1. An Integrated Goods and Services Approach
OPERATIONS MANAGEMENT
An Integrated Goods and Services Approach
Supply Chain Design and Location
CHAPTER 9
JAMES R. EVANS
AND
DAVID A. COLLIER
Operations Management/Ch. 9 Supply Chain Design and Location
©2007 Thomson South-Western

2. Chapter 9 Learning Objectives
To understand the components of a supply chain, the key functions of supply chain management, and how supply chains fit into overall value chains by examining a case study of Dell.
To understand the common types of metrics used to evaluate supply chain performance and how they are calculated, to see how the cash-to-cash conversion cycle helps to explain supply chain performance, and to understand the “bullwhip effect.”
To understand the scope of issues involved in designing supply chains, the difference between efficient versus responsive supply chains and push versus pull systems, the role of contract manufacturers, and design of multi-site supply chains for services.
Operations Management/Ch. 9 Supply Chain Design and Location
©2007 Thomson South-Western

3. Chapter 9 Learning Objectives
To understand the basic criteria and decision models used to design supply chain networks and make location decisions.
To be able to apply simple quantitative methods and models to help locate goods-producing or service-providing facilities.
To understand key design issues relating to the design of supply chain management systems, including the selection of transportation services, supplier evaluation, technology selection, and inventory management.

4. Chapter 9 Supply Chain Design and Location
Value (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.
U.S. Economy: $1.1 trillion in inventory ($400 billion at retail, $290 billion at wholesale, and $450 at manufacturers) for sales of $3.2 trillion.
Operations Management/Ch. 9 Supply Chain Design and Location
©2007 Thomson South-Western

5. Chapter 9 Supply Chain Design and Location
Three Views of Value/Supply Chains:
Input/Output View
Pre- and Post-Production Services View
Hierarchical Chain Structure
Operations Management/Ch. 9 Supply Chain Design and Location
©2007 Thomson South-Western

6. The Value Chain – Input/Output View
Exhibit 2.1
The Value Chain – Input/Output View
Operations Management/Ch. 9 Supply Chain Design and Location
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7. Pre- and Postservice View of the Value Chain
Exhibit 2.3
Pre- and Postservice View of the Value Chain
Operations Management/Ch. 9 Supply Chain Design and Location
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8. Chapter 9 Supply Chain Design and Location
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.
Operations Management/Ch. 9 Supply Chain Design and Location
©2007 Thomson South-Western

9. Exhibit 9.1 Typical Goods-Producing Hierarchical Supply Chain View
Operations Management/Ch. 9 Supply Chain Design and Location
©2007 Thomson South-Western

10. Exhibit 9.2
Supply Chain Structure in the Automotive Industry
The automobile industry is an excellent example of an OEM.

11. Chapter 9 Supply Chain Design and Location
The Supply Chain Operations Reference (SCOR)
Model is based on five basic functions in SCM:
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
Operations Management/Ch. 9 Supply Chain Design and Location
©2007 Thomson South-Western

12. Chapter 9 Supply Chain Design and Location
The Value (Supply) Chain and Dell
Dell sells highly customized personal computer, servers, computer workstations, and peripherals.
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 focused on gaining the customer include corporate partnerships, technical support, and strong supplier relationships.
Postproduction services focus on keeping the customer, including billing, shipping, returns, and technical support.

13. Exhibit 9.3
A Value Chain Model of Dell, Inc.

14. Chapter 9 Supply Chain Design and Location
Understanding and Measuring Supply Chain Performance
Supply chain metrics balance customer requirements and internal supply chain efficiency.
Delivery reliability is measured by perfect order fulfillment.
Responsiveness is measured by order fulfillment lead time or perfect delivery fulfillment.
Customer-related measures measure the level of customer satisfaction.
Operations Management/Ch. 9 Supply Chain Design and Location
©2007 Thomson South-Western

15. Exhibit 9.4
Common Metrics Used to Measure Supply Chain Performance

16. Supply chain efficiency measures include: Inventory Turnover (IT) =
Chapter 9 Supply Chain Design and Location
Supply chain efficiency measures include:
Inventory Turnover (IT) =
Cost of goods sold /Average inventory value (Eq. 9.1)
Inventory Days’ Supply (IDS) = Average total inventory/Cost of goods sold per day (Eq. 9.2)
Cost of Goods Sold per Day (CGS/D) =
Cost of goods sold value/Operating days per year (Eq. 9.3)
Revenue per Day (R/D) =
Total revenue/Operating days per year (Eq. 9.7)
Operations Management/Ch. 9 Supply Chain Design and Location
©2007 Thomson South-Western

17. Supply chain efficiency measures include:
Chapter 9 Supply Chain Design and Location
Supply chain efficiency measures include:
Cash-to-Cash Conversion Cycle = IDS + ARDS - APDS (Eq. 9.4)
Accounts Receivable Days’ Supply (ARDS) =
Accounts receivable value/Revenue per day (Eq. 9.5)
Accounts Payable Days’ Supply (ARDS) =
Accounts payable value/Revenue per day (Eq. 9.6)
Revenue per Day (R/D) =
Total revenue/Operating days per year (Eq. 9.7)
Operations Management/Ch. 9 Supply Chain Design and Location
©2007 Thomson South-Western

18. Chapter 9 Dell’s Supply Chain Cash-to-Cash Conversion Cycle
For 2003, Dell's cost of goods sold per day was CGS/D = $29.1 billion/365 days per year = $79,726.
The inventory days’ supply, which Dell calls "inventory velocity," was IDS = $306,000/$79,726 = 3.8 days.
Dell's revenue per day using was R/D = $35.4 billion/365 days per year = $96,986.
ARDS = $2,586,000/$96,986 = 26.8 days
APDS = $5,989,000/$96,986 = 61.8 days.
Therefore, in 2003, Dell's cash-to-cash conversion cycle is
C2C = 3.8 days days – 61.8 days = days.

19. Chapter 9 Dell’s Supply Chain Cash-to-Cash Conversion Cycle
Therefore, in 2003, Dell's cash-to-cash conversion cycle is C2C = 3.8 days days – 61.8 days = days.
The negative value means that Dell receives customers’ payments (accounts receivable) 31.2 days, on average, before Dell has to pay its suppliers (accounts payable).
This means that Dell's value chain is a self-funding cash model!

20. Exhibit 9.5
Dell Computer’s Cash-to-Cash Conversion Cycles 1996 to 2003
Cash-to-Cash Conversion Cycle: inventory days’ supply (IDS) plus accounts receivable days’ supply (ARDS) minus accounts payable days’ supply (APDS)

21. Exhibit 9.6
Dell’s 2003 Negative Cash-to-Cash Conversion Cycle

22. Chapter 9 Supply Chain Design and Location
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.
Operations Management/Ch. 9 Supply Chain Design and Location
©2007 Thomson South-Western

23. Order Amplification for HP Printers
Exhibit 7.7
Exhibit 9.7
Order Amplification for HP Printers
Source: Callioni, Gianpaolo, and Billington, Corey, “Effective Collaboration,” OR/MS Today, October 2001, pp. 34–39.

24. Chapter 9 Supply Chain Design and Location
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.
Operations Management/Ch. 9 Supply Chain Design and Location
©2007 Thomson South-Western

25. Chapter 9 Supply Chain Design and Location
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.
Operations Management/Ch. 9 Supply Chain Design and Location
©2007 Thomson South-Western

26. Chapter 9 Supply Chain Design and Location
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.
Operations Management/Ch. 9 Supply Chain Design and Location
©2007 Thomson South-Western

27. Exhibit 9.8
Supply Chain Push-Pull Systems and Boundaries

28. Chapter 9 Supply Chain Design and Location
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 quickly attached and the unit can be shipped. This would reduce inventory requirements.
Operations Management/Ch. 9 Supply Chain Design and Location
©2007 Thomson South-Western

29. Chapter 9 Supply Chain Design and Location
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.
Operations Management/Ch. 9 Supply Chain Design and Location
©2007 Thomson South-Western

30. Chapter 9 Supply Chain Design and Location
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.
Operations Management/Ch. 9 Supply Chain Design and Location
©2007 Thomson South-Western

31. Chapter 9 Supply Chain Design and Location
Multi-site 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.

32. Chapter 9 Supply Chain Design and Location
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 affects 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.
Operations Management/Ch. 9 Supply Chain Design and Location
©2007 Thomson South-Western

33. Chapter 9 Supply Chain Design and Location
Location Decisions in Supply Chains
Four basic decisions:
global (nation) location,
regional location,
district/community location,
local site selection.
Operations Management/Ch. 9 Supply Chain Design and Location
©2007 Thomson South-Western

34. Exhibit 9.9
Example Location Factors for Site Selection

35. Chapter 9 Supply Chain Design and Location
Location Scoring Model
Scoring model consists of a list of major location criteria, each of which is partitioned into several levels, and an assigned score to each level that reflects its relative importance.
Model assumes that each factor is equal in importance, however weights can be placed on each score to provide differentiation.
Operations Management/Ch. 9 Supply Chain Design and Location
©2007 Thomson South-Western

36. Chapter 9 Supply Chain Design and Location
Center of Gravity Method
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.
Operations Management/Ch. 9 Supply Chain Design and Location
©2007 Thomson South-Western

37. Exhibit 9.10
Facility Location Scoring Model

38. Exhibit 9.11
Taylor Paper Products Plant and Customer Locations: Center of Gravity Method

39. Exhibit 9.12
Excel Spreadsheet for Taylor Paper Products

40. Chapter 9 Supply Chain Design and Location
Transportation Model
Used if all facility locations are fixed.
Determines lowest-cost of distributing goods from supply points (origins) to demand locations (destinations)
Operations Management/Ch. 9 Supply Chain Design and Location
©2007 Thomson South-Western

41. Exhibit 9.13
Transportation Model Spreadsheet for Arnoff Enterprises (Arnoff Enterprises.xls)

42. Exhibit 9.14
Optimal Distribution Plan if Denver Warehouse Is Closed

43. Chapter 9 Supply Chain Design and Location
Network Location Models
Selecting the best facility location, accounting for travels times on public roads.
Locations are called “nodes” and volume, distance, time or cost between nodes are called “arcs”
Goal is to minimize cost, distance traveled, and response and delivery time
Operations Management/Ch. 9 Supply Chain Design and Location
©2007 Thomson South-Western

44. Exhibit 9.15
Zone Connections for Marymount Township

45. Chapter 9 Supply Chain Design and Location
Selecting Transportation Services
Services include rail, motor, air, water, and pipeline.
Critical factors include speed, accessibility, cost, and capability.
Operations Management/Ch. 9 Supply Chain Design and Location
©2007 Thomson South-Western

46. Chapter 9 Supply Chain Design and Location
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.
Operations Management/Ch. 9 Supply Chain Design and Location
©2007 Thomson South-Western

47. Selecting Transportation Services
Exhibit 9.16
Comparison of Transportation Modes
(Note: The best ranking is 1.)
Selecting Transportation Services

48. Chapter 9 Supply Chain Design and Location
Selecting 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.
Operations Management/Ch. 9 Supply Chain Design and Location
©2007 Thomson South-Western

49. Chapter 9 Supply Chain Design and Location
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 is becoming a popular concept where the vendor monitors and manages the inventory for the customer.
Operations Management/Ch. 9 Supply Chain Design and Location
©2007 Thomson South-Western

50. Chapter 9 Solved Problem #1
Evaluate the cash-to-cash conversion cycle for a company that has sales of $3.5 million, Cost of Goods Sold equal to $2.8 million, 250 operating days a year, total average on hand inventory of $460,000, accounts receivable equal to $625,000, and accounts payable of $900,100. What can you conclude about the company’s operating practices?
Solution
Using Equations 9.1 to 9.7 we computed the following:
CGS/D=Cost of goods sold value = $2,800,000 = $11,200/day Operating days per year 250
R/D = Total revenue (sales) = $3,500,000 = $14,000 per day Operating days per year 250
Operations Management/Ch. 9 Supply Chain Design and Location
©2007 Thomson South-Western

51. Chapter 9 Solved Problem #1
Solution (Continued)
IDS = Average total inventory = $460,000 = 41.1 days Cost of goods sold per day $11,200
IT = Cost of goods sold value = $2,800,000 = 6.1 turns Average inventory value $460,000
ARDS= Accounts receivable value = $625,000= 44.6 days Revenue (sales) per day $14,000
APDS = Accounts payable value = $900,100 = 64.3 days Revenue (sales) per day $14,000
Cash-to-Cash Conversion Cycle = IDS + ARDS – APDS = = days.
Operations Management/Ch. 9 Supply Chain Design and Location
©2007 Thomson South-Western

52. Chapter 9 Solved Problem #1
Solution (Continued)
The firm receives the customer's payments (accounts receivable), on average, 21.4 days "after" it must pay its bills to suppliers (accounts payable).
If by improving inventory and/or accounts receivable systems and practices, the firm can shorten the 85.7 days to 64.3 days, theoretically it should not have to borrow funds to support its inventory levels.
All of these numbers should be compared to industry and competitor performance standards.
Operations Management/Ch. 9 Supply Chain Design and Location
©2007 Thomson South-Western

53. Chapter 9 Solved Problem #2
A pizza restaurant wants to build a satellite kitchen in a nearby suburb. Which site would be the best?
Because sites are fixed, we need to evaluate the total weighted time from each site to the customer zone. Total weighted times are:
Site A: 26,700
Site B: 23,500
Site C: 30,500
Site B appears to be the best location because it minimizes total weighted travel time.
Operations Management/Ch. 9 Supply Chain Design and Location
©2007 Thomson South-Western

54. Chapter 9 Solved Problem #3
An automobile dealership in a large city had four locations spread around the Standard Metropolitan Area some as far as 60 miles apart. Each location had a dealership showroom, maintenance and repair service with a parts stockroom, and used and new vehicle lots. The coordinates in miles on an X-Y grid of each city location are shown below with the number of major parts sold each month as the third coordinate. That is, Paris (20,50, 34) is X-axis = 20 miles, Y- axis = 50 miles, and 34 parts are sold per month.
Operations Management/Ch. 9 Supply Chain Design and Location
©2007 Thomson South-Western

55. Chapter 9 Solved Problem #3
Solution Solved Problem # 3
Using Equation 9.8 and 9.9 we obtain:
Center of gravity X-axis =
20(34)+60(36)+70(56)+90(28) = 60.3
Center of gravity Y-axis = 50(34)+40(36)+55(56)+30(28) = 45.8
Operations Management/Ch. 9 Supply Chain Design and Location
©2007 Thomson South-Western

56. Chapter 9 Solved Problem #3
Solution
To minimize the weighted distance among the four user locations the center-of-gravity method gives X coordinate = 60.3 miles and Y-coordinate = 45.8 miles. This location is a good place to start the search for property to locate a warehouse. In fact, these ideal coordinates (60.3, 45.8) are very close to the Hickory location (60, 40) so consideration should be given to add a central warehouse on this property if space is available.
Operations Management/Ch. 9 Supply Chain Design and Location
©2007 Thomson South-Western

57. Exhibit 9.17
University Campus Map Problem # 13

58. Exhibit 9.18
Binghamton City Data -- Problem # 20

59. Exhibit 9.19
R. K. Martin Case Distribution Data