Chapter 3
Network and System
Design
Copyright 2011 John Wiley & Sons, Inc.
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Lecture Outline
• The Supply Chain System
• Understanding Processes: Theory of
Constraints (TOC)
• Integration of Supply Chain Processes
• Designing Supply Chain Networks
• Enterprise Resource Planning (ERP)
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The Supply Chain System
A supply chain can be viewed as a system of
processes that cut across organizations and
deliver customer value, rather than as a series of
separate organizations and functions.
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Processes Across the
Supply Chain
Network and information technology (IT) design
support supply chain strategy for the system
Supply Chain
Strategy
SC Network
Design
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IT Design
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Processes Across the
Supply Chain Continued
• Supply Chain Strategy
– long-range plan for the system
• Supply Chain Network Design
– design of the network structure and business
process
• Information Technology (IT) Design
– enables data sharing, communication, and
process synchronization
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What is a Business Process?
A business process is a structured set of activities
or steps with specified outcomes
– processes involve many organizational functions
– every process has structural and resource
constraints limiting output
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Theory of Constraints
The Theory of Constraints (TOC) was introduced
by Dr. Eliyahu Goldratt in his book The Goal
• Premise of TOC
– every system has at least one constraint
• Objective
– identify the constraint and restructure the
organization to eliminate its impact
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System Constraints
A system cannot produce more than its constraining
activity which is sometimes called the “bottleneck”
Output is related to how system activities are linked
• Activities can be linked:
– serially
– in parallel
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Serial Process Example
Consider the following distribution network:
Maximum output per day = 50,000 units
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Parallel Process Example
Consider the following distribution network:
Maximum output per day = 64,000 units
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Steps of Constraint Management
1. Identify the constraint
2. Exploit the constraint
3. Subordinate all other processes to the
above decision
4. Elevate the constraint
5. When the constraint changes, return to
Step 1
6. Engage in continuous improvement
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System Variation
• Every system or process has variation
– output varies
– activities vary
– equipment and facilities vary
• Variation is a problem
– consumes resources
– adds complexity and uncertainty
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Managing Process Variation
Process variation can be managed
three ways:
– reduce or eliminate variation
– create buffers to deal with the
variation
– design more flexibility into the
process to respond to the variation
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Capacity Implications
Linked supply chain organizations need to
match capacities to avoid bottlenecks
Two common measures:
• Design Capacity
– maximum output rate that can be achieved
• Effective Capacity
– maximum output rate that can be sustained
under normal conditions
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Capacity Utilization
Capacity utilization indicates how much of
capacity is actually being used
Calculation:
Utilization effective =
Utilization design =
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Actual output
Effective Capacity
Actual output
Design Capacity
(100%)
(100%)
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Capacity Utilization Example
A warehouse can process a maximum of
100,000 orders/day with overtime labor. The
facility is designed to process 70,000
orders/day under normal conditions. In June,
the facility processed 80,000 orders/day.
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Capacity Utilization Example
Continued
Calculate effective and design capacity
utilization for the month of June
80,000
Utilization effective =
70,000
80,000
Utilization design =
100,000
Copyright 2011 John Wiley & Sons, Inc.
(100%) = 114.3%
(100%) = 80%
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Integration of Supply Chain
Processes
Companies move through a set of integration
stages as their supply chain strategy evolves
Three Stages:
1. Complete functional independence
2. Internal functional cooperation and
coordination, but not across the supply chain
3. True supply chain integration
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Stages of Supply Chain Integration
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Vertical Integration vs. Coordination
• Vertical Integration
– ownership of upstream suppliers and
downstream customers
• Focus on Core Competencies
– less important activities are outsourced
– companies must coordinate processes
between multiple supply chain entities
– cooperation supplants historical adversarial
supplier relationships
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Supply Chain Networks
Two important aspects of the supply chain
network:
• Physical structure of the network
• Management of the network
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Supply Chain Structure
Three elements define supply chain network
structure:
1. Number of companies in the supply chain
2. Structural dimensions of the network
3. Number of process links across the supply
chain
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Supply Chain Structure Continued
Factors affecting supply chain network
structure:
– product type
– product characteristics
– number of available suppliers
– availability of raw materials
– ease of access to customers
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Supply Chain Network
Management
Not all supply chain branches and links need
to be managed equally
– identify and manage key process links across
the supply chain
– manage processes across entire supply chain
– integrate activities into SCM processes
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Designing Segmented Structures
• Segmented supply chains help
manage varying customer
requirements in a network
• Each segment will result in a
different supply chain structure
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Designing Segmented Structures
Continued
• Three-step approach:
1. Identify key drivers of operational complexity
2. Design differentiated supply chain segments
tailored to these unique complexities
3. Create a customized end-to-end operational
blueprint and performance metrics for each
supply chain segment
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Ways to Segment Supply Chains
• Segment Examples:
– Fast-moving vs. slow-moving products
– Fast growth vs. slow-growth products
– Traditional vs. innovation versus online channel
– High priority customers vs. low priority customers
– Low-volume/low variability vs. low-volume/high
variability
– High-volume/low variability vs. high-volume/high
variability
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Role of Information Technology
IT enables the linking of processes across the
supply chain
– enables communication
– provides storage
– organizes information
– provides visibility
– processes data within and between
firms
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Enterprise Resource Planning
(ERP)
ERP systems are a fully integrated computerbased technology used by organizations to
manage resources throughout the supply chain
ERP is an Information Technology
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ERP Continued
ERP systems consolidate all business
processes into an enterprise-wide system that
– operates in real time
– uses a single, centralized database
– utilizes a standard format for inputted data
– is comprised of modules for business
processes
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ERP Modules
ERP modules can be selected based on the
needs of the business
• ERP Modules:
– Manufacturing
– Supply Chain Management
– Finance
– Project Management
– Human Resources
– Customer Relationship
Management (CRM)
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ERP Components
ERP modules include multiple components
designed for a specific purpose
• Example components of a Supply Chain
Management Module:
– Inventory
– Supply Chain Planning
– Order Entry
– Supplier Scheduling
– Purchasing
– Product Inspection
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ERP Configuration
ERP system configurations:
• Fully Customized
• Standardized “off-the-shelf” modules
• Mix of Customized and Standardized
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ERP Implementation
Implementation Steps:
1. map current business processes
2. identify ERP modules to match
processes
3. identify steps to efficiently unify modules
with processes
4. further refine unity
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Review
1. A supply chain can be viewed as a system of
processes. SCM involves managing these
processes.
2. A business process is a structured set of
activities or steps with specified outcomes.
3. The transactional view of supply chains
focuses on the efficiency and effectiveness
of managing supply chain processes.
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Review Continued
4. The relationship view of supply chains
focuses on managing relationships across
the supply chain.
5. TOC explains how to manage a system.
According to TOC every system has at least
one constraint. A constraint is anything that
prevents the system from being able to
achieve its goal and is sometimes called the
“bottleneck.” A system should be improved
by managing the constraint.
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Review Continued
6. Design capacity is the maximum output rate
that can be achieved by a facility. Effective
capacity is the maximum output rate that can
be sustained under normal conditions.
7. ERP systems are a fully integrated
computer-based technology used by
organizations to manage resources
throughout the supply chain.
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