Daghriri, approaches that can be used to manage capacity

 

 

Daghriri, Talal
Final Essays Questions
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81) Discuss the
approaches that can be used to manage capacity to meet predictable variability
of demand.

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To
begin, firms and companies use a combination of the approaches to reduce the
cost of capacity required to meet predictable variability. The approaches are;

 

A-Time flexibility from workforce:

In
this approach, a firm uses flexible work hours by the workforce to vary
capacity with demand. In many instances, plants do not operate continuously and
are left idle during portions of the day or week. Therefore, spare plant
capacity exists in the form of hours when the plant is not operational. For
example, many plants do not run three shifts, so the existing workforce could work
overtime during peak periods to produce more to meet demand. The overtime is
varied to match the fluctuation in demand. In such settings, use of a part-time
workforce can further increase capacity flexibility by enabling the firm to put
more people to work during peak periods. This system allows production from the
plant to match demand from customers more closely.

 

B- Use of seasonal workforce:

In this approach, a firm uses a temporary workforce during
the peak season to increase capacity to match demand. The tourism industry
often uses seasonal workers. A base of full-time employees exists, and more are
hired only for the peak season. Toyota regularly uses a seasonal workforce in
Japan to match supply and demand better. This approach may be hard to sustain,
however, if the labor market is tight.

 

C- Use of subcontracting: In this approach,

In this approach, a firm subcontracts peak
production so internal production remains level and can be done cheaply. For
such an approach to work, the subcontractor must have flexible capacity and the
ability to lower cost by pooling the fluctuations in demand across different
manufacturers. Thus, the flexible subcontractor capacity must have both volume
(fluctuating demand from a manufacturer) as well as variety (demand from
several manufacturers) flexibility to be sustainable. For example, most power
companies do not have the capacity to supply their customers with all the
electricity demanded on peak days. They rely instead on being able to purchase
power from suppliers and subcontractors that have excess electricity. This
allows the power companies to maintain a level supply and, consequently, a
lower cost.

 

D-Use of
dual facilities–specialized and flexible:

 In this approach, a
firm build both dedicated and flexible facilities. Dedicated facilities produce
a relatively stable output of products over time in a very efficient manner.
Flexible facilities produce a widely varying volume and variety of products but
at a higher unit cost. Each dedicated facility could produce at a relatively
steady rate, with fluctuations being absorbed by the flexible facility.

 

 

 

E-Designing
product flexibility into the production processes:

In this approach, a firm has flexible production lines
whose production rate can easily be varied. Production is then changed to match
demand. Hino Trucks in Japan has several production lines for different product
families in the same plant. The production lines are designed so that changing
the number of workers on a line can vary the production rate. As long as
variation of demand across different product lines is complementary. For example,
when one goes up, the other tends to go down), the capacity on each line can be
varied by moving the workforce from one line to another. Of course, this
requires that the workforce be multi skilled and able to adapt easily to being
moved from line to line. Production flexibility can also be achieved if the
production machinery is flexible and can be changed easily from producing one
product to producing another. This approach is effective only if the overall
demand across all the products is relatively stable. Several firms that produce
products with seasonal demand try to exploit this approach by carrying a
portfolio of products that have peak demand seasons distributed over the year.
A classic example is that of a lawn mower manufacturer that also manufactures
snow blowers to maintain a steady demand on its factory throughout the year.

 

 

82) Explain the basic
strategies that an aggregate planner has available to balance the various costs
and meet demand.

In the beginning, there are essentially three
distinct aggregate planning strategies for achieving balance among the costs.
These strategies involve trade-offs between capital investments, workforce
size, work hours, inventory, and backlogs/lost sales. Most strategies that a
planner actually uses are a combination of these three and are referred to as mixed
strategies. The three strategies are as follows:

1.  
Chase strategy—using capacity as the
lever:

 With
this strategy, the production rate is synchronized with the demand rate by
varying machine capacity or hiring and laying off employees as the demand rate
varies. In practice, achieving this synchronization can be very problematic
because of the difficulty in varying capacity and workforce on short notice.
This strategy can be expensive to implement if the cost of varying machine or
labor capacity over time is high. It can also have a significant negative
impact on the morale of the workforce. The chase strategy results in low levels
of inventory in the supply chain and high levels of change in capacity and
workforce. It should be used when the cost of carrying inventory is very
expensive and costs to change levels of machine and labor capacity are low.

 

2.  
Time flexibility strategy—using
utilization as the lever:

 This strategy may be
used if there is excess machine capacity. For example, if machines are not used
twenty-four hours a day, seven days a week). In this case, the workforce
(capacity) is kept stable but the number of hours worked is varied over time in
an effort to synchronize production with demand. A planner can use variable
amounts of overtime or a flexible schedule to achieve this synchronization.
Although this strategy does require that the workforce be flexible, it avoids
some of the problems associated with the chase strategy, most notably changing
the size of the workforce. This strategy results in low levels of inventory but
with lower average utilization. It should be used when inventory carrying costs
are relatively high and machine capacity is relatively inexpensive.

 

 

3.  
Level strategy—using
inventory as the lever:

 With this strategy, a
stable machine capacity and workforce are maintained with a constant output
rate. Shortages and surpluses result in inventory levels fluctuating over time.
Here production is not synchronized with demand. Either inventories are built
up in anticipation of future demand or backlogs are carried over from high- to
low-demand periods. Employees benefit from stable working conditions. A
drawback associated with this strategy is that large inventories may accumulate
and customer orders may be delayed. This strategy keeps capacity and costs of
changing capacity relatively low. It should be used when inventory carrying and
backlog costs are relatively low.

 

 

83)What is the impact
of lack of coordination on the performance of the supply chain?

  A lack
of coordination occurs either because different stages of the supply chain have
objectives that conflict or because information moving between stages gets
delayed and distorted. The different stages of a supply chain may have
objectives that conflict if each stage has a different owner. So, everyone may
just think about his stage and his profit. So, each stage tries to maximize its
own profits, resulting in actions that often diminish and reduce the total
supply chain profits. Information is distorted as it moves within the supply
chain because complete information is not shared between stages. This
distortion is exaggerated by the fact that supply chains today produce a large
amount of product variety. The lack of supply chain coordination leads to increased inventories, poorer
product availability, poorer quality and a drop-in profit. For example, Ford
Motor Company has several thousand suppliers, and those suppliers have suppliers.
With each state focused on its own objective, information often gets distorted
as it moves across these stages, which is enhanced by the vast amount of supply
chains producing so many products. When a company, like Ford, makes one model
with different added options, it increases the likelihood of incomplete or
false information to be distributed to its suppliers. This is what’s causing
the biggest challenge today: for supply chains to get full coordination and
information as both ownership and products continue to increase. One
consequence due to this lack of efficiency is the bullwhip effect. This is when
fluctuations in orders increase as they move up the supply chain from retailers
to wholesalers to manufacturers to suppliers. This misrepresents what demand
looks like at each state and therefore it appears there is a difference in
demand at each stage.

Therefore, the lack of coordination on the performance results in;

Manufacturing
cost: manufacturing costs increase as misinformation is
spread along the supply chain. Due to the bullwhip effect, P and its
suppliers must ready more orders than what is actually demanded.

 

Inventory
cost: inventory costs also increase as P carries a more
inventory than it has to. Consequently, inventory costs increase in the supply chain. The
extra inventory requires more warehousing space and so warehousing costs end up
rising.

 

-Replenishment
Lead Time: replenishment lead times rise as well. The bullwhip effect
makes scheduling with suppliers much more hectic and therefore costly. At
times, the inventory cannot supply the orders that are coming in.

 

-Transportation
cost: Transportation happens more frequently as orders are being
filled at various times while the supply chains lack coordination to determine
a set schedule for transport and delivery.

 

-As a result of the bullwhip effect, transportation
requirements change drastically at any given time. Extra transportation
capacity needs to be maintained to cover high-demand periods, which ultimately raises
transportation costs.

 

-Labor
cost for shipping and receiving: Labor costs
increase due to the amount of fluctuation which results in varying labor
requirements.

 

 

-The
level of product availability: 

Lack of coordination negatively
affects the amount of product availability. This in turn increases the
likelihood that retailers will run out of stock, which means they’ll lose
money.

 

 

 

 

 

84) Discuss the role
of cycle inventory in the supply chain.

The primary role of cycle inventory is to allow
different stages in the supply chain to purchase product in lot sizes that
minimize the sum of the material, ordering, and holding cost. If a manager were
considering the holding cost alone, he or she would reduce the lot size and
cycle inventory. Economies of scale in purchasing and ordering, however,
motivate a manager to increase the lot size and cycle inventory. A manager must
make the trade-off that minimizes the total cost when making the lot sizing decision.
Ideally, cycle inventory decisions should be made considering the total cost
across the entire supply chain. In practice, however, each stage often makes
its cycle inventory decisions independently. Actually, this practice increases
the level of cycle inventory as well as the total cost in the supply chain.

Any
stage of the supply chain exploits economies of scale in its replenishment
decisions in the following three typical situations:

 

1. A fixed
cost is incurred each time an order is placed or produced.

2. The supplier offers
price discounts based on the quantity purchased per lot.

3. The supplier offers
short-term discounts or holds trade promotions.

 

In
addition, Cycle inventory exists in a supply chain because different stages
exploit economies of scale to lower total cost. The costs considered include
material cost, fixed ordering cost, and holding cost. The supply chain
operation phase operates on a weekly or daily time horizon and deals with
decisions concerning individual customer orders.

 

 

 

 

 

 

 

 

85) Describe the two
types of ordering policies and the impact each has on safety inventory.

A replenishment policy consists of decisions
regarding when to reorder and how much to reorder. These decisions determine
the cycle and safety inventories along with the fr and the CSL. There
are several forms that replenishment policies may take. We restrict attention
to two instances:

1. Continuous review: Inventory is
continuously tracked and an order for a lot size Q is placed when the
inventory declines to the reorder point (ROP). The time between orders may
fluctuate given variable demand. When using a continuous review policy, a
manager has to account only for the uncertainty of demand during the lead time
(L). For example, consider the store manager at B&M who continuously tracks
the inventory of phones. She orders 600 phones when the inventory drops below
ROP = 400. In this case, the size of the order does not change from one order
to the next. The time between orders may fluctuate, given variable demand.

2. Periodic review: Inventory status is
checked at regular periodic intervals, and an order is placed to raise the
inventory level to a specified threshold. For example, consider the purchase of
flash drives at B&M. The store manager does not track flash drive inventory
continuously. Every Thursday, employees check flash drive inventory, and the
manager orders enough so that the total of the available inventory and the size
of the order equals 1,000 flash drives. In this case, the time between orders
is fixed. The size of each order, however, can fluctuate given variable demand.
These inventory policies are not comprehensive, but they suffice to illustrate
the key managerial issues concerning safety inventories.

 

87) What trade-offs do
managers need to consider when making transportation decisions?

The cost of coordinating operations is
generally hard to quantify. Shippers should evaluate different transportation
options in terms of various costs as well as revenues and then rank them
according to coordination complexity. A manager can then make the appropriate
transportation decision. Managers must consider the following trade-offs when
making transportation decisions:

•  Transportation
and inventory cost trade-off.

•  Transportation
cost and customer responsiveness trade-off.

 

The trade-off between transportation and
inventory costs is significant when designing a supply chain network. Two
fundamental supply chain decisions involving this trade-off are:

•  Choice
of transportation mode

•  Inventory
aggregation

 

So, managers have to
consider inventory costs when choosing transportation. Transportation options that
require higher costs can be justified as long as they end up with considerably
less inventories. Firms can drastically cut the safety inventory they need by
physically aggregating inventories in one spot but this results in an increase
of transportation costs.

 

The transportation cost a
supply chain incurs is coupled with the degree of responsiveness between supply
chains. If a firm has high responsiveness and grants that all orders be shipped
within one day of their placement, transportation will be happening more and
more frequently to fulfill that promise and so, transportation costs will
increase. If they go the other direction and decrease responsiveness, they can take
more time to aggregate orders, which will result in a lower transportation
cost.

 

 

 

88) What are some of
the benefits of effective sourcing decisions?

Effective sourcing processes within a firm or
company can improve the profits for the firm and total supply chain surplus in
a variety of ways. It is important that the drivers of improved profits be
clearly identified when making sourcing decisions. In addition, there are Some
of the benefits from effective sourcing decisions are the following:

A-
Identifying the right source can result in an activity performed at high
quality and lower cost.

B- Better economies of scale can be achieved if
orders within a firm are aggregated.

C- More efficient procurement transactions can
significantly reduce the overall cost of purchasing. This is most important for
items where a large number of low-value transactions occur.

D- Design collaboration can result in products
that are easier to manufacture and distribute, resulting in lower overall
costs. This factor is most important for supplier products that contribute a
significant amount to product cost and value.

E- Good procurement processes can facilitate
coordination with the supplier and improve forecasting and planning. Better
coordination lowers inventories and improves the matching of supply and demand.

F- Appropriate supplier contracts can allow for
the sharing of risk, resulting in higher profits for both the supplier and the
buyer.

G- Firms can achieve a lower purchase price by
increasing competition through the use of auctions.

 

 

 

 

89) Explain how
revenue management is beneficial.

To begin, revenue management adjusts and
control the pricing and available supply of assets to increase and maximize the
profits. Revenue management has a significant impact on supply chain
profitability when one or more of the following four conditions exist:

1. The value of the
product varies in different market segments.

2. The product is highly perishable,
or product wastage occurs.

3. Demand
has seasonal and other peaks.

4. The
product is sold both in bulk and the spot market.

 

One powerful tool for every asset owner is revenue management. Owners can
use revenue management during seasonal demands or if buyers are willing to pay
extra at different points in time. Revenue management can be effective a
segment is willing to pay to use a capacity at the last minute, and if there is
another segment that wants a lower price commits ahead of time. Revenue
management is also crucial when perishable inventory is a factor. For example,
airline seats have a variable value by market segment. A business traveler might
pay more for a flight that best fits their schedule. A leisure traveler will most
likely change their schedule in order to pay less. Revenue Management in a supply
chain will attain more money from the business traveler than the leisure
traveler. As a result, they will always make more money than an airline which
charges the same price. Comparable strategies can be used in car rentals and
hotel rooms because of the differences between leisure and business travelers.

                                                                                                 

 

 

90) Discuss the
factors driving an increased focus on sustainability.

The factors can be divided into three distinct
categories as the following,

 

1. Reducing
risk and improving the financial performance of the supply chain.

2. Attracting
customers that value sustainability.

3. Community pressure and
governments mandates, and making the world more sustainable.

 

Furthermore, the biggest achievement occurs with a focus on sustainability.
This decreases the risk for a supply chain and increases finances. When driven
by customer demand or the desire to make the world more sustainable, costs increase,
and the companies lose money. It is interesting to note that there is
significant opportunity even if supply chains only focus on the areas that
reduce risk and improve financial performance. Customers to this point have not
been willing to pay extra for sustainable products even though many customers
are environmentally sensitive. As such, macro policies may be one of the best
options for improving the sustainability of all supply chains.

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