Chapter 1 Introduction to Operations Management
TAYUR2011-MBA
• • • • • • • • •
Chapter 1 : Introduction to Operations
Course Design Syllabus walk-through, homework, exam and grades 7 elementary concepts Operations Management: Getting Acquainted Three views of Operations Management Wisdom of the ages Sustainability and Operations: A Framework Deep Dive: Private Equity plus Lean Operations Discussion: Lean Operations, Just-in-Time, Supply Chain Strategy for Turbulent Times, Service Operations
© 2005 SmartOps Corporation. All rights reserved
2
Welcome to Operations Management core class. You must have logged into BlackBoard already and found a variety of documents, arranged in separate folders. These slides are in a folder called Lecture Slides. There are ten of these chapters. At the end of each lecture, I will post additional “slides” based on what we discussed in a folder called After-class Slides. They will be also in pdf format, scanned from the handwritten pages. There are ten readings in the Readings folder that you need to provide a one-page summary for each (30%); two technical assignments (30%); and a final exam (40%). All dates are provided in duedates.doc file under Assignments folder along with the two technical assignments. In addition to these slides and readings, there are other documents in the folder Readings. The first one, Operations ManagementGetting Acquainted, is what we will cover for two lectures (the first week). The other document is Chapter Plans; this will give you a preview of what we plan to cover by chapter.
TAYUR2011-MBA
Course Design
• Chapter structure: Elementary Concepts, Deep Dive, Discussion, Perspective • Topic selection: Core Operations topics and contemporary issues such as private equity and sustainability • Source of material: In addition to usual business articles and technical (text book) content, actual industry implementation examples to show end-to-end process • No text book or HBS cases
© 2005 SmartOps Corporation. All rights reserved
3
As this is likely the very first time you are encountering "Operations", this course is set up to give you both the "basic MBA content that exists in all decent B-schools" as well as a distinctive perspective that is uniquely "Carnegie Mellon". We will do so by mingling contemporary topics with traditional ones, and layering each chapter by first discussing elemantary concepts, then doing a deep dive (the 10 readings), followed by general discussions and some advanced topics. Particularly important is that we will look at actual implementations at companies, such as GE, Caterpillar, Frito-Lay, Deere, ConAgraFoods, Celestica and so on, and view the world from the lens of a "stakeholder capitalist" (also called "a capitalist with a social conscience and a moral compass") who is working within a "mixed-economy" of a democracy, sometimes competing against "state-capitalism" in a global interdependent economy. There is no required text book, but if you do want to have a couple as references, I recommend Jan Van Mieghem's Operations Strategy, and Matching Supply with Demand, by Gerard Cachon and Christian Terseisch. As you will see, however, that they are "standard" academic texts, far removed from actual implementations and also stay clear of many of the real world issues.
TAYUR2011-MBA
• • • • • • • • • •
Syllabus
Chapter 1: Introduction to Operations Chapter 2: Designing a supply chain Chapter 3: Forecasting Chapter 4: Distribution and Retail Operations Chapter 5: Production Planning in Process Industries Chapter 6: Safety Stocks Chapter 7: Operating a global supply chain Chapter 8: Site Operations Chapter 9: Service Operations Chapter 10: Operations Strategy
© 2005 SmartOps Corporation. All rights reserved
4
We will cover topics from the "Operations Management-Getting Acquainted" document first, and then get into the meat of Chapter 1. The Lecture Plans document will give you a preview of what will discuss in each of these chapters.
TAYUR2011-MBA
7 Elementary Concepts
• Manufacturing vs. Retail/Distribution vs. Services • Manufacturing: Flexible factory, focussed factory, flow shop, job shop, vertical integration, out-sourced production • Manufacturing: Discrete vs. Continuous (‘process’), maketo-stock, finish-to-order, make-to-order, engineer-to-order • Services: After-market parts/support vs. logistics vs. service centers (including call centers, hospitals, banks) • Logistics/Transportation: Cars, Vans, Trucks, Trains, Planes, Ships • Manufacturing Verticals: Chemicals, Hi-Tech, Consumer Packaged Goods, Pharmaceuticals, Industrial Machinery, Clothing/Soft Goods, Medical Devices, Utilities • Companies: Large vs. Medium vs. Small; Division vs. Enterprise; Private vs. Public © 2005 SmartOps Corporation. All rights reserved
5
Now that we have spent a week getting acquainted with OM, let us learn to view our business world along these seven dimensions. Please categorize the company where you currently work, your past employment and your future dream employment. Let us also look at today's WSJ and read off 20 names of companies and see where they fall.
TAYUR2011-MBA
Economic Value of OM - 1
• Operations is where the rubber meets the road, and it is by actually performing operations, that economic value is created. Of course, to compete in a competitive market place one needs to be financed well, out-market the others, conduct proper accounting and attract (and retain) the best talent, out-strategize and out-execute, manage risk and so on. That is, the other functional areas are support functions to the main aspect of a business, which is creating products or services, in an efficient and profitable manner. • This is the execution view of Operations Management
© 2005 SmartOps Corporation. All rights reserved
6
TAYUR2011-MBA
Economic Value of OM - 2
• Operations Management is concerned with process and product innovations. In the former, higher quality versions of an existing product or services can be provided at a lower cost. In the second case, a new product or service may be introduced for the first time. To take advantage of heterogeneity in consumers, a variety of products and services may be offered by a firm differentiated by quality, availability and price. • This is the innovation view of Operations Management
© 2005 SmartOps Corporation. All rights reserved
7
TAYUR2011-MBA
Economic Value of OM - 3
• Operations Management is about organizing for success and being prepared to compete in a dynamic, uncertain, and imperfect market place. By selecting what to make (and what to outsource), by having an agile global foot print supported by enterprise information architecture, by selecting operating rules and parameters to support a segmented customer base, by thinking through different possible scenarios and consequences of the actions that we can take, a firm creates economic and social value in an ‘anticipate, sense and respond’ framework. • This is the game view of Operations Management
© 2005 SmartOps Corporation. All rights reserved
8
TAYUR2011-MBA
• • • •
Wisdom of the Ages
Management Engineering (now Management Consulting) Management Science Entrepreneurship Private Equity and Venture Capital
© 2005 SmartOps Corporation. All rights reserved
9
To understand how we got here, it is worthwhile to know some history.
TAYUR2011-MBA
Management Engineering
• Term coined by James O’ McKinsey, founder of McKinsey&Co., a small Chicago firm (at that time) • Marvin Bower (Harvard Law and HBS MBA, 1930) joins McKinsey in 1933; built the company that we know today • Bower hired MBAs directly from Business Schools • Positioned McKinsey&Co. as a post B-school program for aspiring entrepreneurs • Bruce Henderson (HBS, MBA 1941) establishes BCG
© 2005 SmartOps Corporation. All rights reserved
10
TAYUR2011-MBA
Management Science
Management Science should not aim at showing the Manager the ‘one right solution’. It must define the ‘right question,’ must help bring out the full range of alternative solutions. Management Science should aim at showing the Manager what to expect from a given course of action and at warning him when events fail to live up to expectations. It should supply him (ST add: also her) with the vision needed to make rational decisions in respect to the business enterprise. The aim of Management Science should be to arm the Manager’s imagination. Peter Drucker, 1955
© 2005 SmartOps Corporation. All rights reserved
11
TAYUR2011-MBA
Entrepreneurship
• ‘Jobs do no simply exist. They are created by alert, imaginative and resourceful men (ST add: and women) who discover or think that they have discovered opportunities to sell something at a profit. These opportunities are exploited by adventurous investors who are willing to risk heavy losses in order to make large gains. A community in which everyone attempted to make a living by getting on someone else’s payroll would be a community of the unemployed.’ • Sumner H. Slichter, first HBS professor to be made University Professor at Harvard, in the October 1945 issue of FORTUNE
© 2005 SmartOps Corporation. All rights reserved
12
This is basically summarizing what Joseph Schumpeter popularized: the driver of economic growth is entrepreneurial energy supported by capital. This is the Carnegie Mellon view of the world (and also the U. Chicago view), distinct from the view of Keynes.
TAYUR2011-MBA
Private Equity and Venture Capital
• “Without the financial wherewithal to make it happen, a great business idea is nothing” • In 1946, Georges F. Doroit (HBS Professor) helped found one of the nation’s first public VC firms, American Research & Development Corporation (ARD) • The VC industry, as we know today, is largely due to HBS alumni who graduated in the 1930s through 1950s • Example: DEC (1957 investment of $70,000) returned $350 Million in 1971
© 2005 SmartOps Corporation. All rights reserved
13
Can you name the top 3-5 VC and PE companies in the US today?
TAYUR2011-MBA
Typical Private Equity Structure
Private Equity Firm General Partner
P.E. Fund Limited Partnership
Institutional Investors Capital Calls (as needed) Individual Investors
Prior Owner Mgmt Team
Company A
Company B
Company C
Š 2005 SmartOps Corporation. All rights reserved
Let us see how a PE firm (a financial service firm) works. Note that the portfolio company of a PE firm can be a manufacturing firm, or a logistics firm or a service firm.
TAYUR2011-MBA
Private Equity Operations: CCG
• 2000-1: Fund focus, prospectus, raising capital, creating the Board • 2001-3: Building pipeline of prospects, building relationships with regional economic development organizations, building connections in Harrisburg • 2001-4: Deal due-diligence, LOI, final negotiations, capital structure (for each deal) • 2005-9: Lean Operations (waste reduction, quality, facility layout, streamline material flow, capacity expansion, capacity flexibility, workforce training, measurement and incentives) plus Business Development (website, collateral, strategic relationships, sales execution) • 2007-2010: Investment Banker hired, diligence and qualification of prospective buyers, get sealed bids, negotiate with top bid (while keeping next two warm), close deal, keep some money in escrow • 2008-2010: Distribute cash to investors
© 2005 SmartOps Corporation. All rights reserved
15
Let us do a deep dive by looking at a company that was struggling in the auto industry (due to industry decline and Chinese competitors) and was repurposed into a growing (and very profitable) supplier in the energy industry (that can also supply to the mining/ construction industry) by a PE firm founded by our alums, on a Ops major and the other a Finance major. The key is here is to pay down debt by freeing up cash through lean operations, while growing the business. Buy low, create value through lean ops and business growth, sell high. Welcome to stakeholder capitalism 101 in a mixed economy. Note that all stakeholders (employess, previous owner, Management Team, investors, local society) are better off here, and also it is worth appreciating the importance of tax-break (by the Government) for energy industry.
Wind Energy
Š 2005 SmartOps Corporation. All rights reserved
16
TAYUR2010-MBA
Š 2005 SmartOps Corporation. All rights reserved
17
TAYUR2010-MBA
2002
2003
2004
2005
2006
2007
REVENUE*
7.5
10.0
14.0
16.6
17.7
31.2
EBITDA*
6%
3.4%
6.9%
6.8%
8.9%
15.0%
EBITDA GROWTH Scrap %*
---
0.8
2.1
2.5
3.5
10.4
6.8%
5.0%
5.2%
5.6%
4.8%
3.1%
Mktg. Plan Wind – Cert.
ACQUIRED
OPS Plan
2002
2003
Wind – Explosion
Scrap Reduction
CDP #1
© 2005 SmartOps Corporation. All rights reserved * Changed for Confidentiality Purposes
Wind – Rebirth
2004
Lean
Purchasing
CDP #2
Waste Stream
2005
2006
2007
EXIT
2008
18
CDP stands for capital deployment plan. This slide summarizes 7 years on to one page!
TAYUR2011-MBA
Divestiture Summary
Revenue Growth: EBITDA Growth: Investment: IRR: CCG Fund IRR:
4X 10X 11X ($3M in; $34M at exit) 53+% 21% To Date
CCG LP’s: Mgmt Team: Company & Community:
Happy Happy
© 2005 SmartOps Corporation. All rights reserved
Bright Future
TAYUR2010-MBA
•
Sustainability and Operations
While sustainability can be broadly defined as “the capacity to endure”, the term is often discussed along three lines: rationalism (economic), naturalism (environmental), and humanism (social). – An example of a rationalistic framework of sustainability are • (Product Produced ) / (Natural Resource Input) – The naturalistic framework looks at how an item is made within the broader natural system, thereby considering the both the inputs consumed (i.e. raw materials, fuel) and the waste produced (offset by recycling) – From a humanistic standpoint, sustainability relies on the notion of humans wanting to live in a way that preserves both their own and other species life for future generations
•
Companies are increasingly considering the sustainability of their operations, particularly along rationalistic and naturalistic lines. – For manufacturing companies, central to this analysis are the products made and the supply chain that makes those products. – Central to the supply chain is inventory, from raw materials and components to work-in-process and finished goods.
•
•
If a supply chain is able to run with less inventory, and the manufacturing operations are lean, then we are able to reduce raw material consumption, lower manufacturing and transportation energy consumption, and mitigate exposure to having to dispose obsolete inventory
Lean Operations and Enterprise Inventory Optimization, the process of properly planning and positioning the inventory across the supply chain, enables a more sustainable supply chain (rationalistic) and ultimately a more sustainable manufactured product lifecycle (naturalistic)
© 2005 SmartOps Corporation. All rights reserved
20
Since sustainability is a contemporary topic, here are two slides that will help you frame it for business discussions.
TAYUR2010-MBA
Sustainability Through Better Supply Chain Design and Execution Inventory properly sized to demand and risk results in less waste from expired, obsolete or returned inventory, which reduces air emissions and fuel consumption required in production and transportation
Inventory disposal Product design
Supply chain execution
Accurate safety stock levels for each item at each location reduces expediting needed to meet customer service targets, thereby reducing overall transportation fuel consumption and emissions
Transportation cost
Manufacturing Optimized inventory levels places less stress on manufacturing resource consumption resources since less product has to be manufactured, also enhancing flexibility to meet regulatory and pollution control
Enabling Sustainable Product Lifecycles
Warehouse operation
Product manufacturing and distribution
Supplier selection Supply chain design Ongoing product use
Manufacturing site construction Distribution center quantity and size Transportation mode selection
Product recycling
Less overall warehouse inventory translates into less energy consumption expended on material handling Factoring supply variability and risk along with other costs helps achieve supplier selection that properly reflects impact of inventory production, handling, and disposal
Inventory sized for demand dynamics results in better use of existing capacity by ensuring that inventory is manufactured at the right time, thereby avoiding air emissions and pollution associated with capacity expansion Visibility into inventory requirements enables better and compliant use of existing warehouse facilities Right-sized inventory enables selection of less carbon intensive transportation modes into supply chain design
Proper incorporation of recycled finished goods as source of raw material inventory enables overall less component consumption
Š 2005 SmartOps Corporation. All rights reserved
21
You should also learn to create these type of charts for ROIC (return on invested capital), EPS (earnings per share) and SVA (share holder value added). This is how you will "communicate" your initiatives, investments and ideas to the stakeholders.