Sep 09, 2008 Jan A. Van Mieghem New Faculty Teaching Orientation MMBA: Operations

Sep 09, 2008

Jan A. Van Mieghem

New Faculty Teaching Orientation

MMBA: Operations

1. Short bio

2. What is ops & the Kellogg operations management curriculum

3. Teaching models to guide managers: Palu Gear

4. Debrief & personal views on teaching at a research business school

Outline

1. Short bio




Outline

What is Operations?

“The process of bringing

goods and services

to customers”

© J.A. Van Mieghem

Value is created through a chain of activities, including customer exchanges

Difference = supply chain surplus = value

Bringing goods and services to customers:Value maximization and Supply Chain Surplus

Ideas Design ProduceMarket& Sell

Ship Service

Total supply chain cost Willingness to pay

Finance, Information Systems, Human Resources, Accounting

Informationstructure

A process is a transformation of inputs into outputs through a network of activities and buffers, utilizing resources, IT and mgt

OutputsGoodsServices

InputsFlow units/Entities(customers, data, material, cash, etc.)

Labor & CapitalResources

ProcessManagement

Network ofActivities and Buffers

The three ‘colors’ of operational excellence

Management Infrastructure

“The formal structures, processes and systems through which resources are managed in support of the operating system”

“The way people think, feel and conduct themselves in the workplace, individually and collectively”

Mindsets, Capabilities & Behaviors

“The way assets and resources are configured and optimised to create value and minimise losses”

Operating System

Source: John Drew

McK’s Operations Practice

Product Development Purchasing and Supply Management Manufacturing (MMP) Supply Chain Management Service Operations Business support functions (BSF)

Content of OPNS430

Module 1: Operations Strategy Introduction to Operations Aligning Strategy and Operations. Focus Product-Process Matrix Module 2: Process Analysis & Applications Process Measures and Little’s Law Process Flow Analysis. Targeting Improvement Flow Time & Capacity Analysis Optional Review, Check web for time and room Flow Time & Capacity Analysis: Peak Loads Module 3: Lean Operations House Building Game Paradigm of Lean Operations Lean Operations for Product Variety Optional Review, Check web for time and room Midterm Exam: in class, closed book

Content of OPNS430

Module 4: Supply Chain Management Inventory Basics. Economies of Scale Uncertainty, Safety Inventory & Pooling Pooling: Centralization & Postponement Optional Review, Check web for time and room Optimal Service Level Module 5: Capacity Management in Services Capacity, Queuing & Flow Time Analysis

Application to Call Centers Module 6: Quality Quality and Voice of the Customer Process Capability & Statistical Process Control The Value of 6-Sigma Optional Review, Check web for time and room Wrap Up and Review

Core OpsOPNS 430

Allon, Deo, Lin,Gurvich, Shin

Analytical modelingon spreadsheets

OPNS 450 Deshmukh, Savaskan

Operations StrategyOPNS 454

Ata, Van Mieghem

Logistics and supplychain management

OPNS 455 Bassamboo, Chopra

Service operationsOPNS 456 Lariviere

• • Product development Tech 919 Conley • MMM electives

Operational Risk OPNS 919A WalkerTechnology Firm Integration Farrow

Curriculum & Faculty

4 majors in the MEDS dept– Operations– Analytical consulting– Decision sciences– Managerial economics

MMM dual degree program– MMM = MBA + MEM, the Kellogg School MBA and Northwestern

Engineering dual-degree program that integrates management, operations and design.

The operations management curriculum at Kellogg

Supply chain: design, economics, logistics, and risk management

– Allon, Bassamboo, Chopra, Lariviere, Van Mieghem, Savaskan, Shin

Service optimization: call centers and health care– Allon, Ata, Bassamboo, Deo, Gurvich, Lin, Van Mieghem

Demand and revenue management: consumer behavior, network control

– Allon, Ata, Bassamboo, Gurvich, Lariviere

Operations Research streams at Kellogg

© Van Mieghem

1. Short bio




Outline

Slide 16Supply Chain Management © Van Mieghem

What are the flows in a SC? What is the goal of a SC? What makes for a “good” SC?

Raw Materialsupply points

Movement/Transport

Raw MaterialStorage Movement/

TransportMovement/Transport

PLANT 1

PLANT 2

PLANT 3

WAREHOUSES(DCs)

Movement/Transport

MARKETS

Manufacturing

Finished GoodsStorage

A

B

C

1. Procurementor supply system

2. OperatingSystem 3. Distribution System

4. Salesor demand system

What is a Supply Chain?


Key Financial Indicators of Supply Chain Performance Profitability Return on Assets Net Present Value …

But these are LAGGING indicators. What must the supply chain do to achieve this?

What does this require?


Drivers of Supply Chain Performance: Improved Matching of Supply and Demand

What happens if supply does not match demand?– If S > D:– If S < D:

Improve Matching of Demand with Supply

Transportation InformationInventory Facilities


Average abnormal returns by who holds the excess inventory

-7.57

-5.49

-10

-8

-6

-4

-2

0

Customers hold excess invengtoryAnnouncing firm holds excess

inventory

Ave

rage

sha

reho

lder

ret

urn

(%)

Demand-Supply Mismatches and ShareholderValue: The Case of Excess Inventories

Source: research paper by Vinod R. Singhal, 2006.


Costs of not Matching Supply and Demand

Cost of overstocking – liquidation, obsolescence, holding

Cost of under-stocking – lost sales and resulting lost margin

What are the causes (challenges) driving this mismatch?


Supply Chain Management Managing the Supply Chain

Key to matching demand with supply Cost and Benefits of inventory

Economies of Scale Palu Gear: Inventory management of a retailer Optimal order quantity: EOQ Impact of lead-time: ROP Levers for improvement


Transportation costs per pallet

Source: Better Logistics in European consumer goods, McK Quarterly 2007. (data from disguished CPG manufacturer)


Annual jacket revenues at a Palü Gear retail store are roughly $1M. Palü jackets sell at an average retail price of $325, which represents a mark-up of 30% above what Palü Gear paid its manufacturer. Being a profit center, each store made its own inventory decisions and was supplied directly from the manufacturer by truck. A shipment up to a full truck load, which was about 1500 jackets, was charged a flat fee of $2,200. To exploit economies of scale, stores typically ordered full truck loads. (Palü’s cost of capital is approximately 20%.)

What order size would you recommend for a Palü store in current supply network?

retailermanufacturer

Palü Gear: Retail Inventory Management & Economies of Scale


Economies of Scale: Inventory Build-Up Diagram

R: Annual demand rate,

Q: Number of wind breakers per replenishment order

Number of orders per year = R/Q.

Average number of wind breakers in inventory = Q/2 .

Q

Time t

Inventory Profile:# of wind breakers in inventory over time.

Inventory

Q/2

“cycle stock”

-R = Demandrate


Costs associated with batches

Order Costs (S)– Setup/Changeover of process– Transportation– Receiving

Holding costs (H)– Physical holding cost– Cost of capital– Cost of obsolescence


Palü Gear: evaluation of current policy of ordering 1500 units each time

1. What is average inventory I? I = Annual cost to hold one unit H = Annual cost to hold I =

2. How often do we order? Annual throughput R = # of orders per year = Annual order cost =

3. What is total cost? TC =

4. What happens if order size changes?


Find most economical order quantity: Spreadsheet for a Palü Gear retailer

Number of units Number ofper order/batch Batches per Annual Annual Annual

Q Year: R/Q Setup Cost Holding Cost Total Cost50 62 135,385$ 1,250$ 136,635$ 100 31 67,692$ 2,500$ 70,192$ 150 21 45,128$ 3,750$ 48,878$ 200 15 33,846$ 5,000$ 38,846$ 250 12 27,077$ 6,250$ 33,327$ 300 10 22,564$ 7,500$ 30,064$ 350 9 19,341$ 8,750$ 28,091$ 400 8 16,923$ 10,000$ 26,923$ 450 7 15,043$ 11,250$ 26,293$ 500 6 13,538$ 12,500$ 26,038$ 510 6 13,273$ 12,750$ 26,023$ 520 6 13,018$ 13,000$ 26,018$ 530 6 12,772$ 13,250$ 26,022$ 540 6 12,536$ 13,500$ 26,036$ 550 6 12,308$ 13,750$ 26,058$ 600 5 11,282$ 15,000$ 26,282$ 650 5 10,414$ 16,250$ 26,664$ 700 4 9,670$ 17,500$ 27,170$ 750 4 9,026$ 18,750$ 27,776$ 800 4 8,462$ 20,000$ 28,462$ 850 4 7,964$ 21,250$ 29,214$ 900 3 7,521$ 22,500$ 30,021$

1000 3 6,769$ 25,000$ 31,769$

$-

$20,000

$40,000

$60,000

$80,000

$100,000

$120,000

$140,000

$160,000

0 100 200 300 400 500 600 700 800 900 1000

Order (batch) size Q

Setup Cost

Holding Cost

Total Cost


Accurate Response to Scale Economies: Economic Order Quantity EOQ

The order quantity that minimizes total supply chain cost is: H

SRQEOQ

2

H Q/2: Annual holding cost

Order Size Q

Total annual costs

S R /Q:Annual setup cost

SRH2

Annual unit demand

Fixed cost per order

Annual unit holding cost


Optimal Economies of Scale: For a Palü Gear retailer

R = 3077 units/ year = 59 units/wk C = $ 250 / unit

r = 0.20/year S = $ 2,200 / order

Unit annual holding cost = H = 0.20/yr x $250 = $50/yr

Optimal order quantity = Q = sqrt(2 x 3077 x 2200/50) = 520

Number of orders per year = R/Q = 5.9

Time between orders = Q/R = 0.17yr = 8.8weeks

Annual order cost = (R/Q)S = $13,008.87/yr

Average inventory I = Q/2 = 260

Annual holding cost = (Q/2)H =$13,008.87/yr

Average flow time T = I/R = 0.084 yr = 4.4weeks

H

SRQEOQ

2


Optimal Economies of Scale: Managerial Insights

How cut inventories (economically smart)?

Budgeting for growth– Last FY: Sales = $100M Inventories = $20M– Next year: Sales = $200M Inventories = ?– Days-of-inventory:

Centralized inventory management

SRHCH

SRQ EOQEOQ 2

2


Learning Objectives: Batching & Economies of Scale

Increasing batch size Q of order (or production) increases average inventories (and thus flow times).

– Average inventory for a batch size of Q is Q/2.

The optimal batch size minimizes supply chain costs by trading off setup cost and holding cost and is given by the EOQ formula.

To reduce batch size, one must reduce setup cost (time). Economies of scale are manifested by the square-root

relationship between QEOQ and (R, S):– If demand increases by a factor of 4, it is optimal to increase batch size

by a factor of 2 and produce (order) twice as often.– To reduce batch size by a factor of 2, setup cost has to be reduced by a

factor of 4.


Role of Leadtime L: Palü Gear cont.

The lead time from when a Palü Gear retailer places an order to when the order is received is two weeks. If demand is stable as before, when should the retailer place an order?

Inventory Profile:

Two key decisions in inventory management are:– How much to order?– When to order?

Q

Time t

-R

Inventory

1. Short bio




Outline

Teaching Strategy for new faculty

Goal: get down the learning curve ASAP (≥ 7.5) Why?

– Instant gratification vs. long term pain and dysfunctional (research) life

How: Over-invest early (now) (Jim Patell)– Learn from and copy the masters

Sit in each class Prepare each class like a student, record and take notes as a teacher

– Focus on delivery! (Sharon Novak) No points for fancy slides or different content → copy exactly existing content Practice makes perfect

– Continuous Improvement After each class take 2 minutes to write down “ex-post” Team member

Teaching Execution

Team up (riding in the peloton v solo)– leverage but carry your weight

Have a process: Standardize content & exams– This is huge risk mitigation factor (demonstrated in ops and fin I)– Again, this allows you to focus on delivery

Prepare– Timing & structure– Know the details (students notice)

Enable continuous improvement Brief evaluation + suggestions for next time; keep electronic Experiment to find your own “art & voice”

Empathy and energy/passion Do care: Get to know the MBA mindset: how can you help them be successful? Are you convinced that what you teach is valuable for MBAs?

Looking back…

We have one of the best jobs ever! Nothing replaces experience: the first time is hard

– Acknowledge it and prepare yourself accordingly– It’s OK to feel down or even cry; you will survive—we all did

Keep your eye on the ball: research = market value and mobility– Teaching is important but tenure requires research– Publish that dissertation + start new research– Seek balance over time: research > teaching > research synergies

Congratulations for starting at Kellogg; Enjoy the journey and remember that we are blessed

Documents

Sep 09, 2008 Jan A. Van Mieghem New Faculty Teaching Orientation MMBA: Operations