SCM Fundamentals
Firms can compete based on some combination of cost, quality, speed,
service and variety. This is a strategic decision, but also the operational
side, which is to be as efficient as possible, is important and one to
address.
According to Porter, companies have support activities (HR, technology,
etc.) and primary activities. All primary activities are relevant to supply
chain management. Supply chain management is not only about saving
costs, but also about adding value. Porter also defined a competitive
strategy, which is about the way to add value. he defines for possibilities:
Cost leadership become a low-cost producer
Differentiation offer unique products and services
Focus target a specific part of the market with a cost leadership or
differentiation strategy
Supply chains can be cost-efficient, mostly stable for the long term, or
responsive, reacting on variable demand, uncertainties and a short selling
season.
Other differentiation possibilities:
Product leadership continuous innovation in the product offered.
Operational excellence delivering reliable products against
competing prices with minimal inconvenience to the customer
(McDonald’s, Picnic).
Customer intimacy develop products according to customer
wishes to work towards a permanent customer base (Netflix,
Bol.com).
A supply chain is a goal-oriented network of processes and stock points
(locations in the supply chain where inventories are held) used to deliver
goods and services to customers. A single stock point is called a station,
consisting of one or more servers. A sequence of stations used to generate
the product or service is called a line/routing/flow. All lines producing all
products and/or services is called a network. A network with the goal to
transform inputs in outputs with a value for the customer is called the
transformation process.
Types of flows:
Downstream flows: suppliers to customers.
Upstream flows: customers to suppliers.
Some important performance measures:
Throughput (TH) rate at which entities are processed by the
system.
Work in process (WIP) number of entities in the system, which can
be measured in physical units (parts, people, jobs) or financial units
(value).
, Cycle time (CT) time it takes an entity to traverse the system,
including any rework or other disruptions.
The objective is typically to have a high throughput and a low WIP and
cycle time. The best measure of efficiency is the inventory turns (= TH /
WIP), in which TH is measured as the cost of goods sold in a year and WIP
is the dollar value of the average amount of inventory held in the system.
Deterministic cycle times are the average cycle time instead of taking
probability distributions into account, also ignoring waiting lines in the
system. Therefore, it is usually smaller or equal to the actual average
cycle time.
The capacity of a system is the maximum average rate at which entities
can flow through the system. This could be for a station, routing or
network. The bottleneck of a system is the process with the highest
utilization (= rate into station / capacity of station). The bottleneck defines
the maximum rate of the line. The capacity is the input rate that makes
utilization of the bottleneck 100%. If there is yield loss between different
stations, changing the amount of loss could also affect which station is the
bottleneck.
The effective capacity = base capacity – detractors (machine in repair).
WIP is measured in time, the total processing time the amount of WIP
waiting represents. A too low WIP decreases utilization, a too high WIP
increases cycle time. Increasing WIP will lead to a marginally lower
increase in utilization. The system will fall behind anytime there is any kind
of temporary slowdown in production and is not able to catch up again
afterwards. Therefore, utilization of 100% is impossible, due to variation.
Little’s law: L (average WIP) = TH (average throughput) * CT (average
cycle time). This doesn’t consider cyclic behavior, bulk arrivals, etc.
Inventory adds value as a buffer, to be able to sell even when you can’t by
new raw materials or the manufacturing process has some issues. It also
has costs (direct costs, devaluation, protection), which leads to a trade-off.
Overcapacity leads to non-working machines and employees, increasing
operational costs. undercapacity might result in the loss of customers and
strained machines and staff.
A learning curve shows the learning rate L, showing the time needed for
producing a unit compared to the original production time if production
doubles. If L = 0.8, if you produce 2 instead of 1 product, the second
product takes 0.8 times the producing time of the first unit.
The theoretical capacity can be increased by working overtime. If WIP
increases too much, management can agree on working overtime,
decreasing WIP, discontinuing overtime, lowering capacity, again
increasing WIP. This is the overtime vicious circle.
Firms can compete based on some combination of cost, quality, speed,
service and variety. This is a strategic decision, but also the operational
side, which is to be as efficient as possible, is important and one to
address.
According to Porter, companies have support activities (HR, technology,
etc.) and primary activities. All primary activities are relevant to supply
chain management. Supply chain management is not only about saving
costs, but also about adding value. Porter also defined a competitive
strategy, which is about the way to add value. he defines for possibilities:
Cost leadership become a low-cost producer
Differentiation offer unique products and services
Focus target a specific part of the market with a cost leadership or
differentiation strategy
Supply chains can be cost-efficient, mostly stable for the long term, or
responsive, reacting on variable demand, uncertainties and a short selling
season.
Other differentiation possibilities:
Product leadership continuous innovation in the product offered.
Operational excellence delivering reliable products against
competing prices with minimal inconvenience to the customer
(McDonald’s, Picnic).
Customer intimacy develop products according to customer
wishes to work towards a permanent customer base (Netflix,
Bol.com).
A supply chain is a goal-oriented network of processes and stock points
(locations in the supply chain where inventories are held) used to deliver
goods and services to customers. A single stock point is called a station,
consisting of one or more servers. A sequence of stations used to generate
the product or service is called a line/routing/flow. All lines producing all
products and/or services is called a network. A network with the goal to
transform inputs in outputs with a value for the customer is called the
transformation process.
Types of flows:
Downstream flows: suppliers to customers.
Upstream flows: customers to suppliers.
Some important performance measures:
Throughput (TH) rate at which entities are processed by the
system.
Work in process (WIP) number of entities in the system, which can
be measured in physical units (parts, people, jobs) or financial units
(value).
, Cycle time (CT) time it takes an entity to traverse the system,
including any rework or other disruptions.
The objective is typically to have a high throughput and a low WIP and
cycle time. The best measure of efficiency is the inventory turns (= TH /
WIP), in which TH is measured as the cost of goods sold in a year and WIP
is the dollar value of the average amount of inventory held in the system.
Deterministic cycle times are the average cycle time instead of taking
probability distributions into account, also ignoring waiting lines in the
system. Therefore, it is usually smaller or equal to the actual average
cycle time.
The capacity of a system is the maximum average rate at which entities
can flow through the system. This could be for a station, routing or
network. The bottleneck of a system is the process with the highest
utilization (= rate into station / capacity of station). The bottleneck defines
the maximum rate of the line. The capacity is the input rate that makes
utilization of the bottleneck 100%. If there is yield loss between different
stations, changing the amount of loss could also affect which station is the
bottleneck.
The effective capacity = base capacity – detractors (machine in repair).
WIP is measured in time, the total processing time the amount of WIP
waiting represents. A too low WIP decreases utilization, a too high WIP
increases cycle time. Increasing WIP will lead to a marginally lower
increase in utilization. The system will fall behind anytime there is any kind
of temporary slowdown in production and is not able to catch up again
afterwards. Therefore, utilization of 100% is impossible, due to variation.
Little’s law: L (average WIP) = TH (average throughput) * CT (average
cycle time). This doesn’t consider cyclic behavior, bulk arrivals, etc.
Inventory adds value as a buffer, to be able to sell even when you can’t by
new raw materials or the manufacturing process has some issues. It also
has costs (direct costs, devaluation, protection), which leads to a trade-off.
Overcapacity leads to non-working machines and employees, increasing
operational costs. undercapacity might result in the loss of customers and
strained machines and staff.
A learning curve shows the learning rate L, showing the time needed for
producing a unit compared to the original production time if production
doubles. If L = 0.8, if you produce 2 instead of 1 product, the second
product takes 0.8 times the producing time of the first unit.
The theoretical capacity can be increased by working overtime. If WIP
increases too much, management can agree on working overtime,
decreasing WIP, discontinuing overtime, lowering capacity, again
increasing WIP. This is the overtime vicious circle.
