JWI 550 Operations Management - Course Wrap Up, 3/24/13
Jack Welch rocks my world once again. This is a superbly designed course that provides a solid framework to
inspire and install effective operations within any product or service organization.
I can feel my mind and spirit lit brighter with unique OM insights gained from this course.
Dr DP
1. Operations Management (OM) is the guts of an organization.
When aligned to strategy, OM can guide employees with clear goals, drive competitive advantage and differentiate an organization within an industry.
2. Tactical procedures of operations management in a competitive industry include:
Design of goods and services
Manage quality
Process and capacity design
Location planning
Layout design
HR and Job Design
Supply chain management
Inventory, materials planning
Scheduling & Forecast of Demand and Supply
Maintenance & Reliability
3. Operational strategy when running a manufacturing plant
- Ensure everyone understands that the purpose of the firm is to make money
- Increase throughput, reduce inventory and operating cost
- Use Drum, Buffer, Rope model from the Theory of Constraint to manage bottlenecks strategically, increase throughput, develop strong organizational operations.
5. Operational processes and strategies between a service & manufacturing industries share commonalities.
6. Turn on LEAN manufacturing principles for superior products and customer service
7. Manage capacity and quality of operations while preparing to meet demand.
Five inventory categories are: pipeline (on the move), cycle lot size (order size based on usage forecast), buffer (due to variability in demand),
anticipation (seasonal), speculation (guess demand and take risk)
8. Outsourcing and its OM implications
Outsourcing is unethical when it:
- violates religious holidays
- moves pollution from one country to another
- stresses cheap labor that leads to employee abuse
- violates basic human rights
- is used primarily for short term cost-reduction instead of building good long term partnerships
- results in loss of technology
9. Bullwhip effect can influence supply chain functions.
Distorted information from one end of a supply chain to other end can lead to tremendous inefficiencies:
excessive inventory, poor customer service, lost revenues, misguided capacity plans, ineffective transportation and missed production schedules.
Mitigation strategies: integrate new information systems, define org relationships, implement new measurement and incentive systems, manage inventory
10. Understand Internet's influence on operations processes:
Capture the transparency of OM in supply chain, capture the soul of the customer
take hidden agendas out of the supply chain
11. OM during difficult economics times
Particularly important to have a clear strategy and a strong vision for guiding operational decisions
The job of you as a leader during tough times is to make it clear to your people
- why we are doing it
- competitive rationale for doing it
- what is it going to look like when it's over
- what it's going to look like when we get through the tough times
- most of all, what is in it for the people? to go through the pain you are driving them to go through
MAKE THEM FEEL just exactly what life will be like when you get through this tough time
12. What makes operations work is Culture
- an open culture where they are rewarded for finding a better way every day
- reward and promote boundaryless behavior (both in terms of Wallet and Soul)
- You get the behaviors you reward
Sunday, March 24, 2013
Friday, March 22, 2013
Financial Management - Basics
JWI 530 Financial Management I Course Summary, 3/22/13
Each week this elegantly designed course exposed me to new and exciting concepts in financial management. The lectures, readings, DQs, web-exes, made up a rich learning experience. This is easily one of the best courses I have ever taken.
I. Mastered concepts
None. "What we know is the size of the fist while what we don't know is the size of the world", said Avvaiyaar, an ancient Indian saint. I believe this is a great introduction, much like opening the door to a whole new world of finance. The elegantly designed course allows me to embrace financial figures and work my way gainfully forward in a business situation.
Basic finance questions to ask:
1. Does this project earn a positive NPV?
2. What is the desired hurdle rate?
3. What is the firm's current ratio and how has is the trend?
4. What is the firm's debt to equity ratio?
5. How robust is the firm's cash flow - can it withstand a stress test ?
5. If we invest in this project, what do we give up in terms of other opportunities, including repayment of debt to our lenders?
6. What do our FFS reports show for worst-case, status quo and best-case scenarios in the year ahead?
7. Will a bond issuance provide us more options than issuing shares at this time?
8. What is our cash conversion cycle at the moment?
9. How do we improve our days inventory outstanding?
10. Does it make sense to use debt to finance our next project or use our available cash?
11. Know when to abandon a project based on what the future holds, not on what happened in the past
- how much will carrying out the project cost and how much will it bring in ?
- what is the cost of abandoning it?
- use numerical models to control emotions eg. housing crisis
12. Never be afraid to Ask Why
II. Concepts I understand but want to learn more about
The entire course falls under this category.
(i) Linkage between Financial management and Corporate social responsibility - ethics before profits
(ii) Limitations of rational behavior - free markets are part of a fragile eco-system that can crash and need government intervention
(iii) Cost of Capital, US Treasury notes, Debt/Equity ratios - the foundations of capitalism
(iv) How to read basic financial reports - Balance sheet, Income statement, shareholder's equity, cash flow
(v) Tightly manage cash flow and liquidity - the firm needs to survive today to reach lofty goals in the future
(vi) Ratios - to monitor Liquidity, Turnover, Effectiveness
(vii) How to optimize ROIC - WACC spread
(viii) Tools to manage financial health of firms - capex, FCF, CCC, operating leverage
(ix) Finance tools to evaluate a project's worth - DCF, NPV, IRR, Hurdle Rate
NPV is the main tool
IRR is the discount rate that yields NPV of zero
(x) Capital markets - stock and bond valuations, market cap
(xi) Capital budgeting & structure - FFS and project differentiation methods
(xii) Forecast finances with models
- under promise and over deliver
(xiii) Good financial management must fit into corporate strategy
- adopt a smart, realistic, fast way to secure a business's long term edge over competition
- place right people in right jobs
- relentlessly pursue doing things in a better way
(xiv) Financial manager's job is
- to identify lucrative projects based on rigorous analysis
- finance the project with right mix of stocks, bonds, debt, equity
- allocate excess cash based on competitive positioning, tax benefits, shareholder expectations
(xv) Inventory turn over = cash value of goods & services sold/cash value of inventory
III. Questions about financial management I would like to explore
(i) The differences between DCF and NPV and IRR when applied to real world projects
(ii) The concept of operating leverage and how to utilize it for decision making
(iii) How financial numbers are linked to business strategy on a daily basis in firms
I feel I can confidently begin to make my way around financial reports, texts and materials now.
two thumbs up !
Dr DP
Each week this elegantly designed course exposed me to new and exciting concepts in financial management. The lectures, readings, DQs, web-exes, made up a rich learning experience. This is easily one of the best courses I have ever taken.
I. Mastered concepts
None. "What we know is the size of the fist while what we don't know is the size of the world", said Avvaiyaar, an ancient Indian saint. I believe this is a great introduction, much like opening the door to a whole new world of finance. The elegantly designed course allows me to embrace financial figures and work my way gainfully forward in a business situation.
Basic finance questions to ask:
1. Does this project earn a positive NPV?
2. What is the desired hurdle rate?
3. What is the firm's current ratio and how has is the trend?
4. What is the firm's debt to equity ratio?
5. How robust is the firm's cash flow - can it withstand a stress test ?
5. If we invest in this project, what do we give up in terms of other opportunities, including repayment of debt to our lenders?
6. What do our FFS reports show for worst-case, status quo and best-case scenarios in the year ahead?
7. Will a bond issuance provide us more options than issuing shares at this time?
8. What is our cash conversion cycle at the moment?
9. How do we improve our days inventory outstanding?
10. Does it make sense to use debt to finance our next project or use our available cash?
11. Know when to abandon a project based on what the future holds, not on what happened in the past
- how much will carrying out the project cost and how much will it bring in ?
- what is the cost of abandoning it?
- use numerical models to control emotions eg. housing crisis
12. Never be afraid to Ask Why
II. Concepts I understand but want to learn more about
The entire course falls under this category.
(i) Linkage between Financial management and Corporate social responsibility - ethics before profits
(ii) Limitations of rational behavior - free markets are part of a fragile eco-system that can crash and need government intervention
(iii) Cost of Capital, US Treasury notes, Debt/Equity ratios - the foundations of capitalism
(iv) How to read basic financial reports - Balance sheet, Income statement, shareholder's equity, cash flow
(v) Tightly manage cash flow and liquidity - the firm needs to survive today to reach lofty goals in the future
(vi) Ratios - to monitor Liquidity, Turnover, Effectiveness
(vii) How to optimize ROIC - WACC spread
(viii) Tools to manage financial health of firms - capex, FCF, CCC, operating leverage
(ix) Finance tools to evaluate a project's worth - DCF, NPV, IRR, Hurdle Rate
NPV is the main tool
IRR is the discount rate that yields NPV of zero
(x) Capital markets - stock and bond valuations, market cap
(xi) Capital budgeting & structure - FFS and project differentiation methods
(xii) Forecast finances with models
- under promise and over deliver
(xiii) Good financial management must fit into corporate strategy
- adopt a smart, realistic, fast way to secure a business's long term edge over competition
- place right people in right jobs
- relentlessly pursue doing things in a better way
(xiv) Financial manager's job is
- to identify lucrative projects based on rigorous analysis
- finance the project with right mix of stocks, bonds, debt, equity
- allocate excess cash based on competitive positioning, tax benefits, shareholder expectations
(xv) Inventory turn over = cash value of goods & services sold/cash value of inventory
III. Questions about financial management I would like to explore
(i) The differences between DCF and NPV and IRR when applied to real world projects
(ii) The concept of operating leverage and how to utilize it for decision making
(iii) How financial numbers are linked to business strategy on a daily basis in firms
I feel I can confidently begin to make my way around financial reports, texts and materials now.
two thumbs up !
Dr DP
Sunday, March 10, 2013
Capital budgeting & structure, FFS & project differentiation methods
JWI 530 Financial Management I, week 9 summary, 3/10/13
Fundamentals of capital budgeting process and ways to achieve target capital structure with right Debt/Equity mix made this a very interesting week. FFS method for financial bounding of best/nominal/worst case scenarios equips me with a powerful framework to forecast and lead a firm. Identification of parameters with which projects can be distinguished adds to my tool set.
excellent week...insightful discussions...takeaways below
Dr DP
I. Financial planning methodology.
**********************************
- move away from setting targets arbitrarily based primarily on past data and colored by inward-looking views of some executives.
Instead, the firm's growth and incentive compensation targets should be based on a rigorous analysis of external marketplace dynamics,
anticipated moves of competitors and an accurate forecast of the future.
- adopt the Forecasted Financial Statements (FFS) methodology
to project a complete set of financial statements and bound the financial metrics by envisioning future scenarios:
a bedrock case (conservative), a nominal case (attainable), an optimistic case (rosy) and a pessimistic case (worst case).
The FFS method will be critical to optimize operations with which the firm's intrinsic value and the stock price can be steadily improved.
- have a never-ending focus on the linkages between corporate strategy, business planning and financial forecasting
to continually elevate the game and drive the firm to higher and higher performance.
- improve the firm's productivity and employee morale with these changes
B. There are several factors that need to be taken into account in making a choice between two projects
********************************************************************************************************
(1) Potential for financial returns - this is just one of the important factors but in my opinion it should not be the first consideration.
(2) Strategic fit & Industry situation- First and foremost, the manager should ask if it makes strategic sense for the firm to engage in either of the projects (Welch, 2005). The more strategic a project the more attractive it is for the firm's future. For example, IBM realized that its PC business which was getting commoditized in the marketplace was no longer strategically important and decided to sell the PC business unit though it was at times profitable (http://news.cnet.com/ibm-sells-pc-group-to-lenovo/2100-1042_3-5482284.html).
(3) Debt/Equity financing mix - the more leveraged a project is, the more risk it could pose for the firm. Understanding the D/E financing mix for the projects would help to weed out the weaker project (http://educ.jmu.edu/~drakepp/principles/module6/capbudtech.pdf)
(4) Uncertainty of cash flows - all financial models such as NPV are based on assumptions about cash flows. The impact of uncertainty in cash flows needs to be assessed carefully for the projects. If one project carries higher uncertainty, it would become possibly less attractive (http://educ.jmu.edu/~drakepp/principles/module6/capbudtech.pdf)
(5) Payback period (Ehrhardt & Brigham, 2009) ie liquidity of investment - the time it takes to get back the investment is an important metric to consider. If one project takes much longer to payback, uncertainty associated with it will increase and thereby make it less attractive.
(6) Ethical considerations - if one project makes money by not following environmental standards (eg. one dairy farm could use rGBH growth harmone to increase milk production while another would not) then it should be de-prioritized.
(7) Competitive advantage
(8) IP
C. Manage the capital structure
************************************
Achieve target structure for Debt and Equity taking tax benefits into account
D. Capital budgeting process
**********************************
Use capital judiciously to replace, expand, invest, comply
Fundamentals of capital budgeting process and ways to achieve target capital structure with right Debt/Equity mix made this a very interesting week. FFS method for financial bounding of best/nominal/worst case scenarios equips me with a powerful framework to forecast and lead a firm. Identification of parameters with which projects can be distinguished adds to my tool set.
excellent week...insightful discussions...takeaways below
Dr DP
I. Financial planning methodology.
**********************************
- move away from setting targets arbitrarily based primarily on past data and colored by inward-looking views of some executives.
Instead, the firm's growth and incentive compensation targets should be based on a rigorous analysis of external marketplace dynamics,
anticipated moves of competitors and an accurate forecast of the future.
- adopt the Forecasted Financial Statements (FFS) methodology
to project a complete set of financial statements and bound the financial metrics by envisioning future scenarios:
a bedrock case (conservative), a nominal case (attainable), an optimistic case (rosy) and a pessimistic case (worst case).
The FFS method will be critical to optimize operations with which the firm's intrinsic value and the stock price can be steadily improved.
- have a never-ending focus on the linkages between corporate strategy, business planning and financial forecasting
to continually elevate the game and drive the firm to higher and higher performance.
- improve the firm's productivity and employee morale with these changes
B. There are several factors that need to be taken into account in making a choice between two projects
********************************************************************************************************
(1) Potential for financial returns - this is just one of the important factors but in my opinion it should not be the first consideration.
(2) Strategic fit & Industry situation- First and foremost, the manager should ask if it makes strategic sense for the firm to engage in either of the projects (Welch, 2005). The more strategic a project the more attractive it is for the firm's future. For example, IBM realized that its PC business which was getting commoditized in the marketplace was no longer strategically important and decided to sell the PC business unit though it was at times profitable (http://news.cnet.com/ibm-sells-pc-group-to-lenovo/2100-1042_3-5482284.html).
(3) Debt/Equity financing mix - the more leveraged a project is, the more risk it could pose for the firm. Understanding the D/E financing mix for the projects would help to weed out the weaker project (http://educ.jmu.edu/~drakepp/principles/module6/capbudtech.pdf)
(4) Uncertainty of cash flows - all financial models such as NPV are based on assumptions about cash flows. The impact of uncertainty in cash flows needs to be assessed carefully for the projects. If one project carries higher uncertainty, it would become possibly less attractive (http://educ.jmu.edu/~drakepp/principles/module6/capbudtech.pdf)
(5) Payback period (Ehrhardt & Brigham, 2009) ie liquidity of investment - the time it takes to get back the investment is an important metric to consider. If one project takes much longer to payback, uncertainty associated with it will increase and thereby make it less attractive.
(6) Ethical considerations - if one project makes money by not following environmental standards (eg. one dairy farm could use rGBH growth harmone to increase milk production while another would not) then it should be de-prioritized.
(7) Competitive advantage
(8) IP
C. Manage the capital structure
************************************
Achieve target structure for Debt and Equity taking tax benefits into account
D. Capital budgeting process
**********************************
Use capital judiciously to replace, expand, invest, comply
Supply Chain Management & Ethical Outsourcing
JWI 550 Operations Management week9 summary, 3/10/13
I enjoyed another fantastic week of learning in this class. I particularly value the ethical concerns that need to be taken into account. I understand Nike's stumble could have been avoided if they used Jack Welch's approach to outsourcing - which is to not view outsourcing as just a cost reduction play but as an opportunity to grow the intellect of the firm. It is clear to me that by respecting, valuing and tapping the intelligence of the team members of the outsource provider and driving end-to-end development of supply chain, higher and sustainable performance of supply chains can be achieved.
JWI 550 Operations Management Week9 Summary
A. Supply Chain Management principles (Heizer & Render, 2011)
**************************************************************
I. Competition is no longer between companies; it is between supply chains.
1. Supply chain management is of strategic importance
It is the management of activities related procurement of materials and services, transforming them into intermediate goods and final products, and delivering them through a distribution system.
2. Objective is to build a chain of suppliers that focuses on maximizing value to the ultimate customer.
3. Ethics within the supply chain critical for Sustainability (Institute for supply management has principles and standards for ethical conduct)
4. Supply chain economics
Make or Buy Decision : produce a component or service in house or buy it from an outside source
Outsourcing - transferring a firm's activities to external suppliers
5. 6 Supply chain strategies
Negoatiate with many suppliers and play one supplier against another
Develop long-term partnering relationships with a few suppliers
Vertical integration
Joint ventures
Develop Keiretsu networks (suppliers who become part of the company coalition)
On Demand virtual firm (develop a network of companies; rely on variety of supplier relationships to provide services on demand)
6. Manage the supply chain
Success requires mutual agreement on goals, mutual trust, compatible organizational cultures.
Complicaitons in developing integrated and efficient supply chains include: local optimization, incentives, large lots.
Bullwhip effect - fluctuation in orders or cancellations through the supply chain
Pull Data - accurate sales data that initiate transactions to pull product through the supply chain
Single state control of replenishment - fixing reponsibility for monitoring and managing inventory for the retailer
Vendor managed inventory
Collaborative planning, forecasting, replebishment (CPFR)
Blanket order
Postponement
Drop shipping - ship direct from suppler to customer
Passthru hub - ship from hubs
channel assembly - distribution channel to assemble product
7. save thru supply chain efficiency with e-procurement
phone, email, waste =>centralized online system
8. Supply chain operations are - Plan, Source, Make, Deliver, Return
B. Outsourcing as a supply chain strategy (Heixer & Render, 2011)
*******************************************
1. Outsourcing - procure from external sources services and products that are normally part of an organization
Backsourcing - return of business activity to the original firm
Offshoring - move a business process to a foreign country but retain control of it
Nearshoring - choose an outsourcing provider in the home country or a nearby country
2. Outsorucing Strategy
core competencies: unique skills, talents, capabilities, specialized knowledge, proprietary technology/information, unique production methods
Identify non-core activities and outsource them
3. Theory of comparative advantage
countries benefit from specializing in products and services in which they have relative advantage
and importing goods where they have a relative disadvantage
4. Outsourcing Risks
Making decisions without sufficient understanding, analysis and planning leads to 50% failure rate
- erratic power grids
- difficult local government officials
- inexperienced managers
- unmotivated employees
- drop in quality
- poor customer service
- political backlash from outsourcing to foreign countries
- change management
- logistics issues (insurance, customs, timing)
5. Advantages of outsourcing
********************************
Cost savings,
gaining outside experience,
improving operations and service,
focusing on core competencies,
gain outside technology,
image,
right-sizing the firm
6. Disadvantages of outsourcing
*********************************
Increase in transport costs
loss of control
create future competitors
negative impact on employees
degrade effects that show up in the longer term
7. Audits & Metrics to evaluate outsourcing performance
********************************************************
Outsourcing agreements must specify results and outcomes
Evaluation process must monitor factors that ensure satisfactory and continuing performance eg. Quality, customer satisfaction, delivery, cost, improvement
Outsourced relationship needs to be based on continuing communication, understanding, trust, performance
8. Ethical issues in outsourcing
**********************************
Outsourcing is unethical when it:
- violates religious holidays
- moves pollution from one country to another
- stresses cheap labor that leads to employee abuse
- violates basic human rights
- is used primarily for short term cost-reduction instead of building good long term partnerships
- results in loss of technology
C.Bullwhip effect in supply chains (Lee, Padmanabhan & Wang)
************************************************************
Exaggerated order swings in supply chains result despit rational decision making by members in supply chain
Distorted information from one end of a supply chain to other end can lead to tremendous inefficiencies:
excessive inventory, poor customer service, lost revenues, misguided capacity plans, ineffective transportation and missed production schedules.
Mitigation strategies: integrate new information systems, define org relationships, implement new measurement and incentive systems.
excessive inventory management
D. Aligning incentives in supply chains
****************************************
A supply chain stays tight only if every company on it has reasons to pull in the same direction.
To prevent misalignment:
- Conduct incentive audits when adopting new technologies or entering new markets
- Educate managers about supply chain partners and their constraints
- Get executives to examine case studies from other industries
E. Hitting the wall - Nike & International Labor practices
***********************************************************
To be ethical and fair, a firm must take into account Monetary and Non-monetary impact for employees at the outsourced location
Leadership in fairness can make perfect business sense - can avoid loss of revenues, damage to brand from activist-led changes forced on the firm
F. More notes on advantages, costs and risks of outsourcing
*************************************************
There are several advantages, costs and risks of outsourcing (JWI 530, Welch, video, week9; Heizer & Render, 2009). One must take into account the many considerations from a 360 degree view and arrive at a balanced and well informed decision.
Outsourcing should not be approached just as a cost reduction move but also as a way to increase the organization's intellect and gain new markets (Welch, video, WK9). Overestimating the true benefits and underestimating the hidden problems is a recipe for big trouble.
Advantages
(1) Gain new markets eg. IBM understood the outsourcing trend early on but saw it as an opportunity to gain new growth markets rather than just as a cost arbitrage scenario. IBM today employs more people from India than in any other country. By doing this IBM gained a strong presence in a growth market early on.
(2) Increase the organization's intellectual horse power - gain different perspectives from outside the firm and use them as a source of innovation for improving products, processes and services eg. IBM Microelectronics has a 24x7 data analysis team with half the team in the US and half in Bangalore, India. The pace of learning has doubled and faster yield ramps are being delivered.
(3) Lower cost eg. India based firms such as Infosys, TCS, WIPRO, Satyam Mahindra, promise to significantly lower the outsourced IT support cost for its worldwide clients and have been wildly successful with this business model.
(4) Improve operations and services eg. IBM Microelectronics partners with Global Foundries, an AMD spin-off, to outsource excess demand. IBM gains by getting increased capacity while Global Foundries gains by increased demand. It is a win-win situation.
(5) Focus on core competencies. By using the strengths of the outsourcing provider to the supply chain, a firm can free up its human, physical and financial resources to reallocate to its core competencies.
(6) Gain outside technology eg. IBM Services division helps businesses upgrade to state-of-art enterprise computing technology. Individual businesses cannot easily develop such capabilities on their own.
(7) Boost Brand Image. By associating with a credible firm, brand image of a firm can be enhanced.
(8) Right size the organization. Human Resource in bloated organizations that are not competitive can be trimmed to the right size by leveraging outsource options.
Costs
(1) Infrastructure may need to be built eg Power outages common in India and power generators are needed for smooth operations; IT infrastructure may need to be added to manage information flow
(2) Potentially increased transportation costs if the firm and the outsource provider are oceans and mountains apart
(3) Loss of control eg. Dell and HP which use the same contractor Quanta to produce their laptops may struggle for control over the supplier.
(4) Buffer stocks may be needed to to avoid disruptions in supply (JIT inventory may not work)
Risks
(1) Creates future competition eg. Intel outsourced chip production, a core competency, to AMD, which quickly capitalized on the opportunity to become a top competitor.
(2) Country's political stability of the system eg. China could make a move any day and so it is important to understand options
(3) Problems may develop over longer term though short term may look great like sunshine and peaches. CEOs with short term mind-set may have a bias that prevents them from seeing this fact eg. IT provider Satyam created bogus financial reports and firms that were close to Satyam did not want to see the truth that was in plain sight.
(4) Talent to enable supply chain to operate thousands of miles away
(5) Quality assurance becomes difficult with loss of control over parts of supply chain
(6) Training the team from a distance may not be easy or sustainable
(7) Loss of employee morale, productivity and loyalty eg. seeing a friend getting laid off can do permanent damage to employee trust
(8) Ethical violations eg. lower standards in environment, labor and human rights in foreign countries could do great damage to indigenous cultures and create a backlash. Foxconn, a Chinese firm which provides parts for Apple's products, drives its employees so hard that suicide rates are abnormally high.
Dr DP
I enjoyed another fantastic week of learning in this class. I particularly value the ethical concerns that need to be taken into account. I understand Nike's stumble could have been avoided if they used Jack Welch's approach to outsourcing - which is to not view outsourcing as just a cost reduction play but as an opportunity to grow the intellect of the firm. It is clear to me that by respecting, valuing and tapping the intelligence of the team members of the outsource provider and driving end-to-end development of supply chain, higher and sustainable performance of supply chains can be achieved.
JWI 550 Operations Management Week9 Summary
A. Supply Chain Management principles (Heizer & Render, 2011)
**************************************************************
I. Competition is no longer between companies; it is between supply chains.
1. Supply chain management is of strategic importance
It is the management of activities related procurement of materials and services, transforming them into intermediate goods and final products, and delivering them through a distribution system.
2. Objective is to build a chain of suppliers that focuses on maximizing value to the ultimate customer.
3. Ethics within the supply chain critical for Sustainability (Institute for supply management has principles and standards for ethical conduct)
4. Supply chain economics
Make or Buy Decision : produce a component or service in house or buy it from an outside source
Outsourcing - transferring a firm's activities to external suppliers
5. 6 Supply chain strategies
Negoatiate with many suppliers and play one supplier against another
Develop long-term partnering relationships with a few suppliers
Vertical integration
Joint ventures
Develop Keiretsu networks (suppliers who become part of the company coalition)
On Demand virtual firm (develop a network of companies; rely on variety of supplier relationships to provide services on demand)
6. Manage the supply chain
Success requires mutual agreement on goals, mutual trust, compatible organizational cultures.
Complicaitons in developing integrated and efficient supply chains include: local optimization, incentives, large lots.
Bullwhip effect - fluctuation in orders or cancellations through the supply chain
Pull Data - accurate sales data that initiate transactions to pull product through the supply chain
Single state control of replenishment - fixing reponsibility for monitoring and managing inventory for the retailer
Vendor managed inventory
Collaborative planning, forecasting, replebishment (CPFR)
Blanket order
Postponement
Drop shipping - ship direct from suppler to customer
Passthru hub - ship from hubs
channel assembly - distribution channel to assemble product
7. save thru supply chain efficiency with e-procurement
phone, email, waste =>centralized online system
8. Supply chain operations are - Plan, Source, Make, Deliver, Return
B. Outsourcing as a supply chain strategy (Heixer & Render, 2011)
*******************************************
1. Outsourcing - procure from external sources services and products that are normally part of an organization
Backsourcing - return of business activity to the original firm
Offshoring - move a business process to a foreign country but retain control of it
Nearshoring - choose an outsourcing provider in the home country or a nearby country
2. Outsorucing Strategy
core competencies: unique skills, talents, capabilities, specialized knowledge, proprietary technology/information, unique production methods
Identify non-core activities and outsource them
3. Theory of comparative advantage
countries benefit from specializing in products and services in which they have relative advantage
and importing goods where they have a relative disadvantage
4. Outsourcing Risks
Making decisions without sufficient understanding, analysis and planning leads to 50% failure rate
- erratic power grids
- difficult local government officials
- inexperienced managers
- unmotivated employees
- drop in quality
- poor customer service
- political backlash from outsourcing to foreign countries
- change management
- logistics issues (insurance, customs, timing)
5. Advantages of outsourcing
********************************
Cost savings,
gaining outside experience,
improving operations and service,
focusing on core competencies,
gain outside technology,
image,
right-sizing the firm
6. Disadvantages of outsourcing
*********************************
Increase in transport costs
loss of control
create future competitors
negative impact on employees
degrade effects that show up in the longer term
7. Audits & Metrics to evaluate outsourcing performance
********************************************************
Outsourcing agreements must specify results and outcomes
Evaluation process must monitor factors that ensure satisfactory and continuing performance eg. Quality, customer satisfaction, delivery, cost, improvement
Outsourced relationship needs to be based on continuing communication, understanding, trust, performance
8. Ethical issues in outsourcing
**********************************
Outsourcing is unethical when it:
- violates religious holidays
- moves pollution from one country to another
- stresses cheap labor that leads to employee abuse
- violates basic human rights
- is used primarily for short term cost-reduction instead of building good long term partnerships
- results in loss of technology
C.Bullwhip effect in supply chains (Lee, Padmanabhan & Wang)
************************************************************
Exaggerated order swings in supply chains result despit rational decision making by members in supply chain
Distorted information from one end of a supply chain to other end can lead to tremendous inefficiencies:
excessive inventory, poor customer service, lost revenues, misguided capacity plans, ineffective transportation and missed production schedules.
Mitigation strategies: integrate new information systems, define org relationships, implement new measurement and incentive systems.
excessive inventory management
D. Aligning incentives in supply chains
****************************************
A supply chain stays tight only if every company on it has reasons to pull in the same direction.
To prevent misalignment:
- Conduct incentive audits when adopting new technologies or entering new markets
- Educate managers about supply chain partners and their constraints
- Get executives to examine case studies from other industries
E. Hitting the wall - Nike & International Labor practices
***********************************************************
To be ethical and fair, a firm must take into account Monetary and Non-monetary impact for employees at the outsourced location
Leadership in fairness can make perfect business sense - can avoid loss of revenues, damage to brand from activist-led changes forced on the firm
F. More notes on advantages, costs and risks of outsourcing
*************************************************
There are several advantages, costs and risks of outsourcing (JWI 530, Welch, video, week9; Heizer & Render, 2009). One must take into account the many considerations from a 360 degree view and arrive at a balanced and well informed decision.
Outsourcing should not be approached just as a cost reduction move but also as a way to increase the organization's intellect and gain new markets (Welch, video, WK9). Overestimating the true benefits and underestimating the hidden problems is a recipe for big trouble.
Advantages
(1) Gain new markets eg. IBM understood the outsourcing trend early on but saw it as an opportunity to gain new growth markets rather than just as a cost arbitrage scenario. IBM today employs more people from India than in any other country. By doing this IBM gained a strong presence in a growth market early on.
(2) Increase the organization's intellectual horse power - gain different perspectives from outside the firm and use them as a source of innovation for improving products, processes and services eg. IBM Microelectronics has a 24x7 data analysis team with half the team in the US and half in Bangalore, India. The pace of learning has doubled and faster yield ramps are being delivered.
(3) Lower cost eg. India based firms such as Infosys, TCS, WIPRO, Satyam Mahindra, promise to significantly lower the outsourced IT support cost for its worldwide clients and have been wildly successful with this business model.
(4) Improve operations and services eg. IBM Microelectronics partners with Global Foundries, an AMD spin-off, to outsource excess demand. IBM gains by getting increased capacity while Global Foundries gains by increased demand. It is a win-win situation.
(5) Focus on core competencies. By using the strengths of the outsourcing provider to the supply chain, a firm can free up its human, physical and financial resources to reallocate to its core competencies.
(6) Gain outside technology eg. IBM Services division helps businesses upgrade to state-of-art enterprise computing technology. Individual businesses cannot easily develop such capabilities on their own.
(7) Boost Brand Image. By associating with a credible firm, brand image of a firm can be enhanced.
(8) Right size the organization. Human Resource in bloated organizations that are not competitive can be trimmed to the right size by leveraging outsource options.
Costs
(1) Infrastructure may need to be built eg Power outages common in India and power generators are needed for smooth operations; IT infrastructure may need to be added to manage information flow
(2) Potentially increased transportation costs if the firm and the outsource provider are oceans and mountains apart
(3) Loss of control eg. Dell and HP which use the same contractor Quanta to produce their laptops may struggle for control over the supplier.
(4) Buffer stocks may be needed to to avoid disruptions in supply (JIT inventory may not work)
Risks
(1) Creates future competition eg. Intel outsourced chip production, a core competency, to AMD, which quickly capitalized on the opportunity to become a top competitor.
(2) Country's political stability of the system eg. China could make a move any day and so it is important to understand options
(3) Problems may develop over longer term though short term may look great like sunshine and peaches. CEOs with short term mind-set may have a bias that prevents them from seeing this fact eg. IT provider Satyam created bogus financial reports and firms that were close to Satyam did not want to see the truth that was in plain sight.
(4) Talent to enable supply chain to operate thousands of miles away
(5) Quality assurance becomes difficult with loss of control over parts of supply chain
(6) Training the team from a distance may not be easy or sustainable
(7) Loss of employee morale, productivity and loyalty eg. seeing a friend getting laid off can do permanent damage to employee trust
(8) Ethical violations eg. lower standards in environment, labor and human rights in foreign countries could do great damage to indigenous cultures and create a backlash. Foxconn, a Chinese firm which provides parts for Apple's products, drives its employees so hard that suicide rates are abnormally high.
Dr DP
Saturday, March 2, 2013
Inventory Management - minimize but never run out
JWI 550 Operations Management, week8 summary, 3/2/13
It was a pleasure to read the LL Bean case and the UV case study on managing inventories. My spouse and I went to Maine as part of our honeymoon several years ago and stopped by the LL Bean store en route to Bar Harbor. To our pleasant surprise we discovered this store is open 24 hours a day 365 days a year. It was the first time we learned of a 24x7 operation and it came across as a paradigm shift. I bought the LL Bean biography book at this store and learned what it took to build this business. So reading more about LL Bean through the case brought pleasant memories.
While the LL Bean case made up think about inventory management questions, the UV case came in with a structured framework to tackle the uncertainty in demand. Together, learning from these two cases equips us with a powerful tool to make informed inventory management decisions.
this was yet another memorable week of learning.
Dr DP
JWI 550 Operations Management, week8 summary,3/2/13
I. L.L. Bean Case (Schleifer, 1992)
*************************************
Inventory management objectives are:
Marketing view - never run out of supplies; max out customer service
Finance view - minimize inventory
There is uncertainty in Demand
*************************************
(i) Customer behavior affects demand (unpredictable)
- runaway hit and demand (customers turned away)
- far exceed demand forecasts
- new trend begins
- dog item sells below expectations
- Customer demands specific items
will walk out if not there (understocking risk)
will cancel order over mail/phone
- Customer willing to substitute demand
Customer visiting a store - supply of different items generates demand
Leads to two types of risk: Cost of Lost sales vs Cost of wrong inventory
***************************
forecasting vs liquidating risk
tough to accurately match demand and supply
forecast errors - f (competition, weather, economy)
Key inventory strategy questions are
*************************************
What is the appropriate order quantity ?
Replenishment rate of items consumed ?
Order more than needed to get volume discount?
large lot size to lower cost ?
raw materials
Smaller lot size - shorter lead time, better customer service
time to change-over from production of one product to another - reduce lead time
II. Managing Inventories: Fundamentals (UV Case, 2009)
******************************************************
(i) Inventory types by function are:
Pipeline, Cycle lot size, Buffer, Anticipation, Speculation
1. Cycle stock inventories: to allow batching of purchased or manufactured goods
It is the average inventory carried between reordering cycles
Key decision: Lot size vs forecast usage units per week
2. Pipeline inventories: to provide for transit of inventory
It is the inventory moving from one point to another
Key decision: minimize transit times eg. flight shipment instead of ground transport
3. Safety stock inventories: to protect against uncertainties in supply or demand
4. Seasonal inventories: to smooth a mismatch between demand and supply
Build seasonal inventory in anticipation of large demands in specific months
Alter production workforce during year to match seasonal low to high swings in demand
f(seasonal demands, promos, plant vacations, planned shut downs)
5. Speculation inventories: to deal with special buying circumstances
(ii) Right inventory choice involves costs and tradeoffs among various factors
Use ABC inventory classification by value of product to firm and the 80/20 Pareto principle
Manage A items more closely than other classes
Inventory choices must provide economic benefits significantly greater than carrying costs:
capital costs - interest tied up in inventory
possession costs - insurance, property taxes, spoilage, deterioration, pilferage, warehouse labor and info record keeping
facility costs - property taxes, insurance, rental fees, maintenance, equipment and labor
It was a pleasure to read the LL Bean case and the UV case study on managing inventories. My spouse and I went to Maine as part of our honeymoon several years ago and stopped by the LL Bean store en route to Bar Harbor. To our pleasant surprise we discovered this store is open 24 hours a day 365 days a year. It was the first time we learned of a 24x7 operation and it came across as a paradigm shift. I bought the LL Bean biography book at this store and learned what it took to build this business. So reading more about LL Bean through the case brought pleasant memories.
While the LL Bean case made up think about inventory management questions, the UV case came in with a structured framework to tackle the uncertainty in demand. Together, learning from these two cases equips us with a powerful tool to make informed inventory management decisions.
this was yet another memorable week of learning.
Dr DP
JWI 550 Operations Management, week8 summary,3/2/13
I. L.L. Bean Case (Schleifer, 1992)
*************************************
Inventory management objectives are:
Marketing view - never run out of supplies; max out customer service
Finance view - minimize inventory
There is uncertainty in Demand
*************************************
(i) Customer behavior affects demand (unpredictable)
- runaway hit and demand (customers turned away)
- far exceed demand forecasts
- new trend begins
- dog item sells below expectations
- Customer demands specific items
will walk out if not there (understocking risk)
will cancel order over mail/phone
- Customer willing to substitute demand
Customer visiting a store - supply of different items generates demand
Leads to two types of risk: Cost of Lost sales vs Cost of wrong inventory
***************************
forecasting vs liquidating risk
tough to accurately match demand and supply
forecast errors - f (competition, weather, economy)
Key inventory strategy questions are
*************************************
What is the appropriate order quantity ?
Replenishment rate of items consumed ?
Order more than needed to get volume discount?
large lot size to lower cost ?
raw materials
Smaller lot size - shorter lead time, better customer service
time to change-over from production of one product to another - reduce lead time
II. Managing Inventories: Fundamentals (UV Case, 2009)
******************************************************
(i) Inventory types by function are:
Pipeline, Cycle lot size, Buffer, Anticipation, Speculation
1. Cycle stock inventories: to allow batching of purchased or manufactured goods
It is the average inventory carried between reordering cycles
Key decision: Lot size vs forecast usage units per week
2. Pipeline inventories: to provide for transit of inventory
It is the inventory moving from one point to another
Key decision: minimize transit times eg. flight shipment instead of ground transport
3. Safety stock inventories: to protect against uncertainties in supply or demand
4. Seasonal inventories: to smooth a mismatch between demand and supply
Build seasonal inventory in anticipation of large demands in specific months
Alter production workforce during year to match seasonal low to high swings in demand
f(seasonal demands, promos, plant vacations, planned shut downs)
5. Speculation inventories: to deal with special buying circumstances
(ii) Right inventory choice involves costs and tradeoffs among various factors
Use ABC inventory classification by value of product to firm and the 80/20 Pareto principle
Manage A items more closely than other classes
Inventory choices must provide economic benefits significantly greater than carrying costs:
capital costs - interest tied up in inventory
possession costs - insurance, property taxes, spoilage, deterioration, pilferage, warehouse labor and info record keeping
facility costs - property taxes, insurance, rental fees, maintenance, equipment and labor
Capital Markets, Stock & Bond Valuations, Market Cap
JWI 530 Financial Management I, week8 summary, 3/2/13
This week's lecture equipped us with valuable concepts such as capital markets, valuation of stock and bond, and market capitalization. The DQ made us think about best ways to raise capital for a firm - using equity or debt options - in the context of the broader economy.
fascinating takeaways
Dr DP
I. World's wealth ~ $200 trillion
- freely traded global capital markets
- bank deposits
- real estate value
II. Capital Markets
- home to world's wealth ; Massive warehouse of capital
- Forum for exchange of securities - stocks (equity) & bonds(debt) - of constantly changing value
- living, breathing organisms that provide opportunity and information
- beware, this is not a friendly entity: financial opportunities are created and destroyed
effective tools in right hands, WMD in wrong ones
- Offer govts, businesses and institutions the opportunity to raise capital.
- participants enter at their own peril; ignorance and weakness will be taken advantage of by others
- monitored and regulated by govt agencies to ensure fairness eg SEC, FINRA, FSA
- feedback mechanism to firms direction from outside perspective
- determine the business's cost of capital
- provides a window into status of competitors, customers, suppliers
- offer opportunities for a firm to invest excess capital and execute strategic acquisitons, mergers, sales
III. Bond Market vs Stock Market
Stocks (Equity)
- partial ownership in a firm
- entitlement for future dividends
- stock market is a physical or electronic space where buyers and sellers can exchange shares
- prices on electronic display eg NYSE
- specialists help in price-discovery process and complete transactions
- information is clear
- broad set of players; gets a lot of attention and dominates discussion
- $41 trillion
Bonds (Debt)
- obligation to pay interest over a fixed schedule in exchange of loan
- Information is Opaque as prices not generally available for public view;
trading prices to institutions dealing in trades of $1M or more published in investor info sources eg. Bloomberg
- mostly traded over the counter
- $83 trillion; dwarfs stock market; small changes in bonds cause big waves in stocks
- dictates flow of capital throughout the world
IV. Value
Intrinsic value (Fundamental value)
Perceived value (Market value)
Understand the difference to make informed decisions
Dislocation between Market Value vs Intrinsic value
Market value - physical cost of buying shares of a stock or purchase of a bond = f(what buyers ask to pay for security, what sellers are willing to sell for)
Intrinsic value - what the security is worth
Sometimes markets can be wildy off and market value can be misaligned from intrinsic value
When that happens there is a "dislocation" - an opportunity is born; exploit them
Best investors spot the dislocations effectively than other market players
They buy or sell the security before the market catches up with them
"Value is what you get. Price is what you pay", Warren Buffet
Bond Valuation
Bonds yield interest at fixed schedules into the future
Value of a bond = value of a series of payments into the future
Value of a bond is determined by the present value of the remaining payments the bond must make to the owner
Discount rate = f(prevailing interest rates & other factors)
Bond Price
Bond price = f(duration until maturity, govt interest-rate, ability of firm to meet obligation to shareholders)
Bond yield = what the investor gets paid
Stock valuation: capture fair value of one share of a company' stock
- an art and a science
- abstract
- attempt to quantify firm's survival ability and how much money it will create in the future
- valuation framework depends on context (company's industry, market, competitive position, other complex variables)
- Discounted Cash Flow (DCF) & NPV analysis: weapons of choice for valuing businesses
- Other techniques: Multiple valuations, Replacement value valuations, book value analysis
V. Market Capitalization
Share price * shares outstanding
- price to purchase entire equity stake of company
- measure of what the world thinks a company is worth
This week's lecture equipped us with valuable concepts such as capital markets, valuation of stock and bond, and market capitalization. The DQ made us think about best ways to raise capital for a firm - using equity or debt options - in the context of the broader economy.
fascinating takeaways
Dr DP
I. World's wealth ~ $200 trillion
- freely traded global capital markets
- bank deposits
- real estate value
II. Capital Markets
- home to world's wealth ; Massive warehouse of capital
- Forum for exchange of securities - stocks (equity) & bonds(debt) - of constantly changing value
- living, breathing organisms that provide opportunity and information
- beware, this is not a friendly entity: financial opportunities are created and destroyed
effective tools in right hands, WMD in wrong ones
- Offer govts, businesses and institutions the opportunity to raise capital.
- participants enter at their own peril; ignorance and weakness will be taken advantage of by others
- monitored and regulated by govt agencies to ensure fairness eg SEC, FINRA, FSA
- feedback mechanism to firms direction from outside perspective
- determine the business's cost of capital
- provides a window into status of competitors, customers, suppliers
- offer opportunities for a firm to invest excess capital and execute strategic acquisitons, mergers, sales
III. Bond Market vs Stock Market
Stocks (Equity)
- partial ownership in a firm
- entitlement for future dividends
- stock market is a physical or electronic space where buyers and sellers can exchange shares
- prices on electronic display eg NYSE
- specialists help in price-discovery process and complete transactions
- information is clear
- broad set of players; gets a lot of attention and dominates discussion
- $41 trillion
Bonds (Debt)
- obligation to pay interest over a fixed schedule in exchange of loan
- Information is Opaque as prices not generally available for public view;
trading prices to institutions dealing in trades of $1M or more published in investor info sources eg. Bloomberg
- mostly traded over the counter
- $83 trillion; dwarfs stock market; small changes in bonds cause big waves in stocks
- dictates flow of capital throughout the world
IV. Value
Intrinsic value (Fundamental value)
Perceived value (Market value)
Understand the difference to make informed decisions
Dislocation between Market Value vs Intrinsic value
Market value - physical cost of buying shares of a stock or purchase of a bond = f(what buyers ask to pay for security, what sellers are willing to sell for)
Intrinsic value - what the security is worth
Sometimes markets can be wildy off and market value can be misaligned from intrinsic value
When that happens there is a "dislocation" - an opportunity is born; exploit them
Best investors spot the dislocations effectively than other market players
They buy or sell the security before the market catches up with them
"Value is what you get. Price is what you pay", Warren Buffet
Bond Valuation
Bonds yield interest at fixed schedules into the future
Value of a bond = value of a series of payments into the future
Value of a bond is determined by the present value of the remaining payments the bond must make to the owner
Discount rate = f(prevailing interest rates & other factors)
Bond Price
Bond price = f(duration until maturity, govt interest-rate, ability of firm to meet obligation to shareholders)
Bond yield = what the investor gets paid
Stock valuation: capture fair value of one share of a company' stock
- an art and a science
- abstract
- attempt to quantify firm's survival ability and how much money it will create in the future
- valuation framework depends on context (company's industry, market, competitive position, other complex variables)
- Discounted Cash Flow (DCF) & NPV analysis: weapons of choice for valuing businesses
- Other techniques: Multiple valuations, Replacement value valuations, book value analysis
V. Market Capitalization
Share price * shares outstanding
- price to purchase entire equity stake of company
- measure of what the world thinks a company is worth
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