CHAPTER 9 SUPPLY CHAIN DESIGN DAVID A. COLLIER AND JAMES R. EVANS. OM, Ch. 9 Supply Chain Design 2009 South-Western, a part of Cengage Learning

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

2 Chapter 9 Learning Outcomes l e a r n i n g o u t c o m e s LO1 LO2 LO3 LO4 Explain the concept of supply chain management. Describe the key issues in designing supply chains. Explain important factors and decisions in locating facilities. Describe the role of transportation, supplier evaluation, technology, and inventory in supply chain management. 22

3 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 we ve inherited ToyCo s 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 factories one 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 shouldn t 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? 33

4 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. 44

5 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) 55

6 Exhibit 2.1 The Value Chain Input/Output View 66

7 Exhibit 2.3 Pre- and Postservice View of the Value Chain 77

8 Exhibit 9.1 Typical Goods-Producing Supply Chain Structure 88

9 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. 99

10 The Supply Chain Operations Reference (SCOR) Model is a framework for understanding the scope of SCM based on five basic functions: 1. Plan: developing a strategy that balances resources with requirements. 2. Source: procuring goods and services to meet planned or actual demand. 3. Make: transforming goods and services to a finished state to meet demand. 4. Deliver: managing orders, transportation, and distribution to provide the goods and services. 5. Return: customer returns, maintenance, dealing with excess goods

11 The Value and Supply Chain and Dell Chapter 9 Supply Chain Design 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

12 Exhibit 9.2 A Value Chain Model of Dell, Inc

13 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

14 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

15 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

16 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

17 Exhibit 9.3 Supply Chain Push-Pull Systems and Boundaries 17 17

18 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

19 Multisite management is the process of managing geographically dispersed serviceproviding 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

20 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

21 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

22 Extra Exhibit Order Amplification for HP Printers Source: Callioni, Gianpaolo, and Billington, Corey, Effective Collaboration, OR/MS Today, October 2001, pp

23 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

24 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

25 Exhibit 9.5 Example Location Factors for Site Selection 25 25

26 Location Decisions in Supply Chains Four basic decisions: global (nation) location regional location community location local site location 26 26

27 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

28 Exhibit 9.6 Solved Problem. Taylor Paper Products Plant and Customer Locations: Center of Gravity Method 28 28

29 Exhibit Extra Excel Spreadsheet for Taylor Paper Products 29 29

30 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

31 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

32 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

33 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