Introduction to Supply Chain Management and Operations - Chapter 1

  Chapter 

Operations and Supply Chain Management (OSCM) is the design, operation, and improvement of the systems that create and deliver the firm’s primary products and services. OCSM is concerned with the management of the entire system that produces a product or delivers a service. For every product/service a supply network as shown in exhibit 1.1 can be made.

Success in today’s global markets requires a business strategy that matches the preferences of customers with customers, networks, shareholders, employees and the environment (see also exhibit 1.2). Operations refers to manufacturing and service processes that are used to transform the resources employed by a firm into products desired by customers. A Supply Chain encompasses all activities associated with the flow and transformation of goods and services from the raw materials stage through to the end-user, as well as the associated information flows.

A process is made up of one or more activities that transform inputs into outputs. Operations and supply chain processes can be categorized as follows:

  • Planning: processes needed to operate an existing supply chain strategically;

  • Sourcing: selection of suppliers that will deliver the goods and services needed to create the firm’s product;

  • Making: where the product is produced or the service is provided;

  • Delivering: also logistics processes. Delivering products to warehouses and customers, contact with customers and information systems need to be managed;

  • Returning: involves the processes for receiving worn-out, defective, and excess products back from customers and support for customers who have problems with the delivered product.

The are five essential differences between goods and services:

  • Intangible process: a service cannot be weighed or measured. This means that services innovations cannot be patented and customers cannot try the service beforehand.

  • Requires the degree of interaction with the customer to be a service;

  • Heterogeneous: services vary day to day between the customer and the servers, whereas variation in producing goods can be almost zero;

  • Perishable and time dependent: services can’t be stored;

  • Specification of a services can be defined as a package of features that affect the five senses, existing of supporting facility like location and layout, facilitating goods like variety, consistency and quantity, explicit services like training of the personnel and availability to the service, and implicit service like attitude of the personnel, waiting time and privacy.

The Goods-Services Continuum is provided in exhibit 1.4. Learn this! Product-service bundling refers to when a firm builds service activities into its product offerings to create additional value for the customer.

Efficiency Doing something at the lowest possible cost.

Effectiveness Doing the things that will create most value for the customer.

Value The attractiveness of a product relative to its cost.

An interesting relation between OCSM functions and profit is the direct impact of a cost reduction in one of these functions on the profit margin. There are two ratios that relate to the productivity of labour employed by the firm: net income per employee and revenue (or sales) per employee. The receivables turnover ratio measures the efficiency of a company in collecting its sales on credit:

Receivable turnover = annual credit sales / average account receivable

The lower the ratio, the longer receivables are being held and the higher the risk of them not being collected. Another ratio is the inventory turnover, which measures the average number of times inventory is sold and replaced during the fiscal year. This ratio measures how efficient the company turns its inventory into sales.

Inventory turnover = costs of goods sold / average inventory value

The asset turnover ratio is the amount of sales generated for every dollar’s worth of assets. This measures how efficient a firm is using its assets in generating sales revenue.

Asset turnover = revenue (or sales) / total assets

The historical development of OCSM (see also exhibit 1.7):

  1. The Manufacturing Strategy Paradigm was developed in the late 1970s and early 1980s by researchers at the Harvard Business School;

  2. Lean manufacturing, Just-In-Time and Total Quality Management became in the 1980s popular by the Japanese;

  3. Standardized service quality and productivity became popular by McDonald;

  4. Total Quality Management and Quality Certification (e.g., ISO 9000) developed in the late 1980s and 1990s by Deming, Juran and Crosby;

  5. Business Process Reengineering (revolutionairy instead of evolutionairy changes) was necessary in the economic recession in the 1990s and was described by Michael Hammer. Taylor (scientific management) and Frank and Lilian Gilbreth were also important in this field;

  6. Six Sigma Quality tools were extended in the 1990s and can be used in many different organisations;

  7. Supply Chain Management is a total system approach to managing the flow of information, materials and services from material suppliers through factories and warehouses to the end customer. Mass customization is the ability to produce a unique product exactly to a particular customer’s requirements;

  8. Electronic Commere became popular in the late 1990s because of the rise of Internet and the use of it as an essential element of business activity;

  9. Service science was a direct response to the growth of services;

  10. Business analytics is the use of current business data to solve business problems using mathematical analysis.

As operations and supply management is a dynamic field, a global enterprise challenges nowadays different issues:

  1. Coordination between mutually supportive but separate organizations (existence of contract manufacturers that are specialized in performing focused manufacturing activities);

  2. Optimization of global supplier, production, and distribution networks;

  3. Management of customer touch points (recognition that making resource utilization decisions must capture the implicit costs of lost customers as well as the direct costs of staffing);

  4. Raising senior management awareness of operations as a significant competitive weapon;

  5. Sustainability and the triple bottom line: sustainability is the ability to meet current resource needs without compromising the ability of future generations to meet their needs. Triple bottom line is a business strategy that includes social, economic, and environmental criteria.

Practice Questions Chapter 1: Introduction to operations and supply chain management

  • What do the terms operations, supply chain and operations and supply chain management mean?

  • What are operations and supply chain processes and how can they be categorized?

  • What are the five major differences between goods and services?

  • What does product-service bundling mean?

  • What do the terms efficiency, effectiveness and value mean?

  • Can you list some efficiency-related ratios?

  • Which operations and supply management challenges does a global enterprise face?

Answers - Chapter 1

What do the terms operations, supply chain and operations and supply chain management mean?

Operations manufacturing and service processes that are used to transform the resources employed by a firm into products desired by customers. A Supply Chain encompasses all activities associated with the flow and transformation of goods and services from the raw materials stage through to the end-user, as well as the associated information flows. Operations and supply chain management = the design, operation, and improvement of the systems that create and deliver the firm's primary goods and services.

What are operations and supply chain processes and how can they be categorized?

Operations and supply chain processes = one or more activities that transform inputs into outputs. Operations and supply processes can be categorized as follows: planning, sourcing, making, delivering and returning.

What are the five major differences between goods and services?

(1) A service, in contradiction to a good, is an intangible process that cannot be weighed or measured and has no physical dimension; (2) A service requires a certain degree of interaction with the customer for it to be a good service. Without interaction, there is no service; (3) Services are inherently heterogeneous (varying day to day between the customer and the servers); (4) Services are perishable and time dependent, meaning they can't be stored and (5) the specifications of a service can be defined as a package of features

What does product-service bundling mean?

Product-service bundling = firms building service activities into their product offerings to create additional value for the customer.

What do the terms efficiency, effectiveness and value mean?

Efficiency = Doing something at the lowest possible cost.
Effectiveness = Doing the things that will create the most value for the customer.
Value = The attractiveness of a product relative to its cost.

Can you list some efficiency-related ratios?

Net income per employee, revenue per employee, receivable turnover, which is annual credit sales divided by average account receivable > Efficiency in collecting sales on credit, inventory turnover, which is cost of goods sold divided by the average inventory value > Efficiency in turning inventory into sales and asset turnover, which is revenue divided by total assets > Efficiency at using assets in generating sales revenues.

Which operations and supply management challenges does a global enterprise face?

Coordination between mutually supportive but separate organizations, optimization of global supplier, production, and distribution networks, management of customer touch points, raising senior management awareness of operations as a significant competitive weapon and sustainability and the triple bottom line.

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