FOR PROFESSOR DAVIDS – Designing Value-Based Service

Assignment 2: Designing Value-Based Service

As the rate of innovation increases, companies face expanding product/service lines, shorter product and service lifecycles, and more frequent product/service transitions. All of these can bring tremendous value but also pose enormous challenges and risks.

The article “The Art of Managing New Product Transitions” by Erhun, Gonclave, and Hopman from the readings for this module includes a matrix titled “Product Factors and Risk Drivers” which focuses on Intel, a company that manufactures high-tech products. Based on your readings and research, address the following issues:

  • Redesign the product risk factor matrix so that the factors are appropriate for a services firm that delivers traditional tax accounting and audit services. For example, among the supply risks, assume that the company relies on individuals with specific knowledge of the tax law in the jurisdictions where its clients operate, be it state, federal, or foreign.
  • Now, assume that the firm wants to develop a management consultancy practice. (Alternatively, you may choose to add a legal services line instead.). Create a separate new matrix that summarizes the additional risk factors for this firm launching a management consultancy or legal services line. What additional risk factors are you adding to your matrix?
  • Explain how the business risks differ between traditional tax and audit services and management consulting services. In your opinion, what are the three biggest risks the firm faces if it diversifies into the new service line?
  • Recommend whether the firm should organically grow into a consultancy service or acquire a third party to achieve new goals. Justify your recommendations.

Develop a 10-slide presentation in PowerPoint format. Apply APA standards to citation of sources. Use the following file naming convention: LastnameFirstInitial_M4_A2.ppt.

Be sure to include the following in your presentation:

  • A title slide
  • An agenda slide
  • A reference slide
  • Headings for each section
  • Speaker notes to support the content in each slide

By Saturday, March 30, 2013, deliver your assignment to the M4: Assignment 2 Dropbox.

16

12

12

12

8

60

Assignment 2 Grading Criteria Maximum Points

Redesigned the product risk factor matrix for a services firm that has traditionally provided tax and audit services and now wants to develop into a management consultancy.

Created a new matrix that summarizes the additional risk factors for this firm launching a management consultancy or legal services line. Identified additional risk factors to add to the matrix.
Explained how the business risks differ between these two types of services. Listed and ranked the three biggest risks if the firm diversifies into the new service line.
Made recommendations with appropriate justification on whether the firm should organically grow itself into a consultancy or acquire a third party to achieve its goals
Wrote in a clear, concise, and organized manner; demonstrated ethical scholarship in accurate representation and attribution of sources; displayed accurate spelling, grammar, and punctuation.
Total:

Chapter 4: Product Design

Product Design
In this chapter you will learn about…
The Design Process
Concurrent Design
Technology in Design
Design Reviews
Design for Environment
Design for Robustness
Quality Function Deployment
Web resources for this chapter include
OM Tools Software
Animated Demo Problems
Internet Exercises
Online Practice Quizzes
Lecture Slides in PowerPoint
Virtual Tours
Excel Worksheets
Excel Exhibits
Company and Resource Weblinks
www.wiley.com/college/russell
Product Design at Green Mountain Coffee
Green Mountain Coffee Roasters
Green Mountain Coffee Roasters
129

Designing products for GREEN MOUNTAIN COFFEE involves searching the world over for unique coffee beans and experimenting with the roasting process to convert those beans to distinctive flavors. But design also means introducing new products that help the consumer enjoy Green Mountain coffee. The Keurig coffee maker and biodegradable coffee cup shown here are two examples.
Keurig coffee makers, along with the innovative K-cup, allow coffee lovers to brew one cup of coffee at a time in under a minute. An office-worker, for example, can choose from over 130 different varieties of coffees and teas, and have fresh coffee at any time throughout the day. The single-cup design was a response to the question: “Why do we brew coffee a pot at a time when we drink it a cup at a time?”
The biodegradable disposable coffee cup developed by Green Mountain and International Paper is the result of years of research and a market trial of nearly 5 million cups. The fiber used to produce the cups is grown and harvested from sustainable forests. The inner surface of the cup is made from a corn-based bioplastic that under the right conditions completely breaks down into organic matter. With more than 2.5 million cups of Green Mountain coffee sold each day, that’s a substantial reduction in landfill usage.
In this chapter, we talk about designing products to meet customer needs, as well as designing products for the environment.
New products and services are the lifeblood of an organization. Designs can provide a competitive edge by bringing new ideas to the market quickly, doing a better job of satisfying customer needs, or being easier to manufacture, use, and repair.
Design is a critical process for a firm. Strategically, it defines a firm’s customers, as well as its competitors. It capitalizes on a firm’s core competencies and determines what new competencies need to be developed. It is also the most obvious driver of change—new products and services can rejuvenate an organization, define new markets, and inspire new technologies.
Design can provide a competitive edge.
The design process itself is beneficial because it encourages companies to look outside their boundaries, bring in new ideas, challenge conventional thinking, and experiment. Product and service design provide a natural venue for learning, breaking down barriers, working in teams, and integrating across functions.
The Design Process
Design has a tremendous impact on the quality of a product or service. Poor designs may not meet customer needs or may be so difficult to make that quality suffers. Costly designs can result in overpriced products that lose market share. If the design process is too lengthy, a competitor may capture the market by being the first to introduce new products, services, or features. However, rushing to be first to the market can result in design flaws and poor performance, which totally negate first-mover advantages. Design may be an art, but the design process must be managed effectively.
An effective design process:
Virtual Tours
Matches product or service characteristics with customer requirements,
Ensures that customer requirements are met in the simplest and least costly manner,
Reduces the time required to design a new product or service, and
Minimizes the revisions necessary to make a design workable.
Product design defines the appearance of the product, sets standards for performance, specifies which materials are to be used, and determines dimensions and tolerances. Figure 4.1 outlines the design process from idea generation to product launch. Let’s examine each step in detail.
Figure 4.1 The Design Process
Idea Generation
Internet Exercises
The design process begins with understanding the customer and actively identifying customer needs. Ideas for new products or improvements to existing products can be generated from many sources, including a company’s own R&D department, customer complaints or suggestions, marketing research, suppliers, salespersons in the field, factory workers, and new technological developments. Competitors are also a source of ideas for new products or services. Perceptual maps, benchmarking, and reverse engineering can help companies learn from their competitors.
Perceptual maps compare customer perceptions of a company’s products with competitors’ products. Consider the perceptual map of breakfast cereals in terms of taste and nutrition shown in Figure 4.2. The lack of an entry in the good-taste, high-nutrition category suggests there are opportunities for this kind of cereal in the market. This is why Cheerios introduced honey-nut and apple-cinnamon versions while promoting its “oat” base. Fruit bits and nuts were added to wheat flakes to make them more tasty and nutritious. Shredded Wheat opted for more taste by reducing its size and adding a sugar frosting or berry filling. Rice Krispies, on the other hand, sought to challenge Cocoa Puffs in the “more tasty” market quadrant with marshmallow and fruit-flavored versions.
Figure 4.2 A Perceptual Map of Breakfast Cereals
Internet Exercises
Benchmarking refers to finding the best-in-class product or process, measuring the performance of your product or process against it, and making recommendations for improvement based on the results. The benchmarked company may be in an entirely different line of business. For example, American Express is well known for its ability to get customers to pay up quickly; Disney World, for its employee commitment; Federal Express, for its speed; McDonald’s, for its consistency; and Xerox, for its benchmarking techniques.
Reverse engineering refers to carefully dismantling and inspecting a competitor’s product to look for design features that can be incorporated into your own product. Ford used this approach successfully in its design of the Taurus automobile, assessing 400 features of competitors’ products and copying, adapting, or enhancing more than 300 of them, including Audi’s accelerator pedal, Toyota’s fuel-gauge accuracy, and BMW’s tire and jack storage.
For many products and services, following consumer or competitors’ leads is not enough; customers are attracted by superior technology and creative ideas. In these industries, research and development is the primary source of new product ideas. Expenditures for R&D can be enormous ($2 million a day at Kodak!) and investment risky. (Only 1 in 20 ideas ever becomes a product and only 1 in 10 new products is successful.) In addition, ideas generated by R&D may follow a long path to commercialization.
The design process can also be outsourced to a design firm, as shown in the following “Along the Supply Chain” box.
Along the Supply Chain: Great Ideas From IDEO
IDEO is a 350-person design firm located in Palo Alto, California, with offices in San Francisco, Chicago, Boston, London, and Munich. Renowned for its innovative approach to design, the firm designs customer “experiences” rather than products or services. You’ve seen IDEO designs—the Palm V, Polaroid’s I-Zone camera, Steelcase’s Leap Chair, Zinio interactive magazines, Crest’s standup toothpaste tube, AT&T’s mMode, and more. IDEO is thorough and fast. Its famous five-step process consists of:
Observation Understand the consumer experience by shadowing customers, photographing customers within a space, tracking consumer interactions, and keeping visual diaries. User interviews are diverse, extreme (those who know nothing about a product and those who know everything), and personal (users tell stories about their experiences).
Brainstorming Generate ideas based on the data gathered through observation. The session lasts no more than an hour and is governed by specific rules that deter judgment, prevent interruptions, and keep the group focused. Participants are encouraged to build on the ideas of others, generate large quantities of ideas, think visually, and say anything that comes to mind, no matter how outlandish.
Rapid Prototyping Mockup models to help visualize proposals and speed up decision making. Build mockups quickly and cheaply. Create scenarios, use videos, and act out customer roles. Don’t sweat the details, just get the concept down.
Refining Weed out the prototypes and refine the remaining options. Engage the client in narrowing down the choices. Focus on the outcome of the process. Be disciplined. Get agreement from stakeholders.
Implementation Use a diverse workforce to carry out the plans. IDEO employs engineers of all types, as well as sociologists, psychologists, artists, computer scientists, manufacturers, linguists, and more.
One of IDEO’s most unique designs is the interactive dressing room in Prada’s upscale retail store. The dressing room is a simple eight-foot-square booth with glass walls that switch from transparent to translucent when a room is occupied. Once inside, the customer can switch the doors back to transparent at the touch of a switch to show off a garment to someone outside the booth. There are two interactive closets in the dressing room, one for hanging clothes and one with shelves. As garments are hung in the closet or placed on the shelves, their RFID (radio frequency ID) tags are automatically scanned and information about alternative sizes, colors, fabrics, and styles is displayed on an interactive touch screen.
The dressing room also contains a video-based Magic Mirror. As the customer begins to turn in front of the mirror, the image becomes delayed, allowing the customer to view him- or herself in slow motion from all angles. Different lighting conditions can be selected from a warm evening glow to cool blue daylight. A recording of the session can be saved to the customer’s Prada card or e-mailed to a friend.
Sales associates are equipped with a handheld “staff device” for scanning merchandise, checking inventory availability, communicating with the customer in the dressing room, and controlling the video display. This enables the sales associate to spend more time attending personally to a customer and less time chasing to the stock room to check for available items.
Think of other products or services that combine technology with personal attention.
Sources: Bruce Nussbaum, “The Power of Design,” Business Week (May 17, 2004), pp. 86–94; Jeannette Brown, “Prada Gets Personal,” Business Week E-Biz (March 18, 2002); www.ideo.com/case-studies/prada (accessed June 30, 2004).
Feasibility Study
Internet Exercises
Marketing takes the ideas that are generated and the customer needs that are identified from the first stage of the design process and formulates alternative product and service concepts. The promising concepts undergo a feasibility study that includes several types of analyses, beginning with a market analysis. Most companies have staffs of market researchers who can design and evaluate customer surveys, interviews, focus groups, or market tests. The market analysis assesses whether there’s enough demand for the proposed product to invest in developing it further.
A feasibility study consists of a market analysis, an economic analysis, and a technical/strategic analysis.
If the demand potential exists, then there’s an economic analysis that looks at estimates of production and development costs and compares them to estimated sales volume. A price range for the product that is compatible with the market segment and image of the new product is discussed. Quantitative techniques such as cost/benefit analysis, decision theory, net present value, or internal rate of return are commonly used to evaluate the profit potential of the project. The data used in the analysis are far from certain. Estimates of risk in the new product venture and the company’s attitude toward risk are also considered.
Finally, there are technicalandstrategic analyses that answer such questions as: Does the new product require new technology? Is the risk or capital investment excessive? Does the company have sufficient labor and management skills to support the required technology? Is sufficient capacity available for production? Does the new product provide a competitive advantage for the company? Does it draw on corporate strengths? Is it compatible with the core business of the firm?
Performance specifications are written for product concepts that pass the feasibility study and are approved for development. They describe the function of the product—that is, what the product should do to satisfy customer needs.
Rapid Prototyping
Designers take general performance specifications and transform them into a physical product or service with technical design specifications. The process involves building a prototype, testing the prototype, revising the design, retesting, and so on, until a viable design is determined.
Rapid prototyping as the name implies, creates preliminary design models that are quickly tested and either discarded (as fast failures) or further refined. The models can be physical or electronic, rough facsimiles or full-scale working models. The iterative process involves form and functional design, as well as production design.
Form Design
Form design refers to the physical appearance of a product—its shape, color, size, and style. Aesthetics such as image, market appeal, and personal identification are also part of form design. In many cases, functional design must be adjusted to make the product look or feel right. For example, the form design of Mazda’s Miata sports car went further than looks—the exhaust had to have a certain “sound,” the gearshift lever a certain “feel,” and the seat and window arrangement the proper dimensions to encourage passengers to ride with their elbows out. For an update on Mazda’s latest design, see the “Along the Supply Chain” box.
Functional Design
Functional design is concerned with how the product performs. It seeks to meet the performance specifications of fitness for use by the customer. Three performance characteristics considered during this phase of design are reliability, maintainability and usability.
Reliability
Internet Exercises
Reliability is the probability that a given part or product will perform its intended function for a specified length of time under normal conditions of use. You may be familiar with reliability information from product warranties. A hair dryer might be guaranteed to function (i.e., blow air with a certain force at a certain temperature) for one year under normal conditions of use (defined to be 300 hours of operation). A car warranty might extend for three years or 50,000 miles. Normal conditions of use would include regularly scheduled oil changes and other minor maintenance activities. A missed oil change or mileage in excess of 50,000 miles in a three-year period would not be considered “normal” and would nullify the warranty.
Along the Supply Chain: Mazda’s New Concept Car Embodies Motion
How does a company carry through a product concept to final design? Mazda does so carefully and with great precision.
In recent years, Mazda has been searching for a design concept to make its products more distinct and instantly recognizable. One possibility is the concept of flow. The Japanese language has several words to describe flow. Mazda’s latest concept car, the Ryuga (ree-yoo-ga) means “gracious flow, motion born in nature.”
The element of flow is integrated throughout the car’s design as follows:
Ryuga’s dramatic wedge shape suggests a windswept motion even as the car is parked. Large wheels placed at the far corners of the car’s exterior give it a stable, balanced stance. Smaller volumes in the front progressing to larger volumes in the rear provide tension and direction of flow.
The surface texture of Ryuga’s side panels brings forth images of carefully raked pebbles in Japanese dry gardens or gentle ripples caused by a breeze over a pool of water.
The headlamp shape is reminiscent of the flow of morning dew dropping from bamboo leaves.
The 21-inch wheel spokes are slightly twisted as if they are delivering torque and the trailing edges of the wheel spokes are accented with the car’s exterior color to impart motion.
Flowing lava inspired both Ryuga’s exterior hue and tail lamp design. Depending on the light, the car’s surface appears to be shades of yellow, red, and blue, exactly like molten, flowing lava.
The interior of the car also reflects a flowing motion. Two large gull-wing doors provide a wide-open invitation to the interior, designed to resemble a cockpit to maximize the emotional connection between car and driver. The rear passenger space provides lounge-like comfort with the impression of movement further reinforced in the patterns of the fabric.
Elongated pods give the cockpit depth while bringing information closer to the driver. An open top steering wheel with highly sensitive settings responds to the driver’s smallest input and provides enhanced sight lines.
Cameras installed for monitoring rear movement and blind spots allows the driver to change lanes, merge and monitor traffic in one fluid motion without having to take one’s eyes off the road ahead.
How does Mazda further incorporate this flow concept into its “Zoom, Zoom” ad campaign?
gizmag.com
gizmag.com
Source: Adapted from “Mazda Ryuga Concept Captures the Spirit of Motion,” www.gizmag.com/go/6705, January 9, 2007.
A product or system’s reliability is a function of the reliabilities of its component parts and how the parts are arranged. If all parts must function for the product or system to operate, then the system reliability is the product of the component part reliabilities.
Rs = (R1)(R2)…(Rn), where Rn is the reliability of the nth component.
For example, if two component parts are required and each has a reliability of 0.90, the reliability of the system is 0.90 × 0.90 = 0.81, or 81%. The system can be visualized as a series of components as follows:
Note that the system reliability of 0.81 is considerably less than the component reliabilities of 0.90. As the number of serial components increases, system reliability will continue to deteriorate. This makes a good argument for simple designs with fewer components!
Failure of some components in a system is more critical than others—the brakes on a car, for instance. To increase the reliability of individual parts (and thus the system as a whole), redundant parts can be built in to back up a failure. Providing emergency brakes for a car is an example. Consider the following redundant design with R1 representing the reliability of the original component and R2 the reliability of the backup component.
These components are said to operate in parallel. If the original component fails (a 5% chance), the backup component will automatically kick in to take its place—but only 90% of the time. Thus, the reliability of the system is1

Rs

= R1 + (1 – R1)(R2)

 

= 0.95 + (1 – 0.95)(0.90) = 0.995

Example 4.1 Reliability

Q:

Determine the reliability of the system of components shown below.

Solution

First, reduce the system to a series of three components,
Then calculate the reliability of the series.
0.98 × 0.99 × 0.98 = 0.951
The Excel solution to this problem is shown in Exhibit 4.1.
Exhibit 4.1 Using Excel for Calculating Reliability

Reliability can also be expressed as the length of time a product or service is in operation before it fails, called the mean time between failures (MTBF). In this case, we are concerned with the distribution of failures over time, or the failure rate. The MTBF is the reciprocal of the failure rate (MTBF = 1/failure rate). For example, if your laptop battery fails four times in 20 hours of operation, its failure rate would be 4/20 = 0.20, and its MTBF = 1/0.20 = 5 hours.
Reliability can be improved by simplifying product design, improving the reliability of individual components, or adding redundant components. Products that are easier to manufacture or assemble, are well maintained, and have users who are trained in proper use have higher reliability.
Maintainability (also called serviceability) refers to the ease and/or cost with which a product or service is maintained or repaired. Products can be made easier to maintain by assembling them in modules, like computers, so that entire control panels, cards, or disk drives can be replaced when they malfunction. The location of critical parts or parts subject to failure affects the ease of disassembly and, thus, repair. Instructions that teach consumers how to anticipate malfunctions and correct them themselves can be included with the product. Specifying regular maintenance schedules is part of maintainability, as is proper planning for the availability of critical replacement parts.
One quantitative measure of maintainability is mean time to repair (MTTR). Combined with the reliability measure of MTBF, we can calculate the average availability or “uptime” of a system as
Example 4.2 System Availability

Q:

Amy Russell must choose a service provider for her company’s e-commerce site. Other factors being equal, she will base her decision on server availability. Given the following server performance data, which provider should she choose?

Provider

MTBF (hr)

MTTR (hr)

A

60

4.0

B

36

2.0

C

24

1.0

Solution

SAA

= 60/(60 + 4) = 0.9375 or 94%

SAB

= 36/(36 + 2) = 0.9473 or 95%

SAC

= 24/(24 + 1) = 0.96 or 96%

Amy should choose Provider C.
The Excel solution to this problem is shown in Exhibit 4.2 below.
Exhibit 4.2 Using Excel for System Availability

Excel File
Usability
All of us have encountered products or services that are difficult or cumbersome to use. Consider
Internet Exercises
Cup holders in cars that, when occupied, hide the radio buttons or interfere with the stick shift.
Salt shakers that must be turned upside down to fill (thereby losing their contents).
Speakers in laptop computers that are covered by your wrists as you type.
Doors that you can’t tell whether to pull or push.
Remote controls with more and more buttons of smaller and smaller size for TV, cable, stereo, VCR, DVD, and more.
Levers for popping the trunk of a car and unlocking the gas cap located too close together.
These are usability issues in design. Usability is what makes a product or service easy to use and a good fit for its targeted customer. It is a combination of factors that affect the user’s experience with a product, including ease of learning, ease of use, and ease of remembering how to use, frequency and severity of errors, and user satisfaction with the experience.2
Although usability engineers have long been a part of the design process, their use has skyrocketed with computer, software, and Web site design. Forrester Research estimates that 50% of potential sales from Web sites are lost from customers who cannot locate what they need. Researchers have found that Internet users have a particularly low tolerance for poorly designed sites and cumbersome navigation.
Apple revolutionized the computer industry with its intuitive, easy-to-use designs and continues to do so with its sleek and functional iPods and iPhones. Microsoft employs over 140 usability engineers. Before a design is deemed functional, it must go through usability testing. Simpler, more standardized designs are usually easier to use. They are also easier to produce, as we’ll see in the next section.
One aspect of usability is assessing how many functions to assign to a product.
Production Design
Production design is concerned with how the product will be made. Designs that are difficult to make often result in poor-quality products. Engineers tend to overdesign products, with too many features, options, and parts. Lack of knowledge of manufacturing capabilities can result in designs that are impossible to make or require skills and resources not currently available. Many times, production personnel find themselves redesigning products on the factory floor. Late changes in design are both costly and disruptive. An adjustment in one part may necessitate an adjustment in other parts, “unraveling” the entire product design. That’s why production design is considered in the preliminary design phase. Recommended approaches to production design include simplification, standardization, modularity, and design for manufacture.
Design simplification attempts to reduce the number of parts, subassemblies, and options in a product. It also means avoiding tools, separate fasteners, and adjustments. We’ll illustrate simplification with an example. Consider the case of the toolbox shown in Figure 4.3. The company wants to increase productivity by using automated assembly. The initial design in Figure 4.3a contains 24 common parts (mostly nuts and bolts fasteners) and requires 84 seconds to assemble. The design does not appear to be complex for manual assembly, but can be quite complicated for a robot to assemble.
Figure 4.3 Design Simplification
Source: Adapted from G. Boothroyd and P. Dewhurst, “Product Design…. Key to Successful Robotic Assembly,” Assembly Engineering(September 1986), pp. 90–93.
As shown in Figure 4.3b, the team assigned to revise the design simplified the toolbox by molding the base as one piece and eliminating the fasteners. Plastic inserts snap over the spindle to hold it in place. The number of parts was reduced to four, and the assembly time cut to 12 seconds. This represents a significant gain in productivity, from 43 assemblies per hour to 300 assemblies per hour.
Figure 4.3c shows an even simpler design, consisting of only two parts, a base and spindle. The spindle is made of flexible material, allowing it to be snapped downward into place in a quick, one-motion assembly. Assembly time is reduced to 4 seconds, increasing production to 900 assemblies an hour. With this final design, the team agreed that the assembly task was too simple for a robot. Indeed, many manufacturers have followed this process in rediscovering the virtues of simplification—in redesigning a product for automation, they found that automation isn’t necessary!
Using standard parts in a product or throughout many products saves design time, tooling costs, and production worries. Standardization makes possible the interchangeability of parts among products, resulting in higher-volume production and purchasing, lower investment in inventory, easier purchasing and material handling, fewer quality inspections, and fewer difficulties in production. Some products, such as light bulbs, batteries, and DVDs, benefit from being totally standardized. For others, being different is a competitive advantage. The question becomes how to gain the cost benefits of standardization without losing the market advantage of variety and uniqueness.
One solution is modular design. Modular design consists of combining standardized building blocks, or modules, in a variety of ways to create unique finished products. Modular design is common in the electronics industry and the automobile industry. Dell and Gateway customers build their own PCs from a variety of standard modules. Toyota’s Camry, Corolla, and Lexus share the same body chassis. Even Campbell’s Soup Company practices modular design by producing large volumes of four basic broths (beef, chicken, tomato, and seafood bisque) and then adding special ingredients to produce 125 varieties of final soup products.
Design for manufacture (DFM) is the process of designing a product so that it can be produced easily and economically. The term was coined in an effort to emphasize the importance of incorporating production design early in the design process. When successful, DFM not only improves the quality of product design but also reduces both the time and cost of product design and manufacture.
Specific DFM software can recommend materials and processes appropriate for a design and provide manufacturing cost estimates throughout the design process. More generally, DFM guidelines promote good design practice, such as:
Minimize the number of parts and subassemblies.
Avoid tools, separate fasteners, and adjustments.
Use standard parts when possible and repeatable, well-understood processes.
Design parts for many uses, and modules that can be combined in different ways.
Design for ease of assembly, minimal handling, and proper presentation.
Allow for efficient and adequate testing and replacement of parts.
Internet Exercises
Final Design and Process Plans
In the preliminary design stage, prototypes are built and tested. After several iterations, a pilot run of the process is conducted. Adjustments are made as needed before the final design is agreed on. In this way, the design specifications for the new product have considered how the product is to be produced, and the manufacturing or delivery specifications more closely reflect the intent of the design. This should mean fewer revisions in the design as the product is manufactured and service provided. Design changes, known as engineering change orders (ECOs), are a major source of delay and cost overruns in the product development process.
The final design consists of detailed drawings and specifications for the new product or service. The accompanying process plans are workable instructions for manufacture, including necessary equipment and tooling, component sourcing recommendations, job descriptions and procedures for workers, and computer programs for automated machines. We discuss process planning in more detail in Chapter 6.
Launching a new product involves ramping up production, coordinating the supply chain, and rolling out marketing plans. This is one of the areas in which marketing and production must work very closely together.
Concurrent Design
Many companies known for creativity and innovation in product design are slow and ineffective in getting new products to the market. Problems in converting ideas to finished products may be caused by poor manufacturing practices, but more than likely they are the result of poor design. Design decisions affect sales strategies, efficiency of manufacture, speed of repair, and product cost.
Reducing the time-to-market involves completely restructuring the decision-making process and the participants in that process. The series of walls between functional areas portrayed in Figure 4.4, must be broken down and replaced with new alliances and modes of interaction. This feat can be accomplished by using a team approach to design and a concept known as concurrent design.
Figure 4.4 Breaking Down the Barriers to Effective Design
Concurrent design helps improve the quality of early design decisions and thereby reduces the length and cost of the design process. Design decisions overlap; therefore, one stage of design is not completely finished before another stage begins.
One example of concurrent design is suppliers who complete the detailed design for the parts they will supply. In the traditional design process, manufacturers determine component design in detail, down to the fraction of an inch, including the specific material to be used. Detailed engineering drawings are made, and only then are suppliers called in to submit their bids. Many of today’s successful manufacturers, on the other hand, provide general performance specifications to their component suppliers, such as:
Design a set of brakes that can stop a 2,200-pound car from 60 miles per hour in 200 feet ten times in succession without fading. The brakes should fit into a space 6 inches × 8 inches × 10 inches at the end of each axle and be delivered to the assembly plant for $40 a set.3
The supplier is asked to prepare a prototype for testing. Detailed decisions are left up to the supplier, as a member of the design team who is the expert in that area. This approach saves considerable development time and resources.
Concurrent design also involves incorporating the production process into design decisions. In many cases, design engineers do not have a good understanding of the capabilities or limitations of their company’s manufacturing facilities; increased contact with manufacturing can sensitize them to the realities of making a product. Simply consulting manufacturing personnel early in the design process about critical factors or constraints can improve the quality of product design. This is where most companies begin their efforts in changing the corporate culture from a separate design function to one that is integrated with operations.
Involve suppliers and manufacturing in the design process.
One more difference between sequential design and concurrent design is the manner in which prices are set and costs are determined. In the traditional process, the feasibility study includes some estimate of the price to be charged to the customer. However, that selling price is not firmed up until the end of the design process, when all the product costs are accumulated and a profit margin is attached, and it is determined whether the original price estimate and the resulting figure are close. This is a cost-plus approach. If there are discrepancies, either the product is sold at the new price, a new feasibility study is made, or the designers go back and try to cut costs. Remember that design decisions are interrelated; the further back in the process you go, the more expensive are the changes. Concurrent design uses a price-minus system. A selling price (that will give some advantage in the marketplace) is determined before design details are developed. Then a target cost of production is set and evaluated at every stage of product and process design. Techniques such as value analysis (which we discuss later) are used to keep costs in line.
Use price-minus costing.
Because concurrent design requires that more tasks be performed in parallel, the scheduling of those tasks is more complex than ever. Project-scheduling techniques, such as PERT/CPM (discussed in Chapter 9), are used to coordinate the myriad interconnected decisions that constitute concurrent design.
Concurrent design is aided by the use of technology. The next section describes technology in design.
Technology in Design
New products for more segmented markets have proliferated over the past decade. Changes in product design are more frequent, and product life cycles are shorter. IBM estimates the average life of its new product offerings is about six months. The ability to get new products to the market quickly has revolutionized the competitive environment and changed the nature of manufacturing.
Part of the impetus for the deluge of new products is the advancement of technology available for designing products. It begins with computer-aided design (CAD) and includes related technologies such as computer-aided engineering (CAE), computer-aided manufacturing (CAM), and collaborative product design (CPD).
Internet Exercises
Computer-aided design (CAD) is a software system that uses computer graphics to assist in the creation, modification, and analysis of a design. A geometric design is generated that includes not only the dimensions of the product but also tolerance information and material specifications. The ability to sort, classify, and retrieve similar designs from a CAD database facilitates standardization of parts, prompts ideas, and eliminates building a design from scratch.
CAD-generated products can also be tested more quickly. Engineering analysis, performed with a CAD system, is called computer-aided engineering (CAE). CAE retrieves the description and geometry of a part from a CAD database and subjects it to testing and analysis on the computer screen without physically building a prototype. CAE can maximize the storage space in a car trunk, detect whether plastic parts are cooling evenly, and determine how much stress will cause a bridge to crack. With CAE, design teams can watch a car bump along a rough road, the pistons of an engine move up and down, a golf ball soar through the air, or the effect of new drugs on virtual DNA molecules. Advances in virtual reality and motion capturing technology allow designers and users to experience the design without building a physical prototype.
The ultimate design-to-manufacture connection is a CAD/CAM system. CAM is the acronym for computer-aided manufacturing. CAD/CAM involves the automatic conversion of CAD design data into processing instructions for computer-controlled equipment and the subsequent manufacture of the part as it was designed. This integration of design and manufacture can save enormous amounts of time, ensure that parts and products are produced precisely as intended, and facilitate revisions in design or customized production.
Computer-aided design (CAD) is used to design everything from pencils to submarines. Some of our everyday products are more difficult to design than you may think. Potato chips with ridges, the top of a soda can, a two-liter bottle of soft drink, a car door, and golf balls are examples of simple products that require the sophistication of CAD for effective design and testing. Shown here are two examples of dimple design on Titleist golf balls. The number, size, and patterns of dimples on a golf ball can affect the distance, trajectory, and accuracy of play. The advent of CAD has allowed many more designs to be tested. Today, more than 200 different dimple patterns are used by golf-ball manufacturers. Golf clubs and golf courses are also designed using CAD.
Courtesy of Titleist and FootJoy Worldwide
Besides the time savings, CAD and its related technologies have also improved the quality of designs and the products manufactured from them. The communications capabilities of CAD may be more important than its processing capabilities in terms of design quality. CAD systems enhance communication and promote innovation in multifunctional design teams by providing a visual, interactive focus for discussion. Watching a vehicle strain its wheels over mud and ice prompts ideas on product design and customer use better than stacks of consumer surveys or engineering reports. New ideas can be suggested and tested immediately, allowing more alternatives to be evaluated. To facilitate discussion or clarify a design, CAD data can be sent electronically between designer and supplier or viewed simultaneously on computer screens by different designers in physically separate locations. Rapid prototypes can be tested more thoroughly with CAD/CAE. More prototypes can be tested as well. CAD improves every stage of product design and is especially useful as a means of integrating design and manufacture.
CAD and its related technologies produce better designs faster.
With so many new designs and changes in existing designs, a system is needed to keep track of design revisions. Such a system is called product life cycle management (PLM). PLM stores, retrieves, and updates design data from the product concept, through manufacturing, revision, service, and retirement of the product.
Collaborative Product Design
The benefits of CAD-designed products are magnified when combined with the ability to share product-design files and work on them in real time from physically separate locations. Collaborative design can take place between designers in the same company, between manufacturers and suppliers, or between manufacturers and customers. Manufacturers can send out product designs electronically with request for quotes (RFQ) from potential component suppliers. Or performance specs can be posted to a Web site from which suppliers can create and transmit their own designs. Designs can receive final approval from customers before expensive processing takes place. A complex design can involve hundreds of suppliers. The Web allows them to work together throughout the design and manufacturing processes, not just at the beginning and the end.
Software systems for collaborative design are loosely referred to as collaborative product design (CPD). These systems provide the interconnectivity and translation capabilities necessary for collaborative work across platforms, departments, and companies. In conjunction with PLM systems, they also manage product data, set up project workspaces, and follow product development through the entire product life cycle.
Collaborative design accelerates product development, helps to resolve product launch issues, and improves the quality of the design. Designers can conduct virtual review sessions, test “what if” scenarios, assign and track design issues, communicate with multiple tiers of suppliers, and create, store, and manage project documents.
These virtual review sessions often include the design review tools presented in the next section.
Design Review
Before finalizing a design, formal procedures for analyzing possible failures and rigorously assessing the value of every part and component should be followed. Three such techniques are failure mode and effects analysis (FMEA), fault tree analysis (FTA), and value analysis (VA).
Failure mode and effects analysis (FMEA) is a systematic approach to analyzing the causes and effects of product failures. It begins with listing the functions of the product and each of its parts. Failure modes are then defined and ranked in order of their seriousness and likelihood of failure. Failures are addressed one by one (beginning with the most catastrophic), causes are hypothesized, and design changes are made to reduce the chance of failure. The objective of FMEA is to anticipate failures and prevent them from occurring. Table 4.1 shows a partial FMEA for potato chips.
Table 4.1 Failure Mode and Effects Analysis for Potato Chips

Failure Mode

Cause of Failure

Effect of Failure

Corrective Action

Stale

Low moisture content, expired shelf life, poor packaging

Tastes bad, won’t crunch, thrown out, lost sales

Add moisture, cure longer, better package seal, shorter shelf life

Broken

Too thin, too brittle, rough handling, rough use, poor packaging

Can’t dip, poor display, injures mouth, choking, perceived as old, lost sales

Change recipe, change process, change packaging

Too salty

Outdated recipe, process not in control, uneven distribution of salt

Eat less, drink more, health hazard, lost sales

Experiment with recipe, experiment with process, introduce low-salt version

Fault tree analysis (FTA) is a visual method of analyzing the interrelationship among failures. FTA lists failures and their causes in a tree format using two hatlike symbols, one with a straight line on the bottom representing and and one with a curved line on the bottom for or.Figure 4.5 shows a partial FTA for a food manufacturer who has a problem with potato chip breakage. In this analysis, potato chips break because they are too thin or because they are too brittle. The options for fixing the problem of too-thin chips—increasing thickness or reducing size—are undesirable, as indicated by the Xs. The problem of too-brittle chips can be alleviated by adding more moisture or having fewer ridges or adjusting the frying procedure. We choose to adjust the frying procedure, which leads to the question of how hot the oil should be and how long to fry the chips. Once these values are determined, the issue of too-brittle chips (and thus chip breakage) is solved, as indicated.
Figure 4.5 Fault Tree Analysis for Potato Chips

Value analysis (VA), (also known as value engineering) was developed by General Electric in 1947 to eliminate unnecessary features and functions in product designs. It has reemerged as a technique for use by multifunctional design teams. The design team defines the essential functions of a component, assembly, or product using a verb and a noun. For example, the function of a container might be described as holds fluid. Then the team assigns a value to each function and determines the cost of providing the function. With that information, a ratio of value to cost can be calculated for each item. The team attempts to improve the ratio by either reducing the cost of the item or increasing its worth. Every material, every part, and every operation is subjected to such questions as:

1.

Can we do without it?

2.

Does it do more than is required?

3.

Does it cost more than it is worth?

4.

Can something else do a better job?

5.

Can it be made by a less costly method? with less costly tooling? with less costly material?

6.

Can it be made cheaper, better, or faster by someone else?

Updated versions of value analysis also assess the environmental impact of materials, parts, and operations with questions such as:

7.

Is it made of recyclable or biodegradable material?

8.

Is the process that produces the item sustainable?

9.

Will it use more energy than it is worth?

10.

Does the item or its by-product harm the environment?

These questions lead us to the next section on design for environment.
Design for Environment
Each year Americans dispose of 350 million home and office appliances (50 million of them hair dryers) and more than 10 million PCs. At the current rate of discard, it’s not hard to visualize city dumps filled with old refrigerators and computers. These types of images have prompted government and industry to consider the environmental impact of product design.
Internet Exercises
Environmental labeling, such as Germany’s Green Dot program, gives the seal of approval to environmentally safe products. International standards for environmental stewardship, called ISO 14000, may soon be required as a condition to do business in certain countries and companies, and to qualify for foreign aid, business loans, and reduced insurance premiums. These types of laws, regulations, and incentives make design for environment an imperative.
Design for environment (DFE) involves designing products from recycled material, using materials or components that can be recycled, designing a product so that it is easier to repair than discard, and minimizing unnecessary packaging. As shown in Figure 4.6, it also includes minimizing material and energy use during manufacture, consumption, and disposal.
Figure 4.6 Design for Environment

Extended Producer Responsibility
Extended producer responsibility (EPR) is a concept that holds companies responsible for their product even after its useful life. Governments worldwide are enacting regulations, economics incentives, and information requirements for environmentally friendly products and services. German law mandates the collection, recycling, and safe disposal of personal computers and household appliances, including stereos and video appliances, television sets, washing machines, dishwashers, and refrigerators. Some manufacturers pay a tax for recycling; others include the cost of disposal in a product’s price.
The Netherlands considers television sets chemical waste and requires companies to dispose of them accordingly. Norwegian law requires producers and importers of electronic equipment to recycle or reuse 80% of the product. Nine U.S. states now have “takeback” laws that require the return and recycling of batteries. Brazil considers all packaging that cannot be recycled hazardous waste. The sale of mercury thermometers is banned in the United States, and disposal of them is billed to the producers. Minnesota has an agreement with Sony to take back and recycle Sony electronic products. The European Union requires that 80% of the weight of discarded cars must be reused or recycled.
Factors such as product life, recoverable value, ease of service, and disposal cost affect decisions on disposal, continued use, and recycling. Many products are discarded because they are difficult or expensive to repair. Materials from discarded products may not be recycled if the product is difficult to disassemble. That’s why Hewlett Packard and Xerox design their products for disassembly. As a result, HP has been able to disassemble and refurbish 12,000 tons of equipment annually with less than 1% waste. Xerox’s program to recycle copier parts saves the company more than $200 million annually. The Dell Recycle Program collects redundant equipment from customers, regardless of brand, to be resold, refurbished, recycled, or disposed of in an environmentally friendly fashion. In addition, customers can receive discount coupons if they trade-in, donate to charity, or auction old and unwanted PCs.
Recycling programs save money.
Sustainability
Recyclability and zero waste are important aspects of design for environment and are often the first goals to be set. Sustainability, the ability to meet present needs without compromising those of future generations, is a broader concept and more difficult to achieve. Sustainability uses renewable resources with zero waste to produce recyclable or biodegradable products that do not harm the environment or yield harmful by-products. These are indeed lofty goals, but more and more corporations are finding that with green design they can add to the bottom line while helping the environment and pleasing their customers. Several principles for green design are presented in Table 4.2. Read about Walt-Mart’s goals for sustainability and their progress in meeting them in the accompanying “Along the Supply Chain” box.
Table 4.2 Principles of Green Product Design

Use fewer materials. Take a critical look at product dimensions, materials strength, and production techniques to ensure that materials are used efficiently. This includes less packaging. By working with suppliers to reduce the packaging on just 16 toy items, Wal-Mart used 230 fewer shipping containers, 256 fewer barrels of oil, and 1300 fewer trees.

Use recycled materials or recovered components. It is not enough to design products that are recyclable; incorporate already recycled material into the design.

Don’t assume that natural materials are always better. Some synthetics may have less impact on the environment than the extraction of a natural resource. Polyester fabric, for example, is 100% recyclable. Polar fleece, created by Malden Mills, is made from recycled soda bottles.

Don’t forget energy consumption. Many design teams focus their attention on material selection without considering the amount of energy needed to produce, process, use, or dispose of the product.

Extend the useful life of the product. Throw-away products waste materials and cost more energy to replace. Make products of good quality that will last longer before being discarded.

Involve the entire supply chain. All participants along the supply chain share responsibility for the life-cycle environmental impacts of products.

Change the paradigm of design. Design products as systems and life cycles, or design services instead. Customers want a solution for a certain problem, which may call for a service instead of a product.

Source: Adapted from the Business Social Responsibility Web site, www.bsr.org, accessed April 1, 2007.
Whether it’s greening a design or making other design changes to please the customer, companies need a procedure for ensuring that the myriad of design decisions are consistent and reflective of customer needs. Such a technique, quality function deployment, is discussed in the next section.
Virtual Tours
Along the Supply Chain: The Greening of Wal-Mart
Corporate America is turning green and saving lots of green doing it. Take Wal-Mart, for instance. As the biggest private user of electricity in the United States and owner of the nation’s second-largest fleet of trucks, it’s obvious that cutting down on fossil fuels could save money as well as help the environment. But when Wal-Mart began working with Conservation International, even they were surprised at their company’s footprint on the environment and how much impact small changes could make. For example, eliminating excessive packaging on its private label toy line would save $2.4 million a year in shipping costs, 3,800 trees, and 1 million barrels of oil. Installing auxiliary power sources in its fleet of trucks (instead of idling the engine while drivers sleep) would save $26 million in fuel costs. Bailing plastic refuse for recycling and resale would produce $28 million in additional revenue.
Wal-Mart CEO Leo Scott explains it this way, “If we throw it away, we had to buy it first. So we pay twice—once to get it, once to have it taken away. What if we reverse that? What if our suppliers send us less, and everything they send us has value as a recycled product? No waste, and we get paid instead.”
Leva Geneviciene/iStockphoto
Greening its 60,000 suppliers has the potential of generating huge savings, both environmentally and on the bottom line. One of Wal-Mart’s initiatives, reducing supplier packaging by 5% by 2013, is the equivalent of removing 213,000 trucks from the road, and saving 324,000 tons of coal and 67 million gallons of diesel fuel per year. Wal-mart’s purchase and promotion of fair trade coffee, organic food, organic cotton, and other initiatives has transformed companies and industries.
Wal-Mart employs 1.8 million workers and greets 176 million customers in their stores each week. Imagine the impact if Wal-Mart could influence even a fraction of its base to be more environmentally aware. For example, if each customer who visits Wal-Mart in a week buys one compact fluorescent light (CFL) bulb, electric bills would be reduced by $3 billion, 50 billion tons of coal would be conserved, and landfills would have one billion fewer incandescent light bulbs. Wal-Mart’s goal, in partnership with GE, is to sell 100 million CFL bulbs over the next 12 months.
More broadly, Wal-Mart’s sustainability goals are:
100% renewable energy—existing stores 25% more efficient in 7 years; new stores 30% more efficient in 4 years. Currently, three Wal-Mart eco-stores use windmills, solar panels, skylights, and alternative energy sources.
Zero waste—reduce solid waste by 25% in 3 years, all private brand packaging improved in 2 years. At Wal-Mart super stores, spoiled food is composted to be converted into fertilizer and resold. At new eco-stores, cooking oil from the deli powers heating units, and recycled asphalt is incorporated into the building’s foundation.
Sustainable products—20% of suppliers in 3 years; design and support a green product program in China.
“Sustainability 360” is a company-wide initiative to engage Wal-Mart’s associates, suppliers, communities and customers in sustainable design. Incentive plans and sustainability scorecards encourage merchandise buyers to purchase more environmentally preferable products. Fourteen “sustainable value networks” composed of Wal-Mart executives, suppliers, environmental groups, and regulators meet every few months to share ideas, set goals, and monitor progress.
Minimal footprint—developing a common-sense plan for selecting sites and using construction materials that minimize Wal-Mart’s footprint and improve the land. Recognizing that the company has a lot of catching up to do in this area, Wal-Mart has initiated an “Acres for America” program where at least one parcel of priority wildlife habitat is preserved for every parcel developed over the next 10 years. The initiative is backdated to cover the current footprint of all its stores and distribution centers, as well as future development. In total, that means 138,000 acres is slated for protection.
What green initiatives is your university pursuing?
Sources: Marc Gunther, “The Green Machine,”Fortune, August 7, 2006; Wal-Mart: On the Side of the Angels,”Business Week, March 30, 2007; Corporate website, walmartstores.com, accessed April 1, 2007.
Quality Function Deployment
Imagine that two engineers are working on two different components of a car sunroof simultaneously but separately.4 The “insulation and sealing” engineer develops a new seal that will keep out rain, even during a blinding rainstorm. The “handles, knobs, and levers” engineer is working on a simpler lever that will make the roof easier to open. The new lever is tested and works well with the old seal. Neither engineer is aware of the activities of the other. As it turns out, the combination of heavier roof (due to the increased insulation) and lighter lever means that the driver can no longer open the sunroof with one hand! Hopefully, the problem will be detected in prototype testing before the car is put into production. At that point, one or both components will need to be redesigned. Otherwise, cars already produced will need to be reworked and cars already sold will have to be recalled. None of these alternatives is pleasant, and they all involve considerable cost.
Coordinating design decisions can be difficult.
Could such problems be avoided if engineers worked in teams and shared information? Not entirely. Even in design teams, there is no guarantee that all decisions will be coordinated. Ford and Firestone have worked together for over 75 years. But teamwork did not prevent Firestone tires designed to fit the Ford Explorer from failing when inflated to Ford specifications. A formal method is needed for making sure that everyone working on a design project knows the design objectives and is aware of the interrelationships of the various parts of the design. Similar communications are needed to translate the voice of the customer to technical design requirements. Such a process is called quality function deployment (QFD).
Internet Exercises
QFD uses a series of matrix diagrams that resemble connected houses. The first matrix, dubbed the house of quality, converts customer requirements into product-design characteristics. As shown in Figure 4.7, the house of quality has six sections: a customer requirements section, a competitive assessment section, a design characteristics section, a relationship matrix, a tradeoff matrix, and a target values section. Let’s see how these sections interrelate by building a house of quality for a steam iron.
Figure 4.7 Outline of the House of Quality
Our customers tell us they want an iron that presses quickly, removes wrinkles, doesn’t stick to fabric, provides enough steam, doesn’t spot fabric, and doesn’t scorch fabric (see Figure 4.8). We enter those attributes into the customer requirements section of the house. For easier reference, we can group them into a category called “Irons well.” Next we ask our customers to rate the list of requirements on a scale of 1 to 10, with 10 being the most important. Our customers rate presses quickly and doesn’t scorch fabric as the most important attributes, with a score of 9. A second group of attributes, called “Easy and safe to use” is constructed in a similar manner.
Figure 4.8 A Competitive Assessment of Customer Requirements
Customer requirements
Next, we conduct a competitive assessment. On a scale of 1 to 5 (with 5 being the highest), customers evaluate our iron (we’ll call it “X”) against competitor irons, A and B. We see that our iron excels on the customer attributes of presses quickly, removes wrinkles, provides enough steam, automatic shutoff, and doesn’t break when dropped. So there is no critical need to improve those factors. However, we are rated poorly on doesn’t stick, doesn’t spot, heats quickly, quick cool-down, and not too heavy. These are order qualifiers. We need to improve these factors just to be considered for purchase by customers. None of the irons perform well on doesn’t scorch fabric, or doesn’t burn when touched. Perhaps we could win some orders if we satisfied these requirements.
Competitive assessment
In order to change the product design to better satisfy customer requirements, we need to translate those requirements to measurable design characteristics. We list such characteristics (energy needed to press, weight of iron, size of the soleplate, etc.) across the top of the matrix shown in Figure 4.9. In the body of the matrix, we identify how the design characteristics relate to customer requirements. Relationships can be positive, + or minus,–. Strong relationships are designated with a circled plus, ⊕ or ⊝. Examine the plusses and minuses in the row, Doesn’t break when dropped. We can ensure that the iron doesn’t break when dropped by increasing the weight of the iron, increasing the size of the soleplate, increasing the thickness of the soleplate, or adding a protective cover. Of those options, making the soleplate thicker has the strongest impact.
Figure 4.9 Converting Customer Requirements to Design Characteristics
Product design characteristics are interrelated also, as shown in the roof of the house in Figure 4.10. For example, increasing the thickness of the soleplate would increase the weight of the iron but decrease the energy needed to press. Also, a thicker soleplate would decrease the flow of water through the holes, and increase the time it takes for the iron to heat up or cool down. Designers must take all these factors into account when determining a final design.
Figure 4.10 The Tradeoff Matrix: Effects of Increasing Soleplate Thickness
The last section of the house, shown in Figure 4.11, adds quantitative measures to our design characteristics. Measuring our iron X against competitors A and B, we find that our iron is heavier, larger, and has a thicker soleplate. Also, it takes longer to heat up and cool down, but requires less energy to press and provides more steam than other irons. To decide which design characteristics to change, we compare the estimated impact of the change with the estimated cost. We rate these factors on a common scale, from 1 to 5, with 5 being the most. As long as the estimated impact exceeds the estimated cost, we should make a change. Thus, we need to change several product characteristics in our new design, such as weight of the iron, size of the soleplate, thickness of the soleplate, material used for the soleplate, number of holes, time required to heat up, and time required to cool down.
Figure 4.11 Targeted Changes in Design
Now visualize a design team discussing target values for these product characteristics using the data provided in the house of quality as a focal point. The house does not tell the team how to change the design, only what characteristics to change. The team decides that the weight of the iron should be reduced to 1.2 lb, the size of the soleplate to 8 in. by 5 in., the thickness of the soleplate to 3 cm, the material used for soleplate to silverstone, the number of holes to 30, time to heat up to 30 seconds, and time to cool down to 500 seconds. Figure 4.12 shows the completed house of quality for the steam iron.
Figure 4.12 The Completed House of Quality for a Steam Iron
The house of quality is the most popular QFD matrix. However, to understand the full power of QFD, we need to consider three other houses that can be linked to the house of quality (Figure 4.13). In our example, suppose we decide to meet the customer requirement of “heats quickly” by reducing the thickness of the soleplate. The second house, parts deployment, examines which component parts are affected by reducing the thickness of the soleplate. Obviously, the soleplate itself is affected, but so are the fasteners used to attach the soleplate to the iron, as well as the depth of the holes and connectors that provide steam. These new part characteristics then become inputs to the third house, process planning. To change the thickness of the soleplate, the dies used by the metal-stamping machine to produce the plates will have to change, and the stamping machine will require adjustments. Given these changes, a fourth house, operating requirements, prescribes how the fixtures and gauges for the stamping machine will be set, what additional training the operator of the machine needs, and how process control and preventive maintenance procedures need to be adjusted. Nothing is left to chance—all bases are covered from customer to design to manufacturing.
Figure 4.13 A Series of Connected QFD Houses
Other houses
Excel Template
In comparison with traditional design approaches, QFD forces management to spend more time defining the new product changes and examining the ramifications of those changes. More time spent in the early stages of design means less time is required later to revise the design and make it work. This reallocation of time shortens the design process considerably. Some experts suggest that QFD can produce better product designs in half the time of conventional design processes. In summary, QFD is a communications and planning tool that promotes better understanding of customer demands, promotes better understanding of design interactions, involves manufacturing in the design process, and provides documentation of the design process.
Benefits of QFD
Design for Robustness
A product can fail because it was manufactured wrong in the factory—quality of conformance—or because it was designed incorrectly—quality of design. Quality-control techniques, such as statistical process control (SPC) discussed in Chapter 3, concentrate on quality of conformance. Genichi Taguchi, a Japanese industrialist and statistician, suggests that product failure is primarily a function of design quality.
Consumers subject products to an extreme range of operating conditions and still expect them to function normally. The steering and brakes of a car, for example, should continue to perform their function even on wet, winding roads or when the tires are not inflated properly. A product designed to withstand variations in environmental and operating conditions is said to be robust or to possess robust quality. Taguchi believes that superior quality is derived from products that are more robust and that robust products come from robust design.
The conditions that cause a product to operate poorly can be separated into controllable and uncontrollable factors. From a designer’s point of view, the controllable factors are design parameters such as material used, dimensions, and form of processing. Uncontrollable factors are under the user’s control (length of use, maintenance, settings, and so on). The designer’s job is to choose values for the controllable variables that react in a robust fashion to the possible occurrences of uncontrollable factors. To do this, various configurations of the product are tested under different operating conditions specified in the design of experiments (DOE). The experiment is replicated multiple times. The mean performance of an experimental configuration over a number of trials is called the “signal.” The standard deviation of performance is referred to as “noise.” The most robust design exhibits the highest signal-to-noise ratio.
The signal-to-noise ratio measures the robustness of a design.
As part of the design process, design engineers must also specify certain tolerances, or allowable ranges of variation in the dimension of a part. It is assumed that producing parts within those tolerance limits will result in a quality product. Taguchi, however, suggests that consistency is more important to quality than being within tolerances. He supports this view with the following observations.
Consistent errors can be more easily corrected than random errors,
Parts within tolerance limits may produce assemblies that are not within limits, and
Consumers have a strong preference for product characteristics near their ideal values.
Let’s examine each of these observations.
Consistent mistakes are easier to correct. Consider the professor who always starts class 5 minutes late. Students can adjust their arrival patterns to coincide with the professor’s, or the professor’s clock can be set ahead by 5 minutes. But if the professor sometimes starts class a few minutes early, sometimes on time, and other times 10 minutes late, the students are more apt to be frustrated, and the professor’s behavior will be more difficult to change.
Consistency is important to quality.
Consistency is especially important for assembled products. The assembly of two parts that are near opposite tolerance limits may result in tolerance stack-ups and poor quality. For example, a button diameter that is small (near to the lower tolerance limit) combined with a buttonhole that is large (near to its upper tolerance limit) results in a button that won’t stay fastened. Although it is beyond the scope of this book, Taguchi advises how to set tolerance limits so that tolerance stack-up can be avoided.
Manufacturing tolerances define what is acceptable or unacceptable quality. Parts or products measured outside tolerance limits are considered defective and are either reworked or discarded. Parts or products within the limits are considered “good.” Taguchi asserts that although all the parts or products within tolerances may be acceptable, they are not all of the same quality. Consider a student who earns an average grade of 60 in a course. He or she will pass, whereas a student who earns an average grade of 59 will fail. A student with a 95 average will also pass the course. Taguchi would claim that there is negligible difference between the quality of the students with averages of 59 and 60, even though one was “rejected” and the other was not. There is, however, a great deal of difference in the quality of the student with an average of 60 and the student with an average of 95. Furthermore, a professor in a subsequent class or a prospective employer will be able to detect the difference in quality and will overwhelmingly prefer the student who passed the course with a 95 average. Quality near the target value is preferable to quality that simply conforms to specifications.
Internet Exercises
Taguchi quantified customer preferences toward on-target quality in the quality loss function(QLF). The quadratic function, graphed in Figure 4.14 implies that a customer’s dissatisfaction (or quality loss) increases geometrically as the actual value deviates from the target value. The quality loss function is used to emphasize that customer preferences are strongly oriented toward consistently meeting quality expectations. Design for Six Sigma (DFSS) uses the Taguchi method to reduce variability in design.
Figure 4.14 Taguchi’s Quality Loss Function
The quality loss function quantifies customer preferences toward quality.
Practice Quizzes
Summary
New products and services enhance a company’s image, invigorate employees, and help a firm to grow and prosper. The design process begins with ideas formulated into a product concept. Once a product concept passes a feasibility study, performance specs are given to designers who develop and test prototype designs. For selected prototypes, design and manufacturing specs are taken through a pilot run where the design is finalized and the planning for product launch begins.
Time-to-market can be accelerated by using design teams, concurrent design, design for manufacture concepts, and CAD/CAM systems. The quality of design can be improved through design reviews, design for environment, quality function deployment, and robust design.
Designs define what goods or services are to be provided to the customer. We must now decide how to provide them. The next chapter describes the decisions involved in planning processes and making decisions about technology and capacity.
Summary of Key Terms
benchmarking
finding the best-in-class product or process, measuring one’s performance against it, and making recommendations for improvements based on the results.
CAD/CAM
the ultimate design-to-manufacture connection.
collaborative product design (CPD)
software system for collaborative design and development among trading partners.
computer-aided design (CAD)
a software system that uses computer graphics to assist in the creation, modification, and analysis of a design.
computer-aided engineering (CAE)
engineering analysis performed at a computer terminal with information from a CAD database.
concurrent design
a new approach to design that involves the simultaneous design of products and processes by design teams.
design for environment (DFE)
designing a product from material that can be recycled or easily repaired rather than discarded.
design for manufacture (DFM)
designing a product so that it can be produced easily and economically.
extended producer responsibility
holding a company responsible for its product even after its useful life.
failure mode and effects analysis (FMEA)
a systematic approach to analyzing the causes and effects of product failures.
fault tree analysis (FTA)
a visual method for analyzing the interrelationships among failures.
form design
the phase of product design concerned with how the product looks.
functional design
the phase of a product design concerned with how the product performs.
maintainability
the ease with which a product is maintained or repaired.
modular design
combining standardized building blocks, or modules, in a variety of ways to create unique finished products.
perceptual map
a visual method for comparing customer perceptions of different products or services.
production design
the phase of product design concerned with how the product will be produced.
product life-cycle management
software for managing the entire lifecycle of a product.
quality function deployment (QFD)
a structured process that translates the voice of the customer into technical design requirements.
rapid prototyping
quickly testing and revising a preliminary design model.
reliability
the probability that a given part or product will perform its intended function for a specified period of time under normal conditions of use.
reverse engineering
carefully dismantling and inspecting a competitor’s product to look for design features that can be incorporated into your own product.
robust design
the design of a product or a service that can withstand variations in environmental and operating conditions.
simplification
reducing the number of parts, subassemblies, or options in a product.
standardization
using commonly available parts that are interchangeable among products.
sustainability
the ability to meet present needs without compromising those of future generations.
time-to-market
the length of time from idea conception to product launch.
usability
ease of use of a product or service.
value analysis (VA)
an analytical approach for eliminating unnecessary design features and functions.
Summary of Key Formulas
Reliability in series
Rs = (R1)(R2)…(Rn)
Reliability in parallel
Rs = R1 + (1 – R1)R2
or
Rs = 1 – [(1 – R1)(1 – R2)…(1 – Rn)]
Mean time between failures
System Availability

Solved Problems
Animated Demo Problems

1.

RELIABILITY
Jack McPhee, a production supervisor for McCormick, Inc., is committed to the company’s new quality efforts. Part of the program encourages making product components in-house to ensure higher quality levels and instill worker pride. The system seems to be working well. One assembly, which requires a reliability of 0.95, is normally purchased from a local supplier. Now it is being assembled in-house from three components that each boast a reliability of 0.96.
Customer complaints have risen in the three months since McCormick started doing its own assembly work. Can you explain why?
What level of component reliability is necessary to restore the product to its former level of quality?
Jack can’t increase the reliability of the individual components; however, he can add a backup with a reliability of 0.90 to each component. If the backups have a reliability of 0.90, how many will be needed to achieve a 0.95 reliability for the assembly?

SOLUTION

Complaints are valid
Each component would need a reliability of 0.983 to guarantee an assembly reliability of 0.95
Components in parallel 0.96 + (1 – 0.96)(0.90) = 0.996
One backup
Two backups
Three backups
For a system reliability of 0.95, choose two backups.

2.

SYSTEM AVAILABILITY
Amanda is trying to decide which Internet service provider to use. Her friends are always complaining about service interruptions and how long it takes to get the service up and running again. Amanda is a conscientious student and wants reliable access to the Internet. With that goal in mind, she has collected data on mean time between failures (MTBF) and mean time to repair (MTTR) for three Internet service providers. Given that cost and speed are comparable among the three options, which provider would you recommend?

Provider

MTBF

MTTR

MostTel

20

1

Star

40

4

CableX

80

6

SOLUTION

Provider

MTBF

MTTR

System Availability

MostTel

20

1

20/(20 + 1) = 0.952

Star

40

4

40/(40 + 1) = 0.909

CableX

80

6

80/(80 + 6) = 0.930

Choose MostTel

Questions
Internet Exercises Weblinks

41.

Describe the strategic significance of design. How can organizations gain a competitive edge with product or service design?

42.

Look around your classroom and make a list of items that impede your ability to learn. Classify them as problems in quality of design or quality of conformance.

43.

Give an example of a product or service you have encountered that was poorly designed. Read about more bad designs at the bad designs Web site http://www.baddesigns.com. Make a list of the factors that make a design unworkable.

44.

Sometimes failures provide the best opportunities for new products and services. Read the Post-It Note story at http://www.3m.com. Search the Net for at least one other failure-to-success story.

45.

Business Week sponsors a best design competition each year. Read about this year’s winners and write a brief summary about what makes these designs special.

46.

Automakers often post concept cars on their Web sites. Find out how the design process for these cars differs. Which cars do you think will be commercially successful? Why?

47.

Construct a perceptual map for the following products or services: (a) business schools in your state or region, (b) software packages, and (c) video rental stores. Label the axes with the dimensions you feel are most relevant. Explain how perceptual maps are used.

48.

Read about benchmarking at the American Productivity and Quality Center http://www.apqc.org and the Benchmarking Exchange http://www.benchnet.com. What is benchmarking? What types of things do these organizations benchmark? How are the studies conducted? If possible, access one of the free benchmarking reports and summarize its findings.

49.

Find out if your university benchmarks itself against other universities. If so, write a summary of the characteristics that are considered, the measures that are used, and the results. Do the data support your views as a customer?

410.

What kinds of analyses are conducted in a feasibility study for new products?

411.

Differentiate between performance specifications, design specifications, and manufacturing specifications. Write sample specifications for a product or service of your choosing.

412.

How are reliability and maintainability related? Give an example for a product or service you have experienced.

413.

Explain how simplification and standardization can improve designs. How does modular design differ from standardization?

414.

How can design teams improve the quality of design? Relate your experiences in working in teams. What were the advantages and disadvantages?

415.

Discuss the concept of concurrent design. What are the advantages of this approach? How would you apply concurrent design to a group project?

416.

What does design for manufacture entail? List several techniques that can facilitate the DFM process.

417.

Describe the objectives of failure mode and effect analysis, fault tree analysis, and value analysis. Apply one of the techniques to a project, computer assignment, or writing assignment you have recently completed.

418.

Access the Environmental Protection Agency http://www.epa.gov/ to read about the U.S. government’s commitment to environmental product design. Compare the U.S. approach to that of other countries.

419.

Search the Internet for two or more companies that design for environment. What are the main components of each company’s green design initiative? How do their approaches differ?

420.

Link to the International Standards Organization http://www.iso.org and explore ISO 14000. What do these standards entail? How were they developed? How does a company attain ISO 14001 certification? Why would they want to?

421.

What is the purpose of QFD? Find out if companies really use QFD by visiting the QFD Institute http://www.qfdi.org and summarizing one of their case studies.

422.

Discuss the concept of robust design. Give an example of a robust product or service.

423.

How does CAD relate to CAE and CAM? How do CAD and the Internet promote collaborative design?

Problems
GO Problems

41.

Use the following instructions to construct and test a prototype paper airplane. Are the instructions clear? How would you improve the design of the airplane or the manner in which the design is communicated?
Begin with an 8 1/2 in. by 11 in. sheet of paper.
Fold the paper together lengthwise to make a center line.
Open the paper and fold the top corners to the center line.
Fold the two top sides to the center line.
Fold the airplane in half.
Fold back the wings to meet the center line.
Hold the plane by the center line and let it fly.

42.

An alternative airplane design is given here. Follow the assembly instructions and test the airplane. Are the instructions clear? Compare the performance of this airplane design with the one described in Problem 4.1. Which plane was easier to construct? How would you improve the design of this plane or the manner in which the design is communicated?
Begin with an 8 1/2 in. by 11 in. sheet of paper.
Fold it lengthwise in alternating directions. The folds should be about 1 in. wide.
Hold the top of the folded paper in one hand and fan out the back portion with the other hand.
Make a small fold in the nose of the plane to hold it together, and let it fly.

43.

Calculate the reliability of the following system.

44.

A broadcasting station has five major subsystems that must all be operational before a show can go on the air. If each subsystem has the same reliability, what reliability would be required to be 95% certain of broadcast success? 98% certain? 99% certain?

45.

Competition for a new generation of computers is so intense that MicroTech has funded three separate design teams to create the new systems. Due to varying capabilities of the team members, it is estimated that team A has a 90% probability of coming up with an acceptable design before the competition, team B has an 80% chance, and team C has a 70% chance. What is the probability that MicroTech will beat the competition with its new computers?

46.

MagTech assembles tape players from four major components arranged as follows:
The components can be purchased from three different vendors, who have supplied the following reliability data:

 

Vendor

Component

1

2

3

A

0.94

0.85

0.92

B

0.86

0.88

0.90

C

0.90

0.93

0.95

D

0.93

0.95

0.90

If MagTech has decided to use only one vendor to supply all four components, which vendor should be selected?
Would your decision change if all the components were assembled in series?

47.

Glen Evans is an emergency medical technician for a local rescue team and is routinely called on to render emergency care to citizens facing crisis situations. Although Glen has received extensive training, he also relies heavily on his equipment for support. During a normal call, Glen uses five essential pieces of equipment, whose individual reliabilities are 0.98, 0.97, 0.95, 0.96, and 0.99, respectively.
Glen claims his equipment has maximum probability of failure of 5%. Is he correct?
What individual equipment reliabilities would guarantee an overall reliability of 96%?

48.

Examine the systems given below. Which system is more reliable, a or b? c or d? Now calculate the reliability of each system. Were your perceptions correct?

If it costs $1000 for each 90% reliable component, $1500 for each 93% component, $2000 for each 95% reliable component, and $10,000 to replace a failed system, which system would you choose, a or b? c or d?

49.

Omar Marquez is the audio engineer for Summer Musical Enterprises. The group is considering the purchase of a new sound system consisting of five separate components. The components are arranged in series with identical reliabilities. The Basic system with component reliabilities of 80% costs $1000, the Standard system with component reliabilities of 90% costs $2000, and the Professional system with component reliabilities of 99% costs $5000. The cost of a failure during a performance is $50,000.
Calculate the reliability of each system. Which system would you recommend?
Omar has learned that each system described above can also be purchased in a Plus configuration, where each component has an identical backup, for double the original cost. Which system would you recommend now?

410.

La Pied manufactures high-quality orthopedic shoes. Over the past five years, the general public has “found” La Pied products, and sales have skyrocketed. One unanticipated result has been a sharp increase in factory returns for repair, since local shoe repair shops do not have the materials or expertise to fix La Pied products. The popular walking sandal has been targeted for redesign. Currently, the leather pieces are glued together, then stitched. There is a 70% chance that the glue will last for the life of the sandal, and a 50% chance that the stitching will remain intact. Determine the sandal’s reliability. How would the reliability of the sandal increase if the company adds two more rows of stitching?

411.

The Management Department recently purchased a small copier for faculty use. Although the workload of the office staff has improved somewhat, the secretaries are still making too many trips to the Dean’s office when the departmental copier is out of service. Sylvia, the departmental secretary, has been keeping track of failure rates and service times. With a mean time between failures of 100 hours and a mean time to repair of 24 hours, how much of the time is the new copier available for faculty use?

412.

Karen Perez runs an office supply store that also performs simple office services, such as copying. It is time to purchase a new high-speed copier and Karen has learned that machine uptime is a critical factor in selection. She has gathered the following data on reliability and maintainability for the three copiers she is considering. Given that all other factors are equal, which machine should Karen purchase?

Copier

Mean Time Between Failures (Hours)

Mean Time to Repair (Hours)

Able Copy

40

1

Business Mate

80

4

Copy Whiz

240

8

413.

As a regional sales manager, Nora Burke travels frequently and relies on her cell phone to keep up to date with clients. She has tried three different service providers, Airway, Bellular, and CyCom, with varying degrees of success. The number of failures in a typical eight-hour day and the average time to regain service are shown below. Nora’s contract is up for renewal. Which cellular service should she use?

Cellular Co.

No. of Failures

Time to Regain Service

Airway

10

2 minutes

Bellular

8

4 minutes

CyCom

3

10 minutes

414.

Nadia Algar is the overworked IT resource person for her department. In the next round of computer purchases, she is determined to recommend a vendor who does a better job of documenting possible errors in the system and whose customer service line is more responsive to the needs of her colleagues. Nadia compiled the following data over an eight-week observation period. Assuming 40 hours per week, which computer vendor should Nadia pursue?

Computer Vendor

Number of Problems

Mean Time to Reach Customer Service (Hours)

Mean Time to Fix Problem (Hours)

JCN

50

3.0

2.0

Bell

100

2.0

1.0

Comtron

250

1.0

0.5

415.

The PlayBetter Golf Company has experienced a steady decline in sales of golf bags over the past five years. The basic golf bag design has not changed over that period, and PlayBetter’s CEO, Jack Palmer, has decided that the time has come for a customer-focused overhaul of the product. Jack read about a new design method called QFD in one of his professional magazines (it was used to design golf balls), and he commissioned a customer survey to provide data for the design process. Customers considered the following requirements essential for any golf bag they would purchase and rated PlayBetter’s bag (X) against two competitor bags (A and B) on those requirements.
Construct a house of quality for golf bags. Then write a brief report to Mr. Palmer recommending revisions to the current golf bag design and explaining how those recommendations were determined.

416.

Students often complain that the requirements of assignments or projects are unclear. From the student’s perspective, whoever can guess what the professor wants wins the highest grade. Thus, grades appear to be assigned somewhat arbitrarily. If you have ever felt that way, here is your chance to clarify that next project or assignment.
Construct a house of quality for a paper or project. View the professor as the customer. For the perceptual map, have your professor compare one of your papers with typical A, B, or C papers. When you have completed the exercise, give your opinion on the usefulness of QFD for this application.

417.

Create a house of quality for a computer. Develop customer requirements related to ease of use, cost, capabilities, and connectivity. Make sure the customer requirements are a “wish list” stated in nontechnical terms.

418.

Create a QFD example from your own experience. Describe the product or service to be designed and then complete a house of quality using representative data. Explain the entries in the house and how target values were reached. Also, describe how other houses might flow from the initial house you built. Finally, relate how QFD improves the design process for the example you chose.

Case Problem 4.1

Q:

Lean and Mean
Megan McNeil, product manager for Lean and Mean (L&M) weight reduction company, is considering offering its own brand of prepared dinners to its clients. Clients would order the dinners, usually a month’s supply at a time, from L&M’s Web site and have them delivered to their home address. The dinners would, of course, encourage weight loss, but would also be more nutritious, tastier, and easier to prepare than current grocery store offerings. The price would most likely be on the high end of the scale.
The product design team has constructed the framework for a house of quality from initial customer interviews. Now the team is set to perform a competitive assessment by selecting three popular grocery store brands and measuring the design characteristics. As the team works on the house, it is anticipated that additional design characteristics may emerge. The target row of the house would represent L&M’s new brand.
Complete the following house of quality, and write a report to Megan containing your recommendations for the new product development. Be sure to explain how you arrived at your conclusions.

Excel Template
References
Baldwin, C., and K. Clark. Design Rules: The Power of Modularity. Boston: MIT Press, 2000.
Blackburn, J. (ed.). Time-Based Competition: The Next Battleground. Homewood, IL: Irwin, 1991.
Bowen, H. K., K. Clark, and C. Holloway. The Perpetual Enterprise Machine. New York: Oxford University Press, 1994.
Collier, D. A. The Service/Quality Solution. New York: Irwin, 1994.
Ealey, L. Quality by Design: Taguchi Methods and U.S. Industry. Dearborn, MI: ASI Press, 1988.
Garvin, D. Managing Quality. New York: Macmillan, 1988.
Haksever, C., R. Murdick, B. Render, and R. Russell. Service Management and Operations. Upper Saddle River, NJ: Prentice Hall, 2000.
Halpern, M. “CPC: Exploiting E-Business for Product Realization.” Gartner Advisory Strategic Analysis Report February 28, 2001.
Hauser, J. R., and D. Clausing. “The House of Quality.”Harvard Business Review (May–June 1988), pp. 63–73.
Heskett, J. L., W. E. Sasser, and C. Hart. Service Breakthroughs: Changing the Rules of the Game. New York: Macmillan, 1990.
Kelley, T., Jonathan Littman, and Tom Peters, The Art of Innovation: Lessons in Creativity from IDEO. New York: Currency/ Doubleday, 2001.
King, B. Better Designs in Half the Time. Methuen, MA: GOAL/QPC, 1989.
Leonard-Barton, D. Wellsprings of Knowledge: Building and Sustaining the Sources of Innovation. Boston: Harvard Business School Press, 1995.
Lovelock, C. H. Managing Services: Marketing, Operations, and Human Resources. Englewood Cliffs, NJ: Prentice Hall, 1992.
Prahalad, C. K., and Venkat Ramaswamy. The Future of Competition: Co-Creating Unique Value with Customers. Boston: Harvard Business School Press, 2004.
Sampson, S. E. Understanding Service Businesses. Salt Lake City, UT: Brigham Young University, 1999.
Shostack, G. L. “Designing Services That Deliver.”Harvard Business Review (January–February 1984), pp. 133–139.
Stoll, H. “Design for Manufacture.”Manufacturing Engineering (January 1988), pp. 67–73.
Sullivan, L. P. “Quality Function Deployment.”Quality Progress 19 (6; 1986), p. 39.
Taguchi, G., and D. Clausing. “Robust Quality.”Harvard Business Review (January–February 1990), pp. 65–75.
Whitney, D. “Manufacturing by Design.”Harvard Business Review (July–August 1988), pp. 83–91.
Womack, J. P., D. T. Jones, and D. Roos. The Machine that Changed the World. New York: Macmillan, 1990.
Notes
1The reliability of parallel components can also be calculated as Rs = 1 – [(1 – R1)(1 – R2)… ].
2These are described on http://www.usability.gov.
3J. P. Womack, D. T. Jones, and D. Roos, The Machine that Changed the World (New World: Macmillan, 1990), pp. 157, 160.
4Adapted from Bob King, Better Designs in Half the Time (Methuen, MA: GOAL/QPC, 1989), pp. 1.1–1.3.

Skip to Content
Top of Form

Welcome Jayleen Cutler – 303469531 | Inbox | What’s New | Community | Help | Logout
Home

Classroom

Library

Program

Account

University Library

eBooks

Center for Writing Excellence

Center for Mathematics Excellence

Phoenix Career Services

Search
Search Location Search Type Enter search text Search
Preferences

Font Size

Margins

Font Style

 

Use Defaults

Change font size, margins and font style to customize your eBook Collection experience.
These changes will only apply to books you read online.
Operations Management. Creating Value Along the Supply Chain, Sixth Edition
Chapter 5: Service Design
ISBN: 9780470095157 Author: Roberta S. Russell, Bernard W. Taylor
copyright © 2009 John Wiley & Sons
Service Design
In this chapter, you will learn about….
The Service Economy
Characteristics of Services
The Service Design Process
Tools for Service Design
Waiting Line Analysis for Service Improvement
Web resources for this chapter include
OM Tools Software
Animated Demo Problems
Internet Exercises
Online Practice Quizzes
Lecture Slides in PowerPoint
Virtual Tours
Excel Worksheets
Excel Exhibits
Company and Resource Weblinks
www.wiley.com/college/russell
Service Design at Green Mountain Coffee
Services aren’t just for service companies. Product-producing companies are chock full of services. Take GREEN MOUNTAIN COFFEE for example. They sell their coffee through online stores and mail order catalogues, service processes that must be effectively designed and operated. Customer service can have as much of an effect on customer satisfaction as the product itself. Shown on the previous page is a recent Bizrate report on Green Mountain Coffee, along with two shopper comments. While the overall report is very good, we have selected two somewhat disgruntled customer comments to analyze. The first comment complains about the difficulty of navigating the Web site which may have something to do with the neutral ratings on other factors. The second comment shows how a customer, unsatisfied with a product, can give high ratings to the service and promise to shop here again!
Services are the predominant force in our society. In the United States, services account for over 80% of the labor force, 94% of job growth, and 70% of GDP. Globally, services account for over 50% of the economics of Brazil, Russia, Japan, and Germany, and the service sector is growing rapidly in the emerging economies of India and China. The impact of supporting services on product success has turned product-producing companies into service providers. Increased outsourcing of business services demands more in-depth understanding of the service product and standards for quality. Service computing has prompted a new level of understanding of customer requirements and design theory. Major societal problems, such as education, healthcare, disaster relief, and government services, depend on complex customer-focused processes and benefit significantly from an innovative and interdisciplinary approach to their study and analysis. This unprecedented shift in customer, corporate, and societal demand for services and the management of corresponding resources has created a critical need for study, analysis and design of service systems.
In this chapter, we discuss the service economy, characteristics of services, the services design process, tools for service design, and waiting line theory for service improvement.
The Service Economy
The rise of the service sector is not just an American phenomenon. Services represent the fastest growing sector of the global economy and account for two thirds of global output, one third of global employment, and nearly 20% of global trade. Figure 5.1
1 shows the progression from agrarian to manufacturing to service economies for the ten nations of the world with the largest labor force. As shown in the enlarged U.S. graph, manufacturing hit its peak in 1950s, and declined rapidly as automation and outsourcing took hold. Similar trends are seen in other nations’ economies.
Figure 5.1 Economic Trends by Industry Sector for the Top Ten Labor-Producing Nations
Source: U.S. Bureau of Labor Statistics, IBM Almaden Research Center
Internet Exercises
Examining the latest U.S. figures on percent of employment by industry sector (shown in Figure 5.2a), we find that manufacturing accounts for only 11% of the labor force, a smaller percentage than either education and health, professional services, government, or wholesale and retail trade. As an aside, the United States has a positive balance of trade in services, and a deficit in manufactured goods. Clearly, the effective design and efficient operation of services are paramount to the health of the economy. We concentrate on services in this chapter and continue to provide service example and content in subsequent chapters.
Figure 5.2 Percent Employment and GDP by Industry Sector

Internet Exercises
Figure 5.2b shows U.S. figures on percent of GDP by industry sector. In this chart, manufacturing accounts for 21% of GDP, the largest of the industry sectors shown, whose closest rival is financial services. Thus, although the manufacturing sector of the economy is declining, it still contributes significantly to GDP and as such is also discussed and used for examples in later chapters.
Characteristics of Services
Services are acts, deeds, performances or relationships that produce time, place, form or psychological utilities for customers. A cleaning service saves the customer time from doing the chores himself. Department stores and grocery stores provide many commodities for sale in one convenient place. An online broker puts together information in a form more usable for the investor. A night out at a restaurant or movie provides psychological refreshment in the middle of a busy workweek.
Services can also be defined in contrast to goods. A good is a tangible object that can be created and sold or used later. A service is intangible and perishable. It is created and consumed simultaneously. Although these definitions may seem straightforward, the distinction between goods and services is not always clear-cut. For example, when we purchase a car, are we purchasing a good or the service of transportation? A flat-screen TV is a manufactured good, but what use is it without the service of television broadcasting? When we go to a fast-food restaurant, are we buying the service of having our food prepared for us, or are we buying goods that happen to be ready-to-eat food items?
In reality, almost all purchases of goods are accompanied by facilitating services, and almost every service purchase is accompanied by facilitating goods. Thus, the key to understanding the difference between goods and services lies in the realization that these items are not completely distinct but rather are two poles on a continuum, as shown in Figure 5.3.
Figure 5.3 A Continuum from Goods to Services
Source: Adapted from Earl W. Sasser, R. P. Olsen, and D. Daryl Wyckoff, Management of Service Operations (Boston: Allyn Bacon, 1978), p. 11.
Understanding the different characteristics of services can help us better design service activities and the systems for their delivery.
Services can be distinguished from manufacturing by the following eight characteristics. Although not all services possess each of these characteristics, they do exhibit at least some of them to some degree.
Services are intangible.It is difficult to design something you cannot see, touch, store on a shelf, or try on for size. Services are experienced, and that experience may be different for each individual customer. Designing a service involves describing what the customer is supposed to “experience,” which can be a difficult task. Designers begin by compiling information on the way people think, feel, and behave (called psychographics).
Because of its intangibility, consumers perceive a service to be more risky to purchase than a product. Cues (such as physical surroundings, server’s demeanor, and service guarantees) need to be included in service design to help form or reinforce accurate perceptions of the service experience and reduce the consumer’s risk.
The quality of a service experience depends largely on the customer’s service expectations. Expectations can differ according to a customer’s knowledge, experience, and self-confidence.
Customers also have different expectations of different types of service providers. You probably expect more from a department store than from a discount store, or from a car dealer’s service center than from an independent repair shop. Understanding the customer and his or her expectations is essential in designing good service.
Service output is variable.This is true because of the various service providers employed and the variety of customers they serve, each with his or her own special needs. Even though customer demands vary, the service experience is expected to remain consistent. According to a recent survey, the most important measures of service quality to the customer are reliability and consistency. Service design, then, must strive for predictability or robustness. Examples of services known for their consistency include McDonald’s, Holiday Inn, and ServiceMaster. Extensive employee training, set operating procedures, and standardized materials, equipment, and physical environments are used by these companies to increase consistency.
Internet Exercises
Services have higher customer contact.The service “encounter” between service provider and customer is the service in many cases. Making sure the encounter is a positive one is part of service design. This involves giving the service provider the skills and authority necessary to complete a customer transaction successfully. Studies show a direct link between service provider motivation and customer satisfaction. Moreover, service providers are not motivated primarily by compensation but rather by concurrence with the firm’s “service concept” and being able to perform their job competently.
High customer contact can interfere with the efficiency of a service and make it difficult to control its quality (i.e., there is no opportunity for testing and rework). However, direct contact with customers can also be an advantage for services. Observing customers experiencing a service generates new service ideas and facilitates feedback for improvements to existing services.
Services are perishable.Because services can’t be inventoried, the timing and location of delivery are important. Service design should define not only what is to be delivered but also where and when.
The service and the service delivery are inseparable.That means service design and process design must occur concurrently. (This is one area in which services have an advantage over manufacturing—it has taken manufacturing a number of years to realize the benefits of concurrent design.) In addition to deciding what, where, and when, service design also specifies how the service should be provided. “How” decisions include the degree of customer participation in the service process, which tasks should be done in the presence of the customer (called front-room activities) and which should be done out of the customer’s sight (backroom activities), the role and authority of the service provider in delivering the service, and the balance of “touch” versus “tech” (i.e., how automated the service should be).
Services tend to be decentralized and geographically dispersed.Many service employees are on their own to make decisions. Although this can present problems, careful service design will help employees deal successfully with contingencies. Multiple service outlets can be a plus in terms of rapid prototyping. New ideas can be field-tested with a minimum disturbance to operations. McDonald’s considers each of its outlets a “laboratory” for new ideas.
Services are consumed more often than products, so there are more opportunities to succeed or fail with the customer. Jan Carlzon, former president of SAS Airlines, calls these opportunities “moments of truth.” Services are confronted with thousands of moments of truth each day. Careful design and redesign of the service encounter can help make each moment of truth a positive experience. In a sense, the service environment lends itself more readily to continuous improvement than does the manufacturing environment.
Services can be easily emulated.Competitors can copy new or improved services quickly. New ideas are constantly needed to stay ahead of the competition. As a result, new service introductions and service improvements occur even more rapidly than new product introductions.
The Service Design Process
Services that are allowed to just happen rarely meet customer needs. World-class services that come to mind—McDonald’s, Nordstrom, Federal Express, Disney World—are all characterized by impeccable design. McDonald’s plans every action of its employees (including 49 steps to making perfect french fries); Nordstrom creates a pleasurable shopping environment with well-stocked shelves, live music, fresh flowers in the dressing rooms, and legendary salespersons; Federal Express designs every stage of the delivery process for efficiency and speed; and Disney World in Japan was so well designed that it impressed even the zero-defect Japanese.
Service design is more comprehensive and occurs more often than product design. The inherent variability of service processes requires that the service system be carefully designed. Figure 5.4 shows the service design process beginning with a service concept and ending with service delivery.
Figure 5.4 The Service Design Process
The service concept defines the target customer and the desired customer experience. It also defines how our service is different from others and how it will compete in the marketplace. Sometimes services are successful because their service concept fills a previously unoccupied niche or differs from the generally accepted mode of operation. For example, Citicorp offers 15-minute mortgage approvals through online computer networks with real estate offices, credit bureaus, and builder’s offices, and an expert system loan-application advisor. Amazon excels at customer service for online orders, and eBay’s worldwide reach creates more lively auctions with a huge community of buyers and sellers. Shouldice Hospital performs only inguinal hernia operations, for which its doctors are very experienced and its facilities carefully designed. Local anesthesia is used; patients walk into and out of the operating room under their own power; and telephones, televisions, and dining facilities are located in a communal area some distance from patient rooms. As a result, patients quickly become ambulatory, are discharged within hours (compared to normal week-long stays), and pay one-third less for their operations.
From the service concept, a service package is created to meet customer needs. The package consists of a mixture of physical items, sensual benefits, and psychological benefits. For a restaurant the physical items consist of the facility, food, drinks, tableware, napkins, and other touchable commodities. The sensual benefits include the taste and aroma of the food and the sights and sounds of the people. Psychological benefits are rest and relaxation, comfort, status, and a sense of well-being.
Effective service design recognizes and defines all the components of a service package. Finding the appropriate mix of physical items and sensual and psychological benefits and designing them to be consistent with each other and the service concept is also important. A fast-food restaurant promises nourishment with speed. The customer is served quickly and is expected to consume the food quickly. Thus, the tables, chairs, and booths are not designed to be comfortable, nor does their arrangement encourage lengthy or personal conversations. The service package is consistent. This is not the case for an upscale restaurant located in a renovated train station. The food is excellent, but it is difficult to enjoy a full-course meal sitting on wooden benches in a drafty facility, where conversations echo and tables shake when the trains pass by. In the hospitality industry, Marriott Corporation is known for its careful design of specialty hotels. From its Courtyard Marriott to Fairfield Inn to residential centers, each facility “fits” its clientele with a well-researched service package.
From the service package, service specifications are developed for performance, design, and delivery. Performance specifications outline expectations and requirements for general and specific customers. Performance specifications are converted into design specifications and, finally, delivery specifications (in lieu of manufacturing specifications).
Design specifications must describe the service in sufficient detail for the desired service experience to be replicated for different individuals at numerous locations. The specifications typically consist of activities to be performed, skill requirements and guidelines for service providers, and cost and time estimates. Facility size, location, and layout, as well as equipment needs, are also included. Delivery specifications outline the steps required in the work process, including the work schedule, deliverables, and the locations at which the work is to be performed.
The Service-Process Matrix
Notice in Figure 5.4 that both customers and service providers may be involved in determining performance, design, and delivery specifications. Service processes can be classified according to the degree of customization (involvement of the customer in service design and the delivery) and labor intensity (involvement of the service provider in service design and delivery).
Figure 5.5 shows a service-process matrix based on these two service characteristics. A professional service, such as accountant, lawyer, or doctor, is highly customized and very labor intensive. A service shop, such as schools and hospitals, is less customized and labor intensive but still attentive to individual customers. A mass service, such as retailing and banking, offers the same basic services to all customers and allows less interaction with the service provider. Services with the least degree of customization and labor intensity, such as airlines and trucking, are most like manufactured products and are thus best processed by a service factory.
Figure 5.5 The Service-Process Matrix
Source: Adapted from Roger Schmenner, “How Can Service Businesses Survive and Prosper?” Sloan Management Review 27(3);29.
Virtual Tours
The degree of contact between the customer and service provider has an impact on how individual services are designed and delivered. A large lecture class is taught differently than a seniorlevel seminar class. Charter airline flights entail more customer and provider participation than a commercial flight. Commissioning a work of art or custom building a home can involve the customer throughout the design and delivery process. Table 5.1 describes the design decisions involved in high-contact versus low-contact services. Think about how these decisions affect the operations and supply chain system.
Table 5.1 Differences in Design for High-Contact Services

Design Decision

High-Contact Service

Low-Contact Service

Facility location

Convenient to customer

Near labor or transportation source

Facility layout

Must look presentable, accommodate customer needs, and facilitate interaction with customer

Designed for efficiency

Quality control

More variable since customer is involved in process; customer expectations and perceptions of quality may differ, customer present when defects occur

Measured against established standards; testing and rework possible to correct defects

Capacity

Excess capacity required to handle peaks in demand

Planned for average demand

Worker skills

Must be able to interact well with customers and use judgment in decision making

Technical skills

Scheduling

Must accommodate customer schedule

Customer concerned only with completion date

Service process

Mostly front-room activities; service may change during delivery in response to customer

Mostly back-room activities; planned and executed with minimal interference

Service package

Varies with customer; includes environment as well as actual service

Fixed, less extensive

Source: Adapted from R. Chase, N. Aquilano, and R. Jacobs, Operations Management for Compensative Advantage (New York: McGraw-Hill, 2001), p. 210.
Service Factory. Electricity is a commodity available continuously to customers.
(bottom center) Gary Conner/PhotoEdit, (top center) John Coletti/Index Stock
Alamy Images
Professional Service. A doctor provides personal service to each patient based on extensive training in medicine.
SuperStock, Inc.
Tools for Service Design
There are many different tools for designing services. QFD, discussed in the previous chapter, has wide application in services. Other common tools are service blueprints, scripting, servicescapes, and waiting line analysis.
Service Blueprinting
Service operations involve several different players (the customer, other customers in the system, the primary service provider, other service providers), both front and back room operations, and different opportunities for interaction among the players during the service process. Service blueprinting is the process of recording in graphical form the activities and interactions in a service process. The term blueprinting is used to reinforce the idea that services need to be as carefully designed as a physical product and documented with a blueprint of its own. Figure 5.6 shows a service blueprint for an installment loan process. Notice the line visibility behind which “back office” operations are performed. Potential failure points and times estimates are also included.
Figure 5.6 Service Blueprint for an Installment Lending Operation
Source: Lynn Shostack, “Service Positioning through Structural Change,” Journal of Marketing 51 (January, 1987), p 36. Reprinted with permission by the American Marketing Association.
Figure 5.7 shows an expanded service blueprint of a coffee shop operation. Several more lines have been added to the diagram. The line of influence shows activities designed to influence the customer to enter the service facility. The line of interaction is where the customer interacts with the service provider and other customers. The line of visibility separates front office (or onstage) activities from back office (or backstage) activities. In this example, the barista prepares the coffee in front of the customer, but must go backstage to retrieve cups from the stockroom. The line of support is where the service provider interacts with backstage support personnel to complete their tasks. Moving these various lines on the service blueprint allows the designer to experiment with expanding or decreasing the activities in each area. For example, the barista could disappear behind a curtain to prepare the coffee, or the customer could serve the coffee herself and interact with the service provider only when paying.
Figure 5.7 Expanded Service Blueprint for a Coffee Shop

Front-Office and Back-Office Activities
In manufacturing firms, the focus of activities is on the back office, i.e., producing products efficiently. Whereas, in service firms, the focus is on the front office, interacting with the customer. Every firm needs both a front and back office, but firms may structure these in different ways.
In the front office, the customer interface can be an individual, the service provider, or a self-service kiosk or machine. The interactions in the front office influence the customer’s perception of the service and thus are critical to a successful design. Typical front office goals are courtesy, transparency, responsiveness, usability, and fun.
The back office processes material or information to support the front office needs. Typical goals of the back office are efficiency, productivity, standardization, and scalability.
Obvious conflicts exist between front and back officers. Connecting the front and back offices in a meaningful way and encouraging the flow of information and support are two of the challenges of service design. Designing the service with an eye to the entire system will help alleviate some of the tensions. Mass customization is an example of a front/back compromise. Instead of giving customers the freedom to order anything they want, present a menu of options from which the customer may choose. This provides some stability to the back office, while also being responsive to the customer.
Internet Exercises
Servicescapes
It is precisely because services are so intangible that physical cues to service quality are needed. Servicescapes design (1) the space and function where the service takes places; (2) the ambient conditions, such as music, temperature, décor, and noise; and (3) signs, symbols, and artifacts. It is important that the servicescape be consistent with the service concept, and that all the elements be consistent with each other.
Servicescapes have proved to be extremely important to customer perception of service quality and to their satisfaction with the service. The next “Along the Supply Chain” box describes the health benefits of an effective servicescape for hospitals.
Quantitative Techniques
There are many quantitative techniques for improving the service process. One of the most common and powerful is waiting line analysis, covered in the next several sections
Along the Supply Chain: The Health Benefits of Good Design
Steelcase furniture isn’t just for offices anymore. Nurture, their line of patient-friendly furnishings, is part of an evidence-based design movement in healthcare where the impact of the physical environment on patient care and health is being investigated. Research shows that hospital design can cut infection rates, lower physician error, improve staff performance, shorten hospital stays, and save lives. The ideal patient room, for example, is a private room with three zones: (1) the patient zone, which includes the bed and overbed table; (2) the staff zone, with a sink, sanitizer, and counter for writing; and (3) the family zone, comfortable enough to encourage longer stays. Access is key to all areas—caregiver access to the patient, patient access to the bathroom, everyone’s access to vital information. Rooms are designed as “acuity-adaptable,” meaning they can accommodate a variety of medical conditions. New rooms use more natural light, reduce noise, and improve infection control.
A hospital room in which the patient has ownership of his surroundings and feels connected to staff and loved ones is an environment exceptionally conducive to healing. The Center for Health Design estimates that such rooms can add $12 million to the cost of hospital construction, but with reduced falls and transfers, fewer infections, and safer care, those extra costs can be recouped within the first year of operation.
Courtesy Nurture by Steelcase, Inc.
Sources: Andrew Blum, “How Hospital Design Saves Lives,” Business Week Online, August 15, 2006; Reena Jana, “Steelcase’s Medical Breakthrough,” Business Week, March 22, 2007; Chuck Salter, “A Prescription for Innovation,” Fast Company, April 2006; Nurture Web site, http://nurture.steelcase.com

Waiting Line Analysis for Service Improvement
Anyone who goes shopping, to the post office, or to a movie experiences the inconvenience of waiting in line. Not only do people spend time waiting in lines, but machinery waits in line to be serviced or repaired, trucks line up to be loaded or unloaded at a shipping terminal, and planes wait to take off and land. Waiting takes place in virtually every productive process or service. Since the time spent by people and things waiting in line is a valuable resource, the reduction of waiting time is an important aspect of operations management.
Companies are able to reduce waiting time and provide faster service by increasing their service capacity, which usually means adding more servers—that is, more tellers, more mechanics, or more checkout clerks. However, increasing service capacity has a monetary cost, and therein lies the basis of waiting line, or queuing, analysis; the trade-off between the cost of improved service and the cost of making customers wait.
Providing quick service is an important aspect of quality customer service.
Waiting lines are analyzed with a set of mathematical formulas which comprise a field of study called queuing theory. Different queuing models and mathematical formulas exist to deal with different types of waiting line systems. Although we discuss several of the most common types of queuing systems, we do not investigate the mathematical derivation of the queuing formulas. They are generally complex and not really pertinent to our understanding of the use of waiting line analysis to improve service.
Internet Exercises
Elements of Waiting Line Analysis
Waiting lines form because people or things arrive at the servicing function, or server, faster than they can be served. This does not mean that the service operation is understaffed or does not have the capacity to handle the influx of customers. Most businesses and organizations have sufficient serving capacity available to handle its customers in the long run. Waiting lines result because customers do not arrive at a constant, evenly paced rate, nor are they all served in an equal amount of time. Customers arrive at random times, and the time required to serve each individual is not the same. A waiting line is continually increasing and decreasing in length (and is sometimes empty) but in the long run approaches an average length and waiting time. For example, your local bank may have enough tellers to serve an average of 100 customers in an hour, and in a particular hour only 60 customers might arrive. However, at specific points in time during the hour, waiting lines may form because more than an average number of customers arrive and they have transactions that require more than the average amount of time.
Decisions about waiting lines and the management of waiting lines are based on these averages for customer arrivals and service times. They are used in queuing formulas or models to compute operating characteristics such as the average number of customers waiting in line and the average time a customer must wait in line. Different sets of formulas are used, depending on the type of waiting line system being investigated. A bank drive-up teller window at which one bank clerk serves a single line of customers in cars is different from a single line of passengers at an airline ticket counter that are served by three or four airline agents. In this section we present the elements that make up waiting lines before looking at waiting line formulas in the following sections.
Elements of a Waiting Line
The basic elements of a waiting line, or queue, are arrivals, servers, and the waiting line. The relationship between these elements is shown in Figure 5.8 for the simplest type of waiting line system, a single server with a single queue. Following is a brief description of each of these waiting line elements.
Figure 5.8 Elements of a Waiting Line System
Awaiting line systemconsists of arrivals, servers, and waiting line structure.
The Calling Population
In our discussions of waiting lines, a customer is a person or thing that wants service from an operation. The calling population is the source of the customers to the waiting line system, and it can be either infinite or finite. An infinite calling population assumes such a large number of potential customers that it is always possible for one more customer to arrive to be served. For example, the department store in Figure 5.8, a grocery store, a bank, and a service station are assumed to have infinite calling populations; that is, the whole town or geographic area.
A finite calling population has a specific, countable number of potential customers. All the customers may be waiting in line at the same time; that is, it may occur that there is not one more customer to be served. Examples of a finite calling population are a repair person in a shop who is responsible for a fixed number of machines to work on, a trucking terminal that services a fleet of ten trucks, or a nurse assigned to attend to only twelve patients.
The Arrival Rate
The arrival rate is the rate at which customers arrive at the service facility during a specified period. This rate can be estimated from empirical data derived from studying the system or a similar system, or it can be an average of these empirical data. For example, if 100 customers arrive at a store checkout counter during a 10-hour day, we could say the arrival rate averages 10 customers per hour. However, although we might be able to determine a rate for arrivals by counting the number of customers during a specific time period, we would not know exactly when these customers would arrive. It might be that no customers would arrive during one hour and 20 customers would arrive during another hour. Arrivals are assumed to be independent of each other and to vary randomly over time.
The variability of arrivals at a service facility often conform to a probability distribution. Arrivals could be described by many distributions, but it has been determined (through years of research and the practical experience of people in the field of queuing) that the number of arrivals per unit of time at a service facility can frequently be described by a Poisson distribution. In queuing, the average arrival rate, or how many customers arrive during a period of time, is signified by λ.
Arrival rate (λ) is most frequently described by a Poisson distribution.
In order to use the queuing formulas we will develop in this chapter to analyze different queuing situations, we have to make some other assumptions about customer arrivals. When customers arrive at the service facility, they will join the waiting line and not decide to leave if the line looks too long, which is called balking. Another assumption is that customers are patient; once they join the waiting line they will not leave, no matter how long they must wait. This is called reneging. Finally, a customer in line will not move to another line and then back again; this is called jockeying.
Service Times
In waiting line analysis arrivals are described in terms of a rate, and service in terms of time. Service times in a queuing process may also be any one of a large number of different probability distributions. The distribution most commonly assumed for service times is the negative exponential distribution. Although this probability distribution is for service times, service must be expressed as a rate to be compatible with the arrival rate. The average service rate, or how many customers can be served in a period of time is expressed as μ.
Empirical research has shown that the assumption of negative exponentially distributed service times is not valid as often as is the assumption of Poisson-distributed arrivals. For actual applications of queuing analysis, the assumptions for both arrival rate and service time distribution would have to be carefully checked.
Poisson arrival rate = exponential time between arrivals; exponential service times = Poisson service rate.
Interestingly, if service times are exponentially distributed, then the service rate is Poisson distributed. For example, if the average time to serve a customer is three minutes (and exponentially distributed), then the average service rate is 20 customers per hour (and Poisson distributed). The converse holds true for Poisson arrivals. If the arrival rate is Poisson distributed, then the time between arrivals is exponentially distributed.
Arrival Rate Less Than Service Rate
It is logical to assume that the rate at which service is provided must exceed the arrival rate of customers. If this is not the case, the waiting line will continue to grow infinitely large and there will be no “average” solution. Thus, it is generally assumed that the service rate exceeds the arrival rate, λ < μ. Customers must be served faster than they arrive, or an infinitely large queue will build up; λ – μ. Queue Discipline and Length The queue discipline is the order in which waiting customers are served. The most common type of queue discipline is first come, first served—the first person or item waiting in line is served first. Other disciplines are possible. For example, a machine operator might stack work-in-process parts beside a machine so that the last part is on top of the stack and will be selected first. This queue discipline is last in, first out. Or the machine operator might reach into a box full of parts and select one at random. This queue discipline is random. Often customers are scheduled for service according to a predetermined appointment, such as patients at a dentist’s office or diners at a restaurant where reservations are required. These customers are taken according to a prearranged schedule regardless of when they arrive at the facility. Another example of the many types of queue disciplines is when customers are processed alphabetically according to their last names, such as at school registration or at job interviews. The most common service rule is first come, first served. In manufacturing operations, sometimes jobs with the shortest expected processing times are selected first in order to get the most jobs processed in the shortest time period. In emergency services like emergency rooms at hospitals, the most critical problem is typically served first. Queues can be of an infinite or finite size or length. An infinite queue can be of any size, with no upper limit, and is the most common queue structure. For example, it is assumed that the waiting line at a movie theater could stretch through the lobby and out the door if necessary. A finite queue is limited in size. An example is the driveway at a bank teller window that can accommodate only a limited number of cars, before it backs up to the street. Basic Waiting Line Structures Waiting line processes are generally categorized into four basic structures, according to the nature of the service facilities. In technical terminology they are called single-channel, single-phase; single-channel, multiple-phase; multiple-channel, single-phase; and multiple-channel, multiple-phase processes. The number of channels in a queuing process is the number of parallel servers for servicing arriving customers. The number of phases, on the other hand, denotes the number of sequential servers each customer must go through to complete service. An example of a single-channel, single-phase queuing operation is a post office with only one postal clerk waiting on a single line of customers. This is more commonly called simply a single-server waiting line, and it is illustrated in Figure 5.9a. A post office with several postal clerks waiting on a single line of customers is an example of a multiple-channel, single-phase process or simply a multiple-server waiting line. It is illustrated in Figure 5.9b. These are the two basic waiting line structures we will focus on in this chapter. Figure 5.9 Basic Waiting Line Structures The other two waiting line structures we mentioned have multiple phases; that is, they have a sequence of servers, one following another. For example, when patients go to a clinic for treatment or check into a hospital, they first wait in a reception room, then they may go to an office to fill out some paperwork. When they get to the treatment room, the patients receive an initial checkup or treatment from a nurse, followed by treatment from a doctor. This arrangement constitutes a single-channel, multiple-phase queuing process. If there are several doctors and nurses, the process is a multiple-channel, multiple-phase process. Another example of a multiple-phase system is a manufacturing assembly line in which a product is worked on at several sequential machines or by several sequential operators at workstations. These are more complex structures and are beyond the scope of this text. You may quickly visualize a familiar waiting situation that fits none of these categories of waiting line structures. The four waiting line structures we have described are simply the four basic general categories; but there are many variations, which often require very complex mathematical formulas to analyze. In some cases they can only be analyzed using simulation (the topic of Supplement 12). However, the basic fundamentals of waiting line analysis for the simpler queuing models that we will discuss in this chapter are relevant to the analysis of all queuing problems, regardless of their complexity. Operating Characteristics The mathematics used in waiting line analysis do not provide an optimal, or “best,” solution. Instead they generate measures referred to as operating characteristics that describe the performance of the waiting line system and that management uses to evaluate the system and make decisions. It is assumed these operating characteristics will approach constant, average values after the system has been in operation for a long time, which is referred to as a steady state. These basic operating characteristics used in a waiting line analysis are defined in Table 5.2. Table 5.2 Queuing System Operating Characteristics Notation Operating Characteristic L Average number of customers in the system (waiting and being served) Lq Average number of customers in the waiting line W Average time a customer spends in the system (waiting and being served) Wq Average time a customer spends waiting in line P0 Probability of no (i.e., zero) customers in the system Pn Probability of n customers in the system ρ Utilization rate; the proportion of time the system is in use Asteady stateis a constant, average value for performance characteristics that the system will attain after a long time. Traditional Cost Relationships in Waiting Line Analysis There is generally an inverse relationship between the cost of providing service and the cost of making customers wait, as reflected in the cost curves in Figure 5.10. As the level of service, reflected by the number of servers, goes up, the cost of service increases, whereas waiting cost decreases. In the traditional view of waiting line analysis, the level of service should coincide with the minimum point on the total cost curve. Figure 5.10 The Cost Relationship in Waiting Line Analysis As the level of service improves, the cost of service increases. The cost of providing the service is usually reflected in the cost of the servers, such as the cost of the tellers at a bank, postal workers at a post office counter, or the repair crew in a plant or shop. As the number of servers is increased to reduce waiting time, service cost goes up. Service cost is normally direct and easy to compute. The cost of waiting is not as easy to determine. The major determinant of waiting cost is the loss of business that might result because customers get tired of waiting or frustrated and leave; then, they may purchase the product or service elsewhere. This business loss can be temporary (a single event) or permanent (the customer never comes back). The cost due to a loss of business is especially difficult to determine, since it is not part of normal accounting records, although some trade organizations for businesses and industries occasionally provide such data. Other types of waiting costs include the loss of production time and salary for employees waiting to use machinery or equipment, load or unload vehicles, and so forth. Better service requires more servers. Most companies and organizations that have waiting as an integral part of their service process usually establish a goal for customer waiting time that corresponds to a level of service they want to achieve. For example, Taco Bell has determined that a 3-minute average waiting time will result in only 2.5 percent of customers leaving, which they consider to be an acceptable service goal. Bank of America has a similar waiting time goal for serving its bank customers. The U.S. Postal Service has a goal of five minutes to serve its retail customers. The Psychology of Waiting In some instances, it is not possible to reduce waiting times, or other important issues besides cost may be involved. When these situations occur, the problem of providing quality service often depends more on psychological solutions. In other words, the organization will try to make waiting more palatable. For example, long lines are fairly common at Disney World, especially at certain peak times during the day. Although it is unlikely that any company has analyzed the technical aspects of waiting more than Disney, customers must still wait for long periods of time at certain shows, exhibits, and rides. Given the limited physical capacity of some attractions, the time required for a customer to complete them, and the large flow of customers, it is simply not possible to make the lines shorter or the service quicker without letting fewer people into the park. In these cases Disney management attempts to improve service in other ways to reduce customer dissatisfaction. For example, they make use of costumed characters to entertain customers waiting in line and distract them from the long waits. Mobile vendors sell food, drinks, and souvenirs to people in line. The provide accurate wait times, which are more tolerable than vague ones, and they provide frequent updates. For customers who are particularly annoyed by long waits, they sell special passes for a fee that allows customers to go to the front of the line for some attractions and to get into the park early before its normally scheduled opening. Along the Supply Chain: Improving Waiting Time in England’s National Health Service As part of its 10-year National Health Service plan, the British government has spent billions of pounds to improve service, particularly the reduction of waiting times to see a GP and for accidents and emergencies, and to schedule surgery. At Bridge Lane Medical Centre in Battersea, southwest London, the waiting time for a patient to see a GP has been reduced from between seven to ten days to within 48 hours, the government’s goal for waiting time to see a GP. The Medical Centre achieved this waiting time reduction by first hiring a salaried doctor to increase the number of surgeries and having its own GPs work longer hours, until the existing backlog of appointments was eliminated. It then looked for ways to innovate service. One innovation was to create “commuter clinics” in the morning between 8:00 A.M. and 9:00 A.M. and in the evening between 5:30 P.M. and 6:30 P.M. to fit patients’ work schedules. Patients who were not as restricted by their work schedules were encouraged to come at other times. Once patients discovered that they could see a doctor quickly, they no longer made unnecessary appointments; the new system also reduced the number of emergency cases that came in without an appointment. Since implementing its improved service, the Medical Centre has achieved 100% patient satisfaction. This is a case where quality service is demanded by the public, even though the cost of the improved service likely far exceeds the financial return since it’s in the public domain. Source: N. Timmins, “Extra Funds Fail to Ease Frustrations for Hospitals: Waiting Times Cut by More Than a Week,” FT.com/Financial Times (October 29, 2002). Disney uses costumed characters like Minnie Mouse to entertain customers waiting in line to distract them from their long wait. Joe Raedle/Getty Images News and Sport Services Waiting rooms, such as at a doctor’s office, provide magazines and newspapers for customers to read while waiting. Televisions are occasionally available in auto repair waiting areas, in airport terminals, or in bars and lounges of restaurants where customers wait. The “Along the Supply Chain” box describes Bank of America’s experiments to distract customers waiting in line. Mirrors are purposely located near elevators to distract people while they wait. Supermarkets locate magazines and other “impulse-purchase” items at the checkout counter, not only as a diversion while waiting but as potential purchases. All these tactics are designed to improve the quality of service that requires waiting without actually incurring the cost of reducing waiting time. Some service companies attempt to handle arrivals in a “smarter” way instead of adding cost by using more servers or reducing service time. They might provide selective preferential treatment to good, or certain types of, customers in order to reduce their waiting time. For example, grocery stores have express lanes for customers with only a few purchases. Airlines and car rental agencies issue special cards to frequent-use customers or customers who pay an additional fee that allows them to join special waiting lines at their check-in counters. Some telephone retailers check the phone numbers of incoming calls, and based on a customer’s sales history, they are routed to more experienced or specialized salespeople. For some critical service providers, waiting times of any duration are simply not allowable. A police or fire department must provide sufficient service capacity so that calls for assistance can have quick response. This often results in long periods of underutilization where police officers, or firefighters are not doing anything. In these cases cost is not really a factor; that is, there’s no cost tradeoff for improved service. In other words, it would not be socially responsible (or acceptable) to reduce the number of fire stations or firefighters to reduce cost and incur an “acceptable” increase in waiting time for service. Waiting Line Models The simplest, most basic waiting line structure illustrated in Figure 5.9 is the single-server model. We run into this type of waiting line every day. When you buy a cup of coffee at your local Starbucks or convenience store in the morning, when you go to the cable TV office to pay your bill, when you go to a professor’s office, when you use the copier in the library, when you buy a ticket to see a movie in the evening, you wait in line to be served by one server. Along the Supply Chain: The Psychology of Waiting at Bank of America In a market research study of its customers, the Bank of America discovered that when a person stands in line for more than about three minutes a gap develops between the actual waiting time and the customer’s perceived waiting time. For example, if customers wait two minutes, they feel like they’ve been waiting for two minutes; however, if they have been waiting for five minutes, it may seem more like ten minutes to them. Bank of America also learned from prior studies that long waits have a direct relationship to customer satisfaction. Furthermore, the bank knew from previous psychological studies that if people were distracted from boring activities, time would seem to pass more quickly. As a result, Bank of America undertook a “transaction zone media” experiment to see what would happen if it placed televisions above the tellers in a bank branch lobby to entertain customers waiting in line (i.e., the transaction zone); would it reduce their perceived waiting time? The bank installed television monitors (tuned to CNN) in a typical bank branch and measured actual versus perceived waiting time. The results showed that the amount of waiting times customers overestimated dropped from 32% to 15% when compared to a bank without televisions. To measure the financial impact of these results, the bank employed a customer satisfaction index (based on a customer survey); every one-point improvement in the index results in $1.40 in increased annual revenue per household. The experimental results indicated that the projected reductions in waiting times would result in a 5.9-point increase in the customer satisfaction index. As a result, a bank branch with 10,000 household customers could expect an increase in annual revenue of $82,600. A bank branch with only a few thousand household customers could expect to recoup the estimated $10,000 one-time cost of installing televisions in less than a year. Relate stories of your waiting line experiences. Source: S. Thomke, “R&D Comes to Services: Bank of America’s Path-breaking Experiments,” Harvard Business Review 81 (April 4, 2003), pp. 70–79. There are several variations of the single-server waiting line system, and in this section we will present several of the following frequently occurring variations: Poisson arrival rate, exponential service times Poisson arrival rate, general (or unknown) distribution of service times Poisson arrival rate, constant service times Poisson arrival rate, exponential service times with a finite queue Poisson arrival rate, exponential service time with a finite calling population Variations of the basic single-server model. The Basic Single-Server Model In the basic single-server model we assume the following: Poisson arrival rate Exponential service times First-come, first-served queue discipline Infinite queue length Infinite calling population Assumptions of the basic single-server model. The basic operating characteristics of this single-server model are computed using the following formulas, where λ = mean arrival rate, μ = mean service rate, and n = the number of customers in the waiting line system, including the customer being served (if any). λ = mean arrival rate; λ = mean service rate. The probability that no customers are in the queuing system (either in the queue or being served) is The probability of exactly n customers in the queuing system is Basic single-server queuing formulas. “Good” operating characteristics for a waiting line system, and hence good service, are relative and must have some basis for comparison. For example, the waiting time at this McDonald’s in Pushkin Square in Moscow averages about 45 minutes. Americans would not accept this level of service. To Muscovites used to waiting in lines that often consume the better part of a day, the waiting time at this McDonald’s is amazingly short. It represents good service to them. Roy/EXPLORER/Photo Researchers The average number of customers in the queuing system (i.e., the customers being serviced and in the waiting line) is The average number of customers in the waiting line is The average time a customer spends in the queuing system (i.e., waiting and being served) is The average time a customer spends waiting in line to be served is The probability that the server is busy and a customer has to wait, known as the utilization factor, is The probability that the server is idle and a customer can be served is Example 5.1 A Single-Server Model Q: The auxiliary bookstore in the student center at Tech is a small facility that sells school supplies and snacks. It has one checkout counter where one employee operates the cash register. The combination of the cash register and the operator is the server (or service facility) in this waiting line system; the customers who line up at the counter to pay for their selections form the waiting line. Customers arrive at a rate of 24 per hour according to a Poisson distribution (λ = 24), and service times are exponentially distributed, with a mean rate of 30 customers per hour (μ = 30). The bookstore manager wants to determine the operating characteristics for this waiting line system. Solution The operating characteristics are computed using the queuing formulas for the single-server model as follows: Remember that these operating characteristics are averages that result over a period of time; they are not absolutes. In other words, customers who arrive at the bookstore checkout counter will not find 3.2 customers in line. There could be no customers or 1, 2, 3, or 4 customers. The value 3.2 is simply an average over time, as are the other operating characteristics. Notice that there are four customers in the system (L = 4) and 3.2 customers in line (Lq = 3.2). The difference is only 0.8 customer being served because 20% of the time there is no customer being served (I = .20). Also note that the total time in the system of 10 minutes (W = 10) is exactly equal to the waiting time of 8 minutes (Wq = 8) plus the service time of 2 minutes (i.e., 60/30). Service Improvement Analysis The operating characteristics developed from the queuing formulas in Example 5.1 indicate the quality of service at the Tech auxiliary bookstore. The average waiting time of eight minutes is excessive and would likely cause customers to become frustrated and leave without making a purchase. Normally, a waiting time of two to three minutes is the most a customer will comfortably tolerate at a store like this. Thus, the bookstore management could use the operating characteristics to formulate new strategies to improve service and then test these strategies. For example, the bookstore might consider adding an additional employee to assist the present operator. This would enable more customers to be served in less time, thus increasing the service rate. If the service rate were increased from 30 customers per hour to 40 customers per hour, the waiting time would be reduced to only 2.25 minutes. Management would then have to decide whether the cost of the new employee is worth the reduction in waiting time. Alternatively, the bookstore could be redesigned to add an additional cash register as well as another employee to operate it. This would have the effect of reducing the arrival rate. If exiting customers split evenly between the two cash registers, then the arrival rate at each register would decrease from 24 per hour to 12 per hour with a resulting customer waiting time of 1.33 minutes. Again, management would have to determine whether the reduction in waiting time is worth the cost of a new cash register and employee. This is the crux of waiting line analysis: determining whether the improvement in service is worth the cost to achieve it. Solution of the Single-Server Model with Excel Excel can be used to solve all of the queuing models in this chapter. The Excel solution screen for the single-server model for the auxiliary bookstore at Tech in Example 5.1 is shown in Exhibit 5.1. Excel files for this exhibit and all other exhibits in this chapter can be downloaded from the text Web site. Exhibit 5.1 Single Server Excel File Advanced Single-Server Models There are many variations of the single-server model as shown in Figure 5.11. The most common are: constant service times, finite queue length, and finite calling populations. Figure 5.11 Advanced Single-Server Models Constant service times occur most often when automated equipment or machinery performs the service. Examples are vending machines, car washes, and many manufacturing operations. Finite queue lengths occur when there is a physical limitation to the length of the waiting line. For example, this can occur when cars waiting at a bank for an ATM machine are prohibited from extending into the street. A finite calling population refers to a situation when the number of “customers” that can arrive to a system is limited, such as invitation-only events, student advisees, or maintenance for a fleet of rental cars. The formulas for these models, included in the Summary of Key Formulas at the end of the chapter, can be quite involved. For that reason, all of these models, along with the single-server model and the multiple-server model discussed in the next section, can be solved with the Excel add-in that accompanies this book, OM Tools. Exhibit 5.2 shows the OM Tools solution to a single-server finite queue problem. Exhibit 5.2 Advanced Single-Server Models Excel File Multiple-Server Model A large number of operational waiting line systems include multiple servers. These models can be very complex, so in this section we present only the most basic multiple-server (or channel) waiting line structure. This system includes a single waiting line and a service facility with several independent servers in parallel, as shown in Figure 5.9b. An example of a multiple-server system is an airline ticket and check-in counter, where passengers line up in a roped-off single line waiting for one of several agents for service. The same waiting line structure is found at the post office, where customers in a single line wait for service from several postal clerks, or at a multiplex theater where customers typically line up in a single line to buy movie tickets from one of several ticket sellers. The Basic Multiple-Server Model The formulas for determining the operating characteristics for the multiple-server model are based on the same assumptions as the single-server model—Poisson arrival rate, exponential service times, infinite calling population and queue length, and FIFO queue discipline. Also, recall that in the single-server model, μ > λ; however, in the multiple-server model, sμ > λ, where s is the number of servers. The operating characteristics formulas are as follows.
Withmultiple-server models,two or more independent services in parallel serve a single waiting line.
The probability that there are no customers in the system (all servers are idle) is
sμ > λ: The total number of servers must be able to serve customers faster than they arrive.
The probability of n customers in the queuing system is

These passengers waiting in line to purchase tickets or check baggage and get a boarding pass at LAX are part of a waiting line system with multiple servers. Passengers are cordoned into a single line to wait for one of several airline agents to serve them. The number of agents scheduled for duty at the check-in counter is determined by waiting line operating characteristics based on different passenger arrival rates during the day and for different days.
David Young-Wolff/PhotoEdit
The probability that a customer arriving in the system must wait for service (i.e., the probability that all the servers are busy) is
Example 5.2 A Multiple-Server Waiting Line System

Q:

The student health service at Tech has a waiting room in which chairs are placed along a wall, forming a single waiting line. Some students have health problems that only require a nurse. The students are served by three nurses, each located in a separate room. Students are treated on a first-come, first-served basis.
The health service administrator wants to analyze this queuing system because excessive waiting times can make students angry and they complain. Students have a medical problem and thus are impatient anyway. Waiting increases their impatience.
A study of the health service for a six-month period shows that an average of 10 students arrive per hour (according to a Poisson distribution), and an average of four students can be served per hour by a nurse (Poisson distributed).

Solution

λ

=

10 students per hour

μ

=

4 students per hour per service representative

s

=

3 service representatives

=

(3)(4) = 12(> λ = 10)

Using the multiple-server model formulas, we can compute the following operating characteristics for the service department:
The health service administrator has observed that students are frustrated by the waiting time of 21 minutes and the 0.703 probability of waiting. To try to improve matters, the administrator is considering adding another nurse. The operating characteristics for this system must be recomputed with s = 4 nurses.
Substituting s = 4 along with λ and μ in the queuing formulas results in the following operating characteristics:

P0

=

0.073 probability that no students are in the health service

L

=

3.0 students in the health service

W

=

0.30 hour, or 18 minutes, in the health service

Lq

=

0.5 students waiting to be served

Wq

=

0.05 hour, or 3 minutes, waiting in line

Pw

=

0.31 probability that a student must wait for service

These results are significantly better; waiting time is reduced from 21 minutes to 3 minutes. This improvement in the quality of the service would have to be compared to the cost of adding an extra nurse.

Exhibit 5.3 Multiple Server Waiting Line in Excel
Explanation of Excel functions used in Exhibit 5.3
FACT (number)
A factorial is a count of the number of ways a group of items can be arranged (also called a permutation). The mathematical symbol for factorial is !. For example, 5! = 5 * 4 * 3 * 2 * 1 = 120. In Excel, FACT (5) = 120.
VLOOKUP (lookup value, table array, column number that contains the value to be returned).
VLOOKUP searches for a value in the first column of a table array and returns a value in the same row from another column in the table array. In this example, VLOOKUP(D6,G18:H36,2) looks up the number of servers, s, in the first column of the table and returns the value from the second column, which calculates the summation portion of the P0 formula.
Summary
Services represent the fastest growing sector of the global economy and account for two thirds of global output, one third of global employment and nearly 20% of global trade. The world’s most industrialized nations are predominantly service economies.
Service design and operations present unique challenges due to the intangible nature of services, the inherent variability in service delivery, and the co-production of value by the customer and service provide. The design process involves developing a service concept, defining the service package, and determining performance, design and delivery specifications. Design tools such as service blueprints, servicescapes, service scripts, and waiting line analysis facilitate the design process.
Since waiting is an integral part of many service-related operations, it is an important area of analysis. The mathematical formulas presented in this chapter for modeling various waiting line structures provide the basis for designing and improving service systems.
Summary of Key Terms
arrival rate
the rate (λ) at which customers arrive at a service facility during a specified period.
calling population
the source of customers to a waiting line.
channels
the number of parallel servers.
finite queue
a waiting line that has a limited capacity.
facilitating services
services that support the use of goods.
facilitating goods
goods that support the delivery of services.
goods
tangible objects that can be created and sold at a later date.
infinite queue
a waiting line that grows to any length.
line of influence
signs or activities that influences a customer to seek a service.
line of interaction
point where a customer and service provider interact.
line of support
point where a service provider interacts with support personnel.
line of visibility
separates front office and back office activities.
operating characteristics
measures of waiting line performance expressed as averages.
phases
the number of sequential servers a customer must go through to receive service.
queue
a single waiting line that forms in front of a service facility.
queue discipline
the order in which customers are served.
services
acts, deeds or performances that provide value to the customer.
servicescapes
the design of the physical environment (including signs, symbols and, artifacts) in which a service takes place.
service blueprinting
a specialized flow chart used for service processes.
service concept
the purpose of a service; it defines the target market and the customer experience.
service package
the mixture of physical items, sensual benefits, and psychological benefits provided to the customer.
service time
the time required to serve a customer; the time period divided by service time yields the service rate (μ).
utilization factor (ρ)
the probability the server is busy and the customer must wait.
Summary of Key Formulas
Single-Server Model
Single-Server Model with Finite Calling Population
Multiple-Server Model
Single-Server Model with Constant Service Times
Single-Server Model with Finite Queue

Solved Problems
Animated Demo Problem

1.

SINGLE-SERVER MODEL
The new-accounts officer at the Citizens Northern Savings Bank enrolls all new customers in checking accounts. During the three-week period in August encompassing the beginning of the new school year at State University, the bank opens a lot of new accounts for students. The bank estimates that the arrival rate during this period will be Poisson distributed with an average of four customers per hour. The service time is exponentially distributed with an average of 12 minutes per customer to set up a new account. The bank wants to determine the operating characteristics for this system to determine if the current person is sufficient to handle the increased traffic.

SOLUTION

Determine operating characteristics for the single-server system:

The average waiting time of 48 minutes and the average time in the system are excessive, and the bank needs to add an extra employee during the busy period.

2.

MULTIPLE-SERVER MODEL
The Citizens Northern Bank wants to compute the operating characteristics if an extra employee were added to assist with new-accounts enrollments.

SOLUTION

Determine the operating characteristics for the multiple-server system:

The waiting time with the multiple-server model is 2.3 minutes, which is a significant improvement over the previous system; thus, the bank should add the second new-accounts officer.

Questions

51.

How would you define a service?

52.

List eight characteristics of services and explain what impact each characteristic has on the design process.

53.

Describe the service package for (a) a bank, (b) an airline, and (c) a lawn service.

54.

Generate as many ideas as you can for additional services or improvements in service delivery for (a) banking, (b) higher education, and (c) health care.

55.

Go to www.ibm.com and search for SSME. What is SSME? Why is it important to IBM?

56.

Identify 10 real-life examples of queuing systems with which you are familiar.

57.

Why must the utilization factor in a single-server model be less than 1?

58.

Give five examples of real-world queuing systems with finite calling populations.

59.

List the elements that define a queuing system.

510.

How can the results of queuing analysis be used by a decision maker for making decisions?

511.

What is the mean effective service rate in a multiple-server model, and what must be its relationship to the arrival rate?

512.

For each of the following queuing systems, indicate if it is a single- or multiple-server model, the queue discipline, and if its calling population is infinite or finite:
Hair salon
Bank
Laundromat
Doctor’s office
Adviser’s office
Airport runway
Service station
Copy center
Team trainer
Mainframe computer

513.

For Example 5.1 in this chapter, discuss why the multiple-server model would or would not be appropriate as an alternative to reduce waiting time?

514.

Discuss briefly the relationship between waiting line analysis and quality improvement.

515.

Define the four basic waiting line structures and give an example of each.

516.

Describe the traditional cost relationship in waiting line analysis.

517.

Is the following statement true or false? The single-phase, single-channel model with Poisson arrivals and undefined service times will always have larger (i.e., greater) operating characteristic values (i.e., W, Wq, L, Lq) than the same model with exponentially distributed service times. Explain your answer.
Is the following statement true or false? The single-phase, single-channel model with Poisson arrivals and constant service times will always have smaller (i.e., lower) operating characteristic values (i.e., W, Wq, L, Lq) than the same model with exponentially distributed service times. Explain your answer.

518.

Under what conditions can the basic single-server and multiple-server models be used to analyze a multiple-phase waiting line system?

519.

Why do waiting lines form at a service facility even though there may be more than enough service capacity to meet normal demand in the long run?

520.

Provide an example of when a first-in, first-out (FIFO) rule for queue discipline would not be appropriate.

521.

Under what conditions will the single-channel, single-phase queuing model with Poisson arrivals and undefined service times provide the same operating characteristics as the basic model with exponentially distributed service times?

522.

What types of waiting line systems have constant service times?

Problems
GO Problems

51.

McBurger’s fast-food restaurant has a drive-through window with a single server who takes orders from an intercom and also is the cashier. The window operator is assisted by other employees who prepare the orders. Customers arrive at the ordering station prior to the drive-through window every 3.6 minutes (exponentially distributed) and the service time is 2.4 minutes (exponentially distributed). Determine the average length of the waiting line and the waiting time. Discuss the quality implications of your results. If you decide that the quality of the service could be improved, indicate what things you might do to improve quality.

52.

The ticket booth on the Tech campus is operated by one person, who is selling tickets for the annual Tech versus State football game on Saturday. The ticket seller can serve an average of 12 customers per hour (Poisson distributed); on average, 8 customers arrive to purchase tickets each hour (Poisson distributed). Determine the average time a ticket buyer must wait and the portion of time the ticket seller is busy.

53.

The Minute Stop Market has one pump for gasoline, which can service 10 customers per hour (Poisson distributed). Cars arrive at the pump at a rate of 5 per hour (Poisson distributed).
Determine the average queue length, the average time a car is in the system, and the average time a car must wait.
If, during the period from 4:00 P.M. to 5:00 P.M., the arrival rate increases to 12 cars per hour, what will be the effect on the average queue length?

54.

The Universal Manufacturing Company produces a particular product in an assembly-line operation. One of the machines on the line is a drill press that has a single assembly line feeding into it. A partially completed unit arrives at the press to be worked on every 8 minutes, on average, according to an exponential distribution. The machine operator can process an average of 10 parts per hour (Poisson distributed). Determine the average number of parts waiting to be worked on, the percentage of time the operator is working, and the percentage of time the machine is idle.

55.

The management of Universal Manufacturing Company (Problem 5-4) likes to have its operators working 90% of the time. What must the assembly line arrival rate be in order for the operators to be as busy as management would like?

56.

The Peachtree Airport in Atlanta serves light aircraft. It has a single runway and one air traffic controller to land planes. It takes an airplane 8 minutes to land and clear the runway (exponentially distributed). Planes arrive at the airport at the rate of 5 per hour (Poisson distributed).
Determine the average number of planes that will stack up waiting to land.
Find the average time a plane must wait in line before it can land.
Calculate the average time it takes a plane to clear the runway once it has notified the airport that it is in the vicinity and wants to land.
The FAA has a rule that an air traffic controller can, on the average, land planes a maximum of 45 minutes out of every hour. There must be 15 minutes of idle time available to relieve the tension. Will this airport have to hire an extra air traffic controller?

57.

The National Bank of Union City currently has one outside drive-up teller. It takes the teller an average of three minutes (exponentially distributed) to serve a bank customer. Customers arrive at the drive-up window at the rate of 12 per hour (Poisson distributed). The bank operations officer is currently analyzing the possibility of adding a second drive-up window at an annual cost of $20,000. It is assumed that arriving cars would be equally divided between both windows. The operations officer estimates that each minute’s reduction in customer waiting time would increase the bank’s revenue by $2000 annually. Should the second drive-up window be installed? What other factors should be considered in the decision besides cost?

58.

During registration at Tech every quarter, students in the Department of Management must have their courses approved by the departmental advisor. It takes the advisor an average of five minutes (exponentially distributed) to approve each schedule, and students arrive at the adviser’s office at the rate of 10 per hour (Poisson distributed). Compute L, Lq, W, Wq, and ρ. What do you think about this system? How would you change it?

59.

All trucks traveling on Interstate 40 between Albuquerque and Amarillo are required to stop at a weigh station. Trucks arrive at the weigh station at a rate of 120 per eight-hour day (Poisson distributed), and the station can weigh, on the average, 140 trucks per day (Poisson distributed).
Determine the average number of trucks waiting, the average time spent at the weigh station by each truck, and the average waiting time before being weighed for each truck.
If the truck drivers find out they must remain at the weigh station longer than 15 minutes on the average, they will start taking a different route or traveling at night, thus depriving the state of taxes. The state of New Mexico estimates it loses $10,000 in taxes per year for each extra minute (over 15) that trucks must remain at the weigh station. A new set of scales would have the same service capacity as the present set of scales, and it is assumed that arriving trucks would line up equally behind the two sets of scales. It would cost $50,000 per year to operate the new scales. Should the state install the new set of scales?

510.

In Problem 5-9(a), suppose arriving truck drivers look to see how many trucks are waiting to be weighed at the weigh station. If they see four or more trucks in line, they will pass by the station and risk being caught and ticketed. What is the probability that a truck will pass by the station?

511.

In Problem 5-8, the head of the Management Department at Tech is considering the addition of a second advisor in the college advising office to serve students waiting to have their schedules approved. This new advisor could serve the same number of students per hour as the present advisor. Determine L, Lq, W, and Wq for this altered advising system. As a student, would you recommend adding the advisor?

512.

Annie Campbell is a nurse on the evening shift from 10:00 P.M. to 6:00 A.M. at Community Hospital. She is responsible for 15 patients in her area. She averages two calls from each of her patients every evening (Poisson distributed), and she must spend an average of 10 minutes (negative exponential distribution) with each patient who calls. Nurse Smith has indicated to her shift supervisor that although she has not kept records she believes her patients must wait about 10 minutes on average for her to respond and she has requested that her supervisor assign a second nurse to her area. The supervisor believes 10 minutes is too long to wait, but she does not want her nurses to be idle more than 40% of the time. Determine what the supervisor should do.

513.

Wallace Publishers has a large number of employees who use the company’s single fax machine. Employees arrive randomly to use the fax machine at an average rate of 20 per hour. This arrival process is approximated by a Poisson distribution. Employees spend an average of two minutes using the fax machine, either transmitting or receiving items. The time spent using the machine is distributed according to a negative exponential distribution. Employees line up in single file to use the machine, and they obtain access to it on a first-come, first-served basis. There is no defined limit to the number who can line up to use the machine.
Management has determined that by assigning an operator to the fax machine rather than allowing the employees to operate the machine themselves, it can reduce the average service time from the current 2 minutes to 1.5 minutes. However, the fax operator’s salary is $8 per hour, which must be paid 8 hours per day even if there are no employees wishing to use the fax machine part of the time. Management has estimated the cost of employee time spent waiting in line and at the fax machine during service to be 17¢ per minute (based on an average salary of $10.20 per hour per employee). Should the firm assign an operator to the fax machine?

514.

The Universal Manufacturing Company has a single assembly line that feeds two drill presses in parallel. As partially completed products come off the line, they are lined up to be worked on as drill presses become available. The units arrive at the workstation (containing both presses) at the rate of 90 per hour (Poisson distributed). Each press operator can process an average of 60 units per hour (Poisson distributed). Compute L, Lq, W, and Wq.

515.

The Escargot is a small French restaurant with 6 waiters and waitresses. The average service time at the restaurant for a table (of any size) is 80 minutes (exponentially distributed). The restaurant does not take reservations and parties arrive for dinner (and stay and wait) every 16 minutes (Poisson distributed). The restaurant is concerned that a lengthy waiting time might hurt its business in the long run. What is the current waiting time and queue length for the restaurant? Discuss the quality implications of the current waiting time and any actions the restaurant might take.

516.

Cakes baked by the Freshfood Bakery are transported from the ovens to be packaged by one of three wrappers. Each wrapper can wrap an average of 120 cakes per hour (Poisson distributed). The cakes are brought to the wrappers at the rate of 300 per hour (Poisson distributed). If a cake sits longer than 5 minutes before being wrapped, it will not be fresh enough to meet the bakery’s quality control standards. Does the bakery need to hire another wrapper?

517.

The Draper Clinic has two general practitioners who see patients daily. An average of 6.5 patients arrive at the clinic per hour (Poisson distributed). Each doctor spends an average of 15 minutes (exponentially distributed) with a patient. The patients wait in a waiting area until one of the two doctors is able to see them. However, since patients typically do not feel well when they come to the clinic, the doctors do not believe it is good practice to have a patient wait longer than an average of 20 minutes. Should this clinic add a third doctor, and, if so, will this alleviate the waiting problem?

518.

The Wearever Shoe Company is going to open a new branch at a mall, and company managers are attempting to determine how many salespeople to hire. Based on an analysis of mall traffic, the company estimates that customers will arrive at the store at the rate of 9 per hour (Poisson distributed), and from past experience at its other branches, the company knows that salespeople can serve an average of 6 customers per hour (Poisson distributed). How many salespeople should the company hire in order to maintain a company policy that on average a customer should have to wait for service no more than 30% of the time?

519.

When customers arrive at Gilley’s Ice Cream Shop, they take a number and wait to be called to purchase ice cream from one of the counter servers. From experience in past summers, the store’s staff knows that customers arrive at the rate of 35 per hour (Poisson distributed) on summer days between 3:00 P.M. and 10:00 P.M. and a server can serve 15 customers per hour on average (Poisson distributed). Gilley’s wants to make sure that customers wait no longer than 5 minutes for service. Gilley’s is contemplating keeping three servers behind the ice cream counter during the peak summer hours. Will this number be adequate to meet the waiting time policy?

520.

Huang’s television-repair service receives an average of four TV sets per eight-hour day to be repaired. The service manager would like to be able to tell customers that they can expect their TV back in 3 days. What average repair time per set will the repair shop have to achieve to provide 3-day service on the average? (Assume that the arrival rate is Poisson distributed and repair times are exponentially distributed.)

521.

Partially completed products arrive at a workstation in a manufacturing operation at a mean rate of 40 per hour (Poisson distributed). The processing time at the workstation averages 1.2 minutes per unit (exponentially distributed). The manufacturing company estimates that each unit of in-process inventory at the workstation costs $31 per day (on the average). However, the company can add extra employees and reduce the processing time to 0.90 minute per unit at a cost of $52 per day. Determine whether the company should continue the present operation or add extra employees.

522.

The Seaboard Shipping Company has a warehouse terminal in Spartanburg, South Carolina. The capacity of each terminal dock is three trucks. As trucks enter the terminal, the drivers receive numbers, and when one of the three dock spaces becomes available, the truck with the lowest number enters the vacant dock. Truck arrivals are Poisson distributed, and the unloading and loading times (service times) are exponentially distributed. The average arrival rate at the terminal is five trucks per hour, and the average service rate per dock is two trucks per hour (30 minutes per truck).
Compute L, Lq, W, and Wq.
The management of the shipping company is considering adding extra employees and equipment to improve the average service time per terminal dock to 25 minutes per truck. It would cost the company $18,000 per year to achieve this improved service. Management estimates that it will increase its profit by $750 per year for each minute it is able to reduce a truck’s waiting time. Determine whether management should make the investment.
Now suppose that the managers of the shipping company have decided that truck waiting time is excessive and they want to reduce the waiting time. They have determined that there are two alternatives available for reducing the waiting time. They can add a fourth dock, or they can add extra employees and equipment at the existing docks, which will reduce the average service time per location from the original 30 minutes per truck to 23 minutes per truck. The costs of these alternatives are approximately equal. Management desires to implement the alternative that reduces waiting time by the greatest amount. Which alternative should be selected?

523.

Drivers who come to get their licenses at the department of motor vehicles have their photograph taken by an automated machine that develops the photograph onto the license card and laminates the complete license. The machine requires a constant time of 4.5 minutes to develop a completed license. If drivers arrive at the machine at the mean rate of 11 per hour (Poisson distributed), determine the average length of the waiting line and the average waiting time.

524.

A vending machine at Municipal Airport dispenses hot coffee, hot chocolate, or hot tea in a constant service time of 30 seconds. Customers arrive at the vending machine at a mean rate of 50 per hour, Poisson distributed. Determine the average length of the waiting line and the average time a customer must wait.

525.

In Problem 5-20 suppose that Huang’s television-repair service cannot accommodate more than 10 TV sets at a time (under repair and waiting for service). What is the probability that the number of TV sets on hand will exceed the shop capacity?

526.

Norfolk, Virginia, a major seaport on the East Coast, has a ship coal-loading facility. Currently, coal trucks filled with coal arrive at the port facility at the mean rate of 149 per day (Poisson distributed). The facility operates 24 hours a day. The coal trucks are unloaded one at a time on a first-come, first-served basis by automated mechanical equipment that empties the trucks in a constant time of eight minutes per truck, regardless of truck size. The port authority is negotiating with a coal company for an additional 30 trucks per day. However, the coal company will not use this port facility unless the port authority can assure them that their coal trucks will not have to wait to be unloaded at the port facility for more than 12 hours per truck on the average. Can the port authority provide this assurance?

527.

The Waterfall Buffet in the lower level of the National Art Gallery serves food cafeteria-style daily to visitors and employees. The buffet is self-service. From 7:00 A.M. to 9:00 A.M. customers arrive at the buffet at a rate of eight per minute; from 9:00 A.M. to noon, at four per minute; from noon to 2:00, at 14 per minute; and from 2:00 P.M. to closing at 5:00 P.M., at eight per minute (Poisson distributed). All the customers take about the same amount of time to serve themselves and proceed to the buffet. Once a customer goes through the buffet, it takes an average of 0.4 minute (exponentially distributed) to pay the cashier. The gallery does not want a customer to have to wait longer than four minutes to pay. How many cashiers should be working at each of the four times during the day?

528.

The Hair Port is a hair-styling salon at Riverside Mall. Four stylists are always available to serve customers on a first-come, first-served basis. Customers arrive at an average rate of four per hour (Poisson distributed), and the stylists spend an average of 45 minutes (exponentially distributed) on each customer.
Determine the average number of customers in the salon, the average time a customer must wait, and the average number waiting to be served.
The salon manager is considering adding a fifth stylist. Would this have a significant impact on waiting time?

529.

The Riverton Police Department has eight patrol cars that are on constant call 24 hours per day. A patrol car requires repairs every 30 days, on average, according to an exponential distribution. When a patrol car is in need of repair it is driven into the motor pool, which has a repairperson on duty at all times. The average time required to repair a patrol car is 12 hours (exponentially distributed). Determine the average time a patrol car is not available for use and the average number of patrol cars out of service at any one time, and indicate if the repair service seems adequate.

530.

The Crosstown Cab Company has four cabs on duty during normal business hours. The cab company dispatcher receives requests for service every seven minutes, on average, according to an exponential distribution. The average time to complete a trip is 20 minutes (exponentially distributed). Determine the average number of customers waiting for service and the average time a customer must wait for a cab.

531.

A retail catalogue operation employs a bank of six telephone operators, who process orders using computer terminals. When a terminal breaks down, it must be disconnected and taken to a nearby electronics repair shop, where it is repaired. The mean time between terminal breakdowns is six working days, and the mean time required to repair a terminal is two working days (both exponentially distributed). As a result of lost sales, it costs the mail-order operation an estimated $50 per day in lost profits each day a terminal is out for repair. The company pays the electronics repair shop $3000 per year on a service agreement to repair the terminals. The company is considering the possibility of signing a new service agreement with another electronics repair shop that will provide substitute terminals while the broken ones are at the repair shop. However, the new service agreement would cost the mail-order operation $15,000 per year. Assuming that there are 250 working days in a year, determine what the mail-order operation should do.

532.

The Baytown Post Office has four stations for service. Customers line up in single file for service on an FIFO basis. The mean arrival rate is 40 per hour, Poisson distributed, and the mean service time per server is five minutes, exponentially distributed. Compute the operating characteristics for this operation. Does the operation appear to be satisfactory in terms of: (a) postal workers’ (servers’) idle time; (b) customer waiting time and/or the number waiting for service; and (c) the percentage of the time a customer can walk in and get served without waiting at all?

533.

Andromeda Books is a small independent publisher of fiction and nonfiction books. Each week the publisher receives an average of eight unsolicited manuscripts to review (Poisson distributed). The publisher has 12 freelance reviewers in the area who read and evaluate manuscripts. It takes a reviewer an average of 10 days (exponentially distributed) to read a manuscript and write a brief synopsis. (Reviewers work on their own, seven days a week.) Determine how long the publisher must wait on average to receive a reviewer’s manuscript evaluation, how many manuscripts are waiting to be reviewed, and how busy the reviewers are.

534.

Amanda Fall is starting up a new house painting business, Fall Colors. She has been advertising in the local newspaper for several months, and based on inquiries and informal surveys of the local housing market she anticipates that she will get painting jobs at the rate of four per week (Poisson distributed). Amanda has also determined that it will take a four-person team of painters an average of 0.7 week (exponentially distributed) for a typical painting job.
Determine the number of teams of painters Amanda needs to hire so that customers will have to wait no longer than two weeks to get their houses painted.
If the average price for a painting job is $1700 and Amanda pays a team of painters $500 per week, will she make any money?

535.

The Associate Dean in the College of Business at Tech is attempting to determine which of two copiers he should lease for the college’s administrative suite. A regular copier leases for $8 per hour and it takes an employee an average of six minutes (exponentially distributed) to complete a copying job. A deluxe, high-speed copier leases for $16 per hour, and it requires an average of three minutes to complete a copying job. Employees arrive at the copying machine at the rate of seven per hour (Poisson distributed) and an employee’s time is valued at $10 per hour. Determine which copier the college should lease.

536.

The Corner Cleaners 24-hour laundromat has 16 washing machines. A machine breaks down every 20 days (exponentially distributed). The repair service the laundromat contracts takes an average of one day to repair a machine (exponentially distributed). A washing machine averages $5 per hour in revenue. The laundromat is considering a new repair service that guarantees repairs in 0.50 day, but they charge $10 more per hour than the current repair service. Should the laundromat switch to the new repair service?

537.

The Ritz Hotel has enough space for six taxicabs to load passengers, line up, and wait for guests at its entrance. Cabs arrive at the hotel every 10 minutes and if a taxi drives by the hotel and the line is full it must drive on. Hotel guests require taxis every five minutes on average and then it takes a cab driver an average of 3.5 minutes to load passengers and luggage and leave the hotel (exponentially distributed).
What is the average time a cab must wait for a fare?
What is the probability that the line will be full when a cab drives by and it must drive on?

538.

The local Quick Burger fast food restaurant has a drive-through window. Customers in cars arrive at the window at the rate of 10 per hour (Poisson distributed). It requires an average of four minutes (exponentially distributed) to take and fill an order. The restaurant chain has a service goal of an average waiting time of three minutes.
Will the current system meet the restaurant’s service goal?
If the restaurant is not meeting its service goal, it can add a second drive-in window that will reduce the service time per customer to 2.5 minutes. Will the additional window enable the restaurant to meet its service goal?
During the two-hour lunch period the arrival rate of drive-in customers increases to 20 per hour. Will the two-window system be able to achieve the restaurant’s service goal during the rush period?

539.

From 3:00 P.M. to 8:00 P.M. the local Big-W Supermarket has a steady arrival of customers. Customers finish shopping and arrive at the checkout area at the rate of 80 per hour (Poisson distributed). It is assumed that when customers arrive at the cash registers they will divide themselves relatively evenly so that all the checkout lines are even. The average checkout time at a register is seven minutes (exponentially distributed). The store manager’s service goal is for customers to be out of the store within 12 minutes (on average) after they complete their shopping and arrive at the cash register. How many cash registers must the store have open in order to achieve the manager’s service goal?

540.

Customers arrive at the lobby of the exclusive and expensive Ritz Hotel at the rate of 40 per hour (Poisson distributed) to check in. The hotel normally has three clerks available at the desk to check guests in. The average time for a clerk to check in a guest is four minutes (exponentially distributed). Clerks at the Regency are paid $12 per hour and the hotel assigns a goodwill cost of $2 per minute for the time a guest must wait in line. Determine if the present check-in system is cost effective; if it is not, recommend what hotel management should do.

541.

The Delacroix Inn in Alexandria is a small exclusive hotel with 20 rooms. Guests can call housekeeping from 8:00 A.M. to midnight for any of their service needs. Housekeeping keeps one person on duty during this time to respond to guest calls. Each room averages 0.7 call per day to housekeeping (Poisson distributed), and a guest request requires an average response time of 30 minutes (exponentially distributed) from the staff person. Determine the portion of time the staff person is busy and how long a guest must wait for his or her request to be addressed. Does the housekeeping system seem adequate?

542.

Jim Carter builds custom furniture, primarily cabinets, bookcases, small tables, and chairs. He only works on one piece of furniture for a customer at a time. It takes him an average of five weeks (exponentially distributed) to build a piece of furniture. An average of 14 customers approach Jim to order pieces of furniture each year (Poisson distributed): however, Jim will only take a maximum of eight advance orders. Determine the average time a customer must wait to receive a furniture order once it is placed and how busy Jim is. What is the probability that a customer will be able to place an order with Jim?

543.

Judith Lewis is a doctoral student at State University, and she also works full time as an academic tutor for 10 scholarship student athletes. She took the job hoping it would leave her free time between tutoring to devote to her own studies. An athlete visits her for tutoring an average of every 16 hours (exponentially distributed), and she spends an average 1.5 hours (exponentially distributed) with the athlete. She is able to tutor only one athlete at a time, and athletes study while they are waiting.
Determine how long a player must wait to see her and the percentage of time Judith is busy. Does the job seem to meet Judith’s expectations, and does the system seem adequate to meet the athlete’s needs?
If the results in part (a) indicate that the tutoring arrangement is ineffective, suggest an adjustment that could make it better for both the athletes and Judith.

544.

Agents at the security gate at the Hurtsfield County Regional Airport are able to check passengers and process them through the security gate at the rate of 52 per hour (Poisson distributed). Passengers arrive at the gate throughout the day at the rate of 45 per hour (Poisson distributed).
Determine the average waiting time and waiting line.
The passenger traffic arriving at the airport security gate varies significantly during the day and flight takeoffs tend to cluster making the passenger traffic very heavy at specific times while at other times there is little or no passenger traffic through the security gate. At the times leading up to flight takeoffs passengers arrive at a rate of 125 per hour (Poisson distributed). Develop and solve a waiting line system that can accommodate this increased level of passenger traffic.

545.

The inland port at Pittsburgh is a transportation hub that transfers shipping containers from trucks coming from eastern seaports to rail cars for shipment to inland destinations. Containers arrive at the inland ports at the rate of 9 per hour. It takes 25 minutes (exponentially distributed) for a crane to unload a container from a truck, place it on a flatbed railcar, and secure it. Suggest a waiting line system that will effectively handle this level of container traffic at the inland port.

546.

The Dominion Landing theme park has a new water ride, the Raging Rapids. The ride holds 36 people in boat-cars and it takes 4.1 minutes to complete the ride circuit. It also takes the ride attendants another 3.5 minutes (with virtually no variation) to load and unload passengers. Passengers arrive at the ride during peak park hours at the rate of 4.4 per minute (Poisson distributed). Determine the length of the waiting line for the ride.

Case Problem 5.1

Q:

Streamlining the Refinancing Process
First National Bank has been swamped with refinancing requests this year. To handle the increased volume, it divided the process into five distinct stages and created departments for each stage.
The process begins with a customer completing a loan application for a loan agent. The loan agent discusses the refinancing options with the customer and performs quick calculations based on customer-reported data to see if the customer qualifies for loan approval. If the numbers work, the customer signs a few papers to allow a credit check and goes home to wait for notification of the loan’s approval.
The customer’s file is then passed on to a loan processor, who requests a credit check, verification of loans or mortgages from other financial institutions, an appraisal of the property, and employment verification. If any problems are encountered, the loan processor goes to the loan agent for advice. If items appear on the credit report that are not on the application or if other agencies have requested the credit report, the customer is required to explain the discrepancies in writing. If the explanation is acceptable, the letter is placed in the customer’s file and the file is sent to the loan agent (and sometimes the bank’s board) for final approval.
The customer receives a letter of loan approval and is asked to call the closing agent to schedule a closing date and to lock in a loan rate if the customer has not already done so.
The closing agent requests the name of the customer’s attorney to forward the loan packet. The attorney is responsible for arranging a termite inspection, a survey, a title search, and insurance and for preparing the closing papers. The attorney and the closing agent correspond back and forth to verify fees, payment schedules, and payoff amounts.
The loan-servicing specialist makes sure the previous loan is paid off and the new loan is set up properly. After the closing takes place, the bank’s loan-payment specialist takes care of issuing payment books or setting up the automatic drafting of mortgage fees and calculating the exact monthly payments, including escrow amounts. The loan-payment specialist also monitors late payment of mortgages.
It is difficult to evaluate the success or failure of the process, since the volume of refinancing requests is so much greater than it has ever been before. However, customer comments solicited by the loan-servicing specialist have been disturbing to management.
Customer Comments:
I refinanced with the same bank that held my original loan, thinking erroneously that I could save time and money. You took two months longer processing my loan than the other bank would have, and the money I saved on closing costs was more than eaten up by the extra month’s higher mortgage payments.
I just got a call from someone at your bank claiming my mortgage payment was overdue. How can it be overdue when you draft it automatically from my checking account?
How come you do everything in writing and through the mail? If you would just call and ask me these questions instead of sending forms for me to fill out, things would go much more quickly.
If I haven’t made any additions to my house or property in the past year, you appraised it last year, and you have access to my tax assessment, why bother with another appraisal? You guys just like to pass around the business.
I never know who to call for what. You have so many people working on my file. I know I’ve repeated the same thing to a dozen different people.
It took so long to get my loan approved that my credit report, appraisal report, and termite inspection ran out. You should pay for the new reports, not me.
I drove down to your office in person today to deliver the attorney’s papers, and I hoped to return them with your signature and whatever else you add to the closing packet. The loan specialist said that the closing agent wouldn’t get to my file until the morning of the scheduled closing and that if she hit a snag, the closing could be postponed! I’m taking off half a day from work to attend the closing and “rescheduling” is not convenient. I know you have lots of business, but I don’t like being treated this way.
I received a letter from one of your loan-payment specialists today, along with a stack of forms to complete specifying how I want to set up my mortgage payments. I signed all these at closing—don’t you read your own work? I’m worried that if I fill them out again you’ll withdraw the payment twice from my account!
Create a service blueprint of the refinancing process. Why do you think the bank organized its process this way? What problems have ensued?
Examine the process carefully. Look at customer/provider interactions. Which steps create value for the customer? Which steps can be eliminated? Construct a new blueprint showing how the overall process can be improved.

Case Problem 5.2

Q:

Herding the Patient
Bayside General Hospital is trying to streamline its operations. A problem-solving group consisting of a nurse, a technician, a doctor, an administrator, and a patient is examining outpatient procedures in an effort to speed up the process and make it more cost-effective. Listed here are the steps that a typical patient follows for diagnostic imaging:
Patient enters main hospital entrance.
Patient takes a number and waits to be called to registration desk.
Patient registers.
Patient is taken to diagnostic imaging department.
Patient registers at diagnostic imaging reception.
Patient sits in department waiting area until dressing area clears.
Patient changes in dressing area.
Patient waits in dressing area.
Patient is taken to exam room.
Exam is performed.
Patient is taken to dressing area.
Patient dresses.
Patient leaves.
Create a service blueprint of the procedure and identify opportunities for improvement.
Describe what elements of a servicescape would make this service more palatable to the customer and efficient for the hospital staff.

Case Problem 5.3

Q:

The College of Business Copy Center
The copy center in the College of Business at State University has become an increasingly contentious item among the college administrators. The department heads have complained to the associate dean about the long lines and waiting times for their secretaries at the copy center. They claim that it is a waste of scarce resources for the secretaries to wait in line talking when they could be doing more productive work in the office. Hanford Burris, the associate dean, says the limited operating budget will not allow the college to purchase a new copier or copiers to relieve the problem. This standoff has been going on for several years.
To make her case for improved copying facilities, Lauren Moore, a teacher in Operations Management, assigned students in her class to gather some information about the copy center as a class project. The students were to record the arrivals at the center and the length of time it took to do a copy job once the secretary actually reached a copy machine. In addition, the students were to describe how the copy center system worked.
When the students completed the project, they turned in a report to Professor Moore. The report described the copy center as containing two machines. When secretaries arrive for a copy job, they join a queue, which looked more like milling around to the students, but they acknowledged that each secretary knew when it was his or her turn, and, in effect, the secretaries formed a single queue for the first available copy machine. Also, since copy jobs are assigned tasks, secretaries always stayed to do the job no matter how long the line was or how long they had to wait. They never left the queue.
From the data the students gathered, Professor Moore was able to determine that secretaries arrived every eight minutes for a copy job and that the arrival rate was Poisson distributed. Furthermore, she was able to determine that the average time it takes to complete a job was 12 minutes, and this is exponentially distributed.
Using her department’s personnel records and data from the university personnel office, Dr. Moore determined that a secretary’s average salary is $8.50 per hour. From her academic calendar she added up the actual days in the year when the college and departmental offices were open and found there were 247. However, as she added up working days, it occurred to her that during the summer months the workload is much less, and the copy center would probably get less traffic. The summer included about 70 days, during which she expected the copy center traffic would be about half of what it is during the normal year, but she speculated that the average time of a copying job would remain about the same.
Professor Moore next called a local office supply firm to check the prices on copiers. A new copier of the type in the copy center now would cost $36,000. It would also require $8000 per year for maintenance and would have a normal useful life of 6 years.
Do you think Dr. Moore will be able to convince the associate dean that a new copy machine will be cost effective?

Case Problem 5.4

Q:

Northwoods Backpackers
Bob and Carol Packer operate a successful outdoor wear store in Vermont called Northwoods Backpackers. They stock mostly cold-weather outdoor items such as hiking and backpacking clothes, gear, and accessories. They established an excellent reputation throughout New England for quality products and service. Eventually, Bob and Carol noticed that more and more of their sales were from customers who did not live in the immediate vicinity but were calling in orders on the telephone. As a result, the Packers decided to distribute a catalog and establish a phone-order service. The order department consisted of five operators working eight hours per day from 10:00 A.M. to 6:00 P.M., Monday through Friday. For a few years the mail-order service was only moderately successful; the Packers just about broke even on their investment. However, during the holiday season of the third year of the catalog order service, they were overwhelmed with phone orders. Although they made a substantial profit, they were concerned about the large number of lost sales they estimated they incurred. Based on information provided by the telephone company regarding call volume and complaints from customers, the Packers estimated they lost sales of approximately $100,000. Also they felt they had lost a substantial number of old and potentially new customers because of the poor service of the catalog order department.
Prior to the next holiday season, the Packers explored several alternatives for improving the catalog order service. The current system includes the five original operators with computer terminals who work eight-hour days, five days per week. The Packers have hired a consultant to study this system, and she reported that the time for an operator to take a customer order is exponentially distributed with a mean of 3.6 minutes. Calls are expected to arrive at the telephone center during the six-week holiday season according to a Poisson distribution with a mean rate of 175 calls per hour. When all operators are busy, callers are put on hold, listening to music until an operator can answer. Waiting calls are answered on a first-in, first-out basis. Based on her experience with other catalog telephone order operations and data from Northwoods Backpackers, the consultant has determined that if Northwoods Backpackers can reduce customer call waiting time to approximately one-half minute or less, the company will save $135,000 in lost sales during the coming holiday season.
Therefore, the Packers have adopted this level of call service as their goal. However, in addition to simply avoiding lost sales, the Packers believe it is important to reduce waiting time to maintain their reputation for good customer service. Thus, they would like about 70% of their callers to receive immediate service.
The Packers can maintain the same number of workstations/computer terminals they currently have and increase their service to 16 hours per day with two operator shifts running from 8:00 A.M. to midnight. The Packers believe when customers become aware of their extended hours the calls will spread out uniformly, resulting in a new call average arrival rate of 87.5 calls per hour (still Poisson distributed). This schedule change would cost Northwoods Backpackers approximately $11,500 for the six-week holiday season.
Another alternative for reducing customer waiting times is to offer weekend service. However, the Packers believe that if they do offer weekend service, it must coincide with whatever service they offer during the week. In other words, if they have phone order service eight hours per day during the week, they must have the same service during the weekend; the same is true with 16-hours-per-day service. They feel that if weekend hours differ from weekday hours it will confuse customers. If eight-hour service is offered seven days per week, the new call arrival rate will be reduced to 125 calls per hour at a cost of $3600. If Northwoods offers 16-hour service, the mean call arrival rate will be reduced to 62.5 calls per hour, at a cost of $7300.
Still another possibility is to add more operator stations. Each station includes a desk, an operator, a phone, and a computer terminal. An additional station that is in operation five days per week, eight hours per day, will cost $2900 for the holiday season. For a 16-hour day the cost per new station is $4700. For seven-day service, the cost of an additional station for eight-hour per-day service is $3800; for 16-hour-per-day service the cost is $6300.
The facility Northwoods Backpackers uses to house its operators can accommodate a maximum of 10 stations. Additional operators in excess of 10 would require the Packers to lease, remodel, and wire a new facility, which is a capital expenditure they do not want to undertake this holiday season. Alternatively, the Packers do not want to reduce their current number of operator stations.
Determine what order service configuration the Packers should use to achieve their goals, and explain your recommendation.

References
Chase, R., F. R. Jacobs, and N. Aquilano. Operations Management for Competitive Advantage. New York: McGraw-Hill/Irwin, 2005.
Cooper, R. B. Introduction to Queuing Theory, 2nd ed. New York: North Holland, 1981.
Davis, M., and J. Heineke. Operations Management. New York: McGraw-Hill/Irwin, 2004.
Fitzsimmons, J., and M. Fitzsimmons. Service Management. New York: McGraw-Hill/Irwin, 2004.
Gross, D., and C. Harris. Fundamentals of Queuing Theory, 2nd ed. New York: Wiley, 1985.
Hillier, F. S., and O. S. Yu. Queuing Tables and Graphics. New York: North Holland, 1981.
Kleinrock, L. Queuing Systems, vols. 1 and 2. New York: Wiley, 1975.
Lee, A. Applied Queuing Theory. New York: St. Martin’s Press, 1966.
Morse, P. M. Queues, Inventories, and Maintenance. New York: Wiley, 1958.
Saaty, T. L. Elements of Queuing Theory with Applications. New York: Dover, 1983.
Solomon, S. L. Simulation of Waiting Line Systems. Upper Saddle River, NJ: Prentice Hall, 1983.
White, J. A., J. W. Schmidt, and G. K. Bennett. Analysis of Queuing Systems. New York: Academic Press, 1975.
Zeithaml, V. Service Quality. Cambridge, MA: Marketing Science Institute 2004.
Notes
1This figure and much of the content of this chapter are adapted from the excellent materials gathered by IBM’s Service Science, Management, and Engineering group available at http://www.almaden_ibm.com/asr/SSME/coursematerials/.
eBook Collection
Home
Table of Contents
Read Book Online
Buy This Book
Download eBook
Print Chapter
Search
Preferences
Help
Get Adobe Reader
Useful Links
Reference and Citation Generator
APA Information
Grammar and Writing Guides

Home | Classroom | Library | Program | Account
Sitemap | Downloads | Community Relations | System Status | Terms of Use | Privacy Policy | Ethics and Compliance
Contact Us
Report a problem | Ask a question | Share a thought
Copyright © 2011 University of Phoenix PWAXDNET007
Bottom of Form
Tools
 
Loading …
 
Turn on chat
 

Chat Client Login
Top of Form
Username:Password:Authentication failed
Bottom of Form
 
 

Jayleen Cutler, view your profile.
Top of Form
Status
Type your statusStatus Text
Bottom of Form
Top of Form
Online or Offline StatusSelect Status
Online

Offline
Bottom of Form
Turn on chat

Search Results
No matches found for
Find contacts on
PhoenixConnectsm
Search People
Top of Form
Search Contacts Search ContactsClear Search Results
Bottom of Form
Preferences
Turn on chat when I log in

Play new message sound

Show offline contacts

Show avatars

 
Add Friends

 
Go to Calendar: Opens in a new window.Create
Previous Month

Current Month

Next Month
March 2013

SUN

MON

TUE

WED

THU

FRI

SAT

 

 

 

 

 

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

29

30

31

 

 

 

 

 

 

March 26
No events
Refresh
close
Problem Connecting. Please try again in a few minutes.
 
Events0
Preferences
Show Class Events

 
 
Topics for this page
The help tool is currently unavailable.
In the meantime, please try these additional support resources:
Productivity Tools
Chat

Email

Calendar

More help topics »

Go to inbox: Opens in a new window.Compose Email: Opens in a new window.
Loading…
Preferences
Show Number of Messages messages
Show Number of Lines per Message lines each
close
 
Refresh
close
Problem Connecting. Try again in a few minutes.
 
Tools
Minimize Toolbar

99+

0

0

0
 
previous
next
  
 
Help
Close

Popout
Topics for this page
Productivity Tools
Chat

Email

Calendar

More help topics »

InviteCancel
 close
 faculty
 
Group Chat
Add To Group Chat

Minimize Conversations
Chat
 
Top of Form
Chat Message
Chat Text box
Bottom of Form
 
Close all converstations
Conversations

Skip to Content
Top of Form

Welcome Jayleen Cutler – 303469531 | Inbox | What’s New | Community | Help | Logout
Home

Classroom

Library

Program

Account

University Library

eBooks

Center for Writing Excellence

Center for Mathematics Excellence

Phoenix Career Services
Search
Search Location Search Type Enter search text Search
Preferences

Font Size

Margins

Font Style

 

Use Defaults

Change font size, margins and font style to customize your eBook Collection experience.
These changes will only apply to books you read online.
Operations Management. Creating Value Along the Supply Chain, Sixth Edition
Chapter 10: Supply Chain Management Strategy and Design
ISBN: 9780470095157 Author: Roberta S. Russell, Bernard W. Taylor
copyright © 2009 John Wiley & Sons
Supply Chain Management Strategy and Design
In this chapter, you will learn about…
Supply Chains
The Management of Supply Chains
Information Technology: A Supply Chain Enabler
Supply Chain Integration
Supply Chain Management (SCM) Software
Measuring Supply Chain Performance
Web resources for this chapter include
Animated Demo Problems
Internet Exercises
Online Practice Quizzes
Lecture Slides in PowerPoint
Virtual Tours
Company and Resource Weblinks
www.wiley.com/college/russell
Supply Chain Management Strategy and Design at Green Mountain Coffee
Green Mountain Coffee Roasters
Green Mountain Coffee Roasters
Coffee is a commodity, and in the mass-market segment of the industry (i.e., lower-priced, prepackaged brands sold in supermarkets), product pricing is generally a function of supply and demand. However, the specialty coffee beans that GREEN MOUNTAIN uses tend to trade somewhat differently than commodity beans. They’re usually sold on a negotiated basis at a substantial premium cost over commodity beans. In Green Mountain’s supply chain it procures unroasted specialty coffee beans using a combination of outside brokers and direct business relationships with farms, coffee estates, cooperatives, and other parties. The company gains several advantages from this direct strategy including improved quality, product differentiation, and supply and pricing stability. On the downstream side of its supply chain, Green Mountain sells most of its coffee through resellers, including restaurants, supermarkets, specialty food and convenience stores, hospitality and food service, and office coffee services. It also operates a direct mail-order business and a Web site where customers can buy coffee and coffee-related products. Green Mountain uses an enterprise resource planning (ERP) system developed with PeopleSoft modules to effectively manage its supply chain.
Supply Chains
Globalization and the evolution of information technology have provided the catalysts for supply chain management to become the strategic means for companies to manage quality, satisfy customers, and remain competitive. A supply chain encompasses all activities associated with the flow and transformation of goods and services from the raw materials stage to the end user (customer), as well as the associated information flows. In essence, it is all the assets, information, and processes that provide “supply.” It is made up of many interrelated members, starting with raw material suppliers, and including parts and components suppliers, subassembly suppliers, the product or service producer, and distributors, and ending with the end-use customer.
Figure 10.1 illustrates the stages, facilities, and physical movement of products and services in a supply chain. The supply chain begins with suppliers, which can be as basic as raw material providers. These suppliers are referred to as upstream supply chain members, while the distributors, warehouses, and eventual end-use customers are referred to as downstream supply chain members. The stream at the bottom of the figure denotes the flow of goods and services (i.e., demand) as the supply chain moves downstream. Notice that the stream is very rough at the upstream end and gets smoother as it moves downstream, a characteristic we will discuss in greater detail later. Also note that “information” is at the center of Figure 10.1; it is the “heart and brains” of the supply chain, another characteristic we will talk more about later.
Figure 10.1 The Supply Chain
The supply chain in Figure 10.1 can represent a single producer directly linked to one level of suppliers and one set of end-use customers. A grocery store that gets food products like milk, eggs, or vegetables directly from a farmer (and not through a broker or middle man), and sells them directly to the customer who consumes them reflects this basic level of supply chain. However, supply chains are more typically a series of linked suppliers and customers; every customer is in turn a supplier to the next, up to the final end user of the product or service. For example, Figure 10.2 shows the supply chain for denim jeans, a straightforward manufacturing process with a distinct set of suppliers. Notice that the jeans manufacturer has suppliers that produce denim who in turn have suppliers who produce cotton and dye.
Figure 10.2 The Supply Chain for Denim Jeans

As Figures 10.1 and 10.2 show, the delivery of a product or service to a customer is a complex process, encompassing many different interrelated processes and activities. First, demand for a product or service is forecast, and plans and schedules are made to meet demand within a time frame. The product or service can require multiple suppliers (who have their own suppliers) who prepare and then ship parts and materials to manufacturing or service sites. A large manufacturer like General Motors, has thousands of suppliers that serve its 120 parts plants and 30 auto and truck assembly plants, including first-tier suppliers that supply it directly, second-tier suppliers that supply those suppliers, third-tier suppliers that supply second-tier suppliers, and so on. Parts and materials are transformed into final products or services. These products may then be stored at a distribution center or warehouse. Finally, these products are transported by carriers to external or internal customers. However, this may not be the final step at all, as these customers may transform the product or service further and ship it on to their customers. All of this is part of the supply chain—that is, the flow of goods and services from the materials stage to the end user.
The supply chain is also an integrated group of business processes and activities with the same goal—providing customer satisfaction. As shown in Figure 10.3, these processes include the procurement of services, materials, and components from suppliers; production of the products and services; and distribution of products to the customer including taking and filling orders. Information and information technology tie these processes together; it is what “integrates” them into a supply chain.
Figure 10.3 Supply Chain Processes
The supply chain is also an integrated group of processes to “source,” “make,” and “deliver” products.
Supply Chains for Service Providers
Supply chains for services are sometimes not as easily defined as supply chains for manufacturing operations. Since the supply chain of a service provider does not always provide the customer with a physical good, its supply chain does not focus as much on the flow of physical items (material, parts, and subassemblies) through the supply chain. It instead may focus more on the human resources and support services necessary to provide its own service. The supply chain of a service provider also tends to be more compact and less extended than a manufacturing supply chain. It generally does not have as many tiers of suppliers, and its distribution network is smaller or nonexistent. However, supply chains of service companies are definable and can be effectively managed using many of the same principles. Service companies and organizations have suppliers (who have suppliers), and they distribute their products to customers (who may have their own customers). Although a hospital and HMO do not provide actual goods to its customers, they nevertheless purchase equipment, computers, drugs, and medical supplies from suppliers (who have suppliers). They also contract for services (such as food preparation or laundry); hire doctors, nurses, accountants, administrators, and staff; and provide health care. They have quality-management issues throughout their supply chain. They also encounter the same problems and inefficiencies as a manufacturing-based supply chain. Other service-oriented companies, like McDonald’s, do, in fact, provide a physical product, and thus have a more discernible supply chain with distribution, transportation and inventory like a manufacturing company.
Value Chains
In recent years, terms such as value chain and demand chain have been used instead of, or interchangeably with, supply chain. Are there any differences between the two terms? Originally, a value chain was thought to have a broader focus than a supply chain. A value chain included every step from raw materials to the eventual end user, whereas a supply chain focused more narrowly on the activities that get raw materials and subassemblies into the manufacturing operation, that is, supply. In this context, the ultimate goal of a value chain is the delivery of maximum value to the end user. However, we have already indicated that the general perception of a supply chain is that it also encompasses this same broad focus, from raw material to end user. Alternatively, a demand chain has been referred to as a network of trading partners that extends from manufacturers to end-use consumers. The objective of demand chain management is to increase value for any part or all of the chain. This perhaps is a somewhat more narrowly defined perspective then a supply chain or value chain. However, in reality all of these terms have come to mean approximately the same thing to most people, and the terms are frequently used interchangeably.
Along the Supply Chain: Successful Supply Chain Design at Toyota and Honda
In the 20+ years following the quality management movement of the 1980s, U.S. companies have often struggled to adopt the Japanese supply chain design philosophy of keiretsu, a close-knit network of suppliers that continuously learn, improve, and prosper with their parent companies. Quality philosophy prescribed a supplier partnering model that reduced the number of suppliers, awarded remaining suppliers a long-term commitment, and encouraged top-tier suppliers to manage lower-tier suppliers to take responsibility for quality and costs, and deliver just-in-time. However, this type of approach has frequently not worked out in the United States, and U.S. companies have been unable to replicate the close supplier partnering relationships that the Japanese have created. By the turn of the century, cost again had become the primary criterion for the selection of suppliers by U.S. companies. The benefit of sourcing globally with low-cost suppliers in countries like China, and the development of Internet technologies, which allowed suppliers to compete more efficiently on cost, has seemed to outweigh the benefit of developing long-term supplier relationships. As a result, relationships between U.S. manufactures and U.S. suppliers are worse now than before the quality revolution started. For example, Ford uses online reverse auctions to get the lowest-priced components it can, and GM writes contracts with suppliers that enables them to switch to a less expensive supplier immediately. This has led many U.S. companies to think that it’s not possible to replicate the Japanese keiretsu model outside of Japan. However, Toyota and Honda operations in North America have shown that this is not the case.
In the past decade Toyota and Honda have developed excellent partnering relationships with many of the same suppliers in Canada, the United States and Mexico that are at odds with the big three automakers. Of the 2.1 million Toyota/Lexus vehicles and 1.6 million Honda/Accura vehicles sold in North America in 2003, almost 80 percent of the manufacturing costs came from North American suppliers. Toyota and Honda have both been able to replicate their keiretsu supplier relationships in North America, and as a result they have the best relationships with their suppliers in the U.S. auto industry, they have the fastest product development process, and they continuously reduce costs and improve quality. In various supplier-based surveys Toyota and Honda have consistently ranked as the most preferred companies to work with: J. D. Powers found that suppliers rated Toyota and Honda among the best innovators; and while reducing costs of producing Camrys and Accords by 25% in the 1990s, the two Japanese companies continued to rank at the top of quality surveys. When Toyota and Honda first began their manufacturing operations in the United States, they gave local suppliers small orders and gave them their expectations for cost, quality, and delivery. For those suppliers that met their expectations, Toyota and Honda gave them larger contracts. Over time, Toyota and Honda went to great lengths to understand how their suppliers worked, they supervised them, they developed their technical capabilities, they (selectively) shared information, and they participated in joint improvement activities. The two companies set high standards and expectations, but they have not tried to maximize profits at the expense of their suppliers unlike the accusations against U.S. automakers. According to Taiichi Ohno who developed the Toyota Production System (including JIT and kanban), “The achievement of business performance by the parent company through bullying suppliers is totally alien to the spirit of the Toyota Production System.”
Discuss why you think U.S. automakers failed to try to emulate the Japanese keiretsu philosophy in their supply chain designs, in light of continued evidence of its success.
Source: J. K. Liker and T. Y. Choi, “Building Deep Supplier Relationships,” Harvard Business Review 83 (12; December 2004), pp. 104–113.
A common thread among these perceptions of supply, value, and demand chains is that of value. Value to the customer is good quality, a fair price, and fast and accurate delivery. To achieve value for the customer, the members of the supply chain must act as partners to systematically create value at every stage of the supply chain. Thus, companies not only look for ways to create value internally in their own production processes, but they also look to their supply chain partners to create value by improving product design and quality, enhancing supply chain performance and speed, and lowering costs. To accomplish these value enhancers, supply chain members must often collaborate with each other and integrate their processes, topics that we will continually return to in this chapter.
The Management of Supply Chains
Supply chain management (SCM) focuses on integrating and managing the flow of goods and services and information through the supply chain in order to make it responsive to customer needs while lowering total costs. Traditionally, each segment of the supply chain was managed as a separate (stand-alone) entity focused on its own goals. However, to compete in today’s global marketplace a company has to count on the combined and coordinated effort of all members of the supply chain.
Supply chains require close collaboration, cooperation, and communication among members to be effective. Suppliers, and their customers must share information. It is the rapid flow of information among customers, suppliers, distributors, and producers that characterizes today’s supply chain management. Suppliers and customers must also have the same goals. They need to be able to trust each other: Customers need to be able to count on the quality and timeliness of the products and services of their suppliers. Furthermore, suppliers and customers must participate together in the design of the supply chain to achieve their shared goals and to facilitate communication and the flow of information.
Keys to effective supply chain managementare information, communication, cooperation, and trust.
Supply Chain Uncertainty and Inventory
One of a company’s main objectives in managing its supply chain is to synchronize the upstream flow of incoming materials, parts, subassemblies, and services with production and distribution downstream so that it can respond to uncertainty in customer demand without creating costly excess inventory. Examples of factors that contribute to uncertainty, and hence variability, in the supply chain are inaccurate demand forecasting, long variable lead times for orders, late deliveries, incomplete shipments, product changes, batch ordering, price fluctuations and discounts, and inflated orders. The primary negative effects of supply chain uncertainty and variability are lateness and incomplete orders. If deliveries from suppliers are late or incomplete, they slow down the flow of goods and services through the supply chain, ultimately resulting in poor-quality customer service. Companies cope with this uncertainty and try to avoid delays with their own form of “insurance,” inventory.
Supply chain members carry buffer (or extra) inventory at various stages of the supply chain to minimize the negative effects of uncertainty and to keep goods and services flowing smoothly from suppliers to customers. For example, if a parts order arrives late (or does not arrive at all) from a supplier, the producer is able to continue production and maintain its delivery schedule to its customers by using parts it has stored in inventory for just such an occurrence.
Companies also accumulate inventory because they may order in large batches in order to keep down order and transportation costs or to receive a discount or special price from a supplier. However, inventory is very costly. Products sitting on a shelf or in a warehouse are just like money sitting there not being used when it could be used for something else. It is estimated that the cost of carrying a retail product in inventory for one year is over 25% of what the item cost. Inventory-carrying costs is over $300 billion per year in the United States. As such, suppliers and customers would like to minimize or eliminate it.
The Bullwhip Effect
Distorted information or the lack of information, such as inaccurate demand data or forecasts, from the customer end can ripple back upstream through the supply chain and magnify demand variability at each stage. This can result in high buffer inventories, poor customer service, missed production schedules, wrong capacity plans, inefficient shipping, and high costs. This phenomenon, which has been observed across different industries, is known as the bullwhip effect. It occurs when slight to moderate demand variability becomes magnified as demand information is transmitted back upstream in the supply chain. In Figure 10.1 the stream at the bottom of the figure reflects this occurrence; the flow is greater (and the waters more turbulent) further upstream. Figure 10.4 presents a detailed perspective of the bullwhip effect.
Figure 10.4 The Bullwhip Effect
The bullwhip effect is created when supply chain members make ordering decisions with an eye to their own self-interest and/or they do not have accurate demand information from the adjacent supply chain members. If each supply chain member is uncertain and not confident about what the actual demand is for the succeeding member it supplies and is making its own demand forecast, then it will stockpile extra inventory to compensate for the uncertainty. In other words, they create a security blanket of inventory. As shown in Figure 10.4, demand for the end user is relatively stable and the inventory is small. However, if slight changes in demand occur, and the distributor does not know why this change occurred, then the distributor will tend to overreact and increase its own demand, or conversely reduce its own demand too much if demand from its customer unexpectedly drops. This creates an even greater overreaction by the manufacturer who supplies the distributor and the suppliers who supply the manufacturer. One way to cope with the bullwhip effect is for supply chain members to share information, especially demand forecasts.
If the supply chain exhibits transparency, then members can have access to each other’s information, which reduces or eliminates uncertainty.
Risk Pooling
When supply chains stretch over long distances and include multiple parts, services, and products, uncertainty increases. In “lean” supply chains there is little redundancy and slack, i.e., inventory, so when disruptions occur, the effects can cascade through the supply chain hindering normal operations. For example, a labor strike at an automobile plant can cause downstream assembly plants to reduce or stop production, which, in turn, can result in a lack of autos on dealer lots. Parts shortages, customer order changes, production problems and quality problems are the types of things that can disrupt a supply chain. As we have suggested, one way to offset this uncertainty is by carrying extra inventory at various stages along the supply chain, i.e., the bullwhip effect. However, another way to reduce uncertainty is called risk-pooling.
In risk pooling, risks are aggregated to reduce the impact of individual risks. As this implies, there are several ways to pool supply chain risks. One way is to combine the inventories from multiple locations into one location, like a warehouse or distribution center. It is well known (and can be shown mathematically) that it is more economical to hold inventory at one central location than dispersing it across several customer locations. Doing so reduces the overall inventory investment needed to achieve a target service level across all the customers the distribution center supplies, i.e., it’s more costly to meet variations in demand from several locations than from one, which in effect, reduces demand variability. Adding a distribution center between the supplier and the end-use customers can also shorten the lead time between the supplier and customer, which is another way to pool risks. When the demand forecast is closer to its actual occurrence (i.e., shorter lead time), then variability is reduced; it’s a lot easier to predict demand for next week than for next month.
Another way to pool risks is to reduce parts and product variability, thereby reducing the number of product components, which allows a company to meet demand with fewer products. Common product components that can be used in a lot of different products enable a company to pool its forecasts for the components demand, resulting in fewer forecasts. (The more forecasts there are, the more chances for errors.) Reducing product variability can have the same effect. It’s easier to forecast demand for a small number of product configurations than a larger number of configurations. This is why automobile companies like Honda offer packages of options rather than just a list of add-ons. Yet another way to pool risks is by creating flexible capacity. It reduces the uncertainty for the customer if its demand can be met by several different production facilities, which the supplier can achieve by increasing its production capacities at several different locations. The customer can reduce its own risks by increasing the number of suppliers it uses.
Along the Supply Chain: Eliminating the Bullwhip Effect at Philips Electronics
Philips Electronics is one of the world’s largest electronics companies with over 165,000 employees in more than 150 countries, and with sales in 2005 of over 30.4 billion Euros. Philips Semiconductors, headquartered in Eindhoven, The Netherlands, with over 33,000 employees, and Philips Optical Storage, with over 9,000 employees around the world are subsidiaries of Philips Electronics. Philips Semiconductors is one of the world’s largest semiconductor suppliers with twenty manufacturing and assembly sites around the world, while Philips Optical Storage manufactures optical storage products including drives, subassemblies and components for audio, video, data and gaming playback, and rewritable CD and DVD consumer products. Within the Philips supply chain Philips Semiconductor is the furthest upstream supplier of its downstream customer, Philips Optical Storage. In 2000 Philips Semiconductor recognized that it was suffering from a substantial bullwhip effect and collaborated with Philips Optical Storage on a project to reduce or eliminate it.
In order for Philips Optical Storage to assemble a DVD drive, it requires a number of components and subassemblies, including printed circuit boards, which require integrated circuits to produce that can have long manufacturing lead times. There are two steps in the process of manufacturing integrated circuits; wafer fabrication, which is a complex process that also has long lead times, and assembly. Overall, the total lead time for the supply chain was between 17 and 22 weeks. The planning process was decentralized with each stage in the supply chain planning and operating independently. In addition, information about changes in demand and orders often lagged and was distorted, and deliveries downstream to Philips Optical Storage were unreliable. Individual stages safeguarded against the resulting uncertainty by creating safety stocks. Philips developed a collaborative planning process and supporting software that included a new advanced scheduling system that supported weekly collaborative planning sessions. One of the most important aspects of the new supply chain management system is the speed with which it is able to solve problems that arise. The new system synchronized Philips supply chain, reduced safety stocks, guaranteed order quantities and deliveries, and effectively eliminated the bullwhip effect, resulting in savings of approximately $5 million per year.
Why do you think the “collaborative planning process and supporting software” was a key factor in the ability of Philips to eliminate the bullwhip effect along its supply chain? What obstacles do you think might prevent a company from using a collaborative planning process?
Source: T. de Kok, F. Janssen, J. van Doremalen, E. van Wachem, M. Clerkx, and W. Peeters, “Philips Electronics Synchronizes Its Supply Chain to End the Bullwhip Effect,” Interfaces 35 (1; January–February 2005), pp. 37–48.
Information Technology: A Supply Chain Enabler
Information is the essential link between all supply chain processes and members. Computer and information technology allows real-time, online communications throughout the supply chain. Technologies that enable the efficient flow of products and services through the supply chain are referred to as “enablers,” and information technology has become the most important enabler of effective supply chain management.
Information links all aspects of the supply chain.
Supply chain managers like to use the phrase “in modern supply chain management, information replaces inventory.” Although this statement is not literally true—companies need inventory at some point, not just information—information does change the way supply chains are managed, and these changes can lead to lower inventories. Without information technology supply chain management would not be possible at the level it is currently being accomplished on a global basis. Some of the more important IT supply chain enablers are shown in Figure 10.5.
Figure 10.5 Supply Chain Enablers

Electronic Business
E-business replaces physical processes with electronic ones. In e-business, supply chain transactions are conducted via a variety of electronic media, including EDI, e-mail, electronic funds transfer (EFT), electronic publishing, image processing, electronic bulletin boards, shared databases, bar coding, fax, automated voice mail, CD-ROM catalogues, the Internet, Web sites, and so on. Companies are able to automate the process of moving information electronically between suppliers and customers. This saves both labor costs and time.
Some of the features that e-business brings to supply chain management include:
Cost savings and price reductions derived from lower transaction costs (including labor and document savings)
Reduction or elimination of the role of intermediaries and even retailers and service providers, thus reducing costs
Shortening supply chain response and transaction times for ordering and delivery
Gaining a wider presence and increased visibility for companies
Greater choices and more information for customers
Improved service as a result of instant accessibility to services
Collection and analysis of voluminous amounts of customer data and preferences
The creation of virtual companies like Amazon.com that distribute only through the Web, which can afford to sell at lower prices because they do not need to maintain retail space
Leveling the playing field for small companies, which lack resources to invest in infrastructure (plant and facilities) and marketing
Gaining global access to markets, suppliers, and distribution channels
Electronic Data Interchange
Electronic data interchange (EDI) is a computer-to-computer exchange of business documents in a standard format, which has been established by the American National Standards Institute (ANSI) and the International Standards Organization (ISO). It creates a data exchange that allows trading partners to use Internet transactions instead of paper when performing purchasing, shipping, and other business. EDI links supply chain members together for order processing, accounting, production, and distribution. It provides quick access to information, allows better customer service, reduces paperwork, allows better communication, increases productivity, improves tracking and expediting, and improves billing and cost efficiency.
EDI can be effective in reducing or eliminating the bullwhip effect discussed earlier in this chapter. With EDI, supply chain members are able to share demand information in real time, and thus are able to develop more accurate demand forecasts and reduce the uncertainty that tends to be magnified at each upstream stage of the supply chain.
Along the Supply Chain: Strategic Supply Chain Design at 7-Eleven in Japan and the United States
7-Eleven Japan, a $21 billion convenience store chain with 9,000 stores, is one of the most profitable retailers in the world, with annual profit margins of around 30%. The 7-Eleven stores in Japan have very low stock out rates, and their supply chain is agile and adaptive, that is, focusing on responding to quick changes in demand instead of fast, cheap deliveries. It uses real-time systems to track sales data on customer demographics and preferences at all of its stores. Its stores are linked to distribution centers, suppliers, and logistics providers so that demand fluctuations can be detected quickly and stores can be restocked quickly. The company schedules deliveries to its stores within a 10-minute margin, and if a delivery is more than 30 minutes late the carrier must pay a harsh penalty equal to the gross margin of the products being carried to the store. Employees reconfigure shelves at least three times per day to cater to different customer demands at different times of the day. To reduce traffic delays different suppliers in the same region consolidate shipments to distribution centers (where products are cross-docked for delivery to stores). Key to 7-Eleven Japan’s successful supply chain operation is its keiretsu model of close partnerships with its suppliers that relies on incentives and penalties; if they contribute to 7-Eleven’s success, they share the rewards; if they fail to perform as expected, they pay a harsh penalty. However, the company also creates a relationship of trust and mutual understanding and respect with its suppliers; for example, when a carrier makes a delivery to a store, the content is not verified, allowing the carrier to make rapid deliveries, saving them time and money.
In the early 1990s 7-Eleven in the United States was losing money and market share as competition increased when major oil companies began to add mini-marts to their gas stations. 7-Eleven had always been a vertically integrated company controlling most of the activities along its supply chain. The company had its own distribution network, delivered its own gasoline, made its own candy and ice, and even owned the cows for the milk it sold. Store managers were required to do a lot of things in addition to merchandising including store maintenance, credit card processing, payroll, and IT management. 7-Eleven in the United States looked to its highly successful Japanese unit and its very successful keiretsu supply chain model for a solution. The Japanese 7-Eleven stores relied on an extensive and carefully managed network of suppliers to carry out many day-to-day functions resulting in reduced costs, enhanced quality, growth and high profits. 7-Eleven in the United States decided to outsource everything that wasn’t critical; if a supply chain partner could provide a function more effectively than 7-Eleven could, then it became a candidate for outsourcing. The company divested itself of direct ownership of its human resources function, finance, IT, logistics, distribution, product development, and packaging. However, for some critical activities it maintains a degree of direct control; for example, while it outsources gasoline distribution to Citgo, it maintains control over gas pricing and promotion, which are often critical to a store’s bottom line. In another case it allows one of its most important suppliers, Frito-Lay, to deliver directly to its stores, thus taking advantage of their vast warehousing and transport system, but it doesn’t allow Frito-Lay to make critical store decisions about order quantities and shelf placement. It has also used its supplier partnerships for innovations, for example, working with Coca-Cola and Hershey to develop a Twizzler-flavored Slurpee and a Twizzler-based edible straw, and partnering with American Express to set up store ATM machines. 7-Eleven’s supply chain makeover has been a huge success. 7-Eleven now dominates the convenience store industry with almost three times the sales per employee, double the store sales growth, and almost twice the inventory turns as the rest of the industry.
It seems that Japanese companies are frequently the innovators in quality management and supply chain design and management; Japanese companies like 7-Eleven Japan, have been innovators and leaders while U.S. companies have lagged behind and followed the Japanese lead. Why do you think this is?
Sources: Hau L. Lee, “The Triple-A Supply Chain,” Harvard Business Review, 82 (10; October 2004), pp. 102–112: and “Mark Gottfredson, Rudy Puryear and Stephen Phillips,” Harvard Business Review, 83 (2; February 2005), pp. 132–139.
Bar Codes
In bar coding, computer-readable codes are attached to items flowing through the supply chain, including products, containers, packages and even vehicles. The bar code contains identifying information about the item. It might include such things as a product description, item number, its source and destination, special handling procedures, cost, and order number. A food product can be identified down to the farmer who grew it and the field it was grown in. When the bar code information is scanned into a company’s computer by an electronic scanner, it provides supply chain members with critical information about the item’s location in the supply chain.
Bar code technology has had a huge influence on supply chain management, and it is used by thousands of companies in different situations. Package delivery companies like FedEx and UPS use bar codes to provide themselves and customers with instantaneous detailed tracking information. Supermarkets use scanners at cash registers to read prices, products, and manufacturers from Universal Product Codes (UPCs).
When bar codes are scanned at checkout counters, it also creates point-of-sale data—an instantaneous computer record of the sale of a product. This piece of information can be instantly transmitted throughout the supply chain to update inventory records. Point-of-sale data enable supply chain members—suppliers, producers, and distributors—to quickly identify trends, order parts and materials, schedule orders and production, and plan for deliveries.
Radio Frequency Identification
A recent innovation that’s seen as a likely bar code partner is radio frequency identification (RFID). RFID technology uses radio waves to transfer data between a reader, (that is, a scanner), and an item such as a shipping container or a carton. RFID consists of a tiny microchip and computer, often a small, thin ribbon, which can be put in almost any form—for example between layers of cardboard in a box, or on a piece of tape or a label. An RFID “tag” stores a unique identification number. RFID scanners transmit a radio signal via an antenna to “access” the tag, which then responds with its number. The tag could be an Electronic Product Code (EPC), which could be linked to databases with detailed information about a product item. Unlike bar codes, RFID tags do not need a direct “line of sight” to read, and many tags can be read simultaneously over a long distance.
The RFID tags would make it possible for a supplier or retailer to know automatically what goods they have and where they are around the world. For example, a retailer could distinguish between three cartons of the same product and know that one was in the warehouse, one was in the store, and one was in transit, which would speed up product location, delivery, and replenishment. Figure 10.6 shows some of the advantages RFID provides. RFID technology also has obvious security benefits by being able to identify all items being shipped into the United States on an airplane or a ship.
Figure 10.6 RFID Capabilities
Wal-Mart has mandated that its top suppliers put RFID tags carrying EPC codes on pallets and cases, and Kroger and CVS are doing the same. Wal-Mart perceives that the following value will result from RFID:
Labor to scan barcodes on cases and pallets will be eliminated.
On-shelf monitoring will decrease stock-outs in stores.
Prevention of product shrinkage, vendor fraud, and theft.
Decreased distribution center costs by tracking over 1 billion pallets annually.
Provide inventory visibility enabling a 20% reduction in inventory levels.
Savings of over $8 billion per year.
The Internet
No recent technological innovation has had a bigger impact on supply chain management, and business in general, than the Internet. Through the Internet a business can communicate with customers and other businesses within its supply chain anywhere in the world in real time.
The Internet has eliminated geographic barriers, enabling companies to access markets and suppliers around the world that were previously inaccessible. By doing so, the Internet has shifted the advantage in the transaction process from the seller to the buyer, because the Internet makes it easier for companies to deal with many more suppliers around the world in order to get lower prices and better service.
The Internet adds speed and accessibility to the supply chain. Companies are able to reduce or eliminate traditional time-consuming activities associated with ordering and purchasing transactions by using the Internet to link directly to suppliers, factories, distributors, and customers. It enables companies to speed up ordering and delivery, track orders and delivery in real time, instantaneously update inventory information, and get instantaneous feedback from customers. This combination of accurate information and speed allows companies to reduce uncertainty and inventory. Internet commerce is expected to exceed $6 trillion in this decade.
Build-to-Order (BTO)
Dell was the first computer company to move to a direct-sell-to-customers model over the Internet. Its popular build-to-order (BTO) models were initially based on telephone orders by customers. Dell created an efficient supply chain using a huge number of weekly purchase orders faxed to suppliers. However, Dell now sends out orders to suppliers over the Internet every few hours or less. Dell’s suppliers are able to access the company’s inventories and production plans, and they receive constant feedback on how well they are meeting shipping schedules.
Dell’s Web site allows the customer to configure a PC with the desired features; to order and track the order status, allowing the customer to follow their purchase in real time from order to delivery; and to be notified by e-mail as soon as the order is shipped. Also, Dell created secure private sites for corporate and public sector customers to provide access to service and support information customized to the customer’s products. In addition, Dell provides online access to technical reference materials and self-diagnostic tools that include symptom-specific troubleshooting modules that walk customers interactively through common systems problems.
Along the Supply Chain: Quick Supply Chain Responsiveness and Flexibility at Zara
The Spain-based Inditex clothing company with over 650 Zara luxury clothing stores in 50 countries is one of the most successful clothing retailers in the world. In a very tough competitive global clothing market, Inditex’s sales grew from 367 million Euros to 4.6 billion Euros in a little over 10 years, and Zara sales grow at an annual rate of over 20 percent. Zara’s supply chain strategy is unique and differs from more traditional approaches; it wants to maintain direct control over what happens to its products until the customer buys them, and bring new products to the market quickly. While competitors typically spend months designing new products for the next season, with its super-fast supply chain Inditex is able to design, produce, and deliver new garments to its Zara stores around the world in only 15 days. The result is that in a typical recent year its net margin on sales was 10.5% while H&M’s was 9.5%, Benetton’s was 7%, and Gap’s was less than 1%. While most of its competitors rely on outsourcing, Inditex keeps over half of its production in house; it intentionally maintains extra plant capacity; it manufactures and distributes its products in small batches; it manages all of its own design, warehousing, distribution, and logistics functions; it encourages stock-outs; and it leaves large areas in its expensive Zara retail stores empty.
There are several keys to Inditex’s and Zara’s supply chain success. First its IT system is designed to transmit information quickly and easily back through the supply chain from customers to designers to the production staff. The company’s strategy is for its customers to know that they can always find new products at Zara, but create a sense of exclusively (with spacious stores and relatively few items on display). This retail approach depends on the rapid replenishment of small batches of new goods; Zara’s designers create about 40,000 new designs each year. It offers almost the same products as its high-fashion competitors, but at a lower cost because it uses less-expensive materials. This fast-response system depends on the quick exchange of information throughout Zara’s supply chain, with a very efficient organization that minimizes layers of bureaucracy that might hinder rapid communication between supply chain functions. Everything at Zara including operational procedures, performance measures, and its factory and office layouts are geared to the rapid exchange of information. The company makes extensive use of PDAs to enhance communication between store managers and market specialists. The continual rapid flow of information along Zara’s supply chain and the production of small batches tend to reduce inventory and minimize the bullwhip effect. Also, Zara keeps inventory low by exploiting stockouts; since customers always have new items to choose from, empty racks don’t drive customers away—it simply drives them to purchase other items. Further, the limited inventory and short opportunity to purchase items motivate customers to visit Zara stores more frequently; for example, Zara customers in London visit stores an average of 17 times per year compared to four times for the average clothing store. This high level of traffic allows Zara to spend less on advertising than its competitors. In order to maintain this degree of speed and responsiveness, Zara maintains much more control over its supply chain than its competitors, designing and distributing all of its products, owning all of its shops, and outsourcing a limited amount of its manufacturing. As such, it is much more vertically integrated than its competitors, producing over half of its products in its own factories (making complicated items like women’s suits in-house and outsourcing simpler products like sweaters), and buying 40% of its fabric and its dyestuff from other Inditex companies, whereas competitors Gap and H&M own no production facilities. Zara’s factories are highly automated and make use of sophisticated JIT systems. Zara operates 500K-sq-meter and 120K-sq-meter distribution centers in Spain, which provides the company with more warehouse capacity than they normally need, but enables them to react quicker to unexpected demand increases than their competitors. While Zara’s production and distribution facilities have required major capital investment, the company gets its products to its stores and sells them so quickly that it dramatically reduces the need for working capital.
Zara’s supply chain design is described as being unique and different from traditional approaches; discuss the successful characteristics and features it does share with more traditional supply chain strategies, i.e., what are some of the aspects of Zara’s supply chain design that other companies might try to emulate?
Source: Kasra Meadows, Michael L. Lewis and Jose A. D. Machuca, “Rapid-Fire Fulfillment,” Harvard Business Review, 82 (11; November 2004), pp. 104–110.
With RFID technology, small individual electronic “tags” like these are attached to cartons, packages, or containers, which allows companies and organizations to track their every move around the world.
Alamy
Supply Chain Integration
One of the keys to having a successful, efficient supply chain is to get the various supply chain members to collaborate and work together, that is, to get “in-sync.” This level of coordination is referred to as supply chain integration. Information technology is the key element in achieving supply chain integration through four areas—information sharing, collaborative planning, workflow coordination, and the adoption of new models and technologies. Table 10.1 describes the positive effect each of these elements can have on supply chain performance.
Table 10.1 Supply Chain Integration

Information sharing among supply chain members

Reduced bullwhip effect
Early problem detection
Faster response
Builds trust and confidence

Collaborative planning, forecasting, replenishment, and design

Reduced bullwhip effect
Lower costs (material, logistics, operating, etc.)
Higher capacity utilization
Improved customer service levels

Coordinated workflow, production and operations, procurement

Production efficiencies
Fast response
Improved service
Quicker to market

Adopt new business models and technologies

Penetration of new markets
Creation of new products
Improved efficiency
Mass customization

Information sharing includes any data that are useful to other members of the supply chain such as demand data, inventory stocks, and production and shipping schedules—anything that can help the supply chain members improve performance. Information needs to be transparent (i.e., not hidden) and easily accessible, online. Collaborative planning defines what is done with the information that is shared. Workflow coordination defines how supply chain partners work together to coordinate their activities. Finally, adopting new business models and technologies is how supply chain members redesign and improve their supply chain performance.
Collaborative Planning, Forecasting, and Replenishment
Collaborative planning, forecasting, and replenishment (CPFR) is a process for two or more companies in a supply chain to synchronize their individual demand forecasts in order to develop a single plan for meeting customer demand. With CPFR, parties electronically exchange a series of written comments and supporting data, which includes past sales trends, point-of-sale data, on-hand inventory, scheduled promotions, and forecasts. This allows participants to coordinate joint forecasts by concentrating on differences in forecast numbers. They review the data together, compare calculations, and collaborate on what is causing discrepancies. If there are no exceptions they can develop a purchase order and ship. CPFR does not require EDI; data can be sent via spreadsheets or over the Internet. CPFR is actual collaboration because both parties do the work and both parties share in fixing the problems. Sharing forecasts in this type of collaborative system can result in a significant decrease in inventory levels for both the manufacturer and distributor since it tends to reduce the “bullwhip effect,” and thus lower costs.
Virtual Tours
Along the Supply Chain: Supply Chain Success at Harley-Davidson
In the early 1980s Wisconsin-based Harley-Davidson Motor Company, the country’s largest manufacturer of motorcycles, was struggling to survive. Faced with an onslaught of severe competition from Japan, failing new products, and strategic errors that allowed their engineering capabilities to atrophy, Harley-Davidson was challenged to remain profitable. However, not only did Harley-Davidson survive, it became a huge success story, with sales increasing from 36,735 motorcycles in 1986 to 291,417 in 2003 to over 350,000 motorcycles in 2006. It has also expanded globally into Europe, China and India. A significant factor in its turnaround was the strategic changes it made in managing its supply chain during the next decade.
It was once a company that did not take a thoughtful approach to selecting suppliers, making purchasing decisions, and evaluating delivery and inventory costs. As a result components, parts, and materials were often delivered late with less than desirable quality, which drove up production and inventory costs. However, in the mid-1990s Harley-Davidson initiated sophisticated supply chain strategies to reduce inventory and purchasing costs while improving product quality and delivery times from suppliers.
Harley-Davidson now expects suppliers to focus strategically on cost, delivery, and quality improvement and to hit established cost and quality targets. Suppliers are expected to meet “twice the level of quality” and to develop a written strategic plan to achieve goals for quality improvement.
Suppliers are graded according to defective “parts-per-million” and it has a target goal of 48 defective parts-per-million that suppliers are expected to achieve. Harley-Davidson sends suppliers a monthly report showing their quality and delivery performance, and if the supplier receives a bad report Harley-Davidson sends their people to the supplier to determine the problems and help them resolve them. If the supplier does not improve its performance, it is replaced. In 1995 defective parts-per-million for suppliers were generally around 10,000; however, by 2001 approximately 75% of Harley-Davidson’s supplier base was performing at 48 defective parts-per-million or better, and 36 suppliers were performing at zero defective parts-per-million. Harley-Davidson also expects its suppliers to develop and deliver new products in “half the time,” and they are expected to develop tools for faster product development and plans that are supportive of Harley-Davidson’s design and development efforts. Approximately 80 on-site (resident) suppliers take part in new product design, creating an interface between the company and its suppliers that helps Harley-Davidson improve quality and cut costs.
These objectives consciously reduced Harley-Davidson’s supplier base that could not meet expectations for cost, quality, and delivery by 80%, from 4,000 suppliers to 800. In some cases Harley-Davidson has moved toward single-source relationships with suppliers. In these instances, the company partners with one supplier for a part, system, or component—for example, lighting systems, instrumentation gauges, or ignition systems—and works closely with the supplier to develop technology that the company needs to remain competitive. In return, Harley-Davidson remains loyal to the supplier and reduces supplier uncertainty, provided of course that the supplier continues to meet the company’s objectives for improvement. In order for Harley-Davidson suppliers to remain competitive they must enforce similar exacting goals and standards on their own suppliers, thus creating efficiency and cost effectiveness along the entire length of the supply chain from Harley-Davidson’s suppliers to its suppliers’ suppliers, and so on.
Harley-Davidson is using the Internet to further improve its supply chain performance. The company launched an interactive Internet-based supply chain management strategy that placed a large portion of the company’s supply chain management onto the Internet. It provided all suppliers with information they need to conduct online financial transactions and reduce the time spent chasing invoices. Suppliers are linked by a web portal (www.h-dsn.com) to critical business transaction information, including data on delivery and quality performance and the status of financial transactions. In-house software reports defect rates that provides quick feedback to suppliers about bad components. Suppliers can look at production schedules and delivery requirements and assess their ability to meet those schedules. Documents and information previously sent using an EDI format are now sent more cheaply through the Internet, which is also more universally available to supply companies, particularly smaller ones.
What has been the effect of these changes in supply chain management at Harley-Davidson? They reduced operating expenses by $161 million; the company now manages its inventory according to a just-in-time (JIT) system, and it runs on 6.5 to 10 days’ worth of inventory compared to 8 to 15 days of inventory before its supply chain initiatives; its logistics and distribution center costs as a percentage of sales decreased by 59%. By any measure Harley-Davidson’s supply chain management strategy has been a success.
Harley-Davidson is a manufacturing company with a successful supply chain design. Identify a service company and discuss what elements of Harley-Davidson’s supply chain it might adopt.
Sources: B. Milligan, “Harley-Davidson Wins by Getting Suppliers on Board,” Purchasing 129 (5; September 21, 2000), pp. 51–65; J. Dillner and G. Verga, “Supply Chain Management: Best Practices and its Potential for Consultants,” Women in Consulting, (http://www.womeninconsulting.org), May 2004; M. Sullivan,” High-Octane Hog,” Forbes.com, September 2001; http://www.harleydavidson.com.
Assembly-line worker at Harley-Davidson. This 100-year-old motorcycle manufacturer was named “Company of the Year” by Forbes Magazine in 2002. Innovative changes to its supply chain are keys to its recent successful transformation into a global company.
(c)AP/Wide World Photos
Supply Chain Management (SCM) Software
Enterprise resource planning (ERP) is software that helps integrate the components of a company, including most of the supply chain processes, by sharing and organizing information and data among supply chain members. It transforms transactional data like sales into useful information that supports business decisions in other parts of the company. For example, when data such as a sale becomes available in one part of the business, it is transmitted through ERP software, which automatically determines the effects of the transaction on other areas, such as manufacturing, inventory, procurement, invoicing, distribution, and accounting, and on suppliers. Through these information flows ERP organizes and manages a company’s supply chain. Most ERP vendors systems handle external, Web-based interactions, and have software specifically for supply chain management called “SCM.”
SAP was the first ERP software provider and is the largest, which has made it almost synonymous with ERP applications software. mySAP.com is the umbrella brand name for the SAP software. mySAP.com is a suite of Web-enabled SAP modules that allow a company to collaborate with its customers and business partners along its supply chain. When a customer submits an order, that transaction ripples throughout the company’s supply chain, adjusting inventory, part supplies, accounting entries, production schedules and shipping schedules, and balance sheets. Different nations’ laws, currencies, and business practices are embedded in the software, which enables it to translate sales transactions smoothly between business partners in different countries—for example, a company in Taiwan and its customer in Brazil.
ERP is discussed in greater detail in Chapter 15 (IT Systems for Resource Planning).
Measuring Supply Chain Performance
As we indicated in previous sections, inventory is a key element in supply chain management. On one hand, it enables a company to cope with uncertainty by serving as a buffer between stages in the supply chain. Inventory allows items to flow smoothly through the system to meet customer demand when stages are not in sync. On the other hand, inventory can be very costly. As such, it is important for a company to maintain an efficient supply chain by lowering inventory levels (and costs) as much as possible. In order to accomplish this objective, several numerical measures, also called key performance indicators (KPIs) or metrics, are often used to measure supply chain performance. Three of the more widely used key performance indicators are inventory turnover, inventory days of supply, and fill rate.
Key Performance Indicators
Inventory turnover (or turns) is computed by dividing the cost of goods sold (i.e., the cost of annual sales) by the average aggregate inventory value:
The average aggregate value of inventory is the total value (at cost) of all items being held in inventory, including such things as raw materials, work-in-process (WIP), and finished goods. It is computed by summing for all individual inventory items, the product of the average number of units on hand in inventory at any one time multiplied by the unit value:
Average aggregate value of Inventory = Σ(average inventory for item i) × (unit value item i)
The cost of goods sold is only for finished goods, valued at cost, not the final sale price (which might include discounts or markups).
A poor, or comparatively low, inventory turnover value indicates that a large amount of inventory is required to satisfy demand. In general, a good (or poor) number of inventory turns is relative to what is being achieved at various stages across a company and what the norm is for the industry. In the early 1980s, inventory turns for many manufacturing companies were less than 5; however, the advent of lean production (see Chapter 16) and the increased emphasis on quality management and supply chain management have increased inventory turns in much of the manufacturing sector.
Example 10.1 Computing Key Performance Indicators

Q:

The Tomahawk Motorcycle Company manufactures motorcycles. Last year the cost of goods sold was $425 million. The company had the following average value of production materials and parts, work-in-process, and finished goods inventory:

Production materials and parts

$ 4,629,000

Work-in-process

17,465,000

Finished goods

12,322,000

Total average aggregate value of inventory

$34,416,000

The company wants to know the number of inventory turns and days of supply being held in inventory.

Solution

In recent years, Ford and General Motors have experienced inventory turns in the high teens. Toyota had inventory turns in the 60s in the 1980s when its supply chain was mostly in Japan, but this has fallen to the low teens in recent years as it has expanded globally and the complexities of its supply chain have increased accordingly. High-tech companies typically have around 6 turns per year, but Dell has achieved inventory turns greater than 50, belying its success. Palm has inventory turns of around 26. In one year Palm increased its number of turns from 12 to 26, which decreased inventory from $55 million to $23 million. Alternatively, pharmaceutical giant Pfizer has had recent inventory turns as low as 1.5. However, this does not mean that Pfizer is doing poorly financially—it has been very profitable. It does mean that perhaps it could manage its supply chain more efficiently.
Another commonly used KPI is days (or weeks) of supply. This is a measure of how many days (or weeks) of inventory is available at any point in time. It is computed by dividing the aggregate average value of inventory by the daily (or weekly) cost of goods sold,
Automotive companies like Ford and GM typically carry about 60 days of finished goods supply.
Another frequently used KPI is fill rate. Fill rates are the fraction of orders placed by a customer with a supplier distribution center or warehouse which are filled within a specific period of time, typically one day. High fill rates indicate that inventory is moving from the supplier to the customer at a faster rate, which thereby reduces inventory at the distribution center. For example, Nabisco’s fill rate for its Planter’s peanuts at Wegman’s grocery store chain is 97% meaning that when the store places an order with the Nabisco distribution center 97% of the time it is filled within one day.
Process Control
In Chapter 2 on Quality Management, we talked about various techniques that could be employed to monitor product and service quality. One of the more powerful techniques we presented was statistical process control, the subject of Chapter 3. Although we tend to think that process control is used to monitor and control quality for manufacturing operations, it can also be used to monitor and control any of the processes in the supply chain. If products are defective, then the effects are obvious. However, other problems along the supply chain that create uncertainty and variability are most often caused by errors. If deliveries are missed or are late, if orders are lost, if errors are made in filling out forms, if items with high obsolescence rates (like PCs) or perishable items are allowed to stay too long in inventory, if demand forecast errors are made, if plant and equipment are not properly maintained, then the supply chain can be disrupted, thereby reducing supply chain performance. Thus, at any stage in the process, statistical process control charts can be used to monitor process performance.
SCOR
The Supply Chain Operations Reference (SCOR) model is a supply chain diagnostic tool that provides a cross-industry standard for supply chain management. It was developed and is maintained by the Supply Chain Council, a global not-for-profit trade association organized in 1996 with membership open to companies interested in improving supply chain efficiency primarily through the use of SCOR. The Supply Chain Council (SCC) has over 750 corporate members around the world, including many Fortune 500 companies.
The purpose of the SCOR model is to define a company’s current supply chain processes, quantify the performance of similar companies to establish targets to achieve “best-in-class” performance, and identify the practices and software solutions that will yield “best in class” performance. It is organized around a set of five primary management processes—plan, source, make, deliver, and return, as shown in Figure 10.7. These processes provide a common set of definitions, or building blocks, that SCOR uses to describe any supply chain, from simple to complex. This allows supply chains for different companies to be linked and compared.
Figure 10.7 SCOR Model Processes
A primary feature of the SCOR model is the use of a set of performance indicators or “metrics” to measure supply chain performance. These metrics are categorized as “customer-facing” or “internal-facing” as shown in Table 10.2. Customer-facing metrics measure supply chain delivery reliability, responsiveness, and flexibility with respect to customers and suppliers. Internal-facing metrics measure supply chain cost and asset management efficiency. The metrics may be used for multiple supply chain processes.
Table 10.2 SCOR Performance Metrics

 

Performance Attribute

Performance Metric

Definition

 

 

Delivery performance

Percentage of orders delivered on time and in full to the customer

 

Supply chain delivery reliability

Fill rate

Percentage of orders shipped within 24 hours of order receipt

 

 

Perfect order fulfillment

Percentage of orders delivered on time and in full, perfectly matched with order with no errors

Customer Facing

Supply chain responsiveness

Order fulfillment lead time

Number of days from order receipt to customer delivery

 

Supply chain flexibility

Supply chain response time

Number of days for the supply chain to respond to an unplanned significant change in demand without a cost penalty

 

 

Production flexibility

Number of days to achieve an unplanned 20% change in orders without a cost penalty

 

 

Supply chain management cost

The direct and indirect cost to plan, source and deliver products and services

 

 

Cost of goods sold

The direct cost of material and labor to produce a product or service

 

Supply chain cost

Value-added productivity

Direct material cost subtracted from revenue and divided by the number of employees, similar to sales per employee

Internal Facing

 

Warranty/returns processing cost

Direct and indirect costs associated with returns including defective, planned maintenance and excess inventory

 

 

Cash-to-cash cycle time

The number of days that cash is tied up as working capital

 

Supply Chain Asset Management Efficiency

Inventory days of supply

The number of days that cash is tied up as inventory

 

 

Asset turns

Revenue divided by total assets including working capital and fixed assets

These metrics are used to develop a “SCORcard” that measures both a company’s current supply chain performance for different processes and its competitor’s metrics. The company then projects the level of metrics it needs to be on a par with its competitors, to have an advantage over its competitors, or to be superior. The value associated with these measured improvements in performance is then projected for the different performance attributes. For example, a company may know that the industry “median fill rate” is 90% and the industry best-in-class performance is 99%. The company has determined that its current fill rate is 65%, and that a fill rate of 90% will give it parity with its competitors, a 95% fill rate will give it an advantage, and a 99% fill rate will make it superior to most of its competitors. The company may then project that the improvement in its fill rate plus improvements in the other supply chain reliability attributes (i.e., delivery performance and perfect order fulfillment) will increase supply chain value by $10 million in revenue. This process wherein a company measures its current supply chain performance, compares it to its competition, and then projects the performance levels it needs to compete is referred to as “gap analysis.” SCOR then provides a framework not only for measuring performance but for diagnosing problems and identifying practices and solutions that will enable a company to achieve its competitive performance objectives.
Summary
Supply chain management is one of the most important, strategic aspects of operations management because it encompasses so many related functions. Whom to buy materials from, how to transport goods and services, and how to distribute them in the most cost-effective, timely manner constitutes much of an organization’s strategic planning. Contracting with the wrong supplier can result in poor-quality materials and late deliveries. Selecting the wrong mode of transportation or carrier can mean late deliveries to customers that will require high, costly inventories to offset. All of these critical functional supply chain decisions are complicated by the fact that they often occur in a global environment within cultures and markets at a distance and much different from those in the United States.
Summary of Key Terms
bullwhip effect
occurs when demand variability is magnified at various upstream points in the supply chain.
collaborative planning, forecasting, and replenishment (CPFR)
a process for two or more companies in a supply chain to synchronize their demand forecasts into a single plan to meet customer demand.
e-business
the replacement of physical business processes with electronic ones.
electronic data interchange (EDI)
a computer-to-computer exchange of business documents.
enterprise resource planning (ERP)
software that connects the components of a company by sharing and organizing information and data.
fill rate
the fraction of orders placed by a customer with a supplier distribution center or warehouse which are filled within 24 hours.
inventory
insurance against supply chain uncertainty held between supply chain stages.
inventory turns
a supply chain performance metric computed by dividing the cost of goods sold by the average aggregate value of inventory.
key performance indicator (KPI)
a metric used to measure supply chain performance.
point-of-sale data
computer records of sales at retail sites.
procurement
purchasing goods and services from suppliers.
radio frequency identification (RFID)
radio waves used to transfer data, like an electronic product code, between an item with an embedded microchip and a reader.
SCOR
the supply chain operations reference model; a diagnostic tool that provides a cross-industry standard for supply chain management.
sourcing
the selection of suppliers.
supply chain
the facilities, functions, and activities involved in producing and delivering a product or service from suppliers (and their suppliers) to customers (and their customers).
supply chain management (SCM)
managing the flow of information through the supply chain in order to attain the level of synchronization that will make it more responsive to customer needs while lowering costs.
Summary of Key Formulas

Solved Problem
Animated Demo Problem

Q:

INVENTORY TURNS AND DAYS OF SUPPLY
A manufacturing company had the following average raw materials, work-in-process, and finished goods inventory on hand at any one time during the past year.

Raw Materials

Average Inventory

Unit Cost

1

135

$26.50

2

67

18.20

3

210

9.75

4

97

31.25

Work-in-Process

5

40

$165.00

6

65

230.00

FINISHED GOODS

7

25

$ 670.00

8

18

1050.00

9

35

520.00

The company’s cost of goods sold last year was $2.73 million, and it operates 365 days per year.
Determine the company’s inventory turns and days of supply.

Solution

Compute the average aggregate value of inventory.

Raw materials:(135)($26.50) =

$3,577.50

(67)(18.20) =

1,219.40

(210)(9.75) =

2,047.50

(97)(31.25) =

3,031.25

Work-in-process:(40)(165) =

6,600.00

(65)(230)

14,950.00

Finished goods:(25)(670) =

16,750.00

(18)(1050) =

18,900.00

(35)(520) =

18,200.00

Total

$85,275.65

Compute inventory turns.
Compute days of supply.

Questions
Internet Exercises, Weblinks

101.

Describe the supply chain, in general terms, for McDonald’s and for Toyota.

102.

Define the strategic goals of supply chain management, and indicate how each element of a supply chain (purchasing, production, inventory, and transportation and distribution) has an impact on these goals.

103.

Identify three service businesses in your community and describe their supply chains.

104.

Describe how a business you are familiar with uses IT enablers in its supply chain management.

105.

Select a company and determine the type of suppliers it has, then indicate the criteria that you think the company might use to evaluate and select suppliers.

106.

Locate an e-marketplace site on the Internet and describe it and the type of producers and suppliers it connects.

107.

Explore the Web site of an ERP provider and describe the services it indicates it provides.

108.

Purchasing is a trade magazine with the subtitle, “The Magazine of Total Supply Chain Management and e-Procurement.” Its articles include many examples of supply chain management at various companies. Research an article from Purchasing and write a brief paper on a company reporting on its Supply Chain activities similar to the “Along the Supply Chain” boxes in this chapter.

109.

Transportation & Distribution is a trade magazine that focuses on supply chain management, especially logistics. In fact, its Web site is www.totalsupplychain.com. The magazine includes numerous articles reporting on companies’ experiences with supply chain management. Select an article from Transportation & Distribution and write a brief paper similar to “Along the Supply Chain” boxes in this chapter about a scientific company’s supply chain management.

1010.

Several automobile manufacturers are beginning to implement programs for “build-to-order” cars. Identify an auto company that has initiated a BTO program and describe what it entails. Contrast the BTO program of this manufacturer with a company experienced in BTO production like Dell Computers. Discuss the differences in the supply chains between these companies that makes BTO production more difficult for an auto manufacturer.

1011.

As Amazon.com grew rapidly after it first went “online” with Internet sales in 1995, it experienced several supply chain problems that other retail companies like LL. Bean, Sears, and J.C. Penney were able to avoid. What might some of these problems be and why did Amazon and other dot. com companies experience them?

1012.

Explain why radio frequency identification (RFID) offers enhanced opportunities for security in global transportation and distribution, and how this in turn could improve supply chain efficiency.

1013.

Wal-Mart is one of the leaders in promoting the development and use of RFID and electronic product codes. Explain how Wal-Mart plans to use RFID, why Wal-Mart wants its suppliers to adopt RFID, and what obstacles you think may exist for this new technology.

1014.

It has been suggested that SCOR might serve as an international supply chain certification tool much like ISO certification for quality. Explain how you think SCOR might be used as a certification tool.

1015.

Describe the supply chain for your university or college. Who are the suppliers, producers, and distributors in this supply chain? Are there different supplier tiers? How would you evaluate this supply chain? Does inventory even exist, and if it does, what form does it take?

1016.

Identify a business that employs EDI in its supply chain management and describe how it is used.

1017.

One of the key elements in supply chain management is forecasted demand. Customer demand is obviously an important, if not the most important, factor in determining production and distribution plans and inventory levels all along the supply chain. If more product is produced than demanded, the company and its suppliers are left with crippling inventories; if less product is produced than demanded, current and future lost sales can be devastating. Thus, it is critical that companies know what customer demand will be as closely as possible.
It is also generally assumed that a company cannot control demand; customers determine demand, and customers don’t control their customers. As such, demand is often perceived to be strictly an input to supply chain management. This is not always the case, however, as is demonstrated by the unfortunate experiences of many companies. Following are a few examples of companies that treated demand as an independent factor in their supply chain management decision, to their chagrin.2
At midyear Volvo found itself with a surplus of green cars in inventory. In order to get rid of this inventory, the sales and marketing group offered discounts and rebates to distributors on green cars. The marketing plan was successful, and the demand for green cars increased. However, supply chain planners, unaware of the marketing plan, perceived that a new customer demand pattern had developed for green cars so they produced more green cars. As a result, Volvo had a huge inventory of green cars at the end of the year.
When Hewlett-Packard introduced a new PC, demand faltered when Compaq and Packard Bell cut prices. In reaction, supply chain planners at HP cut production back without realizing sales and marketing had decided to match their competitors’ price cuts. The resulting stockouts HP experienced resulted in a less than merry Christmas season.
Campbell Soup heavily promoted its chicken noodle soup during the winter when demand peaked, which resulted in even greater than normal demand. In order to meet this spike in demand, it had to prepare large amounts of ingredients like chicken in advance and store it. Also, in order to meet the demand, production facilities had to operate in overtime during the winter, which in turn required them to prepare other products in advance and to store them too. The huge inventories and production costs exceeded the revenues from the increased customer demand of chicken noodle soup.
Italian pasta maker, Barilla, offered discounts to customers who ordered full truckloads. This created such erratic demand patterns, however, that supply costs overwhelmed the revenue benefits.
In each of these brief examples, the company was successfully able to influence customer demand with price discounts and effective marketing, demonstrating that demand is not a completely independent factor. In addition, in each case an increase in sales did not result in increased revenues because they were overwhelmed by increased supply chain costs. This presents a complex problem in supply chain management. Effective marketing is generally a good thing because it does increase sales; however, it also makes forecasting demand more difficult because it creates erratic demand patterns tied to price changes. So what should companies do? Should they forego price discounts and promotions to render demand more stable in order to create a more consistent supply chain that can be effectively managed? One company we mentioned in this chapter has, in effect, done this. Identify this company and explain how it manages its supply chain. Also, discuss the complexities associated with managing a supply chain in which price changes from promotions and discounts are used and discuss strategies for overcoming these complexities.

Problems
GO Problems

101.

The Fizer Drug Company manufactures over-the-counter and prescription drugs. Last year the company’s cost of goods sold was $470 million. It carried average raw material inventory of $17.5 million, average work-in-process of $9.3 million, and average finished goods inventory of $6.4 million. The company operates 365 days per year. Compute the company’s inventory turns and days of supply for last year.

102.

The Ashton Furniture Company manufactures coffee tables and chest of drawers. Last year the company’s cost of goods sold was $3,700,000, and it carried inventory of oak, pine, stains, joiners, and brass fixtures, work-in-process of furniture frames, drawers and wood panels, and finished chests and coffee tables. Its average inventory levels for a 52-week business year were as follows.

Raw Materials

Average Inventory

Unit Cost

Oak

8000

$6.00

Pine

4500

4.00

Brass fixtures

1200

8.00

Stains

3000

2.00

Joiners

900

1.00

Work-in-Process

 

 

Frames

200

$30

Drawers

400

10

Panels

600

50

Chests

120

110

Tables

90

90

Finished Goods

 

 

Chests

300

$500

Coffee tables

200

350

Determine the number of inventory turns and the days of supply for the furniture company.

103.

Barington Mills manufactures denim cloth from two primary raw materials, cotton and dye. Work-in-process includes lapped cotton, spun yarn, and undyed cloth, while finished goods includes three grades of dyed cloth. The average inventory amounts on hand at any one time last year and the unit costs are as follows.

Raw Materials

Average Inventory

Unit Cost

Cotton

70,000 lb.

$2.75

Dye

125,000 gal.

5.00

Work-in-Process

 

 

lapped cotton

2000 rolls

$10.50

spun yarn

5000 spools

6.75

undyed cloth

500 rolls

26.10

Finished Goods

 

 

Grade 1 cloth

250 rolls

$65.00

Grade 2 cloth

190 rolls

80.00

Grade 3 cloth

310 rolls

105.00

The company operates 50 weeks per year, and its cost of goods sold for the past year was $17.5 million.
Determine the company’s inventory turns and weeks of supply.

104.

House Max Builders constructs modular homes, and last year their cost of goods sold was $18,500,000. It operates 50 weeks per year. The company has the following inventory of raw materials, work-in-process, and finished goods.

Raw Materials

Average Inventory

Unit Cost

1

7200

$8.50

2

4500

7.20

3

3200

15.40

4

4800

13.70

5

6900

10.50

Work-in-Process

Average Inventory

Unit Cost

A

100

$16,200

B

70

13,500

C

60

6,100

D

35

14,400

Finished Goods

 

 

Model X

20

$78,700

Model Y

10

65,300

Model Z

10

86,000

Determine the number of inventory turns and the days of supply for House Max.

105.

The PM Computer Company makes build-to-order (BTO) computers at its distribution center year round. The following table shows the average value (in $ millions) of component parts, work-in-process, and finished computers at the DC for the past four years.

 

Year

 

1

2

3

4

Component parts

$20.5

27.8

30.8

37.3

Work-in-process

4.2

6.7

7.1

9.5

Finished computers

3.6

7.2

8.6

10.1

Cost of goods sold

226.0

345.0

517.0

680.0

Determine the number of inventory turns and the days of supply for each year.
As the company has grown, does it appear that the company’s supply chain performance has improved? Explain your answer.
If the company wants to improve its supply chain performance, what items should it focus on? Why?

106.

Delph Manufacturing Company is going to purchase an auto parts component from one of two competing suppliers. Delph is going to base its decision, in part, on the supply chain performance of the two suppliers. The company has obtained the following data for average raw materials, work-in-process, and finished goods inventory value, as well as cost of goods sold for the suppliers.

 

Supplier 1

Supplier 2

Cost of goods sold

$8,360,000

$14,800,000

Raw materials

275,000

870,000

Work-in-process

62,000

550,000

Finished goods

33,000

180,000

Each company operates 52 weeks per year.
Determine which supplier has the best supply chain performance according to inventory turns and weeks of supply. What other factors would the company likely take into account in selecting a supplier?

107.

Solve Problem 3-8 in Chapter 3 to construct a c-chart for monitoring invoice errors at Telcom Manufacturing Company.

108.

Solve Problem 3-9 in Chapter 3 to construct a c-chart to monitor late order deliveries at the National Bread Company.

109.

Solve Problem 3-10 in Chapter 3 to construct a p-chart to monitor order problems at BooksCDs.com

1010.

Solve Problem 3-11 in Chapter 3 to construct an x-chart in conjunction with an R-chart for order fulfillment lead time at Valtec Electronics.

1011.

Solve Problem 3-31 in Chapter 3 to construct an x-bar chart in conjunction with an R-chart for delivery time at the Great Outdoors Clothing Company.

Case Problem 10.1

Q:

Somerset Furniture Company’s Global Supply Chain
The Somerset Furniture Company was founded in 1957 in Randolph County, Virginina. It traditionally has manufactured large, medium-priced, ornate residential home wood furniture such as bedroom cabinets and chests of draws, and dining and living room cabinets, tables, and chairs, at its primary manufacturing facility in Randolph County. It employed a marketing strategy of rapidly introducing new product lines every few years. Over time it developed a reputation for high-quality, affordable furniture for a growing U.S. market of homeowners during the last half of the twentieth century. The company was generally considered to be an innovator in furniture manufacturing processes and in applying QM principles to furniture manufacturing. However, in the mid-1990s, faced with increasing foreign competition, high labor rates, and diminishing profits, the Somerset Company contracted to outsource several of its furniture product lines to manufacturers in China, simultaneously reducing the size of its own domestic manufacturing facility and labor force. This initially proved to be very successful in reducing costs and increasing profits, and by 2000 Somerset had decided to close its entire manufacturing facility in the United States and outsource all of its manufacturing to suppliers in China. The company set up a global supply chain in which it arranges for shipments of wood from the United States and South America to manufacturing plants in China where the furniture products are produced by hand by Chinese laborers. The Chinese manufacturers are very good at copying the Somerset ornate furniture designs by hand without expensive machinery. The average labor rate for furniture manufacturing in the United States is between $9 and $20 per hour, whereas the average labor rate for furniture manufacturers in China is $2 per day. Finished furniture products are shipped by container ship from Hong Kong or Shanghai to Norfolk, Virginia, where the containers are then transported by truck to Somerset warehouses in Randolph County. Somerset supplies retail furniture stores from this location. All hardware is installed on the furniture at the retail stores in order to reduce the possibility of damage during transport.
The order processing and fulfillment system for Somerset includes a great deal of variability, as does all aspects of the company’s global supply chain. The company processes orders weekly and biweekly. In the United States it takes between 12 and 25 days for the company to develop a purchase order and release it to their Chinese suppliers. This process includes developing a demand forecast, which may take from one to two weeks; converting the forecast to an order fulfillment schedule; and then developing a purchase order. Once the purchase order is processed overseas by the Chinese manufacturer, which may take 10 to 20 days depending on the number of changes made, the manufacturing process requires approximately 60 days. The foreign logistics process requires finished furniture items to be transported from the manufacturing plants to the Chinese ports, which can take up to several weeks depending on trucking availability and schedules. An additional 5 to 10 days is required to arrange for shipping containers and prepare the paperwork for shipping. However, shipments can then wait from one day to a week for enough available containers. There are often too few containers at the ports because large U.S. importers, like “Big W” discount stores in the United States, reserve all the available containers for their continual stream of overseas shipments. Once enough containers are secured, it requires from three to six days to optimally load the containers. The furniture pieces often have odd dimensions that result in partially filled containers. Since 9/11, random security checks of containers can delay shipment another one to three weeks, and smaller companies like Somerset are more likely to be extensively checked than larger shippers like Big W, who the port authorities don’t want upset with delays. The trip overseas to Norfolk requires 28 days. Once in port, one to two weeks are required for a shipment to clear customs and to be loaded onto trucks for transport to Somerset’s warehouse in Randolph County, which takes from one to three days. When a shipment arrives, it can take from one day up to a month to unload a trailer, depending on the urgency to fill store orders from the shipment.
Because of supply chain variability, shipments can be off schedule (i.e., delayed) by as much as 40%. The company prides itself on customer service and fears that late deliveries to its customers would harm its credibility and result in cancelled orders and lost customers. At the same time, keeping excess inventories on hand in its warehouses is very costly, and since Somerset redesigns its product lines so frequently a real problem of product obsolescence arises if products remain in inventory very long. Somerset has also been experiencing quality problems. The Chinese suppliers employ quality auditors who rotate among plants every few weeks to perform quality control tests and monitor the manufacturing process for several days before visiting another plant. However, store and individual customer complaints have forced Somerset to inspect virtually every piece of furniture it receives from overseas before forwarding it to stores. In some instances, customers have complained that tables and chairs creak noisily during use. Somerset subsequently discovered that the creaking was caused by humidity differences between the locations of the Chinese plants and the geographic areas in the United States where their furniture is sold. Replacement parts (like cabinet doors or table legs) are difficult to secure because the Chinese suppliers will only agree to provide replacement parts for the product lines currently in production. However, Somerset provides a one-year warranty on its furniture, which means that they often need parts for a product no longer being produced. Even when replacement parts were available, it took too long to get them from the supplier in order to provide timely customer service.
Although Somerset was initially successful at outsourcing its manufacturing process on a limited basis, it has since discovered, as many companies do, that outsourcing can result in a host of supply chain problems, as indicated above. Discuss Somerset’s global supply chain and possible remedies for its supply chain problems, including strategic and tactical changes that might improve the company’s supply chain performance, reduce system variability, and improve quality and customer service.

References
Chopra, S. and P. Meindl. Supply Chain Management, 2nd ed. Upper Saddle River, N.J.: Prentice Hall, 2004.
Christopher, M. Logistics and Supply Chain Management, 2nd ed. Upper Saddle River, N.J.: Prentice Hall, 1998.
Dornier, P., R. Ernst, M. Fender and P. Kouvelis. Global Operations and Logistics. New York: John Wiley & Sons, 1998.
Schecter, D. and Gordon S. Delivering the Goods: The Art of Managing Your Supply Chain. New York: John Wiley & Sons, 2002.
Notes
2H. L. Lee, “Ultimate Enterprise Value Creation Using Demand-Based Management,” Stanford Global Supply Chain Management Forum, http://www.stanford.edu/group/scforum/, September 2001.

Skip to Content
Top of Form

Welcome Jayleen Cutler – 303469531 | Inbox | What’s New | Community | Help | Logout
Home

Classroom

Library

Program

Account

University Library

eBooks

Center for Writing Excellence

Center for Mathematics Excellence

Phoenix Career Services
Search
Search Location Search Type Enter search text Search
Preferences

Font Size

Margins

Font Style

 

Use Defaults

Change font size, margins and font style to customize your eBook Collection experience.
These changes will only apply to books you read online.
Operations Management. Creating Value Along the Supply Chain, Sixth Edition
Chapter 10: Supply Chain Management Strategy and Design
ISBN: 9780470095157 Author: Roberta S. Russell, Bernard W. Taylor
copyright © 2009 John Wiley & Sons
Supply Chain Management Strategy and Design
In this chapter, you will learn about…
Supply Chains
The Management of Supply Chains
Information Technology: A Supply Chain Enabler
Supply Chain Integration
Supply Chain Management (SCM) Software
Measuring Supply Chain Performance
Web resources for this chapter include
Animated Demo Problems
Internet Exercises
Online Practice Quizzes
Lecture Slides in PowerPoint
Virtual Tours
Company and Resource Weblinks
www.wiley.com/college/russell
Supply Chain Management Strategy and Design at Green Mountain Coffee
Green Mountain Coffee Roasters
Green Mountain Coffee Roasters
Coffee is a commodity, and in the mass-market segment of the industry (i.e., lower-priced, prepackaged brands sold in supermarkets), product pricing is generally a function of supply and demand. However, the specialty coffee beans that GREEN MOUNTAIN uses tend to trade somewhat differently than commodity beans. They’re usually sold on a negotiated basis at a substantial premium cost over commodity beans. In Green Mountain’s supply chain it procures unroasted specialty coffee beans using a combination of outside brokers and direct business relationships with farms, coffee estates, cooperatives, and other parties. The company gains several advantages from this direct strategy including improved quality, product differentiation, and supply and pricing stability. On the downstream side of its supply chain, Green Mountain sells most of its coffee through resellers, including restaurants, supermarkets, specialty food and convenience stores, hospitality and food service, and office coffee services. It also operates a direct mail-order business and a Web site where customers can buy coffee and coffee-related products. Green Mountain uses an enterprise resource planning (ERP) system developed with PeopleSoft modules to effectively manage its supply chain.
Supply Chains
Globalization and the evolution of information technology have provided the catalysts for supply chain management to become the strategic means for companies to manage quality, satisfy customers, and remain competitive. A supply chain encompasses all activities associated with the flow and transformation of goods and services from the raw materials stage to the end user (customer), as well as the associated information flows. In essence, it is all the assets, information, and processes that provide “supply.” It is made up of many interrelated members, starting with raw material suppliers, and including parts and components suppliers, subassembly suppliers, the product or service producer, and distributors, and ending with the end-use customer.
Figure 10.1 illustrates the stages, facilities, and physical movement of products and services in a supply chain. The supply chain begins with suppliers, which can be as basic as raw material providers. These suppliers are referred to as upstream supply chain members, while the distributors, warehouses, and eventual end-use customers are referred to as downstream supply chain members. The stream at the bottom of the figure denotes the flow of goods and services (i.e., demand) as the supply chain moves downstream. Notice that the stream is very rough at the upstream end and gets smoother as it moves downstream, a characteristic we will discuss in greater detail later. Also note that “information” is at the center of Figure 10.1; it is the “heart and brains” of the supply chain, another characteristic we will talk more about later.
Figure 10.1 The Supply Chain
The supply chain in Figure 10.1 can represent a single producer directly linked to one level of suppliers and one set of end-use customers. A grocery store that gets food products like milk, eggs, or vegetables directly from a farmer (and not through a broker or middle man), and sells them directly to the customer who consumes them reflects this basic level of supply chain. However, supply chains are more typically a series of linked suppliers and customers; every customer is in turn a supplier to the next, up to the final end user of the product or service. For example, Figure 10.2 shows the supply chain for denim jeans, a straightforward manufacturing process with a distinct set of suppliers. Notice that the jeans manufacturer has suppliers that produce denim who in turn have suppliers who produce cotton and dye.
Figure 10.2 The Supply Chain for Denim Jeans

As Figures 10.1 and 10.2 show, the delivery of a product or service to a customer is a complex process, encompassing many different interrelated processes and activities. First, demand for a product or service is forecast, and plans and schedules are made to meet demand within a time frame. The product or service can require multiple suppliers (who have their own suppliers) who prepare and then ship parts and materials to manufacturing or service sites. A large manufacturer like General Motors, has thousands of suppliers that serve its 120 parts plants and 30 auto and truck assembly plants, including first-tier suppliers that supply it directly, second-tier suppliers that supply those suppliers, third-tier suppliers that supply second-tier suppliers, and so on. Parts and materials are transformed into final products or services. These products may then be stored at a distribution center or warehouse. Finally, these products are transported by carriers to external or internal customers. However, this may not be the final step at all, as these customers may transform the product or service further and ship it on to their customers. All of this is part of the supply chain—that is, the flow of goods and services from the materials stage to the end user.
The supply chain is also an integrated group of business processes and activities with the same goal—providing customer satisfaction. As shown in Figure 10.3, these processes include the procurement of services, materials, and components from suppliers; production of the products and services; and distribution of products to the customer including taking and filling orders. Information and information technology tie these processes together; it is what “integrates” them into a supply chain.
Figure 10.3 Supply Chain Processes
The supply chain is also an integrated group of processes to “source,” “make,” and “deliver” products.
Supply Chains for Service Providers
Supply chains for services are sometimes not as easily defined as supply chains for manufacturing operations. Since the supply chain of a service provider does not always provide the customer with a physical good, its supply chain does not focus as much on the flow of physical items (material, parts, and subassemblies) through the supply chain. It instead may focus more on the human resources and support services necessary to provide its own service. The supply chain of a service provider also tends to be more compact and less extended than a manufacturing supply chain. It generally does not have as many tiers of suppliers, and its distribution network is smaller or nonexistent. However, supply chains of service companies are definable and can be effectively managed using many of the same principles. Service companies and organizations have suppliers (who have suppliers), and they distribute their products to customers (who may have their own customers). Although a hospital and HMO do not provide actual goods to its customers, they nevertheless purchase equipment, computers, drugs, and medical supplies from suppliers (who have suppliers). They also contract for services (such as food preparation or laundry); hire doctors, nurses, accountants, administrators, and staff; and provide health care. They have quality-management issues throughout their supply chain. They also encounter the same problems and inefficiencies as a manufacturing-based supply chain. Other service-oriented companies, like McDonald’s, do, in fact, provide a physical product, and thus have a more discernible supply chain with distribution, transportation and inventory like a manufacturing company.
Value Chains
In recent years, terms such as value chain and demand chain have been used instead of, or interchangeably with, supply chain. Are there any differences between the two terms? Originally, a value chain was thought to have a broader focus than a supply chain. A value chain included every step from raw materials to the eventual end user, whereas a supply chain focused more narrowly on the activities that get raw materials and subassemblies into the manufacturing operation, that is, supply. In this context, the ultimate goal of a value chain is the delivery of maximum value to the end user. However, we have already indicated that the general perception of a supply chain is that it also encompasses this same broad focus, from raw material to end user. Alternatively, a demand chain has been referred to as a network of trading partners that extends from manufacturers to end-use consumers. The objective of demand chain management is to increase value for any part or all of the chain. This perhaps is a somewhat more narrowly defined perspective then a supply chain or value chain. However, in reality all of these terms have come to mean approximately the same thing to most people, and the terms are frequently used interchangeably.
Along the Supply Chain: Successful Supply Chain Design at Toyota and Honda
In the 20+ years following the quality management movement of the 1980s, U.S. companies have often struggled to adopt the Japanese supply chain design philosophy of keiretsu, a close-knit network of suppliers that continuously learn, improve, and prosper with their parent companies. Quality philosophy prescribed a supplier partnering model that reduced the number of suppliers, awarded remaining suppliers a long-term commitment, and encouraged top-tier suppliers to manage lower-tier suppliers to take responsibility for quality and costs, and deliver just-in-time. However, this type of approach has frequently not worked out in the United States, and U.S. companies have been unable to replicate the close supplier partnering relationships that the Japanese have created. By the turn of the century, cost again had become the primary criterion for the selection of suppliers by U.S. companies. The benefit of sourcing globally with low-cost suppliers in countries like China, and the development of Internet technologies, which allowed suppliers to compete more efficiently on cost, has seemed to outweigh the benefit of developing long-term supplier relationships. As a result, relationships between U.S. manufactures and U.S. suppliers are worse now than before the quality revolution started. For example, Ford uses online reverse auctions to get the lowest-priced components it can, and GM writes contracts with suppliers that enables them to switch to a less expensive supplier immediately. This has led many U.S. companies to think that it’s not possible to replicate the Japanese keiretsu model outside of Japan. However, Toyota and Honda operations in North America have shown that this is not the case.
In the past decade Toyota and Honda have developed excellent partnering relationships with many of the same suppliers in Canada, the United States and Mexico that are at odds with the big three automakers. Of the 2.1 million Toyota/Lexus vehicles and 1.6 million Honda/Accura vehicles sold in North America in 2003, almost 80 percent of the manufacturing costs came from North American suppliers. Toyota and Honda have both been able to replicate their keiretsu supplier relationships in North America, and as a result they have the best relationships with their suppliers in the U.S. auto industry, they have the fastest product development process, and they continuously reduce costs and improve quality. In various supplier-based surveys Toyota and Honda have consistently ranked as the most preferred companies to work with: J. D. Powers found that suppliers rated Toyota and Honda among the best innovators; and while reducing costs of producing Camrys and Accords by 25% in the 1990s, the two Japanese companies continued to rank at the top of quality surveys. When Toyota and Honda first began their manufacturing operations in the United States, they gave local suppliers small orders and gave them their expectations for cost, quality, and delivery. For those suppliers that met their expectations, Toyota and Honda gave them larger contracts. Over time, Toyota and Honda went to great lengths to understand how their suppliers worked, they supervised them, they developed their technical capabilities, they (selectively) shared information, and they participated in joint improvement activities. The two companies set high standards and expectations, but they have not tried to maximize profits at the expense of their suppliers unlike the accusations against U.S. automakers. According to Taiichi Ohno who developed the Toyota Production System (including JIT and kanban), “The achievement of business performance by the parent company through bullying suppliers is totally alien to the spirit of the Toyota Production System.”
Discuss why you think U.S. automakers failed to try to emulate the Japanese keiretsu philosophy in their supply chain designs, in light of continued evidence of its success.
Source: J. K. Liker and T. Y. Choi, “Building Deep Supplier Relationships,” Harvard Business Review 83 (12; December 2004), pp. 104–113.
A common thread among these perceptions of supply, value, and demand chains is that of value. Value to the customer is good quality, a fair price, and fast and accurate delivery. To achieve value for the customer, the members of the supply chain must act as partners to systematically create value at every stage of the supply chain. Thus, companies not only look for ways to create value internally in their own production processes, but they also look to their supply chain partners to create value by improving product design and quality, enhancing supply chain performance and speed, and lowering costs. To accomplish these value enhancers, supply chain members must often collaborate with each other and integrate their processes, topics that we will continually return to in this chapter.
The Management of Supply Chains
Supply chain management (SCM) focuses on integrating and managing the flow of goods and services and information through the supply chain in order to make it responsive to customer needs while lowering total costs. Traditionally, each segment of the supply chain was managed as a separate (stand-alone) entity focused on its own goals. However, to compete in today’s global marketplace a company has to count on the combined and coordinated effort of all members of the supply chain.
Supply chains require close collaboration, cooperation, and communication among members to be effective. Suppliers, and their customers must share information. It is the rapid flow of information among customers, suppliers, distributors, and producers that characterizes today’s supply chain management. Suppliers and customers must also have the same goals. They need to be able to trust each other: Customers need to be able to count on the quality and timeliness of the products and services of their suppliers. Furthermore, suppliers and customers must participate together in the design of the supply chain to achieve their shared goals and to facilitate communication and the flow of information.
Keys to effective supply chain managementare information, communication, cooperation, and trust.
Supply Chain Uncertainty and Inventory
One of a company’s main objectives in managing its supply chain is to synchronize the upstream flow of incoming materials, parts, subassemblies, and services with production and distribution downstream so that it can respond to uncertainty in customer demand without creating costly excess inventory. Examples of factors that contribute to uncertainty, and hence variability, in the supply chain are inaccurate demand forecasting, long variable lead times for orders, late deliveries, incomplete shipments, product changes, batch ordering, price fluctuations and discounts, and inflated orders. The primary negative effects of supply chain uncertainty and variability are lateness and incomplete orders. If deliveries from suppliers are late or incomplete, they slow down the flow of goods and services through the supply chain, ultimately resulting in poor-quality customer service. Companies cope with this uncertainty and try to avoid delays with their own form of “insurance,” inventory.
Supply chain members carry buffer (or extra) inventory at various stages of the supply chain to minimize the negative effects of uncertainty and to keep goods and services flowing smoothly from suppliers to customers. For example, if a parts order arrives late (or does not arrive at all) from a supplier, the producer is able to continue production and maintain its delivery schedule to its customers by using parts it has stored in inventory for just such an occurrence.
Companies also accumulate inventory because they may order in large batches in order to keep down order and transportation costs or to receive a discount or special price from a supplier. However, inventory is very costly. Products sitting on a shelf or in a warehouse are just like money sitting there not being used when it could be used for something else. It is estimated that the cost of carrying a retail product in inventory for one year is over 25% of what the item cost. Inventory-carrying costs is over $300 billion per year in the United States. As such, suppliers and customers would like to minimize or eliminate it.
The Bullwhip Effect
Distorted information or the lack of information, such as inaccurate demand data or forecasts, from the customer end can ripple back upstream through the supply chain and magnify demand variability at each stage. This can result in high buffer inventories, poor customer service, missed production schedules, wrong capacity plans, inefficient shipping, and high costs. This phenomenon, which has been observed across different industries, is known as the bullwhip effect. It occurs when slight to moderate demand variability becomes magnified as demand information is transmitted back upstream in the supply chain. In Figure 10.1 the stream at the bottom of the figure reflects this occurrence; the flow is greater (and the waters more turbulent) further upstream. Figure 10.4 presents a detailed perspective of the bullwhip effect.
Figure 10.4 The Bullwhip Effect
The bullwhip effect is created when supply chain members make ordering decisions with an eye to their own self-interest and/or they do not have accurate demand information from the adjacent supply chain members. If each supply chain member is uncertain and not confident about what the actual demand is for the succeeding member it supplies and is making its own demand forecast, then it will stockpile extra inventory to compensate for the uncertainty. In other words, they create a security blanket of inventory. As shown in Figure 10.4, demand for the end user is relatively stable and the inventory is small. However, if slight changes in demand occur, and the distributor does not know why this change occurred, then the distributor will tend to overreact and increase its own demand, or conversely reduce its own demand too much if demand from its customer unexpectedly drops. This creates an even greater overreaction by the manufacturer who supplies the distributor and the suppliers who supply the manufacturer. One way to cope with the bullwhip effect is for supply chain members to share information, especially demand forecasts.
If the supply chain exhibits transparency, then members can have access to each other’s information, which reduces or eliminates uncertainty.
Risk Pooling
When supply chains stretch over long distances and include multiple parts, services, and products, uncertainty increases. In “lean” supply chains there is little redundancy and slack, i.e., inventory, so when disruptions occur, the effects can cascade through the supply chain hindering normal operations. For example, a labor strike at an automobile plant can cause downstream assembly plants to reduce or stop production, which, in turn, can result in a lack of autos on dealer lots. Parts shortages, customer order changes, production problems and quality problems are the types of things that can disrupt a supply chain. As we have suggested, one way to offset this uncertainty is by carrying extra inventory at various stages along the supply chain, i.e., the bullwhip effect. However, another way to reduce uncertainty is called risk-pooling.
In risk pooling, risks are aggregated to reduce the impact of individual risks. As this implies, there are several ways to pool supply chain risks. One way is to combine the inventories from multiple locations into one location, like a warehouse or distribution center. It is well known (and can be shown mathematically) that it is more economical to hold inventory at one central location than dispersing it across several customer locations. Doing so reduces the overall inventory investment needed to achieve a target service level across all the customers the distribution center supplies, i.e., it’s more costly to meet variations in demand from several locations than from one, which in effect, reduces demand variability. Adding a distribution center between the supplier and the end-use customers can also shorten the lead time between the supplier and customer, which is another way to pool risks. When the demand forecast is closer to its actual occurrence (i.e., shorter lead time), then variability is reduced; it’s a lot easier to predict demand for next week than for next month.
Another way to pool risks is to reduce parts and product variability, thereby reducing the number of product components, which allows a company to meet demand with fewer products. Common product components that can be used in a lot of different products enable a company to pool its forecasts for the components demand, resulting in fewer forecasts. (The more forecasts there are, the more chances for errors.) Reducing product variability can have the same effect. It’s easier to forecast demand for a small number of product configurations than a larger number of configurations. This is why automobile companies like Honda offer packages of options rather than just a list of add-ons. Yet another way to pool risks is by creating flexible capacity. It reduces the uncertainty for the customer if its demand can be met by several different production facilities, which the supplier can achieve by increasing its production capacities at several different locations. The customer can reduce its own risks by increasing the number of suppliers it uses.
Along the Supply Chain: Eliminating the Bullwhip Effect at Philips Electronics
Philips Electronics is one of the world’s largest electronics companies with over 165,000 employees in more than 150 countries, and with sales in 2005 of over 30.4 billion Euros. Philips Semiconductors, headquartered in Eindhoven, The Netherlands, with over 33,000 employees, and Philips Optical Storage, with over 9,000 employees around the world are subsidiaries of Philips Electronics. Philips Semiconductors is one of the world’s largest semiconductor suppliers with twenty manufacturing and assembly sites around the world, while Philips Optical Storage manufactures optical storage products including drives, subassemblies and components for audio, video, data and gaming playback, and rewritable CD and DVD consumer products. Within the Philips supply chain Philips Semiconductor is the furthest upstream supplier of its downstream customer, Philips Optical Storage. In 2000 Philips Semiconductor recognized that it was suffering from a substantial bullwhip effect and collaborated with Philips Optical Storage on a project to reduce or eliminate it.
In order for Philips Optical Storage to assemble a DVD drive, it requires a number of components and subassemblies, including printed circuit boards, which require integrated circuits to produce that can have long manufacturing lead times. There are two steps in the process of manufacturing integrated circuits; wafer fabrication, which is a complex process that also has long lead times, and assembly. Overall, the total lead time for the supply chain was between 17 and 22 weeks. The planning process was decentralized with each stage in the supply chain planning and operating independently. In addition, information about changes in demand and orders often lagged and was distorted, and deliveries downstream to Philips Optical Storage were unreliable. Individual stages safeguarded against the resulting uncertainty by creating safety stocks. Philips developed a collaborative planning process and supporting software that included a new advanced scheduling system that supported weekly collaborative planning sessions. One of the most important aspects of the new supply chain management system is the speed with which it is able to solve problems that arise. The new system synchronized Philips supply chain, reduced safety stocks, guaranteed order quantities and deliveries, and effectively eliminated the bullwhip effect, resulting in savings of approximately $5 million per year.
Why do you think the “collaborative planning process and supporting software” was a key factor in the ability of Philips to eliminate the bullwhip effect along its supply chain? What obstacles do you think might prevent a company from using a collaborative planning process?
Source: T. de Kok, F. Janssen, J. van Doremalen, E. van Wachem, M. Clerkx, and W. Peeters, “Philips Electronics Synchronizes Its Supply Chain to End the Bullwhip Effect,” Interfaces 35 (1; January–February 2005), pp. 37–48.
Information Technology: A Supply Chain Enabler
Information is the essential link between all supply chain processes and members. Computer and information technology allows real-time, online communications throughout the supply chain. Technologies that enable the efficient flow of products and services through the supply chain are referred to as “enablers,” and information technology has become the most important enabler of effective supply chain management.
Information links all aspects of the supply chain.
Supply chain managers like to use the phrase “in modern supply chain management, information replaces inventory.” Although this statement is not literally true—companies need inventory at some point, not just information—information does change the way supply chains are managed, and these changes can lead to lower inventories. Without information technology supply chain management would not be possible at the level it is currently being accomplished on a global basis. Some of the more important IT supply chain enablers are shown in Figure 10.5.
Figure 10.5 Supply Chain Enablers
Electronic Business
E-business replaces physical processes with electronic ones. In e-business, supply chain transactions are conducted via a variety of electronic media, including EDI, e-mail, electronic funds transfer (EFT), electronic publishing, image processing, electronic bulletin boards, shared databases, bar coding, fax, automated voice mail, CD-ROM catalogues, the Internet, Web sites, and so on. Companies are able to automate the process of moving information electronically between suppliers and customers. This saves both labor costs and time.
Some of the features that e-business brings to supply chain management include:
Cost savings and price reductions derived from lower transaction costs (including labor and document savings)
Reduction or elimination of the role of intermediaries and even retailers and service providers, thus reducing costs
Shortening supply chain response and transaction times for ordering and delivery
Gaining a wider presence and increased visibility for companies
Greater choices and more information for customers
Improved service as a result of instant accessibility to services
Collection and analysis of voluminous amounts of customer data and preferences
The creation of virtual companies like Amazon.com that distribute only through the Web, which can afford to sell at lower prices because they do not need to maintain retail space
Leveling the playing field for small companies, which lack resources to invest in infrastructure (plant and facilities) and marketing
Gaining global access to markets, suppliers, and distribution channels
Electronic Data Interchange
Electronic data interchange (EDI) is a computer-to-computer exchange of business documents in a standard format, which has been established by the American National Standards Institute (ANSI) and the International Standards Organization (ISO). It creates a data exchange that allows trading partners to use Internet transactions instead of paper when performing purchasing, shipping, and other business. EDI links supply chain members together for order processing, accounting, production, and distribution. It provides quick access to information, allows better customer service, reduces paperwork, allows better communication, increases productivity, improves tracking and expediting, and improves billing and cost efficiency.
EDI can be effective in reducing or eliminating the bullwhip effect discussed earlier in this chapter. With EDI, supply chain members are able to share demand information in real time, and thus are able to develop more accurate demand forecasts and reduce the uncertainty that tends to be magnified at each upstream stage of the supply chain.
Along the Supply Chain: Strategic Supply Chain Design at 7-Eleven in Japan and the United States
7-Eleven Japan, a $21 billion convenience store chain with 9,000 stores, is one of the most profitable retailers in the world, with annual profit margins of around 30%. The 7-Eleven stores in Japan have very low stock out rates, and their supply chain is agile and adaptive, that is, focusing on responding to quick changes in demand instead of fast, cheap deliveries. It uses real-time systems to track sales data on customer demographics and preferences at all of its stores. Its stores are linked to distribution centers, suppliers, and logistics providers so that demand fluctuations can be detected quickly and stores can be restocked quickly. The company schedules deliveries to its stores within a 10-minute margin, and if a delivery is more than 30 minutes late the carrier must pay a harsh penalty equal to the gross margin of the products being carried to the store. Employees reconfigure shelves at least three times per day to cater to different customer demands at different times of the day. To reduce traffic delays different suppliers in the same region consolidate shipments to distribution centers (where products are cross-docked for delivery to stores). Key to 7-Eleven Japan’s successful supply chain operation is its keiretsu model of close partnerships with its suppliers that relies on incentives and penalties; if they contribute to 7-Eleven’s success, they share the rewards; if they fail to perform as expected, they pay a harsh penalty. However, the company also creates a relationship of trust and mutual understanding and respect with its suppliers; for example, when a carrier makes a delivery to a store, the content is not verified, allowing the carrier to make rapid deliveries, saving them time and money.
In the early 1990s 7-Eleven in the United States was losing money and market share as competition increased when major oil companies began to add mini-marts to their gas stations. 7-Eleven had always been a vertically integrated company controlling most of the activities along its supply chain. The company had its own distribution network, delivered its own gasoline, made its own candy and ice, and even owned the cows for the milk it sold. Store managers were required to do a lot of things in addition to merchandising including store maintenance, credit card processing, payroll, and IT management. 7-Eleven in the United States looked to its highly successful Japanese unit and its very successful keiretsu supply chain model for a solution. The Japanese 7-Eleven stores relied on an extensive and carefully managed network of suppliers to carry out many day-to-day functions resulting in reduced costs, enhanced quality, growth and high profits. 7-Eleven in the United States decided to outsource everything that wasn’t critical; if a supply chain partner could provide a function more effectively than 7-Eleven could, then it became a candidate for outsourcing. The company divested itself of direct ownership of its human resources function, finance, IT, logistics, distribution, product development, and packaging. However, for some critical activities it maintains a degree of direct control; for example, while it outsources gasoline distribution to Citgo, it maintains control over gas pricing and promotion, which are often critical to a store’s bottom line. In another case it allows one of its most important suppliers, Frito-Lay, to deliver directly to its stores, thus taking advantage of their vast warehousing and transport system, but it doesn’t allow Frito-Lay to make critical store decisions about order quantities and shelf placement. It has also used its supplier partnerships for innovations, for example, working with Coca-Cola and Hershey to develop a Twizzler-flavored Slurpee and a Twizzler-based edible straw, and partnering with American Express to set up store ATM machines. 7-Eleven’s supply chain makeover has been a huge success. 7-Eleven now dominates the convenience store industry with almost three times the sales per employee, double the store sales growth, and almost twice the inventory turns as the rest of the industry.
It seems that Japanese companies are frequently the innovators in quality management and supply chain design and management; Japanese companies like 7-Eleven Japan, have been innovators and leaders while U.S. companies have lagged behind and followed the Japanese lead. Why do you think this is?
Sources: Hau L. Lee, “The Triple-A Supply Chain,” Harvard Business Review, 82 (10; October 2004), pp. 102–112: and “Mark Gottfredson, Rudy Puryear and Stephen Phillips,” Harvard Business Review, 83 (2; February 2005), pp. 132–139.
Bar Codes
In bar coding, computer-readable codes are attached to items flowing through the supply chain, including products, containers, packages and even vehicles. The bar code contains identifying information about the item. It might include such things as a product description, item number, its source and destination, special handling procedures, cost, and order number. A food product can be identified down to the farmer who grew it and the field it was grown in. When the bar code information is scanned into a company’s computer by an electronic scanner, it provides supply chain members with critical information about the item’s location in the supply chain.
Bar code technology has had a huge influence on supply chain management, and it is used by thousands of companies in different situations. Package delivery companies like FedEx and UPS use bar codes to provide themselves and customers with instantaneous detailed tracking information. Supermarkets use scanners at cash registers to read prices, products, and manufacturers from Universal Product Codes (UPCs).
When bar codes are scanned at checkout counters, it also creates point-of-sale data—an instantaneous computer record of the sale of a product. This piece of information can be instantly transmitted throughout the supply chain to update inventory records. Point-of-sale data enable supply chain members—suppliers, producers, and distributors—to quickly identify trends, order parts and materials, schedule orders and production, and plan for deliveries.
Radio Frequency Identification
A recent innovation that’s seen as a likely bar code partner is radio frequency identification (RFID). RFID technology uses radio waves to transfer data between a reader, (that is, a scanner), and an item such as a shipping container or a carton. RFID consists of a tiny microchip and computer, often a small, thin ribbon, which can be put in almost any form—for example between layers of cardboard in a box, or on a piece of tape or a label. An RFID “tag” stores a unique identification number. RFID scanners transmit a radio signal via an antenna to “access” the tag, which then responds with its number. The tag could be an Electronic Product Code (EPC), which could be linked to databases with detailed information about a product item. Unlike bar codes, RFID tags do not need a direct “line of sight” to read, and many tags can be read simultaneously over a long distance.
The RFID tags would make it possible for a supplier or retailer to know automatically what goods they have and where they are around the world. For example, a retailer could distinguish between three cartons of the same product and know that one was in the warehouse, one was in the store, and one was in transit, which would speed up product location, delivery, and replenishment. Figure 10.6 shows some of the advantages RFID provides. RFID technology also has obvious security benefits by being able to identify all items being shipped into the United States on an airplane or a ship.
Figure 10.6 RFID Capabilities
Wal-Mart has mandated that its top suppliers put RFID tags carrying EPC codes on pallets and cases, and Kroger and CVS are doing the same. Wal-Mart perceives that the following value will result from RFID:
Labor to scan barcodes on cases and pallets will be eliminated.
On-shelf monitoring will decrease stock-outs in stores.
Prevention of product shrinkage, vendor fraud, and theft.
Decreased distribution center costs by tracking over 1 billion pallets annually.
Provide inventory visibility enabling a 20% reduction in inventory levels.
Savings of over $8 billion per year.
The Internet
No recent technological innovation has had a bigger impact on supply chain management, and business in general, than the Internet. Through the Internet a business can communicate with customers and other businesses within its supply chain anywhere in the world in real time.
The Internet has eliminated geographic barriers, enabling companies to access markets and suppliers around the world that were previously inaccessible. By doing so, the Internet has shifted the advantage in the transaction process from the seller to the buyer, because the Internet makes it easier for companies to deal with many more suppliers around the world in order to get lower prices and better service.
The Internet adds speed and accessibility to the supply chain. Companies are able to reduce or eliminate traditional time-consuming activities associated with ordering and purchasing transactions by using the Internet to link directly to suppliers, factories, distributors, and customers. It enables companies to speed up ordering and delivery, track orders and delivery in real time, instantaneously update inventory information, and get instantaneous feedback from customers. This combination of accurate information and speed allows companies to reduce uncertainty and inventory. Internet commerce is expected to exceed $6 trillion in this decade.
Build-to-Order (BTO)
Dell was the first computer company to move to a direct-sell-to-customers model over the Internet. Its popular build-to-order (BTO) models were initially based on telephone orders by customers. Dell created an efficient supply chain using a huge number of weekly purchase orders faxed to suppliers. However, Dell now sends out orders to suppliers over the Internet every few hours or less. Dell’s suppliers are able to access the company’s inventories and production plans, and they receive constant feedback on how well they are meeting shipping schedules.
Dell’s Web site allows the customer to configure a PC with the desired features; to order and track the order status, allowing the customer to follow their purchase in real time from order to delivery; and to be notified by e-mail as soon as the order is shipped. Also, Dell created secure private sites for corporate and public sector customers to provide access to service and support information customized to the customer’s products. In addition, Dell provides online access to technical reference materials and self-diagnostic tools that include symptom-specific troubleshooting modules that walk customers interactively through common systems problems.
Along the Supply Chain: Quick Supply Chain Responsiveness and Flexibility at Zara
The Spain-based Inditex clothing company with over 650 Zara luxury clothing stores in 50 countries is one of the most successful clothing retailers in the world. In a very tough competitive global clothing market, Inditex’s sales grew from 367 million Euros to 4.6 billion Euros in a little over 10 years, and Zara sales grow at an annual rate of over 20 percent. Zara’s supply chain strategy is unique and differs from more traditional approaches; it wants to maintain direct control over what happens to its products until the customer buys them, and bring new products to the market quickly. While competitors typically spend months designing new products for the next season, with its super-fast supply chain Inditex is able to design, produce, and deliver new garments to its Zara stores around the world in only 15 days. The result is that in a typical recent year its net margin on sales was 10.5% while H&M’s was 9.5%, Benetton’s was 7%, and Gap’s was less than 1%. While most of its competitors rely on outsourcing, Inditex keeps over half of its production in house; it intentionally maintains extra plant capacity; it manufactures and distributes its products in small batches; it manages all of its own design, warehousing, distribution, and logistics functions; it encourages stock-outs; and it leaves large areas in its expensive Zara retail stores empty.
There are several keys to Inditex’s and Zara’s supply chain success. First its IT system is designed to transmit information quickly and easily back through the supply chain from customers to designers to the production staff. The company’s strategy is for its customers to know that they can always find new products at Zara, but create a sense of exclusively (with spacious stores and relatively few items on display). This retail approach depends on the rapid replenishment of small batches of new goods; Zara’s designers create about 40,000 new designs each year. It offers almost the same products as its high-fashion competitors, but at a lower cost because it uses less-expensive materials. This fast-response system depends on the quick exchange of information throughout Zara’s supply chain, with a very efficient organization that minimizes layers of bureaucracy that might hinder rapid communication between supply chain functions. Everything at Zara including operational procedures, performance measures, and its factory and office layouts are geared to the rapid exchange of information. The company makes extensive use of PDAs to enhance communication between store managers and market specialists. The continual rapid flow of information along Zara’s supply chain and the production of small batches tend to reduce inventory and minimize the bullwhip effect. Also, Zara keeps inventory low by exploiting stockouts; since customers always have new items to choose from, empty racks don’t drive customers away—it simply drives them to purchase other items. Further, the limited inventory and short opportunity to purchase items motivate customers to visit Zara stores more frequently; for example, Zara customers in London visit stores an average of 17 times per year compared to four times for the average clothing store. This high level of traffic allows Zara to spend less on advertising than its competitors. In order to maintain this degree of speed and responsiveness, Zara maintains much more control over its supply chain than its competitors, designing and distributing all of its products, owning all of its shops, and outsourcing a limited amount of its manufacturing. As such, it is much more vertically integrated than its competitors, producing over half of its products in its own factories (making complicated items like women’s suits in-house and outsourcing simpler products like sweaters), and buying 40% of its fabric and its dyestuff from other Inditex companies, whereas competitors Gap and H&M own no production facilities. Zara’s factories are highly automated and make use of sophisticated JIT systems. Zara operates 500K-sq-meter and 120K-sq-meter distribution centers in Spain, which provides the company with more warehouse capacity than they normally need, but enables them to react quicker to unexpected demand increases than their competitors. While Zara’s production and distribution facilities have required major capital investment, the company gets its products to its stores and sells them so quickly that it dramatically reduces the need for working capital.
Zara’s supply chain design is described as being unique and different from traditional approaches; discuss the successful characteristics and features it does share with more traditional supply chain strategies, i.e., what are some of the aspects of Zara’s supply chain design that other companies might try to emulate?
Source: Kasra Meadows, Michael L. Lewis and Jose A. D. Machuca, “Rapid-Fire Fulfillment,” Harvard Business Review, 82 (11; November 2004), pp. 104–110.
With RFID technology, small individual electronic “tags” like these are attached to cartons, packages, or containers, which allows companies and organizations to track their every move around the world.
Alamy
Supply Chain Integration
One of the keys to having a successful, efficient supply chain is to get the various supply chain members to collaborate and work together, that is, to get “in-sync.” This level of coordination is referred to as supply chain integration. Information technology is the key element in achieving supply chain integration through four areas—information sharing, collaborative planning, workflow coordination, and the adoption of new models and technologies. Table 10.1 describes the positive effect each of these elements can have on supply chain performance.
Table 10.1 Supply Chain Integration

Information sharing among supply chain members

Reduced bullwhip effect
Early problem detection
Faster response
Builds trust and confidence

Collaborative planning, forecasting, replenishment, and design

Reduced bullwhip effect
Lower costs (material, logistics, operating, etc.)
Higher capacity utilization
Improved customer service levels

Coordinated workflow, production and operations, procurement

Production efficiencies
Fast response
Improved service
Quicker to market

Adopt new business models and technologies

Penetration of new markets
Creation of new products
Improved efficiency
Mass customization

Information sharing includes any data that are useful to other members of the supply chain such as demand data, inventory stocks, and production and shipping schedules—anything that can help the supply chain members improve performance. Information needs to be transparent (i.e., not hidden) and easily accessible, online. Collaborative planning defines what is done with the information that is shared. Workflow coordination defines how supply chain partners work together to coordinate their activities. Finally, adopting new business models and technologies is how supply chain members redesign and improve their supply chain performance.
Collaborative Planning, Forecasting, and Replenishment
Collaborative planning, forecasting, and replenishment (CPFR) is a process for two or more companies in a supply chain to synchronize their individual demand forecasts in order to develop a single plan for meeting customer demand. With CPFR, parties electronically exchange a series of written comments and supporting data, which includes past sales trends, point-of-sale data, on-hand inventory, scheduled promotions, and forecasts. This allows participants to coordinate joint forecasts by concentrating on differences in forecast numbers. They review the data together, compare calculations, and collaborate on what is causing discrepancies. If there are no exceptions they can develop a purchase order and ship. CPFR does not require EDI; data can be sent via spreadsheets or over the Internet. CPFR is actual collaboration because both parties do the work and both parties share in fixing the problems. Sharing forecasts in this type of collaborative system can result in a significant decrease in inventory levels for both the manufacturer and distributor since it tends to reduce the “bullwhip effect,” and thus lower costs.
Virtual Tours
Along the Supply Chain: Supply Chain Success at Harley-Davidson
In the early 1980s Wisconsin-based Harley-Davidson Motor Company, the country’s largest manufacturer of motorcycles, was struggling to survive. Faced with an onslaught of severe competition from Japan, failing new products, and strategic errors that allowed their engineering capabilities to atrophy, Harley-Davidson was challenged to remain profitable. However, not only did Harley-Davidson survive, it became a huge success story, with sales increasing from 36,735 motorcycles in 1986 to 291,417 in 2003 to over 350,000 motorcycles in 2006. It has also expanded globally into Europe, China and India. A significant factor in its turnaround was the strategic changes it made in managing its supply chain during the next decade.
It was once a company that did not take a thoughtful approach to selecting suppliers, making purchasing decisions, and evaluating delivery and inventory costs. As a result components, parts, and materials were often delivered late with less than desirable quality, which drove up production and inventory costs. However, in the mid-1990s Harley-Davidson initiated sophisticated supply chain strategies to reduce inventory and purchasing costs while improving product quality and delivery times from suppliers.
Harley-Davidson now expects suppliers to focus strategically on cost, delivery, and quality improvement and to hit established cost and quality targets. Suppliers are expected to meet “twice the level of quality” and to develop a written strategic plan to achieve goals for quality improvement.
Suppliers are graded according to defective “parts-per-million” and it has a target goal of 48 defective parts-per-million that suppliers are expected to achieve. Harley-Davidson sends suppliers a monthly report showing their quality and delivery performance, and if the supplier receives a bad report Harley-Davidson sends their people to the supplier to determine the problems and help them resolve them. If the supplier does not improve its performance, it is replaced. In 1995 defective parts-per-million for suppliers were generally around 10,000; however, by 2001 approximately 75% of Harley-Davidson’s supplier base was performing at 48 defective parts-per-million or better, and 36 suppliers were performing at zero defective parts-per-million. Harley-Davidson also expects its suppliers to develop and deliver new products in “half the time,” and they are expected to develop tools for faster product development and plans that are supportive of Harley-Davidson’s design and development efforts. Approximately 80 on-site (resident) suppliers take part in new product design, creating an interface between the company and its suppliers that helps Harley-Davidson improve quality and cut costs.
These objectives consciously reduced Harley-Davidson’s supplier base that could not meet expectations for cost, quality, and delivery by 80%, from 4,000 suppliers to 800. In some cases Harley-Davidson has moved toward single-source relationships with suppliers. In these instances, the company partners with one supplier for a part, system, or component—for example, lighting systems, instrumentation gauges, or ignition systems—and works closely with the supplier to develop technology that the company needs to remain competitive. In return, Harley-Davidson remains loyal to the supplier and reduces supplier uncertainty, provided of course that the supplier continues to meet the company’s objectives for improvement. In order for Harley-Davidson suppliers to remain competitive they must enforce similar exacting goals and standards on their own suppliers, thus creating efficiency and cost effectiveness along the entire length of the supply chain from Harley-Davidson’s suppliers to its suppliers’ suppliers, and so on.
Harley-Davidson is using the Internet to further improve its supply chain performance. The company launched an interactive Internet-based supply chain management strategy that placed a large portion of the company’s supply chain management onto the Internet. It provided all suppliers with information they need to conduct online financial transactions and reduce the time spent chasing invoices. Suppliers are linked by a web portal (www.h-dsn.com) to critical business transaction information, including data on delivery and quality performance and the status of financial transactions. In-house software reports defect rates that provides quick feedback to suppliers about bad components. Suppliers can look at production schedules and delivery requirements and assess their ability to meet those schedules. Documents and information previously sent using an EDI format are now sent more cheaply through the Internet, which is also more universally available to supply companies, particularly smaller ones.
What has been the effect of these changes in supply chain management at Harley-Davidson? They reduced operating expenses by $161 million; the company now manages its inventory according to a just-in-time (JIT) system, and it runs on 6.5 to 10 days’ worth of inventory compared to 8 to 15 days of inventory before its supply chain initiatives; its logistics and distribution center costs as a percentage of sales decreased by 59%. By any measure Harley-Davidson’s supply chain management strategy has been a success.
Harley-Davidson is a manufacturing company with a successful supply chain design. Identify a service company and discuss what elements of Harley-Davidson’s supply chain it might adopt.
Sources: B. Milligan, “Harley-Davidson Wins by Getting Suppliers on Board,” Purchasing 129 (5; September 21, 2000), pp. 51–65; J. Dillner and G. Verga, “Supply Chain Management: Best Practices and its Potential for Consultants,” Women in Consulting, (http://www.womeninconsulting.org), May 2004; M. Sullivan,” High-Octane Hog,” Forbes.com, September 2001; http://www.harleydavidson.com.
Assembly-line worker at Harley-Davidson. This 100-year-old motorcycle manufacturer was named “Company of the Year” by Forbes Magazine in 2002. Innovative changes to its supply chain are keys to its recent successful transformation into a global company.
(c)AP/Wide World Photos
Supply Chain Management (SCM) Software
Enterprise resource planning (ERP) is software that helps integrate the components of a company, including most of the supply chain processes, by sharing and organizing information and data among supply chain members. It transforms transactional data like sales into useful information that supports business decisions in other parts of the company. For example, when data such as a sale becomes available in one part of the business, it is transmitted through ERP software, which automatically determines the effects of the transaction on other areas, such as manufacturing, inventory, procurement, invoicing, distribution, and accounting, and on suppliers. Through these information flows ERP organizes and manages a company’s supply chain. Most ERP vendors systems handle external, Web-based interactions, and have software specifically for supply chain management called “SCM.”
SAP was the first ERP software provider and is the largest, which has made it almost synonymous with ERP applications software. mySAP.com is the umbrella brand name for the SAP software. mySAP.com is a suite of Web-enabled SAP modules that allow a company to collaborate with its customers and business partners along its supply chain. When a customer submits an order, that transaction ripples throughout the company’s supply chain, adjusting inventory, part supplies, accounting entries, production schedules and shipping schedules, and balance sheets. Different nations’ laws, currencies, and business practices are embedded in the software, which enables it to translate sales transactions smoothly between business partners in different countries—for example, a company in Taiwan and its customer in Brazil.
ERP is discussed in greater detail in Chapter 15 (IT Systems for Resource Planning).
Measuring Supply Chain Performance
As we indicated in previous sections, inventory is a key element in supply chain management. On one hand, it enables a company to cope with uncertainty by serving as a buffer between stages in the supply chain. Inventory allows items to flow smoothly through the system to meet customer demand when stages are not in sync. On the other hand, inventory can be very costly. As such, it is important for a company to maintain an efficient supply chain by lowering inventory levels (and costs) as much as possible. In order to accomplish this objective, several numerical measures, also called key performance indicators (KPIs) or metrics, are often used to measure supply chain performance. Three of the more widely used key performance indicators are inventory turnover, inventory days of supply, and fill rate.
Key Performance Indicators
Inventory turnover (or turns) is computed by dividing the cost of goods sold (i.e., the cost of annual sales) by the average aggregate inventory value:
The average aggregate value of inventory is the total value (at cost) of all items being held in inventory, including such things as raw materials, work-in-process (WIP), and finished goods. It is computed by summing for all individual inventory items, the product of the average number of units on hand in inventory at any one time multiplied by the unit value:
Average aggregate value of Inventory = Σ(average inventory for item i) × (unit value item i)
The cost of goods sold is only for finished goods, valued at cost, not the final sale price (which might include discounts or markups).
A poor, or comparatively low, inventory turnover value indicates that a large amount of inventory is required to satisfy demand. In general, a good (or poor) number of inventory turns is relative to what is being achieved at various stages across a company and what the norm is for the industry. In the early 1980s, inventory turns for many manufacturing companies were less than 5; however, the advent of lean production (see Chapter 16) and the increased emphasis on quality management and supply chain management have increased inventory turns in much of the manufacturing sector.
Example 10.1 Computing Key Performance Indicators

Q:

The Tomahawk Motorcycle Company manufactures motorcycles. Last year the cost of goods sold was $425 million. The company had the following average value of production materials and parts, work-in-process, and finished goods inventory:

Production materials and parts

$ 4,629,000

Work-in-process

17,465,000

Finished goods

12,322,000

Total average aggregate value of inventory

$34,416,000

The company wants to know the number of inventory turns and days of supply being held in inventory.

Solution

In recent years, Ford and General Motors have experienced inventory turns in the high teens. Toyota had inventory turns in the 60s in the 1980s when its supply chain was mostly in Japan, but this has fallen to the low teens in recent years as it has expanded globally and the complexities of its supply chain have increased accordingly. High-tech companies typically have around 6 turns per year, but Dell has achieved inventory turns greater than 50, belying its success. Palm has inventory turns of around 26. In one year Palm increased its number of turns from 12 to 26, which decreased inventory from $55 million to $23 million. Alternatively, pharmaceutical giant Pfizer has had recent inventory turns as low as 1.5. However, this does not mean that Pfizer is doing poorly financially—it has been very profitable. It does mean that perhaps it could manage its supply chain more efficiently.
Another commonly used KPI is days (or weeks) of supply. This is a measure of how many days (or weeks) of inventory is available at any point in time. It is computed by dividing the aggregate average value of inventory by the daily (or weekly) cost of goods sold,
Automotive companies like Ford and GM typically carry about 60 days of finished goods supply.
Another frequently used KPI is fill rate. Fill rates are the fraction of orders placed by a customer with a supplier distribution center or warehouse which are filled within a specific period of time, typically one day. High fill rates indicate that inventory is moving from the supplier to the customer at a faster rate, which thereby reduces inventory at the distribution center. For example, Nabisco’s fill rate for its Planter’s peanuts at Wegman’s grocery store chain is 97% meaning that when the store places an order with the Nabisco distribution center 97% of the time it is filled within one day.
Process Control
In Chapter 2 on Quality Management, we talked about various techniques that could be employed to monitor product and service quality. One of the more powerful techniques we presented was statistical process control, the subject of Chapter 3. Although we tend to think that process control is used to monitor and control quality for manufacturing operations, it can also be used to monitor and control any of the processes in the supply chain. If products are defective, then the effects are obvious. However, other problems along the supply chain that create uncertainty and variability are most often caused by errors. If deliveries are missed or are late, if orders are lost, if errors are made in filling out forms, if items with high obsolescence rates (like PCs) or perishable items are allowed to stay too long in inventory, if demand forecast errors are made, if plant and equipment are not properly maintained, then the supply chain can be disrupted, thereby reducing supply chain performance. Thus, at any stage in the process, statistical process control charts can be used to monitor process performance.
SCOR
The Supply Chain Operations Reference (SCOR) model is a supply chain diagnostic tool that provides a cross-industry standard for supply chain management. It was developed and is maintained by the Supply Chain Council, a global not-for-profit trade association organized in 1996 with membership open to companies interested in improving supply chain efficiency primarily through the use of SCOR. The Supply Chain Council (SCC) has over 750 corporate members around the world, including many Fortune 500 companies.
The purpose of the SCOR model is to define a company’s current supply chain processes, quantify the performance of similar companies to establish targets to achieve “best-in-class” performance, and identify the practices and software solutions that will yield “best in class” performance. It is organized around a set of five primary management processes—plan, source, make, deliver, and return, as shown in Figure 10.7. These processes provide a common set of definitions, or building blocks, that SCOR uses to describe any supply chain, from simple to complex. This allows supply chains for different companies to be linked and compared.
Figure 10.7 SCOR Model Processes
A primary feature of the SCOR model is the use of a set of performance indicators or “metrics” to measure supply chain performance. These metrics are categorized as “customer-facing” or “internal-facing” as shown in Table 10.2. Customer-facing metrics measure supply chain delivery reliability, responsiveness, and flexibility with respect to customers and suppliers. Internal-facing metrics measure supply chain cost and asset management efficiency. The metrics may be used for multiple supply chain processes.
Table 10.2 SCOR Performance Metrics

 

Performance Attribute

Performance Metric

Definition

 

 

Delivery performance

Percentage of orders delivered on time and in full to the customer

 

Supply chain delivery reliability

Fill rate

Percentage of orders shipped within 24 hours of order receipt

 

 

Perfect order fulfillment

Percentage of orders delivered on time and in full, perfectly matched with order with no errors

Customer Facing

Supply chain responsiveness

Order fulfillment lead time

Number of days from order receipt to customer delivery

 

Supply chain flexibility

Supply chain response time

Number of days for the supply chain to respond to an unplanned significant change in demand without a cost penalty

 

 

Production flexibility

Number of days to achieve an unplanned 20% change in orders without a cost penalty

 

 

Supply chain management cost

The direct and indirect cost to plan, source and deliver products and services

 

 

Cost of goods sold

The direct cost of material and labor to produce a product or service

 

Supply chain cost

Value-added productivity

Direct material cost subtracted from revenue and divided by the number of employees, similar to sales per employee

Internal Facing

 

Warranty/returns processing cost

Direct and indirect costs associated with returns including defective, planned maintenance and excess inventory

 

 

Cash-to-cash cycle time

The number of days that cash is tied up as working capital

 

Supply Chain Asset Management Efficiency

Inventory days of supply

The number of days that cash is tied up as inventory

 

 

Asset turns

Revenue divided by total assets including working capital and fixed assets

These metrics are used to develop a “SCORcard” that measures both a company’s current supply chain performance for different processes and its competitor’s metrics. The company then projects the level of metrics it needs to be on a par with its competitors, to have an advantage over its competitors, or to be superior. The value associated with these measured improvements in performance is then projected for the different performance attributes. For example, a company may know that the industry “median fill rate” is 90% and the industry best-in-class performance is 99%. The company has determined that its current fill rate is 65%, and that a fill rate of 90% will give it parity with its competitors, a 95% fill rate will give it an advantage, and a 99% fill rate will make it superior to most of its competitors. The company may then project that the improvement in its fill rate plus improvements in the other supply chain reliability attributes (i.e., delivery performance and perfect order fulfillment) will increase supply chain value by $10 million in revenue. This process wherein a company measures its current supply chain performance, compares it to its competition, and then projects the performance levels it needs to compete is referred to as “gap analysis.” SCOR then provides a framework not only for measuring performance but for diagnosing problems and identifying practices and solutions that will enable a company to achieve its competitive performance objectives.
Summary
Supply chain management is one of the most important, strategic aspects of operations management because it encompasses so many related functions. Whom to buy materials from, how to transport goods and services, and how to distribute them in the most cost-effective, timely manner constitutes much of an organization’s strategic planning. Contracting with the wrong supplier can result in poor-quality materials and late deliveries. Selecting the wrong mode of transportation or carrier can mean late deliveries to customers that will require high, costly inventories to offset. All of these critical functional supply chain decisions are complicated by the fact that they often occur in a global environment within cultures and markets at a distance and much different from those in the United States.
Summary of Key Terms
bullwhip effect
occurs when demand variability is magnified at various upstream points in the supply chain.
collaborative planning, forecasting, and replenishment (CPFR)
a process for two or more companies in a supply chain to synchronize their demand forecasts into a single plan to meet customer demand.
e-business
the replacement of physical business processes with electronic ones.
electronic data interchange (EDI)
a computer-to-computer exchange of business documents.
enterprise resource planning (ERP)
software that connects the components of a company by sharing and organizing information and data.
fill rate
the fraction of orders placed by a customer with a supplier distribution center or warehouse which are filled within 24 hours.
inventory
insurance against supply chain uncertainty held between supply chain stages.
inventory turns
a supply chain performance metric computed by dividing the cost of goods sold by the average aggregate value of inventory.
key performance indicator (KPI)
a metric used to measure supply chain performance.
point-of-sale data
computer records of sales at retail sites.
procurement
purchasing goods and services from suppliers.
radio frequency identification (RFID)
radio waves used to transfer data, like an electronic product code, between an item with an embedded microchip and a reader.
SCOR
the supply chain operations reference model; a diagnostic tool that provides a cross-industry standard for supply chain management.
sourcing
the selection of suppliers.
supply chain
the facilities, functions, and activities involved in producing and delivering a product or service from suppliers (and their suppliers) to customers (and their customers).
supply chain management (SCM)
managing the flow of information through the supply chain in order to attain the level of synchronization that will make it more responsive to customer needs while lowering costs.
Summary of Key Formulas

Solved Problem
Animated Demo Problem

Q:

INVENTORY TURNS AND DAYS OF SUPPLY
A manufacturing company had the following average raw materials, work-in-process, and finished goods inventory on hand at any one time during the past year.

Raw Materials

Average Inventory

Unit Cost

1

135

$26.50

2

67

18.20

3

210

9.75

4

97

31.25

Work-in-Process

5

40

$165.00

6

65

230.00

FINISHED GOODS

7

25

$ 670.00

8

18

1050.00

9

35

520.00

The company’s cost of goods sold last year was $2.73 million, and it operates 365 days per year.
Determine the company’s inventory turns and days of supply.

Solution

Compute the average aggregate value of inventory.

Raw materials:(135)($26.50) =

$3,577.50

(67)(18.20) =

1,219.40

(210)(9.75) =

2,047.50

(97)(31.25) =

3,031.25

Work-in-process:(40)(165) =

6,600.00

(65)(230)

14,950.00

Finished goods:(25)(670) =

16,750.00

(18)(1050) =

18,900.00

(35)(520) =

18,200.00

Total

$85,275.65

Compute inventory turns.
Compute days of supply.

Questions
Internet Exercises, Weblinks

101.

Describe the supply chain, in general terms, for McDonald’s and for Toyota.

102.

Define the strategic goals of supply chain management, and indicate how each element of a supply chain (purchasing, production, inventory, and transportation and distribution) has an impact on these goals.

103.

Identify three service businesses in your community and describe their supply chains.

104.

Describe how a business you are familiar with uses IT enablers in its supply chain management.

105.

Select a company and determine the type of suppliers it has, then indicate the criteria that you think the company might use to evaluate and select suppliers.

106.

Locate an e-marketplace site on the Internet and describe it and the type of producers and suppliers it connects.

107.

Explore the Web site of an ERP provider and describe the services it indicates it provides.

108.

Purchasing is a trade magazine with the subtitle, “The Magazine of Total Supply Chain Management and e-Procurement.” Its articles include many examples of supply chain management at various companies. Research an article from Purchasing and write a brief paper on a company reporting on its Supply Chain activities similar to the “Along the Supply Chain” boxes in this chapter.

109.

Transportation & Distribution is a trade magazine that focuses on supply chain management, especially logistics. In fact, its Web site is www.totalsupplychain.com. The magazine includes numerous articles reporting on companies’ experiences with supply chain management. Select an article from Transportation & Distribution and write a brief paper similar to “Along the Supply Chain” boxes in this chapter about a scientific company’s supply chain management.

1010.

Several automobile manufacturers are beginning to implement programs for “build-to-order” cars. Identify an auto company that has initiated a BTO program and describe what it entails. Contrast the BTO program of this manufacturer with a company experienced in BTO production like Dell Computers. Discuss the differences in the supply chains between these companies that makes BTO production more difficult for an auto manufacturer.

1011.

As Amazon.com grew rapidly after it first went “online” with Internet sales in 1995, it experienced several supply chain problems that other retail companies like LL. Bean, Sears, and J.C. Penney were able to avoid. What might some of these problems be and why did Amazon and other dot. com companies experience them?

1012.

Explain why radio frequency identification (RFID) offers enhanced opportunities for security in global transportation and distribution, and how this in turn could improve supply chain efficiency.

1013.

Wal-Mart is one of the leaders in promoting the development and use of RFID and electronic product codes. Explain how Wal-Mart plans to use RFID, why Wal-Mart wants its suppliers to adopt RFID, and what obstacles you think may exist for this new technology.

1014.

It has been suggested that SCOR might serve as an international supply chain certification tool much like ISO certification for quality. Explain how you think SCOR might be used as a certification tool.

1015.

Describe the supply chain for your university or college. Who are the suppliers, producers, and distributors in this supply chain? Are there different supplier tiers? How would you evaluate this supply chain? Does inventory even exist, and if it does, what form does it take?

1016.

Identify a business that employs EDI in its supply chain management and describe how it is used.

1017.

One of the key elements in supply chain management is forecasted demand. Customer demand is obviously an important, if not the most important, factor in determining production and distribution plans and inventory levels all along the supply chain. If more product is produced than demanded, the company and its suppliers are left with crippling inventories; if less product is produced than demanded, current and future lost sales can be devastating. Thus, it is critical that companies know what customer demand will be as closely as possible.
It is also generally assumed that a company cannot control demand; customers determine demand, and customers don’t control their customers. As such, demand is often perceived to be strictly an input to supply chain management. This is not always the case, however, as is demonstrated by the unfortunate experiences of many companies. Following are a few examples of companies that treated demand as an independent factor in their supply chain management decision, to their chagrin.2
At midyear Volvo found itself with a surplus of green cars in inventory. In order to get rid of this inventory, the sales and marketing group offered discounts and rebates to distributors on green cars. The marketing plan was successful, and the demand for green cars increased. However, supply chain planners, unaware of the marketing plan, perceived that a new customer demand pattern had developed for green cars so they produced more green cars. As a result, Volvo had a huge inventory of green cars at the end of the year.
When Hewlett-Packard introduced a new PC, demand faltered when Compaq and Packard Bell cut prices. In reaction, supply chain planners at HP cut production back without realizing sales and marketing had decided to match their competitors’ price cuts. The resulting stockouts HP experienced resulted in a less than merry Christmas season.
Campbell Soup heavily promoted its chicken noodle soup during the winter when demand peaked, which resulted in even greater than normal demand. In order to meet this spike in demand, it had to prepare large amounts of ingredients like chicken in advance and store it. Also, in order to meet the demand, production facilities had to operate in overtime during the winter, which in turn required them to prepare other products in advance and to store them too. The huge inventories and production costs exceeded the revenues from the increased customer demand of chicken noodle soup.
Italian pasta maker, Barilla, offered discounts to customers who ordered full truckloads. This created such erratic demand patterns, however, that supply costs overwhelmed the revenue benefits.
In each of these brief examples, the company was successfully able to influence customer demand with price discounts and effective marketing, demonstrating that demand is not a completely independent factor. In addition, in each case an increase in sales did not result in increased revenues because they were overwhelmed by increased supply chain costs. This presents a complex problem in supply chain management. Effective marketing is generally a good thing because it does increase sales; however, it also makes forecasting demand more difficult because it creates erratic demand patterns tied to price changes. So what should companies do? Should they forego price discounts and promotions to render demand more stable in order to create a more consistent supply chain that can be effectively managed? One company we mentioned in this chapter has, in effect, done this. Identify this company and explain how it manages its supply chain. Also, discuss the complexities associated with managing a supply chain in which price changes from promotions and discounts are used and discuss strategies for overcoming these complexities.

Problems
GO Problems

101.

The Fizer Drug Company manufactures over-the-counter and prescription drugs. Last year the company’s cost of goods sold was $470 million. It carried average raw material inventory of $17.5 million, average work-in-process of $9.3 million, and average finished goods inventory of $6.4 million. The company operates 365 days per year. Compute the company’s inventory turns and days of supply for last year.

102.

The Ashton Furniture Company manufactures coffee tables and chest of drawers. Last year the company’s cost of goods sold was $3,700,000, and it carried inventory of oak, pine, stains, joiners, and brass fixtures, work-in-process of furniture frames, drawers and wood panels, and finished chests and coffee tables. Its average inventory levels for a 52-week business year were as follows.

Raw Materials

Average Inventory

Unit Cost

Oak

8000

$6.00

Pine

4500

4.00

Brass fixtures

1200

8.00

Stains

3000

2.00

Joiners

900

1.00

Work-in-Process

 

 

Frames

200

$30

Drawers

400

10

Panels

600

50

Chests

120

110

Tables

90

90

Finished Goods

 

 

Chests

300

$500

Coffee tables

200

350

Determine the number of inventory turns and the days of supply for the furniture company.

103.

Barington Mills manufactures denim cloth from two primary raw materials, cotton and dye. Work-in-process includes lapped cotton, spun yarn, and undyed cloth, while finished goods includes three grades of dyed cloth. The average inventory amounts on hand at any one time last year and the unit costs are as follows.

Raw Materials

Average Inventory

Unit Cost

Cotton

70,000 lb.

$2.75

Dye

125,000 gal.

5.00

Work-in-Process

 

 

lapped cotton

2000 rolls

$10.50

spun yarn

5000 spools

6.75

undyed cloth

500 rolls

26.10

Finished Goods

 

 

Grade 1 cloth

250 rolls

$65.00

Grade 2 cloth

190 rolls

80.00

Grade 3 cloth

310 rolls

105.00

The company operates 50 weeks per year, and its cost of goods sold for the past year was $17.5 million.
Determine the company’s inventory turns and weeks of supply.

104.

House Max Builders constructs modular homes, and last year their cost of goods sold was $18,500,000. It operates 50 weeks per year. The company has the following inventory of raw materials, work-in-process, and finished goods.

Raw Materials

Average Inventory

Unit Cost

1

7200

$8.50

2

4500

7.20

3

3200

15.40

4

4800

13.70

5

6900

10.50

Work-in-Process

Average Inventory

Unit Cost

A

100

$16,200

B

70

13,500

C

60

6,100

D

35

14,400

Finished Goods

 

 

Model X

20

$78,700

Model Y

10

65,300

Model Z

10

86,000

Determine the number of inventory turns and the days of supply for House Max.

105.

The PM Computer Company makes build-to-order (BTO) computers at its distribution center year round. The following table shows the average value (in $ millions) of component parts, work-in-process, and finished computers at the DC for the past four years.

 

Year

 

1

2

3

4

Component parts

$20.5

27.8

30.8

37.3

Work-in-process

4.2

6.7

7.1

9.5

Finished computers

3.6

7.2

8.6

10.1

Cost of goods sold

226.0

345.0

517.0

680.0

Determine the number of inventory turns and the days of supply for each year.
As the company has grown, does it appear that the company’s supply chain performance has improved? Explain your answer.
If the company wants to improve its supply chain performance, what items should it focus on? Why?

106.

Delph Manufacturing Company is going to purchase an auto parts component from one of two competing suppliers. Delph is going to base its decision, in part, on the supply chain performance of the two suppliers. The company has obtained the following data for average raw materials, work-in-process, and finished goods inventory value, as well as cost of goods sold for the suppliers.

 

Supplier 1

Supplier 2

Cost of goods sold

$8,360,000

$14,800,000

Raw materials

275,000

870,000

Work-in-process

62,000

550,000

Finished goods

33,000

180,000

Each company operates 52 weeks per year.
Determine which supplier has the best supply chain performance according to inventory turns and weeks of supply. What other factors would the company likely take into account in selecting a supplier?

107.

Solve Problem 3-8 in Chapter 3 to construct a c-chart for monitoring invoice errors at Telcom Manufacturing Company.

108.

Solve Problem 3-9 in Chapter 3 to construct a c-chart to monitor late order deliveries at the National Bread Company.

109.

Solve Problem 3-10 in Chapter 3 to construct a p-chart to monitor order problems at BooksCDs.com

1010.

Solve Problem 3-11 in Chapter 3 to construct an x-chart in conjunction with an R-chart for order fulfillment lead time at Valtec Electronics.

1011.

Solve Problem 3-31 in Chapter 3 to construct an x-bar chart in conjunction with an R-chart for delivery time at the Great Outdoors Clothing Company.

Case Problem 10.1

Q:

Somerset Furniture Company’s Global Supply Chain
The Somerset Furniture Company was founded in 1957 in Randolph County, Virginina. It traditionally has manufactured large, medium-priced, ornate residential home wood furniture such as bedroom cabinets and chests of draws, and dining and living room cabinets, tables, and chairs, at its primary manufacturing facility in Randolph County. It employed a marketing strategy of rapidly introducing new product lines every few years. Over time it developed a reputation for high-quality, affordable furniture for a growing U.S. market of homeowners during the last half of the twentieth century. The company was generally considered to be an innovator in furniture manufacturing processes and in applying QM principles to furniture manufacturing. However, in the mid-1990s, faced with increasing foreign competition, high labor rates, and diminishing profits, the Somerset Company contracted to outsource several of its furniture product lines to manufacturers in China, simultaneously reducing the size of its own domestic manufacturing facility and labor force. This initially proved to be very successful in reducing costs and increasing profits, and by 2000 Somerset had decided to close its entire manufacturing facility in the United States and outsource all of its manufacturing to suppliers in China. The company set up a global supply chain in which it arranges for shipments of wood from the United States and South America to manufacturing plants in China where the furniture products are produced by hand by Chinese laborers. The Chinese manufacturers are very good at copying the Somerset ornate furniture designs by hand without expensive machinery. The average labor rate for furniture manufacturing in the United States is between $9 and $20 per hour, whereas the average labor rate for furniture manufacturers in China is $2 per day. Finished furniture products are shipped by container ship from Hong Kong or Shanghai to Norfolk, Virginia, where the containers are then transported by truck to Somerset warehouses in Randolph County. Somerset supplies retail furniture stores from this location. All hardware is installed on the furniture at the retail stores in order to reduce the possibility of damage during transport.
The order processing and fulfillment system for Somerset includes a great deal of variability, as does all aspects of the company’s global supply chain. The company processes orders weekly and biweekly. In the United States it takes between 12 and 25 days for the company to develop a purchase order and release it to their Chinese suppliers. This process includes developing a demand forecast, which may take from one to two weeks; converting the forecast to an order fulfillment schedule; and then developing a purchase order. Once the purchase order is processed overseas by the Chinese manufacturer, which may take 10 to 20 days depending on the number of changes made, the manufacturing process requires approximately 60 days. The foreign logistics process requires finished furniture items to be transported from the manufacturing plants to the Chinese ports, which can take up to several weeks depending on trucking availability and schedules. An additional 5 to 10 days is required to arrange for shipping containers and prepare the paperwork for shipping. However, shipments can then wait from one day to a week for enough available containers. There are often too few containers at the ports because large U.S. importers, like “Big W” discount stores in the United States, reserve all the available containers for their continual stream of overseas shipments. Once enough containers are secured, it requires from three to six days to optimally load the containers. The furniture pieces often have odd dimensions that result in partially filled containers. Since 9/11, random security checks of containers can delay shipment another one to three weeks, and smaller companies like Somerset are more likely to be extensively checked than larger shippers like Big W, who the port authorities don’t want upset with delays. The trip overseas to Norfolk requires 28 days. Once in port, one to two weeks are required for a shipment to clear customs and to be loaded onto trucks for transport to Somerset’s warehouse in Randolph County, which takes from one to three days. When a shipment arrives, it can take from one day up to a month to unload a trailer, depending on the urgency to fill store orders from the shipment.
Because of supply chain variability, shipments can be off schedule (i.e., delayed) by as much as 40%. The company prides itself on customer service and fears that late deliveries to its customers would harm its credibility and result in cancelled orders and lost customers. At the same time, keeping excess inventories on hand in its warehouses is very costly, and since Somerset redesigns its product lines so frequently a real problem of product obsolescence arises if products remain in inventory very long. Somerset has also been experiencing quality problems. The Chinese suppliers employ quality auditors who rotate among plants every few weeks to perform quality control tests and monitor the manufacturing process for several days before visiting another plant. However, store and individual customer complaints have forced Somerset to inspect virtually every piece of furniture it receives from overseas before forwarding it to stores. In some instances, customers have complained that tables and chairs creak noisily during use. Somerset subsequently discovered that the creaking was caused by humidity differences between the locations of the Chinese plants and the geographic areas in the United States where their furniture is sold. Replacement parts (like cabinet doors or table legs) are difficult to secure because the Chinese suppliers will only agree to provide replacement parts for the product lines currently in production. However, Somerset provides a one-year warranty on its furniture, which means that they often need parts for a product no longer being produced. Even when replacement parts were available, it took too long to get them from the supplier in order to provide timely customer service.
Although Somerset was initially successful at outsourcing its manufacturing process on a limited basis, it has since discovered, as many companies do, that outsourcing can result in a host of supply chain problems, as indicated above. Discuss Somerset’s global supply chain and possible remedies for its supply chain problems, including strategic and tactical changes that might improve the company’s supply chain performance, reduce system variability, and improve quality and customer service.

References
Chopra, S. and P. Meindl. Supply Chain Management, 2nd ed. Upper Saddle River, N.J.: Prentice Hall, 2004.
Christopher, M. Logistics and Supply Chain Management, 2nd ed. Upper Saddle River, N.J.: Prentice Hall, 1998.
Dornier, P., R. Ernst, M. Fender and P. Kouvelis. Global Operations and Logistics. New York: John Wiley & Sons, 1998.
Schecter, D. and Gordon S. Delivering the Goods: The Art of Managing Your Supply Chain. New York: John Wiley & Sons, 2002.
Notes
2H. L. Lee, “Ultimate Enterprise Value Creation Using Demand-Based Management,” Stanford Global Supply Chain Management Forum, http://www.stanford.edu/group/scforum/, September 2001.

/wEPDwUKLTIxO
Search within this Chapter
Full Text

sans serif font style
a2b61ac8-d5e4-4
0d52ede9-646f-4

Operations Mana
9780470095157
Login
Type your

Search Con
10
1

/wEPDwUKLTIxO
Search within this Chapter
Full Text
sans serif font style
/wEPDwUKLTIxO
Search within this Chapter
Full Text
sans serif font style

Still stressed with your coursework?
Get quality coursework help from an expert!