Operations and Supply Chain Management

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Operations and Supply Chain Management

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ASSIGNMENT - A

Q1: Discuss what do you understand by operations? Is operations management important for organisations? Why? Differentiate between manufacturing operations and service operations?

Q2: Describe the TQM philosophy and identify its major characteristics. Explain how TQM is different from the traditional notions of quality.

Q3: (a) Describe each of the four costs of quality: prevention, appraisal, internal failure, and external failure.

Q3: (b) Explain the meaning of the plan–do–act–study cycle. Why is it described as a cycle?

Q4: (a) Why do organizations keep inventory? What are the different types of costs associated with inventory?

Q4: (b) What is JIT? Discuss the advantages and disadvantages of JIT approach?

Q5: (a) Distinguish between Statistical Quality Control and Statistical Process Control?

Q5: (b) What are control charts? What are the different types of control charts?

ASSIGNMENT - B

Q1: Define Process? Identify different types of Processes? Discuss the factors that influence Process Selection?

Q2: Define competitiveness? What different operations strategies can a company adopt to become competitive? Discuss using examples of specific organisations.

Q3: What are the different steps to be followed during product development process? How are these guidelines different for services?

CASE STUDY

Revamping the Supply Chain: The Ashok Leyland Way

Introduction

V Ramachandran, (Ramachandran) deputy general manager, Corporate Buying Cell, Ashok Leyland (AL), the Chennai based manufacturer of medium and heavy commercial vehicles was surfing the Internet at midday in his office. A closer look at the screen showed that he had logged on to an auction site. But this auction site was different. Ramachandran was looking for suppliers of some specific tyres in the global market. At a price of $350, five suppliers were interested. He then lowered the price by $5. Now three of them were willing. Ramachandran kept lowering the price, each time by $5. At $325, there was only one response- the seller asked for an hour's time to confirm. Within one hour, the Czechoslovakian company confirmed it could supply the tyres. Both parties then signed up by e-mail and the deal was struck at $325, saving Ashok Leyland Rs 14,700 per set. Known as reverse auction, this was one of the many ways AL was reducing materials cost, which accounted for nearly 70 per cent of its product cost.

In 1997-98, AL, recorded a profit-after-tax (PAT) of Rs. 18.4 crore¹ on sales of Rs. 2,014.3 crore. A look at the previous financial year's PAT showed that the profits for 1997-98 had gone for a severe beating. In 1996-97 AL had a PAT of Rs. 124.9 crore on sales of Rs. 2, 482.5 crore. With the manufacturing Industry reeling under recession, the freight generating sectors (manufacturing, mining and quarrying) saw a steep decline resulting in a severe downturn of freight volumes. For AL, whose business was directly dependent on moving material, goods and people across distances, this had come as a severe blow. AL's supply chain² had gone haywire under the recession which had eaten away 17.62 per cent of its revenues in one year forcing the company to helplessly allow inventories to build up. The results were showing on working capital. It had climbed from 33.34% of sales in 1993-94 to 58.81% in 1997-98.

'Together We Can' - Beat the Recession

AL did not seem to succumb to the 'uncertainty gloom' that was playing havoc to its business environment. It decided to meet the challenge by re-gearing its systems, be it material order, procurement, material handling, inventory control or production. AL conducted brainstorming sessions inviting ideas on cost cutting. Quality Circle³ teams were formed for this purpose. Said Thomas T. Abraham, deputy general manager Corporate Communications, "Our Quality Circle teams were very helpful at this juncture and the worker involvement made it easier to address cost cutting." AL took every employee's ideas into account and figured out a way to keep things going and reduce production without inflicting pain.

The recession saw AL waging a war on wastage and inefficiency. AL took many initiatives ranging from tiering its vendor network to reducing the number of vendors, and consequently, moving to a just-in-time (J-I-T)⁴ ordering system, to joint-improvement programmes (JIP), which were essentially exercises in value-engineering undertaken in association with key vendors. It set up different tier-levels to improve the quality of the suppliers. Tiering formed the basis of the vendor-consolidation drive. Till 1998, Ashok Leyland used to source the 62 components that went into its front-end structure of its trucks and buses, from 16 suppliers. In 2000, one tier-I vendor sourced the products from the other vendors and supplied the assembly to the company. This saved cost and time provided the vendor network was well coordinated with AL's own manufacturing operations.

At AL, Vendor Development and Strategic Sourcing were handled by Corporate Materials Department (CMD). CMD identified the vendors, rated the vendors based on feedback received from Supplier Quality Assurance Cell, send drawings/specifications, called for quotes with detailed breakup of operation-wise costs, and negotiated the price at which the parts would be supplied. In addition to CMD, there were Materials Management Departments (MMDs) for scheduling based on unit production plan. AL's purchasing philosophy was to maximize bought-out parts. Over 90% of the parts were bought-out. AL believed in global sourcing. Consistent with its operational needs, AL considered both domestic (Indian) as well as international vendors. Global sourcing was normally resorted to overcome local constraints in the form of technology, quality, capacity or cost effectiveness. AL considered new suppliers for required components, based on Vendors' ability to meet its specification, price and delivery schedules. Vendors were required to have a strong manufacturing base with adequate engineering support for their own product development activities, as needed by the category of product.

AL's policy was to develop a vendor base committed to continuous improvement to meet quality, cost and delivery standards. AL considered its vendors as partners in progress and believed in establishing mutually beneficial relationships. It provided necessary technical assistance in the form of project and production engineering, to maintain quality levels. In addition, where required, it also helped vendors financially. AL's Vendors were expected to have a good quality system. Vendors' quality system had to encompass the following: cost effective process, assured process capability, continuous improvements based on customer feedback, compliance of all statutory/ legal/ commercial requirements of AL, a stage of development where the Vendor could come under AL's self-certification system, and, traceability - first-in first-out.

AL also placed emphasis on optimizing the inventory and vendors were required to progressively meet "Just-in-Time" requirements. Delivery mode as well as packaging were required to minimize the handling/loading and unloading time. AL preferred a manufacturing/assembly/ support base at close proximity to the production units.

Commenting on the relationship AL shared with its vendors, J.N. Amrolia, executive director, human resources, said, "The close working relationship with the vendors for vendor development program have benefitted us a lot in cost cutting and making the vendors understand the complexities of material handling." This resulted in low inventories all through the chain. He further added, "We stabilised both the inward material flows as well as the outbound material and that saved us a lot on the inventory." In the late 2000, AL's systems were closer to J-I-T with inventories averaging just seven days, down from three weeks in the late 1990s.

AL seemed to realize that cost cutting would work only if the supply chain was smooth. Thus, in 1999, AL launched Project OSCARS (Optimising Supply Chain and Rationalising Sourcing). OSCARS identified two methods to reduce costs in the inbound supply chain: reduce material costs and through optimum inventory levels reduce the invisible inventory carrying costs. The basic tenets of OSCARS were: a single strategic sourcing agency at the corporate level with local, unit- level scheduling; smaller, stronger vendor base preference for vendors who had access to technology; and to bring down supply chain costs.

Single Window System

The Strategic Sourcing and Corporate Quality Engineering (CQE) teams jointly formed the single window vendor management agency, bringing with them specialised commercial and technical knowledge. Within the centrally negotiated price and share of business, unit material functions interacted with the approved panel of vendors to "pull" materials in line with their production plans.

For the suppliers, this had created a convenient single-point contact with AL, for sharing drawings, for negotiating prices and long-term business volumes, and for assistance and consultancy on quality to management issues. This corporate buying seemed to have benefited AL through consolidation of business per supplier and dealing from a position of strength that consolidated volumes.

The starting block was the creation of a company-wide database for the 22,000-plus parts which were matched with suppliers' part numbers. This revealed a picture of fragmented business and differential pricing at units. A classification of the 1,400-odd suppliers, based on business volumes, showed that 18 per cent accounted for 92.5 per cent of the business, while 61 per cent handled just 1.9 per cent. In Phase I, corporate buying covered major suppliers (Rs 10 lakh plus per year). The materials were classified into "packs" (broad groups of similar items) with one representative each from the CMD and the CQE forming a three-legged race team of specialists for each pack.

Supplier Tiering

AL pruned its panel of direct suppliers through tiering and system buying. Under tiering, AL dealt directly with tier-one suppliers who, in turn, were supported by tier-two and tier-three suppliers. The benefits of system buying could be illustrated with the example of the tool kits that accompanied every vehicle. In the late 1990s, six suppliers' spread over Punjab, Faridabad, Bangalore and Chennai used to supply the 15 items, which were assembled in-house. A short supply of 1,000 screwdrivers meant 1,000 numbers of the remaining 14 items in idle inventories. To overcome this problem, AL aimed at a reduction of its supplier base from 1,400 to 750.

Strategic sourcing aimed at reducing costs for the supplier so that the gains were real, painless and sustainable. Tear down studies and value engineering analyzed the constitution and composition of a part to prune costs through substitution, reduction or elimination of materials/sub-assemblies without affecting quality and performance. The cost benefits were shared with the partnering supplier.

AL focused on a JIT approach for high value/high volume items and low cost logistics for low value high volume items. Project OSCARS brought about a few fundamental changes. The push system ("let us make all we can just in case we need it") which resulted in upto 45 days of inventories of components compared to between 3 and 5 days globally had given way to the pull system ("make what the customer needs, when he needs it"). Each stage produced only as much as the next stage needed. Thus, only when a new chassis was loaded did the request go out for the supply of an engine assembly, and so on, for the front and rear axle assembly lines, and for the components that went into them. This resulted in a savings of Rs 8.50 crore a year and a lean supplychain.

To begin with, Project Oscars classified the main components used by the company into Categories 'A' (amounting to 75 per cent of the total cost of components), 'B' (18 per cent), and 'C' (7 per cent), with their suppliers also being classified accordingly. Then, AL devised different delivery systems for each category, aimed at cutting inventory-holdings.

The plant sent a J-I-T card, specifying the part number, quantity and the unloading location, through courier, fax or e-mail to the supplier who promptly dispatched the required consignment directly to the assembly line. But how did it guess AL's requirement? For that, Project OSCARS devised a funnel-planning system, covering 12 weeks of requirements. The immediate two weeks' plan was frozen and the next two weeks' semi frozen, the balance eight weeks' plan was tentative. Thus, the vendor already knew roughly when to expect the J-I-T card.

To reward the vendors for conforming to the schedule, Project OSCARS planned a reduction in their numbers to 200 over a 3-year time frame. Said S. Nagarajan, Executive Director, AL, "We are looking at giving a minimum business of Rs 1 crore to each supplier involved with us." AL also provided technological inputs for troubleshooting on the suppliers' shopfloors, so that they could cut their costs.

Oscars II

After revamping the inbound supply chain, AL went out to revamp the out-bound supply chain. The revamp of the out-bound supply chain (code named OSCARS II) had the twin objectives of improving customer satisfaction and reducing finished goods inventories, and reaching improved service levels with optimum pipeline inventory levels.

A customer survey and a study of benchmarks had come out with three major parameters for service level targets: order to delivery time, reliability of deliveries and availability of order status information. The customer could expect delivery in five days from the date of payment, for regular models. For multi-axled vehicles, the promised period was two to four weeks. The second promise was that the age of the vehicle when delivered would be a maximum of 90 days.

In the new structure, plant sales yards acted as national pools to hold rare models (called "strangers") and excess of regional requirements. The next tier was made up of the five regional stock pools, which ensured just-in-time supplies to all regional sales offices.

Said Amol J Sandil, executive director, marketing, "Within the objectives of OSCARS II, namely, achieving efficient distribution and working capital management, we have been able to improve customer satisfaction by cutting down on delivery time." He further added, "Qualitative improvements in demand forecasting and data management have been central to this achievement". In 1999, AL also adopted Total Quality Management practices. The Hosur plant in Karnataka came out with a new TQM process which seemed to be a success. (Refer Table I).

Table I: The Seven Plus One TQM Method

Rule	Objective	Result
Total Cost Management (TCM)	Cut Cost	Within a year, operating cost as a percentage of plant turnover was down by a third.
Energy Management	Optimize energy loss	Overall energy saving. Average power cost per product reduced by 30.06% without additional investment.
Value Engineering (VE)	Efficient material usage	Substantial reduction in the chasis cost.
Cross Functional Teams (CFT)	Synergy	The very first CFTs resulted in savings of Rs. 18.2 million.
Suggestion Scheme	Involve everyone	The quick handling of suggestion has resulted in continuous, suggestions to cut cost and improve quality.
Inventory Management (IM)	Better housekeeping	Probably the best IM today in the Industry that has resulted in a lot of saving.
Shop Investment Programme	Monitor and Utilize	Fix Operating cost as per cent of shop turnover machines efficiently.
Plus One	Training	Training across all levels in the organization.

Source: 'Geared Up', A&M, November 15, 2000.

However, with all these activities at the shop floor, AL did not lose sight of the customer. To understand customer needs and assimilate the knowledge, AL adopted '4P' Programme: Probe, Prioritize, Plan and Position. This worked in tandem with manufacturing as part of a cross-functional team (CFT). The CFTs worked towards continuous improvement in products and marketing. AL also built a 'marketing information system' (MIS) to monitor the trends and forecast demand from the inputs of the dealers and field executives.

The Comeback

In the first half of 1999-2000, AL recorded a net profit of Rs 1.9 crore on sales of Rs 1,092.8 crore, against a Rs 36.7 crore loss for the corresponding period in 1998-99. This seemed to have been possible due to operational efficiency resulting from strategic raw material sourcing, with fewer sources and higher volumes, which cut costs; better control over process inputs by tightening supply chain and inventories and; reduced operating expenses through cost savings on energy, tools, spares and adoption of preventive maintenance policies. In 1999-2000, raw material costs were down 1-2% and inventories reduced by Rs 300 crore. Also in 1999-2000, AL sold 37,859 heavy commercial vehicles (HCVs), 27% more than it did in 1998-99. AL's total income in 1999-2000, at Rs 2,611.41 crore was 25% higher than the corresponding figure for 1998-99. Its operational profits in 1999-2000 was Rs 55 crore, Rs.77 crore more than the Rs 12 crore operating loss it had made in 1998-99.

However, analysts felt that the comeback of AL could be attributed to the end of the recession. They cited the example of its main rival, TELCO, which also registered a 37.5% growth in sales volumes in 1999-2000. For AL officials the 'bad years' between 1997 and 2000 made it pinpoint its focus on critical issues like cost-reduction, operational improvement, and market penetration. Commented, R. Seshasayee, Chairman, AL, "The recession made us hasten the process of improvement that we had been working on for some time."

Still, in 1999-2000, despite the reduction, the company's material cost, expressed as a percentage of sales was, at 70%, 3% higher than that incurred by TELCO. Said Arindam Bhattacharya, Principal, A.T. Kearney, who was involved in Ashok Leyland's turnaround effort, "While the company has made significant progress, it will still take time to achieve global standards in inventory management and productivity."

Notes:

1] 1 Crore =10 million
2] A basic supply chain consists of a company, an immediate supplier, and an immediate customer directly linked by one or more of the upstream and downstream flows of products, services, finances and information. An extended supply chain includes suppliers of the immediate supplier and customers of the immediate customer and an ultimate supply chain includes all the companies involved and flows of products, services, finances and information from the initial supplier to the ultimate customer.
3] Work group that meets to discuss ways to improve quality and solve production problems.
4] Inventory system in which production quantities are ideally equal to delivery quantities, with materials purchased and finished goods delivered just in time to be used. Also known as Kanban.

Case Questions

1. Discuss the strategies and initiatives taken by Ashok Leyland to revamp its supply chain? Elaborate how these initiatives helped the organisation.
2. (a) What are inbound and outbound supply chains?

(b) What is reverse auctioning and how did Ashok Leyland used it to their advantage?

(c) How did Ashok Leyland use JIT to reduce their inventory?

(d) Briefly discuss OSCAR I and OSCAR II initiatives taken by the company?

MULTIPLE CHOICE QUESTIONS

1) Which of the following is not a key activity of an operations manager?

a. Understanding the needs of customer

b. Continually learning

c. Managing cash flows

d. Exploiting technology to produce goods and services

2) Which of the following is generally related to service operations?

a. Tangible product

b. Need for flexible capacity

c. Separation of production from consumption

d. Large amount of inventory

3) A measure of the success of an operation in producing outputs that satisfy customers is

a. Efficiency

b. Effectiveness

c. Quality

d. Profitability

4) A measure of the success of an operation in converting inputs to outputs is

a. Efficiency

b. Effectiveness

c. Quality

d. Profitability

5) Operations design choices include all of the following except

a. Operating plans and controls

b. Type of processes and alternative designs

c. Supply chain integration and outsourcing

d. Inventory

6) ____ is the reintroduction of an intermediary in a supply chain.

a. Disintermediation

b. Re-intermediation

c. Channel assembly

d. Warehousing

7) ____ are reductions in unit costs available from increasing the number of products produced.

a. Global networks

b. Focused operations

c. Economies of scope

d. Economies of scale

8) A ____ layout is an arrangement based on the sequence of operations that are performed during the manufacturing of a good or the delivery of a service.

a. Group

b. Process

c. Product

d. Fixed position

9) Location decisions should consider all of the following except

a. Product cost

b. Access to markets

c. Access to labour skills

d. Local government tax incentives

10) A ____ is a one-time variation that is explainable.

a. Cyclical pattern

b. Random Variation

c. Irregular variation

d. Seasonal pattern

11) Which of the following is not a statistical method?

a. Delphi

b. Exponential smoothing

c. Moving average

d. Linear regression

12) Which of the following is not a capacity planning decision option?

a. Promotion and advertising

b. Subcontracting

c. Layoffs

d. Building a new plant

13) The purpose of production planning is to

a. Minimize the work force size

b. Maximize the production rate

c. Minimize the cost of meeting demand

d. Optimize the inventory level

14) Which approach is most appropriate for forecasting demand for a new product?

a. A causal model

b. A Delphi study

c. A time-series model

d. A regression model

15) A key advantage of a process layout is

a. High levels of inventory

b. High degree of automation

c. Flexible equipment and resources

d. Smooth flow of materials

16) All of the following are valid purposes for layout studies except

a. Minimize delays in materials handling and customer movement

b. Increase bottlenecks

c. Promote employee morale and customer satisfaction

d. maintain flexibility

17) A pull system

a. Requires high levels of finished goods inventory

b. Relies heavily on accurate sales forecasts

c. Waits for customer orders

d. Necessitates standardized products

18) Steps which can be taken to reduce the impact of the bullwhip effect include all of the following except

a. Avoiding creating surges in demand due to price cutting and promotional campaigns

b. Reducing manufacturing lead times

c. Reducing information distortion

d. Adding a supply hub to the chain

19) According to the value chain model of Dell, Inc., which of the following is not a pre-production activity?

a. Billing

b. Corporate partnerships

c. Purchasing

d. Software and hardware licensing

20) A ____ is a statement of how many finished items are to be produced and when they are to be produced.

a. Aggregate Plan

b. Master Production Schedule

c. Material Requirements Planning

d. Shop Floor Control

21) Which of the following is not an aggregate planning decision option?

a. Promotion and advertising

b. Subcontracting

c. Layoffs

d. Building a new plant

22) The EOQ model

a. Is very sensitive

b. Is relatively flat (shallow) around the minimum

c. Balances holding costs and stockout costs

d. Allows for variable demand

23) ISO9000 standards consist of all of the following except

a. Definition of key terms

b. Minimum requirements for a quality management system

c. Process simulation

d. A means of demonstrating compliance principles to customers and third-party certification

24) All of the following relate to Six Sigma except

a. Clear financial returns

b. Measures defects per unit

c. Output critical to customers

d. A stretch goal

25) Which of the following is most closely related to Statistical Process Control (SPC)?

a. Acceptance sampling

b. Process specifications

c. Unwanted causes of variation

d. Self-audits

26) Control charts are all of the following except

a. Can determine the source of a problem

b. Useful for process improvement

c. Based on finding values outside of control limits

d. Looks for non-random patterns

27) When examining control charts, variations of characteristic measurements that are within control limits are assumed to be the result of

a. Chance

b. Defective input materials

c. Assignable causes

d. Poor machine tolerances

28) ____ is defined as the satisfaction of ____.

a. Service quality; expectation

b. Service quality; needs

c. Service value; expectation

d. Service value; imagination

29) A technique used to identify likely causes of failure and their consequences so that preventative actions can be taken is

a. Statistical quality control

b. Total quality management

c. Failure mode and effects analysis

d. Statistical process control

30) The cost of quality is

a. An expression of an organization’s performance in quality in financial terms.

b. The difference between customers’ expectations of a product or service and their perceptions of their experience of it.

c. A proactive approach towards quality management by seeking to prevent defects ever being produced.

d. The inspection and testing of the outputs from a transformation process.

31) Six Sigma was first developed at ____ in the late 1970s and early 1980s.

a. Motorola

b. General Electric

c. AlliedSignal

d. None of the above

32) ____ structures are based on loose relationships between different organizational sub-units

a. Matrix

b. Functional

c. Network

d. Multi-divisional

33) Japanese style teamworking has a number of distinctive features which include all of the following except

a. Individual reward systems

b. Multi-skilled workers

c. Assignment of tasks to teams

d. Continuous development of workers’ skills

34) The “D” in the acronym QFD stands for

a. Development

b. Deployment

c. Design

d. Devolution

35) Regarding the first House of Quality, the interrelationship between any pair of technical features is found in

a. The voice of the customer

b. The relationship matrix

c. The roof

d. Technical requirement priorities

36) Which of the following is a chronological representation of stages within the NPD process?

a. Idea selection, preliminary design, testing, prototype

b. Testing, final design, preliminary design, prototype

c. Idea generation, idea selection, prototype, testing

d. Idea selection, prototype, testing, preliminary design

37) Which of the following is not compatible with BPR?

a. Fundamental re-thinking

b. Incremental re-design

c. Dramatic improvements

d. Business processes

38) Smaller batch sizes are facilitated by all the following except

a. Setup time reduction

b. Changes in plant layout

c. JIT policies

d. Changeover time increases

39) ____ is synonymous with environmental concerns.

a. Mass customization

b. Recycling

c. Empowerment

d. Globalization

40) Which is true regarding a responsive supply chain?

a. Demand is stable and predictable.

b. Product life cycles are short and change often because of innovation.

c. Customers require standardization.

d. Contribution margins are low.