CISCOM SUPPLY CHAIN & OPERATIONS MANAGEMENT Business Research and Service Institute Pennsylvania, USA brasi.org 0 CISCOM Four Modules – One Exam Module 1: PLANNING Module 2: ORGANIZING Module 3: DELIVERING Module 4: GROWING brasi.org 1 CISCOM Curriculum MODULE 4 GROWING Chapters 1. Growth Dynamics 2. Sustainable Growth 3. Best Practices and Bench Marking 4. Productivity Tools Lean JIT Six Sigma Theory Of Constraints 5. Change and Transformation 6. Balancing the 4Cs 2 CISCOM Certificate in Supply Chain & Operations Management Module 4 GROWING Business Research and Service Institute www.brasi.org MODULE 4 GROWING CISCOM Chapter 1 Growth Dynamics Business Research and Service Institute www.brasi.org Comparative to market growth A market analysis studies the attractiveness and the dynamics of a special market within a special industry. It is part of the industry analysis and thus in turn of the global environmental analysis. Through all of these analyses, the strengths, weaknesses, opportunities and threats (SWOT) of a company can be identified. Finally, with the help of a SWOT analysis, adequate business strategies of a company will be defined 5 Markov Analysis 'Markov Analysis' A method used to forecast the value of a variable whose future value is independent of its past history. 6 Profitable Growth Continuous Improvement What is the rate of value addition year over year? Cost, Cycle Time, Inventory… Innovation What %age of your revenue represents products launched within the last two years? Product Life Cycle Management… Sustainability What %age of your materials is renewable/ Recycled. Reduce, Reuse, Recycle… 7 Spend analysis It is the process of collecting, cleansing, classifying and analyzing expenditure data with the following purpose. Reducing procurement costs Improving efficiency Monitoring compliance 8 Spend analysis Companies perform spend analysis mainly for profitability, In addition to improving compliance and reducing cycle times it helps companies find new areas of savings and maintain savings that they have already negotiated 9 Spend Visibility - Applications How much are you spending? Who are you paying? What are you getting in return? Cash Flow Analysis Operating Capital Total Cost of Ownership 10 supply chain dynamics constrained Just as in project management, supply chain dynamics are mostly defined by the triple constraints of Time, Quality and Cost. Among the four stages of product life cycle (Introduction, Growth, Maturity and Decline), it is usually the Introduction phase that requires most energy and expenditures. 11 Current market value It is the estimated or quoted price if an asset is offered for sale 12 Original cost It is the cost at which an asset is acquired. 13 Direct Cost and indirect Cost Direct labour and direct material used to make a unit of product Indirect cost includes factory or manufacturing overheads, represented as total value or cost per unit 14 Fixed Cost Fixed cost is that portion of the total cost that does not change with change in volume within a certain range. Cost of equipment is an example. 15 Variable Cost The portion of total cost that is incurred only when product is made, for example, direct material and direct labour 16 Cost Of Goods Manufactured Cost of all good completed at all stages of manufacturing, but not sold yet Expression for COGM for a given period = Work-In-Process opening inventory + Work-In-Process received – Work-In-Process closing inventory 17 Cost of Goods Sold (COGS) It is the cost of inventory at the finished goods stage, which is an asset and is expensed to the P&L statement at the time of sale Expression for COGS for a given period = FG opening inventory + FG receipts into inventory – FG inventory closing balance. 18 Gross Margin Gross Margin = Sales – Cost Of Goods Sold 19 Depreciation It is the depletion of value of an asset over a period of time. The remaining value at the end of each period is called the Book Value, which may be equal to, higher or lower than the market value at that time, depending on the nature of the asset 20 Replacement cost It is the current cost of replacing an asset. 21 Variance When the Standard Costing method is used for product costing, variance represents the difference between the estimated standard cost and the actual costs incurred. Variance may be positive (favourable) or negative (unfavourable). 22 Contribution Margin (CM) Contribution Margin (CM) is the difference between the variable cost and sales price per unit, i.e., the balance amount per unit that is contributed to absorb the fixed costs, overheads and profit margin. Breakeve Point: Total Revenue = Total Cost 400000 Sales Revenue Fixed + Variable Cost Fixed Cost 350000 300000 250000 $ Breakeven Point 200000 150000 Units 100000 50000 0 CM Table 23 Breakeven Point or Breakeven Volume It is the volume of sales at which total cost equals total revenue, i.e., no profit, no loss. With a positive contribution per unit, sales beyond the breakeven point start to accumulate profit. Breakeven is represented by the following equation 24 MODULE 4 GROWING CISCOM Chapter 2 Sustainable Growth Business Research and Service Institute www.brasi.org Improvement Focus: NetSuite Survey Business Improvement Initiatives 2013-2014 Improving employee productivity Reducing Product Cost Innovation Modernizing, Streamlining or Automating Processes Improving Supply Chain Integration Reducing Energy Costs Renegotiating Supplier Contracts Use (Value Achieved) Minimizing Inventory Investment Reducing Overhead Reducing Transportation Costs Rationalizing Supplier Base Laying off Staff Outsourcing Reducing Hours Switching to E-commerce Cutting Salaries Cutting IT Budgets Other 0% 10% 20% 30% 40% 50% 60% 70% 80% 26 Budget – Roadmap for Development Budget is the projection of costs, expenses, revenues and margins over a specified period of time, usually the fiscal year. It a very important tool to channel the organization’s resources towards meeting its strategic objectives 27 Measuring Performance - Financial Ratios Financial Ratios are used to quantify various aspects of business performance in financial terms. Some commonly used ratios are as follows Some Common Financial Ratios Liquidity Ratio or Current Ratio = Current Assets/Current Liabilities Quick Ratio = (Current Asset – Inventory)/Current Liabilities Gross Margin = (Net Sales – COGS)/Net Sales Return On Assets = Net Income/Total Assets Stock Turnover Ratio or Inventory Turns = COGS/Average Inventory 28 P&L Statement P&L Statement measures a company’s performance over a period of time, usually a year. Fiscal year may start from January and end in December, or start in any other month of the year and end 12 months later 29 Balance Sheet It is the snapshot of a company’s financial situation at the end of an accounting period, the same period as for the P&L Statement. On the balance sheet, total assets must equal total liabilities plus owners’ equity, hence the term Balance Sheet. 30 Cash Flow Statement Cash Flow Statement represents the cash inflow and out flow and cash balance for a given period 31 Accrual Accrual is the term used to express a commitment or transaction that crates an asset or a liability, however, the balancing cash flow may not occur at the same time, but may be deferred to a later date. For example, we use electricity, accruing cost every day, although we are billed on a monthly basis 32 Overhead Absorption Overhead absorption is the process of dividing the fixed costs or overheads over the total production volume If the actual volume exceeds the budgeted volume, then the overhead cost is over absorbed or positive absorption variance Conversely, if the actual volume turns out to be less than budget, then the overheads are under-absorbed, meaning that the unabsorbed overhead cost will negatively impact the profit margin 33 Sensitivity Analysis: A tool or mathematical model to assess the impact of a change in inputs to the output. It is also known as the Uncertainty Analysis as the primary objective is to gauge the impact of uncertainty on the outcome 34 MODULE 4 GROWING CISCOM Chapter 3 Best Practices & Bench Marking Business Research and Service Institute www.brasi.org Best Practices A best practice is a technique or methodology that, through experience and research, has proven to reliably lead to a desired result 36 Benchmarking Benchmarking is the process of comparing one's business processes and performance metrics to industry bests and best practices from other companies. 37 Measure of sustainable growth The sustainable growth rate (SGR) is the maximum growth rate that a firm can sustain without having to increase financial leverage. Calculated as: ROE x (1 - dividend-payout ratio) 38 Kaizen – Continuous Improvement The process of continuous improvement, also referred to as the Japanese term Kaizen, focuses on gradual, steady improvements over a sustained period of time 39 The Toyota Production System (TPS) The Toyota Production System (TPS) is an integrated socio-technical system, developed by Toyota, that comprises its management philosophy and practices. The TPS organizes manufacturing and logistics for the automobile manufacturer, including interaction with suppliers and customers. 40 MODULE 4 GROWING CISCOM Chapter 4 Productivity Tools Business Research and Service Institute www.brasi.org Productivity Basics Productivity is the ratio between Input and Output Output productivity Input Supply Chain Overview Example: comparing two similar machines, producing the same item Machine A: Production = 120 Units, Hours used = 60 Productivity = 2 Units Per hour Machine B: Production = 120 Units, Hours used = 48 Productivity = 2.5 Units Per hour Although both the machines produced the same quantity, machine B demonstrated higher productivity. 42 Productivity Basics (Contd.) The concept applies to many situations: Material Productivity: Yields on raw materials received from source A versus source B (scrap factor/quality). Supply Chain Overview Capital Productivity: Financial return from investing in Option A versus Option B. Labor Productivity: Effective processes leading to higher results, versus wasteful processes causing productivity loss. 43 Obstacles to Achieving Productivity Complexity • Unclear roles and responsibilities – duplication of effort Lack of Coordination • Various part of an organization moving in different directions Lack of training • Skills gap to promptly identify and address issues. Supply Chain Overview 44 Competitive Strategy Cost Quality Delivery Speed Convenience Innovation Supply Chain Overview 45 Improvement Methodologies Relevance 1 – 10 (Varies for different industries and situations) Area of Strategic Differentiation TQM JIT Lean 6 Sigma TOC Cost 6 10 10 8 10 Quality 10 7 4 10 3 Speed 2 10 10 8 6 Convenience 8 2 2 2 2 Innovation 10 6 6 8 6 46 Lean Process 5S without 5Y is just housekeeping Lean Process refers to elimination of waste, thereby creating more value with less cost and effort. 47 Value Stream Mapping (VSM) In Value Stream Mapping (VSM), each cost activity is assessed whether it adds value for the customer or for the business. If any activity does neither, then it is a potential candidate for removal 48 Value Chain The concept of Value Chain focuses on analyzing cost and value added at each step of the supply chain with a view to reducing costs, thereby adding value for the customer 49 Gemba Walk Gemba Walk represents the engagement of senior leader in the manufacturing environment where value is created for the customer. The idea is to break down barriers and open communication with the workers and technicians who have valuable insight about process improvement. 50 Quality Management (TQM) TQM aims at building quality in the process, so that the dependence on inspection can be minimized., because… …You cannot inspect quality into a product 51 7 Tools of TQM 1. 2. 3. 4. 5. 6. 7. Cause-and-effect Diagram (also known as the “Fishbone" or Ishikawa diagram) Check Sheet Control Chart Histogram’ Pareto Chart Scatter Diagram Flow Chart Supply Chain Overview 52 Pareto Analysis Pareto Analysis is an approach to emphasize the significant few versus trivial many, in order to focus improvement efforts for the biggest return. It is also called the 80:20 rule, meaning that 80% of the effect is caused by 20% of factors 53 TQM Approach 54 Multiplier Effect of Defects Process 100% = 100% x 100% x 100% WISH or HOPE… 87% = 92% x 99% x 95% REALITY (best guess) 74% = 88% x 91% x 93% 55 Just-In-Time Just-In-Time can be defined as an inventory strategy implemented to improve Return on Investment (ROI) by reducing in-process inventory and associated carrying costs. This process is based on the supply at the time of need only, which is driven by a signal, called Kanban. 56 What is Muda? Muda is the Japanese term for waste – it is used in campaigns to remove any source or cause of waste of material or time, in an effort to improve the quality of products at a lower cost 57 Six Sigma Six Sigma quality or reliability level is achieved when the defects or variability is systematically reduced to only 3.4 defects or errors per million opportunities 58 Measure of Dispersion Sigma = Measure of Dispersion in a Normal Distribution 1 Sigma = 1 Standard Deviation Supply Chain Overview 1 ∑ = 67% Probability of Success (33% Failure) 2 ∑ = 93% Probability of Success (7% Failure) 3 ∑ = 98% Probability of Success (2% Failure) 6 ∑ = .00034% Failure, or 3.4 Failures in 1 Million Opportunities 59 Statistical Process Control Statistical Process Control is a quality management tool which is based on recording the process parameters and product characteristics in order to determine the source of errors or variability and eliminate the root cause. The two main recording formats are Control Charts and Scatter Diagrams 60 Using SPC Data to Determine Process Capability Process/Equipment Capability • Performance data under various conditions • Defining UCL/LCL and Probability of Non-Conformance • Compare with product quality spec, customer requirement, regulatory requirement • Assign equipment to products accordingly • Improve common causes as necessary 61 Tea Packaging: Filler Calibration Regulatory requirement + infusion quality: 2 grams per tea bag Defining UCL/LCL and Probability of Non-Conformance • Volumetric filling • Gravimetric filling Setting the process mean at target weight + variation in order to ensure minimum required weight, with estimated overfill, part of the product cost. 62 Six Sigma Process: DMAIC 1. 2. 3. 4. 5. Define selecting high-impact projects and understanding which underlying metric(s) will reflect project success. Measure documenting the current process, validating how it is measured, and assessing baseline performance. Analyze isolates the top causes behind the effect, no more than three in most cases. Improve Controlling or eliminating the causes; focus on process redesign. Control Sustaining the improvement, by irreversible design change – minimum need for monitoring. Supply Chain Overview 63 DMAIC steps In Six Sigma process improvement, DMAIC steps represent the following. 64 Bull Whip Effect Bull Whip Effect occurs when information is communicated from one step to another in a silo fashion, as it causes distortion and inaccuracy to creep in. Each stage in the supply chain therefore has its own set of numbers which may be different from the actual endrequirement. The Bull Whip Effect can cause inventory excesses or shortages 65 Process Mapping - SIPOC SIPOC – Pizza Delivery Suppliers Inputs Process Outputs Customers ABC Dairies Cheese Prepare Dough Pizza Sunny Farms Vegetables Add Sauce Zesty Inc. Sauces Add cheese and toppings Dine-in customers Take-out customers Delivery customers Golden Mills Flour Bake Remove from oven and serve 66 Lean and Six Sigma Together Together, Lean and Six Sigma have the greatest impact, as Lean focuses on reducing cycle time while Six Sigma focuses on reducing process variability, thereby targeting high, consistent quality at low cost 67 SMED – Single-Minute Exchange of Die Originate from plastic molding: Dies are pre-hated and cooled off-line, without holding the expensive machine hours. Previous Situation: Injection Molding Press Cost Per Hour (mostly depreciation + allocated factory overhead) = $650/Hours Old Die cooling off before removal = 6 hours Removal time = 1 hour New die installation = 2 hours Heating time = 3 hours Total Unproductive time = 12 hours x 650 = $7800 per exchange of dies Number of die changes in a year = 65 Total Cost die changes per year = 65 x $7800 = $507,000 Side effects: • Less flexibility due to large lot size necessary to absorb high switchover cost. • Capacity lost to unproductive (wait) time. 68 SMED – Single-Minute Exchange of Die Improved Situation: Old Die removal (while hot) = 1 hour New Die installation (preheated) = 2 hours Total Unproductive time = 3 hours x 650 = $1950 Number of die changes in a year = 65 Total Cost die change = 65 x $1950 = $126,750 Off-line cooling station = 6 hours x $ 25/hour = $150 x 65 changes = $ 9,750 Total cost per year = $ 126,750 + $ 9720 = $ 136,470 Saving of $ 507,000 - $ 136470 = $ 370,530 Side benefits: • More flexibility due to smaller lot size possible with shorter set-up time (less hours to absorb). • Capacity recovered due to reduction of wait time. 69 SMED – Single-Minute Exchange of Die The concept applicable to any process which presents a potential for concurrent processing 70 SMED – Single-Minute Exchange of Die Airbus patents designs for convertible plane After two years of scrupulous research, the United States Patent and Trademark Office accepted a patent for one of the strangest designs we've seen for a plane. Airbus's 'convertible' plane designs show a detachable cabin, which would allow passengers to board quickly before being attached to the rest of the aircraft. In a business that's all about timing, the newly patented designs could allow airlines to cut turn around times considerably. The detachable cabin would be removed from the roof with the help of a specialized crane, allowing boarding and disembarkment to happen in record time. The cabin full of arriving passengers would be extracted and replaced by another, already full of people going in the other direction. Speedy! 71 Constraints Management It is a powerful tool to identify the bottlenecks in a process and apply strategies to resolve the constraints Drum: The pace of manufacturing or average Takt time – which needs to be maintained in order for the operations to be cost effective and customer oriented Buffer: Inventory cushion for constrained resources in order to avoid disruption in case of a delay in supply from an upstream process. Rope: The communication going back from the key gateways to the releasing processes, advising them if the pace needs to be increased or decreased, depending on the inventory build at the control points. Three elements in the process 72 Theory Of Constraint (TOC) Theory Of Constraint (TOC) developed by Eliyahu M. Goldratt provides a systematic approach to identifying and resolving constraints in business. It is a five-step process Identify the constraint Exploit the constraint Subordinate other resources to the constraint Elevate performance of the constraint Repeat the process for the next constraint 73 Theory Of Constraints - TOC Constraint is “Something” that is blocking your business from achieving its goal of making more profits Dr. Eliyahu M. Goldratt 74 Types of Constraints • Physical o Machines o Materials o Skill Sets o People o Money • Managerial (Nonphysical) o Policies Mindset Culture and Attitude o Measures Perception of how to measure progress o Behaviors Methods Rules and Procedures • Environmental (Nonphysical or Physical) o Infrastructure o Climate/Weather 75 Bull Whip Effect BRASI’s 3 Levers for sustainable growth If the demand information is not shared centrally, rather in silo fashion from one step to another, then it can get distorted in the process and cause imbalance in inventory and customer service. This is caused Bull Whip Effect. Cash Flow Capacity Customer service 76 What is TOC? Organizations are systems analogous to chains Resources are links; processes connect them. The weakest link determines the strength of any chain. The constraint determines the strength of the organization: ability to achieve its goal/purpose make more money now and in the future 77 The TOC Process • STEP 1: IDENTIFY the system’s constraint(s). • STEP 2: Decide how to EXPLOIT the system’s constraint(s). • STEP 3: SUBORDINATE everything else to the above decision. • STEP 4: ELEVATE the system’s constraint(s). • STEP 5: If in a previous step a constraint has been broken, go back to step 1, but do not allow INERTIA to cause a system’s constraint. 78 The TOC Process Raw Material RM Capacity (units/day) Finished Goods A B C D E 10 9 5 7 8 +/- 2 +/- 2 +/- 2 +/- 2 +/- 2 FG Which Station is the Bottleneck? Backlog Example 79 Drum, Buffer & Rope DBR: The generalized process used to manage resources to maximize throughput • The Drum is the rate or pace of production set by the system’s constraint. • The Buffer is the amount of work in front of the bottleneck resource in order to ensure full utilization, eliminating idle time. • Rope is the signal from the bottleneck station to the prior stages/material release to regulate the amount of work flowing to it, in order to maintain a manageable work in process. 80 The Drum-Buffer-Rope elements In Theory Of Constraints, the Drum-Buffer-Rope elements represent the following. • The pace of production, which sets the level of activity for the plant or process Drum Buffer • Predetermined amount of surplus inventory in front of the constrained resource so that it always has work to do and there is no idle time • It is the signal to release material from the upstream process or station, in keeping with the pace set by the Drum Rope 81 Drum, Buffer & Rope Placement 1 A 10 C B 10 A S Constraint Buffer Assembly Buffer Shipping Buffer Rope A 2 D 10 E 5 C F 10 G 10 FG 1 Ship Date S 82 Drum, Buffer & Rope Exercise 1 A 10 B 10 C 10 2 D 10 E 5 F 10 G 10 FG 1 3 H 20 I 20 4 J 10 K 5 L 10 M 10 FG 2 5 N 10 O 10 FG 3 83 Drum, Buffer & Rope Exercise Solution 84 MODULE 4 GROWING CISCOM Chapter 5 Change and Transformation Business Research and Service Institute www.brasi.org More of the Same??? 86 Or a Refreshing, New Idea? 87 Need for Change Change is a fact of life. Organizations, like organisms, must adapt or die. Neither course is comfortable. In its operations, an organization evolves a way of thinking about itself, its competitors, and the environment with which it and they must cope. 88 Resistance to change Resistance to change is the action taken by individuals and groups when they perceive that a change that is occurring as a threat to them. Do people resist change? Or it something else that they resist about change? People resist being changed! People don’t resist change if it is of their liking or if they are involved in making it and feel to be a part of it. Respect for people is a precondition for meaningful and long lasting change. 89 Change Enablers Clarity of Purpose The single most effective motivator Making adjustment as needed – not being stubborn Persistence Never giving up What works, what doesn’t Asking tough questions Facing challenges Managing conflict to bring out the best Knowledge and Information Invest in learning and sharing Encourage exploration Mutual respect and Trust Non-judgmental Mistakes taken as steps towards improvement 90 Leadership A manager is best when people barely know he exists Not so good when they obey and acclaim him Worse when they despise him Fail to honor people, they fail to honor you But of a good manager When his job is done, his aim fulfilled They will all say, “We did it ourselves”. Lao Tzu 4000 BC 91 Phases in Learning or Change 1 2 Unconscious Incompetent I don’t know and I don’t know that I don’t know. Conscious Incompetent I Don’t know but I know that I don’t know. Diving? 3 4 Conscious Competent I am learning and it shows that I am learning. Bike? Unconscious Competent I am practicing effortlessly. Diving! 92 Phases in Team Work FORM Team is formed, as in a project, comprising different skills backgrounds. STORM Everyone sees the project from their own perspective, friction and conflict occur NORM Common grounds are found and adjustments are made to achieve the – Risks and Benefits are realized PERFORM Team develops working processes and flows, metrics to track performance 93 Motivation Motivation can be understood not as something that one has but rather as something one does. It involves recognizing a problem, searching for a way to change, and then beginning and sticking with that change strategy. There are, it turns out, many ways to help people move toward such recognition and action. Miller, 1995 94 Some Pioneers in Scientific Management Armand V. Feigenbaum Quality Systems/TQM W. Edward Deming Management/PDCA Circle Joseph M. Juran Quality Management/SQC Kaoru Ishikawa Management/Root Cause-Fishbone Diagram Genichi Taguchi Manufacturing/Input-Output Control Eliyahu M. Goldratt Theory Of Constraints Supply Chain Overview 95 MODULE 4 GROWING CISCOM Chapter 5 Balancing The 4Cs Business Research and Service Institute www.brasi.org The Balanced Growth Model: 4C’s Customer Service Cash Flow Cost Capacity 97 The 3 V’s of Supply Chain Management VISIBILITY One Plan, Shared VARIABILITY Identify, Minimize VELOCITY Depends on Visibility and Variability Which tools and methods apply to each? 98 A Bunch of Tools…. Theory Of Constraints SUSTAINABILITY DRP – Disaster Recovery Planning POKA YOKE ISO Class A Y2K 5S VSM Kaizen MUDA Sensitivity Analysis JIT 6 Sigma TPM TQM BCP Business Continuity Planning SMED Right First Time cGMP Pareto Analysis ROOT CAUSE ANALYSIS QUALITY CIRCLES HACCP CONTINUOUS IKPROVEMENT Balancing the 4 C’s The role of Growing in Customer Service, Cash Flow, Cost and Capacity as follows: 1. Identify and eliminate waste in the various business processes while delivering the strategic objectives. 2. Invest in continuous learning and people development as the main source of sustainable development. 3. Collaborate on bench marking and best practices across industrial and geographical boundaries. 100 Summary of Learning Objectives • Sustainable, profitable growth is achievable and comes effortlessly as waste is identified and eliminated. • Continuous improvement applies to all walks of life. • Change is achievable and sustainable with the right tools and approach. 101
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