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Supply Chain Design Chapter 10 Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall10- 01.

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Presentation on theme: "Supply Chain Design Chapter 10 Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall10- 01."— Presentation transcript:

1 Supply Chain Design Chapter 10 Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall10- 01

2 What is Supply Chain Design? Supply Chain Design Designing a firms supply chain to meet the competitive priorities of the firms operations strategy Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall

3 Service/Product ProcessesSupply Chain Link Services/Products with Internal Processes Link Services/Products with External Supply Chain Link Services/Products with Customers, Suppliers, and Supply Chain Processes Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall Creating an Effective Supply Chain

4 Supply Chain Efficiency Curve Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall Total costs Supply chain performance New supply chain efficiency curve with changes in design and execution Inefficient supply chain operations Area of improved operations Improve perform- ance Reduce costs

5 Supply Chain Design Pressures Dynamic sales volumes Customer service levels Service/product proliferation Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall

6 Service Supply Chain Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall Home customers Home customers Commercial customers Commercial customers Flowers-on-Demand florist Packaging Flowers: Local/International Arrangement materials FedEx delivery service Local delivery service Internet service Maintenance services

7 Manufacturing Supply Chain Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall East CoastWest CoastEast EuropeWest Europe Retail USAIreland Distribution centers Manufacturer Ireland Assembly Poland USA CanadaAustraliaMalaysia Tier 3 Raw materials GermanyMexicoUSAChina Tier 2 Components GermanyMexico USA Tier 1 Major subassemblies

8 Inventory Measures Average aggregate inventory value =+ Value of each unit of item B Number of units of item B typically on hand Value of each unit of item A Number of units of item A typically on hand Weeks of supply = Average aggregate inventory value Weekly sales (at cost) Inventory turnover = Annual sales (at cost) Average aggregate inventory value Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall

9 Example 10.1 The Eagle Machine Company averaged $2 million in inventory last year, and the cost of goods sold was $10 million. The breakout of raw materials, work-in-process, and finished goods inventories is on the following slide. The best inventory turnover in the companys industry is six turns per year. If the company has 52 business weeks per year, how many weeks of supply were held in inventory? What was the inventory turnover? What should the company do? Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall

10 Example 10.1 Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall

11 Example 10.1 The average aggregate inventory value of $2 million translates into 10.4 weeks of supply and 5 turns per year, calculated as follows: Weeks of supply = Inventory turns = = 10.4 weeks $2 million ($10 million)/(52 weeks) = 5 turns/year $10 million $2 million Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall

12 Application 10.1 A recent accounting statement showed total inventories (raw materials + WIP + finished goods) to be $6,821,000. This years cost of goods sold is $19.2 million. The company operates 52 weeks per year. How many weeks of supply are being held? What is the inventory turnover? Weeks of supply = Average aggregate inventory value Weekly sales (at cost) = = 18.5 weeks $6,821,000 ($19,200,000)/(52 weeks) Inventory turnover = = 2.8 turns $19,200,000 $6,821,000 Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall

13 Financial measures – Total revenue – Cost of goods sold – Operating expenses – Cash flow – Working capital – Return on assets (ROA) Measures of Supply Chain Financial Performance Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall

14 SCM Decisions Affecting ROA Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall Return on assets (ROA) Increase ROA with higher net income and fewer total assets Total assets Achieve the same or better performance with fewer assets Working capital Reduce working capital by reducing inventory investment, lead times, and backlogs Fixed assets Reduce the number of warehouses through improved supply chain design Net income Improve profits with greater revenue and lower costs Total revenue Increase sales through better customer service Cost of goods sold Reduce costs of transportation and purchased materials Operating expenses Reduce fixed expenses by reducing overhead associated with supply chain operations Net cash flows Improve positive cash flows by reducing lead times and backlogs Inventory Increase inventory turnover

15 Inventory Placement Centralized placement Inventory pooling Forward placement Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall

16 What is Mass Customization? Mass customization A strategy whereby a firms highly divergent processes generate a wide variety of customized services or products at reasonably low costs Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall

17 Mass Customization Competitive advantages – Managing customer relationships – Eliminating finished goods inventory – Increasing perceived value of services or products Supply chain design for mass customization – Assemble-to-order strategy – Modular design – Postponement Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall

18 Component supplier Standardized component inventory Order based on forecast FabricationAssemblyCustomer Customer order Supply to forecasted demand Supply as needed Supply as needed Supply Chain Design for Assemble-to-Order Strategy Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall

19 Outsourcing Processes Make-or-buy decision Vertical integration – Backward integration – Forward integration Outsourcing – Offshoring Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall

20 Outsourcing Decision Factors Comparative Labor Costs Rework and Product Returns Logistics Costs Tariffs and Taxes Market Effects Labor Laws and Unions Internet Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall

21 Outsourcing Potential Pitfalls Pulling the Plug too Quickly Technology Transfer Process Integration Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall

22 Example 10.2 Thompson manufacturing produces industrial scales for the electronics industry. Management is considering outsourcing the shipping operation to a logistics provider experienced in the electronics industry. Thompsons annual fixed costs of the shipping operation are $1,500,000, which includes costs of the equipment and infrastructure for the operation. The estimated variable cost of shipping the scales with the in- house operation is $4.50 per ton-mile. If Thompson outsourced the operation to Carter Trucking, the annual fixed costs of the infrastructure and management time needed to manage the contract would be $250,000. Carter would charge $8.50 per ton-mile. What is the break-even quantity? Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall

23 Example 10.2 Q = F m – F b c b – c m = 312,500 ton-miles = 1,500,000 – 250, – 4.50 Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall

24 Strategic Implications Efficient supply chains – Build-to-stock Responsive supply chains – Assemble-to-order – Make-to-order – Design-to-order Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall

25 Environments Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall FactorEfficient Supply Chains Responsive Supply Chains DemandPredictable, low forecast errors Unpredictable, high forecast errors Competitive priorities Low cost, consistent quality, on-time delivery Development speed, fast delivery times, customization, volume flexibility, variety, top quality New- service/product introduction InfrequentFrequent Contribution margins LowHigh Product varietyLowHigh

26 Design Features Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall FactorEfficient Supply Chains Responsive Supply Chains Operation strategyMake-to-stock or standardized services or products; emphasize high volumes Assemble-to-order, make- to-order, or customized service or products; emphasize variety Capacity cushionLowHigh Inventory investment Low; enable high inventory turns As needed to enable fast delivery time Lead timeShorten, but do not increase costs Shorten aggressively Supplier selectionEmphasize low prices, consistent quality, on-time delivery Emphasize fast delivery time, customization, variety, volume flexibility, top quality

27 JobSmall BatchLarge BatchLineContinuous Flow Process Efficient Supply Chain Responsive Supply Chain Increasing supply chain flexibility Increasing service/product volume Service/Product Characteristics Standardized Customized Supply Chain Design Link to Processes Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall

28 Solved Problem A firms cost of goods sold last year was $3,410,000, and the firm operates 52 weeks per year. It carries seven items in inventory: three raw materials, two work-in-process items, and two finished goods. The following table contains last years average inventory level for each item, along with its value. a. What is the average aggregate inventory value? b.How many weeks of supply does the firm maintain? c.What was the inventory turnover last year? CategoryPart Number Average Level Unit Value Raw materials115,000$ , , Work-in- process 45, , Finished goods62, , Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall

29 Solved Problem a. Part Number Average LevelUnit ValueTotal Value 115,000 $ 3.00= 22, = 33, = 45, = 54, = 62, = 71, = Average aggregate inventory value= Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall

30 Solved Problem a. $ 45,000 12,500 3,000 70,000 72,000 96,000 62,000 $360,500 Part Number Average LevelUnit ValueTotal Value 115,000 $ 3.00= 22, = 33, = 45, = 54, = 62, = 71, = Average aggregate inventory value= Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall

31 Solved Problem b. Average weekly sales at cost = $3,410,000/52 weeks = $65,577/week Weeks of supply = Average aggregate inventory value Weekly sales (at cost) = = 5.5 weeks $360,500 $65,577 c.Inventory turnover = Annual sales (at cost) Average aggregate inventory value = = 9.5 turns $3,410,000 $360,500 Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall

32 Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the publisher. Printed in the United States of America.


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