OM2
CHAPTER 9
SUPPLY CHAIN DESIGN
DAVID A. COLLIER
AND
JAMES R. EVANS
OM2, Ch. 9 Supply Chain Design
©2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or
posted to a publicly accessible website, in whole or in part.
1
Chapter 9 Learning Outcomes
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.
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posted to a publicly accessible website, in whole or in part.
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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.
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33
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)
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Exhibit 2.1
The Value Chain – Input/Output View
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posted to a publicly accessible website, in whole or in part.
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Exhibit 2.3
Pre- and Postservice View of the Value Chain
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Exhibit 9.1
Typical Goods-Producing Supply Chain Structure
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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.
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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:
1. Plan: developing a strategy that balances
resources with requirements.
2. Source: procuring goods and services to meet
planned or actual demand.
3. Make: transforming goods and services to a
finished state to meet demand.
4. Deliver: managing orders, transportation, and
distribution to provide the goods and services.
5. Return: customer returns, maintenance, dealing
with excess goods.
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posted to a publicly accessible website, in whole or in part.
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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.
OM2, Ch. 9 Supply Chain Design
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Exhibit 9.2
OM2, Ch. 9 Supply Chain Design
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posted to a publicly accessible website, in whole or in part.
A Value Chain Model of Dell, Inc.
1111
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.
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posted to a publicly accessible website, in whole or in part.
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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.
OM2, Ch. 9 Supply Chain Design
©2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or
posted to a publicly accessible website, in whole or in part.
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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.
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posted to a publicly accessible website, in whole or in part.
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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.
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posted to a publicly accessible website, in whole or in part.
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Exhibit 9.3
Supply Chain
Push-Pull Systems
and Boundaries
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posted to a publicly accessible website, in whole or in part.
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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.
OM2, Ch. 9 Supply Chain Design
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posted to a publicly accessible website, in whole or in part.
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Chapter 9 Supply Chain Design
• Multisite management is the process of
managing geographically dispersed serviceproviding 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.
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posted to a publicly accessible website, in whole or in part.
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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.
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posted to a publicly accessible website, in whole or in part.
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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.
OM2, Ch. 9 Supply Chain Design
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posted to a publicly accessible website, in whole or in part.
2020
Extra Exhibit
Order Amplification for HP Printers
Source: Callioni, Gianpaolo, and Billington, Corey, “Effective Collaboration,” OR/MS Today, October 2001, pp. 34–39.
OM2, Ch. 9 Supply Chain Design
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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.
OM2, Ch. 9 Supply Chain Design
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posted to a publicly accessible website, in whole or in part.
2222
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.
OM2, Ch. 9 Supply Chain Design
©2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or
posted to a publicly accessible website, in whole or in part.
2323
Chapter 9 Supply Chain Design
Location Decisions in Supply Chains
Four basic decisions:
• global (nation) location
• regional location
• community location
• local site location
OM2, Ch. 9 Supply Chain Design
©2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or
posted to a publicly accessible website, in whole or in part.
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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.
OM2, Ch. 9 Supply Chain Design
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posted to a publicly accessible website, in whole or in part.
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Exhibit 9.6
Taylor Paper Products Plant and Customer Locations
Solved Problem
OM2, Ch. 9 Supply Chain Design
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posted to a publicly accessible website, in whole or in part.
2626
Exhibit Extra
Excel Spreadsheet for Taylor Paper Products
Solution
OM2, Ch. 9 Supply Chain Design
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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 = ----------------------------------------------------------------------------[400 + 300 + 200 + 100 + 300 + 100]
= 98.1
OM2, Ch. 9 Supply Chain Design
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2828
Chapter 9 Supply Chain Design
Selecting Transportation Services
• Services include rail, motor, air, water, and
pipeline.
• Critical factors include speed, accessibility,
cost, and capability.
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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, ontime deliveries, and cost of ownership.
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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.
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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.
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posted to a publicly accessible website, in whole or in part.
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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.
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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.
OM2, Ch. 9 Supply Chain Design
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posted to a publicly accessible website, in whole or in part.
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