OPERATIONS AND SUPPLY CHAIN MANAGEMENT

Unit 1:Introduction to Operations Management

 

A performance objective is a fancy word in the field of operations management. At a company-wide level, a performance objective is a singular goal that enables the organization to plan, organize and execute to achieve a predetermined result. They are mostly measured with quantitative metrics such as time or money. 

Think of it this way. If you’re a CEO and you want your business to succeed, what types of activities should you promote so that your company is financially viable and successful? What goals need to be met to produce a quality good or service?  The answers to those questions are your performance objectives.

When it comes to business performance objectives you're likely aware that efficiency and productivity are crucial. But how do you successfully achieve these? The key to having good all-round performance is five performance objectives: quality, speed, dependability, flexibility and cost.

Cost

You’re probably not surprised to find this financial indicator on this list. The lower the cost of business operations, the lower the price can be for customers. Cost is one of the fundamental elements of competition, and so it’s an attractive performance objective to almost every business model out there.

When a manufacturing company can decrease direct and indirect costs, they are able to provide their product at a lower price. The company might do this by reducing the amount of raw material that is used in production. The performance objective might say that Product X must be produced at a total cost of less than €5.00. This increases the profit margin and allows the business to invest in further innovation.

Quality

 It’s all about “doing things right.” Quality is how a company can maintain consistency in meeting customer expectations. It can make or break a company’s product or service because it’s frequently the thing that is most visible to customers.

In manufacturing, quality can be measured in the number of defects per batch, the amount of the product that fails inspection for the first time, or any other measurable factors. For a service company, quality can be measured many ways. For example, some customer feedback websites give stars for the quality of service, or allow customers to write their own review.

Speed

Speed is a massive part of a customer’s decision-making process. The faster they can receive a product or service, the more likely they are to purchase it. In that way, the speed at which a company can meet a customer’s needs can increase sales. It can also reduce the reliance on inventories and reduce other risks such as forecasting errors or costly inputs.

In manufacturing, speed is often a huge factor in the decision of which suppliers to buy from. Speed would refer to the time it takes from placing the order to receiving the shipment. The performance objective, in this case, could be measured in the number of shipments which fail to meet a deadline.

Dependability

 When a company meets its promises and commitments, it is perceived as dependable. And that’s a great thing for a business to strive for – it increases trust with customers and saves time and money in operations.

Say a buyer orders a 500 piece shipment from the manufacturing company, and it is promised in 10 days or less. Is the manufacturer actually able to do what they have promised? This performance objective can be measured by the rate that the customer receives their exact order at the time and location promised.

Flexibility

 In business, flexibility means the ability to alter operations in response to changes. That could mean increasing production volume to meet a rise in demand or introducing new services to meet shifting customer preferences. Flexibility as a performance objective can speed up response time, save cost and promote dependability.

For a manufacturing company, flexibility would allow you to adapt to a customer’s orders on the fly. If you are all of a sudden unable to have incoming shipments of raw material (perhaps due to a global pandemic), can you still make enough products to complete a purchase order?

Importance of five operation performance objective

The five performance objectives in operations management—quality, speed, cost, flexibility, and dependability—are crucial for businesses across various industries. Here's why each objective is important:

1.     Quality:

o   Customer Satisfaction: High-quality products or services lead to satisfied customers, who are more likely to return and recommend the business to others.

o   Competitive Advantage: Superior quality can differentiate a business from its competitors, establishing a reputation for reliability and excellence.

o   Efficiency: Quality reduces rework and waste, lowering costs over time and improving overall operational efficiency.

2.     Speed:

o   Customer Responsiveness: Faster delivery times and response rates enhance customer satisfaction and loyalty.

o   Market Responsiveness: Rapid adaptation to market changes allows businesses to seize opportunities and stay ahead of competitors.

o   Efficiency: Improved operational efficiency through reduced lead times and cycle times can lead to cost savings and increased profitability.

3.     Cost:

o   Profitability: Cost efficiency directly impacts profitability by lowering production costs and improving profit margins.

o   Competitiveness: Lower costs allow businesses to offer competitive pricing, attracting price-sensitive customers.

o   Resource Allocation: Efficient cost management ensures optimal use of resources, enhancing overall financial health and sustainability.

4.     Flexibility:

o   Adaptability: Flexibility enables businesses to respond quickly to changes in customer demands, market conditions, or unexpected disruptions.

o   Customization: Ability to customize products or services to meet diverse customer needs enhances market appeal and customer satisfaction.

o   Risk Management: Flexibility reduces risks associated with rigid processes, allowing businesses to pivot strategies as needed without significant disruption.

5.     Dependability:

o   Reliability: Dependability builds trust with customers, suppliers, and stakeholders by consistently delivering on promises and meeting commitments.

o   Predictability: Reliable operations reduce uncertainty and improve planning, enhancing overall organizational stability.

o   Reputation: A reputation for dependability strengthens brand value and attracts loyal customers who value consistent performance.

Operations play several crucial roles within an organization, contributing directly to its overall success and effectiveness. Roles of operations in an organization:

1.     Facilitating Business Strategy Execution:

o   Operations translate the organization's strategic goals into actionable plans and processes. They ensure that the resources, capabilities, and activities needed to achieve strategic objectives are effectively managed and aligned with the broader mission of the organization.

2.     Efficient Resource Management:

o   Operations manage resources such as human capital, materials, equipment, and technology efficiently. This involves optimizing resource allocation, minimizing waste, and ensuring that resources are used effectively to maximize productivity and profitability.

3.     Production and Service Delivery:

o   Operations are responsible for producing goods and/or delivering services to customers. They oversee the manufacturing processes, service delivery procedures, and logistics to ensure timely and high-quality outputs that meet customer expectations.

4.     Quality Assurance:

o   Operations play a critical role in ensuring product and service quality. They implement quality control measures, standards, and processes to meet regulatory requirements and customer specifications. Continuous improvement initiatives within operations enhance product/service reliability and customer satisfaction.

5.     Cost Management:

o   Operations manage costs throughout the value chain, from procurement and production to distribution and customer service. They aim to minimize costs while maintaining quality standards, optimizing efficiency, and improving profitability.

6.     Customer Satisfaction and Relationship Management:

o   Operations directly impact customer satisfaction through timely delivery, product/service quality, and responsiveness to customer needs. They contribute to building strong customer relationships by consistently meeting expectations and providing value-added services.

7.     Innovation and Continuous Improvement:

o   Operations drive innovation by exploring new technologies, processes, and practices that enhance efficiency, reduce costs, and improve product/service offerings. They also lead continuous improvement efforts to streamline operations, eliminate bottlenecks, and enhance overall organizational performance.

8.     Risk Management:

o   Operations assess and manage risks associated with production, supply chain disruptions, regulatory compliance, and market fluctuations. They implement risk mitigation strategies to minimize operational disruptions and ensure business continuity.

9.     Strategic Alignment and Adaptation:

o   Operations align their activities with the organization's strategic goals and adapt to changes in the external environment. They respond flexibly to market demands, competitive pressures, and technological advancements to maintain competitiveness and achieve long-term growth.

10.  Collaboration and Coordination:

o   Operations foster collaboration across different functions within the organization (e.g., marketing, finance, R&D) and with external stakeholders (e.g., suppliers, distributors). They coordinate activities to achieve synergy and maximize overall organizational performance.

The field of operations management has evolved significantly over time, shaped by industrial revolutions, technological advancements, and changes in global markets. Brief overview of its historical development:

1.     Industrial Revolution (late 18th to early 19th century):

o   Operations management as a formal discipline began with the onset of the Industrial Revolution.

o   The focus was on optimizing production processes, increasing efficiency, and standardizing operations in factories.

2.     Scientific Management (late 19th to early 20th century):

o   Frederick Taylor pioneered scientific management principles, emphasizing time and motion studies to improve productivity.

o   Key concepts included specialization of labor, standardization of tasks, and incentive systems to motivate workers.

3.     Early to Mid-20th Century:

o   Operations management expanded beyond scientific management to include broader principles of management and industrial engineering.

o   Techniques like statistical quality control (developed by pioneers like Walter Shewhart and W. Edwards Deming) gained prominence.

4.     Post-World War II Era:

o   The focus shifted towards integrating management science and operations research techniques into operations management.

o   Concepts such as linear programming, inventory theory, and queuing theory became important tools for optimizing operations.

5.     Late 20th Century:

o   The advent of computers and information technology revolutionized operations management.

o   Concepts like Material Requirements Planning (MRP) and later Enterprise Resource Planning (ERP) systems transformed how businesses managed their resources and operations.

6.     Late 20th to Early 21st Century:

o   Lean manufacturing principles, derived from the Toyota Production System, gained popularity.

o   Just-in-Time (JIT) manufacturing and Total Quality Management (TQM) became widely adopted strategies for improving efficiency and quality.

7.     21st Century:

o   Operations management continued to evolve with advancements in technology, globalization of supply chains, and the rise of e-commerce.

o   Concepts like Six Sigma, Agile methodologies, and sustainability considerations have become increasingly important.

The process view of operations management emphasizes viewing an organization's operations as a series of interconnected processes that transform inputs into outputs. This perspective is crucial for understanding and improving efficiency, quality, and overall performance within an organization. Here are key aspects of the process view of operations management:

1. Process Definition and Mapping:
• Operations are seen as a collection of interrelated activities or processes that create value for customers.
• Each process is defined by its inputs, activities or transformations, and outputs.
• Process mapping techniques, such as flowcharts or value stream mapping, are used to visualize and analyze these processes.
2. Focus on Value Creation:
• The primary goal of operations management is to maximize value creation while minimizing waste.
• Value is defined from the customer's perspective, emphasizing quality, timeliness, and cost-effectiveness of products or services.
3. Integration and Coordination:
• Processes often cut across functional boundaries within an organization.
• Effective operations management requires seamless integration and coordination among different functions (such as production, marketing, logistics) to achieve overall organizational objectives.
4. Continuous Improvement:
• Continuous improvement is a core principle of the process view.
• Techniques like Lean management, Six Sigma, and Total Quality Management (TQM) are applied to streamline processes, reduce defects, and enhance efficiency.
5. Flexibility and Responsiveness:
• Operations must be adaptable to changing market conditions, customer demands, and technological advancements.
• Agile methodologies are increasingly used to improve responsiveness and flexibility in operations.
6. Performance Measurement and Control:
• Key performance indicators (KPIs) are used to measure the performance of processes.
• Feedback mechanisms and control systems help monitor performance and make necessary adjustments to achieve desired outcomes.
7. Supply Chain Integration:
• Operations management extends beyond organizational boundaries to include suppliers and distribution channels.
• Supply chain management focuses on optimizing the flow of materials, information, and finances across the entire supply chain network.
8. Strategic Alignment:
• Operations strategy aligns with overall corporate strategy and goals.
• Decisions regarding capacity planning, location, technology investments, and product/service design are made in alignment with strategic objectives.

The process view of operations management emphasizes viewing an organization's operations as a series of interconnected processes that transform inputs into outputs. This perspective is crucial for understanding and improving efficiency, quality, and overall performance within an organization. Here are key aspects of the process view of operations management:

1. Process Definition and Mapping:
• Operations are seen as a collection of interrelated activities or processes that create value for customers.
• Each process is defined by its inputs, activities or transformations, and outputs.
• Process mapping techniques, such as flowcharts or value stream mapping, are used to visualize and analyze these processes.
2. Focus on Value Creation:
• The primary goal of operations management is to maximize value creation while minimizing waste.
• Value is defined from the customer's perspective, emphasizing quality, timeliness, and cost-effectiveness of products or services.
3. Integration and Coordination:
• Processes often cut across functional boundaries within an organization.
• Effective operations management requires seamless integration and coordination among different functions (such as production, marketing, logistics) to achieve overall organizational objectives.
4. Continuous Improvement:
• Continuous improvement is a core principle of the process view.
• Techniques like Lean management, Six Sigma, and Total Quality Management (TQM) are applied to streamline processes, reduce defects, and enhance efficiency.
5. Flexibility and Responsiveness:
• Operations must be adaptable to changing market conditions, customer demands, and technological advancements.
• Agile methodologies are increasingly used to improve responsiveness and flexibility in operations.
6. Performance Measurement and Control:
• Key performance indicators (KPIs) are used to measure the performance of processes.
• Feedback mechanisms and control systems help monitor performance and make necessary adjustments to achieve desired outcomes.
7. Supply Chain Integration:
• Operations management extends beyond organizational boundaries to include suppliers and distribution channels.
• Supply chain management focuses on optimizing the flow of materials, information, and finances across the entire supply chain network.
8. Strategic Alignment:
• Operations strategy aligns with overall corporate strategy and goals.
• Decisions regarding capacity planning, location, technology investments, and product/service design are made in alignment with strategic objectives.

Strategies for gaining competitive advantage in operations management focus on leveraging operational capabilities to differentiate a business from its competitors. Here are several strategic approaches that organizations commonly use:

1. Cost Leadership:
• Objective: Become the lowest-cost producer in the industry while maintaining acceptable quality.
• Strategies: Implement efficient production processes, optimize supply chain management to minimize costs, invest in technology to automate and streamline operations, and negotiate favorable terms with suppliers.
2. Differentiation:
• Objective: Create unique products or services that are perceived as superior by customers.
• Strategies: Innovate product design or features to stand out in the market, focus on quality and reliability, provide exceptional customer service, and build strong brand equity.
3. Focus:
• Objective: Concentrate on serving a specific market segment or niche effectively.
• Strategies: Tailor products or services to meet the specific needs of the target market, develop expertise in serving that segment better than competitors, and customize marketing and distribution channels accordingly.
4. Quality Management:
• Objective: Deliver consistently high-quality products or services that exceed customer expectations.
• Strategies: Implement Total Quality Management (TQM) principles, continuously improve processes through tools like Six Sigma, engage employees in quality improvement initiatives, and use customer feedback to drive enhancements.
5. Speed and Flexibility:
• Objective: Respond quickly to market changes and customer demands.
• Strategies: Adopt Agile methodologies to enhance responsiveness, reduce lead times in production and delivery, maintain flexible production systems that can easily adapt to changing requirements, and collaborate closely with suppliers to shorten supply chain cycles.
6. Innovation:
• Objective: Introduce new products, processes, or business models ahead of competitors.
• Strategies: Foster a culture of innovation within the organization, invest in research and development, collaborate with external partners for new ideas, and protect intellectual property through patents or copyrights.
7. Sustainability:
• Objective: Embrace environmentally sustainable practices and social responsibility.
• Strategies: Implement green initiatives to reduce waste and energy consumption, source materials ethically, comply with environmental regulations, and engage with stakeholders who prioritize sustainability.
8. Supply Chain Management:
• Objective: Optimize the supply chain to enhance efficiency, reduce costs, and improve customer service.
• Strategies: Develop strategic partnerships with key suppliers, integrate technology for real-time visibility and collaboration, employ lean principles to minimize inventory and waste, and manage risks through robust contingency planning.

Definition of Operations Management Decision

The 10 decisions of operations management is the list of activities crucial in managing and maintaining a business. Execute them well, and your business will stay afloat and can scale without many obstacles.

10 Operations Management Decisions

There are 10 operations management decisions, each of which has its own role in managing your business. Some might bear more importance to you than others, but all are crucial for your business nonetheless.

1. Goods and Services

A business cannot exist without offering something to consumers. The items offered can be goods and services designed to satisfy consumers without hurting the costs. Brands’ identities can also be added if necessary.

2. Quality Management

Well-designed goods or services can lure consumers at first, but what makes them loyal is the quality of those goods or services. Innovation is one way to boost your products’ quality, but you must also try to involve consumers.  It is important to do some research on the market to be able to identify their wants and needs.

3. Process and Capacity Design

Not only are the design and quality of goods or services notable to pay attention to, but the process of creating those goods or services as well. A great process can mean delivering a great product at a lower cost.

4. Location

This goes in hand with logistics. The closer the distance from both suppliers and the consumers, the lower the cost. 

5. Layout Design and Strategy

People get lost easily when they are in a labyrinth as it is designed to be that way. In a common business flow, however, getting lost is the first thing to be avoided. Therefore, every store pr outlet layout must be well-designed and, if necessary, follow the brand’s identity.

6. Human Resources and Job Design

Nowadays, with advancements in technology, machinery and robots take the role of doing many tasks from humans, but that does not remove the fact that skillful and talented humans are still and always be needed. Some types of work still require a human touch, so it is crucial for a company to recruit and train people with the correct skill and talent.

7. Supply Chain Management

Ensuring you find a supplier that delivers a balance in quality of resources and in costs is essential to your business strategy. Choosing the best supplies is important, but choosing the best suppliers is important as well. Careful research has to be done before deciding on any purchase.

8. Inventory

Various markets have different inventory management issues, yet all must strategize and plan their inventory management. How an organization manages its inventory is influenced by the weather, supply limitations, and labor.

9. Scheduling

Efficiency is crucial for every business to stay afloat. For that, proper scheduling is also a part of the 10 operations management decisions that need to be executed well. This includes making sure that activities involving human resources as well as machinery or robots are properly scheduled and maintained for greater operational efficiency.

10. Maintenance

Nothing is perfect forever. Even a long-lasting and highly valuable gemstone like a diamond needs to be taken care of to keep its shine. In a reliable business, everything, such as workers, tools, machines, and working systems, has to be well-maintained.

 

Challenges:

1. Globalization and Complexity:
• Managing operations across global markets, dealing with diverse regulations, currencies, and cultural differences.
2. Rapid Technological Change:
• Adopting and integrating new technologies like AI, IoT, and automation while managing cybersecurity risks and skill gaps.
3. Supply Chain Disruptions:
• Addressing disruptions such as natural disasters, geopolitical events, and supplier failures that impact supply chain continuity.
4. Changing Customer Expectations:
• Adapting to evolving customer preferences, demand for customization, and shorter product life cycles.
5. Cost Pressures:
• Balancing cost reductions with maintaining quality, compliance, and ethical standards.
6. Regulatory Compliance:
• Ensuring operations comply with local and international regulations, including environmental, labor, and safety standards.
7. Talent Management:
• Recruiting, retaining, and developing skilled employees amid competitive labor markets and technological advancements.
8. Environmental Sustainability:
• Managing resources responsibly, reducing carbon footprint, and addressing environmental impacts throughout the supply chain.
9. Cybersecurity Risks:
• Protecting sensitive data, intellectual property, and operational systems from cyber threats and breaches.
10. Strategic Alignment:
• Ensuring that operational decisions and initiatives align with overall business strategies and goals.

 Unit 2 capacity planning     

The (output) capacity of an operation is the maximum amount of value-adding output (per time period) that can be sustained under normal operating conditions. Capacity can be measured in many different ways across many different industries, typically as a unit of output per a unit of time. There is no one-size-fits-all capacity formula to use to calculate capacity.

Design capacity is the maximum output rate that can be achieved under “ideal” conditions (ignoring many real world typical losses and inefficiencies). Design capacity is also known as theoretical capacity or ideal capacity, and is a type of output capacity.

Effective capacity is the maximum output rate that can actually be achieved under standard conditions; it is what can be realistically achieved and sustained. Effective capacity is also known as actual capacity, practical capacity, normal capacity, usable capacity or average capacity, and is also a type of output capacity.

Difference Between Design Capacity and Effective Capacity?

Design capacity is the maximum output rate that could be achieved in ideal circumstances, while effective capacity is the maximum output rate that can actually be achieved in standard circumstances. The design capacity of a process is what we calculate that the system should be able to do when trying to do as much as possible, ignoring many typical losses that occur. On the other hand, effective capacity is what the system can realistically achieve and sustain.

 

Design Capacity vs Effective Capacity: Taxi Example

A taxi driver’s productive output might be measured in the number of miles it drives paying customers per day. 

The taxi driver and his taxi might have the “theoretical” capacity (design capacity) to output 300 paid miles of journeys per day, 30 miles per hour multiplied by his ten hour shift. The car can easily do this and it’s reasonable to do so within the bounds of the law. 

In reality, when he’s working flat out and is never waiting for the next job, the taxi driver might only output 150 miles of taxi journeys in a day. This is his effective capacity (actual capacity), and (in our example) is only half of his theoretical capacity! 

 

Capacity and strategy are closely intertwined in business and organizational contexts. Here's how they relate to each other:

1.     Capacity Planning:

o   Definition: Capacity planning involves determining the production capacity needed by an organization to meet changing demands for its products or services.

o   Role in Strategy: Capacity planning is essential for strategic decision-making. It ensures that a company can meet current and future demand efficiently without over-investing or underperforming. Strategic capacity planning involves aligning capacity with long-term business goals and market expectations.

2.     Strategic Capacity Management:

o   Definition: Strategic capacity management involves making decisions about the scale (how much capacity) and timing (when to add capacity) of facilities, equipment, and human resources to achieve long-term objectives.

o   Role in Strategy: Effective strategic capacity management supports overall business strategy by enhancing competitiveness, enabling growth, and ensuring operational flexibility. It considers factors such as technological advancements, market trends, and competitive positioning to optimize capacity utilization and investment.

3.     Capacity as a Competitive Advantage:

o   Definition: Capacity can be a source of competitive advantage when managed strategically. This involves leveraging capacity to deliver superior products or services, meet customer demands more effectively than competitors, and adapt quickly to market changes.

o   Role in Strategy: Incorporating capacity considerations into strategic planning allows organizations to differentiate themselves in the market. Whether it's through offering faster delivery times, higher product availability, or better service, strategic capacity management supports the overall business strategy by enhancing customer satisfaction and market position.

4.     Risk Management and Resilience:

o   Definition: Strategic capacity planning also involves assessing and mitigating risks associated with capacity shortages or excesses. This includes preparing for unexpected disruptions or changes in demand.

o   Role in Strategy: By anticipating and preparing for risks through effective capacity management, organizations can build resilience into their strategic plans. This resilience enables them to maintain stability and continue delivering value to customers even during challenging times.

Managing demand is a critical aspect of operations and strategic management for businesses. It involves controlling and influencing customer demand for products or services in order to optimize resource utilization, enhance efficiency, and improve customer satisfaction. Here are key strategies and considerations for managing demand effectively:

1.     Forecasting and Planning:

o   Forecasting Demand: Utilize historical data, market trends, and customer insights to forecast demand accurately. This helps in anticipating peaks and troughs in demand.

o   Capacity Planning: Align production capacity, inventory levels, and staffing with forecasted demand to meet customer needs without excess or shortage.

2.     Pricing and Promotion:

o   Price Management: Adjust pricing strategies to influence demand. For example, discounts during off-peak periods or premium pricing for high-demand periods.

o   Promotional Strategies: Use promotions and marketing campaigns strategically to stimulate demand during slow periods or introduce new products/services effectively.

3.     Inventory Management:

o   Just-in-Time (JIT) Inventory: Adopt JIT principles to minimize inventory holding costs while ensuring products are available when needed.

o   Safety Stock: Maintain adequate safety stock levels to buffer against unexpected demand spikes or supply chain disruptions.

4.     Service Differentiation:

o   Service Level Agreements (SLAs): Define service levels and prioritize customer orders based on demand characteristics and profitability.

o   Customization Options: Offer customization or flexible service options to cater to varying customer preferences and demand patterns.

5.     Demand Shaping:

o   Influencing Customer Behavior: Encourage customers to spread demand evenly through incentives such as early booking discounts, subscriptions, or loyalty programs.

o   Demand Forecast Sharing: Collaborate with suppliers and customers to share demand forecasts, enabling better planning and responsiveness across the supply chain.

6.     Technology and Analytics:

o   Demand Sensing: Use advanced analytics and real-time data to sense changes in demand patterns quickly and adjust operations accordingly.

o   Demand Planning Software: Implement software tools for accurate demand forecasting, inventory optimization, and scenario planning.

7.     Collaboration and Communication:

o   Cross-functional Collaboration: Align sales, marketing, operations, and finance teams to synchronize efforts and respond effectively to changes in demand.

o   Customer Communication: Maintain open channels of communication with customers to understand their needs and preferences better.

Break-even analysis in economics, business, and cost accounting refers to the point at which total costs and total revenue are equal. A break-even point analysis is used to determine the number of units or dollars of revenue needed to cover total costs (fixed and variable costs).

Importance of Break-Even Analysis

·        Manages the size of units to be sold: With the help of break-even analysis, the company or the owner comes to know how many units need to be sold to cover the cost. The variable cost and the selling price of an individual product and the total cost are required to evaluate the break-even analysis.

·        Budgeting and setting targets: Since the company or the owner knows at which point a company can break-even, it is easy for them to fix a goal and set a budget for the firm accordingly. This analysis can also be practised in establishing a realistic target for a company.

·        Manage the margin of safety: In a financial breakdown, the sales of a company tend to decrease. The break-even analysis helps the company to decide the least number of sales required to make profits. With the margin of safety reports, the management can execute a high business decision.

·        Monitors and controls cost: Companies’ profit margin can be affected by the fixed and variable cost. Therefore, with break-even analysis, the management can detect if any effects are changing the cost.

·        Helps to design pricing strategy: The break-even point can be affected if there is any change in the pricing of a product. For example, if the selling price is raised, then the quantity of the product to be sold to break-even will be reduced. Similarly, if the selling price is reduced, then a company needs to sell extra to break-even.

Components of Break-Even Analysis

• Fixed costs: These costs are also known as overhead costs. These costs materialise once the financial activity of a business starts. The fixed prices include taxes, salaries, rents, depreciation cost, labour cost, interests, energy cost, etc.
• Variable costs: These costs fluctuate and will decrease or increase according to the volume of the production. These costs include packaging cost, cost of raw material, fuel, and other materials related to production.

Uses of Break-Even Analysis

• New business: For a new venture, a break-even analysis is essential. It guides the management with pricing strategy and is practical about the cost. This analysis also gives an idea if the new business is productive.
• Manufacture new products: If an existing company is going to launch a new product, then they still have to focus on a break-even analysis before starting and see if the product adds necessary expenditure to the company.
• Change in business model: The break-even analysis works even if there is a change in any business model like shifting from retail business to wholesale business. This analysis will help the company to determine if the selling price of a product needs to change.

Break-Even Analysis Formula

Break-even point = Fixed cost/-Price per cost – Variable cost

Example of break-even analysis

Company X sells a pen. The company first determined the fixed costs, which include a lease, property tax, and salaries. They sum up to ₹1,00,000. The variable cost linked with manufacturing one pen is ₹2 per unit. So, the pen is sold at a premium price of ₹10.

Therefore, to determine the break-even point of Company X, the premium pen will be:

Break-even point = Fixed cost/Price per cost – Variable cost

= ₹1,00,000/(₹12 – ₹2)

= 1,oo,000/10

= 10,000

Therefore, given the variable costs, fixed costs, and selling price of the pen, company X would need to sell 10,000 units of pens to break-even.

 

Planning long-term capacity involves strategic decisions aimed at ensuring that an organization's production or service capabilities align with future demand expectations. Several key measures and concepts come into play when planning long-term capacity, including measures of capacity and utilization, and economic and diseconomies of scale:

1.     Measures of Capacity and Utilization:

o   Design Capacity: The maximum output a system or facility can achieve under ideal conditions. It's often expressed in terms of units of production per time period (e.g., units per hour, day, or month).

o   Effective Capacity: The maximum output a system or facility can sustain under normal operating conditions, accounting for factors such as equipment downtime, maintenance, and operator efficiency.

o   Utilization: The ratio of actual output to maximum capacity over a specific time period. It indicates how much of the available capacity is being utilized.

o   Efficiency: The ratio of actual output to effective capacity. It measures how well a system is performing relative to its maximum sustainable output.

2.     Economies of Scale:

o   Definition: Economies of scale refer to the cost advantages that enterprises obtain due to expansion. As production increases, the cost of producing each unit decreases.

o   Types:

§  Internal Economies of Scale: Cost reductions due to factors within the organization, such as increased specialization, better resource allocation, or improved technology.

§  External Economies of Scale: Cost reductions due to factors external to the organization, such as industry-wide efficiencies, shared infrastructure, or favorable regulatory environments.

o   Benefits: Economies of scale enable organizations to lower their per-unit costs, improve profitability, and potentially offer competitive pricing in the market.

3.     Diseconomies of Scale:

o   Definition: Diseconomies of scale occur when an organization or firm expands beyond a certain point, resulting in an increase in average costs per unit produced or service provided.

o   Causes: Examples include bureaucracy, communication breakdowns, coordination challenges, and inefficiencies arising from overly complex operations.

o   Impact: Diseconomies of scale can negate some of the cost advantages initially gained from economies of scale, potentially leading to reduced profitability and operational inefficiencies.

4.     Factors Influencing Long-Term Capacity Planning:

o   Market Demand Forecasts: Accurate forecasts of future demand are essential to determine the required level of capacity.

o   Technological Advancements: Assessing how technological changes can impact production processes, efficiency, and capacity requirements over the long term.

o   Competitive Landscape: Understanding competitors' capacities and capabilities to ensure the organization can effectively compete in the market.

o   Financial Considerations: Evaluating capital investment requirements, financing options, and expected returns on investment in capacity expansion.

5.     Strategic Capacity Planning:

o   Expansion Strategies: Deciding whether to expand existing facilities, build new ones, or form strategic alliances to increase capacity.

o   Flexibility: Building flexibility into capacity planning to accommodate fluctuations in demand and mitigate risks associated with over- or under-capacity.

o   Risk Management: Anticipating and planning for potential disruptions, regulatory changes, or technological shifts that could impact capacity requirements.

 

 

Capacity timing and sizing strategies are essential components of capacity management that businesses employ to align their production or service capabilities with fluctuating demand. These strategies involve making informed decisions about when to expand or reduce capacity, as well as determining the optimal amount of capacity to meet current and future needs. Here’s a deeper look at these strategies:

Capacity Timing Strategies:

1.     Lead Strategy:

• Description: Implementing capacity expansion ahead of anticipated increases in demand.
• Purpose: Ensures that sufficient capacity is available to meet future demand without delays or service disruptions.
• Applicability: Useful when demand growth is predictable or when lead times for capacity expansion are significant (e.g., construction of new facilities).

2.     Lag Strategy:

• Description: Delaying capacity expansion until after an increase in demand is confirmed.
• Purpose: Minimizes the risk of over-investing in capacity that may not be immediately needed.
• Applicability: Suitable when demand growth is uncertain or when there is a need to manage financial resources conservatively.

3.     Match Strategy:

• Description: Expanding capacity in proportion to increases in demand.
• Purpose: Maintains a balance between supply and demand, optimizing resource utilization.
• Applicability: Ideal for industries with volatile demand patterns or when flexibility in capacity adjustment is crucial.

Capacity Sizing Strategies:

1.     Full Capacity:

• Description: Operating at or near maximum capacity levels.
• Purpose: Maximizes production output and economies of scale, reducing per-unit costs.
• Applicability: Suitable when demand is consistently high and stable, allowing for efficient use of resources.

2.     Buffer Capacity:

• Description: Maintaining excess capacity beyond expected demand levels.
• Purpose: Provides flexibility to handle demand variability, unexpected surges, or disruptions.
• Applicability: Important in industries prone to seasonal fluctuations or rapid market changes.

3.     Temporary Capacity:

• Description: Adding capacity for a limited time to meet short-term spikes in demand.
• Purpose: Addresses seasonal or occasional demand fluctuations without permanent investment.
• Applicability: Useful in industries with predictable seasonal peaks or when testing new markets or products.

Factors Influencing Capacity Timing and Sizing Strategies:

·        Demand Forecasting: Accurate predictions of future demand trends are essential for determining when and how much capacity to add or adjust.

·        Market Dynamics: Understanding market growth, competition, and customer preferences helps in aligning capacity decisions with business opportunities.

·        Financial Considerations: Assessing capital availability, financing options, and cost implications of capacity expansion or contraction.

·        Technological Advancements: Adopting new technologies or process improvements to enhance capacity utilization and efficiency.

·        Regulatory and Environmental Factors: Compliance with regulations and considerations for sustainable practices may influence capacity decisions.

Integration with Other Decisions:

·        Operational Planning: Capacity decisions are closely linked with production scheduling, inventory management, and supply chain strategies.

·        Strategic Planning: Capacity planning supports overall business strategies, such as market expansion, product diversification, or cost leadership.

·        Risk Management: Capacity sizing strategies mitigate risks associated with under-capacity (lost sales) or over-capacity (excess inventory or idle resources).

·        Human Resources: Aligning workforce planning and skill development with capacity needs to optimize productivity and performance.

 

Linking Capacity and Other Decisions

Capacity decisions should be very much related to strategies and process throughout the organization. When managers make decisions about location, resource flexibility and inventory, they must consider the impact on capacity cushions. Capacity cushions buffer the organization against uncertainty, as do resource flexibility, inventory, and longer customer lead times. If a system is well balanced and a change is made in some other decision area, then the capacity cushion may need change to compensate. The examples of such things with capacity are as follows:

Competitive Priorities

Change in competitive priorities that emphasizes faster deliveries for a process requires a larger capacity cushion to allow for quick response at uneven demand, if holding finished goods inventory is infeasible or uneconomical.

Quality Management

A drive that has obtained superior levels of quality allows for a smaller capacity cushion because there will be less ambiguity caused by yield losses.

Resource Flexibility

A change to less worker flexibility requires a larger capacity cushion to pay off for the operation overload that is more likely to occur with a less flexible labor force.

Inventory

A change to less trust on inventory in order to smooth the output rate requires a larger capacity cushion to meet increased demands during peak periods.

Scheduling

A change to a more established environment allows a smaller cushion because products or services can be scheduled with more assurance.

 

Another point of discussion is between the capacity and location decisions. A firm that is expanding eventually must append new facilities and find suitable locations for them,whereas a firm that is downsizing often must identify which locations to eliminate. In past one decade, General Motors slice back its capacity by shutting down several factories to stop large losses. It faced several problems while choosing between the older units with cooperative and productive workforces and abandoning the expensive, modern plants where labor relations were poor.

 

Systematic Approach to Long-Term Capacity Decisions

Long-term decisions for capacity would typically include whether to add a new plant or warehouse or to reduce the number of existing ones, how many workstations a given department should have, or how many workers are needed to staff a given process.

Four steps of the systematic process

Step 1: Estimate Capacity Requirements

A process’s capacity requirement is  capacity  for some future time period to meet the forecasted demand of the firm’s customers (external or internal), given the firm’s desired capacity  cushion. The estimation or forecasting  of demand, productivity, competition, and technological change are to be made to estimate capacity requirement. Long-term capacity plans (big expansions) need to consider more future years (perhaps, a whole decade) than do short-term plans.

Step 2: Identify Gaps

A capacity gap in any process, operation or work center is any difference (positive or negative) between projected capacity requirements (M) and current capacity.

Step 3: Develop Alternatives

To solve any problem, managers have to develop alternatives. Search and creative processes are to be employed  to develop alternative plans to cope with projected gaps. A range of alternatives between the expansionist and wait-and-see strategies are to be developed.

Step 4: Evaluate the Alternatives

Quantitative evaluation:  Cash flows (outflows and inflows) are to be estimated  for each alternative over the forecast time horizon compared to the base case. . The operations manager is concerned here only with calculating the cash flows attributable to the project proposed as an alternative.

Qualitative evaluation: Qualitatively, the manager looks at how each alternative fits the overall capacity strategy and other aspects of the business not covered by the financial analysis. Of particular concern might be  competitive reaction. Qualitative factors must be assessed on the basis of judgment and experience.

Unit 3: PROCESS STRATEGY

A process strategy is a company's documentation approach that helps achieve goals and transforms resources into goods and services. This strategy defines a specific process, explores its goals and provides detail on how to bring the desired outcome. The process or transformation strategy explains the resources available to achieve the goals in a specified time. Companies can implement the transformation strategy throughout every department, whether it is sales, operations management, customer service or production. Typically, the strategy a company selects has long-term benefits on the efficiency and flexibility of the process. It even helps implement a process under specific assumptions and constraints. This strategy plans to deliver business goals, such as sales increase, turnover reduction and competitive advantage. The four principles of transformation strategy are:

1. The key to successful business decisions is to select processes that fit the situation, and managers select processes such that the company does not optimize one process at the expense of others.
2. Each individual process is important for the company because the strategy eventually creates the entire production or supply chain.
3. Managers give an advantage to all the internal and external interfaces between processes in the supply chain.
4. An effective process aligns and matches the characteristics of the fundamental process and is a close strategic fit.

Benefits of Process Strategy

Companies focus on producing products and delivering services to ensure higher profit generation. The benefits of including a transformation strategy are:

• Decreases cost: A lack of a documented process might result in surplus goods, materials and time consumption. When employees have a process to follow, the cost of producing a product and delivering a service decreases, resulting in a higher profit margin.
• Increases output: When a company follows a process, it allows for increasing the output of goods or products while reducing the time for production. This ensures companies can produce more products in less time frame.
• Increases efficiency: A well-defined process ensures employees can complete their job in less time and deliver better results. By following a process, it becomes easier to create products and provide service to customers.
• Provides consistent quality: With a strategy, the quality of products and services can remain the same. As customers expect a company to provide the same quality regardless of the production method, having a strategy can provide consistent quality.

Four Process Strategies

Process focus strategy

In process focus, managers organise facilities around specific activities and processes to ensure low volume and a wide variety of products. Every operation gets grouped based on the type of process. The process focus strategy is typically useful when producing small quantities of various items. In a restaurant, this strategy might be a bar or grill on which the chef produces small quantities but offers a variety of products. Some characteristics of this strategy are:

• Has high product flexibility
• Causes variable product flow, indicating planning and scheduling challenges
• Requires general-purpose equipment and skilled personnel
• Requires lower initial capital investment

Repetitive focus strategy

The repetitive focus allows companies to use assembly lines process for their operations. This strategy requires less skilled employees while, at the same time, these employees have the opportunity to excel in different facets of the company. Typically, it is a product-oriented production process that uses modules. These modules are components of a previously manufactured or prepared product. Managers prefer this type of product because it allows more customisation than a product-focused facility.To ensure custom-made products, managers assemble the modules. This helps a company gain the economic advantage of the repetitive focus strategy and ensures low-volume and diverse production. Companies in the restaurant industry might use the repetitive focus strategy. Some characteristics of this strategy are:

• Managers organise facilities as assembly lines
• Increased efficiency compared to the process-based strategy but is less flexible
• Modules can combine into many output options

Product focus strategy

Product focus is a business approach that helps define strategy, metrics and operations in terms of products. Managers in the manufacturing industry use this strategy because it helps improve products to stay relevant in the industry. A product focus strategy ensures high volume and low variety production. Companies using this strategy follow a pre-determined sequence of steps and have a continuous and standardised process flow rather than a discrete flow.For instance, a potato manufacturing company uses a product-based strategy as it uses potato, water, corn and seasoning as inputs, but outputs vary depending upon the seasoning and packaging. Some characteristics of this strategy are:

• Organises the facility into products
• Uses a long and continuous production line that helps in efficient processes
• Requires less skilled employees
• Requires high fixed cost but low variable cost

Mass customisation strategy

Mass customisation is a business approach that primarily focuses on customers and recognises the importance of providing products while using new procedures and programmes. This strategy is a low-cost production strategy that fulfils the changing requirements of the customers. Though the process offers variety, it helps make precise and customised products at a cost-effective price. Achieving mass customisation can be challenging because it requires skilled operational capabilities. For instance, the retail industry uses the mass customisation strategy. Some characteristics of mass customisation are:

• Uses flexible manufacturing processes and computer-aided information to create customised products
• Combines the flexibility of a process or transformation strategy with the efficiency of a product-focus strategy
• Provides businesses with a competitive advantage and increases their economic value
• Increases customer satisfaction and experience
• Ensures raw material inventory is low

Process comparisons typically involve evaluating different methods or procedures to determine their effectiveness, efficiency, suitability for a particular task, or other relevant criteria. Here are some common aspects to consider when comparing processes:

1.     Purpose and Goals: Understand the specific goals and outcomes each process aims to achieve.

2.     Inputs and Outputs: Compare what goes into each process (inputs such as resources, data) and what comes out (outputs such as results, products).

3.     Efficiency: Evaluate how well each process utilizes resources (time, money, manpower) to achieve its goals. This includes considerations of cost-effectiveness and resource optimization.

4.     Effectiveness: Assess the extent to which each process achieves its intended outcomes and meets quality standards.

5.     Flexibility: Consider how adaptable each process is to changing circumstances or requirements.

6.     Scalability: Determine how well each process can handle increasing or decreasing workloads or scale up/down operations.

7.     Risk Management: Evaluate the risks associated with each process, including potential failures, delays, or errors.

8.     Complexity: Compare the complexity of each process in terms of implementation, management, and understanding.

9.     Customer or Stakeholder Impact: Assess how each process affects customers, stakeholders, or end-users.

10.  Feedback and Improvement: Consider mechanisms for gathering feedback and opportunities for continuous improvement within each process.

Unit 9: Integrating the supply chains

Supply chain disruptions refer to significant disturbances or interruptions within the supply chain network that adversely affect the flow of goods or services from suppliers to customers. These disruptions can arise from various factors, including:

1.     Natural Disasters: Events such as earthquakes, hurricanes, floods, and tsunamis can damage infrastructure, disrupt transportation routes, and halt production facilities.

2.     Pandemics and Health Crises: Outbreaks of diseases like COVID-19 can lead to factory closures, labor shortages, and restrictions on transportation and trade.

3.     Political Factors: Changes in government policies, trade tariffs, sanctions, or geopolitical conflicts can disrupt supply chains by affecting transportation routes, customs procedures, and the availability of goods.

4.     Supplier Issues: Problems like bankruptcy, quality issues, or production delays at suppliers can disrupt the supply chain downstream.

5.     Technological Challenges: Issues such as cyber-attacks, IT system failures, or disruptions in communication networks can impair supply chain operations.

6.     Demand Fluctuations: Unexpected spikes or drops in demand can strain supply chains, causing shortages or excess inventory.

7.     Transportation Problems: Issues like port congestion, strikes, fuel price spikes, or accidents can delay shipments and disrupt supply chains.

8.     Climate Change: Extreme weather events and long-term environmental changes can impact agricultural production, transportation logistics, and infrastructure stability.

Product development?

Product development is the process of building a new product, from ideation all the way through launch. Product development begins with those initial brainstorming sessions, when you’re just discussing a budding idea. From there, the process is creative but strategic, and you may have seen it done in a million different ways. But without clear organization, it can be hard to mesh creativity and strategy effectively. Which is where the product development process comes in—a six step framework to help you standardize and define your work.

Let’s dive into the product life cycle and define the six product phases. All of which can help you successfully launch your next product. 

1. Idea generation (Ideation)

The initial stage of the product development process begins by generating new product ideas. This is the product innovation stage, where you brainstorm product concepts based on customer needs, concept testing, and market research. 

It’s a good idea to consider the following factors when initiating a new product concept:

·        Target market: Your target market is the consumer profile you’re building your product for. These are your potential customers. This is important to identify in the beginning so you can build your product concept around your target market from the start.  

·        Existing products: When you have a new product concept, it’s a good idea to evaluate your existing product portfolio. Are there existing products that solve a similar problem? Or does a competitor offer a product that doesn’t allow for market share? And if yes, is your new concept different enough to be viable? Answering these questions can ensure the success of your new concept.

·        Functionality: While you don’t need a detailed report of the product functionality just yet, you should have a general idea of what functions it will serve. Consider the look and feel of your product and why someone would be interested in purchasing it.

·        SWOT analysis: Analyzing your product strengths, weaknesses, opportunities, and threats early in the process can help you build the best version of your new concept. This will ensure your product is different from competitors and solves a market gap. 

·        SCAMPER method: To refine your idea, use brainstorming methods like SCAMPER, which involves substituting, combining, adapting, modifying, putting to another use, eliminating, or rearranging your product concept.   

To validate a product concept, consider documenting ideas in the form of a business case. This will allow all team members to have a clear understanding of the initial product features and the objectives of the new product launch. 

2. Product definition

Once you’ve completed the business case and discussed your target market and product functionality, it’s time to define the product. This is also referred to as scoping or concept development, and focuses on refining the product strategy. 

During this stage, it’s important to define specifics including:

·        Business analysis: A business analysis consists of mapping out distribution strategy, ecommerce strategy, and a more in-depth competitor analysis. The purpose of this step is to begin building a clearly defined product roadmap.

·        Value proposition: The value proposition is what problem the product is solving. Consider how it differs from other products in the market. This value can be useful for market research and for developing your marketing strategy.

·        Success metrics: It’s essential to clarify success metrics early so you can evaluate and measure success once the product is launched. Are there key metrics you want to look out for? These could be basic KPIs like average order value, or something more specific like custom set goals relevant to your organization. 

·        Marketing strategy: Once you’ve identified your value proposition and success metrics, begin brainstorming a marketing strategy that fits your needs. Consider which channels you want to promote your product on—such as social media or a blog post. While this strategy may need to be revised depending on the finished product, it’s a good idea to think about this when defining your product to begin planning ahead of time. 

Once these ideas have been defined, it’s time to begin building your minimum viable product (MVP) with initial prototyping.

3. Prototyping

During the prototyping stage, your team will intensively research and document the product by creating a more detailed business plan and constructing the product.

These early-stage prototypes might be as simple as a drawing or a more complex computer render of the initial design. These prototypes help you identify areas of risk before you create the product.

During the prototyping phase, you will work on specifics like:

·        Feasibility analysis: The next step in the process is to evaluate your product strategy based on feasibility. Determine if the workload and estimated timeline are possible to achieve. If not, adjust your dates accordingly and request help from additional stakeholders.

·        Market risk research: It’s important to analyze any potential risks associated with the production of your product before it’s physically created. This will prevent the product launch from being derailed later on. It will also ensure you communicate risks to the team by documenting them in a risk register. 

·        Development strategy: Next, you can begin working through your development plan. In other words, know how you’ll be assigning tasks and the timeline of these tasks. One way you can plan tasks and estimate timeline is by using the critical path method. 

·        MVP: The final outcome of the prototyping stage is a minimum viable product. Think of your MVP as a product that has the features necessary to go to launch with and nothing above what’s necessary for it to function. For example, an MVP bike would include a frame, wheels, and a seat, but wouldn’t contain a basket or bell. Creating an MVP can help your team execute the product launch quicker than building all the desired features, which can drag launch timelines out. Desired features can be added down the road when bandwidth is available.

Now it’s time to begin designing the product for market launch. 

4. Initial design

During the initial design phase, project stakeholders work together to produce a mockup of the product based on the MVP prototype. The design should be created with the target audience in mind and complement the key functions of your product. 

A successful product design may take several iterations to get just right, and may involve communicating with distributors in order to source necessary materials. 

To produce the initial design, you will: 

·        Source materials: Sourcing materials plays an important role in designing the initial mockup. This may entail working with various vendors and ordering materials or creating your own. Since materials can come from various places, you should document material use in a shared space to reference later if needed.  

·        Connect with stakeholders: It’s important to keep tight communication during the design phase to verify your initial design is on the right track. Share weekly or daily progress reports to share updates and get approvals as needed. 

·        Receive initial feedback: When the design is complete, ask senior management and project stakeholders for initial feedback. You can then revise the product design as needed until the final design is ready to be developed and implemented. 

Once the design is approved and ready to be handed off, move onto the validation phase for final testing before launching the product. 

5. Validation and testing

To go live with a new product, you first need to validate and test it. This ensures that every part of the product—from development to marketing—is working effectively before it’s released to the public.

To ensure the quality of your product, complete the following:

·        Concept development and testing: You may have successfully designed your prototype, but you’ll still need to work through any issues that arise while developing the concept. This could involve software development or the physical production of the initial prototype. Test functionality by enlisting the help of team members and beta testers to quality assure the development. 

·        Front-end testing: During this stage, test the front-end functionality for risks with development code or consumer-facing errors. This includes checking the ecommerce functionality and ensuring it’s stable for launch.

·        Test marketing: Before you begin producing your final product, test your marketing plan for functionality and errors. This is also a time to ensure that all campaigns are set up correctly and ready to launch. 

Once your initial testing is complete, you’re ready to begin producing the final product concept and launch it to your customer base. 

6. Commercialization

Now it’s time to commercialize your concept, which involves launching your product and implementing it on your website. 

By now, you’ve finalized the design and quality tested your development and marketing strategy. You should feel confident in your final iteration and be ready to produce your final product. 

In this stage you should be working on:

·        Product development: This is the physical creation of your product that will be released to your customers. This may require production or additional development for software concepts. Give your team the final prototype and MVP iterations to produce the product to the correct specifications. 

·        Ecommerce implementation: Once the product has been developed and you’re ready to launch, your development team will transition your ecommerce materials to a live state. This may require additional testing to ensure your live product is functioning as it was intended during the previous front-end testing phase. 

Your final product is now launched. All that’s left is to measure success with the initial success metrics you landed on. 

The supply relationship process involves the systematic management of interactions and collaborations between a buyer and its suppliers throughout the procurement and supply chain management lifecycle. Here are the key steps typically involved in the supply relationship process:

1.     Supplier Identification and Selection:

o   Needs Assessment: Define procurement requirements based on business needs, product specifications, quality standards, and delivery schedules.

o   Supplier Search: Identify potential suppliers through market research, supplier databases, recommendations, or industry contacts.

o   Supplier Evaluation: Assess suppliers based on criteria such as capabilities, quality, reliability, financial stability, compliance, and ethical standards.

2.     Negotiation and Contracting:

o   Request for Proposal (RFP) or Quotation (RFQ): Solicit bids from selected suppliers outlining pricing, terms, and conditions.

o   Negotiation: Engage in negotiations to finalize pricing, payment terms, delivery schedules, warranties, and other contractual terms.

o   Contract Finalization: Formalize agreements through contracts or purchase orders detailing rights, responsibilities, and performance expectations.

3.     Supplier Relationship Management (SRM):

o   Onboarding: Integrate suppliers into procurement systems and processes, establish communication channels, and provide necessary training.

o   Performance Monitoring: Track and evaluate supplier performance against key performance indicators (KPIs), service level agreements (SLAs), and quality metrics.

o   Feedback and Improvement: Provide constructive feedback to suppliers, collaborate on continuous improvement initiatives, and address issues promptly to enhance performance and relationship.

4.     Collaborative Planning and Forecasting:

o   Demand Forecasting: Share demand forecasts and production schedules with suppliers to align procurement and supply chain activities.

o   Inventory Management: Collaborate on inventory levels, safety stock, and replenishment strategies to optimize supply chain efficiency and minimize stockouts.

5.     Risk Management:

o   Identification: Identify potential risks such as supply disruptions, quality issues, geopolitical factors, and regulatory changes.

o   Mitigation: Develop risk mitigation strategies, contingency plans, and alternative sourcing options in collaboration with suppliers.

o   Resilience Building: Strengthen supply chain resilience through diversification, redundancy, and robust supply chain mapping.

6.     Continuous Improvement and Innovation:

o   Innovation Collaboration: Foster innovation through joint product development, process improvements, and technology adoption.

o   Benchmarking: Compare supplier performance and practices against industry standards and best practices to drive innovation and efficiency.

7.     Ethical and Sustainability Practices:

o   Compliance: Ensure suppliers adhere to ethical standards, labor practices, environmental regulations, and corporate social responsibility (CSR) policies.

o   Sustainability: Promote sustainable sourcing practices, environmental stewardship, and social responsibility initiatives across the supply chain.

8.     Relationship Building and Communication:

o   Stakeholder Engagement: Foster trust, transparency, and effective communication with suppliers, internal stakeholders, and external partners.

o   Conflict Resolution: Address conflicts or disputes through open dialogue, mediation, and collaborative problem-solving to maintain positive supplier relationships.

 

Order fufilment process

1.     Receiving Inventory

Goods may come from a third party, another company department or a company warehouse; a pipeline (as with oil, fuel, water or some other fluid product); as digital data from a database; or in a variety of forms from other external or internal sources.

In any case, the incoming inventory must be counted, inspected and inventoried to ensure the proper amount was received and the quality is acceptable. SKUs or bar codes on the arriving products are used in the receiving and storage processes, and to retrieve goods from internal storage later.

2.     Inventory Storage

Once goods are received in the fulfillment center, they are inventoried and either immediately disbursed or sent to short- or longer-term storage. Items are ideally stored just long enough to help organize the orderly distribution of goods for existing sales, rather than to hold product for future sales.

3.     Order Processing

An order processing management system dictates the product picking and packing activities per each newly received customer order. In the online marketplace, order management software can be integrated with the shopping cart on an ecommerce website to automatically initiate order processing.

4.     Picking

A picking team or automated warehouse robots select items from the warehouse according to a packing slip's instructions. The packing slip contains specific information, such as a list of item SKUs, product colors, sizes, number of units and location in the distribution center's warehouse.

5.     Packing

Packing materials are selected by a packing team or automated fulfillment robots to achieve the lowest practical dimensional weight, which is calculated by multiplying package length times width times height. Since space on delivery trucks is at a premium, optimizing dimensional weight (or DIM weight) is important to speed transport while also potentially lowering shipment costs.

Further, packing teams often include return shipping materials and labels in case the customer wishes to exchange or return the item for a refund later.

6.     Shipping

The order is sent to a transportation channel or shipping node to be shipped to the customer. Shippers and carriers — be they freight lines or airlines, FedEx, UPS, the U.S. Postal Service (USPS) or other carriers — determine freight billable costs by whichever is greater: actual package weight or its dimensional weight.

Even if the actual weight is low, such as with a t-shirt, packing it in the lowest DIM is often worth it to keep the packaging from adding significantly to the overall package weight. Also, most carriers have packaging rules to optimize their own profits from the shipping space they have available. Failing to meet those requirements can delay shipments if carriers refuse to accept the order.

7.     Delivery

It is common for shipping routes to include more than one carrier. For example, FedEx may pick up a package at the fulfillment center that will later be delivered by the USPS to the customer's home. There are many reasons for these hybrid shipping methods. One common example is that the USPS delivers even to remote areas where most other commercial carriers do not. It's simply more practical to use the USPS for the last mile of delivery in those cases.

8.     Returns Processing

Returns processing begins with including shipping materials and a return label with the original customer's order. When a customer does return a product for exchange or a refund, the process must be executed carefully to ensure it's appropriate to restock it. Obviously if the product malfunctions, it can't be restocked. Nor can a soiled item. Returns processing involves quality control checks and sorting returned products accordingly. Return products are then restocked, returned to a vendor or manufacturer for a distributor refund or credit, or sent to a recycling center.

Supply chain ethics refers to the principles and standards of conduct that guide the interactions and relationships among stakeholders within the supply chain network. It encompasses ethical considerations related to sourcing, manufacturing, distribution, and consumption of goods or services. Key aspects of supply chain ethics include:

1. Labor Standards and Human Rights:
• Ensuring fair treatment of workers throughout the supply chain, including safe working conditions, fair wages, reasonable working hours, and freedom from discrimination and harassment.
• Upholding international labor standards as outlined by organizations such as the International Labour Organization (ILO) and local labor laws.
2. Environmental Sustainability:
• Minimizing environmental impact through responsible sourcing of raw materials, sustainable manufacturing processes, energy efficiency, waste reduction, and pollution prevention.
• Promoting practices that mitigate climate change and support biodiversity conservation.
3. Fair Trade and Fair Business Practices:
• Supporting fair trade principles that aim to provide equitable compensation to producers, promote sustainable livelihoods, and empower marginalized communities.
• Avoiding unethical practices such as bribery, corruption, price fixing, and monopolistic behaviors.
4. Transparency and Accountability:
• Providing transparency into supply chain practices, including supplier relationships, sourcing origins, production processes, and product traceability.
• Holding suppliers accountable for ethical conduct and compliance with agreed-upon standards and contractual obligations.
5. Supplier Diversity and Inclusivity:
• Promoting supplier diversity by engaging with suppliers from diverse backgrounds, including minority-owned, women-owned, and small businesses.
• Fostering inclusive practices that promote equal opportunities and support local economies and communities.
6. Ethical Sourcing and Conflict Minerals:
• Avoiding the use of materials sourced from conflict zones or areas where human rights abuses, child labor, or forced labor are prevalent.
• Implementing due diligence processes to trace and verify the origins of raw materials and ensure compliance with regulations such as the Dodd-Frank Act.
7. Consumer Awareness and Education:
• Educating consumers about ethical considerations in supply chains, empowering them to make informed purchasing decisions that align with their values and support ethical practices.
• Encouraging demand for ethically sourced products and services through labeling, certifications, and advocacy efforts.
8. Continuous Improvement and Collaboration:
• Engaging in continuous improvement efforts to enhance ethical practices within the supply chain, including regular audits, supplier assessments, and performance reviews.
• Collaborating with stakeholders, industry peers, non-governmental organizations (NGOs), and government agencies to address ethical challenges and promote industry-wide best practices.

Supply chain risk management (SCRM) involves addressing various types of risks that can impact the smooth operation and resilience of a supply chain. Here’s how SCRM addresses different categories of risks:

1. Operational Risks:
• Definition: Operational risks in supply chains include disruptions or failures in day-to-day operations that can affect the flow of goods or services.
• Examples: These can range from production line breakdowns, machinery failures, quality issues, and supplier capacity constraints to labor strikes, regulatory compliance issues, and process inefficiencies.
• SCRM Strategies:
• Supplier Diversification: Engage with multiple suppliers to reduce dependency on a single source.
• Continuous Monitoring: Implement real-time monitoring and alerts to identify potential operational disruptions early.
• Business Continuity Planning (BCP): Develop and test contingency plans to quickly restore operations in case of disruptions.
2. Financial Risks:
• Definition: Financial risks involve potential monetary losses or cost increases within the supply chain that can impact profitability and financial stability.
• Examples: These include currency fluctuations, fluctuating raw material prices, supplier bankruptcies, payment defaults, and credit risks.
• SCRM Strategies:
• Financial Hedging: Use financial instruments such as futures contracts or options to mitigate risks associated with currency fluctuations or commodity price volatility.
• Supplier Financial Health Assessment: Regularly assess the financial stability and creditworthiness of key suppliers.
• Supplier Contract Terms: Negotiate favorable payment terms and conditions to manage cash flow effectively and reduce financial risks.
3. Security Risks:
• Definition: Security risks involve threats to the physical safety and security of goods, facilities, and personnel within the supply chain.
• Examples: These can include theft, vandalism, natural disasters, cyber-attacks, terrorism, and geopolitical instability affecting transportation routes.
• SCRM Strategies:
• Physical Security Measures: Implement security protocols, surveillance systems, and access controls at facilities and transportation hubs.
• Cybersecurity Measures: Protect digital assets and data through encryption, secure networks, regular vulnerability assessments, and employee training.
• Supply Chain Visibility: Enhance visibility and tracking capabilities to monitor the movement of goods and detect unauthorized activities.
4. Performance Risks:
• Definition: Performance risks refer to risks related to the performance and reliability of suppliers, logistics providers, and other stakeholders within the supply chain.
• Examples: These include delivery delays, quality issues, non-compliance with contractual obligations, and service level agreement (SLA) failures.
• SCRM Strategies:
• Supplier Relationship Management (SRM): Establish clear performance metrics, conduct regular performance reviews, and foster collaborative relationships with suppliers.
• Supplier Audits: Conduct audits and assessments to ensure suppliers adhere to quality standards, compliance requirements, and contractual terms.
• Alternative Sourcing: Develop contingency plans and alternative sourcing strategies to mitigate risks associated with underperforming suppliers.