.
Trade-offs among Performance Dimensions:
▪ Generally very difficult to excel at all four performance dimensions. Some common conflicts:
o Low cost versus high quality
1
, o Low cost versus flexibility
o Delivery reliability versus flexibility
o Conformance quality versus product flexibility
Trends: sustainability (triple bottom line)
› Environment: Green supply chain, reduction of carbon emission
› Society: Social responsibility
› Economy: Maintain competitive advantages and profitability
Reasons for globalization:
▪ Attract and retain global talent
▪ Attract new markets
▪ Reduction of costs
▪ Learn to improve operations
Trends: Outsourcing
› Third party logistics (e.g., PostNL)
› Vendor managed inventories (e.g., Ford)
› Original equipment/design manufacturers (e.g., Foxconn)
Efficient consumer response: Extensive collaboration between firms to respond faster/better/cheaper to the
fluctuating demands of customers
Cycle time reduction: The cycle time of a supply chain equals the total time required to complete the total
process from raw materials to the delivery of the finished product to the customers
Just-in-time: Philosophy of continuous and forced problem solving that drives out waste
Lecture Week 2
For any given description of a production or service facility, using the assumption that all values are
deterministic, you should be able to calculate the following performance metrics:
1. Throughput time
2. Work-in-progress inventory
3. Location and maximum capacity of the bottleneck
4. Departure rate
5. Utilisation, efficiency
Capacity
Definition Capacity is “the amount of output that a system is capable of achieving
over a specific period of time”
Importance of capacity › Cost implications (idle capacity, excess inventory, higher operating
planning costs)
› Revenue implications (unfulfilled customer demand)
› Uncertainty associated with future demand (forecasting à
uncertainties)
› Customer dissatisfaction (unfulfilled customer demand)
Frequency of Capacity Cost of upgrading too frequently vs. cost of upgrading too infrequently
Additions
› Cost of upgrading too frequently:
- removing and replacing old equipment
- training employees on new equipment
- purchase of new equipment is more costly than selling old equipment.
› Cost of upgrading too infrequently
- infrequent expansion means that capacity is purchased in larger
chunks. The possibility of excess capacity is higher.
2
, Capacity Planning Time › Long range: Longer than one year (productive resources including
Durations buildings, equipment and facilities)
› Intermediate range: Monthly or Quarterly (capacity variation by
hiring, layoffs, new tools, and minor equipment purchases, and
subcontracting)
› Short range: Shorter than one month (personnel transfers)
We must incorporate a time dimension à producing 24,000 liters per
day, processing 80 calls per hour, and treating 57 patients per session
Capacity response to demand Respond to changing demand by adjusting production capacity à
operations performance metrics (flexibility)
Deterministic (certain) vs. Stochastic (uncertain)
Deterministic: No random input. Everything is known in advance (certainty)
Stochastic: Under similar circumstances, different outcomes may occur. For example, throwing a dice
(uncertainty)
Concept: Arrivals
Inter-arrival time: Time between two subsequent arrivals of products/customers at their entrance in the
process
Arrival rate: number of products that arrive per unit of time (e.g. number of products that arrive per hour)
Throughput time: Time that passes between the moment at which the customer/product enters the system and
the moment at which the customer/product is ready
Note: Throughput is not throughput time; Throughput refers to the amount of items passing through a system
or process
› Deterministic throughput times can be estimated by adding up the expected processing times of the
different (sub)processes. Deterministic means that you ignore any probability distributions and just use the
average value (mean or expected value), ignore waiting-line effects in the system.
› If a production/service time follows a normal distribution à Normal (μ,σ), then the mean = μ and the
standard deviation = σ
Deterministic throughput times with multiple paths
In calculating deterministic throughput times, you need to follow the following four steps:
1. Estimate deterministic throughput time for one of the paths
2. Multiply resulting deterministic throughput time with the probability that the path will be followed
3. Repeat 1 and 2 until all paths are handled
4. Compute the total deterministic throughput time = sum of results from step 2 for all paths
Deterministic throughput times for different types of products/customers
› Different types of products/customers in one system
› In case that different types of products/customers follow processes in the same environment, you might be
asked to calculate a throughput time for each type of product/customer.
Concepts: design vs. effective capacity
› Design capacity: Theoretical maximum output of a system or process in a given period.
3
, › Effective capacity: Actual capacity that can be expected given the product mix, methods of scheduling,
maintenance, and standards of quality.
Concepts: Serial and parallel processing
› Serial means that steps are performed consecutively (one after the other)
› Parallel means that steps can be performed simultaneously
Concept: Parallel servers
› If a single process consists of x parallel servers (machines or operators), then each product only needs to be
treated by one of the servers and the other server(s) can simultaneously treat other product(s).
Sufficiency of design capacity
› Is design capacity sufficient to handle the expected number of products that arrive at the various
processes? Follow a three-step procedure:
1. Calculate design capacity of each process
2. Calculate the expected number of products arriving at that process (use percentages in systems with
multiple paths)
3. Compare answers from steps 1 and 2
Concept: Bottleneck
Bottleneck: a process that limits output of the system.
If none of the processes (e.g., machines, workers) in the system is a bottleneck, then the arrival process is to
be the bottleneck.
Determining the bottleneck
1. Calculate the design capacity of each process
2. Calculate the arrival rate of the system
3. If design capacity of all processes is sufficient, arrival process is the bottleneck
a. Otherwise, the process with the smallest design capacity (rate) is the bottleneck
Determining a bottleneck in a system with multiple paths
1. Calculate design capacity of each process
2. Calculate arrival rate
3. If design capacity in all processes is sufficient, then arrival process is the bottleneck
a. Otherwise, check each path if there is one or more processes with insufficient design
capacity: process with the smallest design capacity is the bottleneck.
Concept: Departure rate
› Departure rate: the number of products that leaves the system per time unit.
› The departure rate is determined by the capacity of the bottleneck.
› Only if the arrival process is the bottleneck, then the departure rate = the arrival rate.
Question: What if arrival rate > capacity of any process? When the arrival rate exceeds the capacity of a
process, a backlog of tasks forms, leading to increased waiting times, potential resource saturation, and a
higher likelihood of errors. This imbalance can result in reduced efficiency, compromised quality, and
operational disruptions if not addressed promptly.
Concepts: Utilisation rate and efficiency (Always locate the bottleneck before you start calculating)
› Utilisation rate: fraction of the total time in which a resource or asset is actively engaged or utilized for its
intended purpose, often expressed as a percentage, providing insights into efficiency and productivity levels.
› Utilisation rate = total operating time / total time = actual output/design capacity
› The utilisation rate r for a workstation consisting of n identical, parallel servers can be computed by
r = l/(nµ)
l = arrival rate
µ = production rate per station (only if the arrival process is the bottleneck!)
› Efficiency = actual output/effective capacity
4
