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

Chapter 9 Learning Outcomes 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.

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 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?

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.

Three Views of Value/Supply Chains 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)

Exhibit 2.1 The Value Chain – Input/Output View

Exhibit 2.3 Pre- and Postservice View of the Value Chain

Exhibit 9.1 Typical Goods-Producing Supply Chain Structure

Understanding Supply Chains 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.

Chapter 9 Supply Chain Design Supply Chain Problems at Boeing Boeing has had to push back the production schedule for its first 787 Dreamliner. The twin engine plane is made of composite material and emphasizes fuel efficiency. With over 800 orders, it’s the best selling new airplane in Boeing’s history. However, Boeing outsourced about 70 percent of the production to suppliers, requiring an unprecedented amount of global supply chain coordination. Boeing’s partners in Italy, Japan and elsewhere in the United States are responsible for manufacturing much of the 787 structure, including the composite wings and composite fuselage. But they stumbled early on, and their spotty performance, coupled with parts shortages from various suppliers, slowed work on the first test plane in final assembly at Boeing’s plant in Everett, WA. That forced Boeing to delay first flight and initial deliveries. Some of this work has been shifted back to the USA. 10

The Supply Chain Operations Reference (SCOR) 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.

The Value and Supply Chain and Dell 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.

Exhibit 9.2 A Value Chain Model of Dell, Inc.

Designing the Supply Chain 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.

Designing the Supply Chain 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.

Designing the Supply Chain 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. 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.

Designing the Supply Chain 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.

Exhibit 9.3 Supply Chain Push-Pull Systems and Boundaries

Designing the Supply Chain 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.

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.

Understanding and Measuring Supply Chain Performance 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.

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.

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

The Bullwhip Effect (continued) 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.

Location Decisions in Supply Chains 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.

Exhibit 9.5 Example Location Factors for Site Selection

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

Center of Gravity Method 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.

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

Exhibit Extra Excel Spreadsheet for Taylor Paper Products Solution

Solution: Center of Gravity Calculations 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 = ----------------------------------------------------------------------------- = 98.1 31

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

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.

Chapter 9 Supply Chain Design RFID at Wal-Mart Wal-Mart Stores Inc. is looking to accelerate its RFID rollout. The company required all suppliers shipping products to its Sam Club’s distribution center in DeSoto, TX, to apply the radio tags to their pallets. If they didn’t, Wal-Mart would charge the suppliers $2 per pallet to do it for them. “I think everyone recognizes that it’s the future of how products are going to move through the supply chain, and not just at Wal-Mart, but everywhere,” said Wal-Mart spokesman John Simley. Dean Frew, president and chief executive Xterprise Inc., which helps companies, , implement RFID systems, noted that the benefits are not only for Wal-Mart. “There’s clearly a benefit for the suppliers,…you can’t ignore the fact that if they’re able to keep the shelf stocked more efficiently, in the end suppliers are going to benefit as well.” 34

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.

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.

Difficulties in Managing Supply Chains 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. 37

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. Aris Isotoner made a disastrous decision to move production from Manila to lower cost countries, resulting in higher costs and lower quality. 38

Nike’s Supply Chain Case Study Chapter 9 Supply Chain Design Nike’s Supply Chain Case Study What are Nike’s competitive priorities and how would you rank order them? Should Nike reduce product proliferation in an attempt to reduce their supply chain complexity and costs? What impacts would lower/higher tariffs have on Nike’s supply chain, strategy, and sourcing? What concepts in Chapter 9 are illustrated by this case study? Identify each and explain how it is applied at Nike. 39