1 OM2, Ch. 9 Supply Chain Design ©2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. SUPPLY CHAIN DESIGN CHAPTER 9 DAVID A. COLLIER AND JAMES R. EVANS OM2

22 OM2, Ch. 9 Supply Chain Design ©2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 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. l e a r n i n g o u t c o m e s Chapter 9 Learning Outcomes

33 OM2, Ch. 9 Supply Chain Design ©2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 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. Chapter 9 Supply Chain Design

44 OM2, Ch. 9 Supply Chain Design ©2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 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) Chapter 9 Supply Chain Design

55 OM2, Ch. 9 Supply Chain Design ©2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Exhibit 2.1 The Value Chain – Input/Output View

66 OM2, Ch. 9 Supply Chain Design ©2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Exhibit 2.3 Pre- and Postservice View of the Value Chain

77 OM2, Ch. 9 Supply Chain Design ©2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Exhibit 9.1 Typical Goods-Producing Supply Chain Structure

88 OM2, Ch. 9 Supply Chain Design ©2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 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. Chapter 9 Supply Chain Design

99 OM2, Ch. 9 Supply Chain Design ©2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 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. Chapter 9 Supply Chain Design

10 OM2, Ch. 9 Supply Chain Design ©2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 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. Chapter 9 Supply Chain Design

11 OM2, Ch. 9 Supply Chain Design ©2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Exhibit 9.2 A Value Chain Model of Dell, Inc.

12 OM2, Ch. 9 Supply Chain Design ©2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 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. Chapter 9 Supply Chain Design

13 OM2, Ch. 9 Supply Chain Design ©2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 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. Chapter 9 Supply Chain Design

14 OM2, Ch. 9 Supply Chain Design ©2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Designing the Supply Chain Efficient supply chains are designed for efficiency and low cost by minimizing inventory and maximizing efficiencies in process flow. Examples: Wal-Mart and Proctor & Gamble. Responsive supply chains focus on flexibility and responsive service and are able to react quickly to changing market demand and requirements. Examples: Nordstrom’s and Apple. Chapter 9 Supply Chain Design

15 OM2, Ch. 9 Supply Chain Design ©2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 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. Chapter 9 Supply Chain Design

16 OM2, Ch. 9 Supply Chain Design ©2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Supply Chain Push-Pull Systems and Boundaries Exhibit 9.3

17 OM2, Ch. 9 Supply Chain Design ©2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 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. Chapter 9 Supply Chain Design

18 OM2, Ch. 9 Supply Chain Design ©2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 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 OM2, Ch. 9 Supply Chain Design ©2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 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. Chapter 9 Supply Chain Design

20 OM2, Ch. 9 Supply Chain Design ©2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 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. Chapter 9 Supply Chain Design

21 OM2, Ch. 9 Supply Chain Design ©2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Source: Callioni, Gianpaolo, and Billington, Corey, “Effective Collaboration,” OR/MS Today, October 2001, pp. 34–39. Order Amplification for HP Printers Extra Exhibit

22 OM2, Ch. 9 Supply Chain Design ©2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 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. Chapter 9 Supply Chain Design

23 OM2, Ch. 9 Supply Chain Design ©2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 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. Chapter 9 Supply Chain Design

24 OM2, Ch. 9 Supply Chain Design ©2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Location Decisions in Supply Chains Four basic decisions: global (nation) location regional location community location local site location Chapter 9 Supply Chain Design

25 OM2, Ch. 9 Supply Chain Design ©2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 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. Chapter 9 Supply Chain Design

26 OM2, Ch. 9 Supply Chain Design ©2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Exhibit 9.6 Taylor Paper Products Plant and Customer Locations Solved Problem

27 OM2, Ch. 9 Supply Chain Design ©2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Exhibit Extra Excel Spreadsheet for Taylor Paper Products Solution

28 OM2, Ch. 9 Supply Chain Design ©2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. [58(400) + 80(300) + 30(200) + 90(100) + 127(300) + 65(100)] Cx = [ ] = 76.3 [96(400)+70(300)+120(200)+110(100)+130(300)+40(100)] Cy = [ ] = 98.1 Chapter 9 Supply Chain Design Solution: Center of Gravity Calculations

29 OM2, Ch. 9 Supply Chain Design ©2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Selecting Transportation Services Services include rail, motor, air, water, and pipeline. Critical factors include speed, accessibility, cost, and capability. Chapter 9 Supply Chain Design

30 OM2, Ch. 9 Supply Chain Design ©2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 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. Chapter 9 Supply Chain Design

31 OM2, Ch. 9 Supply Chain Design ©2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 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. Chapter 9 Supply Chain Design

32 OM2, Ch. 9 Supply Chain Design ©2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 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. Chapter 9 Supply Chain Design

33 OM2, Ch. 9 Supply Chain Design ©2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 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. Chapter 9 Supply Chain Design

34 OM2, Ch. 9 Supply Chain Design ©2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 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. Aris Isotoner made a disastrous decision to move production from Manila to lower cost countries, resulting in higher costs and lower quality. Chapter 9 Supply Chain Design