Slack, Chambers and Johnston, Operations Management 5 th Edition © Nigel Slack, Stuart Chambers, and Robert Johnston 2007 Chapter 6 Supply network design Source: Getty Images

Slack, Chambers and Johnston, Operations Management 5 th Edition © Nigel Slack, Stuart Chambers, and Robert Johnston 2007 Supply network design Process design Supply network design Layout and flow Process technology Job design Product/service design Operations strategy Design Improvement Planning and control Operations management

Slack, Chambers and Johnston, Operations Management 5 th Edition © Nigel Slack, Stuart Chambers, and Robert Johnston 2007 Operations in practice Michael Dell started in 1984 by cutting out the ‘middle man’ and delivering computers direct to the customer Using its direct selling methods, Dell went on to become the number one computer maker There are many reasons for Dell’s success but most of them come from the way Dell configures its supply networks Source: Corbis/ Gianni Giansanti/ Sygma

Slack, Chambers and Johnston, Operations Management 5 th Edition © Nigel Slack, Stuart Chambers, and Robert Johnston 2007 Plastic homeware manufacturer Operations network for a plastic homeware company First-tier suppliers Packaging supplier Plastic stockist First-tier customers Wholesaler Second-tier suppliers Ink supplier Cardboard company Chemical company Second-tier customers Retailer Direct supply Information

Slack, Chambers and Johnston, Operations Management 5 th Edition © Nigel Slack, Stuart Chambers, and Robert Johnston 2007 Operations network for a shopping mall First-tier suppliers Cleaning services Security services Maintenance services Shopping mall First-tier customers Retailers Second-tier customers Retail customers Direct supply Information Second-tier suppliers Recruitment agency Cleaning materials supplier Equipment supplier

Slack, Chambers and Johnston, Operations Management 5 th Edition © Nigel Slack, Stuart Chambers, and Robert Johnston 2007 Operations performance should be seen as a whole supply chain issue Benefits of looking at the whole supply chain include It helps an understanding of competitiveness It helps to identify the significant links in the network It helps focus on long-term issues

Slack, Chambers and Johnston, Operations Management 5 th Edition © Nigel Slack, Stuart Chambers, and Robert Johnston 2007 Direction, extent and balance of vertical integration Extent – Narrow process span Extent – Wide process span Direction – Upstream vertical integration Direction – Downstream vertical integration Wholesaler Raw material suppliers Component maker Assembly operation Retailer Balance – Should excess capacity be used to supply other companies?

Slack, Chambers and Johnston, Operations Management 5 th Edition © Nigel Slack, Stuart Chambers, and Robert Johnston 2007 The decision logic of outsourcing Is activity of strategic importance? Explore keeping this activity in-house Yes Does company have specialized knowledge? No Is company’s operations performance superior? Yes No Is significant operations performance improvement likely? Yes No Explore outsourcing this activity No

Slack, Chambers and Johnston, Operations Management 5 th Edition © Nigel Slack, Stuart Chambers, and Robert Johnston 2007 Supply-side and demand-side factors in location decisions The operation Examples of supply-side factors that vary with location, influencing costs labour costs land costs energy costs transportation costs community factors Examples of demand-side factors that vary with location, influencing customer service/revenue labour skills suitability of site image convenience for customers

Slack, Chambers and Johnston, Operations Management 5 th Edition © Nigel Slack, Stuart Chambers, and Robert Johnston 2007 Labour Transport Fabric Supplies Customs duties €15.55 France €14.33 Portugal €11.43 Turkey €11.43 Thailand €11.13 Morocco €10.82 Romania €10.37 China €9.60 Myanmar Cost in euros Cost breakdown of a shirt made in various countries and sold in France

Slack, Chambers and Johnston, Operations Management 5 th Edition © Nigel Slack, Stuart Chambers, and Robert Johnston 2007 Location – Where is the market? Population density LowHigh

Slack, Chambers and Johnston, Operations Management 5 th Edition © Nigel Slack, Stuart Chambers, and Robert Johnston 2007 The balance of capacity Capacity can either lead or lag demand Inventory can be used to smooth out the peaks Spare capacity can be used to supply other operations The danger of this is that the original operation may receive a lower level of service

Slack, Chambers and Johnston, Operations Management 5 th Edition © Nigel Slack, Stuart Chambers, and Robert Johnston 2007 Unit cost curves for individual service centres of varying capacities Average number of bays in use Real cost per customer served Cost curve for 5 bay service centre Cost curve for 10 bay service centre Cost curve for 15 bay service centre ‘Economy of scale’ curve for hotel capacity Diseconomies of scale Economies of scale

Slack, Chambers and Johnston, Operations Management 5 th Edition © Nigel Slack, Stuart Chambers, and Robert Johnston 2007 Capacity lags demand Volume Time Capacity leads demand Volume Time Capacity leading demand and capacity lagging demand Demand Capacity

Slack, Chambers and Johnston, Operations Management 5 th Edition © Nigel Slack, Stuart Chambers, and Robert Johnston 2007 Volume Time Smoothing with inventory Demand Capacity

Slack, Chambers and Johnston, Operations Management 5 th Edition © Nigel Slack, Stuart Chambers, and Robert Johnston 2007 Key Terms Test Demand side The chains of customers, customers’ customers, etc., that receive the products and services produced by an operation. First-tier The description applied to suppliers and customers who are in immediate relationships with an operation 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.

Slack, Chambers and Johnston, Operations Management 5 th Edition © Nigel Slack, Stuart Chambers, and Robert Johnston 2007 Key Terms Test 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. Downstream The other operations in a supply chain between the operation being considered and the end customer.

Slack, Chambers and Johnston, Operations Management 5 th Edition © Nigel Slack, Stuart Chambers, and Robert Johnston 2007 Key Terms Test Upstream The other operations in a supply chain that are towards the supply side of the operation. 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; often associated with the ‘do or buy’ decision.

Slack, Chambers and Johnston, Operations Management 5 th Edition © Nigel Slack, Stuart Chambers, and Robert Johnston 2007 Key Terms Test Location The geographical position of an operation or process. Long-term capacity management The set of decisions that determine the level of physical capacity of an operation in whatever the operation considers to be ‘long-term’; this varies between industries, but is usually in excess of one year. Disintermediation The emergence of an operation in a supply network that separates two operations that were previously in direct contact.

Slack, Chambers and Johnston, Operations Management 5 th Edition © Nigel Slack, Stuart Chambers, and Robert Johnston 2007 Key Terms Test Spatially variable costs The costs that are significant in the location decision that vary with geographical position. 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. Centre-of-gravity method A technique that uses the physical analogy of balance to determine the geographical location that balances the weighted importance of the other operations with which the one being located has a direct relationship.

Slack, Chambers and Johnston, Operations Management 5 th Edition © Nigel Slack, Stuart Chambers, and Robert Johnston 2007 Key Terms Test Fixed-cost breaks The volumes of output at which it is necessary to invest in operations facilities that bear a fixed cost. Economies of scale The manner in which the costs of running an operation decrease as it gets larger. Diseconomies of scale A term used to describe the extra costs that are incurred in running an operation as it gets larger.

Slack, Chambers and Johnston, Operations Management 5 th Edition © Nigel Slack, Stuart Chambers, and Robert Johnston 2007 Key Terms Test Capacity leading The strategy of planning capacity levels such that they are always greater than or equal to forecast demand. Capacity lagging The strategy of planning capacity levels such that they are always less than or equal to forecast demand.