Service Economy and Industry Elements Discussion

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Chapter 13 Web resources for this chapter include OM Tools Software Animated Demo Problems Inventory Management Internet Exercises Online Practice Quizzes Lecture Slides in PowerPoint Virtual Tours In this chapter, you will learn about ... • The Role of Inventory in Supply Chain Management Excel Worksheets • Inventory and Quality Management in the Supply Chain 113 Excel Exhibits Company and Resource Weblinks >> • The Elements of Inventory Management Inventory Control Systems • Economic Order Quantity Models • Quantity Discounts .Reorder Point Order Quantity for a periodic Inventory System Inventory Management AT MARS ars purchases a huge number of raw materials it uses to produce its chocolate (and other) products. Ordering these materials inefficiently excessive inventory costs, thus Mars seeks to manage its inventory along its supply chain such that these costs are minimized. Mars relies on a small number of suppliers for each of the large number of materials it purchases to produce its products, and it procures these materials in a number of ways. One increasingly popular means for material procurement at Mars is through electronic auctions, in which Mars buyers negotiate bids for orders with suppliers online. The most important “strategic" purchases are of high value and large volume in which suppliers provide quantity discounts that they specify as a supply curve with an order quantity range associated with each price level (see a similar figure in this chapter in Figure 13.5). 554 Part 2 Supply Chain Management Chapter 13 Inventory Management 555 Quantity-discount auctions with supply curves are tailored to industries in which volume discounts are common, such as bulk agricultural commodities like Mars uses. The supplier provides its bid as a supply curve (i.e., a quantity- discount schedule), and the auction may be for one product or many. A Mars buyer selects the bids that minimize total procurement costs subject to several rules—there must be a minimum and maximum number of suppliers so that Mars is not dependent on too few suppliers nor loses quality control over too many; there must be a maximum amount purchased from each supplier to limit the influence of any one supplier; and a minimum amount must be ordered that avoids economically inefficient orders (for example, less than a full truckload). In this chapter we will learn about the different inventory models and techniques that companies like Mars uses to determine the lowest cost amount of inventory to order and keep on hand, which is one of the primary goals of supply chain management. With efficient supply chain management, products or services are moved from one stage in the supply chain to the next according to a system of constant communication between customers and suppliers. Items are replaced as they are diminished without maintaining larger buffer stocks of inventory at each stage to compensate for late deliveries, inefficient service, poor quality, or uncertain demand. An efficient, well-coordinated supply chain reduces or eliminates these types of uncertainty so that this type of system will work. Some companies maintain in-process, buffer inventories between production stages to offset irregularities and problems and keep the supply chain flowing smoothly. Quality-oriented compa- nies consider large buffer inventories to be a costly crutch that masks problems and inefficiency primarily caused by poor quality. Adherents of quality management believe that inventory should be minimized. However, this works primarily for a production or manufacturing process. For the retailer who sells finished goods directly to the consumer or the supplier who sells parts or materi- als to the manufacturer, inventory is a necessity. Few shoe stores, discount stores, or department stores can stay in business with only one or two items on their shelves or racks. For these supply chains the traditional inventory decisions of how much to order and when to order continue to be important. In addition, the traditional approaches to inventory management are still widely used by most companies. In this chapter we review the basic elements of traditional inventory management and discuss several of the more popular models and techniques for making cost-effective inventory decisions. These decisions are basically how much to order and when to order to replenish inventory to an optimal level. Despite quality management's (QM) goal to minimize inventory, it's still required for retailers and suppliers. Source: G. Hohner, J. Rich, E. Ng, A. Davenport, J. Kalagnanam, H. Lee, and C. An, "Combinatorial and Quantity-Discount Procurement Auctions Benefit Mars, Incorporated and its Suppliers," Interfaces 33 (1; January-February 2003), pp. 23-35. THE ROLE OF INVENTORY IN SUPPLY CHAIN MANAGEMENT The objective of inventory management has been to keep enough inventory to meet customer demand and also be cost effective. However, inventory has not always been per- tory levels to meet long-term customer demand because there were fewer competitors and products in a generally sheltered market environment. In the current global business environment, with more competitors and highly diverse markets in which new products and new product fea- tures are rapidly and continually introduced, the cost of inventory has increased due in part to quicker product obsolescence. At the same time, companies are continuously seeking to lower costs so they can provide a better product at a "lower” price. Inventory is an obvious candidate for cost reduction. The U.S. Department of Commerce estimates that U.S. companies carry $1.1 trillion in inventory spread out along the supply chain with $450 billion at manufacturers, $290 billion at wholesalers and distributors, and $400 billion at retail- ers. It is estimated that the average holding cost of manufacturing goods inventory in the United States is approximately 30% of the total value of the inventory. That means if a company has $10 million worth of products in inventory, the cost of holding the inventory (including insurance, obsolescence, depreciation, interest, opportunity costs, storage costs, and so on) is approximately $3 million. If inventory could be reduced by half, to $5 million, then $1.5 million would be saved, a significant cost reduction. The high cost of inventory has motivated companies to focus on efficient supply chain management and quality management. They believe that inventory can be significantly reduced by reducing uncertainty at various points along the supply chain. In many cases, un- certainty is created by poor quality on the part of the company or its suppliers or both. This can be in the form of variations in delivery times, uncertain production schedules caused by late deliveries, or large numbers of defects that require higher levels of production or service than what should be necessary, large fluctuations in customer demand, or poor forecasts of customer demand. A company employs an inventory strategy for many reasons. The main reason is holding invento- ries of finished goods to meet customer demand for a product, especially in a retail operation. However, customer demand can also be a secretary going to a storage closet to get a printer cartridge or paper, or a carpenter getting a board or nails from a storage shed. Since demand is usually not known with certainty, it is not possible to produce exactly the amount demanded. An additional amount of inventory, called safety, or buffer, stocks, is kept on hand to meet variations in product demand. In the bullwhip effect (which we have discussed previ- ously in our chapters on supply chain and forecasting), demand information is distorted as it moves away from the end-use customer. This uncertainty about demand back upstream in the supply chain causes distributors, manufacturers, and suppliers to stock increasingly higher safety stock inventories to compensate. Additional stocks of inventories are sometimes built up to meet demand that is seasonal or cyclical. Companies will continue to produce items when demand is low to meet high seasonal demand for which their production capacity is insufficient. For example, toy manufacturers produce large inventories during the summer and fall to meet anticipated demand during the holi- day season. Doing so enables them to maintain a relatively smooth supply chain flow throughout the year. They would not normally have the production capacity or logistical support to produce enough to meet all of the holiday demand during that season. In the same way retailers might find it necessary to keep large stocks of inventory on their shelves to meet peak seasonal demand, or for display purposes to attract buyers. At the other end of the supply chain from finished goods inventory, a company might keep large stocks of parts and material inventory to meet variations in supplier deliveries. Inventory provides independence from vendors that a company does not have direct control over. Invento- ries of raw materials and purchased parts are kept on hand so that the production process will not be delayed as a result of missed or late deliveries or shortages from a supplier. A company will purchase large amounts of inventory to take advantage of price discounts, as a hedge against anticipated price increases in the future, or because it can get a lower price by purchasing in volume. Walmart stores have been known to purchase a manufacturer's entire stock of soap powder or other retail item because they can get a very low price, which they subsequently pass on to their customers. Companies purchase large stocks of low-priced items 556 Part 2. Supply Chain Management Chapter 13. Inventory Management 557 when a supplier liquidates. In some cases, large orders will be made simply because the cost of ordering may be very high, and it is more cost-effective to have higher inventories than to order frequently. Many companies find it necessary to maintain buffer inventories at different stages of their pro- duction process to provide independence between stages and to avoid work stoppages or delays. Inventories are kept between stages in the manufacturing process so that production can continue smoothly if there are temporary machine breakdowns or other work stoppages. Similarly, a stock of finished parts or products allows customer demand to be met in the event of a work stoppage or problem with transportation or distribution. As the level of inventory increases to provide better customer service, inventory costs in- crease, whereas quality-related customer service costs, such as lost sales and loss of customers, decrease. The conventional approach to inventory management is to maintain a level of inventory that reflects a compromise between inventory costs and customer service. However, according to the contemporary "zero defects” philosophy of quality management, the long-term benefits of quality in terms of larger market share outweigh lower short-term production-related costs, such as inventory costs. Attempting to apply this philosophy to inventory management is not simple be- cause one way of competing in today's diverse business environment is to reduce prices through reduced inventory costs. Inventory is kept between stages of a production process. THE ELEMENTS OF INVENTORY MANAGEMENT Inventory: a stock of items kept to meet demand. Inventory is a stock of items kept by an organization to meet internal or external customer demand. Virtually every type of organization maintains some form of inventory. Department stores and grocery stores carry inventories of all the retail products they sell; a nursery has inven- tories of different plants, trees, and flowers; a rental-car agency has inventories of cars; and a major league baseball team maintains an inventory of players on its minor league teams. Even a family household maintains inventories of items such as food, clothing, medical supplies, and personal hygiene products. Most people think of inventory as a final product waiting to be sold to a retail customer-a new car or a can of tomatoes. This is certainly one of its most important uses. However, especially in a manufacturing firm, inventory can take on forms besides finished goods, including: THE EFFECTS OF INFORMATION TECHNOLOGY ON INVENTORY MANAGEMENT As we pointed out in previous chapters, information technology (IT) has become an enabler for effective supply chain management. Traditionally inventory was owned by the buyer (as opposed to the supplier), it was kept at the buyer's location, and the buyer controlled how and when its inven- tory was replenished. However, in recent years these traditional aspects of inventory management have changed, due in large part to advances in IT. Because of technology and software—including such IT tools as enterprises resource planning (ERP) systems (including forecasting software), bar- codes, radio frequency identification (RFID, and point-of-sales data-companies can track and locate inventory throughout its supply chain, which enables them to locate inventory somewhere other than their own facility, and control it remotely or have someone else control it. These tech- nologies have enabled modern supply chain management practices such as vendor managed inven- tory (VMI), continuous replenishment programs (CRP), supplier hubs, and outsourcing operations to third-party service providers (3PL). In these practices inventory can be located at the supplier's facility, at the buyer's, or somewhere in between. Unlike traditional practices, the supplier owns inventory until the buyer needs it and it is delivered, thus relieving the buyer of inventory costs; order sizes are reduced, deliveries (which the supplier pays for) are increased, and the buyer avoids maintaining storage facilities. However, for this to be effective the supplier must be able to mini- mize its own inventory costs and optimize its own supply chain, which can be achieved if the buyer shares end-use demand and sales data with its suppliers through IT. This enables suppliers to make replenishment decisions and provide inventory to the buyer, as it's needed. A recent supply chain management practice is for inventory to be located at “supplier hubs” that are usually at, or in very close proximity to the buyer, and are often owned and operated by a 3PL provider, which shifts all responsibility and liability for inventory to the suppliers that share the hub. For a supplier hub to work, the supply chain members—buyers, suppliers, and 3PL providers—must share information through information technology. The 3PL provider uses information provided by the buyer and suppliers (including forecasts and sales data) to consolidate shipping among suppliers, plan and execute all logistics, connect and coordinate all supply chain members through an IT system, and operate the hub facility. Supplier hubs are being used successfully by such companies as Dell, Apple, Fiat, Hewlett-Packard, Nokia, Cisco, Sam's Club, Samsung, and Volkswagen. • Raw materials • Purchased parts and supplies • Partially complete work in progress (WIP) • Items being transported • Tools, and equipment The purpose of inventory management is to determine the amount of inventory to keep in stock- how much to order and when to replenish, or order. In this chapter we describe several different inventory systems and techniques for making these determinations. Inventory management: how much and when to order. DEMAND The starting point for the management of inventory is customer demand. Inventory exists to meet customer demand. Customers can be inside the organization, such as a machine operator waiting for a part or partially completed product to work on. Customers can also be outside the organization-for example, an individual purchasing groceries or a new DVD player. In either case, an essential determinant of effective inventory management is an accurate forecast of demand. For this reason the topics of forecasting (Chapter 12) and inventory management are directly interrelated. In general, the demand for items in inventory is either dependent or independent. Dependent demand items are typically component parts or materials used in the process of producing a final product. If an automobile company plans to produce 1000 new cars, then it will need 5000 wheels and tires (includ- ing spares). The demand for wheels is dependent on the production of cars—the demand for one item depends on demand for another item. Cars, retail items, grocery products, and office supplies are examples of independent demand items. Independent demand items are final or finished products that are not a function of, or depen- dent on, internal production activity. Independent demand is usually determined by external mar- ket conditions and, thus, is beyond the direct control of the organization. In this chapter we focus on the management of inventory for independent demand items. INVENTORY AND QUALITY MANAGEMENT IN THE SUPPLY CHAIN Dependent demand: items are used internally to produce a final product. Inventory must be sufficient to provide high-quality customer service in QM. Independent demand: items are final products demanded by external customers. A company maintains inventory to meet its own demand and its customers' demand for items in the supply chain. The ability to meet effectively internal organizational demand or external customer demand in a timely, efficient manner is referred to as the level of customer service. A primary objective of supply chain management is to provide as high a level of customer service in terms of on-time delivery as possible. This is especially important in today's highly competitive business environment, where quality is such an important product characteristic. Customers for finished goods usually perceive quality service as availability of goods they want when they want them. (This is equally true of internal customers, such as company departments or employees.) To provide this level of quality customer service, the tendency is to maintain large stocks of all types of items. However, there is a cost associated with carrying items in inventory, which creates a cost tradeoff between the quality level of customer service and the cost of that service. INVENTORY COSTS Three basic costs are associated with inventory: carrying, or holding, costs; ordering costs; and shortage costs. Inventory costs: carrying, ordering, and shortage costs. 558 Part 2 . Supply Chain Management Chapter 13 Inventory Management 559 These offloaded cars at a port are an example of independent demand, as are appliances, computers, and houses. The tires on these cars are an example of an dependent demand item. goodwill that can result in a permanent loss of customers and future sales. Some studies have shown that approximately 8% of shoppers will not find the product they want to purchase in stock, which will ultimately result in total lost sales of about 3%. In some instances, the inability to meet customer demand or lateness in meeting demand results in penalties in the form of price discounts or rebates. When demand is internal, a shortage can cause work stoppages in the production process and create delays, resulting in downtime costs and the cost of lost production (including indirect and direct production costs). Costs resulting from lost sales because demand cannot be met are more difficult to determine than carrying or ordering costs. Therefore, shortage costs are frequently subjective estimates and sometimes an educated guess. Shortages occur because carrying inventory is costly. As a result, shortage costs have an in- verse relationship to carrying costs—as the amount of inventory on hand increases, the carrying cost increases, whereas shortage costs decrease. The objective of inventory management is to employ an inventory control system that will in- dicate how much should be ordered and when orders should take place so that the sum of the three inventory costs just described will be minimized. INVENTORY CONTROL SYSTEMS Justin Kase zsixz/Alamy Carrying costs: the costs of holding an item in inventory. An inventory system controls the level of inventory by determining how much to order (the level of replenishment) and when to order. There are two basic types of inventory systems: a continuous (or fixed-order-quantity) system and a periodic (or fixed-time-period) system. In a continuous system, an order is placed for the same constant amount whenever the inventory on hand decreases to a cer- tain level, whereas in a periodic system, an order is placed for a variable amount after specific regu- lar intervals. .Continuous inventory system: a constant amount is ordered when inventory declines to a predetermined level. . Carrying costs can range from 10 to 40% of the value of a manufactured item. Carrying costs are the costs of holding items in inventory. Annual inventory carrying costs in the United States are estimated to be over $300 billion. These costs vary with the level of inven- tory in stock and occasionally with the length of time an item is held. That is, the greater the level of inventory over a period of time, the higher the carrying costs. In general, any cost that grows linearly with the number of units in stock is a carrying cost. Carrying costs can include the following items: Facility storage (rent, depreciation, power, heat, cooling, lighting, security, refrigeration, taxes, insurance, etc.) • Material handling (equipment) • Labor Record keeping • Borrowing to purchase inventory interest on loans, taxes, insurance) • Product deterioration, spoilage, breakage, obsolescence, pilferage Carrying costs are normally specified in one of two ways. The usual way is to assign total car- rying costs, determined by summing all the individual costs just mentioned, on a per-unit basis per time period, such as a month or year. In this form, carrying costs are commonly expressed as a per-unit dollar amount on an annual basis; for example, $10 per unit per year. Alternatively, carry- ing costs are sometimes expressed as a percentage of the value of an item or as a percentage of av- erage inventory value. It is generally estimated that carrying costs range from 10 to 40% of the value of a manufactured item. Ordering costs are the costs associated with replenishing the stock of inventory being held. These are normally expressed as a dollar amount per order and are independent of the order size. Annual ordering costs vary with the number of orders made—as the number of orders increases, the order- ing cost increases. In general, any cost that increases linearly with the number of orders is an order- ing cost. Costs incurred each time an order is made can include requisition and purchase orders, transportation and shipping, receiving, inspection, handling, and accounting and auditing costs. Ordering costs react inversely to carrying costs. As the size of orders increases, fewer orders are required, reducing ordering costs. However, ordering larger amounts results in higher inven- tory levels and higher carrying costs. In general, as the order size increases, ordering costs decrease and carrying costs increase. Shortage costs, also referred to as stockout costs, occur when customer demand cannot be met because of insufficient inventory. If these shortages result in a permanent loss of sales, shortage costs include the loss of profits. Shortages can also cause customer dissatisfaction and a loss of CONTINUOUS INVENTORY SYSTEMS In a continuous inventory system (also referred to as a perpetual system and a fixed-order-quantity system), a continual record of the inventory level for every item is maintained. Whenever the in- ventory on hand decreases to a predetermined level, referred to as the reorder point, a new order is placed to replenish the stock of inventory. The order that is placed is for a fixed amount that mini- mizes the total inventory costs. This amount, called the economic order quantity, is discussed in greater detail later. A positive feature of a continuous system is that the inventory level is continuously monitored, so management always knows the inventory status. This is advantageous for critical items such as replacement parts or raw materials and supplies. However, maintaining a continual record of the amount of inventory on hand can also be costly. A simple example of a continuous inventory system is a ledger-style checkbook that many of us use on a daily basis. Our checkbook comes with 300 checks; after the 200th check has been used (and there are 100 left), there is an order form for a new batch of checks. This form, when turned in at the bank, initiates an order for a new batch of 300 checks. Many office inventory sys- tems use reorder cards that are placed within stacks of stationery or at the bottom of a case of pens or paper clips to signal when a new order should be placed. If you look behind the items on a hanging rack in a Kmart store, there will be a card indicating it is time to place an order for the item for an amount indicated on the card. Continuous inventory systems often incorporate information technology tools to improve the speed and accuracy of data entry. A familiar example is the computerized checkout system with a laser scanner used by many supermarkets and retail stores. The laser scanner reads the universal product code (UPC), or bar code, from the product package; the transaction is in- stantly recorded, and the inventory level updated. Such a system is not only quick and accurate, it also provides management with continuously updated information on the status of inventory levels. Many manufacturing companies' suppliers and distributors also use bar code systems and handheld laser scanners to inventory materials, supplies, equipment, in-process parts, and finished goods. Ordering costs: the costs of replenishing inventory. Shortage costs: temporary or permanent loss of sales when demand cannot be met. 560 Part 2. Supply Chain Management Chapter 13 Inventory Management 561 ALONG THE SUPPLY CHAIN To consumers the most familiar type of bar code scanners are used with cash registers at retail stores, where the bar code is a single line with 11 digits, the first 6 identifying a manufacturer and the last 5 assigned to a specific product by the manufacturer. This employee is using a portable hand held bar code scanner to scan a bar code for inventory control. In addition to identifying the product, it can indicate where a product came from, where it is supposed to go, and how the product should be handled in transit. GROUND DC 036 751 Inventory Management at Dell times per week. However, the cost of carrying inventory by Dell Inc., has annual revenues of approximately $58 billion Dell's suppliers is ultimately charged to Dell as part of the and over 75,000 employees around the world. Dell's busi- component price, and is thus reflected in the final price of a ness model bypasses retailers, and it sells directly to cus- computer. In order to maintain a competitive price advantage tomers via phone or the Internet. This eliminates one major in the market Dell strives to help its suppliers keep inventory stage in its supply chain and the associated delays and costs. low and reduce inventory costs. Dell has a vendor managed In Dell's supply chain, once a customer places an order (by inventory (VMI) arrangement with its suppliers. In this VMI phone or via the Internet) a credit check is made and the system the suppliers decide how much to order and when to technical feasibility of the computer configuration is send their orders to the revolvers. Dell's suppliers order in checked, a process that takes two or three days. After an batches (to offset ordering costs) using a continuous order- order is processed through these initial steps, it is sent to one ing system with a batch order size, Q, and a reorder point, R, of its assembly plants in Austin, Texas, where the product is where R is the sum of the inventory on order and a safety built, tested, and packaged within eight hours. Dell carries stock. The order size estimate, based on long-term data and very little components inventory itself. Technology changes forecasts, is held constant. Dell sets target inventory levels occur so fast that holding inventory can be a huge liability; for its suppliers—typically 10 days of inventory—and keeps some components lose 0.5-2% of their value per week. In track of how much suppliers deviate from these targets and addition, many of Dell's suppliers are located in Southeast reports this information back to suppliers so that they can Asia and their shipping times to Austin range from seven make adjustment accordingly. days for air transport to 30 days for water and ground trans- port . To compensate for these factors Dell's suppliers keep Why do you think Dell holds the order size Q, constant in its inventory in small warehouses called “revolvers" (for revolv- continuous order system? ing inventory), which are few miles from Dell's assembly plants. Dell keeps very little inventory at its own plants so it Source: R. Kapuscinski, R. Zhang, P. Carbonneau, R. Moore, and withdraws inventory from the revolvers every few hours B. Reeves, "Inventory Decisions in Dell's Supply Chain," Interfaces 34 while most of Dell's suppliers deliver to their revolvers three (3; May-June 2004), pp. 191-205. © Blend Images/Alamy Periodic inventory system: an order is placed for a variable amount after a fixed passage of time. PERIODIC INVENTORY SYSTEMS In a periodic inventory system (also referred to as a fixed-time-period system or a periodic review sys- tem), the inventory on hand is counted at specific time intervals-for example, every week or at the end of each month. After the inventory in stock is determined, an order is placed for an amount that will bring inventory back up to a desired level. In this system, the inventory level is not monitored at all during the time interval between orders, so it has the advantage of little or no required record keeping. The disadvantage is less direct control. This typically results in larger in- ventory levels for a periodic inventory system than in a continuous system to guard against unex- pected stockouts early in the fixed period. Such a system also requires that a new order quantity be determined each time a periodic order is made. An example of a periodic inventory system is a college or university bookstore. Textbooks are normally ordered according to a periodic system, wherein a count of textbooks in stock (for every course) is made after the first few weeks of a semester or quarter. An order for new textbooks for the next semester is then made according to estimated course enrollments for the next term (i.e., demand) and the amount remaining in stock. Smaller retail stores, drugstores, grocery stores, and offices sometimes use periodic systems—the stock level is checked every week or month, often by a vendor, to see how much should be ordered. many items. The wide use of bar code scanners may have eroded that reasoning. At least for larger com- panies, bar codes have made continuous monitoring cheap enough to use for all item classes. The first step in ABC analysis is to classify all inventory items as either A, B, or C. Each item is assigned a dollar value, which is computed by multiplying the dollar cost of one unit by the annual demand for that item. All items are then ranked according to their annual dollar value, with, for example, the top 10% classified as A items, the next 30% as B items, and the last 60% as A items require close inventory control because of their high value; B and C items less control. 100 Figure 13.1 ABC Classifications 90FA Items 80 70 ABC system: an inventory classification system in which a small percentage of (A) items account for most of the inventory value. 60 50 Percentage of dollar value THE ABC CLASSIFICATION SYSTEM The ABC system is a method for classifying inventory according to several criteria, including its dollar value to the firm. Typically, thousands of independent demand items are held in inventory by a com- pany, especially in manufacturing, but a small percentage is of such a high dollar value to warrant close inventory control. In general, about 5 to 15% of all inventory items account for 70 to 80% of the total dollar value of inventory. These are classified as A, or Class A, items. B items represent approximately 30% of total inventory units but only about 15% of total inventory dollar value. C items generally account for 50 to 60% of all inventory units but represent only 5 to 10% of total dol- lar value. For example, a discount store such as Walmart normally stocks a relatively small number of televisions, a somewhat larger number of bicycles or sets of sheets, and hundreds of boxes of soap powder, bottles of shampoo, and AA batteries. Figure 13.1 shows the approximate ABC classes. In ABC analysis each class of inventory requires different levels of inventory monitoring and control—the higher the value of the inventory, the tighter the control. Class A items should experience tight inventory control; B and C require more relaxed (perhaps minimal) attention. However, the original rationale for ABC analysis was that continuous inventory monitoring was expensive and not justified for 40 30 20 B Items 10 C Items 0 10 1 20 60 80 90 100 30 40 50 70 Percentage of inventory items
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Roberta Russell, Bernard Taylor. "Service
Design", Operations Management: Creating
Value Along the Supply Chain, Edn: 6, 2008-0104




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Chapter 5: Service Design
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The service economy accounts for 80% of the workforce, 94% job development, and
81% of the United States’ GDP. Services justify for performances, deeds, or acts that result in
time, place, form, or psychological utilities for customers. Services are different from goods as
they are intangible, their output is variable, are perishable, have higher customer contact, tend to
be dispersed and geographically distributed, consumed more often than products, and can be
emulated easily. The service concept aims at defining a target market and the anticipated
customer experience. Consumers and service providers are convoluted in assessments of
performance, design, and delivery provisions. Service design involves various tool namely:
quality function development, blueprints, scripting, servicescapes, and waiting for line analysis.
Service blueprinting is involves recording activities and interactions in a service process
system. Servicescapes as a tool addresses customer discernment of service quality and their
satisfaction. Servicecapes have to be dependable with the service conception since services are
intangible and physical prompts for quality are desired. Improving the service process is by the
utilization of quantitative techniques such as waiting for line analysis. Quality service provision
incorporates faster deliveries, therein the basis of waiting lie analysis which ensures that there is
improved service and reduction of costs of making customers wait. Constituents of a waiting line
are the calling population, arrivals, servers, and the queue. The relationship between the
structures of the elements is used to assess the operating characteristics of service delivery. In
line with the elements, different formulas are designed to make decisions on the efficiency of the
service design process such that management of the waiting line focuses on sufficient serving of
consumers in most organizations.

The arrival rate determines customers who arrive at a service center at a stated time.
Service time is the period required for a customer to be served as termed by the negative
exponential distribution. Queue discipline and length as another waiting analysis element
described the order in which customers receive the service and most businesses and companies
use the first-come, first-served approach. The waiting line has rudimentary structures classified
based on the nature of the service facilities. The categories are single-channel, single-phase;
single-channel, multiple-phase; multi-channel, multiple-phase process. The number of channels
refers to the sum of parallel servers available and the phases represent total attendants in the
order a custom...

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