GLOBAL OPERATIONS MANAGEMENT

Operations management is an area of business

concerned with the production of goods and services, and involves the responsibility of
ensuring that business operations are efficient in terms of using as little resource as
needed, and effective in terms of meeting customer requirements. It is concerned with
managing the process that converts inputs (in the forms of materials, labor and energy)
into outputs (in the form of goods and services).

Operations traditionally refer to the production of goods and services separately, although
the distinction between these two main types of operations is increasingly difficult to
make as manufacturers tend to merge product and service offerings. More generally,
Operations Management aims to increase the content of value-added activities in any
given process. Fundamentally, these value-adding creative activities should be aligned
with market opportunity for optimal enterprise performance.

According to the U.S. Department of Education, Operations Management is the field

concerned with managing and directing the physical and/or technical functions of a firm
or organization, particularly those relating to development, production, and
manufacturing. Operations Management programs typically include instruction in
principles of general management, manufacturing and production systems, plant
management, equipment maintenance management, production control, industrial labor
relations and skilled trades supervision, strategic manufacturing policy, systems analysis,
productivity analysis and cost control, and materials planning
Origins
The origins of operations management can be traced back through cultural changes of the
18th, 19th, and 20th centuries, including the Industrial Revolution, the development of
interchangeable manufacture, the Waltham-Lowell system, the American system of
manufacturing, scientific management , the development of assembly line practice and
mass production, and the Toyota Production System. Combined, these ideas allowed for
the standardization and continuous improvement of production processes. Key features of
these early production systems were the departure from skilled craftsmen to a more
thorough division of labor and the transfer of knowledge from within the minds of
skilled, experienced workers into the equipment, documentation, and systems.

There are scores of people who can be viewed as thought leaders whose life's work laid
the foundations for operations management (only some of which have name recognition
among the general population). A very cursory list would include (in approximate
chronological order) Adam Smith, Jean-Baptiste Vaquette de Gribeauval, Louis de
Tousard, Honoré Blanc, Eli Whitney, John H. Hall, Simeon North, Frederick Winslow
Taylor, Henry Gantt, Henry Ford, Sakichi Toyoda, Alfred Sloan, Frank and Lillian
Gilbreth, Tex Thornton and his Whiz Kids team, and W. Edwards Deming and the
developers of the Toyota Production System (Taiichi Ohno, Shigeo Shingo, Eiji Toyoda,
Kiichiro Toyoda, and others).

Whereas some influences place primary importance on the equipment and too often
viewed people as recalcitrant impediments to systems (e.g., Taylor and Ford), over time
the need to view production operations as socio-technical systems, duly considering both
humans and machines, was increasingly appreciated and addressed.

Operations research as a sub discipline gained prominence during World War II, when
mathematicians applied analytical tools to optimize operational questions, initially with a
military context, and later also within general operations.

Historically, the body of knowledge stemming from industrial engineering formed the
basis of the first MBA programs, and is central to operations management as used across
diverse business sectors, industry, consulting and non-profit organizations.
DIRECTION OF THE FLOW

Figure 1. The direction of flow for operations management

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FLOW MANAGEMENT

FACTORS AFFECTING FLOW MANAGEMENT ARE:

• MARKET-It change under the influence of several factors

• Competition

• Technology-it change logistics in the form of manufacturing innovations , e.g. ,

barcodes

• Governmental regulations
BASIC PRINCIPLES OF GLOBAL
OPERATIONS AND LOGISTICS:
1. GEOGRAPHICAL INTEGRATION- Geographical integration aims at using the
comparative advantages of space, namely to insure a better access to markets,
labor, parts and resources. A spatial complementarity is established through a set of
origin / destination relationships between the actors of a commodity chain (S, M
and D). Economies are achieved through the principle of location where each actor
seeks to find cost and/or income effective locations. Thus, in a conventional
situation production systems tended to have a regionally oriented location of its
components (1) and finished goods could be exported. With geographical
integration, spatially fragmented commodity chains can emerge, where each
element can undertake a locational choice to maximize efficiency (implying the use
of locations 2, 3 and 4). The function of distribution may also be expanded to cope
with this geographical specialization, with the complexity of physical flows, namely
in terms of a growth in tons-km.

2. SECTORIAL INTEGRATION- In traditional supply chains, vendors, manufacturers,

retailers and customers independently optimise their own logistics and
operations. As a result, they inadvertently create problems and inefficiencies
for other players in the stream – all of which adds to the cost of the whole
system in the final analysis. Directions for co-operation have been defined by
both producers and retailers to implement solutions pulled by the demand of
customers more than pushed by supply of products. In the sector of fast-
moving consumer goods, ECR (Efficient Consumer Response) projects are
an initial attempt to cross the co-operation boundary in we have called
sectorial integration.
Another key actor in sectorial integration is ‘third-party logistics’ (3PL), which
supports and stimulates co-operation between producers and retailers in all
industries. The 3PL industry is undergoing a plethora of alliances, mergers
and acquisitions among the traditional carriers: post offices such as the
Deutsche Post and the Royal Dutch Post, and integrators such as Fedex,
UPS or DHL, in order to provide the right solution to producers and retailers

a. FUNCTIONAL INTEGRATION- Functional integration aims at linking more efficiently

elements of the supply chain, namely to insure that the needs of the customers are
closely met by the suppliers in terms of costs, availability and time. A functional
complementarity is established through a set of supply / demand relationships
involving physical flows between parts and raw material suppliers (S),
manufacturers (M) and distributors (D). Efficiencies, and thus economies, are
achieved through the principle of flow. In this flow-based system, demand is
 synchronized more closely with supply, imposing a reorganization of freight
distribution. This causes a paradigm shift in logistics, where freight distribution
evolves from inventory-based logistics (�push� logistics) to replenishment-based
logistics (�pull� logistics).

DYNAMIC FORCES OF LOGISTICS:

RESOURCE-ORIENTED LOGISTICS-It is the management of the different resources
( capital , material and people)required in manufacturing of goods to be
delivered to the final customer. Resource –oriented logistics focuses on the
relationship between the functional and geographical dimensions. By looking at
the world as a supply of resources and a market for customers, we can see how
the functional dimension can benefit from geographical dimension. Companies
with a strong marketing emphasis need to balance marketing expenditures with
tight control over manufacturing costs .Therefore, they may elect to search in
different geographical locations for the manufacturing sites that minimizes labor
costs. Or they may want to centralize manufacturing in one location to obtain
economies of scale.

The emphasis of the logistics, then. Is oriented towards optimizing the use of
resources. By the same token ,the market for product is becoming independent
of the geographical boundaries. If the market is the world, the company must
coordinate the resources of its different functional areas to satisfy the global
needs.

INFORMATION-ORIENTED LOGISTICS-this logistics concerns the management of

information as a source of competitive advantage. More than the flow of the
products, the logistics system is directly involved with the flow of
information(e.g., availability of products ,time to deliver, customer needs etc).
Companies that segments their customers into many markets and/or offer a
great variety of options to their products are interested in changes in customer
tastes and/or technology developments. Information-oriented logistics, then, is
related to relationship between the sectorial dime and the geographical
dimension. Logistic parteners,for example, offer the possibility of accessing
information in areas not traditionally within the purview of the
company.Suppliers may provide information on latest developments for a
component,while the transportation company allows access to new
markets(e.g., mail order).Involvement in the geographical dimension is the is
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the source of information for the changes that may be occurring in a different
environment.

USER-ORIENTED LOGISTICES-It focuses on final customer.supply chain parteners

can collectively analyse the existing logistic system,identify its bottlenecks
,redundancies and, so on, and can collectively improve that.the main objective is
not only to win new customers ,but to maintain the existing ones.By maintaining
user-oriented approach,the logistic system gain flexibility in responding to the
needs of the customers.

All the three approaches attempt to rationalize resources in order to maximize

profitability.
Understanding Customers
Discover How Your Customer Cycle Works

These are the main reasons every business will lose customers over time.

CUSTOMER LOSS CYCLE

You must replenish customers from the top of your funnel just to stay consistent or to
increase your custom base and turnover.

This means winning new business and is essential if you are going to thrive and beat the
competition. An important way to do this is to ensure your advertising is right and exact.

To succeed you must appeal to your whole audience Customer Cycle

This falls into two categories.These are the main ways to attract new business. The use
of effective adverts and websites can play a huge role in winning new business from all
of these avenues.
Category 1 Your Known Customer Group

These customers fall into the category of those who know you exist.

But what about the customers who don't know you? They ARE looking to part with
money for a service / product you offer. They make up a whopping (approx) 50% of your
target audience, therefore potential increased revenue for your business. How can they
find you? Not everyone knows you exist; it's a false perception to think that way, we have
already established an un-effective ad won't catch the attention of these customers or get
you ahead. You have a good location. But what about the customers who don't shop
locally or who don't pass by your premises? What about the commuters who are out of
town when you are open and who shop and enjoy their time elsewhere? What if you work
from home? These potential customers are spending their hard cash on a service or
product supplied by your competition because they don't know that you exist. By
targeting this group in the right way you can win new business.
Category 2 Your Un-Known Customer Group

Appealing to both types of customer is necessary for your business growth and
success.

Customer Profiling: Methods to Understanding Your Customers

Why understanding customers is critical to your business

Understanding your customers helps you provide better service and identify your target
group of customers. Failing to identify the target group makes it difficult to promote your
products.

Therefore, it is necessary to find out what kind of customers will actually be interested in
the services or products you have to offer.

Ways to Understand Customers

Affinity Profiling

Through this method, you study the buying habits of people in order to determine what
kinds of products a particular customer requires. Thus, if you come across someone who
buys lots of books, literature, and stationery, there is a good chance that they are in the
teaching business and perhaps may be interested in buying more educational products.

Demographic Profiling

Business experts emphasize using a demographic profile to understand what kind of

products click with a particular customer. Through demographic profiling, you can look
into various details such as geographical location, marital status, and educational
qualifications of a person to figure it what you can sell to them.

For instance, a man who has children and an impressive salary may be more interested in
buying an overseas vacation package than a single man who is barely able to manage his
daily expenses.

Psychological Profiling

Psychological profiling can be used to tell a lot about a person by understanding their
psychological motivations. For example, when you see a person driving a BMW and
wearing designer clothes, it’s easy to guess that they love status symbols. Obviously, if
you are selling an Armani watch, they would be a person who would want to buy it.

Lifestyle Coding

Lifestyle coding helps you to understand the way a person leads their life by looking at
their hobbies and habits. For instance, if you come across a person who loves racing, they
are also likely to be interested in vintage cars and stylish car accessories.

Cluster Coding

Class and social activities are closely linked, and a person who earns a very good salary
and works for a multinational company is likely to be interested in formal clothes, laptop
computers, PDAs and cell phones. Cluster coding helps you to understand what class a
person belongs to and how it affects their lifestyle and preferences.

No matter what kind of business you are in, understanding your customers’ needs can
help you to serve them better. Know what they expect from you so you don’t disappoint
them with your product offerings.
WHY SOME ORGANISATIONS FAIL?
 Putting too much emphasis on short-term financial performance at the
expense of research and development.

 Failing to take advantage of strengths and opportunities, and/or failing to

recognize competitive threats.

 Neglecting operations strategy.

 Placing too much emphasis on product and service design and not enough
on process design and improvement.

 Neglecting investments in capital and human resources.

 Failing to establish good internal communications and cooperation among

different functional areas.

 Failing to consider customer wants and needs.

PLANNING AND DECISION-MAKING
10 Strategic Operations Management
Critical Decisions
Product differentiation, high quality, low cost, on time delivery and flexibility can only
be achieved when operations managers make effective decision in ten areas of operation
management..

1. One of strategic operation management critical decisions is product and design

decision. Design products and services affect much of the transformation process. They
determine the costs of operations as well the quality of products and services. An
organization has to develop product design strategies in line with market changes as the product
life cycle so as to sustain market share in the industry.

2. Next is location selection decision. Depending on the nature of the business, location
selection is crucial for the organization success. The decision influences costs such as
transportation cost, logistic cost and rent as well as human resource in the area.

3. Process and layout design is also a critical decision has to be made. Selecting the right
processes and making decisions on appropriate process and layouts strategies affect
management decisions to use specific technology, types of processes with suitable layouts, to
procure resources and also develop maintenance strategies.

4. An organization has to make the right decision on capacity needs, manpower

requirements, purchasing decisions, and inventory need requirements; all these affect the
processes and layout decisions because processes and materials must be located in relations to
each other.

5. Besides that, aggregate planning decisions are required on forecast demand,

production or capacity strategies and demand strategies or maintain level production strategies
so as to meet the market demands.

6. In addition, an organization has to develop feasible and efficient production schedule;

the demand on human resources and facilities must be determined and controlled. Making the
right scheduling decisions enable jobs or products or services to be delivered to customers on
time and within datelines.

7. People are integral part of total work system. Proper division of jobs, work
methods and work measurements must be decided by the organization to ensure the
quality of work life, motivation of workers, the skills required for specific jobs, standard
operating procedures and standard time for a job and also the relative costs for the jobs such as
wages and incentives.

8. Right decision has to be made on quality strategies so as to remain customer focus,

 develop quality policies and quality objectives, and to establish quality process strategies and a
quality management system that yield excellent quality products, processes and services.

9. Inventory decisions can be optimized only when customer orders, production schedules
and human resource planning are considered. An organization has to plan for its inventory
management system for its finished products, as well as its raw materials and work in progress.

10. The manager also has to make decisions whether to carry out preventive maintenance
or breakdown maintenance as it incurs maintenance costs. To do this, an organization has to
decide on its desired levels of reliability, stability and maintenance costs.

Basically, these ten strategic operations management critical decisions are crucial to determine
the organization success in order to fulfill organization's goals and missions. Only by making
proper and appropriate decisions; and review those on timely basis to ensure the decisions are
feasible for the current condition, the organization able to pass all problems and hassles in the
future.

TRADITIONAL VERSUS NEW SUPPLIER

PARTNERSHIP:
TRADITIONAL APPROACH

 Primary emphasis on price

 Short-term contracts
 Evaluations by bids
 Many suppliers
 Improved benefits shared based on relative power
 improvements at discrete time intervals
 Problems are suppliers responsibility to correct
 Information is proprietory

SUPPLIER PARTENERSHIP

 Multiple criteria
 Long -term contracts
 Intensive and extensive evaluation
 Fewer selected suppliers
 Improvement benefits are shared more equitably
 Continuous improvement is sought
  Problems jointly solved
 Information is shared

Top Five Strategic Reasons For

Outsourcing 
Improve Business Focus
Outsourcing allows companies to focus on broader business issues while having
operational details assumed by an outside expert. For many companies, the
single most compelling reason for outsourcing is that several of the how type
issues are siphoning off huge amounts of resources and attention from
management.

Gain Access To World Class Capabilities

By the very nature of their specialisaton, outsourcing providers bring extensive
world- class resources to meeting the needs of their customers. Partnering with
an organization with world-class capabilities can offer access to new technology,
tools and techniques that the organization may not currently possess; more
structured methodologies, procedures and documentation; and a competitive
advantage through expanded skills.

Accelerate Reengineering Benefits

Outsourcing is often a by-product of another powerful management tool;
business process reengineering. It allows an organization to immediately realize
the anticipated benefits of reengineering by having an outside organization one
that is already reengineered to world-class standards/process

Share Risks
There are tremendous risks associated with the investments an organization
makes in information technology. When companies outsource they become more
flexible, more dynamic and better able to change themselves to meet changing
opportunities.

Redirect IS Resources To More Strategic Activities

Every organization has limits on the resources available to it. Outsourcing
permits the redirection of resources from non-core activities toward activities that
provide a greater return in serving the customer.

Top Five Tactical Reason For

Outsourcing
One Time Applications
Applications that need to be developed or modified for a specified time require
high manpower resources at one point of time. For this the organizations need to
ramp up/ ramp down in a relatively short notice. This in-turn is expensive. For this
outsourcing is the best solutions. For eg. Y2k, Euro, porting from one-platform to
another etc.

Reduce Or Control Operating Cost

The single most important tactical reason for outsourcing is to reduce or control
operating costs. Access to an outside provider's lower cost structure is one of the
most compelling short-term benefits of outsourcing.

Make Capital Funds Available

Outsourcing reduces the need to invest capital funds in non-core business
functions. This makes capital funds more available for core areas. Outsourcing
can also improve certain financial measurements by eliminating the need to show
return on equity from capital investments in non-core areas.

Generate A Cash Infusion

Outsourcing can involve the transfer of assets from the customer to the provider.
Equipment, facilities, vehicles and licenses used in current operations all have a
value and are, in effect, sold to the provider as part of the transaction, resulting in
a cash infusion
 Secure Resources Not Available Internally
Companies outsource because they do not have access to the required
resources within the organization. For example, if an organization is expanding
its operations, especially into a new geography, outsourcing is a viable and
important alternative to building the needed capability from the ground up.

CRITERIA FOR CONSIDERING

COMPONENT TO BE OUTSOURCED

 Which products/components should be outsourced?

 What criteria should be used for supplier selection?
 How might these factors change across the life of the main product?
EXAMPLE: CRITERIA USED BY BOSE

CORPORATION
Bose Corporation is a privately held, American company, based
in Framingham, Massachusetts, that specializes in audio equipment.[2] Founded in 1964
by Amar G. Bose, the company operates 5 plants, 151 retail stores (as of October 20,
2006) and an automotive subsidiary at Stow, Massachusetts. With respect to sales in the
U.S. for home audio retail and portable audio retail sales, Bose was ranked third for the
period of November 2008 to April 2009.[3] Bose is known for the 901 speaker series.
Bose Corporation develops and manufactures audio devices (including speakers, amplifiers,
headphones, automotive sound systems [4] for luxury cars), [5][6] automotive suspension systems,
and performs some general research (such as debunking cold fusion.)[7][8][9] The company was
founded in 1964 by Amar G. Bose, a professor of electrical engineering (who retired in 2005) at
the Massachusetts Institute of Technology. Bose has contracts with the U.S. military (Navy, [10] Air
Force[11] & Army[12]) and NASA.[13] Amar Bose is still the Chairman and primary stockholder, and
also holds the title of Technical Director.

CRITERIA:
 A mature, trusting relationship exists with the best supplier in the category

 The supplier has a good engineering capability.

 The volume in the product category exceeds $1 million

 The product category involves many transactions, creating a need for an in-plant
representative

 The product category involves many transactions, creating a need for an in-plant
representative

 The category does not involve proprietary or core technologies

The Bullwhip Effect

An unmanaged supply chain is not inherently stable. Demand variability

increases as one moves up the supply chain away from the retail customer, and
small changes in consumer demand can result in large variations in orders
placed upstream. Eventually, the network can oscillate in very large swings as
each organization in the supply chain seeks to solve the problem from its own
perspective. This phenomenon is known as the bullwhip effect and has been
observed across most industries, resulting in increased cost and poorer service.

Causes of the Bullwhip Effect

Sources of variability can be demand variability, quality problems, strikes, plant

fires, etc. Variability coupled with time delays in the transmission of information
up the supply chain and time delays in manufacturing and shipping goods down
the supply chain create the bullwhip effect. The following all can contribute to the
bullwhip effect:

 Overreaction to backlogs

 Neglecting to order in an attempt to reduce inventory

 No communication up and down the supply chain

 No coordination up and down the supply chain

 Delay times for information and material flow

 Order batching - larger orders result in more variance. Order batching

occurs in an effort to reduce ordering costs, to take advantage of
transportation economics such as full truck load economies, and to benefit
from sales incentives. Promotions often result in forward buying to benefit
more from the lower prices.

 Shortage gaming: customers order more than they need during a period of
short supply, hoping that the partial shipments they receive will be
sufficient.

 Demand forecast inaccuracies: everybody in the chain adds a certain

percentage to the demand estimates. The result is no visibility of true
customer demand.
 Free return policies

Countermeasures to the Bullwhip Effect

While the bullwhip effect is a common problem, many leading companies

have been able to apply countermeasures to overcome it. Here are some of
these solutions:

 Countermeasures to order batching - High order cost is countered with

Electronic Data Interchange (EDI) and computer aided ordering (CAO).
Full truck load economics are countered with third-party logistics and
assorted truckloads. Random or correlated ordering is countered with
regular delivery appointments. More frequent ordering results in smaller
orders and smaller variance. However, when an entity orders more often,
it will not see a reduction in its own demand variance - the reduction is
seen by the upstream entities. Also, when an entity orders more
frequently, its required safety stock may increase or decrease; see the
standard loss function in the Inventory Management section.

 Countermeasures to shortage gaming - Proportional rationing schemes

are countered by allocating units based on past sales. Ignorance of supply
chain conditions can be addressed by sharing capacity and supply
information. Unrestricted ordering capability can be addressed by reducing
the order size flexibility and implementing capacity reservations. For
example, one can reserve a fixed quantity for a given year and specify the
quantity of each order shortly before it is needed, as long as the sum of
the order quantities equals to the reserved quantity.

 Countermeasures to fluctuating prices - High-low pricing can be

replaced with every day low prices (EDLP). Special purchase contracts
can be implemented in order to specify ordering at regular intervals to
better synchronize delivery and purchase.

 Countermeasures to demand forecast inaccuracies - Lack of demand

visibility can be addressed by providing access to point of sale (POS)
data. Single control of replenishment or Vendor Managed Inventory (VMI)
can overcome exaggerated demand forecasts. Long lead times should be
reduced where economically advantageous.

 Free return policies are not addressed easily. Often, such policies simply
must be prohibited or limited.
THE DYANAMIC EVOLUTION WITH
PRODUCT LIFE CYCLE

The stages

A Typical Product Life Cycle

Products tend to go through five stages:

1. New product development stage

o very expensive
o no sales revenue
o losses
2. Market introduction stage
o cost high
o sales volume low
o losses
3. Growth stage
 o costs reduced due to economies of scale
o sales volume increases significantly
o profitability
4. Mature stage
o costs are very low
o sales volume peaks
o prices tend to drop due to the proliferation of competing products
o very profitable
5. Decline stage
o sales decline
o prices drop
o profits decline

Management of the cycle

The progession of a product through these stages is by no means certain. Some products
seem to stay in the mature stage forever (e.g., milk). Marketers have various techniques
designed to prevent the process of falling into the decline stage. In most cases however,
one can estimate the life expectancy of a product category.

Marketers' marketing mix strategies change as their products goes through their life
cycles. Advertising, for example, should be informative in the introduction stage,
persuasive in the growth and maturity stages, and be reminder-oriented in the decline
stage. Promotional budgets tend to be highest in the early stages, and gradually taper off
as the product matures and declines. Pricing, distribution, and product characteristics also
tend to change.

Customers respond to new products in different ways. Diffusion of innovations theory,

pioneered by Everett Rogers, and other diffusion models posits that people have different
levels of readiness for adopting new innovations and that the characteristics of a product
affect overall adoption.

Market evolution

Market Evolution is a process that parallels the product life cycle. As a product category
matures, the industry goes through stages that mirror the five stages of a product life
cycle:

1. Market Crystalization - latent demand for a product category is awakened with

the introduction of the new product
2. Market Expansion - additional companies enter the market and more consumers
become aware of the product category
3. Market Fragmentaion - the industry is subdivided into numerous well populated
competitive groupings as too many firms enter
 4. Market Consolidation - firms start to leave the industry due to stiff competition,
falling prices, and falling profits
5. Market Termination - consumers no longer demand the product and companies
stop producing it

Like human beings, products also have their own life-cycle. From birth to death human
beings pass through various stages e.g. birth, growth, maturity, decline and death. A similar
life-cycle is seen in the case of products. The product life cycle goes through multiple phases,
involves many professional disciplines, and requires many skills, tools and processes.
Product life cycle (PLC) has to do with the life of a product in the market with respect to
business/commercial costs and sales measures. To say that a product has a life cycle is to
assert four things:

 that products have a limited life,

 product sales pass through distinct stages, each posing different challenges,
opportunities, and problems to the seller,
 profits rise and fall at different stages of product life cycle, and
 products require different marketing, financial, manufacturing, purchasing, and
human resource strategies in each life cycle stage.
 The four main stages of a product's life cycle and the accompanying characteristics are:

Stage Characteristics
1. Market 1. costs are high
introduction stage 2. slow sales volumes to start
3. little or no competition
4. demand has to be created
5. customers have to be prompted to try the product
6. makes no money at this stage

2. Growth stage 1. costs reduced due to economies of scale

2. sales volume increases significantly
3. profitability begins to rise
4. public awareness increases
5. competition begins to increase with a few new players in
establishing market
6. increased competition leads to price decreases

3. Maturity stage 1. costs are lowered as a result of production volumes increasing

and experience curve effects
2. sales volume peaks and market saturation is reached
3. increase in competitors entering the market
4. prices tend to drop due to the proliferation of competing
products
5. brand differentiation and feature diversification is emphasized
to maintain or increase market share
6. Industrial profits go down

4. Saturation and 1. costs become counter-optimal

decline stage 2. sales volume decline or stabilize
3. prices, profitability diminish
4. profit becomes more a challenge of production/distribution
efficiency than increased sales
Risk Management

Risk management is the identification, assessment, and prioritization of risks (defined in

ISO 31000 as the effect of uncertainty on objectives, whether positive or negative)
followed by coordinated and economical application of resources to minimize, monitor,
and control the probability and/or impact of unfortunate events[1] or to maximize the
realization of opportunities. Risks can come from uncertainty in financial markets,
project failures, legal liabilities, credit risk, accidents, natural causes and disasters as well
as deliberate attacks from an adversary. Several risk management standards have been
developed including the Project Management Institute, the National Institute of Science
and Technology, actuarial societies, and ISO standards.[2][3] Methods, definitions and
goals vary widely according to whether the risk management method is in the context of
project management, security, engineering, industrial processes, financial portfolios,
actuarial assessments, or public health and safety.

The strategies to manage risk include transferring the risk to another party, avoiding the
risk, reducing the negative effect of the risk, and accepting some or all of the
consequences of a particular risk.

Certain aspects of many of the risk management standards have come under criticism for
having no measurable improvement on risk even though the confidence in estimates and
decisions increase.[1]

Principles of risk management

The International Organization for Standardization (ISO) identifies the following

principles of risk management:[4]

Risk management should:

 create value
  be an integral part of organizational processes
 be part of decision making
 explicitly address uncertainty
 be systematic and structured
 be based on the best available information
 be tailored
 take into account human factors
 be transparent and inclusive
 be dynamic, iterative and responsive to change
 be capable of continual improvement and enhancement

Exchange Rate Exposure

Exchange rate exposure describes the influence of exchange rate movements on the
value of a firm or sector of the economy. Exposure is typically measured as the
correlation of firm or industry stock returns and exchange rate changes in the context of
a market model. Exposure appears to be most prevalent in firms that are small (these
are less likely to engage in hedging activities) or involved in international activities.
While studies have linked ex ante exchange rate risk with firm investment strategies, it
has proven difficult to identify the ex post consequences of exposure on firm or industry
behavior.

Degree of Exposure to Exchange rate:

 Source of firm’s inputs , including financing

 Location of the firm’s final markets

 Location of production

Strategies for Managing Exchange Rate Risk

Forward contracts- In finance, a forward contract or simply a forward is a non-

standardized contract between two parties to buy or sell an asset at a specified future time
at a price agreed today.[1] This is in contrast to a spot contract, which is an agreement to
buy or sell an asset today. It costs nothing to enter a forward contract. The party agreeing
to buy the underlying asset in the future assumes a long position, and the party agreeing
to sell the asset in the future assumes a short position. The price agreed upon is called the
delivery price, which is equal to the forward price at the time the contract is entered into.
The price of the underlying instrument, in whatever form, is paid before control of the
instrument changes. This is one of the many forms of buy/sell orders where the time of
trade is not the time where the securities themselves are exchanged.

The forward price of such a contract is commonly contrasted with the spot price, which is
the price at which the asset changes hands on the spot date. The difference between the
spot and the forward price is the forward premium or forward discount, generally
considered in the form of a profit, or loss, by the purchasing party.

Forwards, like other derivative securities, can be used to hedge risk (typically currency or
exchange rate risk), as a means of speculation, or to allow a party to take advantage of a
quality of the underlying instrument which is time-sensitive.

A closely related contract is a futures contract; they differ in certain respects. Forward
contracts are very similar to futures contracts, except they are not exchange-traded, or
defined on standardized assets.[2] Forwards also typically have no interim partial
settlements or "true-ups" in margin requirements like futures - such that the parties do not
exchange additional property securing the party at gain and the entire unrealized gain or
loss builds up while the contract is open. However, being traded OTC, forward contracts
specification can be customized and may include mark-to-market and daily margining.
Hence, a forward contract arrangement might call for the loss party to pledge collateral or
additional collateral to better secure the party at gain.

How a forward contract works

Suppose that Bob wants to buy a house a year from now. At the same time, suppose that
Andy currently owns a $100,000 house that he wishes to sell a year from now. Both
parties could enter into a forward contract with each other. Suppose that they both agree
on the sale price in one year's time of $104,000 (more below on why the sale price should
be this amount). Andy and Bob have entered into a forward contract. Bob, because he is
buying the underlying, is said to have entered a long forward contract. Conversely, Andy
will have the short forward contract.

At the end of one year, suppose that the current market valuation of Andy's house is
$110,000. Then, because Andy is obliged to sell to Bob for only $104,000, Bob will
make a profit of $6,000. To see why this is so, one needs only to recognize that Bob can
buy from Andy for $104,000 and immediately sell to the market for $110,000. Bob has
made the difference in profit. In contrast, Andy has made a potential loss of $6,000, and
an actual profit of $4,000.

The similar situation works among currency forwards, where one party opens a forward
contract to buy or sell a currency (ex. a contract to buy Canadian dollars) to expire/settle
at a future date, as they do not wish to be exposed to exchange rate/currency risk over a
period of time. As the exchange rate between U.S. dollars and Canadian dollars fluctuates
between the trade date and the earlier of the date at which the contract is closed or the
expiration date, one party gains and the counterparty loses as one currency strengthens
against the other. Sometimes, the buy forward is opened because the investor will
actually need Canadian dollars at a future date such as to pay a debt owed that is
denominated in Canadian dollars. Other times, the party opening a forward does so, not
because they need Canadian dollars nor because they are hedging currency risk, but
because they are speculating on the currency, expecting the exchange rate to move
favorably to generate a gain on closing the contract.

In a currency forward, the notional amounts of currencies are specified (ex: a contract to
buy $100 million Canadian dollars equivalent to, say $114.4 million USD at the current
rate—these two amounts are called the notional amount(s)). While the notional amount or
reference amount may be a large number, the cost or margin requirement to command or
open such a contract is considerably less than that amount, which refers to the leverage
created, which is typical in derivative contracts.

Future contracts - In finance, a futures contract is a standardized contract between two

parties to buy or sell a specified asset of standardized quantity and quality at a specified
future date at a price agreed today (the futures price). The contracts are traded on a
futures exchange. Futures contracts are not "direct" securities like stocks, bonds, rights or
warrants. They are still securities, however, though they are a type of derivative contract.
The party agreeing to buy the underlying asset in the future assumes a long position, and
the party agreeing to sell the asset in the future assumes a short position.

The price is determined by the instantaneous equilibrium between the forces of supply
and demand among competing buy and sell orders on the exchange at the time of the
purchase or sale of the contract.

In many cases, the underlying asset to a futures contract may not be traditional
"commodities" at all – that is, for financial futures, the underlying asset or item can be
currencies, securities or financial instruments and intangible assets or referenced items
such as stock indexes and interest rates.

The future date is called the delivery date or final settlement date. The official price of
the futures contract at the end of a day's trading session on the exchange is called the
settlement price for that day of business on the exchange[1].

A closely related contract is a forward contract; they differ in certain respects. Future
contracts are very similar to forward contracts, except they are exchange-traded and
defined on standardized assets.[2] Unlike forwards, futures typically have interim partial
settlements or "true-ups" in margin requirements. For typical forwards, the net gain or
loss accrued over the life of the contract is realized on the delivery date.
A futures contract gives the holder the obligation to make or take delivery under the
terms of the contract, whereas an option grants the buyer the right, but not the obligation,
to establish a position previously held by the seller of the option. In other words, the
owner of an options contract may exercise the contract, but both parties of a "futures
contract" must fulfill the contract on the settlement date. The seller delivers the
underlying asset to the buyer, or, if it is a cash-settled futures contract, then cash is
transferred from the futures trader who sustained a loss to the one who made a profit. To
exit the commitment prior to the settlement date, the holder of a futures position has to
offset his/her position by either selling a long position or buying back (covering) a short
position, effectively closing out the futures position and its contract obligations.

Futures contracts, or simply futures, (but not future or future contract) are exchange-
traded derivatives. The exchange's clearing house acts as counterparty on all contracts,
sets margin requirements, and crucially also provides a mechanism for settlement.

Who trades futures?

Futures traders are traditionally placed in one of two groups: hedgers, who have an
interest in the underlying asset (which could include an intangible such as an index or
interest rate) and are seeking to hedge out the risk of price changes; and speculators, who
seek to make a profit by predicting market moves and opening a derivative contract
related to the asset "on paper", while they have no practical use for or intent to actually
take or make delivery of the underlying asset. In other words, the investor is seeking
exposure to the asset in a long futures or the opposite effect via a short futures contract.

Hedgers typically include producers and consumers of a commodity or the owner of an

asset or assets subject to certain influences such as an interest rate.

For example, in traditional commodity markets, farmers often sell futures contracts for
the crops and livestock they produce to guarantee a certain price, making it easier for
them to plan. Similarly, livestock producers often purchase futures to cover their feed
costs, so that they can plan on a fixed cost for feed. In modern (financial) markets,
"producers" of interest rate swaps or equity derivative products will use financial futures
or equity index futures to reduce or remove the risk on the swap.

An example that has both hedge and speculative notions involves a mutual fund or
separately managed account whose investment objective is to track the performance of a
stock index such as the S&P 500 stock index. The Portfolio manager often "equitizes"
cash inflows in an easy and cost effective manner by investing in (opening long) S&P
500 stock index futures. This gains the portfolio exposure to the index which is consistent
with the fund or account investment objective without having to buy an appropriate
proportion of each of the individual 500 stocks just yet. This also preserves balanced
diversification, maintains a higher degree of the percent of assets invested in the market
and helps reduce tracking error in the performance of the fund/account. When it is
economically feasible (an efficient amount of shares of every individual position within
the fund or account can be purchased), the portfolio manager can close the contract and
make purchases of each individual stock.

The social utility of futures markets is considered to be mainly in the transfer of risk, and
increased liquidity between traders with different risk and time preferences, from a
hedger to a speculator, for example.

 Options -Options contracts are instruments that give the holder of the instrument the
right to buy or sell the underlying asset at a predetermined price. An option can be a 'call'
option or a 'put' option.

A call option gives the buyer, the right to buy the asset at a given price. This 'given price' is
called 'strike price'. It should be noted that while the holder of the call option has a right to
demand sale of asset from the seller, the seller has only the obligation and not the right. For
eg: if the buyer wants to buy the asset, the seller has to sell it. He does not have a right.

Similarly a 'put' option gives the buyer a right to sell the asset at the 'strike price' to the
buyer. Here the buyer has the right to sell and the seller has the obligation to buy.

So in any options contract, the right to exercise the option is vested with the buyer of the
contract. The seller of the contract has only the obligation and no right. As the seller of the
contract bears the obligation, he is paid a price called as 'premium'. Therefore the price that
is paid for buying an option contract is called as premium.

The buyer of a call option will not exercise his option (to buy) if, on expiry, the price of the
asset in the spot market is less than the strike price of the call. For eg: A bought a call at a
strike price of Rs 500. On expiry the price of the asset is Rs 450. A will not exercise his call.
Because he can buy the same asset from the market at Rs 450, rather than paying Rs 500 to
the seller of the option.

The buyer of a put option will not exercise his option (to sell) if, on expiry, the price of the
asset in the spot market is more than the strike price of the call. For eg: B bought a put at a
strike price of Rs 600. On expiry the price of the asset is Rs 619. A will not exercise his put
option. Because he can sell the same asset in the market at Rs 619, rather than giving it to
the seller of the put option for Rs 600.
UNCERTAINITIES IN GLOBAL SUPPLY
CHAIN
Global Supply Chains under Uncertainties/Risks
With the advent of Internet, IT, and trade liberalization, the firms evolved to be truly
global by adopting integrated management strategies, whereby a set of factories in
different countries are treated as a part of the same supply chain. This makes the supply
chain highly vulnerable to exogenous random events that create deviations, disruptions,
and disasters. Much writings in the recent past as white papers, thought leadership
papers, and case studies on supply chain risk management have emphasized that
redundancy and flexibility are preemptive strategies that can mitigate loses under
random events. But this is against the leanness principles of global supply chains and
increases the cost. It is required to tradeoff between the leanness under normal
environment and robustness under uncertain environments.

Following risk

                      – exchange rate fluctuations;

                       – macro-economic changes;
                       – transportation link failure;
                       – supply deviation;
                       – supplier bankruptcy;
                       – demand uncertainties;
                       – factory shutdowns.
INFORMATION MANGEMENT FOR
GLOBAL LOGISTICS
Physical flow of Information –An Important Logistics Management Tool

USES
 Forecast, Anticipate & Plan

 Operations traced in time

 Product location

 Control & Report

‡Trend to invest in:

 Data Processing

 Information system

 Telecommunication Resources to manage Physical flow

‡Customer satisfaction through:

 info about the physical distribution or supply operation

 ability to transmit that Information

REFERENCES-
 www.google.com
 Wikipedia
 www.qseach.com
 www.marketingguru.com