Chapter 6 Supply network design Source Getty Images

Chapter 6 Supply network design Source: Getty Images Slack, Chambers and Johnston, Operations Management 5 th Edition © Nigel Slack, Stuart Chambers, and Robert Johnston 2007

Supply network design Process design Operations strategy Supply network design Layout and flow Process technology Design Job design Product/service design Operations management Improvement Planning and control Slack, Chambers and Johnston, Operations Management 5 th Edition © Nigel Slack, Stuart Chambers, and Robert Johnston 2007

Operations in practice Source: Corbis/ Gianni Giansanti/ Sygma Michael Dell started in 1984 by cutting out the ‘middle man’ and delivering computers direct to the customer Using its direct selling methods, Dell went on to become the number one computer maker There are many reasons for Dell’s success but most of them come from the way Dell configures its supply networks Slack, Chambers and Johnston, Operations Management 5 th Edition © Nigel Slack, Stuart Chambers, and Robert Johnston 2007

Operations network for a plastic homeware company Second-tier suppliers Chemical company Wholesaler Plastic stockist Cardboard company Ink supplier First-tier customers First-tier suppliers Plastic homeware manufacturer Second-tier customers Retailer Packaging supplier Direct supply Information Slack, Chambers and Johnston, Operations Management 5 th Edition © Nigel Slack, Stuart Chambers, and Robert Johnston 2007

Operations network for a shopping mall Second-tier suppliers Recruitment agency First-tier suppliers First-tier customers Second-tier customers Retail customers Security services Cleaning materials supplier Cleaning services Equipment supplier Maintenance services Shopping mall Direct supply Information Slack, Chambers and Johnston, Operations Management 5 th Edition © Nigel Slack, Stuart Chambers, and Robert Johnston 2007

Operations performance should be seen as a whole supply chain issue Benefits of looking at the whole supply chain include It helps an understanding of competitiveness It helps to identify the significant links in the network It helps focus on long-term issues Slack, Chambers and Johnston, Operations Management 5 th Edition © Nigel Slack, Stuart Chambers, and Robert Johnston 2007

Direction, extent and balance of vertical integration Balance – Should excess capacity be used to supply other companies? Raw material suppliers Component maker Assembly operation Wholesaler Retailer Extent – Narrow process span Extent – Wide process span Direction – Upstream vertical integration Direction – Downstream vertical integration Slack, Chambers and Johnston, Operations Management 5 th Edition © Nigel Slack, Stuart Chambers, and Robert Johnston 2007

The decision logic of outsourcing Is activity of strategic importance? Yes Does No company have No specialized knowledge? Yes Is company’s operations performance superior? No Yes Is significant operations No performance improvement likely? Explore outsourcing this activity Yes Explore keeping this activity in-house Slack, Chambers and Johnston, Operations Management 5 th Edition © Nigel Slack, Stuart Chambers, and Robert Johnston 2007

Supply-side and demand-side factors in location decisions Examples of supply-side factors that vary with location, influencing costs labour costs land costs energy costs transportation costs community factors The operation Examples of demand-side factors that vary with location, influencing customer service/revenue labour skills suitability of site image convenience for customers Slack, Chambers and Johnston, Operations Management 5 th Edition © Nigel Slack, Stuart Chambers, and Robert Johnston 2007

Cost breakdown of a shirt made in various countries and sold in France € 15. 55 France € 14. 33 Portugal Turkey € 11. 43 Thailand € 11. 43 Labour € 11. 13 Morocco Transport € 10. 82 Romania China Fabric € 10. 37 Supplies Customs duties € 9. 60 Myanmar 0 2 4 8 6 Cost in euros 10 12 14 16 Slack, Chambers and Johnston, Operations Management 5 th Edition © Nigel Slack, Stuart Chambers, and Robert Johnston 2007

Location – Where is the market? Population density Low High Slack, Chambers and Johnston, Operations Management 5 th Edition © Nigel Slack, Stuart Chambers, and Robert Johnston 2007

The balance of capacity Capacity can either lead or lag demand Inventory can be used to smooth out the peaks Spare capacity can be used to supply other operations The danger of this is that the original operation may receive a lower level of service Slack, Chambers and Johnston, Operations Management 5 th Edition © Nigel Slack, Stuart Chambers, and Robert Johnston 2007

Real cost per customer served Unit cost curves for individual service centres of varying capacities Cost curve for 5 bay service centre Cost curve for 10 bay service centre ‘Economy of scale’ curve for hotel capacity Economies of scale Cost curve for 15 bay service centre Diseconomies of scale 5 10 Average number of bays in use 15 Slack, Chambers and Johnston, Operations Management 5 th Edition © Nigel Slack, Stuart Chambers, and Robert Johnston 2007

Capacity leading demand capacity lagging demand Capacity leads demand Capacity lags demand Demand Time Volume Capacity Demand Capacity Time Slack, Chambers and Johnston, Operations Management 5 th Edition © Nigel Slack, Stuart Chambers, and Robert Johnston 2007

Smoothing with inventory Volume Capacity Demand Time Slack, Chambers and Johnston, Operations Management 5 th Edition © Nigel Slack, Stuart Chambers, and Robert Johnston 2007

Key Terms Test Demand side The chains of customers, customers’ customers, etc. , that receive the products and services produced by an operation. First-tier The description applied to suppliers and customers who are in immediate relationships with an operation with no intermediary operations. Second-tier The description applied to suppliers and customers who are separated from the operation only by first-tier suppliers and customers. Slack, Chambers and Johnston, Operations Management 5 th Edition © Nigel Slack, Stuart Chambers, and Robert Johnston 2007

Key Terms Test Immediate supply network The suppliers and customers who have direct contact with an operation. Total supply network All the suppliers and customers who are involved in supply chains that ‘pass through’ an operation. Downstream The other operations in a supply chain between the operation being considered and the end customer. Slack, Chambers and Johnston, Operations Management 5 th Edition © Nigel Slack, Stuart Chambers, and Robert Johnston 2007

Key Terms Test Upstream The other operations in a supply chain that are towards the supply side of the operation. Outsourcing The practice of contracting out to a supplier work previously done within the operation. Vertical integration The extent to which an operation chooses to ‘own’ the network of processes that produce a product or service; often associated with the ‘do or buy’ decision. Slack, Chambers and Johnston, Operations Management 5 th Edition © Nigel Slack, Stuart Chambers, and Robert Johnston 2007

Key Terms Test Location The geographical position of an operation or process. Long-term capacity management The set of decisions that determine the level of physical capacity of an operation in whatever the operation considers to be ‘long -term’; this varies between industries, but is usually in excess of one year. Disintermediation The emergence of an operation in a supply network that separates two operations that were previously in direct contact. Slack, Chambers and Johnston, Operations Management 5 th Edition © Nigel Slack, Stuart Chambers, and Robert Johnston 2007

Key Terms Test Spatially variable costs The costs that are significant in the location decision that vary with geographical position. Weighted-score method A technique for comparing the attractiveness of alternative locations that allocates a score to the factors that are significant in the decision and weights each score by the significance of the factor. Centre-of-gravity method A technique that uses the physical analogy of balance to determine the geographical location that balances the weighted importance of the other operations with which the one being located has a direct relationship. Slack, Chambers and Johnston, Operations Management 5 th Edition © Nigel Slack, Stuart Chambers, and Robert Johnston 2007

Key Terms Test Fixed-cost breaks The volumes of output at which it is necessary to invest in operations facilities that bear a fixed cost. Economies of scale The manner in which the costs of running an operation decrease as it gets larger. Diseconomies of scale A term used to describe the extra costs that are incurred in running an operation as it gets larger. Slack, Chambers and Johnston, Operations Management 5 th Edition © Nigel Slack, Stuart Chambers, and Robert Johnston 2007

Key Terms Test Capacity leading The strategy of planning capacity levels such that they are always greater than or equal to forecast demand. Capacity lagging The strategy of planning capacity levels such that they are always less than or equal to forecast demand. Slack, Chambers and Johnston, Operations Management 5 th Edition © Nigel Slack, Stuart Chambers, and Robert Johnston 2007