SUPPLY CHAIN DESIGN

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OM
CHAPTER 9
SUPPLY CHAIN DESIGN
DAVID A. COLLIER AND JAMES R. EVANS
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Chapter 9 Learning Outcomes

l e a r n i n g o u t c o m e s
LO1 Explain the concept of supply chain
management. LO2 Describe the key issues in
designing supply chains. LO3 Explain important
factors and decisions in locating
facilities. LO4 Describe the role of
transportation, supplier evaluation,
technology, and inventory in supply chain
management.
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Chapter 9 Supply Chain Design
atthews Novelties, Inc.
produces a line of popular toys, many on
contract from movie studios and
other entertainment companies.
Matthews Novelties just acquired ToyCo, a
smaller company that essentially owns the market
for miniature cars and trucks. The VP of
Operations stated Now that weve inherited
ToyCos product line, we need to decide where to
produce them. As you know, our state-of-the art
die-casting factory in Malaysia operates at full
capacity, and we have no room to expand the
factory at the current site and no available land
adjacent to it. ToyCo has two factoriesone in
Thailand and another in Malasia. Labor costs in
Thailand are about half of what we experience in
Malaysia but their labor productivity is a lot
lower. Our marketing people have also told us
that the demand in Asia is increasing rapidly.
One senior manager noted, We shouldnt just make
this decision on labor economics. What are
building costs? What about housing and dormitory
availability and education programs for
employees? Do we have accurate demand forecasts?
Where are the suppliers located? What regulations
and restrictions do we face? How stable is their
currency and political situation?

What do you think? Suppose that you wanted to
locate a café on your college campus (other than
in the typical student center). What factors
might you consider in selecting the location?
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Chapter 9 Supply Chain Design

• Supply Chain Purpose The basic purpose of a
  supply chain is to coordinate the flow of
  materials, services, and information along the
  elements of the supply chain to maximize customer
  value.

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Chapter 9 Supply Chain Design

• Three Views of Value/Supply Chains
• Input/Output View (Exhibit 2.1)
• Pre- and Post-Services View (Exhibit 2.3)
• Typical Goods-Producing Supply Chain Structure
  (Exhibit 9.1)

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Exhibit 2.1
The Value Chain Input/Output View
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Exhibit 2.3
Pre- and Postservice View of the Value Chain
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Exhibit 9.1
Typical Goods-Producing Supply Chain Structure
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Chapter 9 Supply Chain Design

• Understanding Supply Chains
• Supply chain management is the management of all
  activities that facilitate the fulfillment of a
  customer order for a manufactured good to achieve
  satisfied
• customers at a reasonable cost.

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Chapter 9 Supply Chain Design

• The Supply Chain Operations Reference (SCOR)
• Model is a framework for understanding the scope
  of SCM based on five basic functions
• Plan developing a strategy that balances
  resources with requirements.
• Source procuring goods and services to meet
  planned or actual demand.
• Make transforming goods and services to a
  finished state to meet demand.
• Deliver managing orders, transportation, and
  distribution to provide the goods and services.
• Return customer returns, maintenance, dealing
  with excess goods.

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Chapter 9 Supply Chain Design

• The Value and Supply Chain and Dell
• Dell sells highly customized personal computers,
  servers, computer workstations, and peripherals.
• Most computers are assembled only in response to
  individual orders purchased through a direct
  sales model.
• Dells value chain electronically links
  customers, suppliers, assembly operations, and
  shippers.
• Preproduction services focus on gaining the
  customer, including corporate partnerships,
  technical support, and strong supplier
  relationships.
• Postproduction services focus on keeping the
  customer, including billing, shipping, returns,
  and technical support.

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Exhibit 9.2
A Value Chain Model of Dell, Inc.
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Chapter 9 Supply Chain Design

• Designing the Supply Chain
• A contract manufacturer is a firm that
  specializes in certain types of goods-producing
  activities, such as customized design,
  manufacturing, assembly, and packaging, and works
  under contract for end users.
• Some of the major global contract manufacturers
  are Flextronics International Ltd., Solectron,
  Jabil Circuit, Hon Hai Precision Industrial,
  Celestica Inc., and Sanmina-SCI Corporation.

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Chapter 9 Supply Chain Design

• Designing the Supply Chain
• Outsourcing to contract manufacturers can offer
  significant competitive advantages, such as
  access to advanced manufacturing technologies,
  faster product time-to-market, customization of
  goods in regional markets, and lower total costs
  resulting from economies of scale.

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Chapter 9 Supply Chain Design

• Designing the Supply Chain
• Efficient supply chains are designed for
  efficiency and low cost by minimizing inventory
  and maximizing efficiencies in process flow.
• Responsive supply chains focus on flexibility and
  responsive service and are able to react quickly
  to changing market demand and requirements.

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Chapter 9 Supply Chain Design

• Designing the Supply Chain
• A push system produces goods in advance of
  customer demand using a forecast of sales and
  moves them through supply chain to points of sale
  where they are stored as finished goods
  inventory.
• A pull system produces only what is needed at
  upstream stages in the supply chain in response
  to customer demand signals from downstream stages.

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Exhibit 9.3
Supply Chain Push-Pull Systems and Boundaries
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Chapter 9 Supply Chain Design

• Designing the Supply Chain
• Postponement is the process of delaying product
  customization until the product is closer to the
  customer at the end of the supply chain.
• An example is a manufacturer of dishwashers that
  would manufacture the dishwasher without the door
  and maintain inventories of doors at the
  distribution centers. When orders arrive, the
  doors can be attached quickly and the unit can be
  shipped. This would reduce inventory
  requirements.

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Chapter 9 Supply Chain Design

• Multisite management is the process of managing
  geographically dispersed service-providing
  facilities.
• McDonald's Corporation has over 30,000 stores in
  121 countries.
• Bank of America has over 16,000 ATMs and 5,700
  branch banks in the United States.
• Federal Express operates over one million
  drop-off mailboxes in 215 countries.
• Supply chains are vital to the operation of
  multisite management organizations.

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Chapter 9 Supply Chain Design

• Understanding and Measuring Supply Chain
  Performance
• Supply chain metrics balance customer
  requirements and internal supply chain
  efficiency.
• Delivery reliability is often measured by perfect
  order fulfillment.
• Responsiveness is often measured by order
  fulfillment lead time or perfect delivery
  fulfillment.
• Customer-related focus on the ability of the
  supply chain to meet customer wants and needs.

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Chapter 9 Supply Chain Design

• The bullwhip effect results from order
  amplification in the supply chain a phenomenon
  that occurs when each member of a supply chain
  orders up to buffer its own inventory.
• Many firms counteract this phenomenon by
  modifying the supply chain infrastructure and
  operational processes.

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Order Amplification for HP Printers
Extra Exhibit
Source Callioni, Gianpaolo, and Billington,
Corey, Effective Collaboration, OR/MS Today,
October 2001, pp. 3439.
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Chapter 9 Supply Chain Design

• The Bullwhip Effect (continued)
• The time lags associated with information and
  material flow cause a mismatch between actual
  customer demand and the supply chains ability to
  satisfy that demand as each component of the
  supply chain seeks to manage its operations from
  its own perspective.

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Chapter 9 Supply Chain Design

• Location Decisions in Supply Chains
• Location decisions can have a profound effect on
  supply chain performance and a firms competitive
  advantage.
• The type of facility and its location affect the
  supply chain structure.
• Location decisions in supply and value chains are
  based on both
• economic (facility costs, operating costs, and
  transportation costs) and
• non-economic (labor availability, legal and
  political factors, community environment) factors.

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Exhibit 9.5
Example Location Factors for Site Selection
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Chapter 9 Supply Chain Design

• Location Decisions in Supply Chains
• Four basic decisions
• global (nation) location
• regional location
• community location
• local site location

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Chapter 9 Supply Chain Design

• Center of Gravity Method
• The center of gravity method determines the X and
  Y coordinates (location) for a single facility.
• Takes into account locations, demand, and
  transportation costs to arrive at the best
  location.

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Solved Problem. Taylor Paper Products Plant and
Customer Locations Center of Gravity Method
Exhibit 9.6
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Exhibit Extra
Excel Spreadsheet for Taylor Paper Products
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Chapter 9 Supply Chain Design

• Other Issues in Supply Chain Management
• Selecting Transportation Services
• Services include rail, motor, air, water, and
  pipeline.
• Critical factors include speed, accessibility,
  cost, and capability.

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Chapter 9 Supply Chain Design

• Supplier Evaluation
• Many companies segment suppliers based on their
  importance to the business and manage them
  accordingly.
• Texas Instruments measures suppliers quality
  performance by parts per million defective,
  on-time deliveries, and cost of ownership.

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Chapter 9 Supply Chain Design

• Technology
• Selecting the appropriate technology is critical
  for both planning and design of supply chains, as
  well as execution.
• Electronic data interchange and Internet links
  streamline information flow between customers and
  suppliers and increase the velocity of supply
  chains.

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Chapter 9 Supply Chain Design

• Inventory Management
• An efficient distribution system allows a company
  to operate with lower inventory levels, which
  reduces costs and provides high levels of service
  to customers.
• Vendor managed inventory (VMI) is becoming a
  popular concept where the vendor monitors and
  manages the inventory for the customer.