Prepared by: Sheena ray Session 2: Chapter 6: Supply Network Design Prepared by: Sheena ray

The Supply Network Perspective Supply Network: The network of supplier and customer operations that have relationships with an operation. Supply Side: The chains of suppliers , suppliers’ suppliers etc, that provide parts , information or services to an operation. Demand Side: The chains of customers, customers’ customers etc. that receive the products and services provided by an operation. Sheena Ray

The Supply Network Perspective First tier – The description applied to suppliers and customers who are in immediate relationships with an operations with no intermediary operations. Second Tier – The description applied to suppliers and customers who are separated from the operation only by first tier suppliers and customers. Immediate supply network – The suppliers and customers who have direct contact with an operation. Total Supply Network – All the suppliers and customers who are involved in supply chains that pass through an operation. Sheena Ray

Why consider the whole supply network 1.It helps an understanding of competitiveness 2.It helps identify significant links in a network Downstream: The other operations in a supply chain between the operation being considered and the end customer. Upstream : The other operations in a supply chain that are towards the supply side of the operation. 3.It helps focus on long term issues Sheena Ray

Design Decisions in Supply networks 1. How should the network be configured ? This has two aspects. First, how can an operation influence the shape which the network might take? Second, how much of the network should the operation own? This may be called the outsourcing , vertical integration or do or buy decision. Outsourcing – The practice of contracting out to a supplier , work previously done within the operation. Vertical Integration – The extent to which an operation chooses to own the network of processes that produce a product or service, the term is often associated with the ‘do or buy ‘ decision. 2. Where should each part of the network owned by the company be located. Should they be near the suppliers or near the raw materials or somewhere close by. This decision is called the operations location decision Sheena Ray

Design Decisions in Supply Network 3.What physical capacity should each part of the network owned by the company have at any point in time? How large should the factory be? If it expands, should it do so in large capacity steps or small ones? Should it make sure that is always has more capacity than anticipated demand or less? These decisions are called long term capacity management decisions. Long Term Capacity Management – The set of decisions that determine the level of physical capacity of an operation considers to be long term; this will vary between industries, but is usually in excess of one year. Sheena Ray

Configuring the Supply Network 1. Changing the shape of the supply network 2.Disintermediation 3. Co-opetition Sheena Ray

Configuring the Supply network 1. Changing the scope of the supply network – Reconfiguring a supply network involves parts of the operation being merged-not necessarily in the sense of ownership of any parts of an operation, but rather in the way responsibility is allocated for carrying out activities. The most common example of network reconfiguration has come through the many companies that have recently reduced the number of direct suppliers. The complexity of dealing with many hundreds of suppliers may both be expensive for an operation , prevent the operation from developing a close relationship with a supplier. It is not easy to be close to hundreds of suppliers Sheena Ray

Configuring the supply network 2. Disintermediation – Another trend in some supply networks is that of companies within a network bypassing customers or suppliers to make contact directly with customers’ customers or suppliers’ supplier. ‘ Cutting out the middlemen’ in this way is called disintermediation. Example : Internet has allowed some suppliers to ‘disintermediate’ traditional retailers in supplying goods and services to customers. Sheena Ray

Configuring the supply network 3. Co-opetition – One approach to thinking about supply networks sees any business as being surrounded by four types of players: suppliers, customers , competitors and complementors. All players in the network, can be both friends and enemies at different times. The term used to capture this idea is ‘ co – opetition’ . Sheena Ray

In-house or Outsource ? Do or Buy? The Vertical Integration Decision Outsourcing or ‘ do or buy decision’ or vertical integration Vertical Integration can be defined in terms of three factors: 1.The direction of vertical integration 2. The extent of Vertical Integration 3.The balance among stages Sheena Ray

Making the outsourcing/ vertical integration Whether it is referred to as do or buy, vertical integration or no vertical integration, in house or outsourced supply, the choice facing operations is rarely simple. Yet the question itself is relatively simple, even if the decision itself is not: Does in house or outsourced supply in a particular set of circumstances give the appropriate performance objectives that it requires to compete more effectively in its markets? Sheena Ray

Deciding whether to Outsource Although the effect of outsourcing on the operation’s performance objective i.e. s important, there are other factors that companies take into account when deciding whether outsourcing an activity is a sensible option. 1. If an activity has a long term strategic importance to a company. 2.A company has specialized skills or knowledge of an activity. 3. A company’s operations performance is already too superior to any potential supplier. 4.But even if its current performance is below that of potential suppliers, it might not outsource the activity if it feels it could significantly improve its performance. Refer to Table 6.1 – How In – house and out sourced supply may affect an operation’s performance objective. Figure 6.4 – The decision logic of outsourcing Sheena Ray

The location of capacity It was Lord Sieff, one time boss of Marks and Spencer , the UK based UK retail organiser , who said, ‘ There are three important things in retailing – location , location and location. Location decisions will usually have an effect on an operations’ costs as well as its ability to serve its customers and therefore its revenues. Location decisions once taken , are difficult to undo. Sheena Ray

Reasons for location decisions Two stimuli often cause organizations to change locations: 1.Changes in demand: To meet higher demand , an operation could expand its existing site, or choose a larger site in another location, or keep its existing location and find a second location for an additional operation; the last two options will involve a location decision. High – visibility operations may not have the choice of expanding on the same site to meet rising demand. 2. Changes in Supply: Changes in cost ,or availability, of the supply of inputs to the operation is the other stimulus for relocation. Sheena Ray

The objectives of the location decision The aim of the location decision is to achieve an appropriate balance between 3 related objectives: The spatially variable costs of the operation Spatially variable costs – The costs that are significant in the location decision that vary with geographical position. The service the operation is able to provide to its customers The revenue potential of the operation Sheena Ray

The Objectives Of The Location Decision In making decisions about where to locate an operation , operation managers are concerned with minimizing spatially variable costs and maximizing revenue / customer service. Fixed Costs – are costs that do not change in response to changes to activity levels. Variable costs – Costs that change in proportion to changes of activity. Location affects both of these but not equally for all types of operation. However factors affecting costs and revenue are different for products and services. For products location of its production are unlikely to affect its revenue. Services, meanwhile , often have both costs and revenues affected by location. Sheena Ray

The Location decision for any operation is determined by the relative strength of supply side and demand side factors. Sheena Ray

Supply Side Influences Labour Costs Land Costs Energy Costs\ Transportation Costs Community Factors Sheena Ray

Supply Side Influences Community Factors are those influences on an operation’s costs which derive from social, political and economic environment of its site. These include: Local tax rates Capital movement restrictions Government Financial assistance Political Stability Local attitudes to Inward Investment Language Local amenities Availability of Support Services History of Labour relations and behavior Environmental restrictions and Waste disposal Planning Procedures and restrictions Sheena Ray

Demand Side Influences Labour Skills The Suitability of the site itself Image of the location Convenience for Customers Sheena Ray

Location techniques Although operations managersmust exercise considerable judgement in the choice of alternative locations, there are some systematic and quantitative techniques which can help the decision process. We comprehend one method here- The Weighted Score Method Sheena Ray

Location techniques – Weighted Score Method Weighted Score Method -A technique for comparing the attractiveness of alternative locations that allocates a score to the factors that are significant in the decision and weights each score by the significance of the factor. The procedure involves, first of all identifying the criteria which will be used to evaluate the various locations. Second, it involves establishing the relative importance of each criterion and giving weighting factors to them. Third, it means rating each location according to each criterion. The scale of the score is arbitrary. Sheena Ray