Fixed by The Supply Configuration From Previous Phase
Fixed by The Supply Configuration From Previous Phase
Fixed by The Supply Configuration From Previous Phase
• Planning decisions:
• Inventory policies
• Must consider in planning decisions demand uncertainty, exchange rates, competition over the
time horizon.
• Inventory or production
• The two views of a supply chain, i.e., the cycle view and the push/pull view can then be
introduced.
• Cycle View: processes in a supply chain are divided into a series of cycles, each performed at the
interfaces between two successive supply chain stages.
• Push/Pull View: processes in a supply chain are divided into two categories depending on
whether they are executed in response to a customer order (pull) or in anticipation of a
customer order (push).
• The cycle view divides the supply chain into a series of 4 cycles between the 5 different stages of
a supply chain.
• The cycles are the customer order cycle, replenishment cycle, manufacturing cycle and
procurement cycle.
• The customer order cycle occurs at the customer/retailer interface and includes all processes
directly involved in receiving and filling the customer.
• The replenishment cycle occurs at the retailer/distributor interface and includes all processes
involved in replenishing retailer inventory.
– Includes all processes necessary to ensure that the materials are available for
manufacturing according to schedule.
• 28.00The supply chain is a concatenation of cycles with each cycle at the interface of two
successive stages in the supply chain. Each cycle involves the customer stage placing an order
and receiving it after it has been supplied by the supplier stage.
• One difference is in size of order. Second difference is in predictability of orders - orders in the
procurement cycle are predictable once manufacturing planning has been done.
• This is the predominant view for ERP systems. It is a transaction level view and clearly defines
each process and its owner.
• Supply chain processes fall into one of two categories depending on the timing of their
execution relative to customer demand.
• Useful in considering strategic decisions relating to supply chain design – more global view of
how supply chain processes relate to customer orders.
• L.L. Bean
• Dell
• The relative proportion of push and pull processes can have an impact on supply chain
performance.
Supply Chain Macro Processes
• Supply chain processes discussed in the two views can be classified into:
• All processes within a supply chain can be classified into three macro processes ,which are:
• Customer Relationship Management (CRM),
• Customer Relationship Management (CRM) includes all processes that focus on the interface
between the firm and its customers such as marketing, sales, call center management and order
management.
• Internal Supply Chain Management (ISCM) includes all processes that are internal to the firm
such as:
• Supplier Relationship Management (SRM) includes all processes that focus on the interface
between a firm and its suppliers such as:
• Discuss the objective of a supply chain and explain the impact of supply chain decisions on the
success of a firm.
• Identify the three key supply chain decision phases and explain the significance of each one.
• Supply Chain: The sequence of organizations - their facilities, functions, and activities - that are
involved in producing and delivering a product or service.
Mission-Strategy-Tactics-Decisions
u Strategy
u Tactics
u Operational decisions
Decision Levels
u Strategic:
u Tactical
u Operational
u 19.30 Strategic: long term, characterized by their permanence and importance, usually there’s
lack of quantitative and validated data, typically require “vision”, typically need long term
forecasts with huge amounts of 18.30uncertainty need to be considered
u Tactical: 3 months to a year typically, typically based on a mixture of internal (like sales
forecasts) and external data (like the economy, exchange rates etc.)
u Operational: typically have permanence of week or less, use of ERP systems etc have provide
extensive operational data, savings or penalties associated typically affect the performance level
(eg., lack of operational planning might leave some customers dissatisfied)
New Marketing
Product and Operations Distribution Service
Development Sales
u Marketing and sales strategy relates to positioning, pricing and promotion of products/services
» At Wal-Mart
» BestBuy
e.g. Always use domestic suppliers within the sales season not in advance.
u Introduction
u All processes and functions that are part of an organization’s value chain contribute to its
success or failure:
– Failure at any one process or function can lead to failure of over chain.
Success or Failure for Strategic Fit
1. The competitive strategy and all the functional strategies must fit together to form a
coordinated over all strategy. Each functional strategy must support other functional
strategies and help a firm reach its competitive strategy goal
1. The different functions in a company must appropriately structure their processes and
resources to be able to execute these strategies successfully
1. The design of the overall supply chain and the role of each stage must be aligned to
support the supply chain strategy.
u A firm must understand the customer needs for each targeted segment and the uncertainty
these needs impose on supply chain.
u These needs help the company define the desired cost and requirements.
u The supply chain uncertainty helps the organization to identify the extend of unpredictability of
demand, disruption and delay that the supply chain must be prepared for.
u Requires identifying:
u Demand uncertainty
u Implied demand uncertainty: Resulting uncertainty for the supply chain given the portion of the
demand the supply chain must handle and attributes the customer desires.
Responsiveness Spectrum
u The demand characteristics of a product and the needs of a customer segment change as a
product goes through its life cycle.
u Early: Uncertain demand, high margins (time is important), product availability is most
important, cost is secondary.
– The functions and stages within a supply chain that devise an integrated strategy with
a shared objective.
– One extreme: Each function at each stage develops its own strategy.
u Five categories:
– This was the popular strategy of 1950s and 1960s, with cost minimization for each
operation with in each stage of supply chain.
48.30Strategic scope must cover all boxes, at least at the supply chain end. Each stage must have fit
across its vertical boxes and supply chain strategy spanning all players. This fit allows the countering
of multiple owners and helps avoid local optimization.
– For instance, the use of air freight could only be justified if the resulting savings in
inventories and improved responsiveness would justify the increase in transportation
costs.
– The goal of only maximizing company profits can sometime lead to conflict between
stages of supply chain.
– A common conflict being that supplier or the manufacturer. may want the other party
to hold more profit so as to safe guard their own profits.
– The supply chain surplus can be compared to the pie, if the parties fight, the stronger
party will have more share of the pie while reducing the size of the pie.
– Supplier and customer work together and share information to reduce total cost and
grow supply chain surplus.
– By working together and sharing info they can reduce the inventories and total cost
thus growing supply chain surplus.
– Higher the supply chain surplus, the more competitive the supply chain is.
– Agile intercompany scope – A firm’s ability to achieve strategic fit when partnering with
supply chain stages that change over time.
– Dynamics exits – Product life cycle get shorter and companies try to satisfy the changing needs
of individual customers.
u In such situations, a company may have to partner with many different firms depending on
the product being produced and the customer being served – strategic fit should have agile
intercompany scope.
u My message to you all is of hope, courage and confidence. Let us mobilize all our resources in
a systematic and organized way and tackle the grave issues that confront us with grim
determination and discipline worthy of a great nation.”
u Empowered Customers
u Globalization
u Systems Concept
u Impellers of supply chain development include those forces that are reshaping the businesses
of today in a hyper competitive environment.
u Empowered Customers:
u Globalization
Supply Chain Concepts
1. Systems Concept
2. Value delivered to the customer can only be increased if the total cost of the entire
supply chain is reduced.
u While there is no right or wrong answer regarding the exact definition of supply chain
management, the underlying effect of such a diversity of opinions is that the supply chain
becomes a set of functionally dispersed ‘islands of power’.
u From a shareholder perspective, return on equity (ROE) is the main summary measure of a
firm’s performance.
u Return on assets (ROA) measures the return earned on each dollar invested by the firm in
assets.
u An important ratio that defines financial leverage is ACCOUNTS PAYABLE TURNOVER (APT).
u ROA can be written as the product of two ratios – PROFIT MARGIN and ASSET TURNOVER.
u Cash-to-cash (C2C) cycle roughly measures the average amount time from when cash enters
the process as COST to when it returns as COLLECTED REVENUE.
1. Logistical Drivers
u Facilities
u Inventory
u Transportation
u Pricing
u Information
u Sourcing
u Pricing
u How much a firm will charge for the goods and services that it makes available in the
supply chain.
u What is a Framework?
u The structure that forms a support or frame for Supply Chain Drivers.
u Competitive Strategy
u Logistical Drivers
u . Location
u Material flow time: time elapsed between when material enters the supply chain to
when it exits the supply chain
u Throughput
u I = DT (Little’s Law)
Example – Nordstrom
u 1.Cycle inventory
u 2.Safety inventory
u 3.Seasonal inventory
u Mode of transportation:
u In-house or outsource
u The connection between the various stages in the supply chain – allows coordination between
stages.
u Allows supply chain to become more efficient and more responsive at the same time (reduces
the need for a trade-off)
u Information technology
u Push (MRP) versus pull (demand information transmitted quickly throughout the supply chain)
u Enabling technologies
– EDI
– Internet
– ERP systems
– Supply Chain Management software
u Set of business processes required to purchase goods and services in a supply chain
u Procurement process
u Firms can utilize optimal pricing strategies to improve efficiency and responsiveness
u Low price and low product availability; vary prices by response times
u Example: Amazon.com
u Globalization
• Distribution – The steps taken to move and store a product from the supplier stage to the
customer stage in a supply chain.
• Drives profitability by directly affecting supply chain cost and the customer experience.
• Choice of distribution network can achieve supply chain objectives from low cost to high
responsiveness.
• Evaluate the impact on customer service and cost for different distribution network options.
• Profitability of the delivery network determined by revenue from met customer needs and
network costs.
1. Response time
2. Product variety
3. Product availability
4. Customer experience
5. Order visibility
6. Returnability
12.05Notes: Increasing the number of facilities moves them closer to the end consumer. This reduces
the response time. As Amazon has built warehouses, the average time from the warehouse to the end
consumer has decreased. McMaster-Carr provides 1-2 day coverage of most of the U.S from 6
facilities. W.W. Grainger is able to increase coverage to same day delivery using about 370 facilities.
17.20Notes: Inventory costs increase, facility costs increase, and transportation costs decrease as we
increase the number of facilities.
• In this option, product is shipped directly from the manufacturer to the end customer,
bypassing the retailer (who takes the order and initiates the delivery request). This option is
also referred to as drop shipping.
• The biggest advantage of drop shipping is the ability to centralize inventories at the
manufacturer.
• A manufacturer can aggregate demand and provide a high level of product availability with
lower levels of inventory than individual retailers.
• The benefits from centralization are highest for high value, low volume items with
unpredictable demand.
• The decision of Nordstrom to drop-ship low volume shoes satisfies these criteria.
• Also, bags sold by e-bags tend to have high value and low relatively volume per SKU.
• The inventory benefits of aggregation are small for items with predictable demand and low
value. Thus, drop shipping would not offer a significant inventory advantage to an online
grocer selling a staple item like detergent.
• Transportation costs are high with drop shipping because the average outbound distance to
the end consumer is large and package carriers must be used to ship the product.
• Package carriers have high shipping costs per unit compared to truckload(TL) or less-than-
truckload (LTL) carriers.
• With drop shipping, a customer order with items from several manufacturers will involve
multiple shipments to the customer. This loss in aggregation in outbound transportation
further increases cost.
• Supply chains save on the fixed cost of storage facilities when using drop shipping because all
inventories are centralized at the manufacturer.
• There can be some savings of handling costs as well because the transfer from manufacturer
to retailer no longer occurs.
• Handling costs can be significantly reduced if the manufacturer has the capability to ship
orders directly from the production line.
• A good information infrastructure is needed so that the retailer can provide product
availability information to the customer even though the inventory is located at the
manufacturer.
• The customer should also have visibility into order processing at the manufacturer even
though the order is placed with the retailer.
• Drop shipping will generally require significant investment in the information infrastructure.
The information infrastructure requirement is somewhat simpler for direct sellers like Dell
because two stages (retailer and manufacturer) do not need to be integrated.
• Under this option, inventory is not held by manufacturers at the factories but is held by
distributors / retailers in intermediate warehouses and package carriers are used to transport
products from the intermediate location to the final customer.
• Information and product flows when using distributor storage with delivery by a package
carrier.
• When designing the delivery network we should account for product and market
characteristics.
• High demand products will have transportation cost play a significant role. Use network with
good transportation cost (retail stores)
• Very low demand products will have inventory play a significant role. Use network with low
inventory costs (direct shipping)
• Many product sources: transportation + information plays a role. Distributor storage with
package carrier
• Few product sources but high customization: manufacturer storage with merge in transit
• High product variety: inventory cost will be significant. Use distributor storage
• Low customer effort: Distributor storage with package carrier delivery or last mile delivery
depending upon desired response time
1. The ownership structure of the distribution network can have as big as an impact as the type
of distribution network.
3. Product price, commoditization, and criticality affect the type of distribution system preferred
by customers.
• Searches for answers for Facility Role, Facility location,Capacity allocation, Market and supply
allocation, Strategic factors, Technological factors, Macroeconomic factors, Political,
Infrastructure factors, Competitive factors,Customer response time and local presence and
Logistics / facility costs in a supply chain.
• Supply Chain Network Design Decisions include the assignment of Facility role, location of
manufacturing, storage or transportation related facilities and the allocation of capacity and
markets to each facility.
• Facility role
• Facility location
– Where should facilities be located?
• Capacity allocation
• Network Design decisions have a significant impact on performance because they determine
the supply chain configuration and set constraints within which other supply chain drivers can
be used either to decrease supply chain cost or increase responsiveness.
• Decisions concerning the role of each facility are significant because they determine the
amount of flexibility the supply chain has in changing way it meets the demand.
• Facility location decisions have a strong and long term impact on the performance of supply
chain because it is strategically expensive to shutdown a facility or move it to a different
location.
• A good location decision should keep the costs down with reasonable high responsiveness.
• In contrast a poorly located facility makes it very difficult for a supply chain to perform close
to the efficient frontier.
• Capacity Allocation decisions also have significant impact on supply chain performance.
• Capacity allocation can be easily altered as compared to location, capacity allocation tends to
stay stable for years.
• Allocating too much capacity would lead to poor utilization and idle inventory as a result
higher costs. Allocating too little capacity would lead to poor responsiveness and if demand is
filled from distant facility than higher costs.
• Network design decisions must be revisited as a firm grows or when two companies merge.
• As redundancies and differences in markets served by either of the two separate firms
consolidation some facilities and changing the location and role of others can help reduce cost
and improve responsiveness.
Kasra Ferdows suggests possible strategic roles for various facilities in a global supply chain network.
1. Off shore Facility: Low cost facility for export production.
1. Strategic factors
3. Technological factors
4. Macroeconomic factors
5. Political
6. Infrastructure factors
7. Competitive factors
.Strategic Factors
• A firms competitive strategy has a significant impact on network design with in supply chain
e.g.
– Apparel and manufacturing to china, Zara has apparel facility in Portugal and Spain to
provide quick response.
• Convenience stores aim to provide easy access to customers as a part of competitive strategy.
• Firms focusing on cost leadership (Efficiency) tend to find the lowest cost location for their
manufacturing facilities, even if that means locating very far from the markets they serve.
• Firms focusing on responsiveness (Agility) tend to locate facilities closer to the market and
may select a high-cost location if this choice allows the firm to quickly react to changing
market needs.
• Global Supply Chain networks can best support their strategic objectives with facilities in
different countries playing different roles.e.g.
• Nike has mass production facilities in china and indonesia and innovative-high
responsivenes and high priced facilities in korea and taiwan.
• Kisra Ferdows suggests possible strategic roles for various facilities in a global supply chain
network.
• Market Reach
• Product Type
• Network Size
• Transportation Costs
• Seasonal effects
Technological Factors
• In contrast, if facilities have lower fixed costs, many local facilities are preferred because this
helps lower transportation costs.
– Taxes, tariffs, exchange rates, and other economic factors that are not internal to an
individual firm.
– If a country has very high tariffs, companies either do not serve the local market or
set up manufacturing plants within the country to save on duties.
• High tariffs lead to more production locations within a supply chain network, with each
location having a lower allocated capacity.
Political Factors
• Companies prefer to locate facilities in politically stable countries where the rules of
commerce are well defined.
• Countries with independent and clear legal systems allow firms to feel that they have
recourse in the courts should they need it.
• This makes it easier for companies to invest in facilities in these countries. Political stability is
hard to quantify, so a firm makes an essentially subjective evaluation when designing its
supply chain network.
• Companies prefer to locate facilities in politically stable countries where the rules of
commerce are well defined.
• Countries with independent and clear legal systems allow firms to feel that they have
recourse in the courts should they need it.
• This makes it easier for companies to invest in facilities in these countries. Political stability is
hard to quantify, so a firm makes an essentially subjective evaluation when designing its
supply chain network.
Infrastructure Factors
• Poor infrastructure adds to the cost of doing business from a given location.
Competitive Factors
• Companies must consider competitors’ strategy, size, and location when designing their
supply chain networks.
• A fundamental decision firms make is whether to locate their facilities close to competitors or
far from them.
• How the firms compete and whether external factors such as raw material or labor availability
force them to locate close to each other influence this decision.
• Collocation benefits all as it increases demand and benefits all the players like
the mechanics workshops along the highways.
• What positive externalities you can think of in the Pakistani Context with
respect to Global Supply Chains or any local SC?
• In the absence of Positive externalities between firms, firms opt to capture the largest
share of the market.
• Locating close to each other to split the market , market segment is between line 0
and 1, customer closest to the firm and the equidistant customer is split evenly
between the two firms.
Competitive Factors
• Firms that target customers who value a short response time must locate close to them.
• If a firm is delivering its product to customers, use of a rapid means of transportation allows it
to build fewer facilities and still provide a short response time.
• This option, however, increases transportation costs. Moreover, there are many situations
where the presence of a facility close to a customer is important.
• Logistics and facility costs incurred within a supply chain change as the number of facilities,
their location, and capacity allocation is changed.
• Companies must consider inventory, transportation, and facility costs when designing their
supply chain networks. Inventory and facility costs increase as the number of facilities in a
supply chain increase.
• Increasing the number of facilities to a point where inbound economies of scale are lost
increases transportation cost.
• The supply chain network design is also influenced by the transformation / Operation
occurring at each facility.
• Total logistics costs are a sum of the inventory, transportation, and facility costs.
• The facilities in a supply chain network must at least equal the number that minimizes total
logistics costs.
• A firm may increase the number of facilities beyond this point to improve the response time
to its customers.
• This decision is justified if the revenue increase from improved response outweighs the
increased cost from additional facilities.
• The objective of the first phase of network design is to define a firm’s supply chain strategy.
• The supply chain strategy specifies what capabilities the supply chain network must have to
support a firm’s competitive strategy.
• Phase I starts with a clear definition of the firm’s competitive strategy as the set of customer
needs that the supply chain aims to satisfy.
• Based on the competitive strategy of the firm, an analysis of the competition, any economies
of scale or scope, and any constraints, managers must determine the supply chain strategy for
the firm.
• The objective of the second phase of network design is to identify regions where facilities will
be located, their potential roles, and their approximate capacity. An analysis of Phase II is
started with a forecast of the demand by country.
• Such a forecast must include a measure of the size of the demand as well as a determination
of whether the customer requirements are homogenous or variable across different countries.
• The next step is for managers to identify whether economies of scale or scope can play a
significant role in reducing costs given available production technologies.
• Next, managers must identify demand risk, exchange rate risk, and political risk associated
with different regional markets.
• They must also identify regional tariffs, any requirements for local production, tax incentives,
and any export or import restrictions for each market.
• The regional configuration defines the approximate number of facilities in the network,
regions where facilities will be set up, and whether a facility will produce all products for a
given market or a few products for all markets in the network.
• Identify demand risk, exchange-rate risk, political risk, tariffs, requirements for local
production, tax incentives, and export or import restrictions.
• Identify competitors.
• The objective of Phase III is to select a set of desirable sites within each region
where facilities are to be located.
• The set of desirable sites should be larger than the desired number of facilities to be set up so
that a precise selection may be made in Phase IV.
• In Pakistani context what do you see which is your strength? Or we have balance between
hard and soft infrastructure?
• The objective of this phase is to select a precise location and capacity allocation for each
facility.
• The network is designed to maximize total profits, taking into account the expected margin
and demand in each market, various logistics and facility costs, and the taxes and tariffs at
each location.
• The aim of the SC Manager should be to Maximize the overall profitability of the supply
chain network while providing customers with the appropriate responsiveness.
• Revenues comes from the sale of the product, where as costs arise from facilities, labor,
transportation, material and inventory.
• The profits of the firm are also affected by taxes and tariffs. IDEALLY, PROFITS after TAX
should be maximized when designing a Supply Chain Networks.
• Many trade-offs during network design e.g, building many facilities to serve local markets
reduces transportation costs and provides a faster response time , but increases the facility
and inventory costs.
• First, these models are used to decide on locations where facilities will be established and the
capacity to be assigned to each facility.
• Managers must make this decision considering a time horizon over which locations and
capacities will not be altered (typically in years).
• Second, these models are used to assign current demand to the available facilities and identify
lanes along which product will be transported.
• Managers must consider this decision at least on an annual basis as demand, prices, and tariffs
change.
• In both cases, the goal is to maximize the profit while satisfying customer needs.
• Important information required and should be available for making design decision
11. WE DESIGN THE MODELS ACCORDING TO THE PHASE OF THE NETWORK DESIGN
FRAMEWORK AT WHICH EACH MODEL IS LIKELY TO BE USEFUL.
13. To follow the exercises from this part of the presentation, you will need to use the
“Solver” add-in for Microsoft.
14. Excel. When installed, it appears in the “Analysis” toolbar under the “Data” tab.