Summary of the Operations Management course, taught at Leiden University.
Contains at least the following topics:
customer value
inventory management
facility location planning
capacity management
outsourcing and procurement
risk mitigation strategies
Lecture 1
Operations management:
- Managing the process of production
- Ensuring efficient & effective business operations
- Using as few resources as needed
- Meeting customer requirement
Emerging trends in OM:
- Online product assortment
- Sharing economy
- Blockchain application in supply chain management
- Internet of Things in manufacturing: continuously and automatically
The five R’s of Supply Chain Management:
Right
product
Right Right
quantity place
Right Right
time price
The supply chain network (SCN) covers the entire
process from raw materials to eventually customers.
Everyone in the SCN has inventory costs, which take up
the majority of the operation costs.
A supply chain is only as strong as the weakest link in
the network. The suppliers have the lowest profit
margins.
Example of a cereal supply chain:
Operation strategy: all decisions you need to make within the departments.
,Challenges in Operations Management:
1. Identify the appropriate operations strategy: different products, channels and customers
require different types of supply chains and different product characteristics suggest
different strategies. The conflicting objectives: cost, time, and service levels.
2. Match supply and demand:
a. Dealing with supply issues
b. Dealing with demand issues: involves inventory costs
3. Inventory and backorder levels fluctuate considerably across the supply chain:
a. Back-orders often have small quantities → increased costs
b. Bullwhip effect: distribution channel phenomenon in which distorted information
from one end of a supply chain to the other leads to huge inefficiencies.
i. Causes:
i. Demand forecast updating
ii. Order batching
iii. Price fluctuation
iv. Rationing and shortage gaming
v. No communication between supply and demand because it may influence
the prices
ii. How to counteract:
i. Information sharing
ii. Break order batches
iii. Stabilize prices
iv. Eliminate gaming in shortage situations
v. Risk sharing
4. Forecasting is not a solution: forecasts are always wrong
5. Demand is not the only source of uncertainty: e.g., production capacity, transportation
times, component availability, natural disasters, regulation etc.
6. Recent trends on cost reduction increase risks significantly: lean manufacturing, outsourcing,
offshoring.
Key issues in OM:
- Customer value: what does the customer value? How do we measure it? How does it
influence the operations strategy?
- Distribution strategies: how much should a firm centralize or decentralize its distribution
system?
- Distribution network configuration
- Production sourcing: where to buy raw materials? Where to produce each component?
Where to assemble?
- Inventory control: at what point do you reorder new batches of the product?
- Supply contracts: how to supply contracts to optimize the entire supply chain performance?
- Supply chain integration and strategic partnering: what level of integration is needed? How
can integration be achieved successfully?
- Smart pricing: how to use pricing to influence demand and improve the bottom line.
Underlying all these foundations is technology → well-used technology keeps a firm ahead of the
curve.
Lecture 2
Customer value: the way customers perceive the company’s offerings, including products, services
and other intangibles. It requires learning why customers purchase, why they continue to purchase,
why they defect from a company and what their preferences and needs are and how they can be
satisfied.
, Value proposition: the value a company promises to deliver to customers should they choose to buy
their product.
The operations strategy that a company deploys must be driven by the value proposition that the
firm provides to its customers. Operations strategy should be different if the value proposition is
different (customers want something different).
Dimensions of customer value:
1. Product innovation speed: speed at which the innovation of a product changes.
a. Innovation speed for functional vs innovative products:
Functional Innovative
Product variety Low High
Product life cycle Long Short
Forecast accuracy High Low
Risk of obsolescence (supplier will discontinue your Low High
product)
Cost of lost sales Low High
2. Product selection and availability: how many products you have available.
a. Sales channel can be online or via brick and mortar retailer.
b. Omni channel: you have to use both physical and online channel.
c. Halo effect: physical retail helps online and vice versa.
d. Long tail phenomena: no matter how many products you have, around 20% of all
your products account for 80% of your sales.
Retail Online
Product variety Low High
Customization Limited High
Forecast accuracy High Low
Volume by product High Low
3. Price and brand: competition on price requires tight control of operations cost. The more
you focus on price, the more you have to focus on reducing costs.
a. Customer utility: u = s – p
i. s = product quality or brand
ii. p = price
iii. = consumer taste (not related to the product
4. Value-added services: when the focus is on services instead of products. Types of service:
a. After-sales service
b. Preventative maintenance
Difference between traditional products and service focused:
Traditional Service
Product variety Depends on business strategy Always high
(allowed) response time Longer (days) Short (hours)
Objective Service level is met Machine uptime → machine
is always working
Demand characteristics Depends on product Sporadic and unpredictable
characteristic
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