OM_Summary_Notes_Part 1

CHAPTER 1: TRENDS AND ISSUES

Introduction
Definitions of OM:

⮚ Operations management—a discipline that focuses on activities that relate to the planning
and control of operations in manufacturing and service organizations.
⮚ Operations management is a systematic approach to addressing issues in the transformation
process that converts inputs into useful, revenue-generating outputs.

Summary
● Manufacturing and service sectors are the major contributors to GDP (Gross
Domestic Product) in India (nearly 75%)
● Manufacturing firms convert raw materials into physical products. Service
organizations provide services to meet customer needs. Both can be viewed as
operations systems that transform inputs into outputs.
● Operations management involves a systematic approach to solve problems in these
systems, considering short-term issues like scheduling and long-term ones like
resource allocation. The main goal is to minimize cost and maximize profit.

Manufacturing and service sector trends

● The index of industrial production (IIP) is a measure of the growth in the
manufacturing sector. The Centre for Monitoring Indian Economy (CMIE) collects
data on several macroeconomic indicators, including the IIP.
● The data from table 1.1 shows a decline in profitability for Indian companies,
especially in services. This highlights the need for better operations management.
● Rising raw material costs and a gradual increase in the cost of material and labour,
pressure companies to reduce waste and improve productivity.
● The focus areas of operations management are likely to be in the areas of better
supplier management and waste reduction.
● India’s rich talent pool of scientists, researchers, and engineers as well as its large,
well-educated English-speaking workforce and democratic regime would make it an
attractive destination for manufacturers (Global Manufacturing Competitiveness Index
2013 released by Deloitte)
Service as a part of OM

● Service sector is growing significantly in India.

● According to the Central Board of Excise and Customs (CBEC), between 1994–95 and
2012–13 the tax revenue from the service sector has grown from `4.1 billion to
`1.325 trillion.
● There's a spectrum of services and products, with some having both characteristics.
In OM, a “pure product” and a “pure service” are just two ends of the spectrum, and
not separate entities. In reality, a vast majority of operations share a continuum of
services and products.
● Operations management principles apply to both service and manufacturing.
● Key differences between services and manufacturing include:
o Intangibility: Services can't be physically touched or held. Products are
tangible and customers can form their assessment of the products more
easily.
o Heterogeneity: Services can vary depending on the customer and provider.
Since the experiential component is dominant in a service, no two services
are exactly alike.
o Simultaneity: Services are often produced and consumed at the same time.
o Perishability: Services can't be stored for later use. They are perishable.
Operations as a key functional area
● An organization typically has 4 main functions: operations, marketing, finance, and
human resources.
o Operations management, as we have already seen, deals with the
management of the conversion process in an organization.
o The marketing function is responsible for understanding the requirements of
customers, creating a demand for the products and services produced, and
satisfying customer requirements by delivering the right products and
services to customers at the right time.
o Both operational and marketing activities require estimates of financial
needs, tapping the market for funds, and management of working capital.
These activities broadly constitute the finance function.
o Managing the workforce and addressing a host of issues related to them is
another important requirement in an organization. The human resources
management function deals with such issues.
● These functions interact and rely on each other's input. For example, marketing
estimates lead to production planning in operations.

● Within operations, there are 5 layers:

o Customer layer: consists of the end customer and various others in the
distribution chain, including retailers and dealers. It interacts with marketing
and includes distributors.
o Core operations layer: manufacturing setup for factories (This may consist of
fabrication, machining, assembly and final inspection) or service delivery
system for service organizations.
o Operations support layer: provides services to core operations. Typically
includes areas such as marketing, quality, design, planning, costing,
information technology, purchase and materials, stores and maintenance.
o Innovation layer: focuses on research and development to stay competitive.
o Supplier layer: consists of companies that provide materials and services.
 ● Each layer interacts with other layers and functions. For example, the supplier layer
interacts with procurement to ensure materials are available for core operations.

Operations Management: A Systems Perspective

● A system perspective considers inputs, outputs, processing, and feedback

mechanisms.
● Inputs to operations include labour, materials, and capital.
● Processing activities convert inputs into outputs, which can be goods or services. n
operating system undertakes to convert the raw material into useful products for
customers. The conversion process adds value to the product and enables the
organization to sell it in the market. Examples are product design, process design,
operations planning, and inventory control.
o Product and process design: once the right mix of products and services are
identified, appropriate processes for manufacturing and delivering them to
the customers need to be identified. This involves deciding on the type of
technology to use, the type of machines to be used in the conversion process,
and the exact method of creating the products and services.
o Operations planning: the organization requires operations planning to ensure
the availability of adequate material and capacity to meet the targeted
production and service delivery.
o Inventory control: ensuring adequate supply of materials for the operations
system. This requires that the suppliers of various materials are identified and
relationships established with them.
 ● Feedback helps monitor and adjust the system. In any system, the feedback loop
serves the purpose of identifying the deviation paths and highlighting the areas that
need immediate correction. Examples are quality management, maintenance
management, and process improvement.
● Demand is an external factor that can't be fully controlled but can be estimated
through forecasting.

Operations Management Functions

● Operations management functions can be categorized as design issues or control

issues.
● Design issues relate to the configuration of the operations system and provide an
overall framework under which the operations system will function. It involves
setting up the framework for how the system operates, like product design, quality
assurance, and capacity planning.
● Control issues involve using the resources effectively, like forecasting, scheduling, and
maintenance.
● The available capacity could be better utilized through production planning and by
scheduling operations so that idle time is minimized. Furthermore, required capacity
and material could be estimated and made available through purchasing and
scheduling procedures. All these constitute operational control decisions in
operations management
● Design decisions are strategic and long-term, while control decisions are tactical and
short-term.
● Typically, a majority of design decisions are made with a planning horizon of five to
ten years. Such decisions usually require a long lead time, multiple levels of
decision-making and huge capital outlay.
● Several operations management decisions are made for a short run of a week or less.
These decisions include detailed scheduling of operations, quality management and
control, and reacting to disruptions and changes in plans

Challenges in Operations Management

● Economic reforms have increased competition, forcing companies to reduce prices,

shorten lead times, and allow for more customization.
● Competitive pressure manifests in terms of three major challenges:
o Falling prices: There has been a continuous fall in prices of branded,
engineered consumer products as well as industrial products.
o Shrinking delivery quote: fast delivery is expected compared to earlier times
when waiting for over a year to get a car was not uncommon.
 o Build-to-order requirements: Systems that allow them to customize,
configure, and visualize their own version of products and services are more
in demand than a standard off-the-shelf version with a few pre-determined
variations.
● Growing customer expectations: Customers now expect higher quality, more variety,
and faster delivery.
● Technological developments: technological advancements are changing how
businesses operate, requiring companies to adapt.
● Environmental concerns are leading to pressure to reduce waste and use fewer
resources.
 CHAPTER 2: OPERATIONS STRATEGY

Introduction

Definition:

Operations strategy is the process of making key decisions regarding the operations function
of an organization on the basis of inputs from its overall corporate strategy.

Summary

● An organization's strategic planning process should define its goals and how it will
achieve a competitive advantage.
● Operations strategy takes the overall corporate strategy and translates it into specific
decisions about how the operations function will run.
● This includes things like capacity, technology, products and services offered, and
supply chain design.

Relevance of operation strategy

● Globalization has increased competition for Indian companies, requiring them to be

more customer-focused and cost-effective.
● On account of globalization, a number of Indian firms have faced a significant fall in
prices, a dramatic reduction in delivery quotes, and the proliferation of variety to
remain competitive in the market.
● Companies need to reduce prices, shorten lead times, and offer more variety to
compete. In such a scenario, better cost management practices are required in
manufacturing and service organizations to handle the threat of competition.
● Operations strategy helps businesses develop a plan to respond to these competitive
pressures.

Strategy-formulation process

The strategy-formulation process can be understood in terms of a series of detailed steps,

which include:

1. Understanding the competitive dynamics at the marketplace

o Market dynamics direct the organization toward the issues it should consider
while formulating its operations strategy. It includes competitor offerings,
customer expectations, and the competitive landscape.
o Businesses can use this information to identify what makes them unique and how
to compete.
 o Customer expectations change over time due to technology, market evolution,
and new competition.
o Companies need to prioritize what matters most to customers (order-winning
attributes) and what's needed to compete at all (order-qualifying attributes).
2. Identifying order-winning and order-qualifying attributes.
o Order-qualifying attributes are the set of attributes that customers expect in the
product or service they consider for purchase. For example, a car needs to be
reliable and functional to be considered for purchase.
o Order-winning attributes are features that set a product or service apart from the
competition and make it more attractive to buy. For example, a car with superior
fuel efficiency or a comfortable ride might be an order-winning attribute.
o These attributes can change over time. For instance, in the 1980s, high quality
was a differentiator, but by the 1990s, it became a basic expectation.
3. Identify strategic options for sustaining competitive advantage
o By analysing competitor offerings and customer expectations, a company can
determine which features are:
● Order-qualifying (necessary to be considered for purchase)
● Order-winning (differentiate from competition and make it more attractive)
o This information helps the company choose how to compete, like high quality,
variety, or convenience.
o These attributes can also be used to develop ways to measure how well the
operation is performing.

4. Devise the Overall Corporate Strategy

o Companies can't implement every possible strategy due to limitations:
▪ Resource limitations (may not have the money or equipment)

▪ Internal factors like management preferences and company culture

o Companies need to pick a strategy that aligns with their strengths and
weaknesses and available resources.
o This chosen strategy becomes the organization's overall corporate strategy which
sets the overall direction for the company (e.g., focus on low-cost goods).

5. Arrive at the Operations Strategy

o The operations strategy translates the direction of corporate strategy into specific
choices about how the operation will run (e.g., large production capacity to
achieve economies of scale).
o Examples for a low-cost strategy:
▪ Procurement finds low-cost suppliers.
 ▪ Production uses continuous flow processes to minimize fixed costs.

▪ Performance measures focus on cost reduction and productivity.

6. The development of measures for operational excellence and the selection of specific
options for configuring the operations system.

Measures for operational excellence

● Operational-excellence measures provide the critical linkage between order-winning

and order-qualifying attributes identified through the strategic planning exercise and
the choices made in the operations.
● Operational excellence measures help assess how well a company's operations align
with its strategic goals.
● These measures are used to compare a company's performance to competitors and
identify areas for improvement.
● There are four common strategic priorities: quality, cost, delivery, and flexibility.
● Companies can choose one or more of these priorities to focus on.
● Each priority has specific performance measures to track progress.
● There are also a few indirect measures that can impact a company's performance by
indirectly affecting any of the other four measures.
● An example is the ratio of indirect labour to direct labour, which can affect lead time
and cost.
Options for strategic decisions in operations

● Translating the corporate strategy into the operations strategy essentially involves
making choices in the design and operational control of the operations system.
● These choices should align with the company's overall strategic objectives.
● There are five key areas where these choices are made:

⮚ Product portfolio:

▪ Product Portfolio Decisions: This refers to what products a company will offer,
the variations of each product, and the level of customization provided to
customers.
▪ Strategic Impact: The product portfolio significantly reflects a company's overall
strategic goals.
▪ Examples:

Airlines: IndiGo prioritizes low cost (economy class only) while Jet Airways
focuses on high-quality service (multiple classes, free meals).

Restaurants: Small self-service eateries target affordability while multi-cuisine

restaurants aim for a premium experience.

Computer Manufacturers: Dell offers customization for differentiation, while

Lenovo emphasizes reliable functionality.

▪ Strategic Objectives (SO) and Product Portfolio:

SO - Differentiation: Achieved through customization of products or services.

SO - Cost Leadership: Achieved through a narrow product portfolio, focusing on

efficiency.

SO - Wide Product Portfolio: Requires flexibility in operations to adapt to

⮚ Process design:
 ▪ Process Design: Process design refers to the overall configuration of the
operations system in such a way that the various activities are consistent with
the process choice
▪ Impact on Flow: The chosen process design impacts how materials and
information move throughout the organization. There are three main flow
types:

o Continuous streamlined flow: Ideal for high-volume production of similar

items (assembly lines). For example, high-volume motorbike manufacturer
(Hero Motor Corp. Ltd.) would likely use a mass production system
(continuous flow) for efficiency.
o Intermittent or batch flow: Used for producing batches of items that may
differ slightly (furniture manufacturing).
o Jumbled flow: Employed for unique or unpredictable projects (custom
software development). For example, a company building complex power
plants (Bharat Heavy Electricals Limited) might use a project shop approach
(jumbled flow) for flexibility.

▪ Alignment with Product Portfolio: The product portfolio (types and variations of
products offered) influences the process design choice.

⮚ Supply chain:

▪ Supply Chain: The supply chain is the network of entities supplying components, raw
materials, and a host of services to the organization as well as those distributing the
finished goods and services to customers through alternative channels.
▪ Strategic Alignment: The design of a supply chain should align with the
company's overall strategic objectives.
▪ Two Supply Chain Types:
o Efficient Supply Chain: Focuses on cost minimization and resource
optimization. Ideal for predictable demand products.
o Responsive Supply Chain: Aims for fast response to market changes.
Suitable for products with fluctuating demand.
▪ Product Profile Impact: The type of products a company offers (functional vs.
innovative) influences the choice of supply chain design.
▪ Examples:
o Annapurna Atta (flour) - Functional product with stable demand, so an
efficient supply chain is suitable for cost-minimization.
o Tanishq watches - Innovative product with unpredictable demand, so a
responsive supply chain is needed for quick adaptation.
 ⮚ Technology:
● Technological Advantage: Advancements in technology offer opportunities to gain
a competitive edge.
● Example: Asian Paints used technology to create a wider variety of paint colours
and sizes.
● Benefits of Technology:
o Increased resource utilization: optimizes resource usage through
computer-controlled systems.
o Scheduling flexibility: allows for quicker response to changes in customer
orders.
o Easier changes and complex operations: facilitates design and process
modifications while maintaining quality.
o Expansion flexibility: enables easier business expansion to meet growing
demand.
o Reduced lead time: shortens the time between order and delivery.
o Lower inventory: leads to reduced costs due to less work-in-progress
inventory.
● Technology as an Enabler: The right technology can empower a company's
operations strategy.
● Strategic Use: Companies aiming for high customer responsiveness may invest in
new technologies, even if they are expensive, and potentially recoup the costs
through customer premiums for the added value.

⮚ Capacity: how much production or service output the system can handle

Capacity decisions in operations strategy affect the cost of goods and services in three
ways:

● Economies of Scale:
o As production volume increases, the cost per unit goes down.
o Spreading fixed costs (buildings, machinery) over a larger output lowers the
overall cost.
● Fixed Cost Absorption:
o Fixed costs include things like salaries, maintenance, and rent.
o By increasing capacity (and sales), these fixed costs are spread over more
units, reducing the cost per unit (contribution margin improves).
● Bargaining Power:
o Larger production volume translates to higher purchasing power for raw
materials.
o Companies can leverage this power to negotiate better prices with suppliers.
● Example: Reliance Industries, a large petrochemical manufacturer, uses its high
production volume to negotiate better rates for the large number of trucks it needs
daily.
Break-even analysis

Break-even analysis is a related concept that links capacity to costs. It explains the
significance of having greater productive capacity to lower costs and maximize profits or
contribution.

F = Fixed costs of production

v = Variable cost of production of one unit

p = Selling price of one unit of the product

c = Contribution of one unit of product towards fixed costs

S = Sales volume (in terms of number of units)

BEPSales = Sales volume required to achieve break even

It is obvious that as every individual unit sells at a price p and has incurred a variable cost of
v, the difference between the two is the excess over the variable cost that could cover the
fixed costs. This quantity is known as the contribution margin (c), and can be represented by
the following equation: c = p – v

● The break-even point is the point at which the contribution margin is able to cover
the total fixed costs. Therefore, at the break-even point, the organization will have a
no-profit, no-loss situation, but would have covered all the fixed costs invested in the
system.
● Break-even sales refers to the number of units to be sold at the break-even point.
The break-even point and break-even sales can be expressed as follows:
The cost versus flexibility trade-off in operations strategy

● Competing Objectives: Cost efficiency and flexibility often oppose each other.
● Flexibility would mean more options in product variety and process design, which
may not allow the organization to exploit the benefits of volume.
● High Flexibility:
o More product variety and complex processes may limit economies of scale.
o Responsive supply chain might lead to forecasting errors and waste.
o Overall cost of products may increase.
● Low Flexibility:
o Fewer product variations allow for cost-reduction strategies.
o Enables efficient supply chain and streamlined processes.
o Lower overall costs.

● Managing the Trade-Off:

o Price Premium: Companies can charge more for products with higher
flexibility.
o World-Class Manufacturing: Implementing best practices to achieve both
some flexibility and cost-efficiency.

World-class manufacturing practices

● Traditional manufacturers struggle to balance cost, quality, delivery, and flexibility.

● World-class manufacturers excel in all four areas simultaneously.
● WCM overcomes trade-offs through a combination of philosophies and practices:
o Just-in-Time (JIT): Eliminates waste and non-value-added activities.
o Total Quality Management (TQM): Continuously improves quality through
employee involvement.
o Total Productive Maintenance (TPM): Empowers workers in equipment
maintenance for better reliability.
o Employee Involvement: Breaks down rigid work structures for better
problem-solving and ownership.
o Simplicity: Systems and processes are designed to be clear and adaptable.

Benefits of WCM:

● Reduced costs through waste elimination and efficient resource use.

 ● Improved quality through continuous focus and error prevention.
● Enhanced delivery reliability through better planning and maintenance.
● Increased flexibility to handle product variety without compromising efficiency.

Challenges of WCM:

● Overcoming resistance to change in traditional organizations.

● Long-term commitment required to implement and sustain WCM practices.

CHAPTER 5: SUPPLY CHAIN MANAGEMENT

Introduction

● Supply Chain: A network of entities that source materials, transform them into
products/services, and deliver them to customers.
● Examples in Manufacturing: Raw materials are converted to finished goods that
move through suppliers, manufacturers, distributors, and retailers.
● Examples in Services: Financial services like fixed deposits involve brokers, banks,
registrars, and logistics companies. The dabbawala network in Mumbai demonstrates
a service supply chain.
● Key Processes: Procurement, production, and distribution.
● Collaboration: Each entity in the chain needs to work together to create value for the
end customer.
● Companies cannot compete solely based on their own production or service delivery.
 ● A well-designed supply chain network with complementary skills delivers a strong
value stream to the customer.

Need for Efficient Supply Chain Management

The challenges of managing supply chains in today's dynamic business environment

characterized by:

● Increased Product Variety and Shorter Life Cycles:

o More new products are being introduced, leading to shorter lifespans for
existing ones (e.g., ambassador cars, liberty shoes, tariff plans).
o This makes demand forecasting difficult.
o When product variety increases, demand volatility also increases.
Organizations find it increasingly difficult to forecast demand and plan
effectively for procurement, production and distribution.
● Demand Volatility:
o With a wider variety of products, customer demand becomes more
unpredictable.
o It's hard to predict the exact demand for each variation of a product (e.g.,
colour TV models).
o Since estimating model-wise demand (for eg. for TV’s) becomes more and
more difficult, organizations need to plan the production as near as possible
to the point of demand, in order to reduce the risk of non-moving inventory.
o This calls for shorter lead times for procurement, manufacture, and delivery.
● Competitive Pressures and change in market dynamics.:
o Companies need to be faster and more responsive to maintain market share.
o This requires shorter lead times for production and delivery.
These challenges raise important questions for supply chain management:

● How does supply chain structure impact performance?

● What are effective inbound logistics strategies?
● What planning tools can improve supply chain management?
● How can we manage product variety and short lifecycles?
● How can we measure supply chain performance?

Information and Material Flows in the Supply Chain

● Material flows from suppliers to production and then to customers (forward

direction).
● Information flows in both directions:
o Forward direction (customer to supplier):

▪ Order entry status (e.g., customer buys a beverage)

▪ Production scheduling based on demand
▪ Material orders sent to suppliers
o Reverse direction (supplier to customer):
▪ Supplier updates on material supply
▪ Production scheduling updates
▪ Dispatch of goods to customers
● Information flow complexity:
o Order changes trigger adjustments in material flow and production plans.
o Collaborative planning and information sharing are crucial for smooth flow.

● Supply Chain Management (SCM) practices ensure smooth flow of materials and
information.

Supply chain components

Supply chains are made up of three distinctive entities: the inbound supply chain, the
in-house supply chain, and the outbound supply chain.

The Inbound Supply Chain

● The inbound supply chain pertains mainly to providing raw materials and components to an
organization.
 ● Focuses on acquiring raw materials, components, and sometimes finished
sub-assemblies from suppliers.
● Examples:

o A machine tool manufacturer needs various types of steel, castings, and

finished parts like motors.
o A hotel chain relies on suppliers for transportation, laundry services, and even
medical care for emergencies.

● Tiered Supplier Structure (example - Automotive industry):

o Tier 1: OEM suppliers providing key subsystems (wiring, upholstery, etc.)

o Tier 2: Component suppliers for each subsystem (castings, forgings, etc. for
transmissions)
o Tier 3: Metal manufacturers and ore-processing firms (steel mills, copper
manufacturers)
● Effective Management Requires Coordination:

o Manufacturing
o Planning
o Procurement functions
o Identifying and developing strategic relationships with suppliers

In-house Supply Chain

● The in-house component of the supply chain relates to the physical configuration of
the conversion process
 ● The raw materials and components sourced from various suppliers are launched into
the production system and converted into useful finished goods
● Includes:
o Manufacturing system design
o Facility management
o Layout and location of resources
o Material handling

● Two Layers:

o Core Manufacturing Layer: Physical resources for conversion (pre-processing,

fabrication, assembly, testing).
o The first operation is done in pre-manufacturing where the raw material is cut
to the required shapes and some pre-processing is done.
o Manufacturing Support Layer: Planning activities like:
▪ Demand management (forecasting, order entry, fulfillment)

▪ Production planning and control

● Collaboration is critical: Since the in-house supply chain plays the major role of
collaboration, both within and outside the organization, several functional areas are
involved in the process. The cooperation of several functional areas, including
planning, materials and procurement, marketing, production, and logistics will be a
critical aspect of the working of an in-house supply chain.

The Outbound Supply Chain

 ● Outbound Supply Chain: Distribution of goods and services to end customers.
● Includes:
o Distribution network design
o warehousing
o logistics planning
o channel management
o channel coordination
o Customer interface management
● Outbound Supply Chain Levels (Fast-moving consumer goods):

i. Factory warehouse
ii. Regional distribution centers
iii. Sales depots
iv. Retail outlets

● Distribution Network Design:

o Refers to the manner in which a set of outbound supply chain entities are
geographically located to stock products and serve end customers by
satisfying the demand in a responsive manner.
o Two main designs:
▪ Centralized distribution: Less inventory storage but requires efficient
logistics.
▪ Decentralized distribution: More safety stock but potentially higher
costs.
● Logistics Management:
o Refers to the physical movement of goods across the supply chain.
o Includes planning shipments, scheduling carriers, and route planning.
o Example: Onjus orange juice - efficient route planning to deliver to many
retail outlets.
● Channel Management:
o Involves multiple entities outside the manufacturing firm (e.g., distributors,
retailers).
o Ensures smooth flow of information and materials across the supply chain.
o Includes data sharing, relationship management, and conflict resolution.
o Customer feedback is crucial for improvements.
Supply chain management: a process orientation

● Process View of Supply Chain: Breaks down the supply chain into four main processes
for better understanding and improvement.
● Four Generic Processes:

1. Planning:
o Establishes the foundation for other supply chain components.
o Includes demand management, resource planning, etc. (covered in later
chapters).
2. Sourcing:
o Focuses on acquiring materials and components (covered in Chapter 7).
o Includes supplier development, purchasing policies, and cost reduction.
3. Manufacturing:
o Activities related to transforming materials into finished goods (covered
elsewhere in the book).
4. Distribution:
o Delivering finished products to customers (covered elsewhere in the book).

● Planning is Crucial:

o Drives activities in all parts of the supply chain.

o Examples:
 ▪ Setting delivery schedules for customers and suppliers.
▪ Planning for materials, resources, capacity, and distribution based on
demand management.

Supply chain structure

● Supply Chain Structure: Refers to how various entities in the supply chain work
together.
o Involves decisions about:
▪ Number of layers (e.g., manufacturers, distributors, retailers)

▪ Composition of each layer (types of entities)

▪ Information flow between layers

▪ Integration between layers

● Example: A six-layer supply chain with independent entities at each layer.
o Each layer reviews inventory and places orders periodically (e.g., retailer
every 7 days).
o There are time delays between order placement and fulfillment (e.g., 2 days
for factory to process an order).
● Impact on Performance:
 o Number of Layers: More layers increase delays, information flow complexity,
and inventory needs.
o Delays: Delays between each layer require higher inventory levels and can
cause mismatched supply and demand.
o Decision-Making: Independent decision-making at each layer (e.g., order
frequency) can lead to misleading information and inefficiencies.
o Independence of Members: Independent goals and policies of each layer
(e.g., discounts, promotions) can negatively impact overall performance.

The bullwhip effect

Bullwhip Effect:

● Caused by independent decision-making and information delays between supply

chain layers.
● Example: Retailers and distributors updating forecasts and orders at different times.
● Leads to:
o Misleading information about demand.
 o Ordering fluctuations that magnify as they move up the supply chain.
o Inventory shortages or surpluses.

Reducing the Bullwhip Effect:

● Reduce Layers: Fewer layers mean less information distortion and ordering delays.
o Example: Companies reaching customers directly from distribution centers.
● Reduce Information Delays:
o Use point-of-sale data, electronic data interchange (EDI), and web
technologies.
o Encourage information sharing among supply chain partners (e.g., sales,
capacity, inventory data).
● Reduce Lead Times:
o Improve business processes with technology and collaboration with
distributors and logistics providers.
● Reduce Fixed Ordering Costs:
o This can encourage more frequent but smaller orders, reducing potential
bullwhip effects.

Measures of supply chain performance

Design of supply chains

Supply chain design is based on the product type: functional vs. innovative.

Functional Products (e.g., toothpaste):

● Stable demand over a long time

● High competition, low profit margins
● Requires efficient supply chain for cost minimization
o Key strategies:

▪ Invest in long-term supplier partnerships

▪ Efficient information sharing for continuous replenishment
▪ Develop robust inventory control mechanisms
▪ Integrate material planning systems with enterprise-wide information
systems (ERP)

Innovative Products (e.g., World Cup T-shirts):

● Novel, time-sensitive, short life cycle

● High profit margins but with variety and demand volatility challenges
 ● Requires responsive supply chain to handle short lead times and unpredictable
demand
o Key strategies:
▪ Short lead times (1 day to 2 weeks)
▪ Accurate demand forecasting is crucial (but more prone to errors)
▪ Reduce product markdowns at the end of the lifecycle (3 months to 1
year)
▪ Postponement strategies:
▪ Packaging postponement (e.g., HP with multilingual
instructions)
▪ Assembly postponement (e.g., Dell computers with
standardized components)
▪ Manufacturing postponement (e.g., Benetton dyeing fabrics
after stitching)

Third-party logistics in web-based firms

● Web-based Sales: Companies sell directly to customers through websites using

various methods:
o Online catalogs with digital payments (e.g., Indian Railways)
o Online auctions (e.g., eBay)
● Order Fulfillment: Crucial aspect of e-commerce where products are delivered to
customers.
o Example: Issues during the 1999-2000 Christmas season led to companies
failing to deliver gifts on time.
● Importance of 3PLs:
o Web-based firms rely on 3PLs to handle order fulfillment and delivery.
o 3PLs ensure timely and efficient product deliveries, which is critical for
customer satisfaction and business success.
o The negative consequences of failed deliveries highlight the importance of
reliable 3PLs in e-commerce.

CHAPTER 6: FACILITIES LOCATION

● Location decisions pertain to the choice of appropriate geographical sites for locating
various manufacturing and/or service facilities of an organization.
 ● Location decisions are an integral part of designing a supply chain for an organization
as it determines the flow of materials from the raw material suppliers to the
factories, and finally to the customers
● Impact on Profitability: Location decisions affect a company's profitability through:
o Manufacturing costs
o Logistics and distribution costs (e.g., distance to market)
o Factor costs (e.g., labour, materials)
● Strategic and Long-Term: Location decisions are strategic due to:
o Significant investments involved
o Long-term impact on operations

Facility Location Options:

● Single Location:
o Example: Boeing, Airbus, HP printer factories
o Products manufactured and shipped to markets from one central location.
● Multiple Locations:
o Example: Ford, Toyota, Essel Propack
o Facilities spread across different markets for better customer access.

Trade-Offs:

● Cost Advantages vs. Responsiveness:

o Locating in low-cost areas may require expensive distribution networks.
o Locating closer to markets may increase responsiveness but raise operational
costs.

Importance of Location Planning:

● Helps find an optimal balance between cost and responsiveness.

● Provides tools and techniques for analysing location problems.
● Impacts other business functions like marketing (e.g., customer proximity).

Globalization and Location Decisions

● Globalization opens new opportunities for facility location for multinational

corporations (MNCs).
● Factors influencing location decisions in a globalized environment:
o Regulatory Issues:
▪ Reduced trade barriers and foreign direct investment (FDI) make
countries like India more attractive for manufacturing.
▪ Regional trading blocs (e.g., SAARC, ASEAN) offer wider location
options within the bloc.
 o Factor Advantages:
▪ MNCs may shift manufacturing to countries with lower labor costs
(e.g., China, India).
▪ Availability of skilled labor, resources (power, water) and technical
infrastructure can influence location choice.
o Expanding Markets in Developing Countries:
▪ Faster economic growth and larger middle class in developing
countries present new market opportunities (e.g., automobile
industry in India).
▪ MNCs set up manufacturing facilities in these regions to capture
market share.

Challenges of Globalized Location Planning:

● Increased complexity due to:

o Multilingual and multicultural settings require additional cost considerations.
o Cultural and regional variations lead to productivity differences.
o Communication challenges and unfamiliar regulations add complexities.
Factors affecting location decisions

Factors Affecting Location Decisions:

● Identify factors: Consider all potential influences on location choice.

● Evaluate importance: Assign weight to each factor based on its significance for the
specific decision.
● Develop assessment method: Create a system to measure the impact of each factor
on potential locations.

Four Categories of Location Factors:

1. Market-related:
a. Existence of a market for the firm’s products and services significantly
influences the location decision. Availability of raw material and other inputs
also affects the overall cost of the system, and hence the profitability.
b. Large markets offer higher demand, access to human resources, and are
generally attractive (e.g., China, India)
c. The nature of competition also determines the suitability of a location. If a market is
already saturated and there are already several established firms competing for the
market share, it requires considerable effort to successfully establish operations in
such a market.
2. Cost-related:
a. Logistics and distribution costs are a major consideration due to their
measurability.
b. Other costs like labour, taxes, and tariffs can also be factored in.
3. Regulatory and Policy Issues:
a. Quality of legal and judicial systems is important.
b. Weak intellectual property protection discourages firms due to potential
imitation and black markets.
c. Good governance, free markets, and financial stability make locations more
attractive.
4. Other Issues:
a. Cultural, linguistic, and climatic factors influence the availability and
well-being of the workforce.
b. Overall quality of life is a consideration.

Location planning methods

There are two main types of facility location decisions:

1. Single Facility - Multiple Candidates:

● Choose one location from several options for a single facility (e.g., building a factory).
 ● Use the factors discussed earlier (market, cost, regulations, etc.) to assess each
location's attractiveness.
● Examples of methods used for this type of decision are not mentioned in this
excerpt, but the previous passage discussed factors to consider.

2. Multiple Facilities - Multiple Candidates:

● Choose k locations out of n options for multiple facilities (e.g., regional warehouses).
● Example: Selecting 4 warehouses from 10 candidate cities to serve a nationwide
demand.
● Requires network flow modeling to decide on the optimal set of locations.
● One popular network model for this scenario is the transportation method, which
helps determine how these facilities will serve various markets.

Location Factor Rating

What is it?

● A simple method to assess the attractiveness of potential locations for a facility.

Steps involved:

1. Identify Relevant Factors: Consider all factors that might influence the location
decision (e.g., market proximity, cost, regulations).
2. Establish Importance: Assign weights (0-100) to each factor based on its relative
significance for the specific decision. Normalize the weights to sum up to 100.
(Example in Table 6.3)
3. Rate Location Performance: Evaluate each location's performance on each factor
using a rating scale (e.g., 1-5).
4. Calculate Total Score: Multiply the weight of each factor by the location's
corresponding rating, and sum the products for each location.
5. Rank Locations: Rank the locations based on their total scores, with the highest score
indicating the most attractive location.

Advantages:

● Easy to understand and implement.

● Can incorporate any relevant factor.

Limitations:

● Only suitable for initial screening and broad comparisons.

● Doesn't account for the impact of each factor's cost or benefit.
The Centre-of-gravity Method

The passage discusses two quantitative methods for location planning beyond the Factor
Rating Method:

1. Distance Measures:

● Useful when proximity to market (or raw materials) is crucial.

● Evaluates a location's suitability based on its distance to relevant points.
● Example: A company distributing products might prioritize locations close to its
customer base to minimize logistics costs.

2. Center-of-Gravity Method:

● Applicable when considering multiple demand or supply points.

● Represents demand/supply points with weights on a coordinate system (e.g., a map).
● Calculates the ideal location (center of gravity) that minimizes the total weighted
distance travelled.
● Limitations:
o May not consider practicalities like land acquisition costs or regulations.
o Might identify an infeasible location (e.g., in a residential area).

Potential Solution:

● Evaluate multiple sites within the area suggested by the center-of-gravity method.
 ● Choose the most suitable option considering practical constraints.

Other issues in location planning

● Fewer Facilities, Wider Reach:

o Improved transportation infrastructure allows companies to operate fewer,
larger facilities and still serve global markets (e.g., HP printers).
 o Examples: better roads, railways, ports with faster turnaround times.
● Impact of the Internet:
o Reduced communication costs enable better coordination with fewer
locations.
o Customer service can be enhanced through online interfaces, reducing the
need for physical proximity.
● Just-in-Time Manufacturing:
o Japanese manufacturers like Toyota use a large number of nearby suppliers
(20-40km radius) for just-in-time deliveries.
o Benefits:
▪ Minimal inventory.

▪ Frequent deliveries (e.g., "milk-run" trucks).

▪ Reduced disruptions from poor infrastructure or events (strikes,

natural disasters).
o Example: Similar practices by Indian auto manufacturers (Chennai, Delhi).
● Location Strategies for Service Industries:
o Customer responsiveness is crucial.
o Service outlets should be located close to demand points to prioritize service
quality over site cost.