Aviation Preparatory Operations Management

Aviation Preparatory Operations Management, Strategic Logistics & Effective Supply Chain

© www.asia-masters.com

Aviation Systems• Aviation system is changing rapidly

– New technologies– New business models – Expanded environmental impact concerns

• Repetitive, recurrent common cause accidents essentially eliminated– Emerging threats are low frequency, hard to detect– Need to move from reactive to proactive and prognostic

• Increase in system demand* – The number, types and complexity of airplanes– The amount of flights and passengers

• Continues evolution in application of system safety concepts in the aviation system


Airport Operations


Overview1. Airline Representation2. Passenger Services3. Ground Services.4. Flight Operations.


1. Airline Representation

Contract negotiation and administration.Supervision and evaluation of contract compliance.Inventory management.

Financial responsibility.


Airline Representation:Contract negotiation and administration.

• Airport use agreements.– Ticket counters.– Common use facilities and services.– Gate and jet-way use.– Incentives and fee waivers.

• Bulk purchase programs.– Passenger services– Catering supplies.– Bag tags.– Ramp services.– Into-plane fueling.

• Bundled services.– Outsourcing above and below wing services.


Airline Representation:Contract Compliance

• Station Manuals.– Preparation and maintenance of Stations Operations Manuals

implementing customer standards and requirements.– Training of all airport contract personnel.

• Performance standards and daily monitoring.– Ground handlers.– Passenger services.

• Quality control.– Periodic check rides to verify performance of vendors.

• Financial compliance– Auditing of services and invoices.– Budgetary controls.


Airline Representation:Inventory Management

• Inventory controls, budgeting, purchasing and warehousing:– Boarding passes.– Bag tags.– Lost and damaged baggage claim forms.– Catering and toiletry supplies.– Alcoholic beverage controlled storage.– Cabin supplies.– In-flight magazines and related items.– Portable equipment (laptops, printers, etc.).


Airline Representation:Financial responsibility.

• Pre-payments and deposits.– Budget and cash flow forecasting.

• Reconciliation of vendor invoices.– Audit and verify ramp services invoiced per turn/flight.– Audit and verify fuel uplifts and into-plane fees.– Verify catering costs and services per enplaned passenger.– Customer financial reporting for operational management

decisions and fiscal planning.– Auditing of passenger fees, airport fees, & taxes.

• Escrow accounting services.– Account reconciliation by flight.


2. Passenger Services

Airline branding and visibility.Airport staffingDelay Amenities.International flights.Catering.Customer service.


Passenger Services: Airline Branding & Visibility

• Airport signage.– Arrival directional signage.– Ticket Counter.– Gate

• Airline attire for contract employees– Provide attire with airline logo or other identification.

• FIDS – Provide graphics for flight information data system for airport

operations.


Passenger Services: Airport staffing

• Passenger check in/ticket counter.– Reservation system compatible equipment.– Boarding passes.– Baggage – tags and excess baggage collections.– Manifest reconciliation (show, no-show, go-show).– Upgrade sales and add-collects as required.– Operator-participant agreement compliance (charter requirement).

• Gate personnel.– Boarding procedures and announcements.– Passenger manifest reporting.


Passenger Services: Coordination

• Delay amenities.– Policy and procedure implementation.

• Meal vouchers.• Hotel and transfer vouchers.• Shuttle buses.• Re-accommodation on other airlines.

• International flights.– International departure/arrival procedures.– Security compliance.


Passenger Services: Catering

• Catering– Budget and cost of goods by flight.– Menu and vendor selection.– Supplies and inventory control.

• Snacks and meals.• Beverages.• Alcohol sales.• Flight by flight reconciliation.

– Arrange for crew meals as required.– USDA regulatory conformance for international flights.


Passenger Services: Customer Service

• Baggage service.– Customer care for lost and damaged bag claims via toll free

number and e-mail.– Coordination and delivery of misplaced bags.

• Reservations.– On-line (web bookings).– Call center operations.– Software customized to customer requirements for yield, loads,

manifests, accounting and management.


3. Ground Services

Aircraft ramp services.Baggage.

Push back and towing.Ground support equipment.

Into-plane fueling.De-icing.Cleaning.

International flights.


Ground Services: Aircraft Ramp Services

• Baggage.– Loading and unloading of baggage into or from the

aircraft.– Baggage handling and transfers.– Assist in weight and balance issues.

• Aircraft push back and towing.– Tugs and tow bars for customer aircraft.– Aircraft marshalling.– Aircraft parking: hard stand and RON.


Ground Services: Aircraft Ramp Services, cont’d.

• Ground support equipment.– Air conditioning– Air-start– Ground power unit (GPU).

• Into-plane fueling.– Fuel release coordination.– Tracking/auditing of uplift receipts.– Price monitoring for competitive cost.

• De-icing.


Ground Services: Aircraft Ramp Services, cont’d

• Cleaning– Cabin cleaning.– Lavatory servicing.

• International flights.– Arrival/departure gates.– Waste management.


4. Flight Operations

Flight Tracking CommunicationsSupport ServicesLoad Control


Flight Operations: Flight Tracking

• Customer aircraft.– Monitor all customer aircraft by satellite and station

reporting to determine down line decisions, delay tactics and sub-service, if needed.

• Related aircraft– Monitor aircraft of other airlines who are on the “call list”

for sub-service to determine best options quickly in the event of a mechanical.


Flight Operations: Communications

• Airline and station messaging.– Establish procedures via SITA, e-mail, fax, phone and radio.

• Regulatory agency reporting.– APIS.– Passenger manifest.

• Schedules– Issue airline operational schedule to ground handlers, passenger

services contractor and airport officials.• FLIFO.

– Update flight information for reservation center and down-line stations.


Flight Operations: Support Services

• Landing Rights.– Arrange and coordinate international landing rights and approvals

foreign governmental agencies, US Customs, US Department of Agriculture (USDA) and Immigration and Naturalization Services (INS).

• Route Planning.– Assist airline dispatch with most cost effective options considering

crews, fuel, customs, etc.• Crew Service.

– Crew accommodations and airport transportation.


Flight Operations: Load Control

• Weight and balance.– Participate in and/or make decisions regarding weight

and balance issues on flights.– Arrange for transport and delivery of any passenger

baggage removed due to operational reasons.



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The Role of Operations Strategy

• Provide a plan that makes best use of resources which;– Specifies the policies and plans for using

organizational resources– Supports Business Strategy as shown on next slide


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Business/Functional Strategy

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Importance of Operations Strategy

• Companies often do not understand the differences between operational efficiency and strategy– Operational efficiency is performing tasks well,

even better than competitors– Strategy is a plan for competing in the

marketplace• Operations strategy is to ensure all tasks

performed are the right tasks


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Developing a Business Strategy

• A business strategy is developed after taking into many factors and following some strategic decisions such as;– What business is the company in (mission)– Analyzing and understanding the market

(environmental scanning)– Identifying the companies strengths (core

competencies)


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Three Inputs to a Business Strategy

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Examples from Strategies

• Mission: Dell Computer- “to be the most successful computer company in the world”

• Environmental Scanning: political trends, social trends, economic trends, market place trends, global trends

• Core Competencies: strength of workers, modern facilities, market understanding, best technologies, financial know-how, logistics


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Example: Nokia

Nokia extended its already formidable dominance of the global handset business on Jan. 24, announcing it had achieved 40% market share in the fourth quarter of 2007. But perhaps the biggest surprise was that the Finnish company achieved this long-promised and psychologically important milestone while also becoming more profitable.

http://www.businessweek.com/globalbiz/content/jan2008/gb20080124_974301.htm?chan=search


http://www.businessweek.com/globalbiz/content/jan2008/gb20080124_974301.htm?chan=search

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Developing an Operations Strategy

• Operations Strategy is a plan for the design and management of operations functions

• Operation Strategy developed after the business strategy

• Operations Strategy focuses on specific capabilities which give it a competitive edge – competitive priorities


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Operations Strategy – Designing the Operations Function

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Competitive Priorities- The Edge

• Four Important Operations Questions: Will you compete on –

Cost? Quality? Time? Flexibility?• All of the above? Some? Tradeoffs?


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Competing on Cost?

• Offering product at a low price relative to competition

– Typically high volume products

– Often limit product range & offer little customization

– May invest in automation to reduce unit costs

– Can use lower skill labor

– Probably use product focused layouts

– Low cost does not mean low quality


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Competing on Quality?• Quality is often subjective• Quality is defined differently depending on who is defining it• Two major quality dimensions include

– High performance design:• Superior features, high durability, & excellent customer service

– Product & service consistency:• Meets design specifications• Close tolerances• Error free delivery

• Quality needs to address– Product design quality – product/service meets requirements– Process quality – error free products


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Competing on Time?

• Time/speed one of most important competition priorities

• First that can deliver often wins the race

• Time related issues involve– Rapid delivery:

• Focused on shorter time between order placement and delivery

– On-time delivery:• Deliver product exactly when needed every time


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Competing on Flexibility?• Company environment changes rapidly• Company must accommodate change by being flexible

– Product flexibility:• Easily switch production from one item to another• Easily customize product/service to meet specific requirements of a

customer

– Volume flexibility:• Ability to ramp production up and down to match market demands


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The Need for Trade-offs

• Decisions must emphasis priorities that support business strategy• Decisions often required trade offs• Decisions must focus on order qualifiers and order winners

– Which priorities are “Order Qualifiers”? e.g. Must have excellent quality since everyone expects it

– Which priorities are “Order Winners”? e.g. Southwest Airlines competes on cost McDonald’s competes on consistency FedEx competes on speed Custom tailors compete on flexibility


February 2012 (v3)

Threat and Error Management (TEM) and Line Operations Safety Assessment (LOSA)


42

Threat and Error Management


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What is a Threat?• Any condition that increases the complexity

of the operation.• Threats, if not managed properly, can

decrease safety margins and can lead to errors.

• “Threats should serve as a Red Flag.” – Watch out! – Something bad can happen!


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• There are two types of threats– External Threats – Those outside of your control

(e.g., weather, lack of equipment, hard to understand documentation, system errors, inadequate lighting)

– Internal (Human) Threats – Those within our control (e.g., fatigue, loss of situation awareness, stress, disregard for following procedures)

Types of Threats


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What is an Error?• The mistake that is made when threats are

mismanaged.• There are 5 types of errors:

1. Intentional non-compliance errors

2. Procedural errors

3. Communication errors

4. Proficiency errors

5. Operational decision errors


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Weather

New Agent

Cabin Crew

Passenger eventsLate Bags

Time pressures

Heavy traffic

Unfamiliar gateFlight Crew

Flight diversion

Distractions

Ramp slope

Late Cargo

Maintenance

System malfunction

Late Gate Change

Threats That Can Lead to Ramp Agent Error


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CommunicationDocumentation

Lighting TemperatureAccessequipment

Tools

Noise

Hazardousmaterials

Airplane/parts design

Threats That Can Lead to Mechanic Error

Lack of Skill

Time pressure

Task distraction/interruption


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Example 1: Air Transat Flight 236

• August 24, 2001: TS 236, an Airbus A330, departed from Toronto, Canada bound for Lisbon, Portugal with 293 passengers and 13 crew members.

• Flight ran out of fuel over the Atlantic Ocean

• Glided to emergency landing in the Azores

• 0 fatalities; 18 injuries, most minor, none life-threatening

• 8 of 12 tires are blown out© www.asia-masters.com

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• The fuel leak was caused by an incorrect part installed in the hydraulics system.

• The replacement engine was supposed to be in the same configuration as the one removed.

• Initially the mx technicians left both the fuel line and the hydraulic line attached to the airplane. Due to differences in the configuration, the rigid fuel line had to be replaced but the flexible hydraulic line was retained.

• A mismatch between the fuel and hydraulic tubes resulted from the installation of the post-mod hydraulic pump and fuel tube assembly with the pre-mod hydraulic tube.

• Over time, chafing from vibration in the hydraulic line degraded the fuel line and caused the leak.

Air Transat Flight 236 Investigation


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Right Engine Pipe Contact

Fuel Pipe Crack and Scratches

Photo Courtesy of Aviation Accidents Prevention and Investigation Department, Government of Portugal

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Threats of Flight 236• Maintenance Related

– No requirements for conducting a pre-installation, configuration parity check.

– Time pressure to complete the work in time for a scheduled flight and to clear the hangar for an upcoming event.

– Due to the ill-fit hydraulic pump, the lead technician realized existence of both pre- and post-Service Bulletin (SB) configurations through searching Airbus Illustrated Parts Catalogue (IPC). However, the computer system used to access technical information was inoperative creating difficulty in accessing the Trent 772B and related SB’s.


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Threats of Flight 236 (cont’d)• Maintenance Related

– No readily available, effective, commonly accepted method to compare the SB (configuration) status of engines, placing reliance on other processes to detect configuration differences.

– The post-installation quality control checks following the engine change did not specify checking the installation of the hydraulic pump, hydraulic tube, and fuel tube.


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Threats of Flight 236 (cont’d)

• Maintenance Related– Neither the engine-receipt nor the engine-change

planning process identified the differences in configuration between the removed and installed engine.


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– The lead technician was unaware of the availability of standalone IPC CDs in the MCC.

– A mismatch resulted from the installation of the post-mod hydraulic pump and the post-mod fuel tube with the pre-mod hydraulic tube assembly.

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– Fuel tube and hydraulic tube contacted with each other due to the mismatch. The fuel tube sustained a 3-by-1/8-inch fracture, which caused fuel leak and eventually fuel exhaustion.

– Despite the knowledge of the optional Rolls-Royce SB RB.211-29-C625, the SB was not reviewed during or following the installation of the hydraulic pump.


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– The logbook entry detailing the installation of the fuel line from the replaced engine was not recorded.

– The technicians were not trained on the risk associated with the application of force while installing mixed-construction (including both rigid and flexible sections) lines.


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Threat and Error Management Model


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What is Threat Management?

• Threat Management – There are two aspects to Threat Management:1. Recognizing that a threat exists

2. Coming up with a strategy to deal with the threat, so that it does not reduce safety margins or contribute to an error


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What is Error Management?

• Error Management – The mitigation or reduction in seriousness of the outcome.1. The resist and resolve filters or defense

mechanisms may be applied to an existing error before it becomes consequential to safety.

2. By applying the resist and resolve filters in the analysis of an error, you may: Improve strategies or counter-measures to identify and

manage both internal and external threats, like fatigue, condition of ground equipment, etc.


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RESISTThings that already exist within the system to protect against errors. The human corrects

the error before it leads to an unwanted consequence.

RESOLVE

Error Management


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Error Outcome

• There are three types of error outcomes:1. Inconsequential – The error has no immediate

effect on safety.

2. Undesired State – Risk or unsafe operational conditions are increased.

3. Additional Error – The error causes another error(s).


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Threat & Error Management Model

RESISTThings that already exist within the system to protect against errors.

The human corrects the error before it leads to an unwanted consequence.

RESOLVE


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RESIST

RESOLVE

Threat & Error Management Model

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Requirements of TEM Analysis• Be Specific• Use TEM language in reporting• Identify Threats, Errors and Error Outcomes• Identify “Resolve and Resist”

Strategies/Counter Measures already in place• Recognize Human Factors affecting behavior

choices and decision making• Recommend solutions for changes that lead

to a higher level of safety awareness

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Resist

Strategies

Resolve

Analyze the Failures

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Conclusions• Become a better Threat Manager

– Learn to actively identify threats in your operation– Learn strategies for managing threats

• Become a better Error Manager– Learn to look for errors that you have made and correct

them before they lead to unwanted consequences– Understand why the Resist and Resolve aspects of Error

Management did not work, and… Find better strategies to deal with the threats that lead to the

error, or Fix threats (like broken equipment) that lead to the error

• Continue building a Safety Culture by encouraging open, honest communications


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Late arriving aircraft

A

B

C

D

Quiz – Question #1

Dark Night

Which is an internal threat?

Fatigue

Stormy Weather


• That is correct, fatigue is one of the many internal threats. Other examples are distractions, lack of knowledge, and complacency

• Stormy weather, dark night, and late arriving aircraft are examples of external threats.

Back to Question Next Question

Quiz – Answer #1

35


• That is incorrect, stormy weather is an external threat. The correct answer would be fatigue.

• Example of internal threats would be fatigue, distractions, lack of knowledge, and complacency.

• Examples of external threats would be stormy weather, lack of communication, poor lighting conditions, and delayed aircraft.


Quiz – Answer #1

36


• That is incorrect, dark night is an external threat. The correct answer would be fatigue.




Quiz – Answer #1

37


• That is incorrect, late arriving aircraft is an external threat. The correct answer would be fatigue.




Quiz – Answer #1

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A threat is anything that increases operational complexity and, if not managed properly, can decrease safety margins and can lead to errors.

A

B


False

True

39© www.asia-masters.com

• That is correct, a threat is anything that increases operation complexity and, if not managed properly, can decrease the safety margins.

• These could be External Threats (weather, system errors, working environment) or Internal (human) Threats (fatigue, preoccupation, disregard for procedures)


Quiz – Answer #2

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• That is incorrect, a threat is anything that increases operation complexity and, if not managed properly, can decrease the safety margins.

• These could be External Threats (weather, system errors, working environment) or Internal (human) Threats (fatigue, preoccupation, disregard for procedures)


Quiz – Answer #2

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75

Errors are mistakes that are made whenthreats are managed incorrectly.

A

B


False

True


• That is correct, errors are mistakes that are made when threats are mismanaged.

• There are 5 types of errors– Intentional non-compliance errors

– Procedural errors

– Communication errors

– Proficiency errors

– Operational decision errors


Quiz – Answer #3

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• That is incorrect, errors are mistakes that are made when threats are mismanaged. If threats are correctly managed they would not turn into errors.

• There are 5 types of errors– Intentional non-compliance errors

– Procedural errors

– Communication errors

– Proficiency errors

– Operational decision errors


Quiz – Answer #3

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78

Which is an error outcome?

A

B

C

D


Inconsequential

Undesired State

Additional Error

All of the above


• That is correct, all of the above are possible outcomes to an error.

• The three types of error outcomes are: Inconsequential, Undesired State, and Additional Errors.

Back to Question Continue

Quiz – Answer #4

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• That is incorrect, because it is incomplete. Inconsequential is only one of the possible outcomes. The correct answer would be all the above, because inconsequential, undesired state, and additional error are all possible outcomes to an error.


Quiz – Answer #4

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• That is incorrect, because it is incomplete. Undesired state is only one of the possible outcomes. The correct answer would be all the above, because inconsequential, undesired state, and additional error are all possible outcomes to an error.


Quiz – Answer #4

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• That is incorrect, because it is incomplete. Additional error is only one of the possible outcomes. The correct answer would be all the above, because inconsequential, undesired state, and additional error are all possible outcomes to an error.


Quiz – Answer #4

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Line Operation Safety Assessment(LOSA)


84

Learning Objectives• After this training you will be able to:

– Define LOSA– Describe the characteristics and benefits of LOSA– Identify the goals of LOSA– Outline the steps necessary to integrate LOSA

into your organization– Understand how LOSA fits into a SMS


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LOSA Background


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What is LOSA?

• Line Operations Safety Assessment– A tool for collecting safety data– Organizational self-assessment– Observing routine operations for both safe and at

risk behaviors– Voluntary, non-threatening, non-punitive

observation


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Threat and Error Management & LOSA?

– LOSA is grounded within the threat and error management (TEM) framework.

Threats increase the complexity and can decrease the safety margins.

Errors reduce the safety margin and increase the chances of adverse events.


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InformWorkforce

LOSA Characteristics

Peer-to-PeerObservations

SystematicObservations

Management &Labor Agreement

Secure & Private

Targeted Enhancements Volunteers

Trusted & Trained Observers

Non-punitive

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Benefits of

LOSA

Identify and Manage Threats

Assess Training

Effectiveness

Check Quality & Usability of Procedures

Involve Employee

Groups

Complements Existing

Safety & QA Programs

Assess Safety

Margins

Identify and Manage Errors

Baseline for Org. Change

Understanding Shortcuts

Identify DesignProblems

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Goals/Intent of LOSA

• Observe day-to-day work behaviors during normal operations

• Discover procedural and systemic threats and errors

• Reduce injuries & equipment and A/C damage

• Generate baseline data, implement new changes, and generate follow-up data to assess effectiveness


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Example 2: Alaska Airlines Flight 536

• December 26, 2005: Alaska Airlines Flight 536 departed from Seattle, WA bound for Burbank, CA with 136 passengers and 5 crew members.

• Probable Cause discovered by the NTSB: At Sea-Tac earlier that day, ramp worker hit A/C with a baggage loader.

• The contact from the above unreported incident caused a 12 by 6 inch hole in the A/C, which caused a decompression during the climb to cruise.


92

Alaska Airlines Flight 536 (cont’d)

• A/C did pressurize on climb out because baggage that got stuffed into the tear helped hold pressure.

• A/C experienced a rapid cabin depressurization during climb out at approximately 26,000 feet.

• Returned to airport with no injuries


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• Post landing examination of the fuselage revealed a 12 by 6 inch hole between the middle and forward cargo doors on the right side of the airplane.

• Ramp worker said he did not know he had hit the A/C; however, after the occurrence, he confessed that he had “grazed the airplane” with a tug, while attempting to depart the vicinity of the airplane.

Alaska Airlines Flight 536 Investigation


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• T/B. Ground Equipment – T/B 5.1 Motorized equipment: Bag tug

• T/E Ground Based– T/E 6.1 Congestion: Equipment Parking

• T/F Human Factors– T/F 8 Knowledge/skills/experience level– T/F 16 Situational Awareness

Threats of Alaska Airlines Flight 536

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• T/I Environmental Threats– T/I 6 Rain

• T/G Operational – T/G 16 Perceived time pressure

Threats of Alaska Airlines Flight 536 (cont’d)


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Errors of Alaska Airlines Flight 536

• E/A General Safety

– E/A 8 Equipment contacting other equipment

– E/A 38 Communication procedures not followed


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How does LOSA fit into a SMS?

MEDA/REDA

FOQA ASAP

CASS

Your Safety Programs

LOSA

SMS

98

Safety Culture Shift for Hazard Identification

ReactiveMEDAREDA

Proactive

QA AuditsHazard ReportingASAP

PredictiveLOSA


Steps to Implement

LOSA

Steering Committee

Marketing

Union Involvement

Learn

Train

Schedule

SelectObservers

Observe

Data Verification

AnalyzeData

Report

Enhance

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What to expect of LOSA observers?• Observers will record and code:

– Threats– Whether the threats were managed or

mismanaged– Errors– Identify the outcomes of the errors

• Observers do not intervene unless there is an imminent safety issue or if an aircraft would be flown in a non-airworthy condition.

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101

What is expected of those being observed during a LOSA?

• During a LOSA observation you should:– Continue normal duties and behaviors– Not be interrupted by the observer in the middle

of a task– Answer a few demographics questions after

being observed (optional)


What makes LOSA successful?

• Involvement from Management & Labor to frontline employees

• Observer being a fly-on-the-wall

• Trusted/trained co-workers as observers

• Anonymity and non-punitive actions for those being observed (e.g., no tattletale)

• Feedback to employees

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103

False

True


A

B

LOSA observations should take place during normal operations.


Quiz – Answer #1

• That is correct, LOSA observations should take place during normal operations.

Back to Question To Next Question55


Quiz – Answer #1

• That is incorrect, LOSA observations should take place during normal operations.


106

Use trained company personnel as LOSA observers

Follow any unsafe findings with disciplinary action

Ensure top management support

Protect anonymity of those observed


A

C

D

B

Which of the following is not a LOSA characteristic?


Quiz – Answer #2

• That is correct, following any unsafe findings with punitive action is NOT one of the characteristics of a LOSA program.

• The characteristics are: peer-to-peer observations, systematic observation instrument based on Threat and Error Management, anonymous, confidential, and non-punitive, secure data collection repository, trusted and trained observers, voluntary participation, joint management/labor sponsorship, data-derived targets for enhancement, data verification, feedback of results.



Quiz – Answer #2• That is incorrect, using trained company personnel as a

LOSA observer is one of the characteristics of a LOSA. The correct answer would be follow any unsafe findings with punitive action; this is NOT one of the characteristics of a LOSA program.




Quiz – Answer #2• That is incorrect, ensuring top management support is

one of the characteristics of a LOSA. The correct answer would be follow any unsafe findings with punitive action; this is NOT one of the characteristics of a LOSA program.




Quiz – Answer #2• That is incorrect, protecting anonymity of those observed

is one of the characteristics of a LOSA. The correct answer would be follow any unsafe findings with punitive action; this is NOT one of the characteristics of a LOSA program.




111

Identify and manage threats

Collect field data for safety management system

Identify strengths and weaknesses of operation

Provide a mechanism to check procedural compliance

All of the above


A

B

C

D

E

How is LOSA beneficial?


Quiz – Answer #3

• That is correct, all the above are benefits to LOSA.

• The benefits are: identify threats in the operating environment, identify threats from within the operations, assess the degree of effectiveness of training, check the quality and usability of procedures, identify design problems in the human/machine interface, understand shortcuts and workarounds, assess safety margins, provide a baseline for organizational change, provide a rationale for allocation of resources.

Back to Question Continue63


Quiz – Answer #3• That is incorrect, because it is incomplete. Identifying and

managing threats is just one of the benefits of a LOSA. The correct answer would be all of the above.




Quiz – Answer #3

• That is incorrect, because it is incomplete. Collecting field data for safety management system is just one of the benefits of a LOSA. The correct answer would be all of the above.




Quiz – Answer #3

• That is incorrect, because it is incomplete. Identifying strengths and weaknesses of the operation is just one of the benefits of a LOSA. The correct answer would be all of the above.



Quiz – Answer #3

• That is incorrect, because it is incomplete. Providing a mechanism to check procedural compliance is just one of the benefits of a LOSA. The correct answer would be all of the above.




117

Conclusions

• LOSA provides a means for your organization to identify external (outside our control) and internal (within our control) threats.

• It should be conducted during routine operations.

• LOSA should use trained volunteers from the organization to do the observations.


118

Conclusions (cont’d)

• No punitive action will be taken as a result of LOSA findings.

• LOSA is a predictive hazard identification system for your SMS that can – Reduce your costs,

– Improve safety, and

– Improve efficiency.



WAREHOUSE MANAGEMENT


Understanding Warehouse Concept• Part of firms logistics system that stores products at and

between point of origin and point of consumption.

• Term “Warehousing” is referred as transportation at zero miles per hour

• Warehousing provides time and place utility for raw materials, industrial goods, and finished products, allowing firms to use customer service as a dynamic value-adding competitive tool.


• A warehouse is a planned space for the storage and handling of goods and material. Inventory represents a large cost to the humanitarian supply chain. One of the primary differences between inventory management and warehouse management is in the complexity of each type of inventory system.


Warehouse Management Process


THE ROLE OF THE WAREHOUSE IN THE LOGISTICS SYSTEM

The warehouse is where the supply chain holds or stores goods.• Functions of warehousing include:

– Transportation consolidation– Product mixing– Docking– Service– Protection against contingencies


DESIGN CONSIDERATION

Ideal Facility for Pure Supplier Consolidation(Full Pallet Movement)

Warehouse Space Requirements


PRINCIPLES OF WAREHOUSE LAYOUT DESIGN

Use one-story facilities

Move goods in a straight line

Use efficient materials-handling equipment

Use an effective storage plan

Minimize aisle space

Use maximum height of the building


WAREHOUSE PROCESSPut-away

•Identify Product•Identify Product Location•Move Products•Update Records

Storage•Equipment•Stock Location– Popularity– Unit Size– Cube

Shipping Preparation•Packing•Labeling•Stacking

Order Picking•Information•Walk & Pick•Batch Picking

Shipping•Schedule Carrier•Load Vehicle•Bill of Loading•Record Update

RECEIVING•Schedule Carrier•Unload Vehicle•Inspect for damage

INPUT

OUTPUT

OBJECTIVES OF EFFICIENT WAREHOUSE OPERATIONS• Provide timely customer service.

• Keep track of items so they can be found readily & correctly.

• Minimize the total physical effort & thus the cost of moving

goods into & out of storage.

• Provide communication links with customers


Benefits of Warehouse Management– Provide a place to store & protect

inventory– Reduce transportation costs– Improve customer service levels

• Complexity of warehouse operation

depends on the number of SKUs

handled & the number of orders

received & filled.

• Most activity in a warehouse is

material handling.


• Capital costs

—Costs of space & materials handling equipment

• Operating costs

—Cost of labor

—Measure of labor productivity is the number of

units that an operator can move in a day

COSTS OF OPERATING A WAREHOUSE


WAREHOUSE ACTIVITIES• Receive goods

• Identify the goods

• Dispatch goods to storage

• Hold goods

• Pick goods

• Marshal shipment

• Dispatch shipment

• Operate an information

system


Benefits of Warehousing

Consolidation Shipment consolidation is an economic benefit of

warehousing. With this arrangement, the consolidating warehouse

receives and consolidated materials from a number of manufacturing plants destined to a specific customer on a single transportation shipment.

The benefits are the realization of the lowest possible transportation rate and reduced congestion at a customer's receiving dock.


Modern Warehouse


• With enough time and space to properly prepare inventory for delivery the number of customer service issues has dropped by 60%. A concurrent reduction in customer service calls allowed this retailer to cut customer service staff by half.

• The improvement in prep and assembly permitted the repair shop staff to be reduced from four to three, and the number of field service technicians to be halved from four to two.

Modern Warehouse


The warehouse now uses the latest version of a furniture industry specific computer system that has enabled the store to reduce the office headcount by three people. This staff reduction was accomplished even though sales volume has doubled since the installation of the system.With accurate inventory, two people who spent their days doing inventory checks for sales staff and researching “not in location” items now do quality control work on the dock.The new computer and quality control efforts have reduced the number of merchandise items returned as wrong or incomplete by 80%, resulting in more successful first time deliveries and more satisfied customers.

Modern Warehouse


The Warehousing Cycle


FIVE COMMON WAREHOUSE MANAGEMENT PROBLEMS AND THEIR POTENTIAL SOLUTIONS

Redundancy – Nothing is less efficient than having to do the same thing twice… or three or four times. Many times, one warehouse worker will pass a ticket on to another, and another, and another, and so on. You can easily eliminate redundancy in your warehouse operations by implementing a good barcoding system. The best automated systems will just about completely eliminate redundancy. If you already have an automated system in place and are still seeing too much repetition in your processes, then it’s time to switch systems. Staying stagnant while useful technology passes you by is a good way to fall behind your competition.


• Picking efficiencies – Another argument to be made for automated systems is that it streamlines picking efficiency. If there is no automation in place, pickers don’t always take the most efficient route to the inventory, which causes a serious process inefficiency. The trickle-down effect is increased order time and added stress on your equipment and workers. In the end, it all amounts to poor customer service, which is not way to stay in business.


• Poor facility layout – Optimizing the layout of your warehouse will make much more effective use of your space. In other words, if your storage systems, racking, and pallet patterns are most efficiently laid out, you may find that you can actually use a much smaller space. One way to optimize the layout of your facility is by ensuring the highest-selling inventory is at the most accessible area for your pickers. By contrast, make sure that the least-selling inventory is in the least accessible area. This solution alone should cause a big increase in productivity.


• Inventory awareness – If pickers aren’t aware of the location of key inventory, the whole warehouse operation will be slowed dramatically. Make sure there is a system in place that allows pickers to be constantly aware of inventory, especially the high-selling items. Also, keep them aware of any changes in location; avoid having to temporarily halt operations so the picker can seek out information on the location of an item needed to fill an order.


• Accuracy – Of course, accuracy is really the key to almost any efficient operation. If you don’t have an automated system in place that keeps an extremely accurate check on inventory, an entire list of things can go wrong. If nobody is sure what’s actually in stock, unnecessary build-ups of the wrong items can occur and consequently, shortages of heavily demanded items can drive customer dissatisfaction. Nothing can hurt a business like a large amount of orders that can’t be filled due to poor inventory accuracy.


Inventory Cost MethodAverage Cost MethodThe average cost method assigns inventory costs by calculating a moving average of all inventory purchase costs. This method can be ideal for companies that sell non-perishable inventory in a non-sequential manner, such as video game retailers. The average cost method can also provide a more steady, reliable cost recognition structure than other methods, assuming costs do not swing wildly up and down for inventory items. To continue the example above under the average cost method, a company would assign an average cost of $19.50 -- the sum of 20 and 19 divided by 2 -- to all 20 widgets sold.

Specific Identification MethodThe specific identification method perfectly matches inventory costs with units sold, assigning the exact cost of each sold inventory item when the specific item is sold. This method is not suited for businesses that sell high volumes of relatively homogenous products, such as food producers, but it can be ideal for companies that sell high-dollar items with relatively low volume, such as automobiles or yachts. Consider a car lot, for example. When a salesperson sells a car, he can forward the exact VIN or invoice number of the car to the accounting department along with the sales information, allowing accountants to look up exactly how much the dealership paid for the car.


A system to keep track of inventory A reliable forecast of demand Knowledge of lead times Reasonable estimates of

Holding costs Ordering costs Shortage costs

A classification system

Effective Inventory Management


Inventory Counting Systems

Periodic SystemPhysical count of items made at periodic intervals

Perpetual Inventory System System that keeps track of removals from inventory continuously, thus monitoringcurrent levels of each item


Inventory Counting Systems (Cont’d) Two-Bin System - Two containers of

inventory; reorder when the first is empty Universal Bar Code - Bar code

printed on a label that hasinformation about the item to which it is attached


Lead time: time interval between ordering and receiving the order

Holding (carrying) costs: cost to carry an item in inventory for a length of time, usually a year

Ordering costs: costs of ordering and receiving inventory

Shortage costs: costs when demand exceeds supply

Key Inventory Terms


Types of Inventories Raw materials & purchased parts Partially completed goods called

work in progress Finished-goods inventories

(manufacturing firms) or merchandise (retail stores)


Types of Inventories (Cont’d) Replacement parts, tools, & supplies Goods-in-transit to warehouses or customers


THE ABC CLASSIFICATIONIn materials management, the ABC analysis (or Selective Inventory Control) is an inventory categorization technique. ABC analysis divides an inventory into three categories- "A items" with very tight control and accurate records, "B items" with less tightly controlled and good records, and "C items" with the simplest controls possible and minimal records.

The ABC analysis provides a mechanism for identifying items that will have a significant impact on overall inventory cost, while also providing a mechanism for identifying different categories of stock that will require different management and controls.


THE ABC CLASSIFICATION (cont’d)The ABC analysis suggests that inventories of an organization are not of equal value. Thus, the inventory is grouped into three categories (A, B, and C) in order of their estimated importance.

'A' items are very important for an organization. Because of the high value of these 'A' items, frequent value analysis is required. In addition to that, an organization needs to choose an appropriate order pattern (e.g. ‘Just- in- time’) to avoid excess capacity. 'B' items are important, but of course less important than 'A' items and more important than 'C' items. Therefore, 'B' items are intergroup items. 'C' items are marginally important.


ABC Analysis CategoryThere are no fixed threshold for each class, different proportion can be applied based on objective and criteria. ABC Analysis is similar to the Pareto Principle in that the 'A' items will typically account for a large proportion of the overall value but a small percentage of number of items.Example of ABC class are• ‘A’ items – 20% of the items accounts for 70% of the annual consumption value of the

items.• ‘B’ items - 30% of the items accounts for 25% of the annual consumption value of the

items.• ‘C’ items - 50% of the items accounts for 5% of the annual consumption value of the

items.

Another recommended breakdown of ABC classes:• "A" approximately 10% of items or 66.6% of value• "B" approximately 20% of items or 23.3% of value• "C" approximately 70% of items or 10.1% of value


The Use of ABC ClassificationThe ABC concept is based on Pareto's law. If too much inventory is kept, the ABC analysis can be performed on a sample. After obtaining the random sample the following steps are carried out for the ABC analysis.

Step 1: Compute the annual usage value for every item in the sample by multiplying the annual requirements by the cost per unit.

Step 2: Arrange the items in descending order of the usage value calculated above.

Step 3: Make a cumulative total of the number of items and the usage value.

Step 4: Convert the cumulative total of the number of items and usage values into a percentage of their grand totals.

Step 5: Draw a graph connecting cumulative % items and cumulative % usage value. The graph is divided approximately into three segments, where the curve sharply changes its shape. This indicates the three segments A, B and C.


Inventory Record AccuracyInventory Record Accuracy (IRA) is a measure of how closely official inventory records match the physical inventory. Many managers equate Inventory Record Accuracy with cycle counting, but there is a lot more to it than just counting.

The units of measurement are either dollar based or count based. These two bases have different purposes and may give widely differing results.

Accountants and financial auditors prefer dollar-based measurements of accuracy. Their concern is to ensure that the inventory value stated on books and tax returns is accurate at an aggregate level. Discrepancies on individual items hold little concern provided that positive and negative discrepancies are roughly equal and the total value is the same.

Operations and material management people have a stronger interest in the accuracy of individual SKUs. If one SKU is short, they can rarely substitute some other part or item that happens to be long


Methods For Improving Accuracy

To improve inventory record accuracy, the error creation rate (i.e. errors per week, month, etc.) must be less than the error removal rate. to increase accuracy we can decrease errors flowing in or increase the removal rate.


Methods For Improving Accuracy (Cont’d)


Methods For Improving Accuracy (Cont’d)

Methods to improve accuracy include Cycle Counting, Physical Inventory, Transaction Reduction and Process Improvement. An optimal approach uses them all.

• Physical Inventory-- In a physical inventory, normal operations cease while a physical count of every item is conducted. The counts are compared to inventory records and, when necessary, the records are corrected.

• Cycle Counting-- A small number of items are physically counted, daily, on a random or semi-random basis. The physical count is compared to the inventory record. When necessary, the records are corrected.

• Process Improvement-- Process Improvement examines the transaction processes. Changes are identified that reduce the probability of error.

• Transaction Reduction-- The most effective way to reduce errors is to reduce the number of transactions. Fewer transactions introduce fewer errors. Kanban, BOM simplification, cellular manufacturing and other elements of Lean make this feasible.


Reasons For Poor AccuracyThere are many causes for inaccurate records. People may enter data inaccurately or not at all. Confusing location codes cause discrepancies between recorded and actual locations. Occasionally, software bugs introduce errors. The thousands of possible causes are either process-related or volume-related.

Process Related Errors-- Each step in a transaction process introduces some probability for error, even if that probability is small. To reduce process-related errors, we must change the process.

Volume-Related Errors-- Every transaction process has an inherent error rate or probability of error resulting from the structure and execution of the process. Over time, and with many transactions, the number of new errors per week or per thousand transactions is relatively constant, if the process remains unchanged. The more transactions, the more errors. If transaction volume is reduced through kanban, backflushing, Cellular Manufacturing or other simplification, errors drop proportionately.


Cycle Counting In The Warehouse

Types Of Cycle CountingThere are a number of types of cycle counting that can be used:• Control Group• Random Sample


Control Group Cycle Counting

When a company starts using cycle counting they may use a control group to test that the method they are using to count items will give the best results. The process usually focuses on a small group of items that are counted many times in a short period. This repeated count process will show any errors in the count technique which can then be corrected. The process is continued until the technique has been confirmed to be accurate.


Random Sample Cycle CountingWhen a number of items to be counted are chosen at random, this is process known as random sample cycle counting. When a company’s warehouse has a large quantity of similar items, they can randomly select a certain number of items to be counted. The count can be performed each day or workday so that a large percentage of the items in the warehouse are counted in a reasonable period.

Two techniques can be used in random sample cycle counting; constant population counting and diminished population counting:

Constant population counting is where the same number of items are counted each time a count is performed. This can mean that certain items are counted frequently and some items are not counted, as the selection of items to be counted is random.

Diminished population counting is a technique where a number of warehouse items are counted and then excluded from being counted again until all of the items in the warehouse are counted. Each count selects items from an ever-decreasing number of eligible items to be counted.


3 Steps to Conducting a Cycle Counting

Identify and prioritize types of materials that need to be counted and establish a method for counting, such as random sampling or using a control group.

An inventory count may depend on whether a company has a reliable WMS, enterprise resource planning (ERP) and/or work process system that can deplete inventory as it is being used for work in progress (WIP), finished or sold.

Based on materiality of the inventory, determine appropriate frequency. Schedule counts during non-peak days/hours if possible. Communicate the plan for the count to employees impacted.


Storage & Material Handling System

Material handling involves short-distance movement within the confines of a building or between a building and a transportation vehicle.

It utilizes a wide range of manual, semi-automated, and automated equipment and includes consideration of the protection, storage, and control of materials throughout their manufacturing, warehousing, distribution, consumption, and disposal.

Material handling can be used to create time and place utility through the handling, storage, and control of material, as distinct from manufacturing, which creates form utility by changing the shape, form, and makeup of material.


Design of Material Handling Systems

Design of Material Handling Systems

Material handling is integral to the design of most production systems since the efficient flow of material between the activities of a production system is heavily dependent on the arrangement (or layout) of the activities. If two activities are adjacent to each other, then material might easily be handed from one activity to another.

If activities are in sequence, a conveyor can move the material at low cost. If activities are separated, more expensive industrial trucks or overhead conveyors are required for transport.

The high cost of using an industrial truck for material transport is due to both the labor costs of the operator and the negative impact on the performance of a production system (e.g., increased work in process) when multiple units of material are combined into a single transfer batch in order to reduce the number of trips required for transport.


Improving the Layout of WarehouseAn inefficient layout of your warehouse can have a negative effect on your business. Decreasing productivity, creating inventory control issues, errors in shipping and posing safety risks. When it comes to laying out your warehouse, it is important to exploit its full space. Everything should be accessible and in the right location, allowing staff to carry out their duties in the most efficient way. Ensuring every square foot of space is properly utilised, within your warehouse, will keep overhead costs to a minimum and increase productivity.


Super-Size the Receiving AreaReceiving is arguably the most critical function of the warehouse. It is important to ensure you have enough room for your staff to carry out all of the necessary activities from breaking down pallets to counting items. The more space there is in the receiving area, then the easier it is for your staff to complete the job efficiently.


SegmentationWarehouse activity can be fast and dynamic which is why it is necessary to create segments in the warehouse that are well defined. For example, your returned products area should be in a separate part of your warehouse that is enclosed by a fence and clearly marked. This ensures that returned products are not mistaken for stock.

It is also important to keep shipping and receiving areas separate and located in different areas of the warehouse to avoid improper staging of freight merchandise.


Set Up Bin Locations & Pick PathIn order to provide your pickers with the best possible chance at filling their order right the first time, make sure they have adequate instructions. The pick path refers to the direction that you want your pickers to move down the aisle. It should start at the farthest point away from the shipping area and dump the picker in front of the shipping prep area.

Sketch out the pick paths on paper ahead of time. The idea is that pickers will make one pass through the facility in the most efficient way possible.


Inventory

Design your warehouse so that inventory does not need to be moved more than once. It usually does not make sense to store items in one place and then move them to another place later.


Special Packaging AreaCertain products need a value add or special packaging area. This needs to be adjacent to the shipping area, because the product will move directly from the value add area to the shipping area.

This area is difficult to cube out and takes up a lot of valuable warehouse space. Therefore, the value adds area should be kept as small as possible.


Random Location StrategyA random location strategy is the idea that a warehouse is laid out according to product accessibility other than popularity.

This is because product popularity changes based upon buying cycles and company advertising. It is therefore best to arrange products in another manner.

As long as easy access to products is maintained, the random location strategy is generally one of the more effective ways to lay out a warehouse.


AislesEnsure quick product availability by having a system of aisles and cross aisles that make it easier to move around your warehouse. Long and continuous aisles can make it difficult in getting from one part of the warehouse to another. However, cross aisles that allow access to the main aisles, help create a grid that is more efficient and easier to navigate.



Supply Chain Management

Supply Chain – an OverviewA supply chain is a system of organizations, people, activities, information, and resources involved in moving a product or service from supplier to customer. Supply chain activities involve the transformation of natural resources, raw materials, and components into a finished product that is delivered to the end customer.In sophisticated supply chain systems, used products may re-enter the supply chain at any point where residual value is recyclable. Supply chains link value chains.

Traditional View: Supply Chains in the Economy (1990, 1996)

• Freight Transportation $352, $455 B– Transportation manager in charge– Transportation software

• Inventory Expense $221, $311 B– Inventory manager in charge– Inventory software

• Administrative Expense $27, $31 B

• Logistics related activity 11%, 10.5% of GNP

$898 B spent domestically for SC activities in 1998. $1,160 B of inventory in the US economy in the early 2000s.

Transportation and inventory managers

Traditional View: Cost breakdown of a manufactured good

• Profit10%

• Supply Chain Cost 20%

• Marketing Cost 25%

• Manufacturing Cost 45%

ProfitSupply Chain

Cost

Marketing Cost

Manufacturing Cost

Effort spent for supply chain activities are invisible to the customers.

What Is a Supply Chain?

Flow of products and services from:– Raw materials manufacturers– Intermediate products manufacturers– End product manufacturers– Wholesalers and distributors and– Retailers

• Connected by transportation and storage activities

• Integrated through information, planning, and integration activities

• Cost and service levels

1.1 What Is Supply Chain Management?

• Supply chain management is a set of approaches utilized to efficiently integrate suppliers, manufacturers, warehouses, and stores, so that merchandise is produced and distributed at the right quantities, to the right locations, and at the right time, in order to minimize system wide costs while satisfying service level requirements.

Two Other Formal DefinitionsThe design and management of seamless, value-added process across organizational boundaries to meet the real needs of the end customer

Institute for Supply ManagementManaging supply and demand, sourcing raw materials and parts, manufacturing and assembly, warehousing and inventory tracking, order entry and order management, distribution across all channels, and delivery to the customer

The Supply Chain Council

PC Industry Supply ChainTracing back the screen you stare at for the bulk of your time.

Cisco’s Value Network

Source

Supplier

Supplier

Distributor

Distributor

Retailer

End-User

Converter

Converter Consumers

Information Flow

Funds/Demand Flow

Value-Added Services

Material Flow

Reuse/Maintenance/After Sales Service Flow

SCM Definition

The SCM Network

FIGURE 1.1: The logistics network

Key Observations

• Every facility that impacts costs need to be considered– Suppliers’ suppliers– Customers’ customers

• Efficiency and cost-effectiveness throughout the system is required– System level approach

• Multiple levels of activities– Strategic – Tactical – Operational

Other Related Observations

• Supply chain strategy linked to the Development Chain

• Challenging to minimize system costs and maximize system service levels

• Inherent presence of uncertainty and risk

3 Core Supply Chain Management Trends

Trend #1: Supply Chain VisibilityTransparent supply chain management and effective supply chain visibility is a critical tool in a company’s continued growth and successful brand image.

Connected supply chains provide additional opportunity link supply chains and receive more data. Data can indicate issues with procurement, product quality, and delivery. Companies that can collect, analyse and respond quickly to issues are one step ahead of their competition.

A trend in dual/multi-sources helps to provide additional supplier sources in the case of any concerns.


Trend #2: The Manufacturing Factory Smarter, more opinionated, and involved consumers are driving economy. Time is precious to them and experience is everything, which is causing brands to shuffle in response to their needs.

Rapid advances in the manufacturing sector are making it possible to build out an on-demand distributed manufacturing platform that will allow for a more effective and iterative product development life cycle.

Increased technology adoption will lead to cheaper, faster, and more accessible manufacturing in turn driving the potential for increased product line diversity and turnaround.


Supply Chain Functions within the Organization

Supply chain management is a cross-functional approach that includes managing the movement of raw materials into an organization, certain aspects of the internal processing of materials into finished goods, and the movement of finished goods out of the organization and toward the end consumer.

As organizations strive to focus on core competencies and become more flexible, they reduce their ownership of raw materials sources and distribution channels.

The effect is to increase the number of organizations involved in satisfying customer demand, while reducing managerial control of daily logistics operations.

The purpose of supply chain management is to improve trust and collaboration among supply chain partners, thus improving inventory visibility and the velocity of inventory movement.


Uncertainty and Risk FactorsMatching Supply and Demand a Major Challenge

REASONS EXAMPLES•Raw material shortages•Internal and supplier parts shortages•Productivity inefficiencies

Boeing Aircraft’s inventory write-down of $2.6 billion

•Sales and earnings shortfall •Larger than anticipated inventories

Sales at U.S. Surgical Corporation declined 25 percent, resulting in a loss of $22 million

•Stiff competition •General slowdown in the PC market

Intel reported a 38 percent decline in quarterly profit

•Higher than expected orders for new products over existing products

EMC Corp. missed its revenue guidance of $2.66 billion for the second quarter of 2006 by around $100 million

Uncertainty and Risk FactorsFluctuations of Inventory and Backorders

throughout the Supply Chain

FIGURE 1-3: Order variations in the supply chain

• Forecasting is not a solution• Demand is not the only source of uncertainty• Recent trends make things more uncertain

– Lean manufacturing– Outsourcing– Off-shoring

Uncertainty and Risk Factors

• August 2005 – Hurricane Katrina– P&G coffee supplies from sites around New Orleans– Six month impact

• 2002 West Coast port strike – Losses of $1B/day– Store stock-outs, factory shutdowns

• 1999 Taiwan earthquake – Supply interruptions of HP, Dell

• 2001 India (Gujarat state) earthquake– Supply interruptions for apparel manufacturers

Uncertainty and Risk Factors

Evolution of Supply Chain Management

1950s 1960s 1970s 1980s 1990s 2000s Beyond

Traditional Mass Manufacturing

Inventory Management/Cost Optimization

JIT, TQM, BPR, Alliances

SCM Formation/Extensions

Further Refinement of

SCM Capabilities

Progression of Logistics Costs

FIGURE 1-4: Logistics costs’ share of the U.S. economy

Composition of Logistics Costs

FIGURE 1-5: Total U.S. logistics costs between 1984 and 2005

SCM Strategy

Mission-Strategy-Tactics-Decisions

• Mission, Mission statement– The reason for existence of an organization

• Strategy– A plan for achieving organizational goals

• Tactics– The actions taken to accomplish strategies

• Operational decisions– Day to day decisions to support tactics

Life Strategy for TedTed is an undergrad. He would like to have a career in business,

have a good job, and earn enough income to live comfortably

Mission: Live a good life• Goal: Successful career, good income• Strategy: Obtain a master’s degree• Tactics: Select a college and a concentration• Operations: Register, buy books, take

courses, study, graduate, get a job

Linking SC and Business Strategy

NewProduct

Development

Marketingand

Sales Operations Distribution Service

Finance, Accounting, Information Technology, Human Resources

Competitive (Business) Strategy

Product Development Strategy-Portfolio of products-Timing of product introductions

Marketing Strategy-Frequent discounts-Coupons

Supply Chain Strategy

Strategies: Product Development

It relates to Technologies for future operations (via patents) and Set of products/services

• Be the technology leaderIBM workstations

• Offer many productsDell computers

• Offer products for locals Tata’s Nano at $2500=100000 rupeesProduction at Singur, West Bengal, India; l x w x h=3.1 x 1.5 x 1.6 meters; Top speed: 105km/hr; Engine volume 623 cc; Mileage 50 miles/gallon; Annual sales target 200,000.

Strategies• Marketing and sales strategy relates to positioning, pricing and

promotion of products/services– e.g. Never offer more than 40% discount– e.g. EDLP = every day low price

• At Wal-Mart– e.g. Demand smoothing via coupons

• BestBuy

• Supply chain management strategy relates to procurement, transportation, storage and delivery– e.g. Never use more than 1 supplier for every input– e.g. Never expedite orders just because they are late– e.g. Always use domestic suppliers within the sales season not in advance.

Fitting the SC to the customer or vice versa?

• Understand the customer Wishes

• Understand the Capabilities of your SC

• Match the Wishes with the Capabilities

• Challenge: How to meet extensive Wishes with limited Capabilities?

Achieving Strategic Fit: Consistent SCM and Competitive strategies

• Fit SC to the customer

• Understanding the Customer– Range of demand, pizza hut stable

– Production lot size, seasonal products

– Response time, organ transplantation

– Service level, product availability

– Product variety– Innovation– Accommodating poor quality

Implied (Demand) Uncertainty for SC

Implied trouble for SC

Contributors to Implied Demand Uncertainty

Low High

Price ResponsivenessCustomer Need

Implied Demand Uncertainty

Commodities DetergentLong lead time steel

Customized products High Fashion ClothingEmergency steel, for maintenance/replacement

Short lead times, product variety, distribution channel variety, high rate of innovation and

high customer service levels all increase the Implied Demand Uncertainty

Understanding the Supply Chain: Cost-Responsiveness Tradeoff

High Low

Low

High

Responsiveness (in time, high service level and product variety)

Cost in $

Efficiency frontier

InefficientFix responsiveness Impossible

Inefficiency Region

Why decreasing slope (concave) for the efficiency frontier?

Achieving Strategic Fit: Wishes vs. Capabilities

Implied uncertainty spectrum

Responsive (high cost)

supply chain

Efficient (low cost)

supply chainCertain demand

Uncertain demand

Responsivenesspectrum Zone o

f

Strateg

ic Fit

Lunch buffet<Low margin>

Gourmet dinner<High margin>

Loosing the strategic fit: Webvan• Webvan started a merger with HomeGrocer in Sept 2000 and

completed in May 2001.• Declared bankruptcy in July 2001. Why?

– “Webvan was so behemoth that could deliver anything to anyone anywhere that it lost sight of a more mundane task: pleasing grocery customers day after day”.

– Short to midterm cash mismanagement. Venture capital of $1.2 B run out. – Merger costs: duplicated work force, integration of technology, realignment

of facilities. • Peapod has the same business model but more focused in terms of

service and locations. It actually survives with its parent company Royal Ahold’s (Dutch Retailer) cash.– Delivers now at a fee of $6.95 within a day.

Big retailers’ Strategy• Wal-Mart: Efficiency• Target: More quality and service• Carrefour: International, ambiance

• K-Mart: Confused. – Squeezed between Target and Wal-Mart– Reliance on coupon sales– Do coupons stabilize or destabilize a Supply chain?

• K-Mart and Sears merged in November 2004. Now called Sears Holdings.

• K-Mart gets cash• Sears gets presence outside malls

Other Factors• Multiple products in a SC. Multiple customers for a given product

– Separate supply chains or Tailored supply chains• e.g. Barnes and Noble: Retailing and/or e-tailing

– Product and/or customer classes• e.g. UTD library loans books for 6 months (2 weeks) to faculty (students)• Customer segmentation by pricing

• Competitors: more, faster and global• UTD online programs compete globally

• Product life cycle (shortening)– SCM strategy moves toward efficiency and low implied uncertainty as products age

• e.g. Air travel is becoming more efficient– e.g. Southwest airlines lead the drive for efficiency– e.g. Airbus announced A380 accommodating 555-800 people on Jan 17, 2005.

• e.g. Flat screen TV producer of AU Optronics of Taiwan was looking for ways to make its SC more efficient in June 2004.

– Replacement sales • Selling to replace broken units.

– e.g. AC replacement is about 50% of the market.– Macroeconomic factors for visibility

• Forecasting Home Depot sales from S&P 500 price index.– Positive correlation is detected.

Achieving Strategic Fit over a Lifecycle

Responsive (high cost)

supply chain

Efficient (low cost)

supply chainCertain demand

Uncertain demand

Zone of

Strateg

ic Fit

Integration

• Integration is the central theme in SCM• Building synergies by integrating business

functions, departments and companies

Strategic ScopeSuppliers Manufacturer Distributor Retailer Customer

Competitive Strategy

Product Dev. Strategy

Supply Chain Strategy

Marketing Strategy

Supply Chain Structures & Reporting


Supply Chain Structures & Reporting


ReportingReporting in the broadest sense covers all the tasks that serve the information supply of information users inside and outside the company. Reporting in the narrower sense is usually understood to mean the provision of information to corporate addressees. In a further limitation, the information supply to addressees can be restricted to management tasks within the company.

This sub-task is referred to as "management reporting" and is the central tool for the information supply of organizational members (management, department and department, project or product managers, etc.) entrusted with management tasks.

Stakeholders EngagementStakeholder engagement is the process by which an organisation involves people who may be affected by the decisions it makes or can influence the implementation of its decisions. They may support or oppose the decisions, be influential in the organization or within the community in which it operates, hold relevant official positions or be affected in the long term.

Stakeholder engagement is a key part of Corporate Social Responsibility (CSR) and achieving the triple bottom line. Companies engage their stakeholders in dialogue to find out what social and environmental issues matter most to them about their performance in order to improve decision-making and accountability.

Engaging stakeholders is a requirement of the Global Reporting Initiative, a network-based organisation with sustainability reporting framework that is widely used around the world. The International Organisation for Standardization (ISO) requires stakeholder engagement for all their new standards.



ProcurementProcurement is the act of finding, acquiring, buying goods, services or works from an external source, often via a tendering or competitive bidding process.

The process is used to ensure the buyer receives goods, services or works the best possible price, when aspects such as quality, quantity, time, and location are compared.

Corporations and public bodies often define processes intended to promote fair and open competition for their business while minimizing risk, such as exposure to fraud and collusion.


5 Roles for Procurement in the Supply Chain

Being a Trusted Advisor to the Business

World-class procurement organizations are much more likely than typical ones to be considered valued partners by the business, not gatekeepers or administrators. Hackett’s research shows that they have a high level of involvement in planning and budgeting half the time, nearly 4x more often than at typical companies.

To achieve this status, world-class procurement organizations make certain to proactively understand what drives the requirements of the business as opposed to simply facilitating the buying process. This makes it possible to reverse-engineer costs and explore potentially less expensive and/or higher-quality alternatives.


Driving Suppliers to Innovate

World-class procurement groups are very effective at building strong business relationships with key suppliers, enabling them to work collaboratively to reduce costs and sometimes even create customized and unique breakthrough solutions.

Procurement organizations have seen positive results from investing in formalizing the innovation life cycle, from idea formation and evaluation to development, productization and continuous improvement. In fact, the research found that top-quartile companies now drive more than twice as much incremental revenue as typical companies through supplier innovation efforts, demonstrating the value of this supply chain strategy.


Providing Analytics-Backed Insights

World-class procurement works closely with the business during operational planning and budgeting periods to provide predictive insights on supply markets. This requires having the tools and expertise to turn data into actionable knowledge.

The ability to view spend data by suppliers on a global basis is a building block of more predictive analytics. World-class organizations have a significant level of information available nearly 90 percent of the time, more than twice as often as typical companies, the research found. They have also mastered this competency to the point that analytics, market intelligence and benchmarking are offered on demand as a service to key stakeholders.


Protecting the Business from Risk

World-class procurement organizations have formal risk management programs to ensure supply continuity and regulatory compliance.

Organizations with a formal and broadly-applied strategy for assessing risk have nearly 25 percent greater procurement ROI than those without them, the research found. This includes completing supplier risk assessments and working with finance and other stakeholders to determine the best mitigation strategy when risk exposure is identified.


Employing an Agile Approach to Staffing

World-class procurement organizations are distinguished by the way they attract, develop and retain talent. Their efforts are not limited by geographical borders, as they hire globally and from other parts of the business, opening the door to new sources of skills and fresh thinking.

Many are utilizing global business services, or more traditional shared services organizations, and have also established relationships with external entities such as business process outsourcers to support activities such as providing supply-market intelligence. They also provide greater training hours per associate, invest more in retention planning, and pay higher salaries.


Spend AnalysisTechnically, spend analysis is the process of aggregating, classifying, and leveraging spend data for the purpose of gaining visibility into cost reduction, performance improvement, and contract compliance opportunities. It is part of an overall spend management and visibility process that includes the analysis, award, and monitoring of corporate spend. Additionally, it is the first and last step of the strategic sourcing process that drives total value.Generic spend analysis enables one to answer the following questions:• Who is buying• What• From whom• When• (optionally) Where• At what price


Spend Analysis – Function


Whole-Life Cost AnalysisWhole-life cost, or Life-cycle cost (LCC), refers to the total cost of ownership over the life of an asset. Also commonly referred to as "cradle to grave" or "womb to tomb" costs. Costs considered include the financial cost which is relatively simple to calculate and also the environmental and social costs which are more difficult to quantify and assign numerical values.

Typical areas of expenditure which are included in calculating the whole-life cost include, planning, design, construction and acquisition, operations, maintenance, renewal and rehabilitation, depreciation and cost of finance and replacement or disposal.


Whole-life cost analysis is often used for option evaluation when procuring new assets and for decision-making to minimize whole-life costs throughout the life of an asset. It is also applied to comparisons of actual costs for similar asset types and as feedback into future design and acquisition decisions.

The primary benefit is that costs which occur after an asset has been constructed or acquired, such as maintenance, operation, disposal, become an important consideration in decision-making. Previously, the focus has been on the up-front capital costs of creation or acquisition, and organisations may have failed to take account of the longer-term costs of an asset. It also allows an analysis of business function interrelationships.

Low development costs may lead to high maintenance or customer service costs in the future. When making this calculation, the depreciation cost on the capital expense should not be included

Whole-Life Cost Analysis (Cont’d)


Whole-Life Cost Analysis


RFIDRadio-frequency identification (RFID) uses electromagnetic fields to automatically identify and track tags attached to objects. The tags contain electronically stored information. Passive tags collect energy from a nearby RFID reader's interrogating radio waves. Active tags have a local power source such as a battery and may operate at hundreds of meters from the RFID reader. Unlike a barcode, the tag need not be within the line of sight of the reader, so it may be embedded in the tracked object. RFID is one method for Automatic Identification and Data Capture (AIDC).


RFID in Supply Chain EfficiencyCommerce Sewn-in RFID label in garment manufactured by the French sports supplier Decathlon. Front, back, and transparency scan.• RFID provides a way for organizations to identify and manage tools and equipment

asset tracking, without manual data entry. RFID is being adopted for item level tagging in retail stores. This provides Electronic Article Surveillance (EAS), and a Self Checkout process for consumers. Automatic identification with RFID can be used for inventory systems. Manufactured products such as automobiles or garments can be tracked through the factory and through shipping to the customer.

• Casinos can use RFID to authenticate poker chips, and can selectively invalidate any chips known to be stolen.


Access controlRFID antenna for vehicular access controlRFID tags are widely used in identification badges, replacing earlier magnetic stripe cards. These badges need only be held within a certain distance of the reader to authenticate the holder.

Tags can also be placed on vehicles, which can be read at a distance, to allow entrance to controlled areas without having to stop the vehicle and present a card or enter an access code.

RFID in Supply Chain Efficiency


Promotion trackingTo prevent retailers diverting products, manufacturers are exploring the use of RFID tags on promoted merchandise so that they can track exactly which product has sold through the supply chain at fully discounted prices.

RFID in Supply Chain Efficiency



RFID in warehouse processes offers:• visibility of accurate real-time information• fast locating of products• possibility to record losses• ability to plan product locations strategically


RFID in manufacturing processes means:• less manual work• less costs• improved visibility• improved planning


RFID in container management and tracking:• offers visibility of real-time cargo movement• improves efficiency• increase accuracy


RFID in distribution processes:• accelerates the speed of delivery• improves efficiency• increases accuracy• reduces distribution costs


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Contract Management Life Cycle

Contract Management Life CycleThe Life Cycle consist of all steps necessary to create a fully executed contract. The steps include: • Contract Creation• Contract Collaboration (internal and external)• Contract Approval• Contract Execution (or signature)

Definition Contract Life Cycle Management “is the process of systematically and efficiently managing contract creation, execution and analysis for maximising operational and financial performance and minimising risk”.

There are a number of other definitions of contract management, the majority of which refer to post-award activities. Successful contract management, however, is most effective if upstream or pre-award activities are properly carried out.


Supplier AppraisalSupplier appraisal establishes (or otherwise) a potential supplier’s capability and capacity to deliver goods and services to your organisation now and in the future. The assessment process should establish the supplier’s capability to control quality, delivery, quantity, price and all the other factors contained in the contract. Following a successful appraisal, the supplier is placed on an approved list of suppliers.


The Importance of Standards in Global Supply Chain




Sourcing in Procurement & Supply


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Aviation Preparatory Operations Management