SUPPLY CHAIN DESIGN CHAPTER 9 DAVID A. COLLIER AND JAMES R. EVANS

LO1 Explain the concept of supply chain management. LO2 Describe the key issues in designing supply chains. LO3 Define metrics used in evaluating supply chain performance. LO4 Explain important factors and decisions in locating facilities. LO5 Describe the role of transportation, supplier evaluation, technology, and inventory in supply chain management.

many of you have probably shopped at the Gap or its other apparel stores, Old Navy or Banana Republic. The supply chain at the Gap, Inc. begins at farms that grow raw materials such as cotton. Textile mills then weave the raw materials into fabrics for making T-shirts and jeans. Factories then cut and sew the fabrics into finished goods, which are then transported to retail stores for sale to consumers. Supply chain management at Gap, Inc. includes the functions of Strategy, Network Logistics, Global Production & Planning, Sourcing & Vendor Development and Sourcing Services. For the Gap and many other clothing manufacturers, the supply chain has significant implications for social responsibility and sustainability.

As the Gap notes: “As with most other companies that sell apparel, we don’t own the garment factories that make our clothes. But we do share responsibility for the conditions under which our clothes are made. Our commitment to safe and fair working conditions extends beyond our employees and stores to include the partners in our supply chain.  We know from firsthand experience that our efforts to improve the lives of people who work on behalf of our company help us run a more successful business. People who work a reasonable number of hours in a safe and healthy environment not only have a better quality of life, but they also tend to be more productive and deliver higher-quality product than those who work in poor conditions.”

What do you think? What percent of the clothes in your closet do you think are produced in other countries? What do you think the structure of the manufacturers’ supply chains look like? Do clothing firms have a responsibility to improve work conditions and sustainability practices wherever they do business?

Understanding Supply Chains A supply chain is a key subsystem of a value chain that focuses primarily on the physical movement of goods and materials along with supporting information through the supply, production, and distribution processes. Key Functions: Purchasing and procurement of materials and supplies, sales and order processing, operations, inventory and materials management, transportation and distribution, information management, finance, and customer service.

Understanding Supply Chains Distribution centers (DCs) are warehouses that act as intermediaries between factories and customers, shipping directly to customers or to retail stores where products are made available to customers. Inventory refers to raw materials, work-in-process, or finished goods that are maintained to support production or satisfy customer demand.

Exhibit 9.1 Typical Goods- Producing Supply Chain Structure

Understanding Supply Chains Supply chain management (SCM) 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.

The Supply Chain Operations Reference (SCOR) Model is a framework for understanding the scope of SCM based on five basic functions: Plan: Developing a strategy that balances resources with requirements. Source: Procuring goods and services to meet planned or actual demand. Make: Transforming goods and services to a finished state to meet demand. Deliver: Managing orders, transportation, and distribution to provide the goods and services. Return: Customer returns, maintenance, dealing with excess goods.

The Supply Chain at Dell Purchasing and supplier partnerships: Keyboards are sourced in Mexico, soundcards in France, and power supplies, disk drives, and chips in Asia. Dell pulls component parts into its factories based on actual customer orders and carries no finished goods inventory, relying on information technology to drive its supply chain. Sustainability is a key part of Dell’s supply chain: Renewable energy use, recycling, and integration of a sustainability strategy.

The Supply Chain at Dell IT Infrastructure using an Oracle database supports Dell’s supply chain. Key modules: Configuration management Procurement Cost Management Inventory Accounts payable

Designing the Supply Chain A contract manufacturer 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. Advantages of using contract manufacturing: Access to advanced manufacturing technologies Faster product time-to-market Customization of goods in regional markets Lower total costs resulting from economies of scale

Designing the Supply Chain Efficient supply chains are designed for efficiency and low cost by minimizing inventory and maximizing efficiencies in process flow. Examples: Wal-Mart and Proctor & Gamble. Responsive supply chains focus on flexibility and responsive service and are able to react quickly to changing market demand and requirements. Examples: Nordstrom’s and Apple.

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.

Exhibit 9.2 Supply Chain Push-Pull Systems and Boundaries

Designing the Supply Chain Postponement is the process of delaying product customization until the product is closer to the customer at the end of the supply chain. Example: 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.

Sustainable Supply Chains A green sustainable supply chain can be defined as "the process of using environmentally friendly inputs and transforming these inputs through change agents—whose byproducts can improve or be recycled within the existing environment.”

Sustainable Supply Chains Environmental performance-enhancing supply chain management activities: Substantially decreasing scrap, packaging, and material losses. Adopting paperless practices for information processing. Lowering expenses associated with hazardous materials. Increasing revenues by converting wastes to by-products. Reducing water and energy requirements. Decreasing the use and waste of solvents, paints, cleaning fluids, and other chemicals. Selecting suppliers that support sustainability. Recovering valuable materials and assets through efficient product take-back and recycle programs.

Relationships Director of greensupplychain.org. Sustainable Supply Chains “Our data indicates that upwards of 60 to 70 percent of a company’s carbon footprint is found along their supply chain,” says Ms. Annie Berger, Relationships Director of greensupplychain.org.

Sustainable Supply Chains Manufactured good recovery: Reuse or resell Repair Refurbish Remanufacture Cannibalize parts Recycle goods Incineration or landfill disposal

Sustainable Supply Chains Reverse logistics refers to managing the flow of finished goods, materials, or components that may be unusable or discarded through the supply chain from customers toward either suppliers, distributors or manufacturers for the purpose of reuse, resale, or disposal.

Exhibit 9.3 Example of a Manufactured Good Recovery (Reverse Logistics) Supply Chain

Measuring Supply Chain Performance Delivery reliability, such as perfect order fulfillment. Responsiveness, such as order fulfillment lead time or perfect delivery fulfillment. Customer-related measures focus on the ability of the supply chain to meet customer wants and needs. Supply chain efficiency measures, such as average inventory value and inventory turnover. Sustainability measures, such as water discharge, CO2 emissions, and energy reductions. Financial measures, such as total supply chain costs and costs of processing returns and warranties.

Exhibit 9.4 Common Metrics Used to Measure Supply Chain Performance

Measuring Supply Chain Performance The bullwhip effect results from order amplification 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 using common data from the point of the supply chain closest to the customer, smaller order sizes, stabilizing price fluctuations, and sharing information.

Location Decisions in Value 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 value chains are based on: Economic (facility costs, operating costs, and transportation costs) Non-economic (labor availability, legal and political factors, community environment) factors

Exhibit 9.5 Example Location Factors for Site Selection

Location Decisions in Value Chains Location Decision Process: Global location Regional location Community location Local site location

Center of Gravity Method The center of gravity method 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.

: Solved Problem Exhibit 9.6 Taylor Paper Products Plant and Customer Locations

Solution Exhibit Extra Excel Spreadsheet for Taylor Paper Products

Solution: Center of Gravity Calculations 58(400) + 80(300) + 30(200) + 90(100) + 127(300) + 65(100) C = = 76.3 x 400 + 300 + 200 + 100 + 300 + 100 96(400)+70(300)+120(200)+110(100)+130(300)+40(100) y = 98.1 400 + 300 + 200 + 100 + 300 + 100 35

Other Issues in Supply Chain Management Selecting transportation services Supplier evaluation Technology Inventory management

Other Issues in Supply Chain Management Vendor managed inventory (VMI) is where the vendor (a consumer goods manufacturer, for example) monitors and manages the inventory for the customer (a grocery store, for example). Advantages: Optimize production operations, better control inventory and capacity, and reduce total supply chain costs and the bullwhip effect. Disadvantages: Often results in higher than necessary customer inventories.

Boston Red Sox Spring Training Decision Case Study Using the center-of-gravity model compute the center of gravity for the population of the county? Show all computations, explain, and justify. Based solely on this criterion where is the best stadium location? 2. Using a weighted scoring model of your own design what are the summary scores for each stadium site for the qualitative criteria in Exhibit 9.8. Show all computations, explain, and justify. 38

Boston Red Sox Spring Training Decision Case Study How will you combine these results—your center-of-gravity results, cost, and qualitative criteria analyses? How might you compute a summary score for each site using all three criteria? Explain and justify. 4. Research and explain at least three ways a sports stadium can “go green” including at least one work practice for stadium employees. Do jobs and processes have to change too? Explain the role of OM. 5. What is your final stadium recommendations? Explain and justify. 39