EXECUTI VE MBA PROGRAMME

Operat ions Management

2006 Shaaban K. Juma
P.O. Box 171 00517, Nairobi, KENYA
Phone +254-20-603502 Fax +254-20-607683
Email: info@shaabanjuma.com



OPERATI ONS MANAGEMENT 1
Supply Chain Planning and Control
Introduction
Traditionally Operations Managers have viewed their responsibility as being
only within their operation.
However, for them to manage this operation competitively and effectively,
they need to look beyond their own operation more so when it becomes
imperative to ensure that the needs of the ultimate consumer in a supply
network are met by the efforts of all operations in the supply network.
Such intercompany operations management is referred to as supply chain
management.
Supply chain management is the management of the interconnection of
organisations which relate to each other through upstream and downstream
linkages between the different processes that produce value
1
in the form of
products and services to the ultimate consumer.
The objective of supply chain management is trying to satisfy end customers
effectively and efficiently.
In trying to do so, each operation will consider the key question of what level
of quality, speed, dependability and flexibility do they need to develop in their
part of the chain in order to satisfy the end customer.
Although the emphasis here is on the end customers, satisfying an operations
immediate customers is equally important as they too will need efficient and
quality inputs to their operations in order to contribute to the overall needs of
the final consumer.
Focusing on managing the supply chain efficiently provides opportunities for
analysis and improvements of operations. For example where an operations
profits are low, savings could be achieved by reducing costs incurred in such
areas as inventory accumulations by analysing the chain for bottlenecks that
may cause lengthy throughput time, thereby contributing to buffering. The
OM may then solve the problem by allowing materials to be produced only

1
According to Michael Porter: Value is the amount buyers are willing to pay for what an
organisation provides themcreating value for buyers that exceeds the cost of doing so is the goal
of any generic strategy. Value, instead of cost, must be used in analyzing competitive position.

6
OPERATI ONS MANAGEMENT 2
when they are need, balancing capacity, and generally controlling the smooth
flow of materials.

Component Activities of Supply Chain Management
Definition of terms:
o Focal operation. A single operation in a supply chain
o Supply side. Operations that contribute to a focal operations inputs
o Demand side. Operations that consume a focal operations outputs
o Purchasing and supply management. The function that deals with the
operations interface with its supply market
o Physical distribution management. Managing the activity of supplying
immediate customers.
o Logistics. An extension of physical distribution management that
refers to the management of materials and information flow from a
business, down through a distribution channel, to end customers.
o Materials management. The management of the flow of materials and
information through the immediate supply chain, including
purchasing, inventory management, stores management, operations
planning and control and physical distribution management.












FOCAL
OPERATI ON
1
st
tier
suppliers

X

Y
2
nd
tier
suppliers

C

A

B

Wholesalers

Retailers
1
st
Tier
Customers
2
nd
Tier
Customers
Supply side Demand side

Purchasing and
supply management
Physical
distribution
management
Logistics
Materials management
Supply chain management

Illustration of terminologies used in supply chain management
OPERATI ONS MANAGEMENT 3
Purchasing and supply management
At the supply end of an operation the purchasing or buying function contracts
with suppliers of materials and services that will be used for production of
goods and services. Some goods and services may not be for production but
are bought for an operations internal consumption, e.g. stationery, furniture
and fittings, etc.
Being the link between the operation and its immediate suppliers, a
purchasing manager must understand the requirements of all the processes
within the operation including the technical details or specifications of
materials and services to be bought and the capabilities of the suppliers.
Tasks involved in purchasing are:

o Operations raise a requisition for materials or services
o Purchasing function compares and selects potential suppliers and sends
a formal request for quotations, especially where purchasing has not
been done for a long time or the items are being bought for the first
time.
o Quotations are received, analysed and a selection is made of the
qualified supplier.
o A purchase order which is a contractual legal document between the
supplier and the operation is raised and forwarded to the chosen
supplier.
Company XYZ
Purchasing Process
B
u
y
i
n
g

D
e
p
t
.
S
u
p
p
l
i
e
r
T
h
e

I
n
t
e
r
n
a
l

O
p
e
r
a
t
i
o
n
Request for
product and
service
Prepare request
for quotations
Select
preferred
supplier
Prepare quotation
Prepare purchase
order
Produce goods
and services
Receive goods
and services
OPERATI ONS MANAGEMENT 4
o The supplier produces and delivers the materials and or services
ordered.
o The purchasing function receives the materials and forwards them to
the relevant recipient operation within the organisation.


Group Discussion
If you were drawing up a document to be sent out to potential suppliers of a new
photocopying machine for your local library, what would you ask them to specify
The purchasing functions objective is to buy the materials and services of the
right quality, if necessary to be delivered quickly, at the right time and
completely, at the right price and where necessary to be able to change
specifications in terms of delivery time and quantity.
The responsibility of ensuring quality lies with the supplier who should be
able to provide a right first time level of quality products and services. It is
not the role of the operations to inspect the goods on delivery as this beats the
purpose of TQM. The supplier will therefore be required to adhere to high
standards of quality and where necessary be certified by the relevant standards
bodies such ISO.
Speed of delivery is relative to the requirements of the industry and will be
affected by the level of competition, complexity of production, logistical
issues among others.
Delivery at the right time and in the right quantities required is important
in order to avoid inventory accumulation or shortages or storage costs. In
service industries late arrival or early arrival can also disrupt schedules.
Supply flexibility is important for operations which operate in fast changing
or uncertain markets. For example a hospital needs to respond to all manner of
ailments from patients who may need unforeseen medication that is not
stocked at the hospital at the time or at all due its storage nature. The supplier
to the hospital must be ready to supply at short notice to meet such demand.
Or must have alternative medication to take care of emergencies and save a
life.
Purchasing at theright price helps an organisation acquire cost advantage in
its operations. This point can only be true if we assume suppliers are
producing quality products or services, hence price is the only significant
issue under consideration.
In many organisations purchase costs account for the biggest share of total
organisational costs, and their proper management can bring significant
savings to the organisation. The following illustration shows how purchasing
at the right price can impact on profitability.
OPERATI ONS MANAGEMENT 5
Present Strategy Issues to Consider Decision Projected

MK
000
MK 000
Revenues 10,000 Increase by 5%
Counter productive to
sales
No action 10,000
Purchases 7,000 Decrease by 7.14%
Negotiate. No
immediate impact
Decrease by 7.14% 6,500
Staff costs 2,000 Decrease by 25% Impact on morale No action 2,000
Overheads 500 Decrease by 100%
Difficult in the short
run
No action 500
Profits 500 I ncrease by 100% 1,000

Group Discussion
What do you think should be the main information which is exchanged between the
purchasing function and other parts of the organization?
Emergent Issues on Purchasing and Supply Management
Si ngl e- ver sus mul t i sour c i ng
A controversial decision faced by many operations managers is whether to
source their input products and services from a single or multiple suppliers.
The pros and cons of either of these decisions are summarised below:

Single-sourcing Multi-sourcing
A
d
v
a
n
t
a
g
e
s


Better quality subject to adherence to
standards
Strong relationships may be created
Greater commitment due to dependency
Better communication
Ease of cooperation in developing new products
or services
Economies of scale
Greater confidentiality


Price reductions due to competition
Can switch sources in case of supply failure
Wide sources of knowledge and expertise to
tap from

D
i
s
a
d
v
a
n
t
a
g
e
s


Vulnerability to disruptions in case of supply
failure
Volume fluctuations may easily affect individual
supplier
Monopolies may exert upward price increases



Commitment of supplier may be difficult to
enforce
Difficulty to develop standards
Communication difficulties
Supplier less likely to invest in new
processes
Difficult to attain economies of scale



The I nt er net
Trade that occurs over the internet (or any computer network) is called
electronic commerce, e-commerce, or e-business.
OPERATI ONS MANAGEMENT 6
The internet has fundamentally changed how businesses and consumers
interact as shown in the new value chain below:



The traditional value chain has in some cases been replaced by a new one
where intermediaries or middlemen who do not add value to the supply chain
have been phased out (disintermediation).
However since not all consumers or business can handle the myriad
transactions of selling on a one-to-one basis, and most consumers do not want
to sift through hundreds of web sites to purchase every day items, new
intermediaries of the internet have arisen as shown in example (c) above.
The internet has impacted on operations by promoting:
o Better customer relations
o More efficient processes
o Lower material costs (economies of scale in purchasing)
o Information technology synergy
o Better and faster decision making
o New forms of organisation
o Expanded supply chain
I N F O R M A T I O N K E Y
Portal a site through consumers access the web, perform searches, and have an opportunity to link directly to other sites
Aggregator. Bring together related sites or sites of interests to affiliated groups
E-retailers act as virtual storefronts
Informediaries. A host of facilitating intermediaries for internet security, customer relationship management,
financial services and delivery services.

Consumer Retailer Manufacturer
Wholesaler/
Distributor
a) The traditional value chain

Consumer Retailer Manufacturer
Wholesaler/
Distributor
b) Intermediaries Eliminated (Disintermediation)
Informediary e-Retailer Aggregator Portal Consumer Manufacturer
c) New intermediaries introduced (Reintermediation)
OPERATI ONS MANAGEMENT 7
o New ways of doing business
o Globalisation
In some instances large companies have used the internet to link their
databases in one exchange where they can share information with their
suppliers.

Kei r et su net w or k s
This is a J apanese term to describe a network of suppliers who have come
together as an alliance to trade with one large manufacturer.
The large manufacturer will support the activities of the keiretsu members in
form of loans or other facilitation roles.
In return the keiretsu members commit to agreed terms such adherence to
quality standards, technical expertise and guaranteed supplies.
Gl obal sour c i ng
Operations have increasingly tended towards buying their inputs from cheap
sources regardless of international boundaries.
This phenomena often referred to as global sourcing has been occasioned by:
o Formation of trading blocks among neighbouring countries with
corresponding lowering of tariff barriers among member states.
Examples of trading blocks are: COMESA, SADC, WTO, EU,
NAFTA, ASEAN, etc.
o Improved international transportation systems such as air travel, ports
and harbours, road and railway systems.
o Cheaper input costs such as labour in some countries, abundance of
raw materials, legal and taxation incentives, etc.
Physical Distribution Management
On the demand side of the operation, products and services need to be
delivered to the customer.
For manufacturing operations this will be transported to the customer while in
the service operations these will involve on-location creation of the service in
the presence of the customer.
Here, we shall focus on distribution of outputs that require physical
distribution management beyond the immediate customer through to final the
customer (logistics).
Characteristics of physical distribution are:
o Multi-echelon systems. Materials flowing through a system are stored
at different points, including points outside the operations, before
reaching the customer, e.g. at own warehouse, at regional warehouses
OPERATI ONS MANAGEMENT 8
and even at retail stores. The purpose of this type of buffering is to
provide an intermediate stage in the distribution system to cushion the
manufacturer from dealing with every single customer on the one part
and to avoid the customer from dealing with a plethora of suppliers on
the other.
o Focused and simplified accessibility of supplies and information. By
channelling outputs through distribution points or warehouses a
manufacturer saves on routing of their products (a few central
distributions placed strategically as opposed to door to door delivery)
and also brings them closer to the customer.
o Backloading challenges. This involves finding a potential customer
who wants their goods transported when conveyance vehicles are
returning while empty to their loading distribution bases after making
deliveries.
o Order fulfilment challenges. This is more pronounced where orders
are received over the internet especially from individual consumer.
Accumulating orders from different consumers to reach an
economically deliverable batch or quantity is a nightmare to
distributors or shippers especially when an operation is used to
supplying in bulk to large single consumers or wholesalers. This may
further be complicated when the consumers order different products
and are scattered over a wide geographical location.

Mat er i al s Management
Materials management was previously seen as a means of reducing total costs
associated with the acquisition and management of materials
2
.
This has now changed to encompass the integration of material flows and its
supporting functions, both throughout the business and out to immediate
customers. It includes the functions of purchasing, expediting, inventory
management, production planning and control and physical distribution
management.
In retail operations where sales cycles are short and the replenishment rate is
high (FMCG), the roles of purchasing, physical distribution and sales maybe
combined into one (a role commonly referred to as merchandising) to ensure
that the right levels of goods are available for sale to customers at any time.
Merchandising may be facilitated by use of PoS systems which update stock
levels automatically as they are sold and trigger purchase orders when control
levels are reached. Goods specifications and supplier details among others are
identified in a PoS system by bar codes inscribed on the face of their
packages.


2
Lee, L. and Dobler, D.W. (1977) Purchasing and Materials Management, McGraw-Hill.
OPERATI ONS MANAGEMENT 9
Group Discussion
What do you understand by the terms logistics, merchandising, materials management
and supply chain management?
Types of Relationships in Supply Chains
Within individual operations it is important to manage the relationships
between an operation and its immediate suppliers and customers. The
relations may be in the form of business to business (B2B) or in the form of
business to consumer (B2C) or the reverse of this, i.e. (C2B).
Types of supply chain relationships are vertical integration relationships,
traditional market supply relationships, virtual operations, partnership supply
relationships and exchange relationships.

Ver t i c al i nt egr at i on r el at i onshi ps
These involve shorter term decisions of make-or-buy (manufacturing) or
do-or-buy (services) decisions.
Major issues to consider here are quality, costs and speed apart from the issue
of core competency (i.e. concentrate on what is core to its operation and will
win it business in the market and outsource those that are not core to it).
As for costs, the operation will make a decision based on the marginal cost
3
it
will incur in doing or making the service or product in-house. If the third
party cost is less than what the operation will spend were it to do it or make it
in-house, then the sensible thing would be to outsource.

Group Discussion
A company is considering buying in leaflets to be included with the packaging of its
products. Its own in-house printing department could produce the leaflets but not at the
same level of quality which a specialist printer could supply. Nevertheless, the in-house
printing department is keen to be given the job of printing the leaflets. The cost of
printing the leaflets in-house is MK 10 per 1,000 leaflets. This cost includes the cost of
the paper and inks (MK 7), the cost of the energy used by the printing machines (MK
0.50) and a standard overhead charge calculated according to the time the job would take
(MK 2.50). The in-house printing department has sufficient capacity to print all the
leaflets which will be required without any extra staff or machines. The companys
purchasing department has several quotations from local printers, the cheapest of which

3
The extra or additional cost, i.e. the difference between its in-house cost and that of the external
supplier.
OPERATI ONS MANAGEMENT 10
is MK 8.50 per 1,000 leaflets, although the printer made it clear that delivery times would
be at least two weeks for each order because they have so much other business currently.
How would you advise the company if it asked you whether it should buy in the leaflets
or allow its own in-house printing unit to do the job?

Tr adi t i onal mar k et suppl y r el at i onshi ps
In its pure form or free market, this involves buying from a new supplier
every time an input is needed by seeking the best quotation from competing
suppliers. Once goods are received and payment is made, there may be no
further trading between the two parties.
Advantages of this relationships are:
o Maintains competition between suppliers and a constant drive to
provide the best.
o Allows the supplier to specialise and attain economies of scale thereby
reducing costs.
o Flexibility is enhanced as the operation can change the number of
suppliers as demand for goods or services changes.
o Innovation can be exploited wherever it occurs amongst the host of
supplier.
o Operations can concentrate on their core services.
Disadvantage attached to this relationship are:
o Supply uncertainties as an operations waits for its order to be fulfilled.
o Time and effort involved in the sourcing and selecting suppliers.
o Erosion of confidentiality, especially where subcontracting or
outsourcing is involved.

Vi r t ual oper at i ons
This involves bringing together a conglomerate of different specialists to work
on an assignment or project and then disband thereafter once the project is
completed.
The lead operation plays the role of broker and depends on its skills and
contacts to manage, organise and supervise the concerned project or
assignment.
Examples of such operations are movie production projects or strategic
alliances in professional organisations.

Par t ner shi p suppl y r el at i onshi ps
These relationships are defined as relatively enduring inter-firm
cooperative agreements, involving flows and linkages that use resources
OPERATI ONS MANAGEMENT 11
and/or governance structures from autonomous organisations, for the joint
accomplishment of individual goals linked to the corporate mission of each
sponsoring firm
4

The aim of the relationship is to establish close cooperation, even to the extent
of sharing skills and resources, to achieve joint benefits beyond those they
could have achieved by acting alone.
The degree of closeness in such partnerships is influenced by such factors as:
o Sharing success. Both parties strive to increase the total amount of
joint benefit they receive rather that concentrating on maximizing
individual personal gains.
o Long term expectations and commitment.
o Multiple points or channels of contact. Communication may transcend
formal channels and involves many individuals and organisations.
o Joint learning. Sharing of experience and perceptions with each
others operations.
o Few relationships. Commitment to limit the number of customers or
suppliers with whom they do business.
o Joint coordination of activities. Ease of coordination of material and
service flows, payment, etc due to the limited number of players.
o Information transparency. An open exchange of information between
the parties which in turn enhances confidence and reliability.
o Joint problem solving.
o Trust. A willingness of both parties to relate to each other on the
understanding that the relationship will be beneficial to both, even
though this may not be guaranteed.
Examples of these relationships are joint ventures like in the automobile and
aircraft manufacture.
The operations exchange
5
between them design specification, medium/long
term plans, goods and services as well as knowledge and investment.

Group Discussion
How is vertical integration different from partnership purchasing?


4
Parke, A. (1993) Strategic Alliance Structuring, Academy of Management Journal, Vol. 36, pp
794-829.
5
Exchanges are flows between operations of transformed resources such as material or
transforming resources such as people or equipment.
OPERATI ONS MANAGEMENT 12
Supply Chain Behaviour
Suppl y c hai n pol i c y
Faced with a dual market demand for different (competing) and at times
complimentary products emanating from the same operations, a manufacturer
will need to decide how to manage the flow of the two in its supply network.
One product may involve innovative products while the other stable and long
term products. For example car models are innovative and their sale may last
for a short time while their spares may be required over a longer time span.
How to deal with these two conflicting demands will obviously require
different approaches.
A suggestion
6
is to organise the supply chains serving those individual
markets differently using the efficient supply chain policy for the functional
and stable product (spares) and the responsive supply chain policy for the
innovative product (new car model).
The ESC policy will attempt to maintain low inventory levels in the
downstream parts of the network so as to maintain fast throughputs and reduce
the amount of working capital tied up in inventory. At the upstream end of the
market, the inventory levels may be high to ensure high capacity utilization
and hence lower manufacturing unit costs. Information flow up and down the
network is critical to ensure quick response in restocking the few stocks
maintained downstream.
The RSC policy on the other hand stresses on high service levels and
responsive supply to the end consumer. Inventory levels will therefore be high
at the downstream end of the network and a quick response to demand change
will be required at the upstream end of the market to ensure supplies are
maintained. However, the upstream end will need to hold fewer inventories
due to the temporary nature of demand for such innovative products. This will
mean low capacity utilization and hence high unit manufacturing costs.

Suppl y c hai n dynami c s
Errors, inaccuracies and volatility may cause distortions in supply networks
causing a build up of inventories by different operations within the network.
The distortions may also be caused by individual operations within the
network trying to manage their flows sensibly.
This effect is known as the Forrestor (or Bullwhip) Effect.

Suppl y c hai n i mpr ovement
Distortions such as the above may be avoided by the sharing of information
among operators in the network, channel alignments and increasing
operational efficiencies.

6
Fisher, M. L. (1997) What is the Right Supply Chain for Your Product, March-April