CHAPTER 10
SUPPLY CHAIN STRATEGY
1
Supply Chain Strategy
• Supply chain management
• Competitive advantage
• Aligning product and supply chain strategy
2
Supply Chain
• A supply chain represents all the stages at which
value is added in producing and delivering a
product or service from suppliers (and their
suppliers) to customers (and their customers).
3
4
Supply Chain Management
• Supply chain management is the coordination of
the following functions and activities along the
supply chain:
–
–
–
–
–
–
Planning and managing of supply and demand
Acquiring material
Warehousing
Inventory control and distribution
Producing and scheduling the product or service
Delivery and customer service
5
Supply Chain Database and Planning
Forecasting
Chapter 13
Supply Chain
Database
Aggregate Planning
Chapter 14
Inventory Control
Chapters 15,16
Operations Scheduling
Chapter 17
6
Supply Chain Management and
Competitive Advantage
• Competitive advantage may be obtained
with a total systems approach to managing
flow of information, materials and services
along the supply chain
7
8
Investment in Supply Chain
• High profit margin (high tech products)
– Reduce stockout
– Invest in reducing lead time along the supply chain
• Low profit margin (staple products)
– Reduce cost
– Increase resource utilization, minimize inventory,
– select vendors on the basis of cost and quality, design
products that can be produced
9
Matching Supply Chain
with Products
Functional
Innovative
Products
Products
Efficient
Supply-Chain
Match
Mismatch
Mismatch
Match
Responsive
Supply-Chain
10
CHAPTER 11
STRATEGIC CAPACITY
MANAGEMENT
11
Strategic Capacity Management
•
•
•
•
Capacity
Planning issues
Capacity additions
Determining capacity requirements
12
Capacity
• Output over a certain time period
– Peak? Average? Design capacity?
• Best operating level
– Design capacity, minimum average cost
• Capacity utilization
Capacity Used

Best Operating Level
13
Planning Issues
• Economies and Diseconomies of scale
– Advantage and disadvantage of capacity
• Learning curve
– Another advantage of capacity
• Focussed factories
– A strategy to remove the disadvantage of capacity
• Capacity flexibility
– A strategy to deal with demand uncertainty
14
Average cost per unit
Economies and Diseconomies of
Scale
250
room
hotel
Best
operating
level
500
room
hotel
1000
room
hotel
Best
operating
level
Best
operating
level
Economies of scale
Diseconomies of scale
15
Processing time per unit
Learning Curve
• An example of 80% learning
curve
– 1st unit
– 2nd unit
– 4th unit
100 hours
80 hours
64 hours
Units produced
16
Learning Curve
Yx = Kxn
where
–
–
–
–
x = Unit number
Yx = time required for the xth unit
K = time required for the first unit
n = log b/log 2, where b is the percentage rate of
improvement
17
Learning Curve
Contract to produce 35 computers
– K = 18 hours
– Learning rate = 80%
– What is time for the 9th unit? 35 units?
Y9
= (18)(9)log(0.8)/log(0.2)
= (18)(0.493)
= 8.874hrs
Y1+…+ Y35
= (18)(15.64)
= 281.52hrs
(See Exhibit TN4.5, p. 138)
(See Exhibit TN4.6, p. 139)
18
Focussed Factories
• Theory
– A production facility is the most efficient when it
concentrates on a fairly limited set of tasks
objectives
• An implication
– Instead of building one huge plant, build several
smaller plants
• An example
– Plant 1: Production of components
– Plant 2: Assembly
19
Capacity Flexibility: Flexible
Workers
Machines
Enter
Worker 2
Worker
3
Worker 1
Exit
Key:
Product route
Worker route
20
Capacity Flexibility: Flexible Machine
A CNC
Hobbing
Machine
• Many tools in the tool magazine
• Tools are changed instantaneously
• Thus, products with different designs are produced without
long setup times
21
Capacity Additions
• Maintaining system balance
• Frequency of capacity additions
– Too frequent: installation, training, premium for up
to date technology, loss of production time
– Too infrequent: cost of excess capacity
• External sources of capacity
– Subcontracting
– Capacity sharing
22
Maintaining System Balance
Inputs
1
2
3
200/hr
50/hr
200/hr
To
customers
(a) Operation 2 a bottleneck
Inputs
1
2
3
200/hr
200/hr
200/hr
(b) All operations bottlenecks
To
customers
23
Capacity Expansion Strategies
Lead strategy
Units Capacit
y
Lag strategy
Units
Demand
Time
Add average
Units
Demand
Time
Time
Determining Capacity Requirements
•
•
•
•
Estimate capacity requirements
Identify gaps
Develop alternatives
Evaluate the alternatives
– Decision tree is a tool used to evaluate
alternatives
25
A Decision Tree Example
Text Chapter 11 Problem 5
• Expando Inc. is considering the possibility of building a facility.
• Small facility: costs $8 million. If demand is low, revenue will be
$10 million. If demand is high revenue will be $12 million.
• Large facility: costs $9 million. If demand is low, revenue will be
$10 million. If demand is high revenue will be $14 million.
• The probability of demand being high is 0.40 and the probability of
it being low is 0.60
• Not constructing a new facility would not generate any additional
revenue.
26
$8 Sma
mi ll
llio
n
h $12 million
g
i
H
0)
4
.
(0
(0. 6
Do Nothing
n
llio
mi e
$9 Larg
0)
Low $10 million
$0
h $14 million
Hig
0)
4
.
(0
(0. 6
0)
Low $10 million
27
$8 Sma
mi ll
llio
n
$10.8
million
Do Nothing
h $12 million
g
i
H
0)
4
.
(0
(0. 6
n
llio
mi e
$9 Larg
0)
Low $10 million
$0
h $14 million
Hig
0)
4
.
(0
(0. 6
0)
Low $10 million
28
$8 Sma
mi ll
llio
n
$10.8
million
Do Nothing
n
llio
mi e
$9 Larg
$11.6
million
h $12 million
g
i
H
0)
4
.
(0
(0. 6
0)
Low $10 million
$0
h $14 million
Hig
0)
4
.
(0
(0. 6
0)
Low $10 million
29
$8 Sma
mi ll
llio
n
n
llio
mi e
$9 Larg
$2.8
million
$10.8
million
Do Nothing
$11.6
million
h $12 million
g
i
H
0)
4
.
(0
(0. 6
0)
Low $10 million
$0
h $14 million
Hig
0)
4
.
(0
(0. 6
0)
Low $10 million
Build the small facility with expected value = $2.8 million
30
Reading and Exercises
• Chapter 10 (Supply Chain Strategy)
– up to p. 413
• Chapter 11 (Strategic Capacity Management)
– up to p. 440
– Problem 6
• Technical Note 4 (Learning Curves)
– up to p. 141
– Problems 1,4
31