Hill A.V. The Encyclopedia of Operations Management: A Field Manual and Glossary of Operations Management Terms and Concepts
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ptg6843605
sponsor – square root law for warehouses
The Encyclopedia of Operations Management Page 336
inventory optimization. Leverage items allow the buyer to exploit its purchasing power. Bottleneck items have
high risk but low profit impact and therefore require risk mitigation strategies. Strategic items require careful
and constant attention and often require strategic partnerships.
Geldermana and Van Weeleb (2003) question the
dimensions used in the Kraljic model and note that it is
difficult to measure these dimensions. They also suggest
that the model should allow for movement between
quadrants. Other dimensions that might be used to segment
suppliers or items include total spend, number of buyers in
the market, number of suppliers in the market,
buyer/supplier power, and generic items (commodity) versus
customized (engineered) items. The sourcing entry
addresses similar issues.
See leverage the spend, Maintenance-Repair-Operations (MRO), purchasing, sourcing, supplier, supply
chain management.
sponsor – A project management term for an individual (individuals) who is (are) the main customer and primary
supporter for a project.
The project sponsor is the main customer for the project. The project is initiated by the sponsor and is not
complete until the sponsor has signed off on it. However, the sponsor is also responsible for holding the project
team accountable for staying on schedule, in budget, in scope, and focused on meeting the requirements as
defined in the project charter. Lastly, the project sponsor is responsible for ensuring that the project team has the
resources (people, money, equipment, space, etc.) and the organizational authority that it needs to succeed.
See champion, cross-functional team, deliverables, DMAIC, post-project review, project charter, project
management, project management triangle, steering committee.
sprint burndown chart – An agile or scrum software development project management tool that provides a
graphical representation of the work remaining in any given sprint.
A sprint burndown chart shows the number of days in the sprint on the x-axis and features (or hours)
remaining on the y-axis. The sprint burndown chart is reviewed daily in the scrum meeting to help the team
review its progress and to give early warning if corrective actions are needed. The chart is updated daily by the
scrum master and is visible to team members at all times.
See agile software development, prototype, scrum, waterfall scheduling.
SQC – See statistical quality control.
square root law for safety stock – When the replenishment leadtime increases by a factor of f, the safety stock
will increase approximately by the factor
f
.
This relationship is based on the safety stock equation and is often helpful when considering offshoring
production. This model can be used to estimate the increase in safety stock due to an increase in the leadtime.
See inventory management, safety stock.
square root law for warehouses – A simple mathematical model stating that the total inventory in a system is
proportional to the square root of the number of stocking locations.
The practical application of this “law” is that the inventory in stocking locations (such as warehouses) will
increase (or decrease) with the square root of the number of stocking locations that serve the market. For
example, doubling the number of stocking locations will increase inventory by a factor of the square root of two
(i.e., ~ 1.414 or about 41% increase). This law warns managers against the naïve assumption that adding
stocking locations will require no additional inventory.
Mathematically, the law can be stated as
I a n
, where I is the total inventory, n is the number of stocking
locations (typically warehouses), and a is a constant. A more useful version of this model is
/
new old new old
I I n n
, where
old
I
and
new
I
are the old and new inventory levels and
old
n
and
new
n
are the old and
new number of stocking locations.
Kraljic’s purchasing portfolio model
Profit
im
p
act
High
Leverage
items
Strategic
Items
Low
Non-critical
items
Bottleneck
Items
Low High
Supply risk
Adapted from Karljic (1983)
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stabilizing the schedule − stage-gate process
Page 337 The Encyclopedia of Operations Management
As mentioned above, this law states that if a firm doubles the number of warehouses, it should expect to
increase inventory by a factor of
/ / 2 / 1 1.414
new old new old
I I n n
. In other words, doubling the number of
stocking locations should increase inventory by about 41%. Similarly, if the firm cuts the number of stocking
locations in half, it should expect to see inventory go down by a factor of
1/ 2 0.707
. In other words, cutting
the number of stocking locations in half should reduce inventory by about 30%. The table below shows the
multiplicative percentage increase or decrease in inventory as the number of stocking points changes.
Multiplicative change in inventory investment with a change in the number of stocking points
Number of future stocking points, I
ne
w
1 2 3 4 5 10 15 20
Number of current
stocking points, I
old
1 100% 141% 173% 200% 224% 316% 387% 447%
2 71% 100% 122% 141% 158% 224% 274% 316%
3 58% 82% 100% 115% 129% 183% 224% 258%
4 50% 71% 87% 100% 112% 158% 194% 224%
5 45% 63% 77% 89% 100% 141% 173% 200%
10 32% 45% 55% 63% 71% 100% 122% 141%
15 26% 37% 45% 52% 58% 82% 100% 115%
20 22% 32% 39% 45% 50% 71% 87% 100%
Source: Professor Arthur V. Hill
The square root law can be found in the literature as far back as Starr and Miller (1962) and was proven
mathematically by Maister (1976) based on a reasonable set of assumptions. Evers (1995) found that the square
root law can be applied to both safety stock and cycle stock and therefore can be applied to total inventory.
Coyle, Bardi, and Langley (2002) provide empirical support for this model. Zinn, Levi, and Bowersox (1989)
found that (1) the square root law is most accurate when market demands are negatively correlated, (2) accuracy
increases with the demand uncertainty at each location as measured by the coefficient of variation, and (3) little
or no benefit from consolidating stock when demands at stocking points are positively correlated.
See consolidation, inventory management, supply chain management, warehouse.
stabilizing the schedule – See heijunka.
stage-gate process – A project management and control practice commonly used for New Product Development
(NPD) that uses formal reviews at predetermined steps in the project to decide if the project will be allowed to
proceed; also called phase review, toll gate, tollgate, or gated process.
Cooper (1993, 2001) developed the stage-gate process to help firms improve their NPD processes. Many
have argued that compared to a traditional process, the stage-gate process brings products to market in less time,
with higher quality, greater discipline, and better overall performance (Cooper 1993).
A gate is a decision point (milestone or step) where the project status is reviewed and a decision is made to
go forward, redirect, hold, or terminate the project. A formal stage-gate process will have a standardized set of
deliverables for each gate. This standardization allows the management team to compare the relative value of
NPD projects in the new product portfolio and to make trade-off decisions. A gate scorecard can be used to
evaluate the deliverables against the standard. For example, demonstrating robust design may be a requirement
in an early stage. The scorecard status may be yellow (caution) if the C
pk
of a critical quality parameter is only 1.
Cooper (2001) outlines the following typical stage-gate phases:
1. Discovery: Pre-work designed to discover opportunities and generate ideas. (Gate = Idea screen)
2. Scoping: A quick, preliminary investigation of the project. (Gate = Second screen)
3. Building the business case: A detailed investigation involving primary research, both technical and
marketing, leading to a business case. This business case includes the product definition, project
justification, and a project plan.
4. Development: The detailed design and development of the product and the production process to make it.
5. Testing and validation: Trials in the marketplace, lab, and plant to verify and validate the proposed new
product and its marketing and production.
6. Launch: Commercialization (beginning of full production, marketing, and selling).
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staging – stakeholder analysis
The Encyclopedia of Operations Management Page 338
The stages from the Advanced Product Quality Planning (APQP) process of the Automotive Industry Action
Group (AIAG) are Concept approval, Program approval, Prototype, Pilot, and Launch.
A typical stage-gate process is as follows:
1. Market analysis: Various product concepts that address a market need are identified.
2. Commitment: The technical feasibility of a particular product concept is determined and design
requirements are defined.
3. Development: All activities
necessary to design, document,
build, and qualify the product and its
associated manufacturing processes
are included.
4. Evaluation: Final design validation
of the product is conducted during
this phase. Clinical and field studies
are conducted, and regulatory
approval to market and distribute the
product is also obtained.
5. Release: The product is commercially distributed in markets where regulatory approval has been obtained.
The table above summarizes these three frameworks.
Many lean sigma programs use a similar “gated” process at the end of each of the steps in the DMAIC
framework to provide accountability and keep the project on track. However, some experts argue that stage-
gates create too much overhead and slow a project down and therefore should only be used for large projects.
Some project management experts argue that stage-gates should be based on the nature of the specific project
rather than on the DMAIC framework.
See deliverables, Design for Six Sigma (DFSS), DMAIC, lean sigma, milestone, New Product Development
(NPD), phase review, project charter, project management, waterfall scheduling.
staging – The manufacturing practice of gathering materials and tools in preparation for the initiation of a
production or assembly process.
In the manufacturing order context, staging involves picking materials for a production or sales order and
gathering them together to identify shortages. This is sometimes called kitting. Staged material is normally
handled as a location transfer and not as an issue to the production or sales order. In the machine setup context,
staging involves gathering tools and materials while the machine is still running.
See kitting, setup time reduction methods.
stakeholder – People, groups of people, and organizations involved in or affected by a decision, change, or activity.
The following is a long list of potential stakeholders for a process improvement project:
• Shareholders
• Senior executives
• Managers
• Administrators
• Process owner(s)
• Doctors/nurses/LPNs
• Project team members
• Operators
• Coworkers
• Previous manager
• Customers/consumers
• Students
• Patients/clients
• Prospective customers
• Network members
• Payers
• Insurers
• Partners
• Suppliers
• Distributors/Sales force
• Other departments
• Support organizations
• Technology providers
• Trade associations
• Unions
• Professional societies
• The press
• Lenders
• Analysts
• Neighbors
• Community
• Future recruits
• Regulators
• Government
• Spouse/children/family
• God
55
See agile software development, Business Continuity Management (BCM), product life cycle management,
project charter, project management, RACI Matrix, stakeholder analysis.
stakeholder analysis – A technique for identifying, evaluating, and mitigating political risks that might affect the
outcomes of an initiative, such as a process improvement project.
55
The point here is that organizations should consider ALL of their stakeholders.
Stage-gate processes for new product development
Cooper AIAG Typical
Discovery
Scoping Concept approval Market analysis
Building the business case Program approval Commitment
Development Prototype Development
Testing and validation Pilot Evaluation
Launch Launch Release
Source: Professor Arthur V. Hill
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stamping − stamping
Page 339 The Encyclopedia of Operations Management
The goal of stakeholder analysis is to win the most effective support possible for the initiative and to
minimize potential obstacles to successful implementation. Stakeholder analysis is particularly important in
major quality management, process improvement, and Business Process Re-engineering (BPR) programs.
The three steps in stakeholder analysis are:
Identify the stakeholders – Identify people, groups, and institutions that might influence the activity (either
positively or negatively). The RACI Matrix is a good tool for helping with this process. See RACI Matrix.
Evaluate “what is in it for me” – Anticipate the kind of influence these groups will have on your initiative.
Develop communication and involvement strategies – Decide how each stakeholder group should be
involved in the initiative and how the team will communicate with them.
The following example illustrates a formal stakeholder analysis using a new quality control information
system as an example. This table can be easily implemented in Excel or Word. The process starts by defining
each stakeholder’s goals and identifying how the project might help or hinder those goals (the positives and
negatives). The involvement strategy seeks to define the right level of involvement for each key stakeholder
group and get them involved early in the project. The communication strategy should define the frequency of
communication, mode of communication, and audience for each stakeholder group.
Stakeholder analysis example
Stakeholder
Quality Manufacturing MIS
Manufacturing
Engineering
Goals
Improve product
quality and improve
reporting.
Improve product
quality and reduce
cost of poor quality.
Keep the backlog of
projects from
growing.
Keep the backlog of
projects from
growing.
Positives
This system could
help us quickly find
defects and find
systemic problems.
This system could
help us quickly find
defects and find
systemic problems.
This project will
replace an old
system that has been
hard to maintain.
The new system will
make it easier for us
to run reports on the
quality data.
Negatives
Our team has no
capacity to handle
this project right
now.
Our team has little
capacity for this.
We do not have a
strong project leader
available.
This new system is
more complex and
will be difficult to
integrate with
existing systems.
We worry that the
new system will not
include important
features that we need
to do our jobs.
Involvement
strategy
Someone from our
Quality team should
be on the project
team, but should not
lead it.
A Manufacturing
person should lead
the project because
manufacturing is the
customer.
Should have a
business analyst on
the team, but should
not lead the project.
Should either have a
member on the team
or at least have an
SME available to the
team.
Communication
strategy
E-mail weekly report
and provide face-to-
face monthly report
to the quality
manager.
E-mail weekly report
and provide face-to-
face monthly report
to the director of
manufacturing.
E-mail monthly
status report to the
director of MIS.
E-mail monthly
status report to the
manager of
manufacturing
engineering.
Source: Professor Arthur V. Hill
The following is a general list of potential benefits for employees: remove frustration, remove bottlenecks,
reduce bureaucracy, make things simpler, improve morale, improve teamwork, improve communication,
accelerate learning, help them serve customers better, and free up time for more important work.
Some experts suggest “co-opting” a potential opponent by inviting them to join the project team as a member
or Subject Matter Expert (SME). The idea is to get your potential opponents on your side early in the process
and use their energy to move the project forward rather than get in the way. See the co-opt entry.
See Business Process Re-engineering (BPR), change management, co-opt, force field analysis,
implementation, lean sigma, lean thinking, project charter, project management, quality management, RACI
Matrix, stakeholder, Total Quality Management (TQM).
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stamping – standard time
The Encyclopedia of Operations Management Page 340
stamping – (1) A manufacturing process that forms materials. (2) A part made by a stamping process.
Stamping is usually done on sheet-metal, but can also be done on other materials. Stamping is usually done
with a press that applies pressure to form the metal with a mold or die. For safety purposes, presses often have
controls that require the operator to have both hands out of the press. This is a good example of error proofing.
See die cutting, error proofing, manufacturing processes.
standard cost – A system of estimating product costs based on direct labor, direct materials, and allocated
overhead.
The standard costing system in most manufacturing firms defines the standard cost as (standard time for
direct labor) x (standard labor rate) + direct materials + overhead. Overhead is typically allocated based on the
direct labor cost. More sophisticated firms allocate overhead using Activity Based Costing (ABC) methods.
When firms allocate overhead to products based on direct labor as the only cost driver, they are often
allocating the largest component of cost (i.e., overhead) based on the smallest component (i.e., direct labor).
Because of product variety and complexity, a constant burden rate (overhead rate) based on direct labor is no
longer appropriate for many firms. This approach has several problems, including:
Too much focus on direct labor – Because overhead is allocated on the basis of direct labor, many
managers assume that they can reduce overhead by reducing direct labor, which is clearly misguided.
Poorly informed outsourcing decisions – When managers assume that the overhead will go away when
direct labor goes away, they sometimes make poorly informed outsourcing decisions and only later discover
that the overhead does not disappear.
Death spiral overhead costs – When decisions are made to outsource a product and the overhead does not
go away, overhead then has to be reallocated to other products, and the firm enters into a “death spiral” with
the same overhead being allocated to fewer and fewer products. (See the make versus buy decision entry).
Poor understanding of product costs – Allocation of overhead on direct labor hides the true product costs,
especially when direct labor is a small portion of the total cost.
See absorption costing, Activity Based Costing (ABC), burden rate, make versus buy decision, overhead,
setup cost, standard time, variable costing.
standard deviation – A measure of the dispersion (variability) of a random variable; the square root of the
variance.
The variance entry has much more information on this subject.
See coefficient of variation, confidence interval, forecast error metrics, Mean Absolute Deviation (MAD),
mean squared error (MSE), range, sample size calculation, sampling, skewness, variance.
standard hours – See standard time.
Standard Operating Procedure (SOP) – See standardized work.
standard parts – Components that an organization has decided will be used whenever possible.
Most firms define a set of standard parts to be purchased in commodity categories, such as fasteners (bolts,
nuts, clips, etc.), which leads to purchasing economies and also simplifies design and manufacturing. This
concept can also be applied to commonly used parts that are designed and manufactured by the firm. The
concept can be broadened to include standard containers, standard labels, standard procedures, etc.
See commodity, commonality, interchangeable parts, pull system, standard products, VAT analysis.
standard products – A good made repetitively to a fixed product specification.
Many manufacturing firms make standard products and store them in inventory. This make to stock strategy
makes sense for many consumer goods products that have fairly predictable demand. In contrast, customized
products must be built (made, assembled, or configured) to a customer’s specifications.
Note, however, that it is possible to make standard products to customer order when the manufacturing cycle
time is shorter than the customer leadtime. This customer interface strategy is particularly helpful for low-
demand, high-cost standard products.
See assembly line, commonality, focused factory, interchangeable parts, make to order (MTO), make to stock
(MTS), postponement, product proliferation, respond to order (RTO), standard parts.
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standard time − standardized work
Page 341 The Encyclopedia of Operations Management
standard time – The planned processing time per part; also called standard hours.
Standard times are used for planning machine and labor load and machine and labor capacity and also for
assigning direct labor costs to products as they pass through a process. Standard times are also frequently used as
a basis for incentive pay systems and as a basis for allocating manufacturing overhead.
Standard time is calculated as the normal time adjusted for allowances for personal needs, fatigue, and
unavoidable delays. See the normal time entry for more detail. The allowance should depend on work
environment issues, such as temperature, dust, dirt, fumes, noise, and vibration, and can be as high as 15%.
Standard times can be set for both setup time and for run time.
Some firms update standard times and costs on an annual basis. Creating standard times is one of the
traditional roles for the industrial engineering function.
See efficiency, industrial engineering, load, normal time, operations performance metrics, performance
rating, standard cost, time study, work measurement, work sampling.
standard work – See standardized work.
standardization – See standardized work.
standardized loss function – See safety stock.
standardized work – The discipline of creating and following a single set of formal, written work instructions for
each process; also called standard work.
Frederick Taylor (1911), the father of scientific management, emphasized standardized work and the “one
best way” for a job design. Traditionally, organizations in North America have called these work instructions
“Standard Operating Procedures” or SOPs. More recently, the Lean Enterprise Institute and other leaders of the
lean manufacturing movement have called these Standardized Work Instructions (SWIs). Standardized work is a
key element of the Toyota Production System (TPS).
Standardized work is particularly important when a process is performed by different people, in different
workcenters, in different locations, or on different shifts. Although it is normally applied to repetitive factory
and service work, it can also be applied to less repetitive knowledge work done by professionals and salaried
workers. For example, supervisors and managers should also have some standardized work. Doctors should
have an SOP for a surgical procedure. Exam rooms should have a standard design so each room has the same
layout, equipment, and supplies, which makes it easy for doctors to share several exam rooms.
In lean manufacturing, the term “standard work” emphasizes having standards for the most effective
combination of labor, materials, equipment, and methods. For repetitive operations, standard work defines the
takt time, work sequence, and standard work in process. Lean firms often use simple text and photos so
procedures are clear for workers from a variety of educational, cultural, and language backgrounds. They are
located next to the process so operators can see them often and so they are readily available for training purposes.
In some firms, language can be an issue due to a multilingual workforce. In these situations, it is important
to provide SOPs in multiple languages. Again, photos and diagrams can be very helpful.
Some firms have implemented SOPs on computer systems. These systems allow for multiple languages and
can also provide photos, videos, animations, and games for training. They can also administer tests for internal
training and certification programs.
Purpose – The purpose of an SOP is to:
Document the correct process
Control the organization
Control work processes
Provide training content
Help implement change
Produce consistent outcomes (reduce variability)
Benefits – The benefits of standardized work include:
Less variation in how work is performed
Improved quality
Fewer defects
Reduced cycle time
Faster training
Help the organization find new work methods
Requirements – Standard procedures should:
Be clear, complete, and concise.
Be realistic.
Be written for the user.
Be revised promptly.
Define the limits of authority.
Cover emergency situations.
Define the process for where to go to get help.
Define the minimum performance standards.
Define training requirements.
Be routinely used for training.
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starving – Statistical Process Control (SPC)
The Encyclopedia of Operations Management Page 342
Suggested format – A suggested format for an SOP follows:
ADMINISTRATION
Author
Approval authority
Title with revision control
Effective date
File name and page numbering
Approval steps/sign off
CONTENT
Purpose
Overview
Departments
Scope
Definitions
Responsibilities and
organization
Instructions with photos,
process maps, steps, etc.
Regulatory responsibilities
Attachments/References
According to the Lean Lexicon (Marchwinski & Shook 2006), standardized work is based on three elements:
1. Takt time, which is the rate at which products must be made in a process to meet customer demand.
2. The precise work sequence in which an operator performs tasks within takt time.
3. The standard inventory, including units in machines, required to keep the process operating smoothly.
See 5S, Business Process Re-engineering (BPR), division of labor, human resources, ISO 9001:2008, job
design, job enlargement, lean thinking, process improvement program, process map, scientific management,
Total Productive Maintenance (TPM), work simplification.
starving – Forcing a process to stop because of lack of input materials.
Starving a bottleneck process is bad, because it will reduce the output of the entire system. Starving a non-
bottleneck process generally has few consequences for the overall output of the system. Starving a non-
bottleneck process might signal that the worker should be moved to somewhere else in the process. Given that
the bottleneck resource defines the capacity for the entire plant, starving a bottleneck resource results in the loss
of capacity for the entire plant. Starving a bottleneck resource might signal the need to improve the planning
system or increase buffers to avoid the situation going forward. Starving and blocking are often discussed in the
same context and are important concepts in the Theory of Constraints (TOC) literature.
See blocking, kanban, Theory of Constraints (TOC).
statement of work (SoW) – See project charter.
station time – The “touch time” at each workstation.
See cycle time.
Statistical Process Control (SPC) – A set of statistical tools that can be used to monitor the performance of a
process.
SPC is usually implemented using graphical methods called control charts to check if the process
performance is within the upper and lower control limits. Ideally, a control chart will signal a problem with all
special (unusual) causes of variation and ignore normal variation.
People sometimes confuse control limits with product specification limits. Control limits are a function of
the natural variability of the process. The control limits are based on the process standard deviation (sigma) and
are often set at plus and minus three sigma. Unlike control limits, specification limits are not dependent on the
process in any way. Specification limits are the boundary points that define the acceptable values for an output
variable of a particular product characteristic. Specification limits are determined by customers, product
designers, and management. Specification limits may be two-sided, with upper and lower limits, or one-sided,
with either an upper or a lower limit.
Inspection can be performed by variables or by attributes. Inspection by variables is usually done for process
control and is performed with an x-bar chart (to control the mean) or an r-chart (to control the range or variance).
Inspection by attributes is usually done for lot control (acceptance sampling) and is performed with a p-chart (to
control the percent defective) or a c-chart (to control the number of defects).
See
Acceptable Quality Level (AQL), acceptance sampling, attribute, c-chart, common cause variation,
control chart, cumulative sum control chart, Deming’s 14 points, incoming inspection, inspection, lean sigma,
np-chart, operating characteristic curve, p-chart, process capability and performance, process validation,
quality assurance, quality management, r-chart, seven tools of quality, special cause variation, specification
limits, Statistical Quality Control (SQC), tampering, Total Quality Management (TQM), u-chart, x-bar chart,
zero defects.
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Statistical Quality Control (SQC) − Straight Through Processing (STP)
Page 343 The Encyclopedia of Operations Management
Statistical Quality Control (SQC) – A set of statistical tools for measuring, controlling, and improving quality.
See Acceptable Quality Level (AQL), acceptance sampling, attribute, c-chart, common cause variation,
control chart, cumulative sum control chart, Deming’s 14 points, hypergeometric distribution, incoming
inspection, inspection, lean sigma, operating characteristic curve, p-chart, process capability and performance,
process validation, quality assurance, quality management, r-chart, seven tools of quality, special cause
variation, specification limits, Statistical Process Control (SPC), tampering, Total Quality Management (TQM),
x-bar chart, zero defects.
steering committee – A project management term for a group of high-level stakeholders who are responsible for
providing overall guidance and strategic direction for a project or program.
See project management, sponsor.
stickiness – The ability of a website to hold the attention of the visitor.
Stickiness is generally accomplished through intriguing, useful, and/entertaining content.
stock – A synonym for inventory.
See part number.
Stock Keeping Unit (SKU) – See part number.
stock position – See inventory position.
stockout – A situation in which a customer demand cannot be immediately satisfied from current inventory; often
used synonymously with a shortage.
Stockouts can often be attributed to either incorrect safety stock parameters (e.g., bad numbers in the
computer) or poor ordering disciplines (planners not following the numbers in the computer).
The cost of a stockout may be nothing if customers are willing to wait or have to wait because they have no
other alternatives. However, in many situations, the stockout cost includes the lost margin. In some severe
situations, the stockout cost includes the net present value of the lifetime value of the customer or even the total
lifetime value of that customer and many others who are influenced by that customer’s word of mouth.
Many (if not most) sources use the terms shortage and stockout interchangeably and only make a distinction
between stockouts with backorders (the customer is willing to wait) and stockouts with lost sales (the customer is
not willing to wait). However, the term “stockout” is sometimes used to imply that the sale is lost, whereas the
term “shortage” implies that the customer is inconvenienced, but the sale is not lost. If the customer is willing to
wait, the demand is said to be “backordered,” and we have a shortage, but not a stockout.
Statistical models can be used to infer (impute) the implied shortage cost (or implied stockout cost) for a
given reorder point, safety stock, or target inventory value. The reorder point (R) that minimizes the sum of the
expected carrying and expected shortage cost is the solution to the newsvendor problem for one order cycle,
which is R = F
-1
(c
under
/(c
under
+ c
over
)), where F
–1
(.) is the inverse CDF for the demand during leadtime
distribution, c
under
is the underage cost (the cost of setting R one unit too low), and c
over
is the overage cost (the
cost of setting R one unit too high). The underage cost is the shortage cost per unit short, and the overage cost is
the cost of carrying one unit for one order cycle (i.e., c
over
= icQ/D), where i is the carrying charge, c is the unit
cost, Q is the average order quantity, and D is the expected annual demand. Note that the optimal safety stock is
the optimal reorder point less the average demand during leadtime. We can rewrite this equation to determine
the shortage cost implied by a given reorder point. In other words, if R is given, the implied shortage cost is
c
s
= F(R)icQ/D/(1 – F(R)), where F(R) is the CDF for the demand during leadtime evaluated at R.
See backlog, backorder, goodwill, newsvendor model, opportunity cost, order cycle, safety stock, service
level, slow moving inventory.
stockout cost – See stockout.
story board – Large, visual communication of important information and key points.
Consultants often talk about their “story board” for a PowerPoint presentation. This is a high-level overview
of the main points that they want to make in their presentation. Story boards are often taped to the wall in a
conference room to help the consulting team envision and improve the flow of ideas in a presentation.
See MECE, Minto Pyramid Principle.
Straight Through Processing (STP) – An initiative used by financial trading firms to eliminate (or at least
reduce) the time to process financial transactions.
ptg6843605
Strategic Business Unit (SBU)
–
strategy map
The Encyclopedia of Operations Management Page 344
STP is enabled by computer-based information and communication systems that allow transactions to be
transferred in the settlement process without manual intervention. STP represents a major shift from present-day,
three-day trading to same-day settlement. One of the benefits of STP is a decrease in settlement risk, because
shortening transaction-related processing time increases the probability that a contract or an agreement is settled
on time (adapted from www.investopedia.com/terms/s/straightthroughprocessing.asp, December 10, 2007).
See lockbox.
Strategic Business Unit (SBU) – A business unit that has either value propositions, core competences, or markets
that are different from the other business units in the firm, and therefore must have its own unique strategy.
strategic sourcing – See sourcing.
strategy map – A causal map that shows the relationships between the critical elements of the organization’s
business system.
Kaplan and Norton (2000) proposed strategy maps as a tool for communicating the critical relationships and
metrics needed to understand and implement the organization’s strategy. According to Larry Bossidy, former
Chairman of Honeywell, many companies fail to execute their strategy and therefore fail in the marketplace
because they do not clearly communicate the strategy to those responsible for executing it (Bossidy, Charan, &
Burck 2002). Many so-called leaders give only a vague description to their “troops” of what they should do and
why each task is important. As a result, they ultimately “lead” their firms to failure. With mixed messages and
unclear direction from the top, managers will do what they think is in the best interests of the firm, their own
departments, and their own careers.
In the information age, businesses must create and manage complex business systems to offer distinctive
value. These business systems are defined by highly interdependent relationships between customers,
distributors, suppliers, employees, buildings, machines, product technologies, process technologies, information
technologies, knowledge, and culture. These relationships must be made clear if the strategy is going to be
understood and implemented in these complex business systems.
Strategy maps can show cause and effect relationships for business relationships, such as the following:
• The firm’s value proposition, target markets, and business performance
• The firm’s value proposition and investments in people, systems, R&D, capacity, and process technology
• Employee recognition programs, employee reward systems, employee motivation, service quality, customer
satisfaction, and customer loyalty
• Sales force size, incentives, and sales
• Advertising investment, message, and media selection
Strategy maps can also highlight the key metrics that will be used to motivate
and monitor the execution of the strategy. Kaplan and Norton (1996) argue that
the strategy map should focus on the few “balanced scorecard” metrics that drive
the strategy to success. These metrics should be reported at a high level in the
firm. Goldratt (1992) emphasizes that most organizations have only one
constraint (bottleneck) that restricts performance and that this constraint should be
the focus for the strategy and the metrics.
As shown on the right, Kaplan and Norton
’
s strategy maps show the causal
relationships going from the bottom up to the top and require four perspectives
(views or levels) for the strategy map – financial, customer, internal, and learning
and growth. They require that the causal linkages always go in order from
learning and growth at the bottom to financial at the top.
The figure below is a simplified example of a strategy map from
Strategy Maps
(Kaplan & Norton 2004).
This example shows how the four perspectives cascade up the causal map to create the airline’s strategy. The
strategic analysis begins at the top with the question, “How do we improve RONA?” The answer in this analysis
is to grow the business without adding more aircraft. As the analysis moves down the causal linkages, the key
strategic initiative must be ground crew training to improve the ground turnaround time. Spear (2008) asserts
that this fast turnaround is the main competitive advantage of Southwest Airlines.
Learning and growth
Internal
Customer
Financial
Kaplan & Norton’s four
views for a strategy map
ptg6843605
stratification
−
Student’s t distribution
Page 345 The Encyclopedia of Operations Management
Each link in the strategy map states a “hypothesis”
or a belief about the causal relationship. For example,
in this strategy map, we see that management believes
that “ground crew training” will improve the
turnaround time. Now that this link is explicitly
communicated as a part of the strategy, it can be
openly discussed and even tested.
In the causal mapping work by Scavarda,
Bouzdine-Chameeva, Goldstein, Hays, and Hill (2006)
and others, strategy maps can be drawn in any direction
and do not require Kaplan and Norton’s four
perspectives. They argue that Kaplan and Norton’s
strategy mapping process imposes too much structure
on the causal mapping process. See the causal map
entry for a strategy map presented in a causal mapping
format. See the Balanced Scorecard entry for a
complete list of references.
See balanced scorecard, causal map, DuPont
Analysis, hoshin planning, hypothesis, lean sigma,
mindmap, mission statement, operations performance
metrics, operations strategy, target market, turnaround
time, value proposition, Y-tree.
stratification – See sampling.
stratified sampling – See sampling.
Student’s t distribution – A continuous probability distribution used when the sample size is small (i.e., less than
30) to test if two population means are different or to create a confidence interval around a population mean; also
known as the t-distribution, the T distribution, and the Student’s t distribution.
Given a random sample of size n from a normal distribution with mean μ, sample mean
x
, and sample
standard deviation
s
, the t statistic is the random variable
( )
/
x
t
s n
, which follows the Student’s t distribution
with k = n – 1 degrees of freedom. The density function for the t statistic is symmetric around the origin and
bell-shaped like the standard normal distribution, but has a wider spread (fatter tails). As the degrees of freedom
increase, the tails of the t distribution become thinner, and the t distribution approaches the normal. Most
statistics texts state that when n > 30, the normal is a good approximation for the Student’s t distribution.
The z statistic is defined as
( )
/
x
z
n
. Both t and z are approximately standard normal (e.g., N(0, 1)) when
n is large (i.e., n > 30), but z is exactly standard normal regardless of the sample size if the population is exactly
normal with known standard deviation
. The t statistic is exactly Student’s t if the population is exactly
normal regardless of the sample size.
Parameter:
Degrees of freedom, k.
Density and distribution functions:
( 1)/ 2
2
(( 1) / 2)
( , )
/
/1
( 2)
k
k
f kt k t
k k
with k degrees of freedom,
k I
, k ≥ 1.
2 ( 1) / 2
1) / 2)
(1 / )
( / 2)
((
( , )
t
k
x
x k dx
k
t
k
k
F k
with k degrees of freedom.
Statistics:
Range (–∞, ∞). Mean = 0 for k > 1; otherwise undefined. Median = mode = 0. Variance =
/( 2)k k
for k > 2; ∞ for 1 < k ≤ 2; otherwise, undefined.
Profits and
RONA
Ground crew
trainin
g
Fewer planes
On-time
service
Attract & retain
more customers
Grow revenues
Financial
Customer
Internal
Learning &
growth
Fast groun
d
turnaround
Lowest
p
rices