OPMA REVIEWER LAHAT ITO GALING SA PPT to meet the real needs of the end

(KAYO NA BAHALA PAANO AARALIN ) customer.

- cross organization boundaries
Chapter 10: Supply chain management - Tightly integrated
Supply chain management

- valued for reducing inventory, and SUPPLY CHAIN OPERATIONS REFERENCES

costs, and improving delivery.
- is essential for businesses, - The Supply Chain Operations
encompassing the flow of materials and Reference (SCOR) model is a process
information from suppliers to reference model originally developed
customers and back. and endorsed by the Supply Chain
- It involves transforming materials into Council, now a part of ASCM, as the
final products and managing returns, cross-industry, standard diagnostic tool
information, and payments. The supply for supply chain management.
chain can be viewed from various - The current version of the SCOR model
perspectives, including firms, factories, is represented as a four-level pyramid,
and service types with Level I (Top Level) defining SCM to
encompass management of five
Companies are focusing on external suppliers distinct processes-Plan, Source, Make,
to optimize operations, using supply chain Deliver, and Return.
thinking to understand processes across all
departments. A major advantage of the SCOR model is that
it provides a common framework and lexicon
DOWNSTREAM OR FORWARD MATERIALS AND for interorganizational communication and
INFORMATION FLOW - This refers to the flow of efforts aimed at improving performance of the
materials and information from a company, entire supply chain.
called Z, to the end customers.
PURCHASING AND LOGISTICS
- Physical Supply
- Physical Distribution - The purchasing and the logistics
functions are integral to the efficient
OPERATIONS LEADER: APPLE'S IPOD AND and effective performance of supply
SUPPLY CHAIN MANAGEMENT chains.
- Supply Chain Management (SCM) is an - These two functions coordinate and
important part of business, especially collaborate with the operations
for companies like Apple with products function within firms to deliver
such as the iPod products and service to customers
- According to the Institute for Supply while meeting cost, quality, delivery,
Management, SCM refers to the design and flexibility objectives.
and management of seamless, value-
added processes between organizations

1
PURCHASING CYCLE THREE KEY DECISIONS TO IDENTIFY THE
RESPONSIBILITIES OF THE LOGISTICS
FUNCTIONS:

1. Choice of transportation: refers to the

decision-making process individuals or
groups go through when selecting a
mode of travel.
2. Packing and materials handling:
involves the processes of preparing
goods for transport and managing the
movement of materials within a facility.
3. Management of storage points: refers
to the organization and oversight of
locations where goods or materials are
stored.
GLOBAL SOURCING
UNPACKAGED: THE ECO-FRIENDLY LONDON
- is the practice of procuring goods and GROCERY STORE
services from suppliers located around
- Unpackaged is an organic grocery store
the world, rather than relying solely on
founded in 2006 by its proprietor,
local or domestic sources.
Catherine Conway, Unpackaged tells its
- This strategy allows. organizations to
customers to bring their own containers
take advantage of cost efficiencies,
when they shop. Customers have
access specialized expertise, and
obeyed, bringing with them bottles,
improve product quality.
glass jars, paper bags, plastic bags, and
REVERSE LOGISTICS old boxes to carry their products home.

- refers to the process of moving goods THE PHILOSOPHY OF UNPACKAGED

from their final destination back to the
Catherine Conway - "We source Fair Trade
manufacturer or supplier for the
products where possible; we don't sell products
purpose of recapturing value or proper
that are shipped by air, we give preference to
disposal.
suppliers who are part of cooperatives, and we
- This process is essential for managing
apply the same three basic principles of the
returns, recycling, refurbishing, and
"waste hierarchy": reduce, reuse and recycle.
management. and waste
Unnecessary packaging increases the price of
the goods because you're effectively being
charged twice.”

2
THE PHILOSOPHY OF UNPACKAGED ● Replenishment lead time: Time from
order to delivery.
1. First, when you buy over packaged
goods, and then through your taxes, Quality
which are spent getting rid of the
leftover rubbish. ● Performance of product/service.
2. Wrong packaging and incorrect ● Conformance to specifications.
materials handling can have damaging ● Customer satisfaction.
effects on products in transit. Flexibility
3. Third, management of storage points
focuses on how many storage facilities ● Volume flexibility: Time to adjust
to have in a supply chain, where to output by a set percentage.
locate storage facilities in the supply ● Mix flexibility: Time to change
chain, and how to manage them. product/service mix.

Purchasing Function Time

- Make-or-buy ● Throughput time: Total cycle time

- Supplier management strategies for across the supply chain.
sourced items
Cost
- Supplier qualification and selection
- Ongoing supplier evaluation and ● Unit cost: Total manufacturing cost per
relationship unit produced (materials, labor,
- Strategic partnership with suppliers overhead).
- Supplier involvement in design
- Sourcing strategy SUPPLY CHAIN DYNAMICS - BULLWHIP EFFECT

Logistics Function In a supply chain, different businesses work

together by sharing materials and information.
- Transportation mode What one business decides or does can
- Materials handling and warehousing significantly affect the others. One key issue
- Packaging that can arise in this system is called the
- Storage locations within a supply chain bullwhip effect, or what economists call the
- Shipping policies accelerator effect. This happens when small
- Third-party logistics providers changes in customer demand lead to bigger
changes in orders placed upstream in the supply
SUPPLY CHAIN PERFORM METRICS
chain.
Delivery
Three (3) key observations arise from analyzing
● On-time delivery: % of orders delivered order patterns among these entities.
on the date requested.
1. There is variability in the orders
● Fill rate: % of orders filled from
received at each level, as consistent
inventory (make- to-stock).

3
 order sizes would otherwise be Summary: Key points about supply chain
expected. dynamics illustrated in Figure 10.4.
2. As we move upstream, this order
variability increases; the farther an Highly Interactive System - The supply chain is
entity is from the market, the greater like a team where every part influences the
the variability it experiences. others.
3. This magnification of order variability The Bullwhip Effect - This effect occurs when
also affects inventory levels. Since small changes in customer orders cause much
entities are not synchronized with longer changes in orders made upstream like by
market demand, varying order sizes factories.
lead to inventory accumulation at times
and shortages or delays at others. Thus, Information and Time Delays - Delays in order
the bullwhip effect impacts both fulfillment and information sharing can lead to
individual entity performance and the issues in the supply chain, even if the
supply chain as a whole. information is accurate.

WHY IS THE BULLWHIP EFFECT SO COMMON Strategies for Improvements - For better work,
ACROSS INDUSTRIES shorten the time it takes to restock and to
quickly share real demand information.
1. Inaccurate forecasting - It refers to the
failure to predict future demand or 10.5 IMPROVING SUPPLY CHAIN
sales accurately. PERFORMANCE
2. Replenishment Lead Time - Longer lead
- Coordination within and Across Firms is
times make companies keep extra
crucial to minimize the bullwhip effect
safety stock to avoid running out of
and improve supply chain performance.
products.
- Firms are often organized into
3. Information Delay - Delays in sharing
functional silos, with different
information about demand up and
departments managing separate parts
down the supply chain create
of the supply chain.
confusion.
- Lack of Coordination within and beyond
4. Order Amplification - As orders are
the firm causes negative effects on the
amplified up the supply chain, actual
supply chain
demand becomes distorted.
- Whether the intended improvement is
in supply chain structure or supply
chain infrastructure.
Mitigation Strategies: - Improvements should aim to increase
- Improve Forecasting coordination to reduce uncertainly,
- Enhance Communication total replenishment lead time and
- Reduce Lead Times supply chain costs.
- Reducing demand uncertainly and
improving resupply reliability can
decrease the need for inventory.

4
 - A supply chain with shorter designed from scratch without regard
replenishment lead times can react for existing processes.
more flexibly to real demand changes,
further reducing inventory
requirements. CHANGING THE CONFIGURATION OF
SUPPLY CHAIN STRUCTURAL IMPROVEMENTS FACTORIES, WAREHOUSES, OR RETAIL
LOCATIONS
- Changes in supply chain structure
rearrange the elements of the supply Outsourcing occurs - when work that
chain, usually in a major and dramatic traditionally has been performed internally is
way. These changes are frequently delegated to another firm, whether that firm is
long-range in nature and require in the same country or in another country.
considerable capital. Changing and Off-shoring - occurs when a firm moves work
improving supply chain structure can be performed internally to another facility
accomplished in a number of different belonging to the same firm but in another
ways country.
FORWARD AND BACKWARD INTEGRATION THE POSTPONEMENT STRATEGY
- Forward Integration the integration is - strategy designed to utilize all available
forward If a manufacturer, for example, data to meet customer needs so it
decides to buy a wholesale firm and delays customization until customer
distribute its products only through that requirements are known.
wholesaler. - It is most often used to increase the
- Backward Integration the integration is competitiveness of a firm entering into
backward in the supply chain, If the global markets or new markets where
manufacturer buys a supplier company. customer data is unavailable.
- Vertical integration there is total
vertical integration, If one firm owns MODULARITY
the entire supply chain.
- Modular product designs have
MAJOR PROCESS SIMPLIFICATION catalyzed the pursuit of mass
customization and allowed those firms
- It is used to improve supply chains to realize many operational benefits,
when the processes are so complex or including simpler process flows, less
out of date that a major change is process complex-ity, lower inventory
required. This could include major investments, and lower unit cost.
conceptual changes in how business is
conducted and major changes in COMPONENT SWAPPING MODULARITY
information systems.
- Suppliers of common parts are
- Additional: the clean state approach is
managed with long-term purchasing
used in which the processes are

5
 agreements, with a focus on pricing and TO IMPROVE SUPPLY CHAIN INFRASTRUCTURE,
reliable delivery. WE FOCUS ON THE FOLLOWING FIVE:
- These suppliers produce in high
volumes and have reliable CROSS-FUNCTIONAL TEAMS
transformation processes. Swappable - The use of cross-functional teams is
component suppliers, by contrast, are pervasive in many businesses today.
selected on the basis of proximity and Their purpose is to provide coordination
ability to deliver quickly. that is lacking across the various
LOGISTICS PROVIDERS departments and functions of a
business.
- A logistics service provider (LSP) is an
outsourced company that provides PARTNERSHIP
supply chain management services such - Partnerships with suppliers and
as transportation, warehousing or customers provide coordination across
distribution services businesses the same way cross-
functional teams provide coordination
within the business.
SUPPLY CHAIN INFRASTRUCTURAL
IMPROVEMENTS SET-UP TIME REDUCTION

- Changes to improve supply chain - Setup time reduction can take many
infrastructure are made within a days out of the supply chain, reducing
specific structure or configuration of the total replenishment lead time and
the supply chain. These changes often the total supply chain throughput time.
are considered to be on the "soft" side INFORMATION SYSTEMS
of the supply chain. They involve
changing the way the supply chain - Information systems are important in
operates within the specific structural changes occurring in industry obtaining
arrangements. sales data from the final customer and
supply chains. One of the feeding that
SUPPLY CHAIN INFRASTRUCTURAL information back through the supply
IMPROVEMENTS (OBJECTIVE) chain.
- The objective of supply chain CROSS-DOCKING
infrastructural improvement initiatives
is the same: to remove sources of - Cross-docking is an innovation in
uncertainty, time, and cost from the transportation that has been attributed
supply chain. to Walmart. The basic idea is that a
supplier's shipments are taken from
various docks at the warehouse when
they arrive and transferred directly to a
Walmart truck at another dock.

6
Role of Technology in Supply Chain ensure that inventory levels are
Management optimized. By integrating e-
procurement into the supply chain.
- Technological advancements, companies can reduce costs, Improve
particularly the Internet and the World supply chain visibility, and increase
Wide Web, have emerged as disruptive responsiveness to market demands.
forces in the business world
There are generally three types of e-
Impact on Supply Chain Management procurement services:
- The Internet has significantly improved 1. Online catalogs listing products, prices,
connectivity within the supply chain, specifications. sales, and delivery terms.
providing seamless Integration between 2. Third-party auctions for buyers and
businesses and end consumer. sellers.
- 3. Private exchanges conducted by major
Key Processes Affected by Technology corporations.

Two (2) fundamental processes in supply chain E-procurement and B2B marketplaces have
management that are heavily Impacted by been growing rapidly. In 2009 e-procurement
technology are Order Placement and Order transactions reached $3.0 trillion, with over
Fulfillment. 20,000 B2B marketplaces. This huge growth,
however, has created significant problems:
Order Placement - The process of order
placement involves not only the entry of the - Too much focus has been placed on
order itself but also the provision of critical technology without adequate attention
information to customers prior to making a to process redesign and process
purchase coordination issues.
- Joint value propositions have not been
Order Fulfillment - Order fulfillment has also developed carefully so that both
benefited from advancements in technology. partners benefit from the B2B
exchange.
- There have been too many fragmented
The Role of E-Procurement efforts across divisions within the same
company and fragmented approaches
- E-procurement has become a vital tool across companies.
in facilitating both order placement and - Multitudes of record accuracy and data
fulfillment. It enables businesses to issues have plagued the process
establish connections with their
suppliers via B2B systems, allowing for
smoother interactions and transactions.
Through e-procurement, businesses can
manage supplier relationships,
automate procurement processes, and

7
CHAPTER 11: Forecasting - For medium-range capacity decisions
extending through the next year or so, a
FORECASTING more detailed forecast by product line
- Forecasting is the art and science of will be needed to determine hiring
predicting future events. plans, subcontracting, and equipment
- A systematic effort to anticipate future decisions.
events based on the patterns and - Short-range capacity decisions
information available from past data. including the assignment of available
- It serves as a cornerstone of strategic people and machines to jobs or
decisions, influencing almost every activities in the near future, should be
aspect of an organization's operations. detailed and highly accurate.

Three ways to accommodate forecasting errors Forecasting in Marketing

- To try to reduce the error through - Forecasting is used for many purposes
better forecasting in marketing, including sales planning.
- To build more flexibility into operations new-product introduction, design of
and the supply chain. marketing programs, pricing decisions.
- To reduce the lead time over which advertising. and distribution planning.
forecasts are required Inventory and Scheduling Decisions
A Forecasting Framework - Inventory decisions resulting in
We should also clarify at the outset the purchasing actions tend to be short
difference between forecasting and planning: range in nature and deal with specific
products.
Forecasting deals with what we think will - Inventory and scheduling decisions,
happen in the future. because of the many items usually
involved, it will also be necessary to
PROCESS DESIGN
produce a large number of forecasts.
- For process design purposes, Thus, a computerized forecasting
forecasting is needed to decide on the system is often used for these
type of process and the degree of decisions.
automation to be used
Finance
Capacity Decisions
- The finance, accounting, and human
- Capacity decisions utilize forecasts at resources functions are also keenly
several different levels of aggregations interested in forecasting. Even the
and precision. routine task of making a budget or
- For planning the total capacity of estimating costs requires a volume
facilities, a long- range forecast several forecast and financial planning
years into the future is needed. grounded on forecasts of sales. Human
resource requires a forecast to

8
 anticipate hiring decisions and about the situation. No rigorous
personnel budget. method is used.

Types of Forecasts Uses of Methods

- Qualitative forecasting methods rely on Delphi Method - Long-range sales forecasts for
managerial judgment, they do not use capacity or facility planning Technological
specific models. forecasting to assess when technological
- Quantitative methods utilize an changes might occur
underlying mathematical model to
arrive at a forecast. Market surveys - Forecasts of total company
sales, major product groups, or individual
QUALITATIVE FORECASTING METHODS products.

- Qualitative forecasting methods utilize Life-cycle Analogy - Forecasts of long-range

managerial judgment, experience, sales for capacity or facility planning
relevant data, and an implicit
mathematical model. Informed judgement - Forecasts for total sales
- Qualitative forecasts should be used and individual products.
when past data are not reliable Time-Series Forecasting - Time-series methods
indicators of future conditions, when are used to make detailed analyses of past
this happens, past data must be demand patterns over time and project those
tempered by judgment before a patterns forward into the future.
forecast can be developed.

Qualitative Methods
MOVING AVERAGE
Description of Methods
- The simplest method of time-series
1. Delphi Method - Forecast developed by forecasting is the moving-average
a panel of experts answering a series of method.
questions on successive rounds. - It is simply the average of a select set of
2. Market surveys - Panels, time periods. It's called 'moving
questionnaires, test markets, or surveys because as a new demand number is
used to gather data on market calculated for an upcoming time period,
conditions. the oldest number in the set falls off,
3. Life-cycles analogy - Prediction based keeping the time period locked.
on the introduction, growth, and
maturity phases of similar products, Exponential smoothing
Uses the S-shaped sales growth curve.
- Based on the very simple idea that a
4. Informed judgment - Forecast may be
new average can be computed from an
made by a group or an individual on the
old average and the most recent
basis of experience, hunches, or facts
observed demand.

9
 - It can be mathematically shown that emphasizing larger discrepancies. A
the weights on each preceding demand lower MSE indicates better accuracy.
data point decreases exponentially. - Mean Absolute Deviation (MAD):
Calculates the average of absolute
Forecasting Errors errors, providing a straightforward
- When exponential smoothing is used, understanding of forecast accuracy
whether it is simple smoothing or more - Mean Absolute Percentage Error
advanced smoothing, an estimate of (MAPE): Normalizes errors as
forecast error should be computed percentages, allowing comparisons
along with the smoothed average. across different data sets.

ADVANCED TIME-SERIES FORECASTING

The error estimate might be used for several - A variation of exponential smoothing
purposes. that has received considerable
attention is adaptive exponential
● To monitor erratic demand smoothing.
observations or outliers, which should - Adaptive exponential smoothing is an
be carefully evaluated and perhaps advanced variation of traditional
rejected from the data. exponential smoothing that allows for
● To determine when the forecasting dynamic adjustments of the smoothing
method is no longer tracking actual coefficient, enhancing forecast
demand and needs to be reset. accuracy.
● To determine the parameter values (eg. - This method has gained significant
N and o) that provide the forecast with attention for its effectiveness in various
the least error. forecasting scenarios, particularly in
● To set safety stocks or safety capacity inventory management.
and thereby ensure a desired level of
protection against stockout. Time-Series Methods

In forecasting work, there are four different Description of Method

ways to measure the long run cumulative 1. Moving averages - Forecast is based on
forecast error over several periods. arithmetic average or weighted average
- Cumulative Forecast Error (CFE): of a given number of past data points.
Measures bias/bias in the forecasts. 2. Exponential smoothing - Similar to
Bias should be zero. A consistent moving average, with exponentially
positive error indicates a need for a more weight placed on recent data.
higher starting point in forecasts. 3. Mathematical model - A linear or
- Mean Squared Error (MSE): Well- nonlinear model fitted to time-series
known standard deviation. Evaluates data, usually by regression methods.
variance by squaring errors, 4. Box-Jenkins - Autocorrelation methods
are used to identify underlying time

10
 series and to fit the "best" model. Simulation model - Simulation of the
Requires about 60 past data points. distribution system describing the changes in
sales and flow of product over time.
Uses of Methods
Selecting a Forecasting Method
1. Moving Average - Short- to medium-
range planning for inventories, 1. User and system sophistication:
production levels, and scheduling. Good Choose a forecasting method that
for many products matches the knowledge level of the
2. Exponential Smoothing - Same as people using it. If it's too complicated,
moving average. they might not trust or use it.
3. Mathematical model - Same as moving 2. Time and Resources: This selection of a
average but limited, due to expense, to forecasting method will depend on the
a few products. time available in which to collect the
4. Box-Jenkins - Limited, due to expense, data and prepare the forecast. Some
to products requiring very accurate methods are fast and cheap, while
short-range forecasts. others take a lot of time and money.
Pick one based on how much time and
Causal Forecasting Methods resources you have.
- Develop a cause-and-effect model 3. Purpose of the Forecast (Use or
between demand and other variables. Decision Characteristics): The method
- Refers to the use of historical data and you choose also depends on what the
causal relationships to predict future forecast will be used for.
sales and demand in the retail industry. - For instance: If you need
precise short-term forecasts for
things like Inventory and
pricing. time-series methods
4 Causal Forecasting Methods
(which use past data) work
Regression - This method relates demand to best.
other external or internal variables that tend to - For long-term decisions, like
cause demand changes. marketing strategies or facility
planning, you don't need as
Econometric model - A system of much accuracy. Qualitative
interdependent regression equations that methods (based on expert
describes some sector of economic sales or opinions) or causal methods
profit activity. (that look at relationships
between factors) might be
Input-Output model - A method of forecasting
better.
that describes the flows from one sector of the
4. Data Availability: often constrained by
economy to another.
available data. The method depends on
how much data you have. If you don't

11
 have much data, choose a simpler How does CPFR work?
approach.
5. Data Patterns: If your data shows 1. Information Sharing: Customers share
trends or seasonal patterns. use their sales forecasts and marketing
advanced methods. If it's unpredictable, plans with suppliers
a qualitative (opinion-based) approach 2. Forecast Comparison: Both customers
might be better. and suppliers compare their demand
forecasts.
3. Collaborative Discussion: If their
forecasts differ, they talk about why
Collaborative Planning, Forecasting, and and adjust them.
Replenishment (CPFR) 4. Replenishment Planning: Once they
- CPFR is a relatively new approach agree on a forecast, the supplier plans
aimed at achieving more accurate how much inventory to produce or
forecasts. restock.
- Collaborative Planning, Forecasting, and Benefits of CPFR
Replenishment (CPFR) is a process
where companies (like Whirlpool) and ● More Accurate Forecasts: Sharing
their partners (like retailers) work information leads to better predictions
together by sharing information to plan of future demand.
and forecast future demand. This ● Lower Inventory Costs: Better forecasts
collaboration helps avoid stock help companies avoid overstocking or
shortages or overproduction. understocking.
● Better Customer Service: Customers are
The important points to remember about CPFR more likely to find the products they
are these: want because stockouts (running out of
1. All parties must be willing to share items) are reduced.
sensitive information about demand Key Factors for CPFR Success
data willing potential orders, new brods
not acond fortune sales promotions be ● Information Sharing: Both sides need to
provided that competitors will not have share important details like future
access to sensitive information. promotions or sales plans.
2. A long-term collaborative relationship ● Long-Term Relationships: Trust
that is mutually beneficial is needed between partners is important so that
This will require an atmosphere of trust sensitive information is not misused.
and ongoing management attention. ● Commitment of Resources: Time and
3. Sufficient time and resources must be money are needed to set up systems
provided for CPFR to succeed. In other and processes to make CPFR work.
words, there is a cost to receive the
benefits of CPFR.

12
Whirlpool Case Study ● Scheduling

Whirlpool collaborates with key retailers, like Capacity

Sears, using CPFR to forecast appliance sales.
Before CPFR, each partner made separate sales - (sometimes referred to as peak
forecasts, which often resulted in errors. By capacity) as the maximum output that
sharing and comparing forecasts, Whirlpool was can be produced over a specific period
able to reduce inventory costs and avoid of time, such as a day, week, or year.
overproduction. - Capacity can be measured in terms of
output measures such as number of
units produced, tons produced, and
number of customers served over a
CHAPTER 12: CAPACITY PLANNING specified period.
Capacity Decisions - It also can be measured by physical
asset availability, such as the number of
- Capacity decisions are based on hotel rooms available, or labor
forecasted estimates of future demand. availability.
- Must be aligned with the operations
strategy of a firm Estimating capacity depends on reasonable
- The operations strategy provides a road assumptions about facilities, equipment, and
map that is used in making supply chain workforce availability for one, two, or three
decisions to create a network of shifts as well as the operating days per week or
organizations whose work and output per year.
are used to satisfy customers' product Utilization The relationship between actual
and service needs. output and capacity. The utilization of capacity
3 Types of Capacity Decisions is a useful measure for estimating how busy a
facility is or the proportion of total capacity
1. Long range decisions are concerned being used.
with facilities and process selection,
which typically extend about one or Effective Capacity
more years into the future. - obtained by subtracting downtime for
2. Medium-range aggregate planning, maintenance, shift breaks, schedule
which extends from six months to a changes, absenteeism, and other
year or two into the future. activities that decrease the capacity
3. Short-range capacity decisions of less available.
than six months regarding the - The capacity that can be used in
scheduling of available resources to effective capacity then, is the amount of
meet demand. capacity that can be used in planning
Hierarchy of Capacity Decisions for actual facility output over a period
of time.
● Facilities Decisions - To estimate effective capacity for the
● Aggregate Planning previously described two-shift facility,

13
 we must subtract hours for planned and 2. Facilities Cost: The cost is influenced
unforeseen events. by scale, timing, and location, and
returns must be manageable in the long
Facilities Decision run.

- Facilities decisions have great 3. Likely behaviors of competitors:

importance to a firm. It involve all Knowing what a competitor is behaving
organizational functions and often are impacts the scale and pace of expansion
in capacity.
made at the highest corporate level,
including top management and the 4. Business Strategy: General
board of directors. determinants of the scope of facility
- Firms must decide whether to expand design and selection are determined by
existing facilities or build new ones. the business strategy: whether the
policy is to emphasize cost, service, or
In facilities decisions, there are five crucial flexibility.
questions:
5. International considerations: Global
1. How much capacity is needed? facilities may leverage access to
2. How large should each facility be? potential markets, supply chains, and
other better talent.
3. When is the capacity needed?
4. Where should the facilities be located? A properly executed facilities strategy is
5. What type of facilities/ capacity are part of an overall strategy toward long-
needed? term growth and competitiveness by
integrating functional areas into the
Faculties Strategy business goals.

- A facilities strategy is a very important

component of an organization's
operations strategy that focuses on key AMOUNT OF CAPACITY
decisions related to changes in capacity,
location, and changes in time. - determined by the forecasted demand
- In this context, these decisions must and by a strategic decision by the firm
take place within the overall business about how much capacity to provide in
strategy and include contributions from relation to expected demand.
marketing, finance, and other - This can be best described by the
functional areas. notion of a capacity cushion.
The main concerns of a facilities strategy are
the following:

1. Predicted Demand: Sufficient

demand forecasting would help avoid
over-investment or under-investment in
capacity. Capacity Cushion

14
 - The capacity cushion is the difference need for more capacity is clear. As a
between the output that a firm could result, the company lags market
achieve and the real output that it demand using a lower-risk strategy.
produces to meet demand.
FACILITY LOCATION
Three Strategies in Capacity Cushion
● Facility location decisions have become
1. Large Cushion A large capacity cushion more complex as globalization has
with capacity in excess of average expanded the options for locating
demand. capacity and developing new markets.
2. Moderate Cushion Conservative with
respect to capacity. Capacity is built to
meet the average forecasted demand Location decisions are made by considering
comfortably. both quantitative and qualitative factors.
3. Small Cushion A small or nearly zero
capacity planned to maximize Quantitative factors that affect the location
utilization. decision may include return on investment, net
present value, transportation costs, taxes, and
Sizes of Facilities lead times for delivering goods and services.
- When capacity is planned, the size of a Qualitative factors can include language and
facility should be determined, keeping norms, attitudes among workers and
in mind economies of scale. The bigger customers, and proximity to customers,
the facilities, the cheaper it usually gets, suppliers, and competitors.
for their fixed cost is spread over more
units.

This happen for two reasons Types of Facilities:

● 1. The cost of large equipment does not Product-Focused (55%)

increase proportionally with output
Product-focused facilities specialize in
● 2. Overhead costs are spread over more
producing a single family or type of product for
units.
a large market, such as the Andersen Window
plant, which manufactures various windows for
the entire U.S.
TIMING OF FACILITY DECISIONS
Market-Focused (30%)
Preempt the competition
Market-focused facilities are situated near the
● In this strategy, the firm leads by markets they serve, as many services cannot be
building capacity in advance of the transported. These facilities are designed for
needs of the market. quick customer response, customization, or to
● In this strategy, the firm waits to Add mitigate high transportation costs.
capacity until demand develops and the

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Process-Focused (10%) S&OP is a vital input for the Enterprise Resource
Planning (ERP) system, which manages detailed
Process-focused facilities typically use one or planning systems across shipments, payments,
two technologies and often produce and other functions.
components or subassemblies for other
facilities. Planning Option

General-purpose (5%) - Effective collaboration between

operations and marketing is crucial in
General-purpose facilities are versatile spaces aggregate planning to balance supply
that can produce a variety of products and and demand.
services, such as furniture manufacturing and - This process ensures output meets
consumer banking. market demands while staying within
facility capacity.
- To enhance the Sales and Operations
Sales and Operation Planning Planning (S&OP) process, we can focus
on two key decision areas: adjusting
Sales and operations planning (5&OP) is a term
supply and modifying demand.
used by many firms to describe the aggregate
planning process, aggregate planning is the Modifying Demand
activity of matching supply of output with
demand over the medium time range. PRICING STRATEGIES

Differential pricing is commonly used to

manage peak demand and encourage purchases
CROSS- FUNCTIONAL NATURE OF S&OP during off-peak times.

Accounting and Finance: S&OP impacts Examples include matinee movie prices, off-
budgeting by providing insights on expected season hotel discounts, and factory incentives
output, inventory, and purchasing levels. for early or late-season orders. These strategies
aim to smooth out demand fluctuations over
Human Resources: The plan informs hiring,
time.
layoffs, and overtime needs, particularly in
labor-intensive industries like services. ADVERTISING AND PROMOTION

Marketing: Plays a key role by projecting future Timely advertising campaigns can help stabilize
supply and demand, ensuring that sales and or boost demand during slower periods.
operations align with market expectations.
For instance, turkey farmers may promote their
Impact on Broader Business Decisions: products outside major holidays, while ski
resorts might offer activities to extend their
Budgeting, personnel, and marketing strategies
season.
are interconnected with S&OP
BACKLOGS AND RESERVATIONS
ERP System Integration:

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Businesses can influence demand by allowing decisions and foster a more productive work
advance reservations or encouraging customers environment.
to wait for their orders, creating a backlog.
While this may lead to lost sales opportunities, Part Time Hiring part-time or temporary
it can help shift demand from peak to off-peak employees to meet peak or seasonal demand is
times. Accepting some loss can be beneficial for an option particularly attractive when part-time
maximizing profit. employees are paid significantly less in wages
and benefits.
COMPLEMENTARY OFFERINGS
Carrying Inventory In manufacturing firms,
To manage seasonal demand fluctuations, inventory can be used as a buffer between
businesses can develop complementary supply and demand.
products.
Subcontracting The outsourcing of work (either
For example, Toro produces both snow blowers manufacturing or service activities ) to other
and lawn mowers, allowing year-round use of firms
manufacturing resources. Similarly, fast-food
chains have introduced breakfast menus to Cooperative Arrangements Arrangements are
utilize otherwise idle space. similar to subcontracting in that other sources
of supply are used, but cooperative
Compared to manufacturing, the service sector arrangements often involve partner firms that
more widely adopts demand management are typically competitors.
techniques. Service providers implement these
strategies to maximize the use of their fixed
capacity, as services cannot be stored as BASIC AGGREGATE PLANNING STRATEGIES
inventory.
There are two basic planning strategies that can
be used, as well as combinations of them, to
Planning option in supply management Supply meet medium-term aggregate demand.
management includes a variety of factors that ● One strategy is to maintain a level
can be used to modify supply through aggregate work-force;
planning. ● the other is to chase demand with the
Hiring and Laying off employees These effects workforce.
must be factored into decisions about whether
to change the size of the workforce to match
demand more closely. 1. LEVEL STRATEGY
- Level strategy essentially holds the
Overtime and Undertime Timely’s overtime regular workforce at a fixed number,
and undertime reporting provides you with a and so the rate of output is relatively
bird’s eye view of your team's time balances, fixed over the aggregate planning
giving you the power to make informed period.

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 - However, a firm using a level strategy PART-TIME LABOR COSTS are associated with
can respond to fluctuations in demand employing workers on a part-time basis to
by using the demand and supply address fluctuations in demand.
planning options discussed in the
previous section. COST OF STOCKOUT OR BACK ORDER refers to
the financial impact of not having enough
inventory to fulfill customer orders.

2. CHASE STRATEGY AGGREGATE PLANNING EXAMPLE

- Chase strategy generally results in a fair
amount of hiring and laying off of The Hefty Beer Company is constructing an
workers as demand is chased. aggregate plan for the next 12 months.
- In the chase strategy, the size of the Although several types of beers are brewed at
workforce is changed to meet, or chase, the Hefty plant and several container sizes are
demand. bottled, management has decided to use
- With this strategy, it is not necessary to gallons of beer as the aggregate measure of
carry inventory or use the demand and capacity.
supply planning options available for AGGREGATE PLANNING
aggregate planning; the workforce
absorbs all the changes in demand. LEVEL WORKFORCE use inventory to meet peak
demands.

LEVEL WORKFORCE PLUS OVERTIME use 20

AGGREGATE PLANNING COSTS is an attempt to percent overtime along with inventory in June,
balance capacity and demand in such a way that July, and August to meet peak demands.
costs are minimized.
CHASE STRATEGY hire and lay off workers each
HIRING AND LAYOFF COSTS. are expenses month as necessary to meet demand
incurred when a company hires new employees
or lays off existing employees to meet changes
in demand.

OVERTIME AND UNDERTIME COSTS. refer to

the additional costs associated with having
employees work more or fewer hours than their
regular schedules.

INVENTORY-CARRYING COSTS refer to the

expenses associated with holding inventory in
stock.

SUBCONTRACTING COSTS is the price paid to

another firm to produce the units.

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