SUPPLY CHAIN DESIGN

1. OM2 CHAPTER 9 SUPPLY CHAIN DESIGN DAVID A. COLLIER AND JAMES R. EVANS

2. Chapter 9 Learning Outcomes l e a r n i n g o u t c o m e s LO1Explain the concept of supply chain management. LO2Describe the key issues in designing supply chains. LO3Explain important factors and decisions in locating facilities. LO4Describe the role of transportation, supplier evaluation, technology, and inventory in supply chain management.

3. 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.

4. 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)

5. Exhibit 2.1 The Value Chain – Input/Output View

6. Exhibit 2.3 Pre- and Postservice View of the Value Chain

7. Typical Goods-Producing Supply Chain Structure Exhibit 9.1

8. Chapter 9 Supply Chain Design • Understanding Supply Chains • Supply chain managementis 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.

9. Chapter 9 Supply Chain Design • The Supply Chain Operations Reference (SCOR) • Modelis 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.

10. 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. • Dell’s 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.

11. A Value Chain Model of Dell, Inc. Exhibit 9.2

12. Chapter 9 Supply Chain Design • Designing the Supply Chain • Acontract manufactureris 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.

13. 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.

14. Chapter 9 Supply Chain Design • Designing the Supply Chain • Efficient supply chainsare designed for efficiency and low cost by minimizing inventory and maximizing efficiencies in process flow. Examples: Wal-Mart and Proctor & Gamble. • Responsive supply chainsfocus on flexibility and responsive service and are able to react quickly to changing market demand and requirements. Examples: Nordstrom’s and Apple.

15. Chapter 9 Supply Chain Design • Designing the Supply Chain • A push systemproduces 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 systemproduces only what is needed at upstream stages in the supply chain in response to customer demand signals from downstream stages.

16. Exhibit 9.3 Supply Chain Push-Pull Systems and Boundaries

17. 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.

18. 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. Chapter 9 Supply Chain Design

19. 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. • Responsivenessis often measured by order fulfillment lead time or perfect delivery fulfillment. • Customer-relatedfocus on the ability of the supply chain to meet customer wants and needs.

20. Chapter 9 Supply Chain Design • The bullwhip effect results from order amplificationin 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.

21. Order Amplification for HP Printers Extra Exhibit Source: Callioni, Gianpaolo, and Billington, Corey, “Effective Collaboration,” OR/MS Today, October 2001, pp. 34–39.

22. 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 chain’s ability to satisfy that demand as each component of the supply chain seeks to manage its operations from its own perspective.

23. 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.

24. Chapter 9 Supply Chain Design • Location Decisions in Supply Chains • Four basic decisions: • global (nation) location • regional location • community location • local site location

25. Chapter 9 Supply Chain Design • Center of Gravity Method • The center of gravity methoddetermines the X and Y coordinates (location) for a single facility. • Takes into account locations, demand, and transportation costs to arrive at the best location.

26. Taylor Paper Products Plant and Customer Locations Exhibit 9.6 Solved Problem

27. Excel Spreadsheet for Taylor Paper Products Exhibit Extra Solution

28. Chapter 9 Supply Chain Design Solution: Center of Gravity Calculations [58(400) + 80(300) + 30(200) + 90(100) + 127(300) + 65(100)] Cx = ------------------------------------------------------------------------------- [400 + 300 + 200 + 100 + 300 + 100] = 76.3 [96(400)+70(300)+120(200)+110(100)+130(300)+40(100)] Cy = ----------------------------------------------------------------------------- [400 + 300 + 200 + 100 + 300 + 100] = 98.1

29. Chapter 9 Supply Chain Design • Selecting Transportation Services • Services include rail, motor, air, water, and pipeline. • Critical factors include speed, accessibility, cost, and capability.

30. 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.

31. 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.

32. 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.

33. Chapter 9 Supply Chain Design • Difficulties in Managing Supply Chains • Although supply chains can have a profound positive effect on business performance, supply chain initiatives do not always work out as one would hope. SupplyChainDigest published the “11 Greatest Supply Chain Disasters.” Examples from the list are summarized below: • Foxmeyer Drug installed new order management and distribution systems that didn’t work. The company filed for bankruptcy and was eventually sold. • GM invested billions in robot technology to streamline production, some of which accidentally painted themselves and dropped windshields on car seats. • WebVan’s massive investment in automated warehouses drained its capital and weren’t justified by demand. The company went bankrupt in a matter of months.

34. Chapter 9 Supply Chain Design • The Denver Airport designed a complex and expensive automated handling system that never worked, causing the new airport to open later than planned. The system was hardly used and eventually dismantled. • Toys R Us.com couldn’t fulfill thousands of orders for promised delivery by Christmas 1999; it eventually outsourced order fulfillment to Amazon.com. • Nike blamed software issues from a new planning and inventory system for a $100 million revenue shortfall for one quarter. • ArisIsotoner made a disastrous decision to move production from Manila to lower cost countries, resulting in higher costs and lower quality.