Chapter 1 by Sridhar Tayur

Chapter 1 Introduction to Operations Management

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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

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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

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Syllabus

Chapter1: 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 Appendix

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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

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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

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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

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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

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Wisdom of the Ages

Management Engineering (now Management Consulting) Management Science Entrepreneurship Private Equity and Venture Capital

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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

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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

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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

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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

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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

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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

Wind Energy

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2002

2003

2004

2005

2006

2007

REVENUE*

7.5

10.0

14.0

16.6

17.7

31.2

EBITDA*

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

Wind – Rebirth

2004 18

Lean

Purchasing

CDP #2

Waste Stream

2005

2006

2007

EXIT

2008

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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

Bright Future

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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

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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.

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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)

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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