OM

CHAPTER 9

SUPPLY CHAIN DESIGN

DAVID A. COLLIER
AND
JAMES R. EVANS

OM, Ch. 9 Supply Chain Design

2009 South-Western, a part of Cengage Learning

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.

OM, Ch. 9 Supply Chain Design

2009 South-Western, a part of Cengage Learning

22

Chapter 9 Supply Chain Design

atthews Novelties, Inc. produces a line of popular toys, many on
contract from movie studios and other entertainment companies.
Matthews Novelties just acquired ToyCo, a smaller company that
essentially owns the market for miniature cars and trucks. The VP of Operations
stated Now that weve inherited ToyCos product line, we need to decide where to
produce them. As you know, our state-of-the art die-casting factory in Malaysia
operates at full capacity, and we have no room to expand the factory at the current
site and no available land adjacent to it. ToyCo has two factoriesone in Thailand
and another in Malasia. Labor costs in Thailand are about half of what we
experience in Malaysia but their labor productivity is a lot lower. Our marketing
people have also told us that the demand in Asia is increasing rapidly. One senior
manager noted, We shouldnt just make this decision on labor economics. What
are building costs? What about housing and dormitory availability and education
programs for employees? Do we have accurate demand forecasts? Where are the
suppliers located? What regulations and restrictions do we face? How stable is their
currency and political situation?

What do you think? Suppose that you wanted to locate a caf on your

college campus (other than in the typical student center). What factors might
you consider in selecting the location?

OM, Ch. 9 Supply Chain Design

2009 South-Western, a part of Cengage Learning

33

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.

OM, Ch. 9 Supply Chain Design

2009 South-Western, a part of Cengage Learning

44

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)

OM, Ch. 9 Supply Chain Design

2009 South-Western, a part of Cengage Learning

55

Exhibit 2.1

OM, Ch. 9 Supply Chain Design

2009 South-Western, a part of Cengage Learning

The Value Chain Input/Output View

66

Exhibit 2.3

OM, Ch. 9 Supply Chain Design

2009 South-Western, a part of Cengage Learning

Pre- and Postservice View of the Value Chain

77

Exhibit 9.1

OM, Ch. 9 Supply Chain Design

2009 South-Western, a part of Cengage Learning

Typical Goods-Producing Supply Chain Structure

88

Chapter 9 Supply Chain Design

Understanding Supply Chains

Supply chain m anagem ent 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.

OM, Ch. 9 Supply Chain Design

2009 South-Western, a part of Cengage Learning

99

Chapter 9 Supply Chain Design

The Supply Chain Operations Reference (SCOR)

M odel is a framework for understanding the scope of
SCM based on five basic functions:
1. P lan: developing a strategy that balances resources
with requirements.
2. Source: procuring goods and services to meet
planned or actual demand.
3. M ake: 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.
OM, Ch. 9 Supply Chain Design
2009 South-Western, a part of Cengage Learning

1010

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.

Dells 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.

OM, Ch. 9 Supply Chain Design

2009 South-Western, a part of Cengage Learning

1111

Exhibit 9.2

OM, Ch. 9 Supply Chain Design

2009 South-Western, a part of Cengage Learning

A Value Chain Model of Dell, Inc.

1212

Chapter 9 Supply Chain Design

Designing the Supply Chain

A contract m anufacturer 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.
OM, Ch. 9 Supply Chain Design
2009 South-Western, a part of Cengage Learning

1313

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.

OM, Ch. 9 Supply Chain Design

2009 South-Western, a part of Cengage Learning

1414

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.

Responsive supply chains focus on flexibility

and responsive service and are able to react

quickly to changing market demand and
requirements.

OM, Ch. 9 Supply Chain Design

2009 South-Western, a part of Cengage Learning

1515

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.

OM, Ch. 9 Supply Chain Design

2009 South-Western, a part of Cengage Learning

1616

Exhibit 9.3
Supply Chain
Push-Pull Systems
and Boundaries

OM, Ch. 9 Supply Chain Design

2009 South-Western, a part of Cengage Learning

1717

Chapter 9 Supply Chain Design

Designing the Supply Chain

P ostponem ent 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.
OM, Ch. 9 Supply Chain Design
2009 South-Western, a part of Cengage Learning

1818

Chapter 9 Supply Chain Design

M ultisite m anagem ent 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.
OM, Ch. 9 Supply Chain Design
2009 South-Western, a part of Cengage Learning

1919

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.
OM, Ch. 9 Supply Chain Design
2009 South-Western, a part of Cengage Learning

2020

Chapter 9 Supply Chain Design

The bullwhip effect results from order

am plification 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.
OM, Ch. 9 Supply Chain Design
2009 South-Western, a part of Cengage Learning

2121

Extra Exhibit

Order Amplification for HP Printers

Source: Callioni, Gianpaolo, and Billington, Corey, Effective Collaboration, OR/MS Today, October 2001, pp. 3439.

OM, Ch. 9 Supply Chain Design

2009 South-Western, a part of Cengage Learning

2222

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 chains ability to satisfy that
demand as each component of the supply
chain seeks to manage its operations from
its own perspective.

OM, Ch. 9 Supply Chain Design

2009 South-Western, a part of Cengage Learning

2323

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.

OM, Ch. 9 Supply Chain Design

2009 South-Western, a part of Cengage Learning

2424

Exhibit 9.5

OM, Ch. 9 Supply Chain Design

2009 South-Western, a part of Cengage Learning

Example Location Factors for Site Selection

2525

Chapter 9 Supply Chain Design

Location Decisions in Supply Chains

Four basic decisions:
global (nation) location
regional location
community location
local site location

OM, Ch. 9 Supply Chain Design

2009 South-Western, a part of Cengage Learning

2626

Chapter 9 Supply Chain Design

Center of Gravity Method

The center of gravity m ethod

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.

OM, Ch. 9 Supply Chain Design

2009 South-Western, a part of Cengage Learning

2727

Exhibit 9.6

OM, Ch. 9 Supply Chain Design

2009 South-Western, a part of Cengage Learning

Solved Problem. Taylor Paper Products Plant and

Customer Locations: Center of Gravity Method

2828

Exhibit Extra

OM, Ch. 9 Supply Chain Design

2009 South-Western, a part of Cengage Learning

Excel Spreadsheet for Taylor Paper Products

2929

Chapter 9 Supply Chain Design

Other Issues in Supply Chain Management

Selecting Transportation Services

Services include rail, motor, air, water, and

pipeline.
Critical factors include speed, accessibility,
cost, and capability.

OM, Ch. 9 Supply Chain Design

2009 South-Western, a part of Cengage Learning

3030

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, on-time deliveries, and cost of
ownership.

OM, Ch. 9 Supply Chain Design

2009 South-Western, a part of Cengage Learning

3131

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.

OM, Ch. 9 Supply Chain Design

2009 South-Western, a part of Cengage Learning

3232

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 m anaged inventory (VM I ) is
becoming a popular concept where the

vendor monitors and manages the

inventory for the customer.

OM, Ch. 9 Supply Chain Design

2009 South-Western, a part of Cengage Learning

3333