Supply Chain Foundations: Buy It, Make It, Move It

Table of contents :
CHAPTER 1: WHAT IS SUPPLY CHAIN MANAGEMENT?
GOALS, OBJECTIVES AND STUFF WE WILL RUIN:
Section 1.1: Breaking Down a Supply Chain
Section 1.2: The Visual Supply Chain
Section 1.3: Managing a Successful Supply Chain
Section 1.4: What We Want from a Supply Chain
Chapter 2: Managing Supply and Inventory
Goals, Objectives and Stuff We Will Ruin:
Section 2.1: Inventory Basics
Section 2.2: Inventory: Cost Considerations
Section 2.3: Procurement Basics
Section 2.4: Developing and Managing Supplier Relationships
Chapter 3: Manufacturing and Operations
Section 3.1: Facility Location Basics
Section 3.2: Products: From Development to Manufacturing
Section 3.3: Layout Types and Manufacturing Strategies
Section 3.4: Bottlenecks and Line Balancing
Chapter 4: Transportation and Logistics
Section 4.1: Welcome to Logistics
Section 4.2: Transportation and Distribution
Section 4.3: Packaging and Containerization
Section 4.4: Global Logistics
Chapter 5: Retail Operations and Waiting Lines
Section 5.1: Retail Supply Chain Management
Section 5.2: In-Store Operations
Section 5.3: Waiting Lines
Section 5.4: A Simple Queuing Model
Chapter 6: Supply Chain Integration
Section 6.1: The Integrated Supply Chain
Section 6.2: The Bullwhip Effect
Section 6.3: Push and Pull Systems
Section 6.4: Lean Systems
Chapter 7: Global SCM Issues and Terms
Section 7.1: Going Global
Section 7.2: Global Operations and Manufacturing
Section 7.3: Global Transportation and Logistics
Section 7.4: Global Sourcing
Chapter 8: Socially Responsible Supply Chain Management
Section 8.1: What is Social Responsibility (SR)?
Section 8.2: Ethics
Section 8.3: Sustainability
Section 8.4: Humanitarian Supply Chain Management
Chapter 9: Business Processes
Section 9.1: Business Process Fundamentals
Section 9.2: Designing a Business Process
Chapter 10: Project Management and Consulting Fundamentals
Section 10.1: Business Process Improvement
Section 10.2: The Basics of Project Management
Section 10.3: The Critical Path Method
Chapter 11: Measuring Performance
Section 11.1: Why People Measure
Section 11.2: Developing a Good Metric
Section 11.3: Developing a System of Metrics
Section 11.4: Metrics in Business and Supply Chain
Chapter 12: Quality Management Basics
Section 12.1: What is Quality?
Section 12.2: Quality Management Programs
Section 12.3: Quality Tools

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Copyright © 2019 by Eddie Davila. All rights reserved. No part of this book may be reproduced or used in any manner without the express written permission of the publisher except for the credited use of brief quotations.

Table of Contents Chapter 1: What is Supply Chain Management Chapter 2: Managing Supply and Inventory Chapter 3: Manufacturing and Operations Chapter 4: Transportation and Logistics Chapter 5: Retail Operations and Waiting Lines Chapter 6: Supply Chain Integration Chapter 7: Global SCM Issues and Terms Chapter 8: Socially Responsible Supply Chain Management Chapter 9: Business Processes Chapter 10: Project Management and Consulting Fundamentals Chapter 11: Measuring Performance Chapter 12: Quality Management Basics

CHAPTER 1: WHAT IS SUPPLY CHAIN MANAGEMENT? GOALS, OBJECTIVES AND STUFF WE WILL RUIN: This module will make you wonder where everything around you came from and how it was made. Be warned, reading this may ruin the way you look at everything you buy, every store you visit, as well as the place where you presently work. Any built-up frustration caused by reading this module will empower you to think about creating supply chain solutions. Beware: A change in your career path might result from reading on.

SECTION 1.1: BREAKING DOWN A SUPPLY CHAIN STORY: THE SANDWICH

 Let’s take a sandwich to work today. Let’s make it at home. What kind of sandwich? We’ll keep it easy, a standard club sandwich: turkey, Swiss cheese and bacon on a roll with lettuce, tomato and mayo. So, what else do we need to do?

PURCHASING Buy stuff. Where will we buy this stuff? Our favorite grocery store? Why is that particular store our favorite? Do they have all of the ingredients we want? Perhaps, but maybe I want bread from the corner bakery. What if the tomatoes at our favorite grocery store don’t look very good? Do we have a back-up store? Do we have enough time to make three grocery stops?

MANUFACTURING AND OPERATIONS Now that we have our ingredients it is time to make the sandwich. What will that take to accomplish? Heating bacon, toasting bread, cutting veggies, etc. When you are done, be sure to put things away for tomorrow’s lunch. Oh, and don’t forget to clean up the mess you made.

TRANSPORTATION AND LOGISTICS We now need to prep the sandwich for travel. Plastic bag? Wax paper? Maybe a plastic reusable container? Do we need a brown paper bag to help us easily carry our packaged sandwich? Do we own any of these things or should we have bought them when we bought the groceries? Is there a fridge at work to keep this cool? Is it possible a co-worker may steal it? I’m sure you can think of dozens of other issues that were not considered above. Welcome to the world of supply chain management - a place where purchasing, operations and logistics are what matters. Buying things, making things and moving things are what supply chain managers think about. They think about making products better, making them faster and doing it with minimal waste. This story about the sandwich was just a small part of the full story. In supply chains, your home and the grocery stores represent the entire length of the supply chain. Real supply chain managers deal with what happens at the grocery distribution center, packaging plants, manufacturing facilities and on the farms. Modern supply chain managers even think about what to do with garbage, recyclables and reusables. Source locally or globally? How can we ensure we have an ethical supply chain? Is our supply chain sustainable? Not sure? Ask a supply chain manager.

1. SUPPLY CHAIN MANAGEMENT The effective and efficient integration of the suppliers, manufacturers and transportation organizations, as well as the other parties responsible for collectively bringing products and services to market. EXPLAINED: Think of the thousands of parts that go into a car. Imagine trying to get the thousands of suppliers to sell you what you want, at a reasonable price, and then having them deliver the items on time. Imagine trying to make sure all of your suppliers are producing top quality parts that will help improve the quality of the vehicle you will sell. Imagine trying to make sure your employees are doing their best to manufacture the vehicles in a quality manner using the minimal resources required.

Those issues are only the beginning: wages, rent, training, packaging, international law, employee motivation… The list of supply chain manager concerns is long and ever-changing. Think about how many things could possibly be wrong with the vehicle. Think about how those problems could be tied to poor supply chain management.

2. PROCUREMENT (A.K.A. PURCHASING) The branch of the supply chain responsible for acquiring materials, equipment, products and services. This would entail finding suppliers, choosing the supplier that offers the best value, negotiating the terms of the purchase, placing orders, and developing long-term relationships with suppliers so that consistent and improved quality can be expected over a long period of time. EXPLAINED: This is the department in the company responsible for doing the shopping. They are the ones that decide which type of copy machine to buy for the office, what color paper they will buy and from which company they will purchase the paper. In a department store, procurement employees (or buyers) would be responsible for finding clothing suppliers, choosing the styles that meet the department store’s brand and then negotiating the terms of the purchase. For a company that makes organic strawberry yogurt, procurement might be responsible for finding the appropriate organic strawberry suppliers and making sure that they are reliable and trustworthy. Since these may all be purchases that will happen over and over again, these procurement employees need to establish relationships with the suppliers that will ensure high-quality and continuous improvement throughout the buyer-supplier relationship.

3. OPERATIONS The branch of the supply chain responsible for making business processes effective and efficient. In essence, operations seek to help the organization create high quality products and/or services, while using the fewest resources possible.

EXPLAINED: Whether you are manufacturing something simple or complex, companies want to make these items in a timely fashion with minimal resources - employees, energy, real estate. This is the constant, never-ending task of operations managers. Do it faster. Do it better. Do it with less money. Do it right now. Operations managers are constantly being asked to improve how things are done. This means utilizing technology, looking for solutions that are more logical and finding new ways to employ the skills and intelligence of human beings. This is not limited to manufacturing products, though. In service, operations managers look for ways to make waiting lines shorter, develop new step-bystep processes to make sure patients in an emergency room are treated properly or to implement new technological solutions to take orders and communicate them to employees. Operations managers are the folks that are responsible for making sure that their systems are making great stuff in the easiest way possible.

4. LOGISTICS The branch of the supply chain responsible for developing the transportation itinerary and finding the appropriate transportation and storage partners to successfully navigate the flow of materials from the point of origin to the final destination. EXPLAINED: Moving products is more than just putting items on a truck. Moving products around the world requires lots of planning. Consider what it takes for you to travel around the world. In order to travel you need to do things such as buy tickets, pack a suitcase, get to the airport, check-in to your flight, go through security, board your plane and store your belongings.  If you have a connecting flight you may need to do many of these things more than once.  Even when you reach your destination city, you’ll still need a taxi to the hotel where you have your reservation. Logistics managers find trucking companies, package the item, find distributors, organize documentation, rent standardized containers… in

addition to planning many other accommodations for the goods to be shipped. As always, time, speed, flexibility and the cost of the shipment are also important considerations.

5. REVERSE LOGISTICS The branch of the supply chain responsible for movement of products and packaging that flow backward in the supply chain, away from the consumer and back in the direction of manufacturers. (The management of materials moving upstream in the supply chain.) EXPLAINED: When you return a defective television to the store, what happens next? Does the item get shipped back to the distributor? Will it be sold for parts, be recycled, or will the product be refurbished or thrown away? Which employees and/or companies will help you move, store, disassemble, repair and/or recycle the product and its components? Moving products and packaging away from the customer can be costly. As a result, reverse logistics is an important segment of the logistics branch. It is also an excellent reminder of how important it is to be accurate. Making errors in shipping, making defective products, damaging goods in transport or making products that do not satisfy the customer can increase the need for reverse logistics.

6. GLOBAL SUPPLY CHAIN MANAGEMENT When suppliers, manufacturers, transportation companies, warehouse and distribution centers, retailers and other supply chain partners span across multiple countries and/or continents, those are considered global supply chains. Effective and efficient management of supply chain partners across multiple countries can offer both competitive advantages and complicated circumstances. EXPLAINED: Distance, culture, laws and time zones are only a few of the things that make managing global supply chains more difficult. Nonetheless, different regions of the world may offer special advantages like lower cost, access to skilled labor, proximity to the customer and proximity to suppliers. In an effort to make their supply chains effective,

efficient and adaptable supply chain managers need to consider the advantages and disadvantages different regions of the world may offer.

SECTION 1.2: THE VISUAL SUPPLY CHAIN STORY: ANATOMY AND PHYSIOLOGY

 Depending on how you want to break it down, the human body is a system made up bones, organs, blood, water, etc. There are big parts, small parts and tiny parts, and yet, somehow these things are all interdependent. Companies are very similar. Just like how the bones and muscles of the body are important in making our lives complete, supply chains are vital in helping a company achieve its primary objectives. Like the muscles and the bones, supply chains get things, make things and move things. Thus, supply chains should strive to be strong, lean and flexible. By understanding the anatomy and the physiology of the human body, scientists have been better able to understand the relationships between our diets, our lifestyles, our habits and our overall health. This knowledge has helped athletes (and non-athletes) perform better, extend their careers and also extend their lives. Supply chains are no different. To better understand how to build a strong supply chain one needs to know its parts, how those parts interact, and the key supply chain terminology required to understand how supply chains function.

SUPPLY CHAIN ILLUSTRATION The illustration below is a simplified version of a supply chain. In this illustration, a manufacturer is the central (or focal) firm in the supply chain. This company will make the end product desired by the customer. Nonetheless, the manufacturer has tiers of suppliers to the left and distributors and retail outlets to the right, along with the end consumer.

 Throughout the illustration, transportation companies move goods between the different supply chain parties. In modern supply chains, an information technology system ties all of these parties together in order to aid in collaboration and planning.

1. 1ST-TIER SUPPLIERS A company’s direct suppliers; typically, a firm that directly provides goods and/or services to a company. EXPLAINED: These are suppliers that are one step to the left in the illustration above. Thus, the manufacturer’s first-tier suppliers are the

company’s designated S1. Similarly, the first-tier suppliers of S1 firms are the S2 companies, and a retailer’s first-tier supplier is their distributor.

2. 2ND-TIER SUPPLIERS A firm that provides goods and/or services to a company’s first-tier supplier. EXPLAINED: These are suppliers that are two steps to the left in the illustration above. Thus, the manufacturer’s second-tier suppliers are the companies designated S2. Similarly, the second-tier suppliers of the distributors are the S1 companies, and the retailer’s second-tier supplier is the manufacturer. It is important to note that a weak S2 company can create problems for their S1 customer. For example, if the S1 company is working with a weak S2, they may have problems fulfilling the needs of the manufacturer. Poor second-tier suppliers increase the risk-level of their customer’s customer.

3. DOWNSTREAM SUPPLY CHAIN In a supply chain, the direction that points toward the end consumer. EXPLAINED: In the provided supply chain illustration, the downstream direction is to the right. In a company, an executive that works in downstream supply chain management finds ways to get goods and services closer to the customer in an effective and efficient manner. Downstream activities might include delivering goods from a manufacturer to a distributor, suppliers (S1) working to get parts prepared in time for manufacturers, and distributors developing relationships with retailers so they can better understand the retailer’s supply chain needs.

4. UPSTREAM SUPPLY CHAIN In a supply chain, the direction that points toward the suppliers. EXPLAINED: In the provided supply chain illustration, the upstream direction is to the left.

In a company, an executive that works in upstream supply chain management might be responsible for ensuring that empty boxes at the retail level are returned to the distributor for reuse and developing relationships with a company’s first-tier suppliers in order to better communicate the needs of the present and the future.

5. SCM FLOWS In order for supply chains to function and develop, three things must continuously flow: materials, money and information. EXPLAINED: Supply chains are known as systems or networks that are tasked with moving materials from suppliers all the way to end customers, so it is rather obvious that if materials stop flowing then the supply chain has stopped functioning. The same logic applies to money. If money stops flowing the supply chain breaks down. When customers don’t pay their bills companies can’t pay their employees and suppliers. When suppliers aren’t getting paid, they stop sending materials. Finally, if the information stops flowing, a chain reaction of poor decisions will begin. Knowing what was bought today, where it was bought, how much was paid, where inventory is getting stolen… These are just a fraction of the questions supply chain managers need to know. Knowing the answers to these questions helps companies make good decisions and minimize wasteful spending that could break the company’s chain.

6. BUSINESS MODEL A company’s plan for how it will purchase items, transform them, deliver them and sell them in an effort to produce a profit. EXPLAINED: Amazon.com vs. a traditional bookstore. Here is an example of two companies that are in the same industry but that have different business models. Both are trying to sell books, but their individual plans for accomplishing that goal are quite different. As customers, we see two obvious differences in their business models – purchase and delivery. We buy books from Amazon online and they are sent

to our home. We must travel to traditional bookstores and buy the book in a building. However, if we look at other parts of their supply chain, we will likely see other differences in how they distribute, buy and handle book returns. Business models often help define the structure of a supply chain, so supply chain managers must understand their importance. As an organization develops a business model it should consider the following questions: 1.

​Do we sell to individual consumers or to big companies?

1.

​Do we sell online, in-stores, or both?

1. ​Do customers make individual purchases or are they subscribers? 1. ​Do you purchase a main part (razor) and then buy the other disposable parts (blades) as needed? With every answer to these questions, the requirements of your supply chain take shape.

7. INVENTORY VISIBILITY (SUPPLY CHAIN VISIBILITY) The ability to see what is happening with inventory upstream and downstream in a supply chain. EXPLAINED: Suppose you are the manager of a retail hardware store and you are running low on garden tools right as the growing season is beginning. As a manager, you want to know when the next shipment of garden tools will arrive. You also want to know how many will arrive. If you can easily find that out, you have supply chain, or inventory, visibility. Knowing when that shipment of hammers will arrive from a distributor is one thing, but if a top-level supply chain executive knows the location of every hammer in the supply chain, that would be a much greater level of supply chain visibility. Knowing how many are at each store, at each distribution center, on each truck at this moment. Where are those trucks

located? How many hammers are at the manufacturing facility? How many are finished goods ready to leave the plant and how many are work in process? How many parts are ready to ship from the suppliers…? That information would allow for a significant level of inventory visibility. It is that level of supply chain visibility which is extremely helpful in making good supply chain decisions.

SECTION 1.3: MANAGING A SUCCESSFUL SUPPLY CHAIN STORY: SPORTS

 Many people love sports. The allure of sports may be that it is an artificial world where there are goals (winning, scoring, blocking, tackling, etc.) and each is easily measured. Even so, there is a hierarchy of objectives. 1.

​Win the game

1.

​Score as a team

1.

​Defend as a team

1.

​Score as an individual

1.

​Defend as an individual

The objectives are typically simple to understand. Statistics provide clues as to how to improve in the future – change tactics, get new players, get a new coach, practice certain skills, etc. Business is similar. Many would have you believe that everything is about profit. As true as this may be, managing with only the intention of making a

profit is as difficult as coaching a team with only the intention of winning. The best coaches understand the hierarchy of goals. They understand that offense requires coaching, defense requires coaching and individual player success requires coaching. Supply chain managers need to understand that they are only part of a team and part of a company. Profit may be the ultimate goal, but profit is ultimately a product of design, marketing, investment, employees, items sold, items stolen, etc. Like a coach in basketball, a supply chain manager must understand all of the goals and measurements and how they are interrelated. Do you know the relationship between profit, cost, revenue, productivity, value, effectiveness, efficiency, adaptability, ROI, cost, quality, flexibility, speed, waste and core competencies? If you want to have a successful supply chain, these are the issues you’ll need to consider on a daily basis.

1. PROFIT Companies invest money to make and deliver products and/or services. Materials, labor, real estate, machines, etc. these expenditures are called costs. Companies then sell the products and/or services for money - this is revenue. The difference between revenue and cost is profit. EXPLAINED: Most folks in business understand that the goal of a business is to make a profit, to make more money than you spend. As stated above:

Profit = Revenue - Cost What some companies fail to acknowledge is that supply chains play a role in both revenue and cost. From the list below, it is easy to see that supply chain managers play a large role in controlling many types of cost that ensure the manufacturing and delivery of the very best products and services. Important supply chain costs: materials, labor, energy, transportation, packaging, storage, defects, insurance…

It is also important to remember, though, that poorly manufactured products that are delivered late and/or damaged will not make customers want to buy a company’s products at premium prices. Thus, we can see that supply chains are crucial to generating revenues.

2. ROI (RETURN ON INVESTMENT) An economic measure that helps evaluate the return of an investment. In its most simple form, an ROI is a ratio of total profit to total investment.

ROI = Total Profit / Total Investment EXPLAINED: Making $10 million is a great thing but could you have done better. Did your investment provide a significant return? Consider the following example: Scenario 1: 1.

​Profit = $10 million; Investment = $1 billion

1.

​ROI = $10,000,000 / $1,000,000,000 = 0.01

Scenario 2: 1.

​Profit = $10 million; Investment = $1 million

1.

​ROI = $10,000,000 / $1,000,000 = 10.0

Scenario 2 obviously provided a better ROI – 1000 times better! Supply chain managers seek to help companies maximize ROI. By controlling costs, investment can decrease; by creating great products and delivering them quickly and in great condition, customers may be willing to pay more, thus improving your chances of increasing profits.

3. COMPETITIVE PRIORITIES – COST, QUALITY, SPEED AND FLEXIBILITY Companies, and supply chains more specifically, are very often competing in four areas stated above. As a result, tracking performance in cost, quality,

speed and flexibility is vital to knowing whether the company is meeting its goals in the present and working toward better performance in the future. EXPLAINED: Think of a fast food chain versus a fancier sit down restaurant that both sell hamburgers, they can both be successful but their clientele likely have different priorities. Fast Food: 1.

​Average but consistent quality

1.

​Quick delivery of your order

1.

​Flexible in terms of what may be on your burger

1.

​Low Cost Meal

Sit Down Restaurant: 1.

​High quality burger

1.

​Delivered in a reasonable period of time

1.

​Preconceived specialty burgers with lots of topping options

So, if a company understands their clientele’s competitive priorities and the supply chain can deliver that mix of competitive priorities to their customer, the company has a chance at being successful. Another thing to consider is how detailed each of the four categories are. 1.

​Cost: Materials, energy, wages, transportation, rent…

1.

​Quality: Design, reliability, consistency, materials and fabrics…

1.

​Speed: Delivery, on-time, innovation time…

1.

​Flexibility: Customization, size of order, design…

Supply chains seek to be effective, efficient and adaptable, that means utilizing the company’s resources to make the best product for your customer, using the least amount of resources, and being able to adapt to evolving market desires. Knowing where the company stands in the areas of cost, quality, speed and flexibility is vital to making better supply chain decisions.

4. CORE COMPETENCIES The primary advantage a company has over its competitors. Typically, a core competency would be difficult, if not impossible, to replicate. EXPLAINED: Why would customers buy from your company? If it is simply low cost, a competitor can easily copy your product or service. The competitor need only lower their price to steal away some of your customers. This ends up eroding everyone’s profits. A company with a core competency has: A better product design, sole access to a world-class supplier, a culture of happy and motivated employees that are friendly to customers and perhaps a well-respected brand name. This company can charge more because customers see what they offer as something that no other company can offer. Companies without a core competency will have, at best, short-term success. When their competitors copy them and undercut their prices, or when their competitors develop core competencies valued by the customer, the initial company will begin to struggle. Think of your favorite companies. Why do you buy from them? What are each of your favorite company’s core competencies? Would it be easy for another company to copy them, or surpass them, and take control of the market?

5. VALUE Value is the ratio of “output purchased” divided by “inputs used to purchase” the product or service. Customers seek value. Value can be increased by giving the customer more for the same price or by giving them the same amount at a lower price.

EXPLAINED: When you go to the grocery store and see two cans of chicken noodle soup, one can costs $2.50 and one can costs $3.00, will you always buy the can that costs $2.50? Some people will but most will consider their options. Why would someone pay more? Most reasonable consumers will do a rough calculation of value in their head – not necessarily with numbers, though. Value can be simplified as:

What did I buy? / What did it cost me? But it doesn’t just have to be about money or the amount of soup in each can. We could also look at other features in each part of the formula: 1.

​Amount of Soup, Taste of Soup, Brand Name, Ease of Cooking

1.

​Money Paid for Soup, Convenience of Purchase

While customers always want maximum value, companies should seek to maximize value by either improving the items in the numerator or by making the denominator of the calculation more appealing.

6. PRODUCTIVITY The ratio of outputs to inputs. From a manufacturing perspective, companies seek to maximize the amount of outputs that can be produced and delivered to market, while minimizing the required inputs. Productivity is a relative term, so typically it can only be compared to the productivity of periods that precede the present productivity. EXPLAINED: Consider the following: 1.

​A company makes 300 backpacks in June.

1.

​Each backpack is valued at $25.

1. ​Energy, labor, and material costs to create the backpacks totals $3,000. The productivity would be measured as:

(300 * $25) / $3,000 Productivity = 2.50 If the productivity in May was 3.0, that would mean productivity had decreased in June. In other words, inputs were not used as resourcefully in June as they were in May. Conversely, if the productivity in May was 1.75, that would indicate that productivity had increased in June. In this case, the company was able to produce more backpacks for the same amount of cost.

7. PRIMARY SUPPLY CHAIN GOALS Effectiveness, efficiency and adaptability – The ultimate goal of supply chain management is to make high quality products and services in a timely fashion that meet the changing needs of the customer and do so in a way that utilizes as few resources as possible. EXPLAINED: What do the best supply chain managers think about every day? a. Effectiveness: Are we getting the job done? Does the product or service created and sold do what it is supposed to do? Does the car meet all of the customer’s expectations? Did the visit to the doctor make the customer feel better both physically and mentally? b. Efficiency: Are we working too hard? Spending too much money? Consider all of the organization’s resources and the related expensesmaterial cost, wages, time, buildings, delivery trucks, packaging…Also, consider what was actually produced. Now compare these inputs and outputs. Was the effective product or service created using minimal resources? c. Adaptability: Can we deal with change? Are we flexible? Being adaptable is important for a company that desires to keep up with innovation demands. It is also important for companies that want to expand to different parts of the world. Perhaps consider these types of questions:

How flexible is the company in meeting individual consumer needs? Is it possible to change the color, material or design of the item?

8. SEVEN TYPES OF WASTE Seven types of waste that threaten supply chain performance are: defects, overproduction, transportation, motion, waiting, inventory and overprocessing. EXPLAINED: Here is a brief description of each type of waste. 1. Defects: Poorly manufactured products are garbage. 2. Overproduction: Making products no one needs is a waste of time, money and effort. 3. Transportation: Moving products does not make the products better, in fact, it increases the possibility of theft, damage and loss. 4. Motion: If employees move too much in a supply chain they could get tired, injured and may be wasting time. 5. Waiting: Work-in-process waiting to be finished was made too early. Items should not be produced too far in advance of their need. 6. Inventory: Items on the shelf are not providing an immediate return and could get lost, broken or stolen. 7. Over-Processing: Doing work that is unnecessary or undesired is a waste of time and resources. It should be noted that often decreasing one of the seven wastes may increase another.

SECTION 1.4: WHAT WE WANT FROM A SUPPLY CHAIN STORY: GREAT MOVIE SCENES

 Think of your favorite movie scenes. What makes those scenes successful? The script, the actors, the special effects, the lighting, the camera angles, the music, the sound effects, the costumes, the editing, etc. If any one of those things was done poorly, perhaps the scene might be ruined for you. Supply chains, though both complex and fragile, are no different. When a supply chain produces the right product, at the right place, at the right time, it was the coordination of people, materials, machines, laws, data, communication and perhaps even the weather. While the movie scene requires a single successful outcome to put on film, supply chains need to manage a complex set of variables every moment of every day that the business is in operation. There are no magic formulas. There is no single way to manage a successful supply chain. There are, however, basic supply chain tools and strategy components that can help you on your path to becoming a successful supply chain manager.

1. KEYS TO BEING A SUCCESSFUL SUPPLY CHAIN MANAGER Supply chains strive to do three things on a daily basis. EXPLAINED: As a supply chain manager, you work to fulfill these goals every day. a. Satisfy the needs of the customer. As discussed in section 3, customers want a certain mix of cost, quality, speed and flexibility. When they get the right mix at the right price, customers feel like they are getting a “value.” Therefore, a good supply chain manager works daily to have suppliers, shippers, manufacturing facilities, distribution centers and retailers give the customer what they want, when they want it and at the right price. b. Satisfy the needs of the company. As discussed in section 3, companies want to get the best possible return on their investment; this means they need to be productive. Companies need to make the very best products and services using the least resources possible. Therefore, a good supply chain manager understands what the customer needs and when they need it, but a supply chain manager also understands the importance of controlling costs and resource usage at every level. c. Be prepared for the future. Things change. Customers want improved products and services, and they want them faster. They want to buy them in different venues, want earth-friendly products and want items at reasonable prices. Suppliers want to raise the price of their raw materials and parts. New technological innovations will become available and employees want better working conditions. The government may also seek to regulate your industry. Even if a supply chain manager develops a strong supply chain, tomorrow will demand that your supply chain evolve. A supply chain manager’s work is never done.

2. SUPPLY CHAIN STRATEGY– A SUPPLY CHAIN STRATEGY INCLUDES: EXPLAINED: A supply chain manager must develop a framework that can meet the needs of the customer today and evolve to meet the needs of tomorrow. a. Understanding the product/service and the market’s desires. – Who’s the customer? What do they want? When do they want it? Where is the customer? If a supply chain manager does not know the answer to these basic questions, then they are likely making errors and being wasteful every day. A good supply chain manager works with other executives to find the answers to these important questions. b. Develop a business model. – Does the customer want to buy this online or in a store? Do they sometimes want to buy it in a store and other times want to buy it online? Whatever the customer wants will require suppliers, manufacturers, logistics partners and retail partners to change how they work. If you don’t understand how the customer wants the product made and sold, your supply chain is likely making mistakes. c. Organizing the right group of supply chain partners. – You understand the market. You need to understand the appropriate business model. Does your company have the right team of suppliers, manufacturers, shippers, distribution centers and retail outlets? If your supply chain team is not sharing information and cooperating then, again, the supply chain is like making errors and being wasteful.

3. SUPPLY CHAIN TOOLS In order to succeed, supply chain managers need the right tools. EXPLAINED: Before the explanation begins, it must be understood that this is not a complete list of supply chain tools. This is simply a list of common tools/skills that can help supply chain managers do their job well. Here are some very brief explanations of why these are supply chain management essentials:

a. Supply Chain Metrics. What defines a successful supply chain for your company? A company needs to be able to report success and failure, and when to provide help to their employees. On the flip side, if things are going well and the numbers are good, that will inform the supply chain manager that perhaps good decisions are being made or that workers are motivated. b. Information Technology Tools. Knowing what is happening in a global supply chain at any given moment requires information technology tools that can collect, organize and report data to supply chain managers. c. Relationship Management Skills. A supply chain is a team of companies working together to satisfy an end-consumer. Having the ability to work with executives and employees at other companies is vital to developing focused and healthy supply chains. d. Financial Resources. – Motivating employees and suppliers, investing in technology to help companies track information and produce better products, purchasing higher grade materials, shipping goods faster… this all costs money. In order to improve supply chain performance, companies need to be willing to invest in supply chains. e. Organizational Integration. Customers are identified, products are designed, financial plans developed, products are advertised… All of these things are typically done by employees outside of the supply chain management group. Trying to run a successful company while having a lack of communication between marketing, design, finance, advertising and the individuals in supply chain is like trying to cross the street blindfolded. Supply chains serve the customer and the other branches of the company. Not giving supply chain departments information and not involving them in planning often results in disaster.

CHAPTER 2: MANAGING SUPPLY AND INVENTORY GOALS, OBJECTIVES AND STUFF WE WILL RUIN: This module will help you discover the incredible contribution purchasing can make to an organization. We will ruin how you make purchasing decisions for yourself. You’ll appreciate the cooperation it took to make your favorite products. This module will help you understand that purchasing low-cost parts is never the primary goal of a world-class global manufacturer. This module might make you want to use your diverse skill set to become a leading procurement executive.

SECTION 2.1: INVENTORY BASICS STORY: YOUR STUFF

 Look around you. Look at all of the stuff you own. Are you the kind of person that has tons of stuff and just wants more, or do you like being a person that has only the things that are required at that point in your life? In either case, you are aware of most of the things you own and have access to at any given time; you are aware of your inventory. There are so many ways to ask you about your inventory. For example, what do you own in these categories? 1.

​Clothes

1.

​Electronics

1.

​School Related Items

1.

​Food and Cooking Items

1.

​Home Decor

It’s also quite likely that each of those categories can be broken down into smaller categories. For example, in the category of clothing: 1.

​Shirts

1.

​Pants

1.

​Sweaters

1.

​Coats

1.

​Socks

1.

​Underwear

Do shoes belong in this category? How about ties, hats and belts? What else might we be forgetting? Perhaps we could ask to group items into these categories: 1.

​Items you will use today.

1.

​Items you will use in the future.

1.

​Items you will likely never use again.

Are we running out of certain things or are there things that will need to be replaced soon? Are we keeping track of these items or instead do we wait to buy these items once they are actually needed? How long will it take us to get them? Whether we know it or not, our lives are consumed with managing inventory. We are all supply chain managers. As we move forward in this module, keep yourself grounded by remembering that companies and individuals all need inventory management. Because we all manage the inventory in our lives, we are all qualified to teach others about inventory management and we are all capable of learning more about improving our own inventory management.

1. INVENTORY The items that are owned by a company for the purpose of present or future sales or for use in day-to-day operations. EXPLAINED: Most people tend to think of inventory as the items available for sale on the store shelves: others will extend inventory to items in the backroom; still others will include items in a distribution center or warehouse. In fact, this is only a small list of items a company may consider part of its inventory. Really, any items the company owns can be included as part of its inventory. Desks, computers, toilet paper, machinery and cleaning supplies would all be part of the company’s inventory. Not all would be classified as the same type of inventory, but they were all items that were bought or created by the company. These items were needed, either to be sold to customers or to use as part of day-to-day operations.

2. THE RELATIONSHIP BETWEEN LEAD-TIME AND LOT SIZE When it comes to making inventory related decisions, two of the most basic considerations are lead-time and lot size. Although basic terms, each is vital to managing supply and therefore, both terms are intertwined. Lead Time – The period of time between when an order is placed and when the order is received by the customer. Lot Size – An accepted order size. This sometimes also refers to a possible order size increment. Example: Lot size of 100 units. Ordering 100, 200, 300, etc. would be possible order sizes. EXPLAINED: Let’s use an example. Your company sells 200 units per week. Your supplier presently has a lead-time of four weeks. What’s the minimum level of inventory required when you place an order? 800 units! If you don’t have 800 units when you place an order, it is very likely you will run out of stock before the next order arrives. Now suppose your supplier announces that they have improved their processes and now lead times are down to two weeks. Not only could they

react more quickly to emergency orders and new customers, but your company would now also be able to let inventory drop to 400 units before an order is placed. As your company decides between multiple suppliers, consider the value of having suppliers with short lead times and flexible lot sizes. As you read this module and learn about cost control and buyer-supplier relationships, think about the relationship between lead-time and lot size.

3. INVENTORY AND RISK Carrying inventory can come at a hefty price, thus there is risk. Not carrying inventory also comes at a risk: The risk of not having inventory and the risk of not being able to satisfy the needs of the customer. EXPLAINED: Inventory and its related costs are the cost of insurance; insurance against the risks posed to a company, their supplier and also their customers. By having inventory, a company could potentially be buffered against this short list of risks that could cause unexpected shortages in supply or unexpected increases in demand. 1. ​Company Risks: Theft or damage to inventory, late shipments from supplier, employee sickness, employee strike, machine malfunctions, harsh weather 1. ​Supplier Risks: Employee sickness or strikes, sudden increases in demand for your company’s supplies, the risks posed by their suppliers 1. ​Customer Risks: Sudden increase in demand, damage to customer’s inventory Can you think of other things that could go wrong in the supply chain? Would having extra inventory in the supply chain help a company better cope with those risks? In all of the above cases, having additional inventory could result in uninterrupted demand. Conversely, if a company has too much inventory,

they risk higher holding costs, which would also include damage, theft and obsolescence.

4. DEMAND FORECASTING A predictive analysis and/or estimation of consumer demand in a future period. EXPLAINED: In this module we discover that many inventory decisions are made, at least in part, on the basis of calculations that require us knowing demand. The problem is that future demand is always unknown. Companies use a number of different techniques to predict future demand. Some techniques are quantitative – typically using historical data to predict future demand. Other techniques are qualitative – using queries of experts to predict future demand. Those experts could include but are not limited to consumers, executives, salespeople and industry experts.

5. STOCK KEEPING UNIT (SKU) A specific product or service’s identification code used to track inventory or catalog sales. EXPLAINED: Most of us are used to seeing a Universal Product Code (UPC) like the one shown below. We know that it represents that product’s individual stock number, or SKU. While many of us have an understanding of what a SKU is, some might not know just how many SKUs there are. A Wal-Mart store typically has between 125,000 and 150,000 SKUs in their system. And yes, each one of those SKU’s comes with its own inventory decisions.



​

6. INDEPENDENT VS. DEPENDENT DEMAND ITEMS 1. ​Independent Demand Item: An item for which demand levels are not directly impacted by the demand of another related item. 1. ​Dependent Demand Item: An item for which demand levels are directly impacted by the demand of another related item. EXPLAINED: Here are some examples of independent demand items (bold) along with their related dependent demand items: 1.

​Car – Tires, windshield wipers, brake pads, motor oil

1. ​New Home Builds - Wood flooring, doors, kitchen countertops, garage door openers 1. ​iPhone X - phone chargers, Bluetooth headsets, screen protectors, protective phone case In each case, as the sales of the independent demand item increases, the demand for all related dependent demand items is also very likely to increase.

7. INVENTORY CLASSIFICATIONS In reviewing some of the inventory classifications below, remember that it is possible that certain types of inventory can be classified under multiple categories. For example, factory inventory that is ready for shipment would, at the very least, be classified as finished goods inventory and pipeline inventory. Please note, for each of the following inventory categories, examples are provided for a company that manufactures snow shovels. Raw Materials – Typically refers to material, parts or components that will be used to create an end item or service. These materials have not yet begun their manufacturing/transformation into a finished good or service. Examples include unassembled handles, shafts and shovel blades. Work-in-Process (WIP) – Items that have begun the manufacturing process but are not yet completed. For example, partially assembled shovels. Finished Goods (FG) – Items that are completed and ready for shipment at a manufacturing facility or assembly plant. For example, fully assembled shovels. Maintenance, Repair and Operations (MRO) – Items that are not intended as part of the finished goods but are important to the daily operations of the company. Examples include desks, computers, cleaning supplies, oil/lubricants and factory equipment. Market Inventory – Inventory that is readily available on the shelf. For example, shovels on the shelf of Home Depot. Safety Stock (Buffer Stock) – Inventory kept to account for variation/uncertainty of demand. For example, 100 shovels are sold per week Sunday to Saturday, with shipments arriving on Sunday morning. Stores always want to start Sunday with 125 units of inventory. In this case, the additional 25 units are safety stock. Anticipation Inventory – Inventory that is created and stored for future use. This is typically used to absorb uneven rates of demand that may be related to seasonal demand or planned price reductions. For example, shovels that are assembled in the summer and stored through the fall, in

anticipation of large winter demand, would be classified as anticipation inventory.) Pipeline Inventory – Inventory in transit between two points, in which the two points establish the beginning and the end of the pipeline. So, the inventory does not necessarily need to be on a truck or train. The pipeline should have enough inventory to account for the demand for the period of time it takes a product to move from point A to point B – this is lead-time. The required pipeline inventory is typically calculated as:

Pipeline Inventory = Period Demand * Lead-Time Pipeline Inventory = dL EXAMPLE: Let’s define the pipeline from the time raw materials arrive until the time that they are available for sale at the store. If it takes raw materials seven days to end up on a store shelf as shovels, then the leadtime is seven days. If 100 shovels are sold per day, then the required pipeline inventory would be 700 units. If there are not 700 or more units properly distributed in the pipeline, there will likely be a shortage within the next seven days.

SECTION 2.2: INVENTORY: COST CONSIDERATIONS STORY: THE COST OF BUYING A CAR

 Perhaps you need a new vehicle. How much will the car that you like cost? Perhaps you research the vehicle and identify the features you’d like in your car. Once you figure out all of those details, you can then calculate the likely price of your dream car. Let’s just say the price of your dream car is $25,000. Does that mean $25,000 will be enough to own the vehicle? Of course not. Buying the car is only the first cost incurred in a long string of costs stretched out over the lifetime of the car, and in some cases even after the car is gone. So, what is the real price of owning a vehicle? What would it include? - Taxes, License, Registration and Fees - Financing (If you plan to get a loan to pay for the car.) - Fuel - Insurance

- Maintenance - Repairs - Parking - Car washes - Additional Items: Child Safety Seats, Decorations, Fragrance Depending on where you live, your lifestyle, your driving habits, the vehicle’s fuel efficiency, and of course the reliability and durability of the vehicle purchased, the actual five-year cost of the vehicle is estimated to fall between $40,000 and $53,000. A $13,000 difference for two different vehicles with the same sticker price! Therefore, it may be possible to purchase a $30,000 vehicle that may ultimately cost you less than one of the $25,000 vehicles. This is an excellent example that demonstrates how the low-cost item can actually end up costing you much more. As we begin this section, it will be important to keep in mind all of the costs that a company must consider when making any inventory purchase.

1. HIGH VS. LOW INVENTORY As discussed in the previous section, inventory is both necessary and a burden. Let’s briefly look at some of the positive aspects of choosing to carry either high levels of inventory or low levels of inventory. Pros of High Inventory Levels: 1. ​Higher levels of customer service - having inventory will help a company address their immediate demand for a product 1.

​Quantity discounts may be possible - lower per unit costs

1. ​Fewer orders will need to be placed - possibly lower ordering costs and transportation costs 1.

​Greater security against unexpected demand variability

Pros of Low Inventory Levels: 1. ​Less storage space required – costs of holding inventory may be lower 1.

​Lower chance of inventory obsolescence and shrinkage

1. ​Less inventory typically means less materials handling requirements 1. ​Less money invested in inventory means more money available for other investment opportunities Both strategies come with positives and negatives, thus inventory managers must consider the trade-offs. Some decisions will move toward satisfying consumer demand other decisions will move toward controlling costs.

2. COSTS OF INVENTORY Every inventory decision costs money and some decisions cost more than others. The costs will also be categorized in different ways. In order to make good decisions, these costs must be analyzed. Before the analysis begins, though, let’s consider the key inventory cost classifications. 1.

​Cost to Purchase: The cost to purchase the inventory.

1. ​Holding Cost: The cost of holding the inventory. Some of these costs may include: Rent for the storage facility, energy and equipment required to keep inventory in an acceptable environment, insurance, security personnel, employees that handle inventory, etc. 1. ​Ordering Cost: The costs associated with placing an order for inventory. This might include the cost to research suppliers, negotiate purchase, the cost to have items shipped and the upkeep of any electronic ordering system. 1. ​Stockout Cost: The costs associated with not having enough inventory on hand to meet customer demand. This might include loss

of the unmet sale in the present, the loss of any future sales from customers, cost of expedited shipment and the cost of altering operational plans to expedite production. Even before we consider inventory cost calculations, it is already becoming apparent that decreasing one cost will likely impact the other costs. As was mentioned earlier, every inventory decision comes with trade-offs.

3. INVENTORY CALCULATION BASICS In the most rudimentary inventory calculations, the key variables to consider are: 1.

​Q – Lot size

1.

​D – Annual demand

1.

​C – Cost to purchase one unit of inventory

1.

​H – Cost to hold one unit of inventory for one year

1.

​S – Cost to place a single order

Using these variables, you can now calculate:

Average Amount of Inventory = Q/2 EXPLAINED: Assume a company starts a period with 0 units of inventory. The company receives an order of 100 units (Q). It sells all 100 units of inventory during that period. The ending inventory for the period is 0 units. What was the average amount of inventory held? 50 units! They started with 100 units (Q), they ended with 0 units. To simplify calculating the average inventory we just divide the order size by two.

Number of orders per year = D/Q

EXPLAINED: If 12,000 units is the expected demand for the year (D), and a company orders 1,000 units per order (Q), then the number of orders per year would be 12.

Time between orders (in weeks) = (Q/D)*52 EXPLAINED: Using the example from number of orders per year (above), D=12,000 and Q=1,000 units. Time between orders would be 4.33 weeks or about the length of an average month.

4. TOTAL ANNUAL INVENTORY COST CALCULATION The most basic calculation for total annual cost of inventory uses the following formula:

TC = DC + (Q/2)*H + (D/Q)*S TC = DC + AHC + AOC In an effort to decode the formulas, see below:

Annual cost to purchase inventory = DC Annual holding cost (AHC) = (Q/2)*H Annual ordering cost (AOC) = (D/Q)*S So, the total annual cost of inventory is the sum of buying, holding and ordering inventory. Some may wonder, “What about stockout costs?” As was mentioned earlier, these are some of the most basic inventory calculations. Advanced calculations that include stockout costs exist and they typically require decisions regarding the amount of safety stock a company is willing to carry.

5. ECONOMIC ORDER QUANTITY (EOQ)

EOQ is the lot size (Q) that will minimize total annual inventory cost (TC); it is therefore seen as the optimal lot size. The formula for EOQ:

EOQ = Sqrt[ (2DS) / H ] EXPLAINED: Basically, if a manager wanted to minimize total inventory cost, they could calculate EOQ and find the optimal order size. EOQ is actually useful in many other situations as well; it can be helpful in manufacturing, transportation and beyond. EOQ can also be described as the lot-size where annual holding cost is equal to annual ordering cost. In the insert below, it can be seen that if AHC is set equal to AOC, then by solving for Q, the optimal Q, EOQ, can be found.

 The graph below illustrates the dynamic nature between AHC, AOC and TC. Thus, we can see that the optimal order size, EOQ, is where AHC and AOC intersect. We can also then seen that when: 1. ​AHC is greater than AOC: Holding costs are too high – You are to the right of EOQ on the chart below. Decrease lot size to reduce TC.

1. ​AOC is greater than AHC: Holding costs are too low – You are to the left of EOQ on the chart below. Increase lot size to reduce TC.

 Notice in the above graph that DC, the cost to purchase the inventory, is the same no matter what the order quantity. In real-life, suppliers may offer quantity discounts for larger order sizes (Q). In those cases where quantity discounts are allowed, a manager would need to calculate an EOQ for each price level and then analyze which best fits the company’s overall cost scenario. While the EOQ may not be a viable lot size, it can be an excellent guide for a manager. Suppose a manager was given the choice of placing an order for either 1000 or 2000 units, the manager could look to EOQ for guidance. If the calculated EOQ was 1880 units, the manager would know that very likely 2000 units was a better order size to minimize TC.

6. INVENTORY CALCULATION EXAMPLE

A supplier allows their customers to buy inventory in increments of 500 units and the supplier delivers only on Mondays. Each unit costs $5.00. Your company, ALPHA, has an annual demand of 14,000 units. ALPHA’s cost to hold one unit of inventory for one year has been estimated as 40 percent of the unit cost. The ordering costs are $425 per order. In an effort to keep inventory low, ALPHA has made their order size 1000 units every 4 weeks. Q = 1000 D = 14,000 C = $5.00 H = 40 percent of $5.00 = $2.00 S = $425.00 As the new inventory manager, what lot size recommendation would you make? Why? To calculate the optimal lot size, EOQ, you would use this formula:

 Since orders of 2,440 are not allowed, let’s use the closest available order size allowed: 2,500 about every nine weeks. Below you can see why nine weeks is the desired time between orders.

Time between orders (in weeks) = (2,500 / 14,000) * 52 TBO = 9.29 weeks What would be the savings to the company? Before when Q = 1000 (Note the large difference between AHC and AOC)

TC = DC + AHC + AOC TC = DC + (Q/2)*H + (D/Q)*S

TC = 14000(5) + (1000/2)*2 + (14000/1000)*425 TC = 70,000 + 1000 + 5950 TC = 76,950 Using the more EOQ friendly Q = 2500 (Note the much smaller difference between AHC and AOC)

TC = DC + AHC + AOC TC = DC + (Q/2)*H + (D/Q)*S TC = 14000(5) + (2500/2)*2 + (14000/2500)*425 TC = 70,000 + 2500 + 2380 TC = 74880 Total annual savings using EOQ-friendly lot size

(Cost at Q=1000) – (Cost at Q=2500) 76,950 – 74,880 = $2,070

SECTION 2.3: PROCUREMENT BASICS STORY: PURCHASING A TEXTBOOK FOR A COURSE

 In a more uncivilized age, textbooks for classes were available only in physical form - hard copies. Nowadays, some books are only available in digital form, some are still only in hard copy and others are available in either digital form or hard copy. Let’s consider what initiates a textbook purchase and how that purchase is completed. The need for a textbook is actually initiated by a course instructor. They request that all students purchase a similar text. Once the book is known, a student then researches how to purchase the book. They likely visit online sites that sell books, they may visit a campus bookstore, or they may even reach out to friends that took the course before. They may look into the cost of new books, used books, digital books and hard copies. Some bookstores even offer an option to rent textbooks. Students might also be interested in knowing how a digital book must be read. Will it require a special device or app? Will the book look better on

one device versus another? With hard copies, they may even look into the possibility that the book can be sold at the end of the semester. These are all important issues that provide the buyer with an idea of what they will get and what it might cost. Once the customers narrow down their purchase options, they can more closely analyze their choices. Who should they buy from? Is one seller more reliable and trustworthy versus another? How long will it take to get the book shipped? Will shipping cost extra? What happens if I decide I do not need the book? What is the return policy? Once a choice is made, the book can be purchased. If the book is in a store you will need to travel to buy it and then return home. Those that buy the book from a friend will need to establish how the exchange will be made. If the book is purchased online we may need to have it delivered, unless it is a digital book in which case we will get it immediately. If it is delivered, we may use a tracking number to estimate when it will arrive. Once we receive the book, we may inspect the book to see if it is in fact the correct book and probably also to see if the book looks interesting. Besides books, we purchase many things in our lives; some purchases are much simpler, some are rather similar, and others are quite different. Our personal procurement processes and our purchasing experiences make you well qualified to study the procurement processes of corporations in this section.

1. MAKE OR BUY Before a company buys anything, the company might consider if it is possible and worthwhile to produce the product or perform the service on their own. Let’s briefly look at a short list of reasons a company may choose to “make” the product or service versus choosing to “buy” the product or service from a supplier. Reasons for Making

For fun, consider Elon Musk as the example. Why would he make Tesla vehicles instead of just designing Tesla vehicles?

1. ​Proprietary Technology – Not only can others not make it, but our company does not want to tell anyone else how to make it. 1. ​No Competent Supplier – Others can make it, but not as good as we can. 1. ​Better Quality Control – We like it made a certain way and are concerned others will not be as detail oriented. 1. ​Idle Capacity – We have the machines and people to make it. Why not take advantage of the idle capacity? 1. ​Control – We want it faster, cheaper, better… than others are willing to make it. Perhaps the demands of our supply chain do not allow us to have suppliers that can dictate so much control over our supply chain flexibility. If you have followed Tesla in the news, you know that recently, Tesla is struggling in manufacturing Tesla vehicles. Reading through the questions above, you might be able to figure out why Tesla is struggling. Perhaps Elon Musk should consider outsourcing manufacturing instead. Reasons for Outsourcing Is outsourcing the manufacture of Tesla vehicles a real option for Elon Musk? Here are some reasons companies choose to have other companies manufacture items on their behalf: 1. ​Insufficient Capacity – We could make it (we have the knowhow), but we just don’t have the time and resources to make it. 1.

​Lack of Expertise – We don’t know how to make it.

1. ​No Competent Supplier – We know how to make it, but not up to the standards we’d like. Our suppliers could definitely make it better. 1. ​Better Use of Resources – We know how to make it, but outside suppliers can produce it to acceptable standards faster and/or at a

lower cost. Tesla’s challenge is interesting in that it probably was not and still may not be competent enough to manufacture Teslas for the masses. At the same time, it would be difficult to find another company that could make Teslas at the quality level and in the quantities required.

2. TOTAL COST OF OWNERSHIP (TCO) As the name would imply, total cost of ownership is the cost of owning an item over the entire lifetime of the item. EXPLAINED: This might include costs to acquire the item, storage, usage, handling, transportation, maintenance, disposal, recycling, refurbishing, etc. Imagine a company’s computer system. It would include, but not be limited to, procurement of the system, software, upgrades, security, system maintenance, energy to power system, technology personnel and implementation. Common criticisms of TCO include the difficulty of capturing all costs and also the fact that TCO drives cost cutting without valuing other product or service aspects that may provide value to the user and/or consumer.

3. VERTICAL INTEGRATION The act of a company taking on additional supply chain responsibilities that were formerly done by outside parties. There are two classes of vertical integration: Forward Integration – Taking over supply chain responsibilities formerly performed by downstream supply chain partners. (Example: A bakery decides to open up a sandwich shop. Rather than just selling bread to sandwich shops, they now forward integrate and use their own bread for their sandwich shop.) Backward Integration – Taking over supply chain responsibilities formerly performed by upstream supply chain partners. (Example: A bakery decides to purchase a flour company. Rather than purchase flour from a flour supplier they now use their new flour branch to both sell flour to other

companies (including competitors) and they also use the flour in their own bakery.)

4. STEPS IN THE PURCHASING PROCESS Each purchase can be quite different. Some items we’ve purchased before, some we’ve never bought before but we know where to buy them, some items we need but have no idea where to buy them, and some items we may not need to buy because somewhere in our inventory we already have them. Nonetheless, here is a step-by-step list of a typical corporate purchasing process. 1. ​Requisition – Someone discovers they need something (Item A). A materials requisition (MR) is issued by the person in need of Item A to inform procurement to get Item A. 1. ​Supplier Selection – Procurement searches their supplier base to see if one of their present suppliers sells Item A. If no one does, they must find a supplier. If more than one company sells the item, they will need to choose a supplier. In either case, procurement may send out a Request for Quotation (RFQ) to get a price for Item A. A negotiation may ensue. 1. ​Place Order – Once a supplier is chosen and a price for Item A is agreed upon, a Purchase Order (PO) may be issued by procurement to formally order the item. 1. ​Track Order – In an effort to inform the eventual user of Item A as to when Item A will be available, procurement will likely track the order to see if it is due to arrive when promised. 1. ​Receive Order – Once Item A arrives it will likely be inspected, scanned into inventory and moved either to where it will be used or onto a shelf for storage. As can be seen, the purchasing process can require lots of effort and resources, thus it can be quite expensive. Nonetheless, when operated

professionally, the purchasing process can help a company buy better products and services at a good price and help ensure that the items arrive when needed. Of course, a poorly run purchasing process can create numerous problems for a company.

5. PURCHASING DOCUMENTS Material Requisition (MR) – The document used to initiate the purchasing process. It is filled out by the intended user and then sent to their procurement office to communicate that need. It will not only signal that a product or service is needed it may also list quantity needed, product/service description and/or specifications. Request for Quotation (RFQ) – If the product or service requested is not in stock, then an RFQ can be issued to one or more potential suppliers. This document simply asks the potential supplier to provide a detailed quote that might include more than just a per unit price; it may also include delivery date, and payment terms. Be aware the quote provided may only be the first step in a negotiation with a supplier. Purchase Order (PO) – If a supplier is chosen and a quote is deemed acceptable, then an order can be formally requested through the use of a Purchase Order (PO). A PO is a contract that states the terms and conditions of the order. Once the PO is accepted by the supplier, a signed copy returned to the buyer represents a binding contract.

6. E-PROCUREMENT SYSTEM An electronic procurement system that can aid in submitting requests for materials, making material orders, negotiating with suppliers, tracking shipments and receiving shipments. The data collected in these systems can also help in analyzing procurement actions, which can lead to better procurement decisions in the future. EXPLAINED: These systems can make every aspect of the purchasing process easier. E-Procurement systems can also aid in developing better relationships with upstream suppliers and downstream supply chain partners. Having a better understanding of what is needed in the present and what has worked well in the past can lead to better communication with

supply chain partners. Consequently, those improved supply chain outcomes can also improve supply chain relationships.

7. CENTRALIZED VS. DECENTRALIZED PURCHASING SYSTEMS Centralized Purchasing – A purchasing system where all corporate employees send material requisitions to a single purchasing department. The centralized purchasing department is then responsible for all purchasing decisions, including supplier choice, order size, and payment terms. Advantages of Centralized Purchasing 1. ​Avoid Duplication – Centralized purchasing departments know the company’s total inventory. If a request is made, the purchasing department would be aware if someone else in the company already has the needed item and is not using it. 1. ​Volume Discounts – By pooling together common orders from different departments, large orders can be used to take advantage of quantity discounts. 1. ​Consolidated Shipping – Perhaps different departments in one company need pens, paper and tape. These are all items that might come from a single supplier. Multiple orders from a single supplier all being shipped in a single shipment. 1. ​Established Supply Base– A centralized purchasing system allows a purchasing department to have a core group of suppliers that it knows and trusts. It also allows for deep supplier relationships to form. 1. ​Supply Specialization – In a centralized purchasing system certain purchasing employees can develop expertise in buying certain categories of products or services.

Decentralized Purchasing – A purchasing system where material requisitions are sent to a departmental purchasing department. Thus, a company with a decentralized purchasing system might have a purchasing department in each department, or perhaps each office might have the ability to make purchases on their own. Advantages of Decentralized Purchasing 1. ​Closer Knowledge of Requirements – In certain cases the employee requesting the material has a better understanding of the items required and the suppliers. Decentralized purchasing may allow users to buy the best item for the intended purpose. 1. ​Closer Knowledge of the Suppliers – Especially when departments are spread across the country or around the world, there are certain items and services where local buyers would be able to make better purchasing decisions than a faraway central purchasing department. 1. ​Speed of Purchase – In a decentralized system when a need arises a product can be bought immediately. In a centralized system multiple documents and approvals, as well as a drawn-out purchasing process, may slow the purchasing of a product or service.

SECTION 2.4: DEVELOPING AND MANAGING SUPPLIER RELATIONSHIPS STORY: THE GIFT

 Think of the best gift you’ve ever received. Why was it so great? Why was it so special? While some may think about the most expensive gift they’ve ever received, most people tend to think about small gifts, inexpensive gifts, gifts that were handmade, gifts that were given to them by someone they loved very much, someone who was very special. Why are those the gifts that most tend to think about? It’s the relationship that made the gift so special. That gift conveyed a level of understanding. That person knew exactly what you wanted without you telling them. That person found something they knew you would love that you didn’t even know existed. Perhaps they made the gift with their own hands. They took time and effort. The colors, materials, fabrics, the craftsmanship, and even the imperfections will remind you of that person forever. If a person who is very busy made it, you understand the sacrifices required to produce the gift. An expensive gift is nice too; that too conveys sacrifice. Still, if the item is too expensive for their budget it may actually make you feel guilty about the gift. The best gifts are the ones that leave both the giver of the gift and the one receiving the gift happy.

If a child gave the gift to you, perhaps they said something that showed you just how much they love you. If a parent or grandparent gave the gift, perhaps they told you a special story about the gift. Gifts are about the relationship. It is your understanding of the other party that can add value to almost any gift. Purchasing from a supplier is very similar. Getting great parts at a good price is good for business, but when you understand the effort put in by your supplier and they have a deep understanding about what you need, that transaction becomes special. If a buyer knows how you will use their parts, when you want them delivered, how you want them packaged, and how you will want that part improved next year, they can provide you with a product and service package that is unique to your needs. Conversely, if a buyer knows how much time and effort it takes to make a part, or the supplier’s challenges in running a profitable organization, or even how soon the supplier prefers to get orders, the buyer can show their supplier just how much they appreciate them. Gift giving is not just about making the person that is getting the gift happy; the circle must be closed. The best gift giving experiences are when the one receiving the gift loves their gift and the one giving the gift can see just how special that gift was to you. It makes both parties want to give more to the friendship. As you build buyer-supplier relationships in your career, remember this: Great suppliers can make your products better, but it is only when both parties understand and appreciate each other that the transaction and the relationship become special.

1. SUPPLIER BASE An established group of suppliers from which a company makes most of its purchases. EXPLAINED: In this section the value of supplier relationships will be discussed. Having a supplier base helps an organization build relationships with suppliers. Also, when buyers work with a group of suppliers over a

long period of time buyers begin to understand the strengths and weakness of each supplier. Buyers will know who to call when they need a rush order, who to call when they need a high-quality part, and perhaps who to call when staying under budget becomes vital.

2. CHOOSING A SUPPLIER Every purchase is different, and every product or service is different. Therefore, the criteria in choosing a supplier should always be different, too. What are some of the common issues buyers consider when they weigh new suppliers? 1. ​Consumer Needs– Do they have a part that will make your product more desirable to your customer? 1. ​Cost, Quality, Speed and Flexibility – What do you and your customer want? Are your goals similar to their goals? 1. ​Technological Capability – Do they offer a product or service no one else can offer? 1. ​Location – Will the distance between their facility and your facility significantly increase lead-time or increase supply chain risk? Will transportation and tariffs pose cost challenges? 1. ​Information Technology System – Will their system and your system be able to share data selectively and securely? 1. ​Ability to Innovate – Do they have money to invest in R&D? Are they interested in innovating? Your product can’t improve if their parts do not improve. 1. ​Capacity Potential – Is their present capacity or their potential for growing capacity sufficient to help you meet your growing demand?

1. ​2nd and 3rd Tier Suppliers – If we look farther downstream in the supply chain are we comfortable with the risks or opportunities their suppliers may pose? Are they willing to let us develop a relationship with their suppliers? 1. ​Reliability – How often do they actually deliver on their promises? When they can’t meet our deadlines what is the typical outcome? 1. ​Service – In addition to great products, what else do they offer? If we are buying a commodity where the market drives the price, what does this supplier offer to differentiate themselves from their competition?

3. MANAGING SUPPLIER RELATIONSHIPS In the opening segment about “The Gift,” we began to discuss the importance of developing good relationships with our suppliers. Good relationships are about communicating our desires and thoughts, and also about establishing acceptable boundaries. Good relationships also embrace opportunities to share and discuss negative interactions. A few very common relationship management tools that help buyers and suppliers communicate are supplier scorecards and supplier certifications: 1. ​Supplier Scorecards – A report card that can be used to communicate desires before a sales presentation or shipment. It can then also communicate performance outcomes after the sales presentation or shipment. The results can then be used to discuss changes that might be required in future interactions. 1. ​Supplier Certifications – Assessments that help ensure that a buyer’s suppliers all meet the minimum supplier standards. Some buyers may not even consider purchasing from a supplier unless that supplier first gets certified. Supplier certifications can be developed by the buyer themselves or they may be developed by an outside agency.

4. SINGLE VS. MULTIPLE SUPPLIERS Just like choosing a supplier is difficult and the issues complex, so is the issue of choosing between one supplier, many suppliers or just a small select group. Let’s consider the two extremes for a car company that needs a tire supplier. What are some reasons a company would only want to have one tire supplier? Why might they want a larger group of tire suppliers? Single Supplier 1. ​Quantity Discount Opportunities – When buying in large quantities a buyer may have negotiating leverage and economies of scale may be easier to achieve. This goes for both the purchase price of the tires and the transportation costs. 1. ​Lowest Total Cost – Perhaps this supplier’s product and service package cannot be matched by any other supplier. Good product, reliable supplier, fast delivery. 1. ​Intellectual Property Advantages – Perhaps no other company can make a tire like the one offered by this company. 1. ​Quality Control – With a single tire supplier a buyer can be fairly certain that all the tires are very similar in design and quality and that all business interactions will be similar. 1. ​Relationship Management is Easier – Sharing and communicating with a single supplier can be easier than trying to maintain multiple relationships simultaneously. 1. ​Easier Collaboration – Sharing information about future needs and working to help develop tires for the future is much easier with one dedicated supplier. Multiple Supplier

1. ​Competition Breeds Innovation – Multiple tire suppliers fighting for a larger percentage of our tire purchases will work harder to set themselves apart in both product and service dimensions. 1. ​Risk Among Multiple Suppliers – If one tire supplier encounters difficulties, the other tire suppliers are ready to step in and carry the additional load. 1. ​Capacity Flexibility – If more tires are needed immediately a buyer can call upon their large tire supplier base to increase supply quickly. 1. ​Location Advantages – For car companies that have multiple plants around the country or even around the world, having multiple suppliers may help ensure that a tire supplier is always relatively close by. This can reduce transportation costs and also reduce lead times. This can help reduce inventory requirements.

CHAPTER 3: MANUFACTURING AND OPERATIONS GOALS, OBJECTIVES, AND STUFF WE WILL RUIN: You’ll discover the complexity of choosing a facility location. This might in turn shed light on the sometimes-ridiculous speculation about manufacturing locations that can be portrayed in popular media. The supply chain coordination required for good product development can be extensive. Next time you see a really great product idea it might make you wonder: Did they really plan it that way or was it perhaps just “dumbluck?” Perhaps you’ll consider touring a modern manufacturing facility. You will better understand some of the questions and challenges manufacturing executives face in running a plant. This module might make you consider becoming a production and/or manufacturing executive.

SECTION 3.1: FACILITY LOCATION BASICS STORY: BUYING A HOME

 Are you prepared to buy a home? Perhaps you have a price limit. Perhaps you want a certain type of home. Maybe you’d like a pool or a big yard with trees. When you actually start to look for a home you begin to realize that those decisions were the easy ones. In many cases, those are the ones over which you have the most control. Sometimes the toughest question is “where is my dream house?” There might be a few locations that have homes like the one you want, but the prices of those homes may vary widely. Do you just take the cheapest option? The home 10 miles from civilization; the one that doesn’t have a school nearby for your kids; the one where you will need to pay extra to have the most basic utilities; the one so far out that getting to work, buying groceries, and getting to a doctor will be inconvenient? That area may blossom into a bustling and beautiful neighborhood, or it might not. Perhaps some organizations will avoid providing services in your area – no pizza delivery, no cleaning and lawn services. You are just way too far out there. On the other hand, the most expensive location has all the services, amenities and stability one could ever ask for, but the taxes for that area are

very high. You are closer to work, but the traffic in that area will make your two-mile trip to work slow and frustrating. Perhaps the house you dream about just doesn’t exist. Do you build one from scratch? Where is land available? How much will that cost? When will I finally be able to move in? What if instead I buy a home that is already built? I can probably move in very soon, but that house is used, some things may be worn down. And no matter how close it is to my idea of a dream home, there are certain things I’d like to change. Now, imagine the difficulties associated with choosing a location for a manufacturing facility. Low-cost labor may sound attractive to investors, but have they considered taxes, land value, currency exchange rates, political stability, local work ethic, labor laws, local suppliers, distributors and transportation companies? Low-cost homes come with a number of trade-offs, so do low-cost manufacturing facilities. If you were put in charge of choosing Toyota’s new manufacturing facility, what would you consider? How about for Gap? Or Samsung? Or Intel?

1. KEY ISSUES TO CONSIDER IN CHOOSING A MANUFACTURING LOCATION By no means is this a complete list of the issues a company should consider when choosing a location for a manufacturing facility, but these are some of the most common issues that are often considered. 1.

​Labor – Wages, technical skills, work ethic, culture, language

1. ​Facility, Infrastructure and Utilities – Are the site and available facilities adequate for the intended purpose? 1. ​Laws – Labor, Intellectual property, environmental regulations, criminal 1.

​Resource Availability – Supplies, raw materials, fuel, energy

1.

​Local Risks – Crime, law enforcement, politics,

1. ​Climate – Will the temperature and weather conditions be appropriate for the product, machines, and employees? 1. ​Transportation and Transportation Infrastructure – Consider the trucks and trains, as well as the road and rails. 1. ​Trade Agreements, Tariffs, and Quotas – Are there rules and regulations that need to be considered?

2. ESTABLISHED CHANNELS OF DISTRIBUTION Channels of distribution represent the chain of organizations that help bring a product into the hands of the end user. This might include packaging companies, delivery companies, warehouses, distribution centers and perhaps even suppliers. Established channels of distribution imply that a certain chain of organizations has an established history of working together and perhaps coordinating supply chain actions. This advanced relationship might imply that transactions occur regularly and perhaps more fluidly. EXPLAINED: Think about a manufacturing facility in your town, state or province. If they have been in business for a long time at that location, they probably have longstanding partnerships with companies that help them get finished goods out of their facilities and into the hands of customers. They may include trucking companies, distribution centers, retail partners and probably many other types of companies. Imagine if one day the manufacturer decided to move to a different part of the country or perhaps to a different country altogether. They would likely need to establish new partnerships. The manufacturer will have to adapt to many changes, work to develop relationships with their new partners, and perhaps learn about new rules, regulations or cultural traditions that will impact their business. Having established channels of distribution can have big advantages. The comfort level of knowing what can be expected on a day-to-day basis and

knowing the reliability of your downstream supply chain partners should not be taken for granted. Another thing to consider, though, is moving your company to a community that already has established channels of distribution for your industry. If you start a company that manufactures vehicles and you then locate your manufacturing facilities in an area that already has two or three other car manufacturers, perhaps your company can take advantage of a community of supply chain companies already accustomed to moving finished vehicles downstream in a supply chain.

3. ESTABLISHED SUPPLIER BASE A company’s supplier base is the collection of companies from which an organization presently purchases products and/or services. An established supplier base implies that an organization has a group of companies with which they have developed a working relationship. This advanced relationship might imply that transactions occur regularly and perhaps more fluidly. EXPLAINED: Similar to “established channels of distribution,” having an established supplier base means that accepted business practices between you and upstream supply chain partners allow for a certain level of comfort and familiarity in day-to-day operations. Again, if an established manufacturer moves to another part of the country or a different part of the world, that manufacturer may need to consider if they want to find new suppliers that are closer to the new location. Similarly, a new company may consider the value of locating their new manufacturing facility in a region with other manufacturers that use similar types of suppliers.

4. HYPERCOMPETITIVE MARKETS This can refer to an industry that is heavily concentrated in a particular region, where the companies compete fiercely. This intense and concentrated competition may result in rapid innovation but short cycles of competitive advantage.

EXPLAINED: In the United States, Detroit is known for manufacturing cars; Las Vegas is a center for gambling and entertainment; Los Angeles is the movie making capital of the world; the San Francisco area is a mecca for technology, and New York is known for food, fashion, theater and finance, among other things. These locations would all be considered hypercompetitive markets. What’s the value of starting your company in a hypercompetitive market? Perhaps knowing that establishing a supplier base or taking advantage of established channels of distribution may be easier to do. While the competition is going to be fierce in these locations, so too might be the advantages.

SECTION 3.2: PRODUCTS: FROM DEVELOPMENT TO MANUFACTURING STORY: THE PAPER AIRPLANE CONTEST

 A schoolteacher has a class with 12 students, all age 13. The teacher divides the students into three teams of four students each. The instructor gives the teams paper and tells the students they are going to compete to manufacture a number of paper airplanes. The best teams will make a large number of excellent planes in a 10-minute period. Before they begin to manufacture paper airplanes, the teams are asked to design their group’s plane. They can make any type of paper airplane they’d like. Based on how the planes fly and how they look, the instructor will assign each plane a value. The instructor will look at the plane, watch it fly, and then based on their personal values the instructor will assign a dollar value to each team’s final design. Paper Airplane Design and Marketing Test 1. ​Team 1: Their paper airplane has a simple design and is capable of flying at a height of about 15 feet. The flight is fast but the plane dives quickly into the ground. The instructor gives it a value of $5 based on how it looks and how it flew.

1. ​Team 2: This team has a paper airplane “wiz.” This particular student makes a beautiful and intricate paper airplane that glides through the air smoothly, reaching 20 feet. The instructor gives Team 2’s plane a value of $20. 1. ​Team 3: This team tries many designs. The final product is a plane that looks very nice and flies quite well. It’s not as intricate in design as the Team 2 plane, but due to the very simple but aerodynamic design, the plane flew 25 feet. The instructor valued this plane at $15. Manufacturing Phase Each team works for 10 minutes. Labor and overhead costs will be a total of $30 for those 10 minutes. Each team is given 20 pieces of paper at a total cost of $20. Thus, each team starts with $50 in total costs. The teams are now ready to compete in the manufacturing phase. What are the results? 1. ​Team 1: This team had a simple design. All four team members were able to make about three to five planes each during the 10minute period. In total they were able to make 17 airplanes. Two were deemed unacceptable by the instructor, while 15 good planes were chosen; $5 each, $75 in revenue. Profit: $25 1. ​Team 2: This team had an extremely intricate plane design. Only one team member was capable of making the plane. That student could only make 4 planes in 10 minutes. All four planes were deemed acceptable by the instructor; $20 each, $80 in revenue. Profit: $30 1. ​Team 3: Their airplane was a bit difficult to manufacture, but since the team worked together on the design, every student on the team was able to make a contribution during this phase. This team split up the duties of making a plane. They created what might be called an assembly line. In total they were able to make 10 airplanes,

one of which was deemed unacceptable; 9 good planes, $15 each, $135 in revenue. Profit: $85 What Did the Students Learn? In sum, customers get to decide the value of your item. Manufacturing is limited by design, available resources and the skill of the employees. A successful company understands the tie between design, marketing, purchasing, hiring, manufacturing and a number of other supply chain processes.

1. RELATIONSHIP BETWEEN DESIGN, MARKETING AND SUPPLY CHAIN MANAGEMENT The introductory segment on the paper airplane contest demonstrates how a great product required teams of employees (or students) to work together. Marketing identifies a target market, while designers and engineers work to develop products that satisfy the needs of the target market. Supply chains must then buy parts, manufacture hundreds or thousands of those end items and then deliver them into the hands of the customer. 1. ​Without the coordination of marketing, design and supply chain, companies may manufacture a great product that is not valued by their target market. 1. ​Perhaps a company may know their target market, but designers fail to consider their desires and preferences. For example, imagine if Starbucks started selling a line of premium deli meats. Starbucks customers may love deli meats, but they just may not want to buy them at Starbucks, nor are Starbucks facilities equipped to store and sell deli meats. 1. ​Imagine if McDonald’s developed a premium half-pound madeto-order hamburger that costs $10 and took 10 minutes to prepare.

What might then be the impact on the kitchen, the drive-thru lines, etc.? 1. ​Perhaps Apple creates beautiful cell phones with wonderful features their target market desires, but the parts are low-quality, and the phones are neither durable nor reliable. The takeaway: In modern companies, coordination and integration are vital to long-term success.

2. STRATEGIC DECISIONS These are typically decisions made at the highest levels of the organization. These decisions provide direction for the company by identifying target markets, business models and potential product or service categories in which the company would like to compete. These decisions typically provide the organization and its primary functional areas long-range goals. EXPLAINED: Before a company designs or manufactures anything, the company must know their purpose. Who is the customer? Where is the customer? What do they desire/need? How do they want to buy the item or service? These are just some of the types of questions that must be answered before a company can develop a strategy. Once the company has some of these answers, they can make strategic decisions. Example: We will make sports cars in the $40,000 price range, for individuals between the ages of 25 and 45; we will sell them online and deliver these vehicles to the consumer’s door. Customers will be able to test drive vehicles at their home by scheduling an appointment using an online system.

3. DESIGN DECISIONS Decisions that seek to satisfy a target market in a particular product or service category. Design decisions provide a more specific roadmap to satisfying strategic goals. EXPLAINED: Once the strategic decisions are made, the company will then consider how that strategy will be fulfilled.

Continuing with the example in “Strategic Decisions,” what are the design decisions that will be required? What will need to be designed? The sports car, the manufacturing facility, the manufacturing process, the website, the appointment system, advertisements/commercials, etc. will all need to be designed.

4. OPERATING DECISIONS Operating decisions are ones that impact the organization in the short-term. They are typically operating decisions related to the daily operations that are performed in a company on a routine basis. EXPLAINED: After the design decisions are made, it will be time to manage the company on a day-to-day basis. Who will be working today? What are they expected to accomplish today? What happens if there are problems with the website or the appointment system? What happens if there are problems in the manufacturing process? What will the company do if a shipment of parts arrives late? Very likely, there are hundreds, if not thousands, of operating decisions that are made each day at a company. Good strategic decisions and design decisions can help make day-to-day operations easier to manage. On the other hand, good operating decisions can help companies fulfill their strategic and design goals.

SECTION 3.3: LAYOUT TYPES AND MANUFACTURING STRATEGIES STORY: RESTAURANT DESIGN

 Suppose you have a space that contains a restaurant-style kitchen approximately 750 square feet including storage space. Attached to this space is a room that is approximately 1,000 square feet where people can eat and interact with employees. How should the eating space be utilized? Well, it depends on what type of eating establishment this is going to be. It depends on the expectations and desires of the customer. Let’s take three examples: fast food, fine dining and school cafeteria. In each case, the needs of the facility are completely different. The following are all operational decisions and activities that will impact the success of the establishment from both the perspective of the customer and the organization. 1. ​Process Considerations - Seating of the customers, Placing food orders, Delivery of food to customer, Payment process, Maintenance of facility

1. ​Production Considerations - Types and variety of food, process choice, interactions between customers and employees 1. ​Consumer variability - Time spent in facility/at table, Percentage of customers taking food home, facility expectations These are only some of the issues that must be considered when deciding how to organize the eating space. This will also help provide guidelines about the processes required to keep customers flowing through the restaurant environment efficiently and effectively. Knowing the answers to some of these questions might also help us make decisions about materials, machines and technology, as well as the type of employees that will need to be hired and trained. Manufacturing facilities are quite similar in the respect that they too must understand the product and the market in order to choose the best strategies and layouts. While a restaurant develops a strategy and a layout that attempts to efficiently and effectively move consumers through a dining experience, manufacturing firms develop manufacturing strategies and make layout decisions that strive to efficiently and effectively move materials through a manufacturing experience. Just as you imagined the different needs between a fast food restaurant, a fine dining establishment, and cafeteria; now try and imagine the different needs of a collection of companies each manufacturing one of these items: Chairs that will be sold at Wal-Mart; Customized chairs to be sold out of a designer furniture store; Wooden chairs that are all the same style but can be ordered in different colors.

1. LINE FLOW STRATEGY VERSUS FLEXIBLE FLOW STRATEGY Please see the chart that follows. This will provide you an easy-to-view comparison of the two primary manufacturing strategies discussed in this section: line flow and flexible flow. This should not be viewed as a chart that should be memorized, rather it should be analyzed so that you can see the connection between all of the categories for a given strategy.



2. LINE FLOW STRATEGY AND LAYOUT Line flow is a manufacturing strategy and layout that typically works well in producing end items (or services) that have relatively high demand and that require very little (if any) customization. The work centers are located in a linear path; items begin on one end of the line and continue in a linear path to the last work center. Each work center performs the exact same work to every unit that passes through that work center. It is important to note that there are two primary types of line flow layouts: Assembly Line – These line flow systems can typically be stopped at any time without compromising the inventory flowing through the system. In other words, stopping the line during the employees’ lunchtime will not cause the work-in-process items on the line to spoil (Cars, trucks, digital devices would all likely utilize an assembly line system). Example: https://www.youtube.com/watch?v=jLud5XYfY_c

Continuous Flow Systems – These line flow systems must run to completion once the process has been started. Loaves of common sliced sandwich bread might be an example of a product that might utilize a continuous flow system. Imagine having a large batch of dough and then putting hundreds of loaf-sized chunks into an oven. Then, while the loaves are baking, the manager shuts down the oven until the next morning when workers return for their next shift. The partially baked bread in the oven would be ruined. Continuous flow systems must finish their cycle. Example: https://www.youtube.com/watch?v=qTIkYw7N0Vs Also, please note that while line flow layouts may see products moving in a straight line, it is also possible that line flows may curve for multiple purposes. As shown in the diagram that follows, these manufacturing layouts may take S-shapes or U-shapes. Why? Sometimes, the dimensions of the facility require that the lines curve, while other times it may be related to how items are made, or perhaps the shape may change so that a single worker can more easily access multiple workstations.



3. FLEXIBLE FLOW STRATEGY AND LAYOUT A manufacturing strategy and layout that typically works well for producing end items (or services) that have relatively low demand levels and that may require a high level of customization. The work centers focus on a particular type of function like drilling, sanding, welding, painting, assembly, etc. While each work center performs a single function, a large degree of variation is possible at each workstation. Example: Painting work center – Different colors, different types of paints, etc. As shown in the physical therapy facility diagram that follows, flexible flow layouts can cater to a number of different customers on the same day, or even at the same time. Once patterns begin to emerge, companies can see if there might be better layout options or if minor changes should be made. For example, while certain aspects of the layout below appear to make sense, someone may question why injured patients needing an x-ray would

be made to walk the entire length of the facility. On the other hand, the type of equipment in the X-ray center might need to be in a room that is in that particular part of this building.



4. HYBRID STRATEGY AND LAYOUT A manufacturing layout that combines elements from both line flow and flexible flow layouts. In this strategy, products may pass through a layout in a linear fashion, but each workstation would have the ability to allow for some level of customization. Items requiring low degrees of customization may be created in hybrid systems that very much resemble line flow systems except for one or two areas. On the other hand, items requiring higher degrees of customization may only utilize line flow elements in a few parts of their facility.

The diagram that follows shows what a hybrid layout might look like at a personal computer company. Note that while products pass through the system in a linear fashion, each station has multiple options. Thus, each end item exiting the process may be different from the prior item.



5. GT (GROUP TECHNOLOGY) CELLS A type of hybrid strategy that utilizes a line-flow layout for low-volume processes. Typically, the company has multiple end items that can be categorized into product families – couches, tables, chairs. Each product family would get its own GT cell. While GT cells allow for a linear path through the layout, each work center may have the ability to offer some level of customization. Thus, while one cell may produce only couches, those couches, while made in a somewhat similar manner, can each be different. The diagram that follows shows how a custom furniture manufacturer may use GT cells to speed production and organize processing while still allowing for some flexibility at each workstation.



6. FIXED POSITION LAYOUT This layout type is used for very large and hard to move items – airplanes, cruise ships, office buildings. In this case the workers and machines come to the worksite and move around the item as needed.

SECTION 3.4: BOTTLENECKS AND LINE BALANCING STORY: ATHLETIC PRECISION

 When world-class athletes train for their given sport or event, no stone is left unturned. If an advantage can be gained, the athlete and their coaches will seek methods to improve. The most typical training methods seek to make the athlete stronger or more flexible. Of course, many athletes also desire to improve their speed and stamina. These have been the most common goals of training since sport began. Though, the very best athletes look for more advanced forms of competitive advantage. How can they perform using less energy? How can they achieve their goals with fewer movements? How can they outperform competitors that are stronger, taller, or more gifted? Some athletes will look to improve their techniques by studying film clips, taking movement and/or dance classes, or practicing yoga or martial arts. Some will seek psychological counseling to find their mental strengths and focus to achieve more. Still, others will run rigorous physiological tests on

their bodies to identify strengths or opportunities they did not know existed. While their sport may not change, competitors and their strategies evolve. So, the world-class athlete must also be prepared to adapt to their changing demands. In the world of manufacturing, an assembly line is like an athlete. On a daily basis the assembly line is asked to perform at the highest level: Produce high quality items, to produce those items quickly, to minimize wasted materials and movements. Assembly lines also seek to develop the ability to adapt to changes in demand. Manufacturing executives are the coaches so it is their job to understand the goals, the opportunities and the methods that will allow them to get the most out of their athlete, the assembly line. In this section, you will be introduced to the challenges that assembly lines face and also the questions and methods that can help create efficient and effective assembly lines, balanced assembly lines. While many who read this will never work in departments, much less companies, that utilize classic assembly line systems, many companies will ultimately try and emulate certain aspects of assembly lines so demand and productivity requirements can be met.

ASSEMBLY LINE CHALLENGES Before we get to the challenges, let us briefly summarize assembly line considerations: Meet demand, make the product well, do it using the fewest resources possible, consider the worker and the machine, be prepared for changes in demand and the assembly line. 1. ​Bottlenecks – A section of a supply chain that limits the overall output of the assembly line. Typically, this is the slowest and/or weakest workstation in the assembly line. Identification of a bottleneck and working to make that workstation more efficient can help the assembly line produce more product and it may even reduce employee stress on the assembly line. 1. ​Too Many Employees and/or Workstations – Controlling cost and movement is key to the long-term efficiency of an assembly line.

A poorly planned assembly line will be characterized by having more workers than required and/or more workstations thus requiring more material hand-offs. 1. ​Employee Inequities – Employees that work on assembly lines often compare their workload to those of their fellow employees. Thus, employees that carry a large assembly line burden are likely to be agitated by their “unfair” expectations. They may demand more money, they might be more likely to quit, they may make more mistakes, or they may reduce performance in an attempt to selfcorrect inequities. 1. ​Present Needs Versus Future Demands – Some assembly lines are ready to meet present demands, for example, 40 units per hour. If product popularity increased quickly, would the assembly line be capable of producing 45 or 50 units per hour?

ASSEMBLY LINE TERMINOLOGY Assembly lines have materials that run through a series of steps. Materials typically move from workstation to workstation at a designated pace. Below are some terms that are commonly used in association with describing assembly lines. Tasks or Work Elements – The smallest units of work that must be accomplished to complete an end item on the assembly line. In the precedence diagram shown below, each lettered item A, B, C…H is a task/work element. Also, note that the time listed next to each element is the amount of time the engineers have allotted for assembly line workers to satisfactorily complete that task. (Task A takes 30 seconds, task B takes 15 seconds, etc.) Total Task Time (t) – The sum of all the tasks on the precedence diagram. Notice, for the given precedence diagram that follows, t=180 seconds.

 Precedence Diagram – An illustration that shows the relationships between all the work elements in an assembly line process. More than just demonstrating which work element goes 1st, 2nd, 3rd, etc. the precedence diagram also illustrates if certain tasks can be completed simultaneously. (Example: Task C and G could possibly be done at the same time.) In balancing an assembly line, it helps a manager see all preceding tasks for any given work element. It aids in putting together workstations without violating precedence relationships. (Example: Before task C can begin, tasks A and B must both be completed. In order to start task H, tasks F, G and E must all be completed.) Workstation – A workstation is the collection of one or more work elements.

To illustrate this further, if a manager decided to make a workstation by grouping together tasks A, B and C, those three tasks would be the sole responsibility of the workstation employee. The employee would be expected to complete all three tasks in 80 seconds. After 80 seconds they would pass their item to the next workstation and begin working on the next item passed to them for 80 seconds. Cycle Time (c) – Assembly lines work to fulfill a given demand during a certain period of work time (operating time). Cycle time is the pace at which products must move through the assembly line in order for the assembly line to keep pace with demand.

Cycle time = Operating time / Demand c = OT / D In the illustration you will note that the assembly line will need to produce 400 units (D) in a six-hour work period (OT). The result is that every 54 seconds a finished item must come off of the assembly line. It is very important to note that the cycle time tells a manager the maximum amount of task time that can be put into a single workstation. Therefore, in this scenario, tasks A and B could be a single workstation since they would have a combined task time of 45 seconds, less than the 54 seconds allowed. On the other hand, in this scenario, A and D could not be in the same workstation since their combined task time would be 70 seconds, well over the 54 seconds allowed. Theoretical Minimum Numbers of Workstations (TM) – Remember, assembly line managers are striving for efficiency, so one of their goals may be to complete all tasks using the least number of workstations. The following formula acts as a guide for theoretical minimum number of workstations.

Theoretical minimum number of workstations = total task time / cycle time TM = t / c

In the example provided, total task time (t) is 180 seconds. Cycle time (c) is 54 seconds. Therefore, the minimum number of workstations is four. It would be impossible to have a partial workstation, so all decimals, no matter how small, must be rounded up. In this case, the calculation resulted in an answer of 3.33 workstations; it must be rounded to four workstations. Answers of three or 3.33 would both be incorrect. It is also important to note that this is the theoretical minimum number of workstations. Depending on the distribution of task times, it may not be possible to fit all tasks into four workstations with 54 seconds or less of task time. Actual Number of Workstations (n) – While the theoretical minimum number of workstations might be the goal of the manager, sometimes the theoretical minimum is not easily achieved. Thus, for the purposes of line balancing calculations, the letter n may be used to denote the actual number of workstations. It is possible that n may equal TM.

HOW TO BALANCE AN ASSEMBLY LINE (LINE BALANCING) Line Balancing – The goals of assembly line balancing is to equitably group precedence diagram tasks into the fewest number of workstations. If done well, demand can be met, employee stress can be minimized, and it might even be possible to meet future increases in demand. What’s Needed Before You Begin? 1. A list of all assembly line tasks and the time each takes to complete. 2. A precedence diagram illustrating the precedence relationships between all assembly line tasks. 3. Product demand for a given period of time. Ultimately this means you need your precedence diagram, sum of task times (t) and the cycle time (c). You can now calculate your theoretical minimum number of workstations (TM). This then gives you an idea of how many workstations might be ideal for the balanced assembly line.

Line Balancing Rules 1. Identify workstation candidates – Which elements are eligible to go into a workstation? Those without any predecessors. Those whose predecessors are all already in this or previous workstations. 2. Choose one of the candidates for placement into the workstation – Some managers prefer to always choose the largest available, others the smallest available, and some managers just choose randomly. 3. Test viability of candidate chosen a. If this candidate brings total task time of that workstation above the cycle time (c), it will not fit. If it does not fit, try another candidate. If no candidates fit, start a new workstation. b. If the candidate does fit, go back to step 1 and try and place a new task into this workstation. Testing Each Workstation: Cycle Time Rule: In order for each workstation to be allowable, the workstation must have a total task time equal to or less the cycle time (c). Precedence Rule: All tasks in the workstation must not violate precedence relationships illustrated in the precedence diagram. For example: Task A and C cannot be in workstation 1. Why? In order for C to be placed in a workstation, B must be in either the same workstation or a prior workstation.

 Here is a step-by-step account of how the above assembly line was balanced. Please note this is only one possible solution. Many others are possible, some with four workstations, others with more than four workstations. 1. Candidates: A and D 2. Choose A - Workstation one (WS1) at 30 seconds so far. 3. Candidates: B and D 4. Choose B - WS1 at 50 seconds. End of WS1. D would not have fit. 5. Candidates: C and D 6. Choose D - WS2 at 40 seconds. 7. Candidates: C and E 8. Neither fits. End of WS2.

9. Candidates: C and E 10. Choose C - WS3 at 35 seconds. 11. Candidates: E, F, and G 12. Choose E - WS3 at 50 seconds. End of WS3. 13. Candidates: F and G 14. Choose F - WS4 at 10 seconds. 15. Candidate: Only G 16. Choose F - WS4 at 20 seconds. 17. Candidate: Only H 18. Choose H - WS4 at 45 seconds. End of WS4. All workstations abide by both the cycle time rule and precedence rule. Is this assembly line balanced? Note, the results are as follows: WS1 – AB - 45 seconds (Idle time: 9 seconds) WS2 – D - 40 seconds (Idle time: 14 seconds) WS3 – CE - 50 seconds (Idle time: 4 seconds) WS4 – FGH - 45 seconds (Idle time: 9 seconds) This line is actually quite balanced: The minimum number of workstations is met and each workstation is relatively close in total task time, 40 to 50 seconds. Sometimes, though, the resulting times on assembly line workstations may look more like this: WS1 – 52 seconds WS2 – 52 seconds WS3 – 24 seconds WS4 – 52 seconds

While this is still at the minimum number of workstations, one workstation has much less to do than the others. This line is not very well balanced. Idle Time – Idle time is the amount of time that is not utilized at each workstation. The total amount of idle time in an assembly line can be calculated using this formula:

Idle time = nc – t So, for our example where we had four workstations, a cycle time of 54 and a total task time of 180, the idle time would be:

Idle time = 4 (54) – 180 = 216 – 180 = 36 seconds This illustrates that the manager created an assembly line of four workstations that had a total of 216 seconds, but only 180 seconds were spent working. There is a total of 36 unused seconds in each iteration of the assembly line. See here how the 36 seconds of idle time are distributed in our solution. WS1 – AB - 45 seconds (Idle time: 9 seconds) WS2 – D - 40 seconds (Idle time: 14 seconds) WS3 – CE - 50 seconds (Idle time: 4 seconds) WS4 – FGH - 45 seconds (Idle time: 9 seconds) Efficiency – Similarly, the efficiency of an assembly line can be measured based on the ratio of time worked on the assembly line versus the total time available in the assembly line.

Efficiency = t / nc So, for our example where we had four workstations, a cycle time of 54 and a total task time of 180, the idle time would be:

Efficiency = 180 / [4 (54)] = 0.833 = 83.3% This illustrates that the manager created an assembly line of four workstations that had a total of 216 seconds, but only 180 seconds were

spent working. Only 83.3% of the time available in the assembly line is being utilized. Things to Consider: 1. Bottleneck: The largest workstation is your slowest workstation. In the given example, the bottleneck would be WS3 with 50 seconds. This workstation limits the output of the entire assembly line. It is the weakest link. 2. Effective Cycle Time: The cycle time in our example was 54 seconds. Notice, though, the assembly line that was created had a bottleneck workstation of only 50 seconds. This means that while the assembly line can move along at a pace of one unit every 54 seconds, it would be possible to increase the pace (and thus the output) of the assembly line to 50 seconds. This would be considered the effective cycle time of the assembly line that was created, 50 seconds. (Note increasing the pace of the line to 50 seconds, from 54, would take your six-hour output from 400 units to 432 units) 3. More Workstations: If additional workstations were added, the effective cycle time would likely drop, and thus higher levels of demand could be met. However, what would be the trade-off? While higher output levels would be possible, costs would likely increase because of the extra worker(s) required to run the additional workstation(s).

CHAPTER 4: TRANSPORTATION AND LOGISTICS GOALS, OBJECTIVES, AND STUFF WE WILL RUIN: Hopefully, you will appreciate the complexity involved in getting goods to a store or directly to your home on-time and in perfect condition. As you begin to work in industry, you’ll better understand the logistical planning required to run a successful company that is responsible for making products and getting them into the hands of customers. This module might make you want to become a logistician.

SECTION 4.1: WELCOME TO LOGISTICS STORY: BIG BOX LOGISTICS AT TARGET

 Target Inc. has over 1700 stores in forty-nine of the fifty US states. Everyday those stores need to have shelves filled with the thousands of products the customers will come in to purchase. Of course, Target has thousands of suppliers responsible for creating the tens of thousands of goods that will be sold at the 1700+ stores, as well as via the online store. While the relationships with these suppliers is managed by the procurement team, managing the movement of goods from supplier to store and from fulfillment center to the customer’s door is the responsibility of the Target logistics team. This means that even if each supplier has inventory available, the Target logistics team must consider questions like: Where is that inventory? How will the inventory get into the United States? Where will it be stored before it is shipped to stores? Which modes of transport will be utilized? Once data is analyzed and a plan is developed by the logistics team leadership, logistics team members are responsible for executing the constant and never-ending movement of goods throughout their supply chain. Even when stores are closed, members of the logistics team are

working at import warehouses, on trucks and in distribution centers. The logistics team even has a role inside the stores, making sure that the right items make it to the appropriate shelf out on the sales floor. Making Target customers happy can be a stressful job. Any failure by the logistics team will likely upset some Target customers. If Target runs out of sunscreen in the summer, if they don’t have the toy your child wants the week of Christmas or if they don’t have your favorite cereal when you visit them this evening, it is very possible that this was a failure of logistics. It doesn’t end there, though. Reuse, disposal, and recycling operations are also tasked to the logistics team. When defective or unwanted products are returned to a store, when shipping boxes are emptied, when pallets are cleared of the items they carried into the store, Target’s reverse logistics specialist must develop and execute logistics solutions. Whether goods and materials are moving toward the consumer (downstream) or away from the consumer (upstream), the Target logistics team is responsible for making sure that items travel on time, in a secure fashion and reach their required destination in the most efficient and effective way possible.

1. LOGISTICS The branch of the supply chain responsible for developing the transportation itinerary and finding the appropriate transportation and storage business partners to successfully navigate the flow of materials from the point of origin to the final destination. EXPLAINED: Moving products is more than just putting stuff on a truck. Just like when traveling by airplane, you need to buy tickets, pack your stuff, get to the airport, check-in, get through security, board, store your stuff, change planes and then get a taxi to the hotel where you have a reservation… moving products around the world requires similar planning. Often mistaken only as transportation professionals, a logistics specialist, also called a logistician, needs access to information about demand, inventory supply, production rates and loss. In addition, a logistician would

need to develop and nurture relationships with transportation and storage companies, as well as manufacturers and suppliers. Supply chains are complex webs of companies and people responsible for the ultimate satisfaction of consumers. Logisticians are responsible for the coordination of all material flows throughout the supply chain.

2. TRANSPORTATION The logistics function that is responsible for the effective and efficient movement of goods from one location to another. EXPLAINED: As you can see from the definition provided, transportation is only one part of the logistics function. While logistics is responsible for synthesizing information between supply chain partners to create large scale plans to ensure goods are available to consumers, transportation is only responsible for moving those goods in a timely and secure fashion. While there is no clear line that distinguishes where transportation would begin and end, a transportation specialist would likely focus on issues related to trucking, air shipment, rail shipment and ocean shipment. Of course, any seasoned supply chain manager knows that those transportation modes are intricately tied to packaging, containerization, documentation, insurance and distribution, as well as a number of other logistics issues.

3. REVERSE LOGISTICS The management of products that flow backward in the supply chain (upstream), away from the consumer and back in the direction of manufacturers. EXPLAINED: When you return a defective television to the store, what happens next? Does the item get shipped back to the distributor? Will it be sold for parts, recycled, will the product be refurbished or thrown away? Which employees and companies will help you move, store, disassemble, repair, and/or recycle the product and its components? Moving products away from the supplier can be costly. As a result, reverse logistics is an immensely important segment of the logistics branch. It is also an excellent reminder of how important it is to be accurate. Making

errors in shipping, making defective products, damaging goods in transport, or making products that do not satisfy the customer can increase the need for reverse logistics.

4. ORDER FULFILLMENT Delivering the right order (product and quantity), to the right place (location and customer), at the right time, in the expected condition, with the appropriate documentation. EXPLAINED: It’s not hard to see just how challenging it is to properly fulfill a single order, much less thousands of orders each day… or in the case of a company like Amazon.com, millions of orders each day. As you read through this module and others, think about the demands on supply chain managers and supply chain partners to achieve perfect order fulfillment. Consider how documentation, containers, forecasting, information management and communication throughout the supply chain are essential in fulfilling every customer’s order.

5. CARGO CLASSIFICATIONS Three of the primary classifications of cargo are: 1. ​Bulk – Cargo that is loose and free flowing. Bulk cargo is not in any type of bag, box or packaging vessel. As such, bulk cargo is typically loaded and unloaded by being pumped, scooped, shoveled, etc. 1. ​Break Bulk – Cargo that is packaged (box, bottle, can, etc.) and/or secured on a pallet. This type of cargo can then be placed inside of a standardized container or a truck trailer. 1. ​Neo-Bulk – Typically these are large items that do not quite fit into either the bulk or break bulk categories. This might include vehicles, logs and livestock. Neo-bulk items are typically not moved in standardized containers.

EXPLAINED: While every item that is transported has its own individual characteristics, these three cargo classifications help logisticians understand some of the likely issues related to their cargo. Moving large amounts of rock salt (bulk cargo) would likely require very different logistics considerations versus moving packaged orange juice (break bulk) ready for shipment to a grocery store. Try and think of things in your neighborhood that would fall under each of the three cargo categories.

6. CUBE VS. WEIGHT Cube represents the dimensional space (volume) inside of a container. The weight limit of a container communicates the maximum combined weight of the cargo that can fit inside of that container. Thus, in logistics, when someone discusses issues of “cube vs. weight” they are likely considering whether a shipment will “weigh out” or “cube out”. Weighing out is when the maximum weight limit is reached in the cargo, but space is still available. Cubing out is when the container is completely filled with cargo, but the maximum weight limited has not been reached.

7. INTERMODAL When cargo is moved from one vehicle or vessel to another vehicle or vessel without directly handling the cargo. Typically, the cargo would be stored inside of a standardized container or a truck trailer, which can swiftly and securely be moved from a ship to a rail car, from a rail car to a truck chassis, etc. EXPLAINED: Intermodal shipments have become commonplace in shipping breakbulk cargo throughout the world due to its fast and secure nature. The ability to stack standardized containers also makes shipments rather efficient.



SECTION 4.2: TRANSPORTATION AND DISTRIBUTION STORY: HOW ARE YOU GETTING THERE?

 This week’s schedule of activities: 1.

​Go into the office Monday through Thursday

1.

​Attend a professional football game on Monday evening

1.

​Meet friends for lunch downtown on Tuesday

1.

​Doctor’s appointment on Thursday morning

1.

​Meet with client in New York City at their office in Manhattan

How will you get to all of these places conveniently, in a cost-effective manner, and of course, on-time? It depends, doesn’t it? Do you have a car?

1.

​Where are all of these locations? Where is your home?

1. ​Is public transportation available? Is it convenient? Is parking available? 1.

​Will the roads be congested?

1.

​Are you comfortable utilizing public transportation?

1.

​Do you have a transportation budget?

Perhaps, the weekly schedule above is not that different from your week. Somehow, you’ll manage to make it to all of those places at the right time with little or no research. How? Perhaps it is experience. Perhaps all of these places are nearby. Perhaps the options in each case are rather obvious. You know the difference between cars, trains, taxis, airplanes and buses. You know the roads, the airports, and train stations that are most convenient. You have a good idea of how long it takes to get to all of these locations. To a certain degree, you are a specialist in the transportation of human beings in your city and/or country. To be a specialist in the transportation of goods you need to know many of the same things. What are the differences between the different modes of transportation? When is it best to use each mode? What does the infrastructure, the transportation canvas, look like? What are some of the key facilities important to safe and swift shipment? Which parts of the journey tend to be the most difficult?

1. FIVE MAJOR MODES OF TRANSPORTATION There are five recognized modes of transportation in the world of logistics. Four are rather obvious and one might surprise you: 1.

​Road

1.

​Rail

1.

​Ocean/Water

1.

​Air

1. ​Pipeline – Used only for liquids or items that can be shipped in a slurry. The key question for each of the four most popular modes is knowing when each mode is most appropriate. This requires an understanding of the strengths and weaknesses of each mode. In looking at the comparison below, be mindful that the information relates mostly to the United States. Each country has a different logistics infrastructure so perceived strengths and weaknesses can vary greatly abroad. 1. Road: 1. ​Primary Strengths: Fast (2nd fastest mode of transport), cheaper than air, high flexibility (roads are everywhere, roads can take you from one mode to another). This is a highly competitive market so costs may be reasonable, and shippers need to be reliable to survive. Typically, a vital component in intermodal transport. Roads get your product right into the customer’s hands. 1. ​Primary Weaknesses: Weather, traffic and crime may pose dangers and delays. Requires lots of licensed and reliable drivers. Fuel costs fluctuations. Rules and regulations may quickly change from one region to the next. 1. ​When to use: Road transportation is not the fastest nor the cheapest of the options available. However, it is also neither the most expensive nor the slowest. Road transportation is thus a reasonable combination of a number of important transportation attributes. The bigger question is: When should road be the most prevalent mode of transport? Well, if the shipment needs to be shipped rather quickly, at a reasonable cost, directly into the hands of a customer, it would likely be a good idea to use road transport. 2. Rail:

1. ​Primary Strengths: Can handle heavier loads than road. Better for longer distances than road. Cheaper than road transport. Works well in conjunction with intermodal ocean and/or road transport. 1. ​Primary Weaknesses: Slow. Rails are not as easily accessible and available as roads. Loss can be higher due to vibrations during transport. Not a very competitive industry so reliability can be low. Getting product directly to customer using only rail is very difficult. 1. ​When to use: Good for heavy and/or bulky shipments that do not need speedy delivery. Also good for items with low “value/weight” ratios. A good intermodal option for lengthy domestic shipments where speed is not vital. 3. Ocean and Waterways: 1. ​Primary Strengths: Low cost per mile for large, bulky or heavy shipments. Almost anything can be shipped via ocean vessel. Works well in conjunction with intermodal rail and/or road transport. 1. ​Primary Weaknesses: Very slow. Reliability of shipment can be low. Due to lengthy shipments, more exposure to the elements, thieves, and hazardous conditions. Getting product directly to customer using only ocean shipment is very difficult. 1. ​When to use: Excellent for large and bulky international shipments that require low transportation costs but do not require quick shipment. 4. Air: 1. ​Primary Strengths: Fastest mode of transport. Minimal exposure to the elements, theft and hazardous conditions. Can work well when linked with road transport in getting items into the hands of the customer.

1. ​Primary Weaknesses: Extremely expensive. Not easily linked with rail and ocean. Cannot accommodate standardized containers. Requires accommodating airports on both ends of a shipment. 1. ​When to use: An attractive option with items that have a high “value/weight” ratio. Especially useful when short lead times and low inventory levels are valued. In addition, useful when security and damage are significant concerns.

2. INTERMODAL RAILCAR SHIPMENTS There are dozens of specialized types of railcars that allow for the easy transport of bulk, break bulk and neo-bulk cargo. Three terms you may encounter with intermodal rail shipments are: Trailer on a Flat Car (TOFC) – A truck trailer is placed directly on a rail car.  See picture below.

 Container on a Flat Car (COFC) - Standardized containers are placed directly on a rail car. See picture below.

 Doublestack - Two containers are stacked on top of each other on a single but specialized railcar that can safely accommodate two containers while still allowing the double-stacked containers to clear tunnels. See picture below.



3. INFRASTRUCTURE In logistics, infrastructure typically refers to the physical structure within a region that is available for the movement and distribution of goods through a supply chain. Some would also include the organizational structure that provides standard procedures, laws, maintenance, oversight and even human resource education and development for a given region. EXPLAINED: Countries are different. That’s obvious, but for a logistician, knowing the differences in infrastructure from one country to another is vital. While shipping items in the United States from the port of Long Beach, California to a store in Albuquerque, New Mexico (about 800 miles) may primarily use a truck, in other countries a trip of similar distance may utilize rail, water transportation or even an air shipment. Why? Sometimes it is due to differences in infrastructure. If you’ve traveled the world (or perhaps even if you’ve just seen movies based in other countries) you know that the physical structure of different countries can vary greatly. Consider this short list of infrastructure concerns: 1. ​Roads – Number of roads, size and condition; connections between major and minor cities 1.

​Bridges – Availability, size, condition

1.

​Rails – Availability for freight and/or passenger transport

1.

​Fuel and Energy – Availability, distribution network, reliability

1. ​Warehouses – Number of facilities, services offered, safety, reliability 1. ​Law Enforcement – Availability, concern for commerce, reliability 1. ​Availability of Skilled Employees – Competent and reliable workforce capable of utilizing machines and technology required to

facilitate logistics Any decision that considers global expansion of the supply chain and/or facility relocation will require a careful analysis of the regional infrastructure.

4. WAREHOUSES AND DISTRIBUTION CENTERS (DCS) While both warehouses and distribution centers tend to be large buildings that contain inventory that will hopefully one day be used and/or sold, there are some differences that set the two apart: 1. ​Warehouses are typically used to store inventory for long periods of time (weeks, months or even years). In a warehouse, storage is the primary function. Items need to be kept safe and preserved for future use. 1. ​Distribution Centers (DCs) focus on efficiently getting items to retail and/or wholesale outlets. DCs try to quickly get large shipments of a single good off of a single truck and then get those goods ready for distribution to dozens of downstream stores. The idea here is to have full trucks with large quantities of one (or a few goods) in-bound and then full trucks with small quantities of many different items outbound. EXPLAINED: When uncertainty is great, large inventories of items are needed to counter all of the different risks that threaten a supply chain. In the old days, when real-time supply chain data was difficult to capture and share, uncertainty about what was happening in the supply chain was rather high. As a result, having large stores of inventory in warehouses was almost required. Over the last 20 to 30 years, advances in capturing and sharing data via electronic systems and the internet have made accessing real-time supply chain data easier. This has translated into a lower level of supply chain uncertainty and a decreased requirement for large warehouses that hold

weeks or months of inventory. Now we know what was sold, where it was sold, how many are left at each location… and we know this almost immediately. Distribution centers help supply chains react quickly to any expected demand and even to minor supply chain emergencies. In both the case of warehouses and DCs, location of the facility and subsequently proximity to customers is vital to providing high levels of supply chain responsiveness to downstream needs. Having a facility within hours of dozens of stores and tens of thousands of customers allows for short lead times when expected or unexpected demand is detected.

5. WAREHOUSE AND DC SERVICES While storage and distribution are primary functions of warehouses and DCs, modern storage and distribution facilities may also provide any number of additional supply chain value-added activities. Below is a short list of some of the services offered by storage and distribution activities. 1. ​Picking and Packing – Think Amazon.com. Certain facilities store items for online retailers and then quickly pick, pack, and label a shipment before it is put on a truck headed for a customer. Doing this well – being fast, accurate, and cost effective - is not as easy as it sounds. 1. ​Assembly– Shipping pre-assembled tables or bicycles and then storing them in a facility is not ideal. Shipping these types of items boxed and unassembled is typical, but consumers may want the item to arrive to their home assembled and ready for use. As a result, some storage and distribution facilities may offer convenient and high-quality assembly services at additional cost to either the retailers or the retailers’ customers. 1. ​Postponement – Sometimes retailers offer customization opportunities. Consider the table from the assembly example above. Suppose that the customer could choose from five different colors. Rather than having inventory of those tables in five different colors, tables could arrive to the facility unpainted. If the facility offers

postponement services, the company could wait until orders were received and then have the table painted. No guessing of demand for each color. Instead, every table can be sold in the color the customer desires. 1. ​Quality Inspections – Items can be damaged in transport, during handling and even while on the shelf. Damaged or defective items can also sneak their way through the supply chain. Some facilities will offer additional services designed to catch quality issues before they impact the final customer. 1. ​Management of Packaging Materials – Boxes, pallets and other types of packaging can be rather expensive. Modern supply chains do their best to reuse these items as often as possible. To aid this endeavor, some facilities are responsible for recovering, handling, and even distributing packaging materials throughout the supply chain. 1. ​Disposal, Disassembly and/or Recycling of Unwanted or Defective Products - What happens to items that are broken, returned or unsold? Some facilities focus on dealing with items that have little or no use. 1. ​Repair or Refurbishing of Defective Product – If items can be repaired or re-sold, some facilities will provide services to prepare those products for re-sale.

6. CENTRAL RETURN CENTER A facility that performs a number of reverse logistics functions typically related to returned consumer products. EXPLAINED: As discussed in the section above, modern storage and distribution facilities can offer a myriad of value-added supply chain services. Central return centers are specialized centers that seek to offer high performance reverse logistics.

7. CROSS-DOCKING

 Distribution of goods from an upstream supplier to a downstream customer through a distribution center with minimal handling and storage times typically less than 24 hours. EXPLAINED: Wal-Mart has thousands of retailers and thousands of stores. How can Wal-Mart quickly get products from suppliers to stores using the smallest number of distribution centers and minimal logistics resources? Cross-docking! By tying together supplier data, store data, DC data, trucking data and sales data, Wal-Mart can have the right amount of trucks, filled with the right products, arrive at the DCs when needed. Those products can be quickly unloaded, sorted and then prepared for loading on outbound trucks headed for Wal-Mart stores. For big box retailers, cross-docking is an essential part of effective and efficient supply chain management. Cross-docking facilities require dozens of garage doors on either side of the facility: doors on one side of the facility would all be inbound truck doors, the doors on the other side of the DC would be outbound truck doors. A single cross-docking facility may feed inventory to over 75 big box stores.

A well-run cross-docking facility is a combination of excellent planning, modern technology and machinery, and motivated human labor.

8. DROP SHIPMENT A three-party system made up of a retailer, a manufacturer or wholesaler, and a consumer. The consumer places the order directly from the retailer, typically through the retailer’s website; the retailer then relays the order to the manufacturer/wholesaler. Upon receiving the order, the wholesaler picks, packs, and ships the ordered items to the consumer. EXPLAINED: Among the many interesting aspects of drop shipments is that the online retailer does not in fact own, nor do they ever possess, the inventory they are selling. They simply showcase the item on their webpage and then pass along the sale to a third party. The retailer does not necessarily need to be an online retailer. In some cases, the retailer may have physical stores with display items so consumers can see and sample the products before a final decision to purchase is made.

9. LAST MILE In supply chain, the last mile typically refers to the portion of the supply chain between the final inventory holding facility and the end consumer. EXPLAINED: While the above definition is rather simple, there are a few things one needs to consider when discussing last mile logistics issues. First, the last mile does not necessarily cover the final mile before the customer gets the desired good. If the customer ordered an item from Amazon.com, the last mile might represent the hundreds of miles from the Amazon center that carries that product to the consumers home. Second, the end consumer is not always a person living in a home. The end consumer can be an office that ordered printer cartridges, a repair person that needs a part to fix their client’s refrigerator, or a factory that is awaiting raw materials. Finally, the real challenges of last mile logistics are that there is so much variation - variation in order size, location, consumer expectations, etc. As

consumers grow more accustomed to ordering items and having them delivered to their point of need, rather than picking up the items at a store or warehouse, last mile logistics will become an increasingly vital issue that logisticians will study.

SECTION 4.3: PACKAGING AND CONTAINERIZATION STORY: PACKING A SUITCASE

 Suppose you live in Los Angeles and have an upcoming week-long trip that will send you to New York. What will you need to consider in packing properly for this trip? Well, you might develop a list of needs or perhaps even do a Google search to find pre-prepared checklists that can guide your packing process. This simply reminds you what to take with you on your trip. What happens next? Now that you know what to take, you will need to figure out a way to get everything into your suitcase and carry-on bag. In our present environment, we’d like to take everything in as few bags as possible since more bags may mean additional cost. Nonetheless, we want to make sure things are packed securely. We may find that we need things like plastic bags, small containers for liquids like shampoos and lotions, containers for toothbrushes and razors, plus we may need to consider additional bags or boxes to help us bring back items like souvenirs and dirty laundry.

How about if we need to access things during the trip: snacks, electronic devices, money, identification, books, etc. Can those items be efficiently and securely packed and still be easily accessible? Have you considered layovers or potentially unexpected delays or disruptions? If you will be going directly to a business meeting or a formal occasion when you arrive, will you have quick access to clean and unwrinkled clothing that would be appropriate for that event? A logistician is prepared for anything and everything - the expected and the unexpected. They understand what will happen during the trip and also what will be required the moment the trip is complete. As a logistician, are you as prepared to meet the needs and challenges of the supply chain as you embark on your trip to New York?

1. PACKAGING Packaging serves multiple purposes in the supply chain. It secures the item, makes it easy to move, it allows the customer to see and make judgments about the item, and in some cases it fulfills legal requirements. Therefore, packaging needs to be considered for many reasons and it needs to be something that supply chain managers consider at every stage of the supply chain – transport, storage, sales floor and even after the item has been sold. Consider this short list of the types of packaging materials used in supply chains: 1.

​Boxes, Bottles, Cans

1.

​Tape, Steel Straps, Plastic Wrap

1. ​Dunnage – Bubble Wrap, Styrofoam Popcorn, Small inflatable airbags used in boxes, Large inflatable bags used in shipping containers 1.

​Pallets, Slip Sheets, Crates

Packaging can be expensive to purchase. It can add weight to a shipment or increase the size of a shipment, thus increase the cost of shipping.

Nonetheless, without well-thought out packaging solutions, items can easily be lost, broken, or stolen in transit. In addition, items that are packaged in an inappropriate manner may not fit on store shelves, inside of containers or on warehouse and DC shelves.

2. PALLETS A platform upon which large amounts of cargo can be securely placed for easy movement by a human-operated or automated forklift, pallet jack or reach truck. These pallets are often made of wood, but can also be made of metal, plastic or composite material.

 EXPLAINED: Moving individual boxes of inventory would require large amounts of human labor and/or capital resources. Pallets allow for many boxes of inventory to be stacked in a stable and secure fashion and can be placed in a container or a truck-trailer. With some planning, a container can be quickly loaded (or unloaded) and because of their rectangular shapes, cube space can be maximized. In addition, modern storage facilities and DCs are equipped to receive, move, and store palletized inventory.

3. SHIPPING LABELS A label that is often attached to inventory (typically affixed to a box) that contains information about the shipment. The label may contain

information about the buyer, seller, the shipper, the cargo, and any other data that may be important to the members of the supply chain. In addition, the label may have barcodes, radio-frequency identification (RFID) tags or some form of encrypted code that will allow supply chain partners to quickly store or investigate shipment data. EXPLAINED: Shipping labels are vital in helping supply chain members quickly scan a box for important shipment details. Is this the right box? Am I at the right address? You might also consider the fact that detailed information on a shipping label may help thieves know which boxes in a shipment may be the most valuable. More importantly, as shipment analytics become more important in our technology driven supply chains, having modern shipping labels and the supporting hardware, software, and storage systems becomes vital to planning and managing world-class supply chains. In addition, if a shipping label is going to provide easy-to-scan information for multiple supply chain partners, all supply chain partners must have access to the technology that can read, store, and transmit the data.

4. STANDARDIZED CONTAINERS Steel boxes that can be loaded with cargo. Presently, the vast majority of the standardized containers in the world come in one of two sizes: 1. ​Twenty-footers – Container dimensions: 20’x8’x 8.5’ (length, width, height) 1.

​Forty-footers - 40’x8’x 8.5’ (length, width, height)

Of these two categories, forty-footers are much more prevalent. It estimated that over 75 percent of the cargo on earth moves in forty-footers.

 These steel boxes make versatile logistics itineraries possible since the standard sizes make for easy stacking on container ships and secure loading on railcars and truck chassis. Subsequently, intermodal shipments that use standardized containers are easy to accommodate since these standardized containers can be moved from truck, to train, to ship with no materials handling and minimal hassle.

 There are many different types of standardized containers: a. Basic 20 and 40 Footers - Capable of carrying all sorts of packaged and/or palletized cargo. b. High-Cubes – A container that is 1 foot taller than the standard 40’ container. Dimensions 40’x8’x 9.5’ (length, width, height) c. Controlled Atmosphere (CA) – Often called reefers because they are refrigerated, modern CA containers can also control humidity, composition of the air and pressure. d. Garmentainers – These containers are similar to the basic containers; except they would have a rod or cable that would allow for easy and secure

movement of clothing on hangers. e. Ventilated – For products that require ventilation while in transport. Example: livestock f. Open-Top – Allow for bulk cargo to be poured into the container. Can also allow for heavy and bulky items to easily be craned into the container.

5. TWENTY-FOOT EQUIVALENT UNIT (TEU) This is how containerized cargo is measured. One 20-foot container is equal to 1 TEU. One forty-foot container is equal to 2 TEUs. TEUs are used to measure a number of things including: 1. ​Amount of break bulk cargo imported or exported into or out of a country (not necessarily restricted to break bulk cargo). Example: Last year Dingo Digital imported 3,500 TEUs into the USA. 1. ​Size of a container ship. Example: That ship that just docked is American President Line’s 14,000 TEU container ship. 1. ​The amount of cargo that enters or leaves a shipping port. Example: In 2011 the Port of Dubai handled over 13 million TEUs. 1. ​Since a majority of the containers on earth are actually 40-foot containers, some logisticians choose to use FEU, which of course stands for forty-foot equivalent unit. Additional TEU Calculations: Example 1: 35 forty-footers and 15 twenty-footers 35 forty-footers * 2 TEUs each = 70 TEUs 15 twenty-footers * 1 TEU each = 15 TEUs Total shipment size = 85 TEUs Example 2: 250 forty-footers and 120 twenty-footers 250 forty-footers * 2 TEUs each = 500 TEUs

120 twenty-footers * 1 TEU each = 120 TEUs Total shipment size = 620 TEUs

6. TYPES OF LOADS AND SHIPPERS Consider three different types of companies and three different types of shipments - Amazon, Apple, Custom Car Inc. (a small-scale importer of customized car parts). 1. ​Amazon will be shipping 1,000 iPads to 1,000 different consumers 1. ​Apple plans on importing 40,000 iPads to their US-based import warehouse 1. ​Custom Car Inc. will import about 40 car parts per week from their Japanese supplier to their US based facility 1. ​While all of these shipments will require transport, the companies that can best service Amazon, Apple, and Car Parts Inc. will be quite different Nowadays there are many different types of shippers but three types of shippers that are prevalent in modern logistics are: a. Truckload (TL) Shippers – These types of shippers specialize in moving large amounts of goods, enough to fill an entire truck. If you are dealing with 20 or 40-foot containers instead of a truck, the term CL Shipper can also be used, where CL stands for container-load. On some occasions it is possible that you may see the term FTL, which stands for full container load. In general, there is no difference between TL and FTL. From our examples above, Apple would require the transportation services of a TL shipper. b. Less-Than-Truckload (LTL) Shippers – If a company has a reasonable amount of goods going to a single location, but not enough goods to fill an

entire truck or container they have an LTL shipment. Again, in the case of a 20 or 40-foot container, this might be referred to as an LCL shipment (lessthan-container-load). From our examples above, Car Parts Inc. would require the transportation services of an LTL shipper. c. Small Package Shippers – A small package typically refers to anything from an envelope to a single packaged shipment of less than 150 pounds, although the upper limit varies from one small package shipper to another. Sometimes they are also referred to as small parcel shippers. In our modern world of online shopping sites and online auction sites (Amazon, Alibaba, eBay), small package shippers are playing an everincreasing role in completing the order fulfillment process. In addition, as online retailers and auction sites become more commonplace, competitive brick-and-mortar retailers are being forced to offer direct shipment services via their online sales-portals. Retailers might also use small package shippers when the item that an in-store customer desires is not in stock at the store. From our examples above, Amazon would require the transportation services of small package shippers.

SECTION 4.4: GLOBAL LOGISTICS STORY: CLIMBING EVEREST

 Perhaps one of the most challenging endeavors any individual can take on is scaling Mount Everest. As Mount Everest rises to over 29,000 feet above sea level, attempting to climb the mountain is not a task to be taken lightly. A person that dreams of climbing Everest will require training and practice in multiple climbing techniques, lots of equipment, and the help of both humans and yaks. A climber will also require a travel visa, immunizations, permits, a monetary deposit for waste disposal and rescue insurance. These are just a few of the things every climber of Mount Everest must plan for before beginning their adventure. Even a skilled climber may not be aware of all of these requirements. Once someone becomes aware of the materials, planning, fees, and paperwork, it is likely they would not know how to get everything required. Would you know where to get the $11,000+ permit? Would you know how to hire Sherpas? Would you know where to get yaks? How about if something goes wrong. Who will help in the event of a storm? Who do you call if someone on your team is badly injured? How would you call them? What are your options if important materials are lost or damaged?

In the world of logistics planning first–time shipments to a new customer in a country that you’ve never shipped to before can be a bit intimidating. Perhaps it’s not as intimidating as planning an Everest expedition, but the list of unknowns can be just as long. In this section you’ll discover some of the Sherpas and yaks of the logistics world, as well as the paperwork and terminology associated with global shipments. Mind you, many of these terms are valid for domestic shipments too, but they are all vital in establishing a foundation for beginning your global logistics expedition. Good luck.

1. THIRD-PARTY LOGISTICS COMPANY (3PL) A contractor that performs one or more logistics functions for their client in an effort to facilitate effective and efficient movement in the supply chain. This third-party contractor can neither be the buyer nor the seller of the items being moved. EXPLAINED: Basically, this can be any company that helps supply chain partners with any logistical needs. Actually, in some cases 3PLs may actually offer services that may fall outside of the realm of logistics (procurement, assembly, etc.). Below is a short list of the types of services that might be performed by a 3PL: 1. ​Arranging shipping itineraries, in some cases taking over all the client’s logistics responsibilities 1.

​Aiding in the import and/or export process

1.

​Warehousing, distribution, picking and packing

1.

​Containerization and transportation

1.

​Packaging

1.

​Documentation

1.

​Product tracking, logistics data and information management

1.

​Logistics specific financial services

1.

​Management of digital marketplaces for logistics services

As can be seen, there are few boundaries in the 3PL industry; almost any logistics related company could conceivably call themselves a 3PL.

2.FREIGHT FORWARDER A contractor (company or person) that helps companies organize the efficient and effective shipment of goods from one point in the supply chain to another. Freight forwarders do not actually transport the goods, instead they negotiate and arrange for one or more logistics companies to prepare, secure, store, track and move the cargo. EXPLAINED: If you didn’t know how to move your cargo, you’d likely want to contact a freight forwarder. Effectively, they act as your logistics manager, finding logistics partners that can aid in all logistical aspects. For this logistics management service, they would charge you a fee on top of the fees required to pay the logistics contractors they hire on your behalf. While they can be beneficial for any type of domestic shipment, they can be particularly useful in helping your company export your products.

3. CUSTOMS HOUSE BROKER A contractor (company or person) that helps a client’s goods clear customs in a foreign country. EXPLAINED: When goods are shipped abroad, they must be inspected by a customs official before they are cleared to enter the country. A customs house broker acts as your agent in this process. They take over the responsibilities of importing that occur before the goods reach the border as well as when the customs officials are inspecting the goods. 1. ​Before goods reach the border: Preparation of documents, issues relating to import fees and taxes.

1. ​During inspection: Answers customs agent questions in an effort to facilitate customs clearance.

4. FREE TRADE ZONE (FTZ) A geographic area sanctioned by the government where items are not under the control of customs authorities. As such, goods can be imported into a country, brought into FTZ and then stored, displayed and/or manipulated before being re-exported without ever being inspected or taxed by customs officials. (In some countries these types of area go under different names – free economic zone, free zone, export processing zone, special economic zone) EXPLAINED: Free trade zones (FTZs) offer companies the ability to easily import materials and export finished goods with minimal hassle. Imagine that a company constantly imports raw materials and parts only to create a product destined to be sold outside of the country. This company is importing materials, paying import tariffs and then re-exporting those materials. Upon export of the finished good the company may be able to request a refund of most of the tariffs paid. While this seems reasonable it is a constant and cumbersome cycle where corporate monies are out of pocket. FTZs therefore create incentives for companies to keep their facilities in the country rather than moving to another country. FTZs are used for more than manufacturing, assembly, and reconfiguration, though. Some companies use FTZs to display expensive equipment. Rather than paying high tariffs for a showroom of product, items can be stored and displayed in a facility located in a FTZ. FTZs can also be used for storage, distribution, picking and packing, and other logistics functions. These may be beneficial if real estate rates and labor wages are low in the country that is sponsoring the FTZ.

5. INCOTERMS A series of commercial terms, often depicted as three letter acronyms, established by the International Chamber of Commerce (ICC) to facilitate

communication in commercial transactions. These terms provide clarity on issues of shipment responsibility, ownership, export and import responsibilities, and cost. The ICC periodically reviews and updates the Incoterms. Presently there are 11 Incoterms: EXW, FCA, CPT, CIP, DAT, DAP, DDP, FAS, FOB, CFR, CIF (For full details on each of these Incoterms visit the ICCs website). EXPLAINED: Incoterms are often seen on logistics documentation. Incoterms provide logistics companies, buyers, and suppliers information about a shipment, including but not limited to the party that would be responsible for some of these logistical responsibilities: 1.

​Export customs declaration

1.

​Payment of import taxes

1.

​Loading and unloading responsibilities

1.

​Insurance

6. SHIPPING DOCUMENTATION In the world of logistics, documentation serves three very important purposes. 1. ​Transportation - Documents are proof that cargo was received, where it originated, where it is going, and it can also represent a binding contract between different supply chain parties. 1. ​Financial – When cargo changes hands it represents a crucial part of the supply chain process. When goods are received by one party the other party expects payment. Shipping documents can provide proof that goods were received according to the terms of sale and that monies can be released to the other party. 1. ​International Shipments – When goods cross borders, customs officials look to shipping documentation to check for legal

infractions and also to assess duties. While each shipment is different, there are some shipping documents that are rather common in the logistics world. Here is a short list of shipping documents that may be of interest to logisticians and customs officials: 1. ​Commercial Invoice – A vital document that provides a reasonable summation of the items being shipped, the parties involved, cargo values, and other information important to supply chain members and customs officials. 1. ​Packing List – Describes all items in a box, including dimensions and weight. In some cases, it may even provide location of items in a box or container. Prices are typically not provided on a packing list. 1. ​Bill of Lading – Serves three main purposes: Contract between shipper and carrier, receipt of goods for the shipper, and it acts as the certificate of ownership. 1. ​Shipper's Export Declaration – A document used by the US government to track all items that exported from the US in order to develop a census of US exports each year. It also provides the appropriate export license information for the goods being shipped. 1. ​Validated Export License – A special export license required for items that are heavily policed by the US government, such as weapons, advanced technologies, nuclear related goods and even agricultural related goods. 1. ​Certificate of Origin – Certifies that the goods were in fact manufactured in the country specified. Important for legal purposes and to assess duties.

CHAPTER 5: RETAIL OPERATIONS AND WAITING LINES GOALS, OBJECTIVES AND STUFF WE WILL RUIN: Any trip to a retail store will never be the same. You will better understand both the psychological and statistical aspects of waiting lines. This module will discuss how modern retail supply chains use collaboration and technology to better serve their customers. You might start to appreciate the hard work that goes into making your favorite retail stores so great every day. You will better understand why skilled retail managers and retail supply chain managers are in such high demand.

SECTION 5.1: RETAIL SUPPLY CHAIN MANAGEMENT STORY: THE IMPORTANCE OF GROCERY STORES

 Buying groceries is probably one of the more personal things you do. I mean, these are places where you will buy things that will actually go inside of your body and ultimately be transformed into part of you. More than that, for some people groceries can translate into happiness. Food can taste good, it can soothe you, it can transform your health and it can be the special bond at a gathering of friends. It’s no wonder why so many of us have our favorite grocery store. Some may even have their favorite grocery stores, this one for fruits and vegetables, that one for bread, another for specialty items. In order to get your favorite foods into your favorite stores, it took incredible supply chain planning. Consider the effort it takes to consistently have the best fruits and vegetables on your store’s shelf. Some stores occasionally have good fruits and vegetables, but your store always has great fruits and vegetables. How do they do that? It takes an entire supply chain to make that happen. A reliable and committed base of farmers, a careful group of shippers,

excellent storage equipment, well-trained employees that know how to care for the fruits and vegetables, and an excellent store that not only houses the fruits and vegetables, but that gives them a clean and friendly environment. How about your favorite items that are sold in a box or a container? In those cases, the grocery store counted on procurement executives to find excellent suppliers that created those excellent items. The procurement executive knows their clientele so they knew you would love the item. As a result, they knew that you would be buying two boxes of that item every week. Thus, they needed to be sure that the supplier would be able to deliver enough of those goods so that you and all of the other fans of that item would find that product on the shelf whenever you visited that store. As technology changes our world, retail supply chains must also be willing to engage with partners and customers both upstream and downstream. Data analytics, cellphone apps, social media, food blogs and the company website must all be utilized in forecasting, planning and marketing. Without those modern-day tools, retailers don’t know what you will expect when you come through their doors. As hard as it is to believe, most people don’t care about the awesome complexities of a well-run supply chain. For these people, if the retail store or the online retailer are unprepared, disorganized or unfriendly, the supply chain has failed. Retail is the last step, and for many, the most important step in the supply chain.

1. RETAILING OPTIONS Here is a short list of the ways retail companies engage with their customers: a. Brick and Mortar – All products and services are sold to customers from physical stores. Example: McDonald’s b. Online or E-tailing– All products and services are sold to customers through an online website. Example: Amazon.com c. Bricks and Clicks – Products can be bought from a physical store or from an online system. Example: Barnes and Noble and BN.com

d. Clicks and Calls – In addition to taking orders via the company website, some companies will also offer sales via the phone. Examples: Lands’ End and L.L. Bean

2. OMNI-CHANNEL RETAILING Retailers that are fully committed to engaging customers via catalogs, phone calls, websites, email, internet chatrooms, social media sites or mobile apps, and of course also in stores. True omni-channel retail readiness would require companies to have a very strong presence in the many channels they choose to meet customers. EXPLAINED: While it may seem like an obvious requirement to modern shoppers, being omni-channel ready takes an incredible level of planning, commitment and information sharing. Plus, the company must be prepared to continuously invest in information technology. Nordstrom is routinely seen as a leader in omni-channel retailing. Customers expect incredible levels of customer service in the store, they want chatroom consultants to display a similar level of care, and they want the company website to convey a similar style. More than that, Nordstrom is committed to making purchases easy via Instagram. No matter where you are, no matter what you want, Nordstrom wants to make sure that they can provide you the service you expect, and even services that you had not even imagined. Consider the level of coordination required between employees working in different channels. Consider the supply chain flexibility required to find products (supply chain inventory visibility) and to quickly make those products available to consumers, no matter where the product and consumer are located.

3. RETAIL SOURCES OF SUPPLY Where do retail organizations like Wal-Mart, Amazon, and Kroger get their inventory? How do they get the products consumers want to buy? Manufacturers – In some cases retail organizations might purchase products directly from the companies that manufacture the goods. Example: Amazon may purchase iPhones and iPads directly from Apple.

Wholesalers – These organizations purchase goods from manufacturers. Typically, they purchase an assortment of goods from many manufacturers, thus a retail company could purchase all of their electronics from a single wholesaler versus having to purchase from each individual manufacturer. Example: A wholesaler might buy and store large quantities of office supplies. Perhaps there is a small retail store in a small town. This small privately-owned store might not be able to buy in large quantities directly from manufacturers. The wholesaler offers the small general store an opportunity to buy a large number of items for the store at more reasonable prices. Drop Shippers – A drop shipper is not really a source of supply, but rather an organization that ties manufacturers and/or wholesalers directly to consumers. Drop shippers never actually possess the product, they simply take orders which are fulfilled by another party. Example: Drop shipper has a website with pictures of items for sale. The consumer places an order from the website. The drop shipper takes the order information and sends it along to a manufacturer or wholesaler that actually holds and owns the inventory. That manufacturer or wholesaler will then pick, pack, and deliver the order to the customer on behalf of the drop shipper.

4. CHARGEBACKS These are effectively penalties charged by retail organizations to their suppliers/vendors for any number of minor and major supply chain offenses. The goal here is to motivate vendor compliance in the areas of ontime shipments, shipment accuracy, product quality, incorrect packaging, label errors, etc. EXPLAINED: This is a highly contentious issue in the retail world and it often leads to litigation. Retail stores will claim simple supply chain errors and/or blatant acts of supply chain non-compliance and will charge the retailer money as a result. While it may seem reasonable to not pay a vendor if they send the wrong item, ship the product late or even if the item comes in a package that won’t fit the planogram, vendors are saying retailers are abusing the system. There are a number of cases where vendors

have claimed that insignificant or minor issues have reduced the amount paid by retailers by hundreds of thousands of dollars per year. See the link below to see some of the types of issues with which retailers are punishing their vendors. Example of chargeback schedule from DSW: https://www.designerbrands.com/vendors/Compliance/

5. COLLABORATIVE, PLANNING, FORECASTING AND RESCHEDULING (CPFR) A formalized effort by supply chain partners to share data and collectively develop forecasts in an attempt to reduce supply chain costs through better planning. EXPLAINED: CPFR helps not only in analysis and planning, but it also forces organizations to discuss opinions and strategies. These discussions help organizations understand the views and organizational values of their supply chain partners. These regular communication sessions, and being able to question issues that seem ambiguous, helps solve problems before they occur. This concept of awareness extends to marketing, advertising and store managers. Materials must be available when customers come into a store after having seen an advertisement on the company website or in an email.

6. VENDOR MANAGED INVENTORY An arrangement where retailers allow vendors to monitor in-store inventories, initiate orders/shipments to the store when inventories are low, and also bring the items into the store and onto the shelf. EXPLAINED: Rather than having a retail store try to monitor every item in their stock and understand the supply chain preferences, order sizes and lead times of all of their vendors, they instead allow vendors to monitor the inventories on the shelf. The vendor can then independently initiate orders at the right time and in the right size. By letting the vendor bring the items into your store and put them on your shelf, the vendor can ensure their

products are appropriately displayed and they can even gain a better understanding of the store environment and the customers they serve.

7. LAST MILE In supply chain, the last mile typically refers to the portion of the supply chain between the final inventory holding facility and the end consumer. EXPLAINED: While the above definition is rather simple, there are a few things one needs to consider when discussing last mile logistics issue. First, the last mile does not necessarily cover the final mile before the customer gets the desired good. If the customer ordered an item from Amazon.com, the last mile might represent the hundreds of miles from the Amazon center that carries that product to the consumers home. Second, the end consumer is not always a person living in a home. The end consumer can be an office that ordered printer cartridges, a repair person that needs a part to fix their client’s refrigerator or a factory that is awaiting raw materials. Finally, the real challenges of last mile logistics are that there is so much variation - variation in order size, location, consumer expectations, etc. As consumers grow more accustomed to ordering items and having them delivered to their point of need, rather than picking up the items at a store or warehouse, last mile logistics will become an increasingly vital issue that logisticians will study.

SECTION 5.2: IN-STORE OPERATIONS STORY: MANUFACTURING YOUR TARGET EXPERIENCE

 In the United States and Canada, Target is a big box retailer which sells many of the items that are sold at Wal-Mart. Wal-Mart is known as a lowcost big box retailer. Target tries to distinguish itself in a number of ways, such as having a “fast, fun and friendly” corporate and store culture, and having stores that are clean, bright and inviting. In addition, while Target and Wal-Mart carry many of the same household and food items, Target stores try to differentiate themselves by having affordable design-oriented products in clothing, home décor and other specialty categories. Since Target customers will likely pay a bit more for the same items they might find in a Wal-Mart, Target must be ready every day to provide a superior store experience for every customer’s visit. Here is just a short list of things that are planned, designed, maintained and executed on a daily basis to manufacture the high-quality Target experience their customers expect:

1. ​Hiring – Target tries to hire people that have the capability to be the “fast, fun and friendly” employee their store guests expect to encounter. 1. ​Customer Service – Odds are that if you encounter a store employee, they’ll say “Can I help you find something?” Target wants customers to know that questions are welcomed. 1. ​Cleanliness – There is a process for how to clean everything, including bathrooms and floors. Walk into a store, walk down a main aisle and look down. You’ll be able to count every light on the ceiling from the reflection on their shiny floors. 1. ​Waiting Lines – Target attempts to staff registers so that there is never more than one person waiting - one customer getting helped plus one in line. 1. ​In-store Logistics – When Target closes, the in-store logistics team jumps into action. They make sure items get off the trucks, are staged in the aisles, decide where they will go, and finally are unpacked and placed on the shelf. 1. ​Store Layout – While Targets are not all identical, many Target stores have similarities. Target’s guests can usually easily navigate their way through almost any store with minimal confusion. 1. ​Assets Protection Team – Target utilizes security personnel, surveillance equipment, parking lot lighting and electronic tools to keep their employees, customers and data secure. A great retail experience does not happen on accident. It takes well-planned retail operations and daily execution to manufacture an experience that will make you comfortable, give you what you want and still control the price you pay.

1. RETAILER OWNERSHIP

Retailers come in many shapes and sizes. As you read about each type of retailer, think about how they likely buy products, move products, and sell products to their customers. Each retailer requires different supply chain strengths. 1. ​Independent Retailer – One store, one owner. Usually they are trying to satisfy a very specialized market or locale. Example: Family owned corner stores or boutique stores that is run by the owner. 1. ​Chain – Multiple stores/facilities run by one owner/company. Example: Home Depot, Wal-Mart, Costco, Gap, Macy’s, Safeway (Amazon.com probably best fits this category). 1. ​Franchise – A franchisor owns the rights to a company and the name and is allowed to open an outlet under that name. The franchisee must abide by the rules and processes of the franchise. Examples: Jiffy Lube, McDonald’s, 7-eleven, Buffalo Wild Wings, Massage Envy. 1. ​Cooperative –Retailer that is owned by its customer members. These organizations typically try and fit the very special needs of the consumers that organized the cooperative. Examples: REI (Recreational Equipment Inc.).

2. PROTOTYPE STORES A series of stores that have common design, construction and layout. EXPLAINED: Utilizing prototype stores allows chain retailers to create standardized plans that will work across their many stores. This can of course be beneficial since it can help companies develop efficiencies across all their stores, but it can also hold companies back when the retail market evolves. Customers may like the fact that they can easily navigate any store in that chain, but they may also wonder why the chain is not providing modern retail amenities.

In an effort to balance efficiencies and innovation, some companies will develop new prototypes every few years. This means that like how Toyota would have a 2017 Camry and a 2018 Camry, Target may have a 2016 prototype store and also a 2012 prototype store. New stores can add features and innovations customers may demand, while still having some of the older features that allow for some level of continuity across the chain. At the same time, Target can phase out old stores or invest in remodeling that will move those old locations into a more modern prototype.

3. RATIONALIZED RETAILING This retail strategy has retail chains develop rigid control structures to develop and manage processes such that all the retail outlets are managed in the same way. EXPLAINED: In a rationalized retailing strategy, a store manager or employee would easily be able to work at almost any store since everything is done the same way. A retailer that uses prototype stores and a rationalized retailing process can potentially grow quickly by applying economies of scale in architecture, construction, hiring, store openings, etc.

4. PLANOGRAM A map of where every product goes on a retail store shelf.

 EXPLAINED: Rather than have each store manager figure out what items go on which shelf; chains can develop planograms for each product

category. This creates incredible efficiencies and also creates continuity for the customer experience from one store in that chain to another. So, while shampoo may be in a different part of Wal-Mart from one location to the next, the shampoo shelves will likely look identical at each of the similarly sized locations.

5. STORE PERSONNEL Many of our biggest complaints when leaving a retail environment are often related to store personnel. They were rude; you couldn’t find someone to help; they weren’t able to answer your question; they made a mistake charging you. Even when your complaint is about waiting lines, store cleanliness and store organization, it was likely related to some of these issues below. Excellent retail operations depend on well-staffed stores. 1.

​Hiring good and reliable people

1.

​Hiring enough people

1. ​Training employees to do their job well – includes processes, product information, using equipment/technology 1.

​Scheduling employees for when they are needed most

1. ​Taking care of your employees – pay, benefits, schedule flexibility, etc. 1.

​Creating a friendly work environment

6. STORE SECURITY Each retail store must utilize personnel, technology, lighting, surveillance systems, locked storage units, etc. to protect those things that the company and its customers value. Stores are responsible for protecting: 1.

​Employees – Managers, store employees and potentially vendors

1.

​Store Assets – Inventory, cash and store property

1. ​Customers and Their Assets – Store visitors, their cars and also any other personal property 1.

​Data – Company, customer and vendor data

EXPLAINED: Modern retailers have large sophisticated security teams at both the corporate and store level that work closely with law enforcement; they should also work with vendors to maintain security. In the last few years, some data security breaches were initiated by hackers that broke into vendor systems to access retail store and consumer data. Next time you walk into a retail chain, be aware that the store is watching you, your car and your credit card information. Why? They are both protecting you and making sure that you are not trying to harm the company or its customers.

7. RETAIL PROCESSES Consistency in retail operations depends on the development and management of excellent in-store processes. This aids the organization in training new employees, developing competencies and also in sharing the benefits of best practices from other stores in the organization. Examples of processes in a retail store include but are not limited to: 1.

​The process of opening and closing the store

1.

​Cleaning bathrooms

1.

​Processing a customer’s returned items

1.

​Stocking items on the shelves

1.

​Changing prices for sale items

SECTION 5.3: WAITING LINES STORY: WAITING LINE ANXIETY

 Waiting lines are a part of nearly every retail experience. As much as we may hate them, we tend to understand that they are unavoidable. Still, some waiting lines are worse than others. Let’s consider some waiting lines and what makes them stressful. Motor Vehicle Department: So many people. Why is everyone so angry? Uncomfortable chairs. Why does everything here take so long? The parking lot was horrible. Bad food in the vending machines. Emergency Room: I’m not feeling well. Everyone seems rushed and no one will listen to me. These chairs are uncomfortable. I just want to lay down. The news channel is making me feel worse. Everyone is sick, I don’t want to touch anything. Hey, why did that person go first, I got here before them? Can you folks please hurry, I’m in so much pain. Bank: Why is there only one teller? Why are all those people over there sitting at their desks? They should be helping me! Why is the customer in front of me taking so much time? Stop talking about your day; just get your money and leave, please.

Airport Security: This is the longest line ever! Why can’t people be prepared when they get to the front? Wait, do I need to take off my shoes at this airport or was that the other airport I just at last week? Grocery Store: Should I get in line at register #1 or register #2? Register 1 it is. Wait, register 2 is faster. I can’t get out of this line because someone is behind me now. Hey this person in front of me has 16 items! This is supposed to be 15 items or less. Are you kidding me, they are doing a price check on an avocado! Restrooms at Sports Stadiums: Did they not realize people were going to be using the restroom at this football stadium? They need more toilets. This bathroom is dirty. Did they just run out of toilet paper? Help, I don’t think I’m going to make it. Waiting lines are never fun, but ill prepared companies, uncooperative customers, lack of supplies, facility layout, too much customer service, confused customers, annoying television programs, unclean environments and angry customer service representatives can make a long wait feel even longer. Good retail operations require managers that understand how to manage waiting line systems.

1. THE GOAL OF WAITING LINE MANAGEMENT Balance the cost paid by the customers (time) with the cost paid by the company (money paid to maintain the system). EXPLAINED: In a waiting line system, everyone pays. Every decision made by a manager shifts payment toward customers or toward the company. For example, add more workers and the company pays more money but the customer’s time in the line will decrease. On the other hand, limit the technology available to the employees and the company’s costs decrease, of course the customer will get a diminished service and likely need to wait longer in the line.

2. PARTS OF A WAITING LINE SYSTEM A waiting line system is made up of three parts:

1. ​Input Source – This is the population of people that might want service. 1.

​Waiting Line – The area in which customers wait for service.

1. ​Service Facility – The area in which customers actually receive service. EXPLAINED: Customers (input source) move from being outside of the system, to entering the system where they might need to wait in a line. Once a server is available, they will move from the line into the service area.

3. MANAGERIAL CONSIDERATIONS IN A WAITING LINE SYSTEM In a waiting line system, managers need to consider: 1. ​Customers – How many are there? How quickly are they arriving? 1.

​The Waiting Lines – What types of lines? How many lines?

1. ​Employees – Who’s working in the system? How many? Skill level and speed? 1. ​Service Facilities – How effective and efficient is the process? Tools? EXPLAINED: As a manager you have the ability to manage all four of these elements. By changing prices, hours of operation, increasing training, upgrading technology, adding more lines, etc. a manager has the ability to impact customer and employee satisfaction, employee efficiency, and many other issues that impact the proficiency of a waiting line system.

4. BASIC WAITING LINE TERMINOLOGY

In studying waiting lines you may sometimes encounter certain terms that may seem ominous but that are actually fairly simple: 1.

​Queue – Line.

1. ​Channel – Line; here it often refers to the number of lines available at each step. 1. ​Phase – A single step in a process. Example: Phases in college enrollment might include: Application process, registration, orientation, scheduling your courses for the first semester. 1. ​Infinite Population of Customers – The number of possible customers that may come into the store is very high (or unlimited). When a customer enters the system, the odds of another entering the system are not impacted in any significant manner. 1. ​Finite Population of Customers – The number of customers is limited. Example: If you have a bus company that has 10 busses, then your company’s repair shop has a finite population of 10 busses. If one bus is in the shop only nine others are left in the population. The odds of a second bus entering the system declines. 1. ​Balking – When a potential customer sees the line but never joins the line because they think it looks too long and/or too slow. 1. ​Reneging – When a customer joins the line, gets frustrated and leaves the line. EXPLAINED: The reason these terms and issues are important is because a change in channels, phases, or the customer population will change the dynamics of the system. These will be important considerations when performing calculations and also in understanding the answers derived from those calculations.

SECTION 5.4: A SIMPLE QUEUING MODEL STORY: CHECKING IN FOR YOUR FLIGHT

 You arrive at a medium-sized airport in a medium-sized American city. The airline you are using has only a few small flights per day out of that city thus they only have one representative at a time working the check-in station. This company does not utilize electronic check-in. This is among the most basic systems - single server, single line, one phase, and for the sake of simplicity, let’s say this is enough to warrant an infinite population. This section will walk you through basic calculations that will tell you a little bit about what this waiting line system looks like on average. Let’s provide you with just a few small bits of information. Customers are taken care of in groups. If you travel by yourself, you are a group. If you travel with a spouse, the two of you are a group. If you were traveling with your family of four that would also be one group. The customer representative can help about 24 groups in an hour. Customer groups arrive to the check-in station at a rate of about 15 groups per hour. Use the illustration below to help you visualize this problem. Please note that the yellow area represents the waiting line, thus tl and nl measure only what happens in the line. The green area represents the area where

customers get service. The blue rectangle represents the entire system, thus ts and ns measure both the line and the service area.



1. ARRIVAL RATE EXPLAINED: On average a customer group joins the line every 4 minutes. (You can calculate that by dividing 60 minutes by 15 customers.) Sometimes people join the line quicker, while other parts of the day are slower.



​

2. SERVICE RATE



EXPLAINED: On average, the representative takes about 2.50 minutes to help one group. (You can calculate that by dividing 60 minutes by 24 customer groups.)

3. PERCENTAGE OF TIME WORKER IS BUSY

 EXPLAINED: This may seem low, but the busier the worker is the longer the lines.

4. AVERAGE NUMBER OF CUSTOMERS IN THE LINE

 EXPLAINED: On average, there is about one group in the line. This may sound low, but remember, there will times during the day when there are no flights and thus no passengers. This is an average of the slow and busy times.

5. AVERAGE AMOUNT OF TIME A CUSTOMER WAITS IN THE LINE

 EXPLAINED: As in the problem above, remember this is only an average of the entire day.

6. AVERAGE NUMBER OF CUSTOMERS IN THE SYSTEM

 EXPLAINED: On average there are 1.66 groups in the system. You may want to imagine this average as one group getting helped and 0.66 groups in the line. That’s not exactly accurate, but it does help paint a picture of what the average customer sees before they enter the line.

7. AVERAGE AMOUNT OF TIME A CUSTOMER SPENDS IN THE SYSTEM

 EXPLAINED: From the time a single group of customers enters the line until the time they are done checking in for their flight, it takes about 6.67 minutes. Again, to illustrate this, let’s remember it takes 2.5 minutes for the representative to help one group. So the average customer spent 4.17 minutes in the line and about 4.17 minutes getting helped.

8. PROBABILITY THERE ARE “N” CUSTOMERS IN THE SYSTEM



EXPLAINED: This helps us understand the probability of each state. There is a 9.2 percent chance that when you arrive at the airport there will be one person getting helped and two other groups in the line waiting for service.

9. PROBABILITY THE SYSTEM IS EMPTY

 EXPLAINED: The odds that you will show up to the airport and find that the check-in representative is not helping a group of customers is 37.5 percent. This helps us understand that if the check-in station is empty on average 37.5 percent of the time then the other part of the day it is likely at least a little bit busy.

ANALYSIS OF SINGLE SERVER ANSWERS It’s important to remember that these solutions are just numbers that were produced using formulas. While mathematically valid, they must be interpreted by a manager. The numbers are helpful, but they are only averages. Things you may want to keep in mind: 1. ​Arrival rates are guesses. We don’t exactly know if customer groups will arrive 15 per hour. Also, customers will likely not arrive exactly every four minutes. They will arrive in small and large clusters throughout the day. 1. ​Some customer groups are small; some groups are large. Some customers are well prepared; others can’t find their paperwork. 1. ​Service rates are guesses. Plus, if you have two different representatives, one that works the early shift and one the late shift, it is likely that one employee is faster than the other.

1.

​This problem does not account for customers that renege or balk.

1. ​Sometimes your answers must be compared with customer expectations and competitor capabilities. If lines for other airlines look worse, customers may feel lucky to be in your lines. If the other airlines use technology and have faster lines and a cleaner counter, your customers may be very frustrated. This doesn’t mean these formulas and the answers are useless. A smart manager can use the answers together with their knowledge of how waiting lines work and generate better solutions for managing the waiting line system.

11. MULTIPLE SERVER QUEUING MODELS The calculations for multiple server models are more complex and will not be covered in this book. Advanced operations textbooks and queuing theory textbooks would be good sources to dive deeper into waiting line models. Nonetheless, let us compare the results for our single-server model in the previous sections with data for a single-line two-server model.

 In the one-server column you will see that all of the answers provided in items two through nine of this section are listed. Let’s now look at the twoserver column on the right side of the chart. What do we see? 1. ​Percentage of time each worker is busy = .3125 – This is one half of what we see in the one server model. Why is that? With one server the worker was busy 62.5 percent of the time. If you have two workers, though, they split up the work and thus each is now only busy 31.25 percent of the time. If a third server was added, each worker would be busy about 20.8 percent of the time (62.5 percent divided by three). 1. ​Probability the system is empty - Since a second worker is added, the chance the facility might be empty (P0) increases from 37.5 percent in the one server model to 52.3 percent in the twoserver model.

1. ​Probability a customer will get served immediately - The odds that a customer gets served immediately also increases in a two-server model. To get served immediately in a one-server model, the system must be empty before the customer arrives (P0 = 37.5 percent). In a two-server model only one of the two servers needs to be available, so now there can be either zero customers in the system (P0) or one customer in the system (P1). Both of those scenarios allow for a new customer to get service immediately. Solution for the two-server model: P0 + P1 = 52.3 percent + 32.7 percent = 85 percent. 1. ​Customers - Number of customers in line and the system both drop. Average number in the system (ns) drops from 1.67 groups to 0.69 groups. Average number in the line (nl) drops from 1.04 groups to 0.04 groups. Those may seem like big drops, but adding a second worker really does improve the waiting line conditions for the worker. 1. ​Time - We see a similar outcome for time in the line and time in the system. Average time in the system (ts) drops from 6.67 minutes to 2.77 minutes. Average time in the line (tl) drops from 4.17 minutes to 0.27 minutes (or about 16.2 seconds). 1. ​Service time - Also note that the difference between ts and tl in both the one and two server models is 2.5 minutes, the time it takes to help a single group of customers. (See item two in this section)

CHAPTER 6: SUPPLY CHAIN INTEGRATION GOALS, OBJECTIVES AND STUFF WE WILL RUIN: Recognize the importance the following supply chain terms: push system, pull system, bullwhip effect, and lean manufacturing. Identify the challenges of developing and managing an integrated supply chain network. After this chapter you may want to simplify your supply chain. The more complex the system, the more difficult it is to manage. Perhaps you’ll discover the need for great executive supply chain leaders intelligent individuals with an appreciation for understanding the complex issues associated with managing an integrated supply chain are in high demand.

SECTION 6.1: THE INTEGRATED SUPPLY CHAIN STORY: JAZZ ENSEMBLES

 The soul and beauty of jazz music lies in the freedom of expression and improvisation. The same song may be recorded many times by one group and never be identical. Sometimes the differences are small, other times the same song can be completely different. Why? Well, in jazz songs are merely skeletons. Jazz groups put flesh on those bones. The greatest jazz ensembles are a collection of virtuoso instrumentalists, people that are masters of their instruments. More than that, though, they are team players. A jazz ensemble with selfish members won’t last long. Because so much of jazz requires improvisation, someone that isn’t in tune with the others and isn’t listening for changes… they can ruin a song. Being an excellent follower is important. Sometimes your job is just to keep the beat and support the group. At the same time, great leaders are required. A great leader understands the strengths of each member. A great leader trusts these highly skilled instrumentalists to make good decisions. The leader trusts these ensemble members so much that they allow each member, in the middle of a song, to

identify challenges and opportunities and to then improvise for the good of the song and the good of the jazz ensemble. Think about what that means; as the song is being played players are given the opportunity to make changes. This can’t happen successfully unless the members are both communicating and listening for the impending changes. It almost becomes instinct, so practice, time and patience are required to build a strong ensemble. The greatest supply chains are no different. They are a collection of great instrumentalists. Someone plays the purchasing instrument, someone the operations instrument, and of course there is the logistics instrument. They must all be masters of their instrument, but they must be listening to each other. If even one member of the supply chain ensemble is too slow, or if they decided to make changes without alerting others, or perhaps if they decided to ignore communications from their fellow supply chain partners… supply chain disaster could strike. (The song would be ruined.) Think about how great your supply chain would be if it was like a great jazz ensemble: Passionate people doing what they do best, empowered and entrusted to make changes and improvements for the good of the group. These are the keys to great jazz music. These are also the keys, though, to world-class integrated global supply chains.

1. RECAP OF SUPPLY CHAIN BASICS Supply chain managers have many responsibilities. They work to help people. They are required to help the company meet goals. Here is a list of supply chain imperatives every supply chain manager needs to remember: 1. ​Focus on People – Good supply chain decisions positively impact customers, employees and investors. 1. ​Competitive Priorities – Good supply chains deliver the right mix of cost, quality, speed and flexibility to their target market. 1. ​Measuring Success – The best supply chains are effective, efficient and adaptable. Effective: Creating and delivering great products and services customers want. Efficient: Using minimal

resources and eliminating waste. Adaptable: Ready for change, constantly evolving. 1. ​Maximize Value – Provide customers the best possible product and service bundle at the lowest possible cost and in the most convenient way possible. 1. ​Productivity – Maximize a company’s high-quality output using the fewest resources possible.

2. THINGS SUPPLY CHAINS DO – LIST OF EIGHT PROCESSES (LAMBERT 2004) In 2004, Dr. Douglas Lambert and his research group identified eight critical supply chain processes. Here are the eight supply chain processes roughly presented in the order in which they would be performed in the supply chain: 1. Product Development and Commercialization: What does the customer want? When does the customer want it? Can we organize the right suppliers, manufacturers, distributors and retail organizations to get the job done right? 2. Supplier Relationship Management: Finding suppliers. Developing relationships. Managing present and future purchases from the suppliers. Working together to improve quality. 3. Manufacturing Flow Management: Making the right items to meet customer expectations. Doing this using the least amount of resources possible. 4. Demand Management: Utilize forecasting to understand likely demand. Once a forecast is available, manage the firm’s facilities and resources to meet expected demand. 5. Order Fulfillment: If proper demand management has taken place, then it will be time to fulfill orders. This might include picking, packing, and shipping items to the customer.

6. Customer Relationship Management: Utilizing information to better understand the needs and desires of your customers today and into the future. 7. Customer Service Management: Communication between customers and the supply chain. Providing customers with product availability details and tracking information. Providing customers with product assistance and maintenance opportunities. 8. Returns Management: Dealing with reverse logistics issues such as damaged and unwanted products, product recalls, the return of pallets to the distribution center, etc. Understanding problems so customers can be made happier and resources can be used more efficiently in the future.

3. SHRINKAGE CALCULATION Supply chains can be a complex network of companies and people, each with their own ability to make errors. The following calculation can help a supply chain manager estimate the number of products that are needed at each stage of the supply chain to account for problems such as defects, theft, damage, and other forms of loss. This formula calculates the total number of inventory that will be input at each stage of the supply chain to account for the rate of loss.

Order Size Required = (Actual Demand) / (Proportion of Acceptable Product Per Order) This calculation must be performed at every stage of the supply chain in an upstream direction – from retailer to supplier. Example: Consumers demand 300 units from a retail store. The supply chain must account for two percent theft from the retail store, one percent damage rates from the distributor, three percent defects at the manufacturer. How many units of inventory must be planned at the manufacturing facility in order to secure 300 units are available for the consumers?

STEP 1 – RETAILER: Order Size Required = (300) / (100% - 2%)

Order Size Required = (300) / (0.98) Order Size Required = 306.12 Always round up in order to avoid shortages – 307 units Use this number for the demand at the next stage STEP 2 – DISTRIBUTOR: Order Size Required = (307) / (100% - 1%) Order Size Required = (307) / (0.99) Order Size Required = 310.1 Always round up in order to avoid shortages – 311 units Use this number for the demand at the next stage

STEP 3 – MANUFACTURER: Order Size Required = (311) / (100% - 3%) Order Size Required = (311) / (0.97) Order Size Required = 320.6 Always round up in order to avoid shortages – 321 units Answer: 321 units must be planned at the manufacturing stage in order to bring 300 units to the consumer.

4. SQUARE ROOT RULE – RISK POOLING Warehouses and distribution centers aid in the efficient movement of inventory through a supply chain. The more of these locations there are, theoretically, the closer your inventory is to the customers. The closer your inventory is to the customer, the faster you can respond to customer needs. In supply chain management this is called an increase in supply chain responsiveness. On the other hand, the fewer storage facilities a company has, the lower their storage costs and also the less total inventory that is required. It’s generally simple to understand why fewer storage facilities will likely equal lower overall storage costs, but why is less overall inventory needed? Well, when companies have multiple storage facilities each facility has its own individual chance of running out of stock, so each must carry enough safety stock to cover a potential rise in demand. Odds would tell us that if a company has four storage facilities two of those facilities are likely to have too much inventory and two facilities probably have too little. So you have four piles of safety stock, but only two would likely ever be needed. If you have one storage facility, though, all of the risk of the four facilities is pooled together. So a significantly smaller amount of inventory will be needed at that one facility versus the combined inventory for four facilities in the same system. But how much less inventory is needed? The following formula calculates the amount of total inventory required when a supply chain decides to change the number of storage facilities it utilizes. A key assumption is that the former and latter state of the system both have the same stock out rate (or customer service rate).

Inv Future = Inv Present [ (SqRt WH Future) / (SqRt WH Present) ] Inv Future = Total combined inventory needed in future

Inv Present = Total combined inventory in present system SqRt WH Future = Square Root of total number of future warehouses SqRt WH Present = Square Root of total number of present warehouses Example: A company presently maintains a 98 percent customer service level (two percent stockout rate). This company presently has four warehouses. Each warehouse has 1,500 units. They would like to reduce their total number of warehouses to two. How many units of inventory would be needed at each of the two warehouses under the proposed new system?

Inv Future = Unknown Inv Present = 4 * 1500 = 6000 units WH Future = 2 WH Present = 4 Inv Future = Inv Present [ (SqRt WH Future) / (SqRt WH Present) ] Inv Future = 6000 [ (SqRt of 2) / (SqRt of 4) ] Inv Future = 6000 [ (1.41) / (2.0) ] Inv Future = 6000 * 0.705 Inv Future = 4,230 units of inventory

ANSWER: The new system would require 4,230 units of inventory in total. Thus, with two storage facilities, each facility would carry half or 2,115 units per facility.

5. THE IMPORTANCE OF SUPPLY CHAIN INTEGRATION Integration is the bringing together of groups that were separated in the hopes of seeing improvements. In the case of supply chain management integration, it is the bringing together of supply chain partners. Furthermore, it is the coordination of the business processes between these diverse supply chain partners. Without integration supply chains cannot become effective nor efficient. Since the supply chain partners will struggle daily to do things well and to do them using minimal resources, there is virtually no chance supply chain partners will be able to adapt to the inevitable change that will come. Supply chain integration is the only way for supply chain partners to achieve effectiveness, efficiency, and adaptability. While many understand that this means that retail should coordinate with distribution and that distribution should coordinate with manufacturing, etc. it should also be understood that customers are part of the supply chain, too and thus supply chains need to establish relationships with customers. Full supply chain integration requires coordination and communication with the customer.

6. OBSTACLES TO INTEGRATION Integration is about bringing diverse groups together and having them coordinate their plans and work methods. It is no wonder then that supply chain integration is about communication, trust and sharing. Therefore, obstacles to integration are all related to poor communication, an unwillingness to share, and/or lack of trust between supply chain partners.

SECTION 6.2: THE BULLWHIP EFFECT STORY: CASCADING INJURIES

 In the world of professional sports, playing through pain and injury is commonplace. It can be a sign of toughness, a display of sacrifice and a demonstration of an excellent work ethic. Unfortunately, it can result in sub-par performance, and worse than that, more injuries. When someone injures even just a toe, it changes the way they run, jump, kick; it even changes the way they throw. What used to be perfect form is now quite imperfect. Their body was not intended to perform in that way. They start to look a bit crooked when they run. They shift their weight to different muscles and bones to protect the injured toe. The ankles, knees, hips and back are paying the price of playing through the pain. Very often, the healthiest athletes are prone to these cascading injuries. Before the athlete knows it, their entire body seems to be “falling apart.” If only they had let their injury heal, perhaps their stride would not have changed. Perhaps their knees would not have gotten injured. Perhaps they would not have strained their back.

Just as seemingly small injuries can result in a cascade of related injuries, so too can problems cascade in a supply chain. Small problems, minor miscommunications, and inconsistent workloads can result in a chain reaction of problems that grow in magnitude as they reverberate up and down the supply chain. Just like a toe injury may ultimately result in a severe hip injury or a herniation in your spine, so too can poor supply chain communication result in massive holding costs or prolonged and expensive stockouts. In supply chain, this domino effect that results in an avalanche of supply chain disruption is called the bullwhip effect.

1. BULLWHIP EFFECT The bullwhip effect is a supply chain phenomenon where fairly stable demand results in a proliferation in the amount of inventory that is carried as one travels upstream in the supply chain. Distribution carries more inventory than retail, manufacturing carries more inventory than distribution, and suppliers carry more inventory than manufacturers. And so on, and so on. EXPLAINED: In business, dealing with uncertainty is a constant challenge. One of the more common tools supply chain managers utilize to battle uncertainty is inventory. Uncertainty can come in many forms in a supply chain: 1.

​Damage

1.

​Theft

1.

​Loss of inventory

1.

​Late shipments

1.

​Weather

1.

​Forecasting errors

In all of the listed cases, and in many others, an easy way to try and minimize the impact of these uncertainties is to carry extra inventory. Imagine a series of supply chain partners all working together to satisfy the same end-customer. One retail store is uncertain about consumer demand in their region. In addition, they may be concerned about late shipments and in-store theft. Distribution has to deal with uncertain demand at each of the retail stores they service.  In addition, distribution needs to consider the possibility of late shipments from suppliers as well as theft or damage that may occur at the distribution center. Manufactures have three levels of uncertainty in front of them: Distribution, retail, and consumer uncertainties. Plus, manufacturing is also concerned with errors that could be made within their facility. Retail, distribution, and manufacturing, each of these supply chain partners will increase inventory to account for uncertainty.  The more layers of uncertainty between the organization and the end user, the greater the need for safety stock. This constant amplification of inventory from one supply chain level to the next is the bullwhip effect.

2. CAUSES OF THE BULLWHIP EFFECT If the bullwhip effect is caused by uncertainty, then very likely most causes of the bullwhip effect are related to poor observations, poor supply chain practices, and poor communication. The following are just a few key causes of the bullwhip effect: A. Order Batching – When companies place large and infrequent orders from their suppliers. Typically, this is done to take advantage of quantity discounts and economies of scale in purchasing and delivery. The problem is that the infrequent orders leave large communication gaps (uncertainty) for suppliers and it may also require suppliers to carry large amounts of inventory so they can be prepared when those large orders are actually placed.

B. Forward Buying – This is the result of suppliers offering sales. Buyers are motivated to buy in large quantities to take advantage of low prices. Buyers are not buying based on demand, but rather on price. Therefore, true demand is unknown by sellers (uncertainty). Sellers experience the uncertainty of demand due to their own short-term drops in price for their customers. C. Rationing – Sometimes, despite their best efforts, suppliers do not have enough inventory to satisfy the demand of all of their customers. If this is the case, suppliers may ration their inventory and send each of their customers only a fraction of the inventory that was ordered. For example, if a company receives orders for 1,000 total units from their customers, but only has 800 units of inventory available, that company might only send each of their customers 80 percent of their orders. These smaller than expected deliveries introduce doubt into the system and thus may trigger negative behaviors in the future. D. Shortage Gaming – Rationing can often lead to shortage gaming. In rationing, customers only receive a fraction of their placed order. This leaves the customer short of their desired inventory level. If customers feel that this rationing may occur again, customers may try to “game” the system by placing an order larger than their expected demand. For example, if their demand is 80 units, they may place an order of 100 units instead of the 80 units needed. The rationale is that when the supplier sends them only 80 percent of their placed order, they will get exactly the demand needed. Shortage Gaming can cause so many types of problems. This would include the possibility that the supplier has enough inventory to fulfill the 100-unit order. In this case the customer now has more inventory than needed. On the other hand, if the supplier does need to ration deliveries, they will still feel as though the customer wanted more. This may cause suppliers to inflate inventory levels in subsequent periods in an effort to meet the large, but false, demand of their customers.

3. CONTROLLING THE BULLWHIP EFFECT If the bullwhip effect is generally caused by poor observations, poor supply chain practices and poor communication, then the remedies are rooted in truth, stability, efficiency, effectiveness and transparency. The following is a

short list of some of the most common tactics used to curb the bullwhip effect: Everyday Low Pricing (EDLP) – When suppliers resist the urge to have sales promotions and instead offer their lowest (and most competitive) prices each day, buyers do not see an advantage to buying in bulk. Instead buyers are more likely to purchase at levels that are closer to their actual demand levels. This is a positive two-way communication. Suppliers are saying, “these are our best prices”. Customers are saying, “at these stable prices we will buy only what is needed. These are our actual demand levels.” Vendor Management Inventory Systems (VMI) – These are systems where buyers share inventory information with suppliers. Suppliers in turn take on the responsibility of managing inventory levels for the buyer by placing, delivering and sometimes even stocking the buyer’s shelves. This system benefits all parties: Shelves are full so customers are satisfied, suppliers know the sales patterns of their product from each store, and the store is less likely to experience stock outs since suppliers can better plan demand and deliveries. Information Sharing – Real-time information sharing between supply chain partners allows organizations to see transactions and inventory movements across the supply chain.  This aids in making sound decisions based on fact. Improve Buyer-Supplier Relationships - Develop strong buyer-supplier relationships that result in the sharing of supply chain responsibilities. In addition, work together in the strategy and planning phases of building and improving supply chains. Practice Lean Manufacturing - Defects, waste, and a general lack of supply chain stability results in higher levels of uncertainty. Sound supply chain practices result in good products produced with minimal resources. These positive results require less safety stock to meet a much lower level of uncertainty.

SECTION 6.3: PUSH AND PULL SYSTEMS STORY: CASUAL DINING RESTAURANT

 A family decides to dine out at a local restaurant that serves typical American cuisine. What do they order? Not counting appetizers and drinks, here was their order: Mom: 1. ​Salad – Chopped salad, tomatoes, grated cheeses, grilled marinated chicken, boiled eggs (chopped), restaurant-made croutons 1.

​Garlic Bread

1.

​Filet Mignon (cooked medium)

1.

​Baked potato – Butter, chives, grated cheese

1.

​Steamed broccoli

1.

​3-cheese macaroni and cheese (Child’s portion)

1.

​Side of assorted sliced fruit

Dad:

Son:

Daughter: 1.

​BBQ short ribs (Child’s portion)

1.

​Mashed potatoes

1.

​Assortment of veggies (steamed)

1.

​Cinnamon applesauce

Once the order is given to the waitress and delivered to the chef, how does the kitchen staff make and assemble the order so the meal will be ready for the entire family at the same time? The family expects high quality food for the price they will pay. All meals should be hot, fresh, and the meal should look appealing when it arrives at the table. How do they get this done? Some of those items take one to two minutes to prepare, others take over an hour to prepare. Do they start preparing all of these items from scratch the moment the order is received or are the items all prepared in advance so they can be sent to your table the moment you place the order? I don’t think it’s too hard to figure out that the answer is probably somewhere in between. Salad greens, vegetables and fruit were likely sliced and chopped before the restaurant even opened. Stored in bins and put into a fridge, they were available for quick incorporation into different dishes throughout the day. Some might have to be steamed but most of the hard worked had already been completed. Meats? The chicken was likely dressed and marinated earlier that day or perhaps even the day before. It was then grilled when the order was given to the cook. The steak was probably seasoned earlier in the day and cooked to medium. The BBQ short ribs, though, they took hours to cook. The preparation and cooking took place many hours in advance. For each dish a different system was developed. Supply chains are quite similar. Some supply chains proactively begin manufacturing and delivering products to stores before customers even know they want them. This is a

push system. This is sort of the system that was used in preparing the BBQ short ribs. Other supply chains wait for the customers to place their orders. This system, the pull system, is customer activated; it allows companies the flexibility to keep finished goods inventory low and also gives the customer an opportunity to customize their product. The steak was created in something close to a pull system. In this section we will explore the push system, the pull system and also something in between called postponement.

1. PUSH SYSTEM A system in which consumer demand is known and expected. As a result, a supply chain will preemptively buy materials, manufacture finished goods and even deliver them to a store or a picking and packing facility where consumers can buy them at a later date. Inventory is “pushed” toward the consumer in anticipation of consumer demand. EXPLAINED: This system works well when product innovation is slow and thus production techniques are rather static. It will also require that consumer demand be fairly well understood. Using the example provided in the opening, an instance of items likely produced using a push strategy would be the BBQ ribs, perhaps even the mashed potatoes and the sliced fruit. These items were ready in advance of the customer arriving. The problem, though, is that if too many customers want BBQ ribs, then the restaurant will not be able to meet demand since creating another batch of ribs would take too long. Returning to the more general explanation, the fairly stable demand along with the stability in the supply chain result in a system where materials can be bought in bulk at low per unit prices, production facilities can achieve economies of scale in line flow production systems and bulk deliveries to large sales facilities can also bring economies of scale. Characteristics of the push system might include: 1.

​Consistently high demand for finished goods

1. ​Desire for finished goods to be immediately and readily available 1.

​Opportunities to take advantage of quantity discounts

1.

​Standardized end-items with little opportunity for customization

1. ​Vulnerability to obsolescence of inventory, high holding costs, and poor demand forecasts that may result in stock outs or massive overstocks.

2. PULL SYSTEM A system that is activated by consumer demand. As a result, a supply chain will not make and store finished goods inventory. Instead, the supply chain will wait for the consumer to place a specific order and only then will the supply chain react by perhaps buying raw materials and/or parts, and then assembling the desired goods, before quickly delivering them to the consumer. Inventory is “pulled” by the consumer by communicating a specific desire to those in the supply chain. EXPLAINED: This system works well when products innovate at a fast pace or consumer desires are not standardized. The more variation in consumer demand, the more likely an organization might be to adopt a pull strategy. Using the example provided in the opening, an example of an item likely produced using a pull strategy would be the filet mignon. While the raw steak was likely available in inventory, the steak was not cooked until the specific order was placed. Only then could the steak be served fresh and to the specific desires of the consumer. Here an organization would likely carry raw materials inventory that might be used to produce a range of finished goods. Perhaps the steak could be served as the main part of a steak dish; perhaps it could be used on a steak sandwich, or perhaps even as a topping on a steak salad. The key element here is customization. The customer gets what they desire and the raw material is used to satisfy a specific customer order. Characteristics of this system might include:

1. ​High raw materials inventory readily available to produce a specific consumer order 1.

​Customizable end-items with a range of customization options

1. ​Vulnerability to sudden increases in demand, poor forecasts that may result in poorly planned production systems/facilities

3. POSTPONEMENT A system that combines push and pull - pushing product elements that are considered standard and then allowing customers to pull product elements that can be customized. Those product elements that are standard will be produced in advanced, and then final production will be delayed (postponed) until the consumer places an order that specifies the customized elements. EXPLAINED: Subway Sandwiches is a good example of a company that takes advantage of postponement. This organization bakes sandwich bread long before customers arrive. In addition, meats, cheese and vegetables have been pre-cut and pre-sliced. Thus, when customers arrive they only need to ask for the appropriate sandwich items to get put together. In this example, the baking of bread, and slicing of meats, cheeses and vegetables are all push elements of the system. Since Subway knew customers would want some combination of those items, they were prepared in advance. This allows for speed in the system (ingredients ready before customer even arrives) and also some economies of scale (large batches of bread produced at the same time), in addition to opportunities for quantity discounts. The pull elements all occur when the customer places the order. The customer can have a sandwich built to their exact specifications quickly while still allowing for a reasonable level of quality consistency for all orders. Companies are free to decide how much push or pull to introduce into their system. Some companies may only choose to allow product color as a

postponed option (a very push-oriented system). Other companies may allow for 5, 10 or more customizable options (a very pull oriented system).

SECTION 6.4: LEAN SYSTEMS STORY: MAXIMIZING LIFE

 School, homework, a job, working out, friends, family, shopping for food and daily essentials, eating, showering, time used to get from one place to another… Getting everything done every day is difficult. And what happens on those days when something unexpected happens? Injuries, illness, tickets to tonight’s game, a surprise invitation to dinner, a power outage, a snowstorm...? Are you ready to get everything done and then deal with unwelcomed or welcomed surprises? What do you do to make the most of each day? Do you make a list of “to do’s?” Do you schedule activities for morning, afternoon, and evening? Do you schedule what you will do each hour? Do you have a routine you follow daily? Perhaps you have found a combination of routine and schedule. If so, how do you adapt your plan to new opportunities that present themselves and the typical changes in one’s life? If you do the same thing every day you likely get very efficient at your scheduled activities. While this means you are more prepared for your day, you are likely forgoing opportunities to

enhance your life: No thanks, I don’t want that new job, to go the championship game this weekend, or to go on a date with that wonderful person I met today, etc. How can you get everything you want done every day? How can you do it in the most efficient manner possible – minimal time, minimal effort? How can you do all that while still allowing for your life to grow and expand? How do you make decisions about what stays in your life and what will need to be left behind? Planning, working, analyzing and decision making, these are things we all do every day. In many cases we are doing these things all at the same time. Sometimes we make mistakes, sometimes we make great decisions, and sometimes we just get lucky. So it goes with companies. Companies need to satisfy customers today. They can’t waste time, money or materials. They need to develop better ways of getting things done. Companies need to develop new products and services to stay ahead of the competition. Sometimes companies need to discontinue old products and services in favor of new ones. Anything in excess is wasteful; as a result, companies today aspire to be lean. Lean systems focus on productivity and value, an irresistible combination for any supply chain manager.



1. ROCKS AND WATER ANALOGY

In the beautiful picture above, we see a lake filled with large rocks. It would be difficult and possibly dangerous to try and navigate these waters in almost any watercraft. How could we more easily get through this stretch of water in a boat? How about if the lake had a lot more water. If the water was high enough, the boat could easily pass this stretch of water by allowing the boat to float over the dangerous rocks. In supply chain management, we use this story to explain how companies use inventory to hide the weaknesses of a supply chain. Imagine that each rock represents a different supply chain weakness: Poor forecasting, high defect rates, unreliable suppliers, theft, unreliable shippers, etc. In each case more inventory might help hide these weaknesses. Imagine if instead a company decided to remove the rock instead of hiding it with more water. In other words, imagine if they fixed the problem instead of hiding it with inventory. This is what companies that embrace lean systems try and do every day. Rather than hide from their problems, they would prefer to expose the problems and thus eliminate the threat from becoming an even bigger and more costly problem in the future.

2. LEAN MANUFACTURING A production philosophy that strives to meet consumer demand and desires but with minimal inventory levels and minimal supply chain waste. (In the past some people referred to lean manufacturing as just-in-time (JIT) and/or the Toyota production system (TPS). Some will argue they are different; some will say there is no significant difference. For this module we will assume there is no difference between lean manufacturing, JIT and TPS.) EXPLAINED: First, it is important to remember that consumer desires are constantly evolving. Even if a company meets consumer demand and desires today, this does not guarantee that they will continue to satisfy consumers into the future. This brings us to the second important point, since consumers’ demands and desires are moving targets there is no single set of business practices that will guarantee success. Lean Manufacturing is a philosophy or set of

values that can guide a company toward good decision making in their supply chains. Nonetheless, as companies strive to provide consumers value, they seek to do so by maximizing productivity. Therefore, all supply chain decisions driven to provide consumers with value need to also be weighed against the types of waste that might be produced for the company: Waiting time, transportation, stored inventory, defects, motion, unnecessary work, inventory produced…

3. KEYS TO LEAN MANUFACTURING By no means is the following a complete list of the issues a company should consider when trying to be lean, but these are some of the most common elements of developing a lean philosophy. These lean manufacturing issues fall into three general categories: quality, management, and operations. Quality Issues: 1. ​High Performance Quality – Being lean means being devoted to the consumer. Companies with lean systems have the ability to be fast and flexible, thus they can innovate and bring their customers the very best products and services. 1. ​Consistent Quality – In addition to providing the best quality, customers expect consistency from one purchase to the next. Lean companies look for simple but reliable practices. Simplicity and reliability are keys to consistent quality. 1. ​Quality at the Source – Empowering every employee to be a quality inspector and manager. By having knowledgeable employees that can identify errors and are then empowered to act, lean companies can find and fix errors as early as possible in the supply chain. The earlier errors are identified the lower the associated costs. In the old days, companies would have inspectors at the end of the process. The inspectors would find errors long after the errors were

first made, thus additional work would be done on items that might already be worthless. 1. ​Poka-Yoke – Mistake-proofing. Lean companies will find ways to completely eliminate certain types of errors. For example, suppose two digital devices are to be connected. Connecting them requires five wires be plugged from one device to the other. Suppose that the five wires each has a different connector that will only fit into a single connection point on the second device. This is a poka-yoke since it would be impossible to fit each of the five wires into the wrong connection point since they would not fit. Management Issues: 1. ​Continuous Improvement - Being lean means being devoted to the consumer. Companies that do not focus on continuous improvement of the product, the processes, the buyer-supplier relationships, and materials used are overlooking opportunities to keep old customers, find new customers, improve quality, increase speed, offer more flexibility, and control costs. 1. ​Close Supplier Ties – Good relationships, trust and information sharing reduces uncertainty and thus will result in fewer unwanted supply chain surprises. This may lead to fewer stockouts, smaller safety stocks, fewer expensive rush shipments and thus less consumer strife. 1. ​Dedication to the Workforce – Lean systems require finding errors, fixing errors, identifying opportunities for improvement and relationship management with supply chain partners. Supply chains that do not invest in their workforce and do not value employee contributions have little hope of performing well today and improving in the future. Educating employees, keeping employees informed, and empowering employees to improve the supply chain are all vital to supply chain maintenance and growth.

1. ​Using Automation when Appropriate– Employees are excellent problem solvers, but they grow weary, they can lose focus and when a job is too repetitive they can get bored. Utilizing automation can be helpful in certain situations. If processes are extremely repetitive, require consistent quality, and must be performed quickly, automation can be an excellent tool. On the other hand, when too much automation is used flexibility and quality improvements can be more difficult to achieve. Operations Issues: 1. ​Small Lot Sizes – Does your company need to produce thousands of units to achieve a profit and/or economies of scale? When companies can produce small batches in a profitable manner they can control inventory levels and still meet consumer demand quickly. 1. ​Standardized Components and Work Methods – Lean systems are constantly asked to improve while still maintaining excellent quality. They can also be rather complex. When companies work to create some standardization it allows the workers to feel more comfortable in performing their jobs and also in identifying mistakes as well as defective components. Lean organizations try and meet varying consumer demand, but when possible, being able to identify opportunities for standard components and work methods can reduce stress and aid in the identification and elimination of errors. 1. ​Short Set-Up/Change-Over – Set-up time is the amount of time it takes to change a system from producing one product to producing a different item. Keeping short set-up times allows systems to run “leaner.” Consider the EOQ formula for manufacturing:

EOQ = Sqrt [(2*Demand* Set-up Costs) / Holding cost]

When set-up times, and thus set-up costs, are low it, will drive down EOQ. This means a system can operate effectively without having to produce large batches. The process can be effective when asked to produce both large and small orders. Notice how different items on this list touch upon different parts of the supply chain. Some relate best to procurement, some to operations and others to logistics. Of course, some of these touch all parts of a supply chain, in particular the quality related items. Also think about how each might impact different people: Customers, employees in our workforce, and our supply chain partners.

CHAPTER 7: GLOBAL SCM ISSUES AND TERMS GOALS, OBJECTIVES AND STUFF WE WILL RUIN: An expanded discussion of procurement, operations, and logistics issues and concepts encountered at the global level. Learn about the difference between outsourcing and offshoring. Understand the issues that must be consider in these types of decisions. Perhaps you’ll choose a new career that will have you travel the world as a supply chain manager.

SECTION 7.1: GOING GLOBAL STORY: GLOBAL EXECUTIVE

 You work for a huge multinational corporation and your boss presents you with the opportunity to take a new position in the company outside of your country. Where do you choose to go? Australia, Europe, Asia, the Middle East, South America or Africa? What if they don’t give you the choice of a location? Perhaps they say that you must go to country X. Hurry, you’ve only got until tomorrow to decide if you will leave or not. If you go, you will need to pack up and move next month. This is a huge opportunity to understand your company at a deeper level. They see a bright future for you and they need you to learn how the organization operates at the global level. What’s going through your head? What gets you excited about this opportunity? What are you worried about? Whichever continent you choose to go to, or get shipped to, there will be a learning curve. Let’s get this straight: This is a business decision, not a vacation. The company expects you to go there and make a difference. Your boss expects you to climb the corporate ladder. Are you confident you will be a successful teammate and leader in another country? Will you be capable of making friends, building alliances and motivating others in this foreign land? In your country, you understand things like: 1.

​Typical work hours and days off

1.

​Relationships with superiors

1.

​Relationships with subordinates

1.

​Acceptable social interactions

1.

​Language, culture and communication

Will you be able to get up to speed so you can be an asset to the office on day one? This is a huge opportunity. You know it’s a great idea to go but still there are risks and concerns. This is your life and you cannot afford any big mistakes. Now imagine the stakes for a company that is considering stretching their supply chain into new parts of the world. Yes, global supply chains are always on the lookout for profitable opportunities – new consumer markets, low cost opportunities, etc.- but just like a large salary might not be enough to make you want to move to your least favorite country, supply chains need to consider the risks and concerns that are present in new markets and low cost regions. In this section, the most basic elements of risk and opportunity will be explored. For some of you, just the thought of moving to a foreign country can make you nervous. The thought of change and instability can make the risks overshadow the opportunities. As a supply chain manager, would you know what to research, what to ask and what to do before moving parts of your supply chain abroad? These are very simple concepts but do your best to remember them as you venture into the other sections of this module.

1. PROFIT MOTIVATIONS In business, most company decisions are directly or indirectly related to corporate profit. Companies want to maximize profit; profit is equal to revenue minus cost. So, as a company considers globalizing its supply chain, both revenue and cost issues must be considered. Revenue opportunities associated with globalizing a supply chain:

1.

​Reach new consumers

1. ​Manage risk of low sales in one market by selling in multiple markets abroad 1. ​Taking your supply chain to new locations may allow your company to learn about alternative sale and distribution options that might be useful in other markets 1. ​Taking your supply chain to new locations may allow your company to learn about new product, service or business trends that can be adopted in other markets. Cost opportunities associated with globalizing a supply chain: 1. ​Potentially lower cost materials, labor, storage, transportation, energy savings, etc. 1.

​Taxes, tariffs, legal fees and business transaction fees

1. ​Taking your supply chain to new locations may allow for your company to learn about business practices and trends that improve savings in other markets It is also important to consider that as companies globalize their supply chains, customers may be buying goods in multiple currencies and the company may be paying for supply chain costs in multiple currencies. Volatility in currency exchange rates presents both opportunities and risks to revenues and costs.

2. GLOBAL BRAND STRATEGY If you have traveled to different countries, you have probably craved some of the items that you buy in your home country. Drinks, food items, toiletries, medicine and batteries are all items we may need to purchase on our trip abroad. For some of us it is a shock when the items we purchase are packaged differently or not found in the types of retail outlets you have at

home. Bigger stores, smaller stores, much smaller stores, different shelving systems, items behind a counter, large recycling fees included, different packaging materials, different size package, different flavors offered… Perhaps you even find there are restrictions on how those items are purchased. As companies expand their supply chains globally, especially to new consumer markets, they must be prepared to deal with differences in: 1.

​Packaging laws

1.

​Accepted packaging conventions

1.

​Environmental requirements

1.

​Different distribution and retail systems

1.

​Different consumer tastes and needs

1.

​Laws that impact truck size

1.

​Label requirements

These issues and many others may impact how your product looks, where it is bought and how consumers judge your brand. One of the primary reasons some companies expand their supply chains is to grow and achieve economies of scale. As you can see though, due to differences from one region to another economies of scale may not be easy to achieve, in fact companies may even encounter diseconomies of scale in some regions.

 This display includes some Coca Cola products, all of which vary in packaging, labeling and size.

3. INTELLECTUAL PROPERTY In business, intellectual property often refers to copyrights, patents, trademarks and other designations that protect the creative ideas of a company, an artist, or other creator of goods, ideas and other output. Intellectual property laws provide the owner of the idea a monopoly on that idea and all works that derive from it. EXPLAINED: As design companies allow other organizations to manufacture goods on their behalf, it is important that the manufacturer respect the intellectual property rights of their client. In other words, Apple does not want their contract manufacturer to share Apple’s technology secrets with Samsung, nor does Apple want their contract manufacturer to create their own versions of an iPhone at another facility.

In addition, as companies choose manufacturing locations for their products, it is expected that the country where the goods will be manufactured provide sufficient intellectual property protection. In other words, if there was a breach of intellectual property rights, Apple would want to know that China would help pursue, capture and bring to justice the perpetrators. At the same time, it would be in Apple’s best interests to create security measures in the factories, on the trucks, in the storage facilities and in all other areas of the supply chain to limit intellectual property issues.

4. KEYS TO ASSESSING THE GLOBAL LANDSCAPE: Below is a short list of issues to consider before moving parts of your supply chain into a new country or region: 1.

​Local competition

1.

​Established supply chain systems

1.

​Advantages of local business clusters

1.

​Exchange rates

1.

​Climate

1.

​Population – size, demographics, density, language

1.

​Real estate

1.

​Geography, topography

1.

​Transportation issues

1.

​Fuel and energy costs

1.

​Laws and taxes

1.

​Local culture

1.

​Political stability

1.

​Work ethic, employee motivation and labor unions

1.

​Protection of intellectual property

As you read this module, read business cases and follow the news, consider as many of these issues as possible in assessing the risks and opportunities of globalizing different supply chains. Please note, no two supply chains are alike, so each issue has a different level of importance for each company. Also, consider whether or not these issues may be routinely overlooked by an industry and whether or not these issues can be exploited for supply chain gain.

SECTION 7.2: GLOBAL OPERATIONS AND MANUFACTURING STORY: WE’LL MANUFACTURE IT IN CHINA

 Where should a company manufacture its goods? In this generation, the pop culture answer, the cliché answer and sometimes the logical answer may all be one in the same: China. Not everything is made in China of course, but it is clear that in some industries China is dominant. https://www.theatlantic.com/china/archive/2013/08/chinas-dominance-inmanufacturing-in-one-chart/278366/ Why are so many goods manufactured in China? There are a number of relatively simple answers to that question that may be relevant for certain industries. 1.

​Labor costs

1.

​Material costs

1.

​Storage costs

1.

​Superior quality

1.

​Reliability in meeting deadlines

These are not always the case in all industries, though. In some cases, China is known for producing low quality goods, being unreliable and believe it or not, in some areas, China is not the low-cost labor alternative. When pressed about other reasons China (or any other location) may provide supply chain advantages and opportunities, experts may mention: 1. ​Established shipping routes within China and shipping routes leading out of China via ocean ports and airports. 1. ​Established networks of suppliers, manufacturers and logistics firms that routinely work together 1.

​Flexibility to increase (or decrease) output

Nonetheless, companies must also heed the concerns of customers, investors, and employees in areas related to issues that could bring the company into the headlines for all the wrong reasons: 1.

​Employee working conditions

1.

​Product safety

1.

​Environmental practices

Developing a global manufacturing strategy, including items like choosing locations and contracting partners, is extremely difficult. Once the supply chain is up and running though, managing product output and monitoring unethical or illegal behaviors among your business partners can be taxing on a daily basis. Those complex issues are beyond the scope of this introductory work, but the terms and concepts in this section will provide you with a reasonable vocabulary for understanding some of the issues and moving parts in the area of global operations and manufacturing, and also in the area of global sourcing.

1. CONSIDERATIONS IN UTILIZING OUTSIDE OPERATIONS AND MANUFACTURING PARTNERS Utilizing external partners to do some or all of your manufacturing, or other operations, comes with both benefits and risks. Possible Benefits of Utilizing External Partners: 1. ​Speed – Outside partners will have a facility, employees and machines already in place. Plus, they likely have suppliers and logistics firms already under contract. Your company would have to go through months if not years of planning to open up a new facility. 1. ​Expertise – Not only is their firm up and operating, their firm has been in business for years and they likely know what they are doing. They have encountered problems and have hopefully fixed them. Your company would have many mistakes ahead of them before they could achieve a contractor’s level of competency. 1. ​Resource Utilization – Their use of people, materials and machines will likely be more efficient than the output of what your company would be able to achieve in the first few months or years. In addition, if they manufacture for multiple companies, they will likely have more buying power with suppliers. 1. ​Focus on Core Competencies – Every company has different strengths. Sometimes utilizing outside partners allows your company to focus on its strengths (e.g. design, marketing) and it allows the contractor to do what it does best, manufacture products. Possible Risks of Utilizing External Partners: 1. ​Quality Control – How concerned are they about the quality level of products that will ultimately carry your name, not theirs? Are they committed only to following your present directions or are

they concerned with finding opportunities for improvement of your product? What happens if the contractor does not perform up to expectations? 1. ​Intellectual Property – Will this company protect the secrets that make your products better and/or unique? 1. ​Business Practices – Is your business partner a legal and ethical entity? How will their negative behaviors reflect on your organization? 1. ​Loss of Strategic Flexibility – When a company outsources a portion of their supply chain to a contractor, they are willingly giving up control over some aspects of their business. Issues related to growth, capacity, product failure, product revisions, etc. may be difficult to address if your company does not have full control over all supply chain decisions.

2. OFFSHORING A strategy where a company moves manufacturing out of its “home” country to another country. Example: Ford Motors has a significant offshoring strategy. Though an American company, Ford Motors has manufacturing plants in the United States and also owns and operates manufacturing plants around the world in many countries including China, Germany, Brazil, Russia and South Africa. Those Ford factories that are outside of the United States are part of Ford’s offshoring strategy.

3. OUTSOURCING When a company contracts an outside firm to perform services, operations or business processes that could be or were previously performed in-house. EXPLAINED: American electronics companies, as well as medical device companies, will often use other companies for design, manufacturing and/or logistics services. Examples of companies that provide supply chain

services in the United States include Sanima, Benchmark Electronics, Plexus and Jabil Circuit. Note: If Dell Computers (US company) utilized Jabil Circuit (US company) for supply chain services this would still be seen as Dell outsourcing, even though both companies are in the United States. Any time a company hires another company to perform services or operations it is an outsourcing arrangement, no matter the location of the two countries.

4. OFFSHORING AND OUTSOURCING A strategy where a company utilizes a contractor in another country to perform services and/or operations. EXPLAINED: This, obviously, is a strategy where a company both outsources and offshores. Apple, an American company, utilizes the manufacturing services of Foxconn, a Taiwan-headquartered electronics manufacturing firm with facilities in Taiwan. Apple is therefore utilizing a strategy that incorporates both offshoring and outsourcing – manufacturing outside of the US, manufacturing done by an outside party.

5. CONTRACT MANUFACTURERS A company that produces goods on behalf of another organization. EXPLAINED: Apple designs numerous digital devices but they outsource manufacturing to companies like Foxconn and Pegatron. Foxconn and Pegatron would therefore be considered Apple’s contract manufacturers.

6. NEAR-SOURCING While this term does not have a consistent definition in the world of supply chain management, it often refers to a type of offshoring or offshoring and outsourcing where the location of the manufacturing facility is relatively close to the location of the consumer. Typically, it refers to a shift in strategy, where a company used to manufacture goods very far away (example: 8,000 miles away) from the home market, but then shifts to manufacturing in a country that is much closer (example: 750 miles away) to the home market.

EXPLAINED: The key words in the definition provided are “relatively close”. Consider Company X, an American company, that sells their products in the US, but manufactures its products in China because of the relatively low Chinese labor costs. Now suppose that ocean port strikes become routine in the US, and/or perhaps oil prices are volatile – very high one month, very low the next. What might Company X do? Company X may not want to manufacture in the United States, but they may consider manufacturing in Mexico. Labor costs will likely be significantly higher, but the lower risk of late shipments and high transportation costs may make near-sourcing in Mexico a more viable option. Note: Near-sourcing can be used to describe both near-source offshoring and also near-source offshoring and outsourcing strategies.

7. MANUFACTURING COMPLIANCE The business behaviors of a manufacturer associated with following the regulations, practices and other requirements that their clients have established. EXPLAINED: In today’s global environment where social media can quickly spread bad news, good news or inaccurate news about your company, manufacturing compliance is important. Whether a company makes their own finished goods or outsources manufacturing to someone else, companies require their associated manufacturing facilities to: 1.

​Manufacture excellent products to specification

1.

​Manufacture excellent products that are safe for use and disposal

1. ​Act in a socially responsible manner – workplace environment, hiring practices, ethical business practices, sustainable business practices 1.

​Protect the data of all members in the supply chain

8. MANUFACTURING AUDITS

A process whereby companies examine whether or not their manufacturing contractors are abiding by the legal and agreed upon regulations, business practices and other established manufacturing requirements. EXPLAINED: In order to monitor supply chain behaviors (both good and bad) and also to capture data for reporting purposes, companies often send internal, or sometimes outsourced auditing teams, to evaluate and assess their associated manufacturing facilities. In some cases these audits are all-encompassing, meaning they evaluate all aspects of the facility – output, management style, employee behaviors, data security, etc. In other cases, though, audit teams may be very specific and only report on one issue. For example, there is a large industry of auditors that focus on monitoring only the working conditions of employees in contract manufacturing facilities.

9. CURRENCY EXCHANGE RATE CONSIDERATIONS It takes time to buy supplies, manufacture products and move them to their final destination. It’s cliché, but in a global supply chain time means money. Consider the following example: June 1 – Products are Manufactured Exchange rate: $1.00 USD = 1 Euro Materials are bought for $1,000 USD Laborers is paid $3,000 USD Total investment - $4,000 USD It’s June 1 and the company has invested $4,000 USD in manufacturing goods that will be sold in Europe on Sept. 1, for a price of 5,000 Euros. Below are three different outcomes based on changes in the rate of currency exchange. Note that the investment and the sale price stay the same, $4,000 USD and 5,000 Euros, respectively. Nonetheless, see how different the profit numbers are for each scenario. Remember, the costs for each scenario are $4,000 USD.

Scenario A – Sept. 1 Exchange rate: $1.00 USD = 1 Euro (No Change) Finished goods are sold in Europe for 5,000 Euros Those 5,000 Euros = $5,000 USD Total Profit = $1,000 USD Scenario B – Sept. 1 Exchange rate: $1.00 USD = 1.50 Euro (Strong dollar) Finished goods are sold in Europe for 5,000 Euros Those 5,000 Euros = $3,333 USD Total Loss = $667 USD Scenario C – Sept. 1 Exchange rate: $1.50 USD = 1.00 Euro (Weak dollar) Finished goods are sold in Europe for 5,000 Euros Those 5,000 Euros = $7,500 USD Total Profit= $3,500 USD Exchange rates can be unpredictable, and thus manufacturing products for Europe in the United States can introduce currency exchange risk. Sure, Scenario C is rather enticing, but companies do not get to choose exchange rates; exchange rates are market driven and no one on June 1 knew what the exchange rate would be on Sept. 1. This type of volatility is the reason why some companies choose to manufacture goods in the country where the products will be sold, even if labor and materials may be relatively expensive. Why? Well, consider this scenario where products are manufactured in Europe for sale in the European market: June 1 - Manufacturing

Materials are bought for 1200 Euros Laborers is paid 3,400 Euros Total investment - 4,600 Euros Sept. 1 – Sale and payment date Finished goods are sold in Europe for 5,000 Euros Total Profit= 400 Euros Profits may be lower than most of the scenarios in the previous example, but at least a profit is “guaranteed.” Sometimes those 400 Euros will equal lots of American dollars, other times 400 Euros might be worth very few American dollars, but no matter the exchange rate, there should be a profit if the product is sold.

SECTION 7.3: GLOBAL TRANSPORTATION AND LOGISTICS STORY: TRIP AROUND THE WORLD

 You and your best friends are planning a trip around the world.  Perhaps your trip will take you to 3 continents, 5 countries, and a number of cities and must-see sites. You plan to eat new foods, see historical artifacts, and enjoy the wonders of these exotic locales. You have an idea of what you want to accomplish on this trip, but efficiently moving between these continents and the individual countries may be more challenging than you had expected. Doing your research on the best modes of transport in each region, the most reliable companies, and then actually buying tickets could be challenging. In addition, making sure you have the required documentation to get you through customs will also be important. Plus, you’ll want to be sure you can move your personal belongings and souvenirs in and out of these countries without a hassle. The internet will be helpful, but in some cases getting the information you really need in a language you can understand may be challenging.

These are the types of challenges that global logisticians face as they plan to send goods from one country to another. Just like you, global logisticians have many choices relating to modes of transport, documentation, legal requirements, in addition to a long list of unknowns they may or may not have imagined. As there has been an increase in global sourcing by multinational organizations, there has been a need for reliable logistics planning and execution to safely bring a variety of goods from one country to another in the fastest, easiest, and most economical fashion possible. Each country has different regulations and tariffs. Infrastructure may make certain modes of transport and containerization more or less feasible. With so many options, logisticians rely on a network of specialized thirdparty partners and global shipping standards. Being familiar with these logistical partners, shipping standards, and documents help logisticians develop reliable itineraries for shipments moving all around the globe.  

1. INFRASTRUCTURE In logistics, infrastructure typically refers to the physical structures and equipment utilized to move goods. In addition, it could also refer to the organizations that support the movement of goods. EXPLAINED: Infrastructure often refers to roads, railways, ocean ports, airports, bridges and other major structures that make the movement of goods possible. It could also include the available trucks, trains, planes, forklifts, loading cranes and ships needed to complete infrastructure projects. Extended further, it could also include the energy and fuel systems, security, skilled labor and many other logistics related systems and organizations. As companies look to reach new suppliers, manufacturers and markets, they must understand the advantages, disadvantages and unique features of a country’s infrastructure. This could make the movement of goods easier, more difficult, cheaper, more expensive or perhaps impossible. For example, consider the differences in infrastructure for people that live in these cities: New York City, Los Angeles and San Francisco.

Infrastructure plays a huge role in the ways most people get to and from work, how they buy groceries and where they live. When people move from one city to another, they may need to change their most common modes of transport and their shopping habits. They may also need to adjust the criteria important in choosing a location for their home. This process is no different for businesses seeking global expansion. Logistical infrastructure is a vital consideration in meeting corporate goals related to profitability, customer satisfaction, and the movement and storage of goods.

2. CUSTOMS AND REGULATIONS CONSIDERATIONS Governments establish customs agencies to control the goods that enter and leave a country, i.e. imports and exports. These customs agencies monitor whether importers and exporters are adhering to the customs regulations established by the government. Customs agencies assist in the following areas: 1. ​Classifying goods and services according to the government’s classification system 1. ​Assessing and collecting the appropriate tariffs and enforcing quotas 1. ​Aiding in issues related to national security, illegal narcotics, weapons, etc. 1. ​Aid in issues related to commerce control, intellectual property, etc. 1.

​Collecting information about goods being imported and exported

3. CUSTOMS-TRADE PARTNERSHIP AGAINST TERRORISM (C-TPAT) A voluntary program developed by US Customs and Border Protection for companies importing goods into the US.

The program requires member organizations to report a significant level of detail related to supply chain partners and actions for each imported shipment. In exchange for providing this information to US Customs, member companies are allowed opportunities for speedier and more hasslefree customs clearance. EXPLAINED: After the Sept. 11 attacks in New York City, US Customs and Border Protection wanted to gather more information about shipments entering the United States. This not only included data relating to the contents of a shipment but also data relating to all supply chain partners associated with the shipment, from the supplier to the shipper that brought the goods into the United States. The program is voluntary; importing companies do not need to become CTPAT members. Nonetheless, companies that do not join, or are not accepted, may experience significantly longer wait times at the border, plus they may experience a higher percentage of physical inspections of their imported goods.

4. THIRD-PARTY LOGISTICS COMPANY (3PL) A contractor that performs one or more logistics functions for their client in an effort to facilitate effective and efficient movement in the supply chain. This third-party contractor can neither be the buyer nor the seller of the items being moved. EXPLAINED: Basically, this is can be any company that helps supply chain partners with any logistical needs. Actually, in some cases, 3PLs may actually offer services that fall outside of the realm of logistics (procurement, assembly, etc.). Below is a short list of the types of services that might be performed by a 3PL: 1. ​Arranging shipping itineraries, in some cases taking over all the client’s logistics responsibilities: 1.

​Aiding in the import and/or export process

1.

​Warehousing, distribution, picking and packing

1.

​Containerization and transportation

1.

​Packaging

1.

​Documentation

1.

​Product tracking, logistics data and information management

1.

​Logistics specific financial services

1.

​Management of digital marketplaces for logistics services

As can be seen, there are few boundaries in the 3PL industry; almost any logistics related company could conceivably call themselves a 3PL.

5. FREIGHT FORWARDER A contractor (company or person) that helps companies organize the efficient and effective shipment of goods from one point in the supply chain to another. Freight forwarders do not actually transport the goods, instead they negotiate and arrange for one or more logistics companies to prepare, secure, store, track and move the cargo. EXPLAINED: If you didn’t know how to move your cargo you’d likely want to contact a freight forwarder. Effectively, they act as your logistics manager, finding logistics partners that can aid in all logistical aspects. For this logistics management service, they would charge you a fee on top of the fees required to pay the logistics contractors they hire on your behalf. While they can be beneficial for any type of domestic shipment, they can be particularly useful in helping your company export your products.

6. CUSTOMS HOUSE BROKER A contractor (company or person) that helps a client’s goods clear customs in a foreign country. EXPLAINED: When goods are shipped abroad, they must be inspected by a customs official before they are cleared to enter the country. A customs

house broker acts as your agent in this process. They take over the responsibilities of importing that occur before the goods reach the border as well as when the customs officials are inspecting the goods. Before goods reach the border: Preparation of documents, issues relating to import fees and taxes. During inspection: Answers the customs agents’ questions in an effort to facilitate customs clearance.

7. FREE TRADE ZONE (FTZ) A geographic area sanctioned by the government where items are not under the control of customs authorities. As such, goods can be imported into a country, brought into an FTZ and then stored, displayed and/or manipulated before being re-exported without ever being inspected or taxed by customs officials. (In some countries these types of areas go under different names – free economic zone, free zone, export processing zone, special economic zone) EXPLAINED: Free trade zones (FTZs) offer companies the ability to easily import materials and export finished goods with minimal hassle. Imagine that a company constantly imports raw materials and parts, only to create a product destined to be sold outside of the country. This company is importing materials, paying import tariffs and then re-exporting those materials. Upon export of the finished good the company may be able to request a refund of most of the tariffs paid – this is called a duty drawback. While this seems reasonable, it is a constant and cumbersome cycle where corporate monies are out of pocket. FTZs therefore create incentives for companies to keep their facilities in the country rather than moving to another country. All of that said, FTZs are used for more than just manufacturing, assembly and reconfiguration. Some companies use FTZs to display expensive equipment rather than paying high tariffs for a showroom of product. Through the FTZs, items can be stored and displayed in a facility located in a FTZ. FTZs can also be used for storage, distribution, picking and packing,

and other logistics functions. These may be beneficial if real estate rates and labor wages are low in the country that is sponsoring the FTZ.

8. INCOTERMS A series of commercial terms, often depicted as three letter acronyms, established by the International Chamber of Commerce (ICC) to facilitate communication in commercial transactions. These terms provide clarity on issues of shipment responsibility, ownership, export and import responsibilities, and cost. The ICC periodically reviews and updates the Incoterms. Presently, there are 11 Incoterms: EXW, FCA, CPT, CIP, DAT, DAP, DDP, FAS, FOB, CFR, CIF (For full details on each of these Incoterms, please visit the ICCs website.) EXPLAINED: Incoterms are often seen on logistics documentation. Incoterms provide logistics companies, buyers and suppliers information about a shipment, including but not limited to the party that would be responsible for some of the following logistical responsibilities: 1.

​Export customs declaration

1.

​Payment of import taxes

1.

​Loading and unloading responsibilities

1.

​Insurance

9. SHIPPING DOCUMENTATION In the world of logistics, documentation serves three very important purposes. 1. ​Transportation - Documents are proof that cargo was received, where it originated, where it is going, and it can also represent a binding contract between different supply chain parties.

1. ​Financial – Whenever cargo changes hands it is considered a crucial part of the supply chain process. When goods are received by one party the other party expects payment. Shipping documents can provide proof that goods were received according to the terms of sale and that monies can be released to the other party. 1. ​International Shipments – When goods cross borders, customs officials look to shipping documentation to check for legal infractions and also to assess duties. While each shipment is different, there are some shipping documents that are rather common in the logistics world. Here is a short list of shipping documents that may be of interest to logisticians and customs officials: 1. ​Commercial Invoice – A vital document that provides a reasonable summation of the items being shipped, the parties involved, cargo values, and other information important to supply chain members and customs officials. 1. ​Packing List – Describes all items in a box, including dimensions and weight. In some cases it may even provide location of items in a box or container. Prices are typically not provided on a packing list. 1. ​Bill of Lading – Serves three main purposes: Contract between shipper and carrier, receipt of goods for the shipper and it acts as the certificate of ownership. 1. ​Shipper's Export Declaration – A document used by the US government to track all items that exported from the US in order to develop a census of US exports each year. It also provides the appropriate export license information for the goods being shipped. 1. ​Validated Export License – A special export license required for items that are heavily policed by the US government, such as

weapons, advanced technologies, goods related to nuclear technology and even goods related to the agricultural industry. 1. ​Certificate of Origin – Certifies that the goods were in fact manufactured in the country specified. Important for legal purposes and to assess duties.

SECTION 7.4: GLOBAL SOURCING STORY: PURCHASING A HOME ABROAD

 Owning a home abroad, either as your primary residence or as a vacation home, is a dream for many. Whether it is living a different lifestyle, a more affordable lifestyle or perhaps it’s just about living in a picturesque location, for some folks, living abroad is a life goal. What types of concerns and questions would (and should) you have before purchasing your new home abroad? 1. ​Real Estate Agent and/or Lawyer – First you’ll probably need an agent, someone to act on your behalf. It is important that this person works for you and that they see you as their primary client. In some cases, real estate agents or lawyers may have agreements with local sellers and thus they may not always act in your best interest. 1. ​Residency Requirements – Can you purchase a home in their country without being a citizen? In some cases, the answer may be yes, in other cases you may be allowed to purchase with certain restrictions. Still, even if they let you purchase the home, it is possible that you may not be allowed to live in the home year-round. There may be visa restrictions on the amount of time you can spend

in the country before returning to your native country. In some countries you will not be allowed to seek employment and you will need to prove that you have sufficient funds to support yourself and your family. Also, it may be required that you purchase health insurance before taking residence. 1. ​Negotiation - Foreign homebuyers need to be aware of how to negotiate and what is actually negotiable. It is also important to consider that in some countries the seller may not need to accept the highest offer for their home, they may choose not to sell to you at all. 1. ​Contracts – It is essential that you have a lawyer that can both represent your interests and explain to you the terms of sale with the owner and the responsibilities you will inherit as the new owner. 1. ​Bribes – In certain countries bribes may be acceptable or even required to complete the sales process. These fees vary so consult your local agent for details. 1. ​Purchasing the Home – How will you pay for the home? In many cases, cash payment is expected from foreign buyers. If the home is to be financed, in certain countries you can expect to put down a large down payment, perhaps greater than 50 percent of the purchase price. 1. ​Selling the Home or Passing Ownership to a Relative – If you decide to sell the home, are there restrictions on how the home is to be sold and at what price? Also, if a profit is made on the sale, how might that be taxed? Will you have any legal commitments following the sale of the home? Also, what happens if after your death you’d like to leave the home for a family member or friend? In some countries there are strict restrictions on how home ownership can be transferred, especially as part of an inheritance.

1. ​Legal Requirements of Owning a Home – As a homeowner, it is important to know your role and liability in areas of waste, plumbing, roads, sidewalks, electrical and communication infrastructure. What is your liability for accidents that occur on your property? Purchasing raw materials, parts, general business services, manufacturing and assembly services, and logistics services are all parts of the global sourcing landscape. This is part of the reason that this is the final section of this module. Before a procurement specialist can make sourcing decisions about materials, operations and logistics, they must understand the issues and decisions involved at the global supply chain level.

1. CULTURE’S IMPACT ON NEGOTIATIONS Each country and/or region of the world ascribes to its own worldview. Consider your personal views on the following issues: 1.

​Equality – Men/women, race, age, socioeconomic background

1. ​Trust and Friendship – Is it important that you have standing relationship, perhaps a long-term relationship, or even a family tie with business partners? Is this expected in certain countries? Is it legal? 1. ​Values - Which of these values are most important to you: Teams, money, individualism, freedom, social status, job, education, integrity, modesty, loyalty, respect, tradition, honesty…? 1. ​Business Decisions - Which do you typically find more important in making a business decision? Persuasive data or an impressive professional presentation? 1. ​Meeting Times - If a meeting is set for 9 a.m., when should that meeting begin?

1. ​Individual Rewards - How would you like to be rewarded? Money, title, time-off, long-term contract, ownership, expanded responsibilities? 1. ​Greetings - How should a person be greeted? What does it mean if you are not greeted this way? If you believe that your answers to any of the preceding questions and issues are the only acceptable answers, it is likely you would have problems building global supply chain alliances. As companies seek to develop relationships with companies around the world, it is important for executives to understand the cultural norms of their business associates. Saying the wrong thing, acting in a way they find odd or offensive, moving too quickly or too slowly, how does this impact their desire to do business with you? Managers seeking to develop a career in global procurement should understand the importance of learning and honoring the cultural values of their potential business partners.

2. EVALUATION OF SUPPLIERS Supplier evaluation is always difficult. Even when the products or services are identical, issues like price, supplier reliability, product quality, terms of sale and shipping time/distance can make evaluating two different suppliers difficult. While some procurement executives may find this daunting, a good procurement manager sees these complexities as the issues that can maximize supply chain effectiveness, efficiency and adaptability. Furthermore, while product samples, price quotes and operational promises are vital to a supplier proving their worth, producing one good sample to show a client and make enticing business offers is easy. The hard part is delivering high quality goods at the right price, time and quantity on a daily basis. As a result, global procurement specialists will often seek to visit the supplier, talk to the plant managers and employees, and may even want to follow materials as they enter the supply chain and then watch the end products packaged and delivered.

3. CUSTOM MANUFACTURING SOLUTIONS ORGANIZATIONS Organizations that provide data on suppliers in a region or country. They may be able to report on product quality, reliability and even on the financial stability of the suppliers. In addition, these types of organizations may assist in setting up meetings with executives from suppliers. For certain industries, these types of organizations may even be able to aid in choosing suppliers, manufacturing contractors and logistics partners. Some will even step beyond procurement of materials and services, and perhaps provide data and financial services between the supply chain partners. EXPLAINED: Suppose a small 25-employee company develops a new digital device. The company would like to get their item manufactured, but they do not know where to begin. Where will this item be manufactured? Which companies should be contacted first? How can we establish meeting with the top suppliers? Establishing a global supply chain can be expensive and time consuming. How can an organization minimize waste in developing their new global supply chain? By reaching out to different types of custom manufacturing service organizations, this small company might be able to quickly identify top candidates to perform the supply, operations and logistics activities required to produce and bring to market this new digital device.

4. BUSINESS PROCESS OUTSOURCING The outsourcing of office activities such as accounting, human resources, and customer service activities like call centers and customer chat. Sometimes these types of outsourced activities are referred to as back office activities. Example: IBM offers business process outsourcing to companies in the US and around the world. IBM offers companies help in the areas of employee recruitment, supply chain services, and customer care and management of financial data. If you owned a small company, you might consider having

IBM help manage these types of business activities rather than developing expensive departments internally.

CHAPTER 8: SOCIALLY RESPONSIBLE SUPPLY CHAIN MANAGEMENT GOALS, OBJECTIVES AND STUFF WE WILL RUIN: Demonstrate that social responsibility and world-class supply chain management are one in the same. Gain an understanding of the challenges organizations face in trying to be ethical, sustainable and mindful of the community. Discover how being sustainable can provide long-term value to organizations and their shareholders. Perhaps you will want to use your supply chain skills to benefit humanitarian organizations.

SECTION 8.1: WHAT IS SOCIAL RESPONSIBILITY (SR)? STORY: THE BUTTERFLY EFFECT OF RECYCLING

 If you are reading this book on an electronic device, you likely live a fairly good life. Shelter, food and clothing are probably a part of your everyday life. Odds are you appreciate your life and you try and give back to this world. Perhaps you try to help the less fortunate or ensure the well-being of our planet and all of the creatures that inhabit it. Let me ask you this question: What will you do with this electronic device when it is no longer useful to you? Perhaps you will sell it or give it to an organization that would find a worthy owner; both are good in that they ensure the continued use of a product. If the product is no longer functional though, you may want to deliver it to a recycling organization. In doing this, you have ensured that parts and materials can have a new life rather than sit in a landfill for hundreds, if not thousands of years. The question is, could it really be that simple? In science there is a phenomenon known as the butterfly effect. It sort of goes like this: When a butterfly flaps it wings, the flapping impacts the air and that in turn moves and changes the environment in a way that could

potentially influence global weather patterns. This idea makes us wonder what would have happened if there were no butterflies or if the wings had flapped faster, or if the butterfly flew in a different direction. Now think, could any one of those things have prevented or caused a hurricane? You, and companies, are like a butterfly in the sense that every decision and subsequent action you make represents a flapping of your wings. Just like how the butterfly that flutters about to get food may cause a hurricane, your recycling of electronics may contribute to the decay of a community, the contamination of a water source or perhaps the death of a child. While the butterfly effect has scientific roots, it is often used as a fable to demonstrate that small actions can influence macro outcomes. Unfortunately, the story of recycled electronics resulting in poor communities around the world being ravaged is no fable. In 2014, Popular Science released an article titled, “The Garbage Man,” which told the story of what happens to many of the recycled electronics in the US when they go abroad. In sum, electronics are made up of an assortment of metal and plastic parts – individual parts sometimes made of different types of metals and plastics. Each type of material has a different value, but only when separated from the rest of the parts. Dissecting even a computer keyboard can be extremely difficult, labor intensive, time consuming and might require the use of chemical agents. In many cases, the costs to recycle these goods is too high, thus exporting old electronics to extremely poor parts of the world is the only way to mine the valuable materials from the goods you submit for recycling. This is where things get ugly. Tons of electronics are diverted to the very poorest communities where healthy people abandon traditional labor opportunities for the “big” money of disassembling electronics with their hands and with the use of toxic chemicals. Those chemical baths result in even more toxic residue that comes into contact with workers, the soil and eventually their sources of drinking water. In addition, some materials either lack value or are forever stuck in the web of obsolete electronics. Piles of computer parts, some of them extremely toxic, litter nearly every corner of these communities. The health of people young and old in these communities is poor at every level and will only continue to get worse should these practices continue.

In our modern world, social responsibility in the business community is a topic that gains more momentum with each passing decade. Rooted in good intentions, it often represents a corporate concern for ethical behavior, sustainable business practices and humanitarian issues. Recycling seems like a noble endeavor but as we unwrap the supply chain loop that follows materials from their raw material origins, to consumer good and into the recycling process, we often find that good intentions are not enough. Wanting to be socially responsible is easy but creating socially responsible organizations, supply chains and business processes can be quite challenging. In the example provided, good intentions spawned the unethical treatment of workers and the creation of toxic output that damaged the environment and resulted in a humanitarian disaster - social irresponsibility at every level. While it may empower those that think making money at any cost is acceptable and deflate the spirit of those that want to create a better world, the unflappable business leaders that will stop at nothing until a safe and clean future is secured need to have a firm foundation in socially responsible supply chain management.

1. SOCIAL RESPONSIBILITY IN BUSINESS In the world of business, social responsibility often means that an organization values three things: 1. ​Legal and Ethical Behavior – Acting within the law of all of the countries in which they conduct business. It might also include treating stakeholders well - employees, business partners and customers. 1. ​Sustainability – Being aware of and supporting or improving Earth-friendly business practices within the company. This includes having business practices, products and services that do not harm the environment in the present nor in the future. 1. ​Commitment to the Community – Investing in the well-being of the communities in which the business operates as well as the greater world.

EXPLAINED: The concept may seem simple, but in fact it can very easily become manipulated or confused. All three categories are so broad and general that different parties can interpret them in different ways. Companies may use the term social responsibility to seek a competitive advantage and special interest groups may create radical interpretations of the concept in order to attack companies.

2. WHY BE SOCIALLY RESPONSIBLE? 1. ​Avoid Government Fines and Regulation – Governments are moving toward making many forms of social responsibility the law. Some companies seek to change before change is imposed upon them. 1. ​Seek Positive Public Image – Being seen as a socially progressive company may expand your market and dissuade regulation that might directly impact your organization. 1. ​Demonstrate Company Goals and Values – Customers and some of a company’s best employees may value social responsibility. They might prefer if the company they work for or support has similar values. 1. ​Protect the Company’s Interests – Some would argue that being good has many long-term rewards, even in business.

3. LINKS BETWEEN SUPPLY CHAIN MANAGEMENT AND SOCIAL RESPONSIBILITY Even the most basic analysis of the fundamental goals of supply chain management demonstrate that in truth the good supply chain management and socially responsible supply chain management seek identical outcomes. 1. ​Eliminate Waste – Good supply chain and business sustainability both value efficiency.

1. ​Legal and Ethical Business Practices – Treating customers, employees and supply chain partners well is vital to controlling costs, maximizing productivity and increasing sales. 1. ​Improve Quality of Life – While supply chains are supposed to efficiently deliver valuable products and services to customers, we can also extend this point to say that the best supply chain practices in business, government and military can be useful to organizations that seek to save lives.

4. CHALLENGES OF DEVELOPING A SOCIALLY RESPONSIBLE SUPPLY CHAIN Modern global supply chains are a complex web of people and businesses. Often even established companies do not know what is happening beyond their first-tier supply chain partners: 1. ​What’s the Right Thing to Do? – Throughout history, companies and activists have developed programs and practices intended to result in better social outcomes. Some of the most logical ideas have resulted in poor, if not dangerous, outcomes. Even in our modern society with so much knowledge about commerce, culture and science, why is it that finding good answers can be extremely difficult? Investigate almost any socially responsible product or business practice and you are likely to find detractors that will argue it causes more harm than good. 1. ​Monitoring Supply Chain Partners (and Yourself) – Companies in aerospace and automobile manufacturing may have over 1,000 first-tier suppliers. Can any company feel truly confident that all business practices at every organization, every single day are socially responsible? It’s difficult to guarantee that every one of your employees is acting in a socially responsible manner at any given moment. With that in mind, imagine the difficulty in monitoring behaviors at all levels of your supply chain.

1. ​Tracking Outcomes Across the Supply Chain – Can you really fix problems across your supply chain without tracking employee behaviors, customer behaviors, resource usage, government fines, etc.? Wanting to fix problems may be the first step, but knowing the level of the problem today and then monitoring the outcomes of changed policies will require good relationships with supply chain partners willing to share their data.

SECTION 8.2: ETHICS STORY: RANA PLAZA



FASHION INDUSTRY DISASTER In April 2013, an eight-story building, Rana Plaza, collapsed in Bangladesh killing 1,129 people and injuring over 2,000 more. Many of these people were workers in the garment industry being poorly paid for working in less than desirable conditions. In fact, the building was originally a five-story building intended for commercial use only. Without proper legal permits, three stories were added to Rana Plaza and some of the floors were illegally used for industrial work like making clothing for the fast-fashion industry – bringing affordable and fashionable clothing from new design to market in a matter of weeks. While this single disaster garnered massive attention on the improper behavior of the fashion industry and modern global supply chain management, even more unnoticed death, destruction and human peril happens continuously but at a slower pace all around the world. Rana Plaza simply called the world’s attention to problems and challenges that still continue today.

Supply chains are tasked with being effective, efficient and adaptable. Businesses typically view these issues from the perspective of satisfying consumers and investors. Often forgotten are the parties in the middle – suppliers, manufacturers, manufacturing workers, truck drivers, pickers and packers, etc. Sometimes even consumers are forgotten while companies deliver dangerous products into their homes and communities.

ISSUES TO CONSIDER Let’s briefly look at a few of the issues that cloud the garment industry in Bangladesh and other similar locations: 1. ​Bangladesh is consistently ranked in the top five exporting countries of clothing, exporting about $20-$25B USD in clothing annually. Thus, this is obviously an important industry for government officials and powerful businesspeople in that country. Unfortunately, their incentive to change prior to Rana Plaza, and even after, was and is still rather low. A potential reason for their lack of action: Making significant changes may come with unforeseen consequences. 1. ​Workers in these types of facilities work long hours in unsanitary and unsafe working conditions. In most cases, labor unions are illegal or are granted limited power by the government, therefore stifling the progression of many changes. 1. ​Wages are low, so families may require their children to work in an effort to bring more money into the home for necessities like food, clothes and shelter. While parents want their children to get an education, sending a child to school could come with significant opportunity costs. To some this all seems so horrible - it is, and for many the ways to fix these problems are so simple and obvious - they aren’t. Let’s consider some of the more common remedies that likely come to mind for even our most ethically minded businesspeople:

1.

​Have the government raise the minimum wage.

1. ​Conduct routine government inspections of the facilities and levy fines and penalties when appropriate. 1. ​Require plants to clean-up their act and clean facilities, improve safety, reduce exposure to toxins, consider child labor issues, etc. 1.

​Close down the most dangerous plants and companies.

1.

​Have fashion retailers more closely monitor their partners.

1. ​Have fashion retailers funnel money upstream to suppliers for upgrades to facilities and/or for increased employee wages. Every one of the above ideas is well intentioned but the execution may be difficult and sometimes the outcomes lead to more problems. 1. ​Governments and local businesses fear making any changes that might result in increased costs for foreign retailers. Foreign retailers may get scared off by higher costs and look for new manufacturers in other countries. 1. ​Stopping production could temporarily close a facility leaving both owners and garment workers without income. It’s very likely that many workers living in the most desperate parts of the world would rather work in dangerous conditions versus not having income to feed their families. 1. ​Inspections and monitoring are intended to improve poor behaviors and find problems before they result in Rana Plaza-like disasters. Still, these processes are often rife with bribery and other forms of corruption. In the case of Rana Plaza, inspectors saw cracks in the building days before the collapse and still little was done. Socially Responsible Supply Chain Managers

This is why modern global supply chain managers need to understand all the levels that can create, fix or unknowingly exacerbate ethical dilemmas in the supply chain. While you may be willing to pay more for your clothing, research fashion companies and hold nefarious retailers responsible, most consumers and investors will not. Ethical supply chain management is about finding trustworthy supply chain partners, developing good relationships, developing productive workplaces, understanding risk and finding waste. It’s really no different than regular supply chain management, it simply requires a braver brand of supply chain manager that is willing to confront the costs of being a good human.

1. ETHICAL ISSUES IN THE SUPPLY CHAIN Companies interested in promoting ethical behavior in the supply chain need to educate all of their employees in the many possible ethical breaches. Here is a short list of issues that fall under the umbrella of ethical supply chain management: 1.

​Obey Laws – This is crucial whether in your country or abroad.

1. ​Choosing Ethical Business Partners – Some companies may seek to pass on the responsibility of unethical business practices to their supply chain partners. In this way they can hide behind excuses and lies, using their partners as scapegoats. 1. ​Do Not Bully Supply Chain Partners and/or Employees – Large companies with lots of power may use their influence to abuse companies and/or people, possibly forcing them to do things that are illegal or unethical. 1. ​Conflicts of Interest – Some suppliers may seek to ensure a contract with your company by giving expensive and/or inappropriate gifts to your procurement manager. Other types of conflicts of interest may include special favors for family members or capitalizing on financial insider information.

1. ​Protect the Environment, Workers and Consumers – Causing harm to people or our planet is unacceptable. 1. ​Breaches in Intellectual Property, Consumer and Employee Personal Data, and Confidential Business Information – Are you adequately protecting the personal data of people and the business secrets of your business partners?

2. TOOLS FOR MANAGING AN ETHICAL SUPPLY CHAIN The best criminals find new ways to break the law and as such laws are continuously changing. Due to the rapid change that exists, modern supply chains are structured in ways never before imagined. As supply chains expand to new regions, different cultures may interpret ethical behavior in different ways. It is for these reasons that the following tools should be used early and often in the development and growth of your supply chain: 1. ​Continuous Education and Awareness Programs – Everyone thinks they know how to be ethical. Don’t take their word for it, provide opportunities for people to learn about how to identify and avoid unethical behavior. 1. ​Security Across the Supply Chain – In our modern world, a company that does not protect its products, people and data is creating an unsafe environment. 1. ​Establish a Whistleblower Program – If an employee discovers an ethical breach, who can they tell? Will this employee be safe if their superiors are perpetrating the unethical behavior being reported? 1. ​Monitoring and Auditing Programs – While these types of programs have their limitations, not attempting to monitor and/or audit supply chain partner and employee behavior may invite unethical behavior.

3. SA8000 Developed by Social Accountability International, SA8000 is a certification that focuses on social responsibility in the workplace and may be of value to companies seeking the approval of customers and/or present and prospective supply chain partners. https://sa-intl.org/programs/sa8000/ In order to receive this certification, companies must subject themselves to audits that will investigate workplaces in nine different categories: 1.

​Child Labor

1.

​Health and Safety

1.

​Discrimination of Any Type

1. ​Payment/Compensation – Fair and legal pay; workers are provided a livable wage. 1. ​Unionization Rights – Freedom to form and join labor unions and also the right to collective bargaining. 1. ​Forced Labor – The organization does not motivate employees to stay by withholding payment or driving workers into debt; this includes prison labor. 1. ​Disciplinary Practices – Fair treatment of all workers with no mental or physical punishment. No abuse of any type. 1. ​Working Hours – Company must abide by the laws of the state and complies with work weeks of no more than 48 hours and no more than six consecutive days of work. 1. ​Ethical Management Systems – Being a complaint organization is not enough. Companies must have a standardized system that

supports and nurtures a socially responsible workplace.

SECTION 8.3: SUSTAINABILITY STORY: GREEN MOVEMENT: THERE’S MONEY IN SUSTAINABILITY

 The spread of capitalism around the globe has opened up new markets to some of the world’s biggest corporations. They have also discovered that it has allowed new and unknown competitors both big and small from all around the world to challenge them in their home countries and abroad. The level of competition in our modern global business environment is fierce. To some it may be surprising that it is during this period of time that many global corporations have committed themselves to sustainability. Why are they doing this now? Good public relations? Fear of government intervention? Yes, perhaps. But companies have also discovered that sustainable business practices are essential to controlling costs in the present and future. In addition, as global resources become scarcer and more valuable, companies are looking to science to improve supply chain productivity. Companies like Nestlé and Nike are extremely concerned with the shrinking availability of freshwater. A lack of water may mean smaller crop yields, higher seed costs, or higher manufacturing costs. Ignoring these

realities today may invite governments to mandate changes in a way that is not beneficial to a company. Companies that import products on large container ships and companies that use petroleum in their manufacturing processes are deeply concerned with unexpected changes in oil prices that may result from government policy changes, climate induced disasters, or shifts in global demands for oil. Not being mindful of your use of resources is a direct dereliction of duty to your investors and stockholders. For companies that want to ensure long-term profits and low costs, being sustainable is a capitalistic imperative. One other complicating issue in the arena of sustainability is that different countries, states, provinces and cities are developing different legislations. Sometimes the new laws send mixed messages to companies. As a result, a company with a poor track record in sustainability may find themselves developing a different sustainable management plan for every region of the world. This can be a costly and confusing logistical nightmare. Modern day sustainability programs and their recommended business practices take on many forms: 1.

​Reduction of toxic emissions and toxic chemicals

1.

​Disposal of toxic materials during production

1. ​Disposal of end-products – recycle, landfill, compost, refurbish, repurpose 1.

​Reuse of packaging

1.

​High fill rates on trucks and in containers

1.

​Reduction of fuel consumption in the supply chain

1. ​Elimination of the use of certain types of fuels, materials and/or water

1. ​Safety programs that include fewer toxins in the materials and workplace 1.

​Measuring sustainability throughout your supply chain

This is only a short and fairly simple list of practices and programs being used globally. Every one of these is geared toward cost control, resource efficiency, finding waste, improving products and services, and anticipating changes that may threaten unprepared companies. As a result, some companies have looked to formalize their commitment to sustainable supply chains by developing “sustainability divisions” within their organizations. While admirable, some will argue that this actually may slow change or empower some within the company to pass the buck. What does that mean? Well, when a company has a sustainability division, the folks in manufacturing, when confronted with a sustainability issue, may say, “that’s not something we can do. If you want that changed you should ask the folks in the sustainability division.” Of course, the people in the sustainability division want to make the change, but manufacturing may resist change and challenge the sustainability division’s authority. One might argue that a company isn’t truly being sustainable until it makes everyone accountable for being sustainable. Unlike ethical supply chain management, where the consequences of poor behavior are often shielded from customers, sustainability issues create a visible impact at many levels. Consumers are immediately impacted by dangerous products; governments quickly feel the effects of toxic emissions, contaminated water and landfill problems; even companies in the supply chain feel the impacts of unsafe materials, unclean work environments and wasted resources. Sustainable supply chains will become ever more important in the present and in the future. Modern supply chain managers must be prepared to analyze supply chains, make progressive decisions and act in sustainable ways.

1. SUSTAINABILITY In the world of business, one of the more commonly accepted definitions for sustainability and sustainable development is the one developed by the

Bruntland Commission in 1987: “Sustainable development is development that meets the needs of the present without compromising the ability of future generations to meet their needs.” EXPLAINED: Prior to the term sustainability, the term environmentalism was often used to define the realm of sustainability. The negative connotations associated with environmentalism made that term and any associated business projects seem non-business focused. Sustainability, in particular the Bruntland definition, made the progressive attitude toward development and innovation seem acceptable. Nonetheless, this short and simple definition provides a roadmap for decision-making. Innovation today is acceptable as long as the consequences of tomorrow are considered. Obviously, there is room for debate on what this definition implies, and perhaps that is the strength of the definition. This definition creates a platform for sustainable business management and decisionmaking.

2. SUSTAINABILITY FRAMEWORKS In an effort to guide supply chain managers toward new ideas, a number of terms and concepts have been used over the years to present different sustainability perspectives. Here are a few of those terms and concepts, each with a short description of what each intended to convey: 1. ​Triple Bottom Line – Companies should consider the possible economic, environmental and social outcomes associated with business decisions. 1. ​Reduce, Reuse, Recycle – Rather than have everything end up in a landfill as garbage, companies should consider ways to conserve materials and energy, maximize the use of their resources and find new uses for items that are no longer valuable. 1. ​Cradle to Grave Design vs. Cradle to Cradle Design – In the past, items were designed to be purchased and used for some

purpose. Little, if any, thought was devoted to what would happen when the item was no longer useful. This was cradle to grave design. In sum, all items were destined for landfills. Cradle to cradle design was coined to expand the mind of designers so that they would consider how the parts in the item might be repurposed once the item was no longer useful to the user. 1. ​Closed Loop Supply Chains – Utilizing the idea of cradle to cradle design, this extends the same concepts to supply chain. Supply chains that seek to create a loop of materials through sustainable procurement, manufacturing, logistics and reverse logistics.

3. CHALLENGES OF BEING SUSTAINABLE Despite all the evidence that sustainability can be both good for the environment as well as for investors, why is supply chain sustainability still hard to pursue? 1. ​Motivating Supply Chain Partners – Some companies still do not see value in sustainable programs. 1. ​Customers Want Things That Last – More durable items often don’t break while you own them. That’s the problem; they may not easily breakdown once tossed into a landfill. 1. ​Local vs. Global Management – If every city, state, province and country has different sustainability laws and programs, your company may need to create a different sustainability plan for each region. 1. ​Lack of Understanding or Knowledge – Some companies realize they have problems and are very willing to fix them. The only problem they may face is confusion. Global supply chains are extremely complex and changing something in procurement may

have unforeseen impacts on distribution. Companies often want to change but don’t know how. 1. ​Metrics – You can’t fix a problem unless you can find it and measure how bad the problem is. Similarly, you can’t prove the problem has been solved unless you can measure the level of improvement 1. ​Managerial Support – Is your boss willing to fund and support new technologies, materials and business practices in an effort to make your company greener?

4. HOW SUPPLY CHAINS CAN BE MORE SUSTAINABLE As has been discussed, sustainability solutions are still in development. Some ideas are good; others have been proven to have adverse effects. Plenty of ideas are being generated every day. Here is a shortlist of some very general ways companies are trying to become more sustainable: 1. ​Procurement – Purchasing better materials, fewer materials and safer materials. 1. ​Logistics – Transportation efficiencies and reduce fuel consumption. 1. ​Manufacturing and Operations Facilities – Energy consumption, defect reduction and minimize emissions. 1. ​Reverse Logistics – Recovery of packaging, damaged items, parts, etc. for reuse, refurbishing, resale and recycling. 1. ​Supply Chain Sustainability Catalysts – Large, powerful companies can become catalysts and often have the power to motivate thousands of suppliers to become sustainable. This not only

impacts the catalyst’s supply chain; it impacts every other company that buys material from that supplier. 1. ​Rethink Design – Poor design will always yield poor outcomes. Sometimes companies need to start from scratch and develop a new design. Example: Electric car engines instead of gasoline powered engines 1. ​Sustainability Accounting – Companies cannot fix a problem until they can find the source. With the help of accounting, supply chains can identify primary areas of costs related to unsustainable business practices. 1. ​Develop Sustainability Metrics – Metrics help companies find problems, track improvement, and they can also motivate employees to change their behavior. 1. ​Life Cycle Analysis – A systematic approach that attempts to quantify the environmental impact of every step in the supply chain. This helps companies identify different types of problems in different parts of the supply chain. The hope is that this will guide managers to create individualized sustainability goals for different departments or functions. EXPLAINED: While all of these seem rather simple and direct, the required creativity in planning and commitment to change is typically what sets apart companies that desire sustainability versus those that actually achieve sustainability.

5. ISO 14000 A series of certifications offered by the International Organization for Standardization in the area of sustainable business practices and management. ISO 14000 certification of your company can prove to other companies/potential supply chain partners, as well as customers, that your company is committed to sustainability at an organizational level.

https://www.iso.org/iso-14001-environmental-management.html

SECTION 8.4: HUMANITARIAN SUPPLY CHAIN MANAGEMENT STORY: THE COMPLEXITY OF PREPARING FOR DISASTER

 Before the Disaster: As you’ve learned, managing supply chains can be difficult. Where is your customer? What do they want? When do they want it? Finding these answers is an endless quest. The answers you do find are often riddled with vagaries. Now imagine trying to plan for a catastrophic natural disaster. As the head of a humanitarian organization you are constantly asked to deal with these types of questions: 1.

​Where are likely locations for the next natural disaster?

1.

​What type of disaster will this be?

1.

​When is this disaster likely to occur?

1.

​How many people will be impacted?

1.

​What will they need?

1.

​Should you buy materials in bulk today? Which ones?

1. ​Should you wait until the disaster strikes? How might this impact supplier prices between your organization and competing humanitarian organizations? Humanitarian organizations are not a place for timid and risk averse businesspeople. It is not a place for people that do not want to deal with the pressures of competition. It’s not a place for people that desire a desk and a clean office. Finally, it is not a place for someone that thinks a poor fiscal quarter is the end of the world. The world of humanitarian organizations is often stable and lacking in supply chain coordination. It is an extremely competitive environment where humanitarian organizations fight to save lives in the most effective way possible. Wasting money and time will drive away financial donors and render your humanitarian organization irrelevant. Oh, and by the way, if you fail, people will die.

SECURING SUPPLY CHAIN PARTNERS As a humanitarian organization seeks to secure supplies, what are some issues they consider? Typically, they are looking for suppliers with a track record. 1. ​How has this supplier performed in different types of humanitarian events in the past? 1. ​While price will be important, quality is equally vital. In a disaster situation, will the materials provided be good enough to meet the necessary requirements? Are the supplies durable enough to withstand the very likely challenging logistical obstacles? 1. ​When can deliveries be expected? What is the lead-time for the first shipment and all subsequent shipments? While the supplier selection criteria are not that different from corporate supplier selection lists, the context of the answers are rather different. Also, since the size of the demand and the disaster event are unknown, supplier flexibility will also be an important consideration. In the end, the basic

supply chain competitive priorities still rule the day - cost, quality, speed and flexibility. The Disaster: Reacting to natural disaster is not the only responsibility of humanitarian organizations. There are all sorts of disasters. Being prepared to deal with one, and sometimes more than one of these at the same time, however, is also the job of humanitarian organizations: 1. ​Quick Striking Natural Disasters – Earthquakes, hurricanes and tsunamis 1. ​Slow Occurring and Drawn Out Natural Disasters – Drought, famine and disease 1. ​Quick Striking Man-Made Disaster – Terrorist attacks and chemical/nuclear accidents 1. ​Slow Occurring and Drawn Out Man-Made Disasters – Political unrest that results in emigration to refugee camps and contamination of water sources The Arena of Despair: Disaster strikes. It’s time to act. Humanitarian organizations must mobilize materials, machines and people to the disaster location. The information about the disaster site may be limited or completely inaccurate. Believe it or not, sometimes customs rules and regulations governing imported items may prevent aid from entering the country. When your organization arrives you will find dozens, if not hundreds, of other organizations arriving at the same time. Domestic and foreign government groups, competing humanitarian organizations, religious organizations, military factions, local law enforcement, healthcare workers, engineers and many other types of people, both foreign and local, all fighting for runways, tent space and access to the roads. Each group has its own agenda - few, if any, are willing to share information and/or collaborate. The possibility of failure is high and worldwide media sources

are ready to report incompetence. Not only are lives at stake, the fate of your organization lies in the balance. If you think Amazon.com faces challenges in the last mile of the supply chain, you likely haven’t considered the chaos and confusion of disaster areas. Infrastructure may have been poor before the disaster, now finding accessible roads, dealing with floods, finding fuel and protecting shipments from looters are just a few of the challenges faced in finding, reaching and helping victims. Communication is the key to making good decisions during the first few hours and days of the disaster. Luckily, even in some of the poorer nations cellphones are commonplace. As a result, modern humanitarian organizations are now racing to find ways to utilize social media, texting and other mobile technology to assess damage, find victims and communicate with other aid organizations. Aftermath: Three weeks after the January 12, 2010 earthquake in Haiti, over 2,000 humanitarian agencies were still on site. Billions of dollars in relief were pledged for aid that would extend through 2020. Hundreds of thousands dead, hundreds of thousands injured and millions without homes – good people in need of help for months or years to come. Bad people looking to take advantage of any opportunities made available. Local businesspeople worried that humanitarian organizations with free goods will destroy their livelihoods. Governments concerned with maintaining the sovereignty of their state. Even if your humanitarian organization is ready for the day that disaster strikes, is your organization ready for the weeks and months that follow? As the process of rebuilding homes and placing people in those homes begins, a tough question begins to surface: Who should get help first? There is no easy answer to that question. Having a foreigner in a humanitarian organization make these decisions is often not well received. Modern humanitarian organizations will often seek out trusted local leaders to help direct aid to those families and individuals who are most in need.

INVESTMENT IN PREVENTION: Even when all is well, humanitarian organizations are working to improve infrastructure, provide vaccines, educate, etc., in an effort to prevent or mitigate the impact of possible future disasters in the most vulnerable locations. This is also beneficial from a reconnaissance perspective. When humanitarian organizations have aid workers in high-risk regions, these workers learn the culture, understand the needs of the community, and often earn the trust and respect of locals. If disaster does strike, these humanitarian organizations are likely to get the best return on their investment as they apply material, capital and human resources to save lives.

CHAPTER 9: BUSINESS PROCESSES GOALS, OBJECTIVES AND STUFF WE WILL RUIN: This module will help you discover the importance of business processes in managing and growing a company. Increase your appreciation of the business processes of your favorite businesses and organizations. Guidance on developing effective and efficient business processes. https://www.youtube.com/watch?v=JUInjQvzIkE

SECTION 9.1: BUSINESS PROCESS FUNDAMENTALS STORY: RECIPE FOR SUCCESS

 Many of us count on recipes to create meals for our friends and family. Recipes allow us to try new foods with a roadmap that has been developed by someone who is hopefully a smarter, more adventurous and more experienced chef. Their creations are documented and then shared with us in cookbooks or emails, on television/YouTube programs or on internet websites. While the foods that result from these recipes can vary, we all know that there are some recipes that are easier to follow than others. That in mind, consider the issues you typically confront in using these recipes: 1. ​Some recipes are too complicated for people with limited experience. 1. ​A recipe may require equipment and ingredients unavailable to the at-home cook.

1.

​Sometimes recipes are too vague to successfully follow.

1. ​The options for ingredients and cooking techniques may leave too much room for error. 1. ​Perhaps the recipe lacks detail. Pictures and videos might be helpful. 1. ​Sometimes we wish the person that created the recipe was available to answer our questions. This is why great recipes are so valuable. When an at-home cook finally discovers a recipe for great food that is easy to understand and consistently reproducible, the recipe is stored away and used many times over. Recipes are the culinary world’s version of a business process. Like a welldesigned and well-documented business process, a good recipe can teach many different types of people how to create high quality outputs on a very consistent basis. A good business process is easy to understand and provides sufficient detail. A good business process also considers and answers every question before it is asked. As you read this section on the fundamentals of business processes, think about culinary recipes. What makes for a good recipe? What makes for a bad recipe? Why might a good recipe produce bad results? Furthermore, as you visit your favorite businesses consider how organizational leaders that develop good business processes might help the company produce consistent results. Consider how good business process might aid in training new employees and adding new locations. Business processes are essential to the success of the company on a daily basis as well as the ability to grow the company in the future.

1. BUSINESS PROCESS A documented series of activities that when completed properly will effectively and efficiently turn inputs (materials, equipment and labor) into valuable products and/or services.

EXPLAINED: How can a restaurant make the dishes on its menu over and over again in a consistent but efficient manner? How do stores process hundreds of transactions each day quickly and accurately? How do store and restaurant chains reproduce the same high-quality output at all of their locations across the country or perhaps at all of their locations around the world? Business processes are at the heart of this repetitive success. In each case, a person or a team of people worked to create a step-by-step explanation for producing and reproducing the same product or service over and over again. In addition to excellent outputs, process development teams work to create the most efficient process and the utilization of fewer resources helps in controlling costs. Further, when a process is fast and efficient it can produce more outputs (products and services) during a given period of time.

2. THE VALUE OF BUSINESS PROCESSES Companies and their supply chains are essentially a collection of dozens, if not thousands, of interconnected and interdependent business processes. Consider an establishment that makes sandwiches and salads. These are just some of the processes that are performed at this establishment each day: 1.

​Slicing cheese and meats

1.

​Preparing vegetables

1.

​Making a sandwich

1.

​Making a salad

1.

​Taking customer orders

1.

​Taking payment from the customer

1.

​Cleaning the kitchen

If this establishment hopes to make the same great food everyday with minimal effort and minimal resources, it needs to develop excellent

business processes for each of the listed processes, plus for all the processes that were not mentioned. Some companies invest in developing and improving their business processes, but other companies do not. What are some of the benefits for organizations that develop excellent business processes? 1. ​Consistency – Outputs, resource utilization, equipment and technology requirements, as well as employee training should be similar. 1. ​Managing from Afar – In organizations that use consistent business processes across locations, executives can identify strengths and weaknesses via analytics from each facility. Resources, outputs, service times, wait times, etc. can be compared across the organization. 1. ​Ability to Grow – Documented corporate business processes allow the organization to more easily open new locations. A good set of processes allows for near immediate replication of the company in different locations. More plainly, this implies that new locations can simply follow the processes presently used at the other locations.

3. CHARACTERISTICS OF A GOOD PROCESS While this is not necessarily a complete list of the characteristics of a good process, these are certainly some of the most important characteristics to consider in developing and managing a good process. As you read these good process characteristics try and envision a business process with which you are very familiar (ordering coffee, placing an order on Amazon, depositing money at the bank, etc.). A. Good Intentions – Processes are often executed and managed by people with the intent of satisfying a customer. As a result, good processes must have good intentions. Things to consider in developing a well-meaning process: 1.

​Goal Oriented – Processes must have specific goals.

1. ​Effectiveness - Goals should include providing customer what they desire. Were you effective in satisfying the customer? 1. ​Efficiency – Goals should also include producing excellent outputs with minimal inputs. 1. ​Stakeholder Consideration – Don’t forget to consider the people involved with the process. Does your process stress safety, security and physical health? Does your process minimize stress and confusion? 1. ​Related Business Processes – In most cases, one process is linked to one or more other processes. Remember to consider how each process might help or hinder a related process. 1. ​Seek Opportunities for Improvement – Having a good process today is great, but does your process seek to improve and grow over time? B. Reproducible Results – Part of the value of a business process is knowing that results are somewhat predictable. Here are some things to consider in developing processes with reproducible results: 1.

​The process must be documented and easy to understand.

1. ​The process should aid in establishing hiring and training practices. 1. ​Is the process capable of providing variable output to meet customer needs? 1. ​What is the capacity of the process? Can the process efficiently and effectively handle the expected demand? C. Measurable and Manageable Results – Customers expect excellent and consistent results from the business processes they encounter. Process

designers and managers need to consider how output will be measured, interpreted and then improved. 1. ​Valuable Metrics – Which numbers will provide insight into the proficiency of the process? The numbers must indicate if process goals are being met. 1. ​Metrics That Aid in Management – What does it mean when your metric is high or low? Furthermore, if the outcome is negative, does the metric help the manager make good decisions? 1. ​Using Data to Learn and Improve – Process managers are always looking for opportunities to learn from the process. This can help improve effectiveness and efficiency, as well as the employee experience, when the process is run in the future. D. Additional Considerations – Business process might include and impact human beings both inside and outside of your company. Perhaps consider some of the following issues: 1. ​Corporate Culture/Corporate Image – Does the process reflect the values and preferences of the employees and customers? 1. ​Supply and Demand Considerations – Customers will wait in line. Employees will need to help customers in a timely fashion. Is the process likely to create a low stress environment for all of those involved? 1. ​New employees – Will new employees be able to learn the process quickly? How will new employees impact the customer experience?

4. WHY DO BUSINESS PROCESSES FAIL? Consumers come into contact with business processes every day. Many of those processes perform poorly and in some cases the processes result in

complete failure. The following list is not complete but it does provide a number of reasons why so many processes perform poorly: A. Used to be Good – There are businesses we love because everything they do seems to be done well. They are fast and friendly. Plus, the employees and managers seem happy to be there. Then one day we start to realize that this company seems to be slipping. What happened to my favorite shop or restaurant? What could have caused a great place to lose its magic touch? 1. ​Market Evolution – It’s possible someone has developed a new process or better technology. All of a sudden what seemed perfect seems slow and incomplete. Even if it isn’t broken, consider investing in continuous improvement programs. If you don’t improve your processes, someone else will. 1. ​Miscommunication – The best employee the company ever had leaves or perhaps they get promoted. It’s possible the new person is just not skilled enough to match past success or perhaps they were never taught the best way to do this job. B. Limitations – It’s possible that the process presently works well since the process has a daily demand of about 35 customers. If the company is successful, the demand may increase significantly. Companies need to understand the limitations of the processes they utilize. Processes have limited service rates; employees get tired and machines might breakdown. Even a good process has limitations. c. Was Never Good – Some processes were flawed from the beginning. These broken processes may be the result of a number of issues: 1. ​Ambiguity – In order to create a good process, process designers need to understand the goals for the process. Process designers might not understand the customer, or they may have incorrectly assumed the process goals. 1. ​Misalignment - Perhaps the goals are understood but poor process design may have resulted in a process that is not working to

achieve those goals. 1. ​Miscommunication – In some cases the company designs a good process, but the process managers and/or process employees fail to follow directions. Why don’t they follow directions? Perhaps they were never properly taught or perhaps they believe their method is better. It’s also possible that some employees are not fit for this process.

SECTION 9.2: DESIGNING A BUSINESS PROCESS

 Preparing for Every Possible Scenario Consider a restaurant with take-out and delivery options. Perhaps customers can place a call to the restaurant. What might happen during these phone calls? Order - Customers will place food orders over the phone. Decisions and Data - During this phone call, customers will provide personal information, perhaps pay for their food and also decide upon some options related to the meal and delivery. Questions - Customers may ask questions about the menu, delivery and payment. Complaints and Corrections - It is also possible some customers might call to complain. Customers may call back to make a change to their order or perhaps to cancel their order. You’ve likely ordered food from a restaurant in this way before. What are some of the elements of each call that are similar? What are some strange issues that have arisen in some situations?

As a manager that might be in charge of designing the business process(es) that will be handled by the employee that answers the phone, your job will be to create a customer-friendly process that has already anticipated every scenario. Questions, responses, comments and greetings for every situation are built into the process. Nowadays, many people would prefer to avoid calling the restaurant to place their orders. Instead orders are placed via websites and apps. While technology is doing the work formerly done by a human, there is still a process. As a process designer you would be asked to create an easy to use process where the customer does most of the work. How are these apps better or worse than the phone calls? Would your electronic process be acceptable for those that fear technology? Ordering food is easy. Even at a restaurant with the most extravagant menu, the process of placing an order is not that difficult, the options are somewhat limited and most importantly the stakes are low. Errors are not likely to result in human casualties. Even a flawed process will rarely result in significant losses for the restaurant. Emergency rooms in hospitals are required to deal with a much higher degree of complexity. The stakes in an emergency room can truly be life or death. Imagine being responsible for developing the process for registering and evaluating incoming patients. The process would need to collect data, ask questions, make decisions, field complaints, and perhaps be prepared to deal with errors and ambiguity. The process would also need to satisfy patients, hospital staff, health professionals, and insurance companies. Designing an excellent business process requires an active imagination, problem solving skills, and an incredible attention to detail. People with this incredible mix of skills will have the ability to start and/or grow companies.

DESIGNING A BUSINESS PROCESS – A STEP-BYSTEP PROCESS The following can be described as an introductory explanation of business process design. Every process is different, so while following this recipe for designing a process is helpful, process designers must utilize their business

acumen and experience to develop innovative processes in the face of realworld ambiguities. Step 1: Goals, Values and Stakeholders – A process serves a customer and establishes those values which are important to the organization. Managers need to measure if the process output is acceptable. Identifying process stakeholders, corporate values and process goals is vital to keeping the process designers focused. Do not move onto Step 2 until Step 1 has been completed in a detailed and satisfactory manner. Step 2: Block Diagram – A block diagram is a simple flow chart that provides a business process designer with a big picture view of the entire system. (Discussed further in the “Flowcharts” section of this module.) The block diagram should detail all of the processes/activities that lead up to this process as well as the processes/activities that will occur after this process is complete. The purpose of the block diagram is to allow a process designer the ability to create a process that utilizes outputs from previous activities to enhance the process being designed. In addition, by understanding the activities that follow, the process designer can be sure to maximize process outputs for the benefit of all the stakeholders in the downstream activities. Step 3: Establish the Process Scope – As the process designer begins to understand the end-goal, the stakeholders and the business environment, the idea of designing a comprehensive process can become overwhelming. Take stock of your available resources. Consider the stakeholder expectations and the desired completion date. These expectations and limitations will likely mean that trade-offs must be made. Develop a scope for the process that will be designed. What are the first and last steps of the process? What are the activities that must be completed in between? Which activities and issues will NOT be considered in the development of this process? Step 4: Define the Service – With a process scope developed, the process that will be designed becomes clearer. In two or three sentences provide a concise but easy-to-understand explanation of this process. This is like a mission statement for the process. It will help the process design team stay focused. It will also allow the process design team to communicate to stakeholders what the fully designed process will look like. Consider

sharing and discussing this statement with stakeholders before proceeding to Step 5. Step 5: Measurement and Management Considerations – Once the process is developed, how will process output be measured? In addition, when the process is struggling, how can managers use the process data? In other words, would certain data mean that employees need help or that consumer preferences have changed? Developing metrics that can provide meaningful output is vital to managing the process over time. Don’t forget to build the required data collection opportunities into the process. Step 6: Primary Steps Detailed – Finally, it is time to develop a list of all of the activities and decisions that must occur during the process. If steps 1 through 5 were properly performed this step should be manageable. Nonetheless, this is also the time to consider all of the variation that might occur during the process. What could go wrong? What are some special situations that might require additional planning? Remember, as a process designer it is your job to create a process that is ready for nearly any situation. Consider the customer, employee and any equipment that might create surprise events. Your customers and employees are counting on you to think of everything before it happens. Step 7: Develop a Process Map – A process map is a flow chart that is utilized to illustrate the sequence of activities within a process. In addition, the process map identifies the different types of activities in the process through the use of different symbols. (Process maps are discussed in more detail in the “Flowcharts” section of this module.) The process map will likely go through multiple iterations as process designers search for an optimal solution. The resulting process map will be useful in designing, testing and further improving the process. The process map will also be helpful in sharing the process with interested stakeholders. Step 8: Evaluation and Testing – Once the business process map is complete, use it as both a quality and communication tool. Walk through the process map slowly to identify areas that lack efficiency or effectiveness. Isolate steps in the process that are awkward or clumsy.

Share the business process map with primary and secondary stakeholders. Have them provide guidance on steps that might be missing in the process. Perhaps these stakeholders will have suggestions for improvement. Use both internal and external feedback to improve the process. Test the process to identify process limitations, process capacity and also to identify further areas that require improvement. Once comfortable move to implement the process.

FLOWCHARTS Developing and improving business processes can benefit from flow charts that help managers illustrate the process for both the benefit of the development team as well as those that will ultimately execute and manage the process. What follows are examples of different types of flowcharts that can be useful in process design and management. Block Diagrams – Block diagrams help process managers see and discuss an entire system. They are used to see the big picture – the world around their process. Simple flowcharts that use only rectangles and arrows; the rectangles in these block diagrams illustrate large business functions or business processes while the arrows illustrate the order in which these functions and/or processes are executed.

 Once the block diagram has been developed, process designers and managers will discuss how preceding activities can positively and/or negatively impact their process. A process manager may consider asking the managers in the preceding activities to provide information and/or assistance. In addition, process designers may look to the managers in the activities that follow for guidance. In the above example, a meeting with the managers in Support and Returns may help you understand the issues they encounter. A good process designer might be able to make changes to the order taking process such that some of those issues would be less likely to occur. Flowchart Symbols – While block diagrams identify all sorts of bigpicture activities and functions using only rectangles, our business process flowcharts (process maps) will utilize a number of different flowchart symbols to help stakeholders identify the different types of activities within a process. In the diagram that follows you will see different symbol shapes. For each symbol an example of that type of activity is also provided. Different industries and software packages might utilize different flowchart conventions. Not to worry, in the business world managers and stakeholders are looking for clarity rather than flowchart symbol perfection.

Also note that small arrows are used to show the direction options for the customers as they make their way through the process.

 Process Maps – A process map is a collection of symbols that illustrates the sequential relationship between all of the different activities and decisions in a particular process. The process map is both a tool to communicate the process to stakeholders as well as a tool to aid in developing and improving processes. A good process map should be easy to understand but also comprehensive in explaining the different options available in a given process. Note, in the process map provided below, the entry and exit points are visible. As you follow the arrows through the process, you can see the different activities that will be performed. In addition, a diamond signifies a decision that will be made which will send the process in one of two directions.

 Swim-lane flowcharts – In the world of process management, these types of flowcharts are effectively the same as standard process maps except that swim-lane flowcharts offer more detail. In these charts we can see the individual or group that is responsible for each activity. Additional lanes can be added to illustrate the amount of time each activity would take. These types of flow charts could be very helpful in communicating individual responsibilities to multiple stakeholders impacted by the process. These types of communications can help a

stakeholder understand how they are dependent on others and how others may be dependent on them.



CHAPTER 10: PROJECT MANAGEMENT AND CONSULTING FUNDAMENTALS GOALS, OBJECTIVES AND STUFF WE WILL RUIN: Guidance on improving business processes. This module might make you want to become a consultant or project manager. Discuss and demonstrate how companies plan and track projects.

SECTION 10.1: BUSINESS PROCESS IMPROVEMENT STORY: IMPROVING ELEMENTARY EDUCATION

 Every community strives to have excellent schools for young children. Some communities perform better than others, but even the best schools look for opportunities to improve. Suppose you are hired by a community as an education consultant; the community’s request is that you help improve their schools. What would you recommend to this community? How would you put the plan into action? Perhaps you have some knowledge or opinions about how education for children might be improved. You walk into a meeting with the administration and begin to rattle off ideas: 1.

​More reading during school hours

1.

​Parental involvement

1.

​Solve math problems in teams

1.

​Change the school day schedule

Not only are these solutions vague, they also assume that you understand the root cause of the problem. Furthermore, a well understood and measurable goal was never stated, and data was never presented to demonstrate the magnitude of the problem. Consider the following questions: As an education consultant, how would you tackle this community’s problems? How would you create a solution that will be supported, implemented and then produce the desired measurable goal? During your career you will be asked to act as a consultant. Whether you attempt to solve your company’s problems or if you are hired to solve another company’s problems, you are acting as a consultant. As you might expect from this chapter/module on business processes, there is actually a process to improve business processes, it is called Business Process Improvement (BPI). Yes, it is all quite obvious and predictable but don’t be fooled, solving business problems is difficult. Each business problem is unique. While BPI is easy to understand, becoming a skilled consultant takes time, effort and discipline.

BUSINESS PROCESS IMPROVEMENT – STEP-BYSTEP The following can be described as an introductory explanation of Business Process Improvement (BPI). Nonetheless, this initial framework should provide some direction in developing solutions for both simple and complex business challenges: Step 1: Desired State – The goal! What is the goal? The goal should be measurable: 10 percent increase in sales, $1 million profit, waiting times less than 1 minute, etc. Consultants must work to understand the client’s goal. This is not as easy as it seems. The goal must be detailed. Be sure the client and consultant agree on the goal. Do not move on to Step 2 until the goal is understood by both the consultant and client.

Example: 80 percent of customers served immediately in a system where system costs are less than $250 per hour. Step 2: Present State – Using the goal from Step 1, measure the present state of the system. Be sure the same metrics used to describe the goal are used to measure the present state. Example: 35 percent of customers served immediately in a system where system costs are $180 per hour. Step 3: Gap Analysis – Measure and compare the difference between the desired state and the present state. Example: Presently, the system is 45 percentage points short of the desired state. The costs are $70 per hour less than the maximum desired level. Step 4: Develop Project Scope – There are numerous reasons why the present goals may not be met. In this example the reasons why goals are not being met could include: Employee numbers, employee skill, process design, equipment, consumer price and perhaps many more, not everything can be explored. Which of these issues will be within the project scope, which will not be considered in this particular improvement project? Be sure to start with a small limited scope. As the project progresses and consultants grow more knowledgeable about the process the scope will expand. Example: Our project will consider both staffing levels and process design. Our project will not look at the price to the consumer. A timeline and budget might be provided. Step 5: Collect, Share and Analyze Data – The improvement project is now moving into a new phase. The gap between present-state and desiredstate is understood and the problem area has been identified. This step begins to dig deeper into the details of the project. Experiments are developed, data is collected, research is performed, issues are discussed and contemplated. As you can see, this step is filled with possibilities. This step requires intelligence and a good work ethic. Example: Given a budget, available resources and a deadline, the consultant would have options that might include: Researching other companies with a

similar process, trying a new process and recording the results, retraining one employee and measuring their improvement versus another employee. Step 6: Develop Solutions and Recommendations – When untrained consultants are given a project, the most common error is to try and develop solutions right away. When an experienced consultant utilizes BPI the development of solutions does not begin until Step 6. The problem is understood, the scope was limited, and data was gathered and analyzed. Only now can consultants feel some confidence in developing solutions. Still, in some cases the data might suggest that the project may need to settle for a partial solution. Perhaps recommendations for a follow-up project might be considered. Example: The process will not be changed. Hire one more employee. Create a new training program for present and future employees. Track process data for three months and then reassess. Step 7: Develop an Implementation Plan – The solutions and recommendations might make sense and the client may even be excited about these ideas, but how will the ideas be made real? Step 7 looks to create an implementation plan. Example: Week one: Managers will work with consultants to discuss and finalize the recommended training program. Week two: Present staff will go through the new training program. New employee will be hired. Week three: New employee will be trained. Data tracking system will be implemented.

CONSULTING BASICS Gaining skills in business process improvement takes time, experience and a willingness to accept that your personal improvement is also a neverending process. Nonetheless, here are some tips that will hopefully help you launch your consulting career: 1. Seek Feedback Early and Often – The client and stakeholders are the ultimate judges of your output, seek their feedback. Their reactions to your progress could provide valuable insight. What is their comfort level? Did they discover a problem? Should you change direction?

2. Manage Scope Inflation (also called Scope Creep) – The scope is developed to keep consultants focused. When scopes grow too big, the project becomes too difficult to manage and resources are wasted. Some scope inflation is likely and possibly healthy, but consultants need to constantly manage the project scope. 3. Anticipate Human Reactions - You may consider your solution simple and logical, but will others react the same way? How will customers and employees react at first and then later? How will you deal with anger and fear from stakeholders? 4. Anticipate Learning Curves – Consider the amount of time it will take employees to learn, adapt, and then master the new process. The client needs to understand that initially the changes may result in decreased output. 5. Understand Your Role as a Helper – Stakeholders sometimes grow frustrated and angry during an improvement project. Be patient and understanding. Their workplace is being unsettled; their jobs are being impacted. While you may get frustrated with the client, be sure to remind yourself that you are there to help. 6. Trust the BPI Process – Inexperienced consultants will want to skip steps in the process. Making assumptions and developing solutions too soon are the most common mistakes. Coming up with ideas that will be impossible to implement is another common error. Do not skip steps in the BPI process.

MAKING AN IMPACT ON THE CLIENT Completing the BPI process might help a consultant develop solutions to corporate challenges but developing a solution does not mean the client will adopt your idea. Even a great idea may not be implemented by the client. As you develop a “sales” presentation to the client of your recommendations, consider those issues which tend to sway clients to adopt your solutions: a. Recommendations Tied to Goals – As you present your ideas make the link between individual solutions and their stated goals.

b. Monetary Benefit – Is it obvious how the solutions will help the company make or save money? c. Value to Work Ratio – Demonstrate that the amount of work/resources that will be invested will provide a significant value. d. Organizational Fit – Established companies have an established structure and established policies. Help the client understand how your ideas will fit into their organization.

SECTION 10.2: THE BASICS OF PROJECT MANAGEMENT STORY: A LIFE OF PROJECTS

 Likely whatever your career, whichever your company, no matter the stage in the company or time of year, you will find yourself in the middle of a project. Projects can be small or huge. Projects might take days to complete or years. Projects might include one company or dozens of companies working together. The important thing to understand is that skills in project management will be valued by nearly every company in any industry. Consider just a few different types of projects: 1.

​Consulting engagements

1.

​Military operations

1.

​Construction projects

1.

​Research and development projects

1.

​Weddings

1.

​Software and/or video game development

1.

​Motion picture development

1.

​Starting a company

1.

​Humanitarian missions

Every project is unique. Every project includes several people with varying skills and personalities. Therefore, project management is a complex topic that could cover an entire book and perhaps several courses. At the end of the day, it goes far beyond books and classes, developing skills in project management requires hands-on experience. In this one section of this relatively short module/chapter, the most basic elements of project planning and organization will be introduced. As you explore these project diagrams and the individual project paths, remember that these projects involve people, activities, resources and managerial estimates. Even the most skilled project managers eventually discover that their project plans were, at best, mediocre guesses attempting to predict and track future events. Nonetheless, without these diagrams our projects would be chaotic ventures.

PROJECT A unique undertaking in which resources (human, material, and/or financial) are organized to achieve an end goal or outcome (tangible and/or intangible). A successful project will often stay within a limited scope and provide some sort of deliverable(s). In addition, the project should be completed within an established period of time. In an effort to measure the success of the project, desired outcomes should be described using metrics. EXPLAINED: Simply, a project attempts to achieve some measurable goal within a given budget of resources and time. In business, a project might be confused with a business process. The primary difference is that a business process attempts to efficiently achieve

a consistent level of output for something that will be done over and over again. A project, on the other hand, is unique. Making a movie is a project. A movie studio might make many movies, but each movie will be different. Each movie presents a different set of challenges based on story, locations, script, equipment, etc.

PROJECT MANAGEMENT – STEP-BY-STEP Projects are often complicated because they are unique, involve many activities and are performed by a number of people. As a result, planning and managing a process is difficult since projects include diverse human personalities and variable intangible resources. So, while managing each project is different, the following are vital elements to increasing the chances of a successful outcome in an efficient manner: Step 1: Define the Project – What exactly is this project trying to achieve? Define this for the stakeholders. Example: An independent group of filmmakers will develop an action movie that will appeal to Americans between the ages of 14 and 39. The movie itself will demonstrate how a team of intelligent teenagers can work together to inspire their community to defeat a powerful enemy. Step 2: Establish Project Priorities – Project managers desire high quality outcomes. High quality outcomes come in different forms: 1. Projects that result in outstanding performance 2. Projects completed quickly 3. Projects completed with minimal resources Even the best projects very rarely result in all three outcomes. To complete a project quickly requires plenty of resources. To complete a project with minimal resources will require more time. Outstanding performance often takes the best resources working for a long period of time. As projects progress, choices will need to be made between performance, time and resources. Before the project begins, project managers should

establish priority between performance, time and resources. This will provide guidance when difficult decisions arise. Example: Keeping costs low is paramount. The budget for this film cannot exceed $15 million. The producers will not provide any additional financing. The movie should hopefully be ready for release before Friday, June 3, of next year. Step 3: Work Breakdown Structure – A well-defined project with established priorities is a project that is ready to be tackled. Projects are often large in scale and utilize myriad resources. To manage a project, the project must be reduced to its smallest activities. The activities must be organized according to required precedents. Once the activities are sequentially organized in a chart, each individual activity’s time and resource estimates must be made. This chart, with time and resource estimates, will allow the manager to calculate project duration, project costs and schedules for the required human and physical resources. One example of this type of chart will be discussed in the upcoming critical path method section of this chapter/module. Example: For each of the following listed activities (and many more), dates can be established, and people can be assigned and/or hired: Script approval, casting the actors, hiring of the crew, rehearsals, filming, film editing, advertising, film distribution, etc. Step 4: Track Project Progress – Once the project begins, a project manager will use a project management chart, such as the Activity-on-Node diagram, commonly called an AON diagram. AON diagrams are discussed later in this chapter/module. Tracking the project will allow the project manager to see if the project is on schedule, behind schedule or ahead of schedule. As the status of the project changes, the project manager will notify the project team if certain activities in the process will need to be completed earlier or if they will need to be delayed. Often members of one project will also be working on other projects. Understanding when this project manager will need them is important for managing their personal schedules.

Example: The star actress of the film will be unavailable for another three weeks due to her commitment to another project. As a result, the planned start date for filming this film will need to be moved back by 10 days. The project manager will notify all crew members and actors about the new dates on which they will be needed.

PROJECT MANAGEMENT TERMINOLOGY As a project manager seeks to successfully complete the project at hand, certain terms will be utilized to describe different types of achievements throughout the project: Objectives – Desired outcomes for the project. These outcomes could be in the areas of performance, cost, time and/or quality. Example: Performance: The movie will make at least $20 million in ticket sales and will not exceed a budget of $15 million. The movie will be released by June of next year. The movie will get a fresh rating on Rotten Tomatoes. Deliverables – A description of the products and/or services that should be delivered by the end of the project. Example: A motion picture with a PG-13 rating. Three different trailers for the film. Movie posters and graphic designs that can be used for promotion of the film. Milestones – Specific events targeted as important to staying on track that will occur throughout the project. These might include start dates, end dates, decisions that will be made, expected due dates for deliverables, etc. Example: Actors should be chosen and under contract by July 1. Shooting locations for the film should be finalized by August 15. Filming should begin by September 1. Filming should be completed by September 24. The final version of the film should be ready by January 10. The movie will be shown at a film festival on February 1.

SECTION 10.3: THE CRITICAL PATH METHOD PLANNING AND TRACKING PROJECTS Projects are made up of multiple activities and each activity is assigned resources. Those activities must be completed in a specific sequence. For example, you cannot begin to film a movie before actors have been hired. You cannot build a home until materials and machines are available. The critical path method aids in organizing the project, measuring project duration and examining options for reducing the duration of the project. When utilized in real-time during a project, the critical path method can signal if the project is ahead of schedule or behind schedule. The critical path method can also identify opportunities to better utilize resources during the project. This section is a simple introduction to the critical path method. Those that go on to study project management in more detail will get a much more detailed account of the diagrams, planning and available options associated with the critical path method. In this section, diagrams for planning and tracking projects will be discussed. In addition, a method for estimating the duration of project and then identifying how to decrease the project duration will be introduced.

1. ACTIVITY-ON-NODE (AON) NETWORK DIAGRAMS Projects are a series of interconnected activities that must all be completed successfully in a particular sequence in order to increase the opportunity for success. The AON Network Diagram is an illustration where each circle represents a single activity in the project. Inside the circles the activity is given a name or symbol. In addition, inside each circle, a number will indicate how much time is required to complete that activity. The arrows help illustrate activity precedence. The arrows leading into each circle/activity allow a project manager to see which activities must be completed before this activity begins. Those arrows leading out of the

circle/activity allow a project manager to see which activities can begin once that activity is completed.

 EXPLAINED: In the AON network diagram above is an illustration of a very simple project. The project has seven activities - A through G. For this example, assume all numbers indicate activity duration in days. Activity B is estimated to take three days to complete. In addition, before activity B can begin, activity A must be completed. Once activity B is completed activities D and E may begin. Activity A is the first activity in this project. Activity G is the final activity in the project.

2. PROJECT PATHS In utilizing an AON Network Diagram, project managers should map all of the paths that lead from the beginning of the project to the end of the project. For each path project managers should then add up the length of the project path using the individual activity durations. Often those new to AON diagrams and project management will consider following only one path from beginning to end. Please note, in order for the

project to be completed, every activity on every path must be completed.

 EXPLAINED: In the above AON Network Diagram, one of three project paths is highlighted, path ABEG. Assuming all times are listed in days, the total duration of this path is 16 days (5 days + 3 days + 2 days + 6 days = 16 days). A project manager would need to map all three paths and all three project path durations. For the given AON Network Diagram, here are the results: Path ABDG - 20 days Path ABEG - 16 days Path ACFG - 21 days In order for this project to be completed successfully, precedence relationships for activity must be satisfied and every project activity (A through G) must be completed.

3. CRITICAL PATH The critical path is the project path with the longest total duration. The critical path defines the expected length of the project.

While the critical path dictates the length of the project, to meet the expected end date, every activity on the critical path must be completed on time. If any activity on the critical path takes longer than its expected duration, the entire project will be completed after the expected end date.

 EXPLAINED: In the above section on Project Paths, all of the project paths were listed. For each project path the path duration was also provided. Path ABDG - 20 days Path ABEG - 16 days Path ACFG - 21 days (CRITICAL PATH) Path ACFG is 21 days in length, thus ACFG is the critical path. This means that this entire project should take 21 days. In order for the project manager to complete the project in 21 days, activities A, C, F and G must all be completed on time. If any of those activities are not done on schedule, the entire project will fall behind schedule. This is why it is called the critical path, every activity on this path is critical to hitting the target end date.

4. SLACK

Slack is the amount of time a path or single activity can be delayed without impacting the project duration. For project paths, the slack is calculated by subtracting the duration of the critical path to the duration of the path in question. Therefore, the slack of the critical path will always be zero. Remember, every activity on the critical path must be done on schedule. For project paths that are not critical, the slack will be a positive number that indicates how many days that path can be delayed without increasing the length of the total project. While the slack for a path may be three, this does not mean that the activities on the path can all share three days of slack. Remember, any activity on the critical path cannot be delayed, thus every activity on the critical path has zero slack. All activities that are not on the critical path have the same maximum slack as the longest path on which the activity rests.

 EXPLAINED: Let’s continue using our same AON diagram to find the slack of each path and then the slack for each activity. Path ABDG - 20 days Path ABEG - 16 days

Path ACFG - 21 days (CRITICAL PATH) We have already identified path ACFG as the critical path. This means that this path has zero slack. In addition, we also know that activities A, C, F and G have zero slack since they are on the critical path. Path ABDG has a slack of one day, which we find by calculating the difference between the duration of the critical path (ACFG - 21 days) and the duration of ABDG (20 days). Now, let’s calculate the slack for the individual activities on path ABDG. Activities A and G are on the critical path; thus, those activities have zero slack. Activities B and D are not on the critical path; thus, B and D can be a combined one day late. Path ABDG - 20 days (One day of slack. Only B or D can be late) Path ACFG - 21 days (CRITICAL PATH - No slack) Let’s now consider path ABEG. Path ABEG has a slack of five days, which we find by calculating the difference between the duration of the critical path (ACFG - 21 days) and the duration of ABEG (16 days). Now, let’s calculate the slack for the individual activities on path ABEG. Again, activities A and G are on the critical path, thus those activities have zero slack. Activities B and E are not on the critical path, thus B and E can be a combined five days late. Path ABEG - 16 days (5 days of slack. Only B and E can be late) Path ACFG - 21 days (CRITICAL PATH - No Slack) You must also remember that B is on path ABDG, which only has one day of slack. Therefore, B can only ever be one day late without impacting the project duration. Activity E can be up to five days late, provided that activity B was not late. If B was one day late and E was 5 days late, that would be a total of 6 days late. Path ABDG would then be 22 days. Why? Sixteen days is the normal duration of ABDG, plus six additional days would bring the project to 22 days.

5. MULTIPLE CRITICAL PATHS

It is possible to have multiple critical paths within a project. If two paths on an AON diagram have identical expected durations, both paths are deemed critical paths. In fact, if all the project paths on a single AON diagram have identical durations, all paths would be considered critical paths. The challenge of having multiple critical paths is that if even one of those paths takes longer than expected, the project will not be completed by the expected time. Thus, having multiple critical paths can put more members of the project team in stressful situations. In addition, when every team member is on a critical path, all presently available resources are being utilized so moving people around to get help on certain activities is no longer possible.

6. CRASHING THE PROJECT Crashing the project is the act of finding a cost-effective way to decrease the present length of the project. This is done by decreasing the time it takes to complete the critical path (or paths). In crashing, project managers identify the activity on the critical path that is the least expensive to reduce. Additional resources are then provided to that activity in an effort to complete the activity at a faster rate. If a project has multiple critical paths, all critical paths must be reduced by the same amount. How to Crash a Project (example): In this example we will reduce the duration of the given project from 21 days to 19 days by spending the least amount of money on additional resources. The project will use the following AON diagram:

 This crashing problem will also utilize the information in the chart below. This chart provides a list of each individual activity, the expected duration of each activity under normal conditions, the minimal time it would take to complete each activity with additional resources, and the cost to reduce each activity.



In this example, Activity A takes five days to complete. If additional resources are utilized, Activity A could be completed in four days. This would cost the project team an additional $800 to acquire those additional resources. Activity G takes six days to complete. If additional resources are utilized, Activity G could be completed in as little as four days. This would cost the project team an additional $1,000 per day to acquire those additional resources. In other words, to complete Activity G in five days it would require $1,000. To complete Activity G in four days it would require $2,000, $1,000 for each day the activity was reduced. Please note, once an activity is reduced to its minimum time, no additional resources can be used to make that activity shorter. For example, let’s say that one of the activities was to bake a cake. If it takes 30 minutes to bake the cake, there are no additional resources that could be added to reduce the cooking time. STEP 1: Find all possible paths from start to end. Use the AON diagram to map all the possible paths from beginning to end. Using this AON diagram, there are three paths that take you from the first activity, Activity A, to the final activity, Activity G. Path ABDG - 20 days (Blue arrows) Path ABEG - 16 days (Green arrows) Path ACFG - 21 days (Red arrows)

 STEP 2: Find the Critical Path(CP) or paths. The path(s) with the longest duration(s) is/are the critical path(s). This project presently has a critical path of 21 days, path ACFG. Path ABDG - 20 days Path ABEG - 16 days Path ACFG - 21 days (CRITICAL PATH) STEP 3: On the Critical Path, find the cheapest task to crash. The critical path on this project is path ACFG. These four activities, A-C-FG, are the only activities that would be considered for reduction (crashing). These activities have been highlighted in red on the chart. The cost of crashing for each of these four activities is: Activity A - $800 to reduce from five days to four days Activity C - $200 to reduce from five days to four days Activity F - $300 to reduce from five days to four days Activity G - $1,000 to reduce from six days to five days

Activity C is the cheapest option to crash on our critical path. Thus, this is the activity that should be crashed first. While Activity E has a lower crashing cost ($100 per day), Activity E is not on the critical path, so it is not eligible to be crashed. Why? Since Activity E is not on the critical path, reducing this activity would not reduce the length of the critical path. In fact, reducing Activity E would cost you $100 and provide you no additional benefit.

 STEP 4: Crash that item (or those items) by one week. Remember to change the completion time on the AON diagram. Notice in the updated AON diagram, Activity C is now listed as four days. This reflects the commitment to crash this activity by one day for a cost of $200.

 STEP 5: Change path times for all affected paths and find the new Critical Path or Paths. Using our AON diagram, with the update to our crashed activity, Activity C, we can now re-calculate the length of each path.



Path ABDG - 20 days (Blue arrows) Path ABEG - 16 days (Green arrows) Path ACFG - 20 days (Red arrows) This project now has two critical paths: Path ABDG (blue) and path ACFG (red). Each path a duration of 20 days. Therefore, our project now takes 20 days and costs an extra $200. Our goal is to complete the project in 19 days so we will need to continue to crash. So, we will return to step three with our updated AON diagram. ROUND #2 - STEP 3: On the Critical Path, find the cheapest task to crash. We now have two critical paths ABDG and ACFG. Both paths must be reduced by one day. Please note, Activity C cannot be crashed. It has reached its minimum duration, four days.

 The best available options to crash would be: *Activity A - This is on both critical paths (ABDG and ACFG) $800 to reduce from five days to four days

*Activity G - This is on both critical paths (ABDG and ACFG) $1000 to reduce from six days to five days *Activities B and F - Activity B ($400) is on path ABDG and Activity F (($300) is on path ACFG. Each path would be reduced by one day - Total crashing cost: $700. *Activities D and F - Activity D ($1200) is on path ABDG and Activity F (($300) is on path ACFG. Each path would be reduced by one day - Total crashing cost: $1500. Based on these four options, crashing activities B and F is the lowest cost option. ROUND #2 - STEP 4: Crash both of the activities (B and F) by one week each. Remember to change the completion time on the AON Diagram. Notice in the updated AON diagram, Activity B is now listed as two days and Activity F is now listed as four days. This reflects the commitment to crash both activities by one day each for a total cost of $700.

 ROUND #2 - STEP 5: Change path times for all affected paths and find the new Critical Path or Paths.

Using our AON diagram, with the update to our crashed activities, Activity B and Activity F, we can now re-calculate the length of each path. Path ABDG - 19 days (Blue arrows) Path ABEG - 15 days (Green arrows) Path ACFG - 19 days (Red arrows) This project still has two critical paths: Path ABDG (blue) and path ACFG (red). Each path an updated duration of 19 days. Therefore, our project now takes 19 days and costs an extra $900. Why $900? The Round 1 crashing cost was $200, and the Round 2 crashing cost was $700. Our goal has now been achieved; the project is now expected to be completed in 19 days. Crashing is now completed. FINAL STEP: Take note of the increased pressure on each activity. Only those items not in any critical path will have slack time. All items on the Critical Path must be completed within the time allotted. For this project there are two critical paths: Path ABDG - 19 days Critical Path Path ABEG - 15 days Path ACFG - 19 days Critical Path All of the activities on the critical paths have no slack. Activities A, B, C, D, F and G are on at least one of the critical paths, thus they do not have any slack. If any one of those activities is delayed, the project will run longer than 19 days. The project can be completed in 19 days, but it is now $900 more expensive and nearly every activity is under intense pressure to remain on time. On the other hand, Activity E is not on the critical path so it does have some slack, four days of slack.

7. PROJECT MANAGEMENT SOFTWARE

The AON diagrams that were used to illustrate the critical path method, as well as crashing, were fairly simple. In real-life, projects are often much more complex. Projects might include dozens, if not hundreds, of activities. Drawing the AON diagram, finding the critical path, crashing the project, and tracking the progress of the project becomes extremely difficult. Figuring out how the schedules of the people and other resources are shifting from day to day becomes all consuming. As a result, project managers often turn to project management software. The project management software can assist in organizing the project and tracking the progress of the project and all its related resources. In addition, project management software can help a project manager run different scenarios for the project – different options can be explored with minimal effort. Project management software can be simple enough to manage small business improvement projects in a company or project management software can be advanced enough to help in huge projects like building a new state-of-the-art football stadium.

CHAPTER 11: MEASURING PERFORMANCE GOALS, OBJECTIVES, AND STUFF WE WILL RUIN: Discover and appreciate the interesting ideas and philosophies behind motivating employees and managing businesses with performance measurement. Develop strong individual metrics as well as understand and implement well-rounded systems of metrics. This module might help you understand why a dual degree in supply chain management and data analytics can be such an effective career tool.

SECTION 11.1: WHY PEOPLE MEASURE STORY: COLLEGE RANKINGS

 How do most American students choose their college or university? In many cases they will utilize one or more college rankings lists. These are lists made up by different publications and/or organizations that attempt to rank colleges based upon a series of criteria that might include: Quality of education, cost, exiting salaries, quality of life, etc. Why do students use these lists? Well, there are hundreds of schools to choose from. Each school has its strengths. Researching dozens of viable universities online and in-person can be both time-consuming and expensive. As a result, many students use these lists to narrow down their choices. In essence, these lists provide guidance in the hopes that students can make a more informed decision. With so many college rankings lists, are they valuable? Are they accurate? Even, if a list is accurate, does it reflect the values of every student that reads the list? Let’s briefly consider one of the most widely recognized lists of college rankings, the US News and World Report rankings. How do they rank the top universities? There are actually a number of criteria that can help raise a university’s rank. Here is list of things that could help the university raise its rank: Rejecting a high percentage of applications, raising faculty salaries, accepting students with higher SAT and/or ACT scores, increasing the number of freshman students that return for their sophomore year, having small class sizes, increasing the number of faculty with PhDs, etc. If you were a prospective college student, how many of those issues would be

important to you in choosing your school? Are you now more skeptical of those rankings? Or do you trust the list makers as experts in guiding you (and every other student) to the very best schools? US News and World Report also ranks the best individual programs in the country. You could find lists of the best electrical engineering programs, the best accountancy programs, the best marketing programs and even the best supply chain management programs. How do they rank college programs? You may be surprised. The ranking is based entirely on a survey of top administrators, usually department chairs in the field being ranked. They ask these top administrators to provide their personal list of what they believe are the top 10 programs in their field. Yes, the entire ranking of college programs is based entirely on a popularity contest. Now that you know this, if you were a prospective supply chain student would you use the US News ranking of supply chain programs to help you choose the best program for you? Don’t answer too quickly. Your new knowledge of how rankings are decided may have shifted your faith in the rankings system, but you are among the few that know even this much (there’s so much more to these rankings). Let’s consider other interested parties. Who else cares about rankings? Yes, parents who may pay for a child’s education, but they and the student likely have similar motivations. Who else? Let’s start with the employers. Some employers hire students from around the country. Still, they can’t visit each university every year; trips to college campuses can get expensive, even for large successful corporations. Suppose a company has a budget to visit only 10 universities this year to recruit supply chain management students. Can you guess how most companies choose which schools to visit? Yep, many go to the US News ranking or some other rankings that likely use similar models to rank schools and programs. If you want a better chance at landing an interview, and thus a job, perhaps going to a ranked university and/or program will take you to a place with significantly more corporate recruiters. Let’s now consider the schools themselves. Many schools know that the rankings of schools and their programs are quite flawed, but schools also understand that even flawed perceptions can drive the best students and companies to value the top ranked universities and programs. As a result,

competitive universities often have no choice except to be attentive to the rankings. If you were a dean and your success was measured by how much you could raise the rank of the university, what might you do? What types of changes would you make to your university and its programs? Would you immediately consult the rankings formulas? Would you be concerned that your new programs might use student tuition to fund programs that might not directly improve the educational environment of your student? Further, measurements, even flawed measurements, change stakeholder behaviors. Did they influence the group of colleges and programs you considered in choosing a school? Do universities with top ranked supply chain management programs have significantly more employers recruiting supply chain students than finance or accounting students? When a dean initiates a new retention program, changes faculty policies or requires higher test scores for incoming students, are these changes being made to improve the educational experience or to feed the US News rankings formula? College rankings were initiated to provide value to students, but their development has resulted in a number of unforeseen behaviors – some good and some bad. Remember this as you run across ranking and performance measurement systems in your life, at your job and in the companies you start.

1. PERFORMANCE MEASUREMENT IN THE WORKPLACE Whether a company is large, small, growing or mature, measuring performance is vital to managing for both consistency and improvement. Companies measure both inputs (materials, money invested, employee hours) and outputs (units produced, defects, customer satisfaction). These measurements may then influence managers’ decisions about employee promotions and terminations, machine and employee scheduling, project management and numerous other managerial issues that may impact how companies utilize their resources. EXPLAINED: A couple of common adages in the world of business are “if you can’t measure it, you can’t improve it” or “you can’t manage what

you can’t measure.” Top executives and even middle managers cannot just say that they had a good month or a good quarter, they need to be able to prove it. As a result, measuring performance becomes vital to convincing customers, employees, and other managers that decisions are being made not just based on “a good feeling” but rather on actual data. Not all the available data is useful or reliable though, so measuring performance and understanding the data is much more difficult than it would seem. This module attempts to help managers better understand how to interpret performance data and develop useful performance metrics.

2. PERFORMANCE METRIC A single performance measurement used to evaluate, motivate and improve performance. EXPLAINED: How do you choose what to wear each day? Do you consider the temperature? How do you decide when to leave your home for work? Do you consider the time? How do you decide how fast to drive your car? How do you decide where to invest your money? So many of the decisions we make are influenced by numbers. Temperature, time, weight, speed, length, return on investment… These are all examples of metrics people routinely use to make decisions.

3. SYSTEM OF METRICS A group of metrics that collectively attempt to provide a multi-dimensional view of a resource or outcome. EXPLAINED: Suppose you needed to hire a recently graduated college student for your company, would it be enough just to know their GPA? Suppose you ran a professional basketball team and needed to find a new player to improve the team, would it be enough to know the average number of points the player scores in their games? In most cases a single metric does not provide enough information to help a decision maker make the most informed decision. As a result, managers will often develop a system of metrics that will provide a more wellrounded picture of the person, company, resource or outcome being evaluated.

Take a moment and think about which three to five metrics you might use to evaluate the full value of a basketball player, a college graduate, a coworker or even a college professor.

4. VALUE OF METRICS Metrics can provide valuable output to managers: Metrics can help identify strengths, weaknesses, areas of improvement and areas of decline. Metrics can create a platform for unbiased recognition and/or promotion of people, groups and companies. Consider, if a global company has 50 purchasing managers that all apply to become the chief purchasing officer, how can a top executive make a fair and informed decision about which of those 50 managers will get the five allotted interview spots? Metrics can sometimes point to corrective actions. Suppose a basketball team is losing a number of games by small margins. Their results in most measured categories are above average or excellent, but they have very poor free throw data. Should the team spend an equal amount of time improving in all facets of the game or is there perhaps a better way to utilize their limited time in practice?

5. REASONS ORGANIZATIONS UTILIZE PERFORMANCE METRICS This is a short list of the reasons people and companies like to measure performance: a. Helps to Establish and Support Standards – Students incapable of getting a C or better in their algebra course should not be allowed to progress to the geometry course. b. Motivate Good Behavior – Sales employees that do not receive an eight out of ten average or higher on their weekly customer evaluations will not receive their bonus. c. Identify Trends – 80 customers that purchase product A typically purchase product B within three weeks of their product A purchase.

d. Manage from Afar – Ford Motors has manufacturing facilities around the world in over 50 countries. Performance metrics allow the very top executives at Ford to understand which facilities are performing well or struggling on a daily basis without having to be at each of those facilities. e. Managing Large Numbers of Resources – American Express employs over 50,000 people in dozens of countries around the world. Without performance metrics it would be difficult to identify areas of strength and/or weakness among their pool of human resources. f. Performance Data can Facilitate Decision Making and Planning – In each of the above items and associated examples, making good decisions and developing plans with higher probabilities of success is dependent on having access to performance measurement data.

SECTION 11.2: DEVELOPING A GOOD METRIC STORY: THE AIRLINE INDUSTRY

 Many people love to travel. Some of those people even love to fly. Not many of those people would have good things to say about the airline industry, though. What are some of the typical ways in which consumers and consumer agencies rate airlines? Let’s consider a few airline industry metrics that may interest you: On-time arrivals, airfare and lost luggage. How have these metrics changed airline behaviors? On-Time Arrivals: For many travelers this is a simple convenience that helps in trip planning, for others this is a vital statistic that will help them know whether or not their airline will be able to get them to a connecting flight on time. How is it measured? It is simply the percentage of flights that arrive at their destination on or before the posted arrival time. How do companies inflate their on-time arrival average? Easy, they just increase the estimated flight time. If the flight departs at noon and is likely to arrive at 2:45pm, the airline is likely to post the arrival time as 3:00pm. Those extra 15 minutes are helpful in case delays occur before or after the plane takes-off. Does this really mean they are reliable, though?

Airfare: In general, consumers want the lowest fares for their airline tickets, however, airlines must also make profits. Still, many consumers see most airlines as interchangeable, thus airline tickets are almost considered commodities. How has this changed airline behaviors? Airlines lower seat prices, but then add on fees for baggage, priority seating, food, etc. In addition, airlines reduce the space available for each seat – decreased legroom. By reducing legroom by 1-inch in a 32-row airplane, a company can fit one extra row of seats. This may increase revenue by $300 to $6,000, or more, per flight. Consumers’ demand for cheaper flights has resulted in uncomfortable travel for many air passengers, especially the taller ones. Lost Luggage: No one likes to lose his or her luggage, not even for a few hours. Interestingly, lost luggage numbers have decreased significantly in the last 10 years. Why? There are a few reasons. The first is improved technology, another is something mentioned in the airfare section above; most airlines charge extra for checked luggage. Once this practice began companies knew customers would demand better service, thus airlines would need to invest some of those luggage fees to improve their baggage handling systems. Plus, once luggage fees were put into place, customers checked fewer bags, thus the number of bags companies handled was reduced. With fewer bags to handle, the job of handling bags became easier. These are the metrics that consumers are said to value in choosing an airline. What did these cherished metrics motivate in the airline industry: Cheating, exaggeration, poor trade-offs, reallocation of resources, and perhaps even some positive changes in behavior. Measurement changes everything. How can we create metrics that motivate good behaviors and that provide meaningful results? This section will provide clues to developing new metrics and also for evaluating metrics that are already in place.

1. GOALS AND STAKEHOLDERS

The key to developing metrics that meet stakeholder goals is first recognizing all the stakeholders and then understanding their individual goals. Who are all the primary stakeholders? What does each party want? How do these parties interact? How will certain stakeholder actions impact other parties? As basic as this may seem it is very often the primary reason poor metrics and poor systems of metrics are developed, adopted and implemented. Knowing the relationships between the stakeholders helps a manager understand how certain actions by one party may result in certain reactions by the other stakeholders. It may also begin to reveal how ambitious, lazy or nefarious individuals may try to take advantage of metrics.

2. CONSEQUENCES OF POOR METRICS An ill-conceived metric can motivate bad behavior and cause managers to make poor decisions. This list provides a more in-depth list of negative outcomes that may be associated to poor metrics: 1. ​Supply Chain Goals Are Not Met – Bad metrics drive companies away from being effective, efficient and adaptable. 1. ​Poor Output – Employees may be working quickly but it could cause them to make more mistakes. 1. ​Waste – Employees driven to work quickly may make more defects and as a result employee time was wasted, materials and energy were wasted, and more resources will be used to produce and deliver new items and recover defective items. 1. ​Undesirable Employee Behaviors – Employees may be driven to cheat, seek shortcuts and engage in activities that provide marginal returns. 1. ​Managers May Make Poor Decisions – Managers may be fooled by data related to poor metrics. It’s also possible managers may intentionally make poor decisions if they feel it could result in better

numbers in poor metric categories favored by top management, especially if those metrics are tied to monetary bonuses and/or promotions. 1. ​Employee Victimization – Honorable employees may become victims of employees that will “game” the performance metric system at any cost. When employees that take shortcuts are rewarded, honorable employees feel hurt for doing the “right thing.” 1. ​Undeserved Winners – Unqualified and/or dishonorable employees may be promoted into positions of power. This could result in long-term corporate dysfunction. 1. ​Lack of Contentment – When employees understand that the performance measurement system is flawed, they become unhappy with their jobs and lose motivation. Their job performance and decision making is no longer driven by positive values and creativity, but rather by satisfying a system of numbers.

3. REQUIREMENTS OF A GOOD METRIC This list provides guidance in creating high quality metrics. It is also helpful in evaluating metrics that are presently being used by an organization. Measurable – Time, length, weight, cost, points, goals, sick days, etc. These are all measurable objects. Are you sure the metric you are using or creating can actually be measured with a good degree of accuracy? Easily Understood – Do employees understand how the number is measured, calculated and influenced? If metrics are about improving performance and motivating good behaviors, then how can employees and managers know what they need to do if they don’t understand the metric? Also, employees and managers should understand how that metric relates to positive outcomes. If someone told you that jumping up and down could improve your work performance, would you do it? Often it is easy to understand which actions are desired, would you be highly motivated to

engage in these activities? Workers need to understand the metrics used by a company, especially those that are most highly valued. Attainable – Employees need to feel that meeting the goals for that metric are feasible. When employees do not feel a metric is attainable, even good employees may consider giving up or cheating. Strategically Oriented – Does the metric align goals with desired actions? Does the metric motivate employees to work toward the desired goals of the company? Easy to Measure – How much effort, time and money is required to accurately track the metric? The cost of the tracking the metric should not outweigh the value the metric provides the organization. Provides Value – Beyond motivating good behavior, data produced should provide managers and employees with information that will lead to better resource utilization, the production of competitive outputs and the early identification of both positive and negative trends. Provides guidance – Metrics are intended to make managing easier. It should be clear what good numbers and bad numbers are. If required, a metric should point managers to corrective actions. Cheater Proof – A well-crafted metric should not be easily manipulated. Managers should develop metrics where negative behaviors might be anticipated and defended against before the implementation of the metric.

4. SMART METRICS This acronym implies that a metric should specifically include the following attributes: Measurable, attainable, relevant and timely, thus the acronym S.M.A.R.T. This acronym is a helpful device that can guide managers in the development of useful managerial metrics. EXPLAINED: A rather slimmed down version of the “requirements of a good metric,” discussed in the above item. Not all managers agree on what the letters in SMART symbolize, but in general the differences are not significant.

SECTION 11.3: DEVELOPING A SYSTEM OF METRICS STORY: THE “MOST IMPORTANT” SPORTS METRICS

 During a global corporation’s annual supply chain conference, I ran into an analytics executive that commonly worked with members of supply chain and information technology (IT) teams. At a lunch we were discussing the company’s challenges, market evolution, and quite a few other common business topics. Being one of the company’s chief analytics executives I asked him, “As you work with different departments within this company, what’s the most common question you get?” He laughed. He said he got asked pretty much the same question in every department he visited, “What are the most important supply chain metrics?” I’m pretty sure I laughed, rolled my eyes, and shook my head. He appreciated that response, I think. Why that reaction? Well, he understood that there weren’t any magic supply chain metrics that would benefit every company and every department. So, I had to follow-up with, “How do you respond to that question?” After years of getting asked that same question over and over he said he had come up with what he felt was an instructive response. In this process of coming up with his response, he said that initially, he said nothing. In fact, instead of saying anything he would reach for a white board or a pad of

paper, and would then write three words: Hockey, baseball, cricket. When he told me this, I was a bit puzzled, but intrigued. He then asked me, “Hockey, baseball and cricket - What do they all have in common?” “They are all sports,” I said tentatively. “Actually, they are all stick and ball sports,” he said. Granted hockey uses a puck but I got the idea. In each sport a player wields a wooden stick at a projectile. He then explained that using the same supply chain metrics across different supply chains that delivered different products to different customers, was just as ridiculous as those three “stick and ball” sports measuring the value of all the players using the same metrics. Imagine comparing hockey players and cricket players by using on-base percentage, home runs and earned run average. Similarly, think about the effectiveness of trying to measure all players by tracking goals, assists and penalty minutes. Or how about using batting strike rate, wickets and stumpings? Each sport has individual rules and regulations, this means that a standard metric measurements system doesn’t accurately evaluate each sport as an individual. The lesson here is that just like how every sport is different, every supply chain is different. There are no shortcuts to finding the metrics that will best measure your supply chain effectiveness or motivate your supply chain employees. Even sports fans know that in each sport, coaches and managers disagree about what the key statistics in their own sport are. In many cases, these organized professional sports are over 100 years old and still so many years later leaders in their profession cannot agree on how to best evaluate players. How do the best sports analytics professionals make informed decisions in their sport? They understand the rules of the game, the goals of the teams, the resources (time, players, outs) available to the teams during each game or match, and also all the possible outcomes in each situation (outs, walks, hits, wickets, goals, wins, losses).

If you want to come up with the best supply chain metrics, knowing the stakeholders, the goals, the available resources, and also the possible outcomes in that particular industry is vital. To the novice businessperson, all supply chains may look alike (or at least similar), but supply chain executives in the food industry, oil industry and the automotive industry all know that they are all playing completely different games.

1. THREE KEY MEASUREMENT SYSTEM ATTRIBUTES A well-rounded system of metrics should include a group of individual metrics that together measure each of the following attributes: Effectiveness – Were the desired goals met? Examples might include: Goals scored, products manufactured, deliveries completed, courses passed, races won, etc. Efficiency – A measure of the resources used in the process. Examples might include: Minutes played, shots taken, amount of aluminum used, total time to make all deliveries, cost of gas used to make deliveries, hours studied, hours of training, etc. Adaptability – A measure of the conditions under which the tasks were completed. Examples might include: Road games, rainy days, against top ranked opponents, small class size, online course, winter months, against tall players, etc. A system that does not measure all of these attributes effectively is subject to mislead managers. For example, suppose a basketball player makes an average of six baskets per game and takes an average of eight shots per game. This player would seem to be quite effective in scoring baskets and they would also appear to be very efficient; they successfully make 75 percent of their attempts. These two measurements alone do not account for adaptability. We don’t know if the player scores these against good or bad teams, children or adults, left-handed players or right-handed players, in the most competitive games or only during the final minutes of games that are no longer

competitive. In order to more fully assess this player’s shooting ability one or more measure of adaptability would be required.

2. KEYS TO DESIGNING A SYSTEM OF METRICS Here are a few important tips to consider when putting together a group of metrics that will help monitor the output of an employee, process or a company. Stakeholders and Goals - Have a plan that revolves around the stakeholders and the goals. Good Metrics - Be sure each individual metric is sound in reasoning and design (See section 2 of this module for more information). Simplicity - Attempt to keep things simple. Try to tie metrics to easy-tounderstand outcomes, resources and behaviors. Do metrics simplify analysis? Do metrics point out positive and negative behaviors? Do metrics lead us to potential solutions/corrective actions? If the metrics are complicated it can become difficult for both managers and employees to understand the resulting data. Completeness - Be sure the system accounts for effectiveness, efficiency and adaptability. Redundancy – Be sure to check that multiple metrics are not measuring the same thing. For example, if multiple metrics in a system measure the hours worked, employees may notice this redundancy and begin to cheat the system by only working more hours. This is an issue when employees realize that they can satisfy multiple metrics by only changing a single behavior. Continuous Improvement – If possible, try to motivate employees to improve behavior while still boosting morale. In other words, good employees should feel rewarded for their past actions, while still discovering opportunities for improving future actions. Remember, a good system of metrics should work toward improvement. Often poor systems of metrics simply act as evidence of past sins and are used to demoralize employees.

Leadership – Measurement systems must be explained and fully supported by leaders at every level. When managers are unable to explain the importance of each metric, employees lose confidence in the validity of the system. Also, if employees believe managers do not support certain metrics, employees will not respect those metrics.

SECTION 11.4: METRICS IN BUSINESS AND SUPPLY CHAIN The Language of Business Analytics in the World of Big Data There are no magic metrics. There is no simple formula. Basically, there are no easy answers. Managing and motivating via performance metrics is like solving a complex puzzle that continues to change as one tries to solve it. Nonetheless, since so much data is now so easily available, executives are confident that the key to corporate success may be hidden inside the terabytes of data that are generated each day. In the world of big data, how does a company begin to develop an analytics program? Well, managing with metrics has been around longer than computers and the internet, so there are some tools, programs and terms that provide a good foundation for the business analytics novice. While this section covers a series of prefabricated systems of metrics, general performance metrics terminology and web-based analytic tools for the modern executive, you would be wise to remember the lessons of the previous sections. As you read through this section consider the possible values, as well as the pitfalls, of items like the SCOR model, the balanced scorecard, executive dashboards, etc. To be an efficient modern-day executive, your employees must be comfortable understanding data, creating new metrics and challenging traditional metrics. That said, modern day executives must also be able to develop solutions that are backed by data and then effectively use that data to support their decisions. Are you ready to be a progressive executive in the modern world of big data? If so, companies, governments and nonprofit entities will be knocking down your door to hire you. Performance measurement and data analytics have become so prevalent that even the data analytics website, Fivethirtyeight.com, has become a bit of a mainstream hit. It discusses politics, business, sports, pop culture, food and science from a data analytics point of view. Perhaps read a few articles at the site with the keen eye of a manager that now knows what to look for in good metrics.

1. KEY PERFORMANCE INDICATORS (KPIS) Individual performance metrics identified by the company as being imperative to achieving the organization’s most important goals. EXPLAINED: In the era of big data where dozens, hundreds or even thousands of performance metrics are available to managers at any time, companies will often develop a set of key performance indicators (KPIs). These KPIs are established to provide managers with a dashboard view of corporate performance. In other words, just like your car provides you a dashboard of data that helps you quickly identify possible problems, KPIs are established as simple but important metrics that can act as an early warning signal of problems that are beginning to emerge within the company. Of course, they can also signal when things are going well and improving within the company.

2. EXECUTIVE DASHBOARDS A computer-generated visual representation of a company’s performance that is often available to executives on nearly any of their digital devices. Executive dashboards provide managers with important data that likely includes, but is not limited to, KPIs. Dashboard data often includes both real-time data and historical data, as well as color-coded performance centers that help managers quickly spot positive, negative or neutral output. EXPLAINED: These colorful and graphically appealing real-time performance reports are available to executives on almost any digital device that is connected to the internet. They are intended to help executives evaluate, manage and plan. As with any performance metric related system, one of the primary goals of executive dashboards should be to make management and decision-making easier. While most are visually engaging, some executive dashboards are so comprehensive in the data they provide, that they can often become both confusing and intimidating to managers and executives.

3. MANAGERIAL PARALYSIS A situation where managers are inundated with data. This overflow of data actually slows decision-making and may even result in managers stalling or

avoiding decision-making. EXPLAINED: If someone gave you a data set of 1,000 numbers and they told you the key to making an important business decision was somewhere in the data set, would you make a decision quickly or take a long time to find the data that would support the right decision? Even if you found data to support your decision, would you feel confident that the data you found was definitive? In the era of big data, managerial paralysis can be a daily challenge. In a world that demands speedy decisions, managers that do not have a firm understanding of performance measurement and data analytics are likely to suffer the stress associated with managerial paralysis.

4. COMMON MEASUREMENT PITFALLS IN BUSINESS Even in organizations that value performance measurement, there are a number of common errors companies often make. Managers Fail to Use the Data – While management may value metrics, individual managers may not utilize the metrics. Instead these managers prefer to use their intuition or personal beliefs to guide their decisions. Blind Belief in Institutional Metrics – Companies may not bother to test their traditional metrics or investigate the behaviors the metrics may influence. Some managers believe that “these are the numbers we’ve always used, why make a change?” Incomplete Measurements – Some managers prefer to measure only what they and/or their departments do well. To them, the perception of positive outcomes is more important than actually achieving the company’s overall primary goals. Utilizing Too Many Metrics – Some organizations get overzealous about measuring. Any measurement that can be captured is not only measured but it is made available to managers. This can confuse managers and lead to managerial paralysis.

Driving Toward Perfection May Waste Resources – When managers drive employees to get perfect scores, extreme employee efforts may be inefficient (marginal returns, poor use of resources). What Do Those Numbers Really Mean? – While employees may know that high numbers are good and low numbers are bad, do managers understand what the results indicate? In other words, how much better is a 3.8 GPA than a 3.6 GPA? Is there a significant difference in the quality of the students with these GPAs? Does the manager know which actions to take to help the 3.6 student and/or their instructor?

5. SHARED METRICS – A METRIC THAT IS IMPACTED BY TWO RELATED PARTIES. EXPLAINED: If you’ve ever taken a college class you know that students are measured by grades. As a student in that course you were probably also asked to evaluate the professor. Student grades and instructor evaluation, these are two metrics that measure in only a single direction. A student may earn a poor grade and, in their frustration, may intentionally give the instructor a low rating. It’s difficult to tell if the instructor was poor, the student was poor or both parties performed poorly. Imagine if there was a metric that would require good output from both student and instructor. If such a metric existed, the instructor might try harder to engage the student and create a better learning environment. Meanwhile, the student might work to understand the material better and guide the instructor as to their specific needs. In supply chains, where buyer-supplier cooperation is vital to supply chain excellence, having metrics that motivate companies to work toward outcomes that favor both sides of a supply chain relationship is vital. Modern supply chain managers are working to develop shared metrics across their supply chains but as you might imagine, developing these sophisticated metrics is not easy.

6. BALANCED SCORECARD (BSC) A performance management tool that focuses on strategic activity and strategic outcomes. While some companies alter the 4 elements of their

balanced scorecard, most companies utilize some form of the traditional scorecard that tracks output in four different areas: 1. Financial Results – Utilizes some basic financial metrics related to cost, revenues and profits. 2. Customer-Related Results – Measures to see if the company is meeting the customers’ product and/or service requirements as well as customer satisfaction expectations. 3. Internal Business Process Results – Measures to see that the business processes in the supply chain are running efficiently and effectively. 4. Learning and Growth Results – Measures the working environment, the dedication to continuous improvement and other issues that are related to the company’s human resources. EXPLAINED: The theory behind the BSC approach is to proactively look for problems before they impact financial results. Rather than wait for profits to decline or sales to drop, a company should be able to see problems that may be on the horizon by measuring beyond financial results. If customers are unhappy (poor customer-related results) then very likely sales will soon begin to drop, and with them, profits. A BSC would help a manager catch the customer-related issues earlier than a traditional system that only tracked financial results. Companies that identify poor quality, may be able to avert drops in customer-related measurements, as well as financial measurements. Similarly, a company with a poor work environment, a stagnant work environment or a poorly trained workforce is likely to experience issues at many levels. All of these problems could very soon impact processes, customers, and profits. From a supply chain perspective, the BSC approach is a good way to demonstrate the diversity of issues in a supply chain, which could ultimately impact the bottom line.

7. SUPPLY CHAIN OPERATIONS REFERENCE (SCOR) MODEL

A measurement tool that enables supply chain partners to track performance, communicate progress and develop opportunities for improvement. This management tool is considered valuable because it connects supply chain activities from suppliers at one end of the supply chain to customers at the opposite end of the supply chain, and all supply chain parties in between. According to the SCOR model, the five primary supply chain processes are: 1. Plan – Demand and supply chain planning 2. Source – Purchasing Process 3. Make – Manufacturing Process 4. Deliver – Logistics and Transportation 5. Return – Reverse Logistics As seen in the image below, all five processes overlap between different supply chain parties. This demonstrates why integration is likely for supply chains that adopt the SCOR model. It can also lead to companies developing shared metrics.

 EXPLAINED: The SCOR model is recognized by hundreds of companies as a tool to help integrate the supply chain. The SCOR model is also seen as valuable because it helps organizations measure not only their own performance but also the performance of supply chain partners both upstream and downstream.

The model is complex and can be difficult and expensive to implement, but a large group of global companies have successfully implemented the SCOR model and reported improved supply chain performance since implementation.

8. TOTAL SUPPLY CHAIN MANAGEMENT COSTS The cost of every process, material, fee, defect, etc. that runs through the supply chain; sometimes also explained as the cost to plan, source and deliver products and services. (Note the relationship between this and three of the five SCOR Model processes.)

9. CASH-TO-CASH CYCLE A measure of the number of days between the time a company pays their supplier for inventory and the time that the same company is paid for the same inventory by their customer. The Cash-to-Cash Cycle formula is

(Days of Inventory on Hand) + (Days of Accounts Receivable owed to your company by your customers) – (Days of accounts payable your company owes to suppliers) EXPLAINED: Essentially, this metric measures how long cash that is invested in inventory is out of the company’s pocket. As long as cash is tied up inventory, the company is restricted from investing in those funds in other endeavors. Having a low cash-to-cash cycle is ideal. If the cash-to-cash cycle is measured to be five days, the company can expect those invested funds to be back in their pocket five days after the supplier is paid. Obviously, the calculation is not that simple since a company likely negotiates payment terms with its supplier. Perhaps a company will pay their supplier 30 days after inventory is received. At the same time, your customer may not pay you for their purchase until 45 days after you have delivered the goods.

In some cases companies can actually have negative cash-to-cash cycles. How? Suppose your customer pays online before you even deliver the goods and suppose you also do not pay your supplier until 45 days after inventory is shipped. In this case, a negative cash-to-cash cycle would be possible.

10. CAPACITY UTILIZATION A ratio of the amount of product produced by a manufacturing process versus the maximum capacity of that facility. The formula for this would be:

(Actual Factory Output) / (Factory Design Capacity) EXPLAINED: If a company can produce 200 cars per day but present demand only calls for 120 vehicles to be produced per day, then the factory is only utilizing 60 percent of its designed capacity. Typically, a high capacity utilization would be desired. If capacity utilization becomes too high though, the company may experience issues with growth. Also, when an organization has an extremely high capacity utilization it means they have very little available capacity to fix problem, address defects, or meet unexpected surges in demand.

11. PROCESS VELOCITY A measure of how long a unit sits in a process versus the amount of work time that is expended on the unit. The formula for this is:

(Throughput Time) / (Value Added Time). Throughput time is the total time the unit spent in the system collectively. Value added time is the amount of time the item was worked on during the process. EXPLAINED: If a car is dropped off at a service shop at 8 a.m. and is ready for pick up at noon, the throughput time is four hours. If the car needed only basic service that took only one hour for the technician to

perform, then the value-added time was 1 hour. The process velocity here would be 4.0. Why? 4 hours / 1 hour = 4.0 As can be seen, the ideal process velocity would be 1.0. Why? This would mean that every moment the product was in the system value was being added. If process velocity was 1.0, there was no waiting time and there was no need to hold the item for a long period of time.

12. PERFECT ORDER FULFILLMENT The percentage of orders that are full, arrive on time and are damage free. EXPLAINED: Supply chains are asked to deliver the right item, to the right place, at the right time. Perfect order fulfillment strives to measure this by making sure that all orders are complete (if 100 units were ordered then 100 were received by the customer), all orders were delivered on or before the date promised and that all items were damage free. Perfect order fulfillment is a valued metric because it is multi-faceted since it takes into account accuracy, speed and quality.

CHAPTER 12: QUALITY MANAGEMENT BASICS GOALS, OBJECTIVES AND STUFF WE WILL RUIN: Discover the complexity and ambiguity associated with defining, producing, improving and controlling quality Learn about and understand many of the basic quality terms and programs utilized in the corporate environment. This module might make you want to pursue highly valued quality certifications and degrees.

SECTION 12.1: WHAT IS QUALITY?

 STORY: QUALITY IS IN THE EYE OF THE BEHOLDER Who makes a better phone, Samsung or Apple? Better sport, basketball or football? What’s better, PC or Mac? Better car, Porsche or Tesla? Who’s your favorite world leader? While you may insist that there is a correct answer to each of these questions, the truth is that everyone gets to make their own choice. Quality is in the eye of the beholder. Every person gets to make his or her own choice about what constitutes quality. For some it would be a measurable attribute like speed or size, for others it might be the durability of an item and still for others it is just a matter of how it looks. More likely it is a very special combination of a number of different measurable and immeasurable attributes for each and every person. Let’s Consider a few Quality Showdowns: PC versus Mac – You likely have a preference. Depending on your needs, your technical ability and some personal tastes, you’ve likely crafted your own opinion. Typically, the differences are related to a number of issues that may include:

1.

​Design

1.

​Technical specifications

1.

​Operating system

1.

​A ratio of computing power for money paid (value)

1. ​Software availability for that machine and, if available for both, the usability on one machine versus the other 1.

​Security related issues

1. ​The availability and the “quality” of technical support by the manufacturer As a computer company develops new machines and devices, they must carefully consider these and quite a few other issues in trying to win over new customers, as well as in trying to keep customers that have previously purchased their products. Consider this, what would it take for you to switch your preference and/or allegiance? Preferred Cell Phone Provider In the United States, choosing a cell phone provider can present quite the challenge. While the cell phone company provides a digital service, there are also hardware limitations that may be associated with a consumer’s choice. In addition, when a consumer does choose a provider, new plans are constantly introduced that may be better or worse values. In many cases, the complexity of the available plans makes it difficult for the average consumer to choose between keeping their present plan with their provider or choosing a new plan with that same provider, and in doing so accepting a new 2-year contract. The most common issues a consumer must contend with would likely include:

1.

​Number of minutes

1.

​Coverage – quality of signal

1.

​Data speeds

1.

​Types of phones offered by that company

1. ​Customer service (availability and level of service) – online, instores, via phone calls 1. ​Total value of the plan – minutes, data, texts, monthly fee, penalties for going over allotted data/minute allowances, penalty for ending contract early. What do you like about your present provider? What would it take for you to switch to a new provider? Or are you just waiting for your contract to expire before you switch? How will you choose your next provider? These are the issues that keep product and service organization executives up at night. If only they knew what the customer wanted. Actually, sometimes they know very well what customer desires. The problem is that even when companies know what consumers desire, sometimes when presented with exactly what they asked for a consumer realizes the reality was not as impressive as their dream. Sometimes the most successful companies are the ones that deny giving customers what they asked for and instead give the consumer something they never even imagined. Think of your favorite apps, products and services. Before you discovered them, did you ever imagine that something so wonderful could exist? How important is the quest to find quality? Just look at some of the most popular websites that help people make decisions about almost every purchase or experience: 1. ​Rottentomatoes.com and Metacritic.com for all sorts of media including movies, television programs, video games and music 1.

​Edmunds.com for vehicles (both new and used)

1.

​Yelp.com for restaurants and services

1.

​Consumer Reports for consumer products and services

1.

​Ratemyprofessor.com for college instructors

1.

​CNET.com for digital products and services

1.

​Avvo.com for legal services

1.

​Tripadvisor.com for travel related services

1.

​Gamerankings.com for video games

As you look through these sometimes-overlapping sites, what is something that you will almost surely discover? Quality is in the eye of the beholder. For every incredible product or service, there will always be at least one person that will provide a rational or irrational reason why they hate what you love.

1. QUALITY The ability of a product or service to meet a consumer’s expectations. Quality expectations may be related to, but not limited to, design, durability, performance, materials used, aesthetics, delivery, consistency and associated service. EXPLAINED: As the introduction to this section discussed, finding a definition of quality that encompasses everyone’s views and desires is difficult, as such, this definition of quality is both bland and open to interpretation. Like many of the most important issues in business though, the discussion of such complicated and sometimes ambiguous issues like “quality” help companies discover a path to understanding their goals and their mission. In the world of supply chain management, a customer’s definition of quality can be an excellent guide for managers to make decisions related to strategy, tactics, resources, supply chain partner selection and supply chain execution.

2. DIMENSIONS OF QUALITY (PRODUCT) What are the categories/dimensions of quality that consumers use to determine the quality of a tangible product and/or good? While everyone is entitled to their own opinion, the most common dimensions of quality that consumers consider in measuring a good’s quality are listed below. When you watch a car commercial, it is hard to imagine that either visually or verbally they do not touch upon most of the dimensions of quality listed here: 1.

​Performance – The car goes from zero to 60mph in 4.9 seconds

1.

​Reliability – A car you can count on, one that won’t breakdown

1. ​Durability – A car that can handle tough conditions and last “forever” 1. ​Features – Entertainment system, 4-wheel drive, sunroof, navigation system, leather interior and heated seats 1. ​Aesthetics – Beautiful shots of the car in the sun and at night, in multiple colors 1.

​Reputation/Brand – Toyota, Mercedes, Ford, Porsche, BMW

1. ​Service Response – Is it easy to find a service center and even easier to get into contact with them 1. ​Serviceability – Is the item being purchased easy to use; for digital devices, this may be especially important for some consumers 1. ​Maintenance and Repair - This might include the type of warranty or the costs associated with the required upkeep/maintenance of the item. (This might even include whether a product can be repaired if damaged or extend to the idea that while a TV can be repaired if broken, the cost to repair it would be prohibitive - a customer might just be better off buying a new TV)

3. DIMENSIONS OF QUALITY (SERVICE) In the item above, the quality dimensions of a product were provided. Here we see many of the typical dimensions of quality for a service. For this list let’s consider common service organizations in industries like healthcare, education, restaurant/food industry, vacation lodging and air travel: 1. ​Time – Time from arrival to service completion (for example, amount of time spent waiting in lines) 1. ​Timely – Was the service received when expected and available when needed 1. ​Complete – Did the service fulfill all of the customer’s expectations 1.

​Accurate – Were all customer requests fulfilled as expected

1. ​Responsive – If a mistake was made, did the waitress see the problem, acknowledge the problem and then fix the problem promptly 1. ​Courtesy – Was the service provided with an acceptable level of both friendliness and professionalism 1. ​Consistent – Can a consumer expect every visit to be just as good as the last 1. ​Accessible – Location, hours of operation, website availability, 1-800 numbers 1. ​Convenient – Hours of operation, user-friendliness and paperwork

4. COSTS OF QUALITY

Managing quality requires a vigilant commitment to monitoring quality, identifying problems at different stages in the supply chain, finding root causes and then devoting resources to fixing the root causes. One very helpful way of seeing the costs of quality at different stages of the supply chain is by categorizing them into four categories. One key lesson learned via the costs of quality is that the longer you wait in the supply chain to address the problems, the more expensive the quality costs are to the organization. In addition, the relationship between the four costs of quality helps determine where the problem might be and what needs to be addressed. As you will likely notice, as internal failure costs are increased, external failure costs should decrease. Also, as prevention costs are increased, both internal and external failure costs should decrease. Internal Failure Costs – Problems found and fixed within the supply chain - Quality costs that were identified within the supply chain, before they reached the consumer. These types of costs would include resources wasted to produce the item, disposal of the damaged good and possibly the costs of work and materials required to repair the item. Something to consider: If the problem is addressed internally the customer never sees the problem. It also helps managers discover that internal quality improvements could help decrease or eradicate these problem costs. External Failure Costs – Problems that reach the consumer - These costs represent the worst-case scenario and have the highest potential for losses. These are the costs associated with “repairing” damage caused from delivering substandard items or services. Something to consider: If damaged items are sold to the consumer reverse logistics costs, warranty costs and replacement costs would be classified as external failure costs. In addition, the customer may not purchase from the company ever again, they may tell others, the media may publicize the quality failure and the company’s brand may be damaged. If defective items caused injury or death, legal fees, fines and penalties would all be classified as external failure costs. Something else to consider: Supply chains must get the right item to the right place at the right time, therefore even the late shipment of an item

would be deemed an external failure cost since it would likely impact the customer’s perception of the company’s reliability. Appraisal Costs - Where are the problems? Appraisal costs are also called assurance costs - These are costs associated with monitoring quality in stable systems or the costs of researching when systems are producing substandard quality. Something to consider: Before steps can be taken to fix problems, root causes must be found; thus, appraisal costs could be associated with finding root causes of quality deficiencies. Appraisal costs could include the costs of measuring, evaluating, auditing and therefore they may include process inspections, inspector and consultant fees, lab time/fees, system interruptions and costs associated with interviewing employees about the process. Prevention Costs – Fix present problems, prevent future problems - These are costs associated with efforts to eliminate any identified quality related problems or costs related to reducing the potential for quality problems in the future. Something to consider: Prevention costs can be seen in many different levels of the organization and throughout the supply chain. Examples might include: Efforts to improve product, service, and/or process design; Human resource efforts to increase or improve training; Changing hiring policies to attract better employees; Materials related efforts: Choosing better suppliers, purchasing premium raw materials, parts, and components; Machines: maintenance, upgrades; Improved packaging; Corporate quality programs; Better management of third parties and efforts to improve buyersupplier relationships.

5. QUALITY GURUS The study of quality management has been intense for well over 100 years now. Some of the giants of the quality world include: W. Edwards Deming, Joseph Juran and Philip Crosby. Below are a few hallmarks of their contributions:

Deming - Deming’s Fourteen Points – Deming was a champion of continuous improvement. In an effort to help organizations foster a culture of continuous improvement, he developed a list of quality recommendations that are often just referred to as Deming’s Fourteen Points. Juran – Quality Trilogy – His primary quality teachings emphasized three things: Quality planning, quality improvement and quality control. Crosby – Quality is Free – Crosby is famous for his book that proclaimed, “Quality is Free.” Before Crosby, most saw quality as a burden on corporate costs. Crosby argued that a lack of quality may have lower costs, but it would eliminate any value. As a result, the more that was invested in quality, the greater the value of the product or service. In addition to these three quality gurus, other well-known quality gurus would include: Genichi Taguchi, Armand Feigenbaum, James Harrington, Kaoru Ishikawa, Shigeo Shingo and Walter Shewhart.

6. CALCULATING RELIABILITY Reliability is a measure of the percentage of time a system or product operates successfully. It assumes that in order for a system or product to operate successfully, all parts of the system (or parts in the component) must themselves be reliable. Thus, the reliability formula for a product is:

Reliability of a product with n interdependent components = (Reliability of component 1) * (Reliability of component 2) * (Reliability of component 3)*…(Reliability of component n) Reliability (Product) = r(1) * r(2) * r(3) *…r(n) To find the reliability of a system, the same formula is used except instead of using the “reliability of component x,” the formula would use the “reliability of step x” in that system.

Example: A child’s toy has four interdependent components. The toy only works if all four parts work properly. The reliability of part A is 96 percent, the reliability of part B is 89 percent, and the reliability of parts C and D are both 98 percent. What is the total reliability of this toy?

Reliability (toy) = 0.96 * 0.89 * 0.98 * 0.98 = 0.82 or 82 percent Reliability with a Backup Sometimes a product can utilize a back-up component when the primary component is in an unreliable state. For example, suppose a company gave you two light bulbs with your lamp. If the first light bulb died, the second light bulb could possibly fix the problem. In this case, the combined reliability of a component and its “backup” component, or backup components if there are more than one, would be calculated using this formula:

Total backup reliability = 1.0 - (1.0 – r) Total # of components Example: Let’s use the same example from above where the child’s toy has four interdependent components. The reliability of part A is 96 percent, the reliability of part B is 89 percent, and the reliability of parts C and D are both 98 percent. Since part B seems to be the weakest component, what would happen if we had three total B’s (1 - part B with two back-up components)? What is the total reliability of this toy with the backups? First calculate the combined reliability of the 3-component B’s.

Total backup reliability = 1.0 - (1.0 – 0.89)3 1 – 0.113 = 0.9986 Now take that new reliability and plug it back into the reliability formula for the whole toy:

Reliability (toy) = 0.96 * 0.9986 * 0.98 * 0.98 = 0.921 or 92.1 percent

SECTION 12.2: QUALITY MANAGEMENT PROGRAMS

 STORY: DELIVERING THE QUALITY MESSAGE Imagine running a global corporation with 50,000+ employees. How do you ensure that every employee is focused on protecting and improving the perception of quality associated with your company? Well, as we already know, quality can mean many different things to many different people. Quality has so many dimensions and no single company can fulfill everyone’s desires. Since quality can mean different things to different people, companies must work to communicate to their employees and customers what type of quality they aspire to deliver. Sometimes the message begins with a corporate tagline/slogan. Look at these companies and their associated tagline/slogan. Whether you love or hate these companies, there is no doubt what matters to them, what they believe in, what they aspire to daily, what they want their consumers to expect and then ultimately receive:

1.

​Ford – Quality is job one

1. ​Goodyear – The best tires in the world have Goodyear written all over them 1.

​Hallmark – When you care enough to send the very best

1.

​General Electric – We bring good things to life

1.

​BOSE – Better sound through research

1.

​CNN – The most trusted name in news

1.

​Fedex – When it absolutely, positively has to be there overnight

1.

​John Deere – Nothing runs like a Deere

1.

​New York Times – All the news that’s fit to print

As a manager at any of these companies, you would understand the values of your organization, what the consumer expected, and in many cases these slogans/taglines could help you make the right decision about how to utilize the company’s resources. Managing quality may begin with a message, but how can a company do all of the things required to survive for years and even decades? How can a company do all of these things every day, in every office and facility around the world? 1. ​Produce and deliver consistent levels of high-quality services or products 1.

​Improve their present product and service offerings

1.

​Create and deliver new product and service offerings

1.

​Expand their definition of quality

1.

​Understand the changing needs of the market

In a world with global supply chains made up of hundreds if not thousands of supply chain partners, how can a company ensure that every supply chain partner is not just committed to quality, but that each also has a similar definition of quality that will meet the needs of the targeted end-customer? In this section some of the most traditional quality management programs and techniques will be addressed. Please be mindful that most companies will utilize more than one of these programs or techniques simultaneously. While your company may not subscribe to all or any of these, it is likely that their preferred quality programs are related to one or more of the topics addressed in this section. Finally, while popular, all of these programs and techniques have their detractors. Just like the definition of quality, everyone has different opinions about what are the most effective quality programs.

1. TOTAL QUALITY MANAGEMENT (TQM) As the name would suggest, total quality management seeks to address the management of quality at all levels of an organization and/or supply chain. While TQM is commonly referred to in the business world, it is interesting that no single explanation for TQM is universally accepted. Even those definitions that are often found are rather vague. See here the International Organization of Standardization (ISO) statement on TQM: “A management approach for an organization, centered on quality, based on the participation of all its members and aiming at long-term success through customer satisfaction, and benefits to all members of the organization and to society.” From this, we can see that a number of different parties and issues are addressed. Here are three commonly used TQM principles: Customer Focus – The customer defines quality, so all attention should be focused on the customer and their evolving definition of quality. The customer is the guide for employees, management, supply chain partners and all continuous improvement efforts. Involvement – A supply chain must work to involve all those within the supply chain to design, produce and deliver quality to the customer. This means management must work to keep employees engaged in the quest for

quality. Managers must also develop relationships with supply chain partners to collaborate and share in an effort to maintain their customer focus. Continuous Improvement – Quality evolution is never ending. Companies need to preach continuous improvement to all members of the supply chain. More than that though, managers must reward continuous improvement efforts and achievements. Only by rewarding supply chain members for continuous improvement efforts can companies be sure that a customer focus is maintained. As can be seen, the three TQM principles roll from one principle into the next. Because of this, a TQM wheel (See below) is often used to illustrate that customers are at the center and that involvement and continuous improvement must constantly revolve around the customer.



2. BENCHMARKING

Benchmarking is a process where companies compare their practices and performance measurements to those of other companies. Sometimes companies make these comparisons with companies that are very similar, even within the same industry, but still other times companies will benchmark themselves against companies that are quite different from them. The benchmarking process typically has four key steps: 1. ​Step 1: Identify an Area to Benchmark – Benchmarking is not a wide scale effort to compare a company as a whole, rather it selects processes or programs that are easier to compare. 1. ​Step 2: Identify Leaders – Once a process or program is set to be benchmarked, find those organizations that have been identified as leaders in those categories. 1. ​Step 3: Contact Leaders, Gather Data – Investigate how leaders act and perform. How does your process measure up? Identify areas that require improvement. 1. ​Step 4: Analyze, Act and Follow-up – Plan, initiate change, measure and assess progress. While most envision benchmarking as an exercise in measuring one’s company versus their direct competition, there are other forms of benchmarking: Competitive Benchmarking – This type of benchmarking is used when companies want to measure their processes, programs and outcomes versus those of their direct competitors. Examples: Honda benchmarking Toyota, Dell benchmarking Apple. Functional Benchmarking – When a company benchmarks an organization that is successful in an area where their processes reflect similar inputs, outputs or values. Examples: A Ford dealership benchmarking customer service programs at Southwest Airlines. Boeing

benchmarking quality control techniques at Toyota. A restaurant benchmarking a hospital for cleaning/sanitation techniques. Internal Benchmarking – Some organizations are so big that they can benchmark one department versus another. In reality, even smaller organizations can do some kinds of internal benchmarking. Example: General Electric’s energy group benchmarking hiring practices from General Electric’s healthcare group.

3. SIX SIGMA Six Sigma is a quality program that was developed by Motorola in the 1980s and has been used widely around the world since the 1990s. This program strives for the complete elimination of defects. The program uses different techniques and quality tools to assess and improve business processes. The six sigma program requires integrated efforts where teams from different parts of a company work to identify root causes and then develop solutions. One of the keys to maintaining such strict quality standards is that Six Sigma demands processes that are extremely consistent, thus they have very little variation. Individuals can become six sigma certified by going through training and testing. Some companies may require an individual to utilize six sigma techniques in a quality improvement program before the individual can become fully certified. It should be noted that there are different levels of certification that include: Green belt, black belt, master black belt and six sigma champion. One of the more recognizable aspects of the six sigma program is the fivestep process for finding, fixing and controlling quality issues. This five-step process is referred to as DMAIC, which stands for Define, Measure, Analyze, Improve and Control. 1.

​Step 1: Define the problem.

1.

​Step 2: Measure the performance of the process.

1. ​Step 3: Analyze the data measured in an effort to find a root cause.

1.

​Step 4: Improve the process; develop and implement solutions.

1. ​Step 5: Control the process; monitor progress and measure levels of improvement.

4. QUALITY CERTIFICATIONS AND AWARDS Some organizations utilize certifications and awards to self-assess and also to motivate employees to focus on quality within the organization and the supply chain. ISO 9000 – ISO 9000 is an international quality certification that helps organizations to understand the basics of quality management, to measure their present state of quality and also to identify areas for improvement. In addition, the ISO 9000 certification can signal a commitment to quality to an organization’s supply chain partners as well as their customers. The Malcolm Baldrige National Quality Award (MBNQA) – Once companies learn about the world of quality certification and quality improvement programs, some will endeavor to reach new quality heights. In the United States, the Malcolm Baldrige National Quality Award is awarded to companies based in the US that are deemed to demonstrate the very best in the area of performance excellence. Deming Prize – A Japanese quality award given to companies or individuals that have contributed to the field of quality.

SECTION 12.3: QUALITY TOOLS STORY: DIAGNOSTICS (CAR/MECHANIC AND HUMAN/DOCTOR)

 Even as doctors have evolved to be less robotic and more attentive to the psychological needs of their patients, diagnostic tests are still a staple at almost any visit to the doctor. Even the most basic visit to the doctor will include a check of your vital signs and a collection of basic personal data: 1.

​Body temperature

1.

​Pulse rate

1.

​Blood pressure

1.

​Breathing rate

1.

​Personal data: Height, weight, age, sex and personal habits

In each of the diagnostic tests, there is a range of acceptability for most humans of different ages and sexes. If all data is read as “acceptable” during a check-up, the patient may be measured as being healthy. If the patient

came in with an ailment, the diagnostic tests may provide clues about what may or may not be wrong with the patient. Depending on the patient’s personal history, their age, their verbal complaints, their observed condition or their measured vital signs, additional diagnostic tests may be ordered: 1.

​Blood tests

1.

​X-rays

1.

​EKGs

1.

​Biopsies

1.

​CT Scans

1.

​Oxygen saturation tests

1.

​Spinal taps

1.

​MRIs

These are just a few diagnostic tools and tests that help doctors see what, if anything, may ail a patient. Sometimes doctors are trying to find a root cause to a problem, other times they simply want to collect baseline measures of a healthy patient so they can compare those tests against the same patient as they age or if that patient ever develops bothersome symptoms. Just like how doctors use diagnostic tests and tools to measure and improve the quality of our health, quality managers have a series of quality tools that they can utilize to test the health of a system, monitor its consistency or to find root causes of apparent quality problems. Just like a person’s body temperature is not enough to help a doctor completely diagnose a problem and prescribe a solution, so too must a quality manager use a series of quality tools and observations to properly diagnose a quality problem and then develop a solution to correct the problem.

1. CAUSE-AND-EFFECT DIAGRAMS (FISHBONE CHARTS) A diagram used to identify possible causes for quality problems. The chart begins as a single horizontal arrow that points to the right; the arrow points to the quality problem. Into that arrow point four other “cause” arrows and each of the four arrows is a category of issues that may be causing the problem. The four categories are usually: Labor, process, machine and material. In the example provided, you can see that the problem is “delayed airline departures.” Systematically, a manager and/or a quality team would then brainstorm all the possible causes of a delayed airline departure: a. Machines that when malfunctioning could cause the flight to be delayed: Plane, computers, ticket printers, baggage conveyors and fuel truck b. Materials that when absent could cause the flight to be delayed: Paper, food, fuel and drink c. Processes that when operating poorly could cause problems that delay the flight: Check-in process, baggage handling, boarding process, cleaning process and maintenance process d. Employees that when working below their expected level, absent, understaffed or when poorly trained could cause slowdowns: Pilots, flight attendants, customer representatives, etc. Notice the chart only includes issues that can actually be managed by human beings in the airline industry. Issues like weather and airport security (controlled by the airport, not the airline) are deemed environmental and thus would not appear on the chart. Once a quality team has a completed cause-and-effect diagram, the team could find data to see how many flights were actually delayed because of the causes listed on each of the cause branches. The team could look for patterns, areas that might be easy to address and larger systematic problems that might require a big budget project.



2. SCATTER DIAGRAMS Diagrams that attempt to show a possible relationship and/or correlation between two sets of data.

 It is important to remember that just because a correlation seems likely, it does not prove it exists. In the chart above, it may be possible that employees with more work experience have also received more training. It is also possible that the training had little or no impact on the number of defects produced. Perhaps the employee’s experience on the job was instrumental in learning how to avoid defects. One odd example to help bring this through: Over 80 percent of drivers that get into car accidents are milk-drinkers. Does this mean drinking milk was the cause of most car accidents? Of course not.

3. PARETO CHARTS When a company experiences a number of different quality problems, pareto charts can help managers identify which categories of problems are the most prevalent.

 Using the chart above, this company can see that a number of the vehicles being brought into the service center are experiencing problems with the dashboard display. This may help the company develop a program to find and fix those problems quickly. On the other hand, an organization does not want to lose sight of the fact that the small number of issues with tires could have resulted in serious injuries or fatalities. As with any set of data or chart, while the tool can be helpful in finding some problems, a manager has to be mindful of the complete picture.

4. HISTOGRAMS Similar to the Pareto charts, a histogram attempts to categorize output. The difference here is that data falls into quantitative categories (versus qualitative categories used in pareto charts).



5. FLOWCHARTS (PROCESS MAPS) A diagram made up of a series of symbols that maps a process. Each symbol represents a different step or activity in the process. The chart aids in building a quality process and identifying points of concern in terms of managing and delivering quality.



6. CONTROL CHARTS A chart that plots sample data over a period of time. The chart has a center line (goal), an upper control limit and a lower control limit. If a data point lands outside of the control limits, the process is deemed to be out of control and thus the process requires attention. In some cases, managers may preemptively stop the process before it goes out of control should a negative pattern become apparent.



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