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SUPPLY CHAIN DESIGN

Chapter#9

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4 Introduction

A supply chain is a system of organizations, people, activities, information, and resources involved in moving a product or service from supplier to customer. Supply chain activities transform natural resources, raw materials, and components into a finished product that is delivered to the end customer. In sophisticated supply chain systems, used products may re-enter the supply chain at any point where residual value is recyclable.

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Supply Chain Design

Tota

l co

sts

Supply chain performance

New supply chain efficiency curve with changes in design and execution

Inefficient supply chain operations Area of

improved operations

Figure 9.1 – Supply Chain Efficiency Curve

Improve perform-ance

Reduce costs

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Supply Chain Design

The goal is to reduce costs as well increase performance. Supply chains must be managed to coordinate the inputs with the outputs in a

firm to achieve the appropriate competitive priorities of the firm’s enterprise processes.

The Internet offers firms an alternative to traditional methods for managing the supply chain.

A supply chain strategy is essential for service as well as manufacturing firms.

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Supply Chains

Every firm or organization is a member of some supply chain

Services Provide support for the essential elements of various services the firm

delivers

Manufacturing Control inventory by managing the flow of materials Suppliers identified by position in supply chain – “tiers” Suppliers and customers

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Homecustomers

Homecustomers

Commercialcustomers

Commercialcustomers

Flowers-on-Demand floristFlowers-on-Demand florist

PackagingPackaging Flowers: Local/International

Flowers: Local/International

Arrangement materials

Arrangement materials

FedEx delivery service

FedEx delivery service

Local delivery service

Local delivery service

InternetserviceInternetservice

Maintenance services

Maintenance services

Supply Chains

Figure 9.2 – Supply Chain for a Florist

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East Coast West Coast East Europe West Europe Retail

USA Ireland Distribution centers

ManufacturerIreland Assembly

Germany Mexico USATier 1 Major subassemblies

Germany Mexico USA ChinaTier 2 Components

Supply ChainsPoland USA Canada Australia MalaysiaTier 3 Raw

materials

Figure 9.2 – Supply Chain for a Manufacturing Firm

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Inventory and Supply Chains

Scrap flow

Inventory level

Output flow of materials

Input flow of materials

Figure 9.4 – Creation of Inventory

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Inventory and Supply Chains

Balance the advantages and disadvantages Pressures for small inventories

Inventory holding cost Cost of capital Storage and handling costs Taxes, insurance, and shrinkage

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Inventory and Supply Chains

Pressures for large inventories Customer service Ordering cost Setup cost Labor and equipment utilization Transportation cost Payments to suppliers

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Three aggregate categories Raw materials Work-in-process Finished goods

Types of Inventory

Classified by how it is created Cycle inventory Safety stock inventory Anticipation inventory Pipeline inventory

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Types of Inventory

Figure 9.5 – Inventory at Successive Stocking Points

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Cycle Inventory

Lot sizing principles

1. The lot size, Q, varies directly with the elapsed time (or cycle) between orders.

2. The longer the time between orders for a given item, the greater the cycle inventory must be.

Average cycle inventory = = Q + 0

2

Q

2

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Safety Stock and Anticipation Inventory

Safety Stock inventory

- Protects against uncertainties in demand, lead time, and supply changes

Anticipation inventory

- Used to absorb uneven rates of demand or supply

- Predictable, seasonal demand patterns lend themselves well to the use of anticipation inventory

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Estimating Inventory Levels

1. Enter the average lot size, average demand during a period, and the number of periods of lead time:

2. To compute cycle inventory, simply divide average lot size by 2. To compute pipeline inventory, multiply average demand by lead time

Cycle inventoryPipeline inventory

Average lot sizeAverage demandLead time

350

70

2

175

140

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Inventory Reduction Tactics Cycle inventory

Reduce the lot size Reduce ordering and setup costs and allow Q to be reduced Increase repeatability to eliminate the need for changeovers

Safety stock inventory Place orders closer to the time when they must be received Improve demand forecasts Cut lead times Reduce supply chain uncertainty Rely more on equipment and labor buffers

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19 Inventory Reduction Tactics Anticipation inventory

Match demand rate with production rates Add new products with different demand cycles Provide off-season promotional campaigns Offer seasonal pricing plans

Pipeline inventory Reduce lead times Find more responsive suppliers and select new carriers Change Q in those cases where the lead time depends on the

lot size

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Inventory Placement

Where to locate an inventory of finished goods Use of distribution centers (DCs) Centralized placement Inventory pooling Forward placement

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Inventory measures

Measures of Supply Chain Performance

Average aggregate inventory

value

= +Value of

each unit of item B

Number of units of item B typically on hand

Value of each unit of item A

Number of units of item A typically on hand

Weeks of supply =Average aggregate inventory value

Weekly sales (at cost)

Inventory turnover =Annual sales (at cost)

Average aggregate inventory value

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Financial measures

Total revenue Cost of goods sold Operating expenses Cash flow Working capital Return on assets

Measures of Supply Chain Performance

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Return on assets (ROA)

Increase ROA with higher net income and

fewer total assets

Total assetsAchieve the same or better performance with fewer assets

Working capitalReduce working capital by reducing inventory investment, lead times,

and backlogs

Fixed assetsReduce the number of warehouses through

improved supply chain design

Net incomeImprove profits with greater revenue and

lower costs

Measures of Supply Chain PerformanceTotal revenue

Increase sales through better customer service

Cost of goods soldReduce costs of

transportation and purchased materials

Operating expensesReduce fixed expenses by

reducing overhead associated with supply

chain operations

Net cash flowsImprove positive cash flows by reducing lead times and

backlogs

InventoryIncrease inventory turnover

Figure 9.8 – How Supply Chain Decisions Can Affect ROA

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Mass Customization

Competitive advantages

Managing customer relationships Eliminate finished goods inventory Increased perceived value of services or products

Supply chain design for mass customization Assemble-to-order strategy Modular design Postponement

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Outsourcing Processes Make-or-buy decision

Vertical integration

Backward integration Forward integration

Outsourcing

Offshoring Benefits to outsourcing Pitfalls to outsourcing

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Efficient supply chains

Responsive supply chains

Design of efficient and responsive supply chains

Strategic Implications

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Strategic Implications TABLE 9.1 | ENVIRONMENTS BEST SUITED FOR EFFICIENT AND RESPONSIVE

| SUPPLY CHAINS

Factor Efficient Supply Chains Responsive Supply Chains

Demand Predictable, low forecast errors Unpredictable, high forecast errors

Competitive priorities Low cost, consistent quality, on-time delivery

Development speed, fast delivery times, customization, volume flexibility, variety, top quality

New-service/product introduction

Infrequent Frequent

Contribution margins Low High

Product variety Low High

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Strategic Implications TABLE 9.2 | DESIGN FEATURES FOR EFFICIENT AND RESPONSIVE SUPPLY CHAINS

Factor Efficient Supply Chains Responsive Supply Chains

Operation strategy Make-to-stock or standardized services or products; emphasize high volumes

Assemble-to-order, make-to-order, or customized service or products; emphasize variety

Capacity cushion Low High

Inventory investment Low; enable high inventory turns

As needed to enable fast delivery time

Lead time Shorten, but do not increase costs

Shorten aggressively

Supplier selection Emphasize low prices, consistent quality, on-time delivery

Emphasize fast delivery time, customization, variety, volume flexibility, top quality

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