1. Designing Effective Supply Chains Chapter 12

2. What is Supply Chain Design?
Designing a firm’s supply chain to meet the competitive priorities of the firm’s operations strategy.

3. Creating An Effective Supply Chain
Identifying external and internal pressures
Dynamic sales volumes
Customer service and quality expectations
Service/product proliferation
Emerging markets

4. Creating an Effective Supply Chain
Link Services/Products
with External Supply Chain
Link Services/Products
with Internal Processes
Service/Product
Processes
Supply Chain
Link Services/Products with Customers,
Suppliers, and Supply Chain Processes
Figure 12.1

5. Supply Chain Efficiency Curve
Inefficient supply chain operations
Total costs
Supply chain performance
Area of improved operations
Reduce costs
New supply chain efficiency curve with changes in design and execution
Improve perform-ance
Figure 12.2

6. Service Supply Chain Packaging Flowers: Local/International
Arrangement materials
FedEx delivery service
Local delivery service
Internet service
Maintenance services
Flowers-on-Demand florist
Home
customers
Commercial
Figure 12.3

7. Manufacturing Supply Chain
Poland
USA
Canada
Australia
Malaysia
Tier 3
Raw materials
Germany
Mexico
USA
China
Tier 2
Components
Germany
Mexico
USA
Tier 1
Major subassemblies
Manufacturer USA
Assembly
USA
Ireland
Distribution centers
East Coast
West Coast
East Europe
West Europe
Retail
Figure 12.4

8. Measuring Supply Chain Performance
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

9. Example 12.1
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 company’s 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?

10. Example 12.1
Figure 12.5

11. Example 12.1
The average aggregate inventory value of $2 million translates into 10.4 weeks of supply and 5 turns per year, calculated as follows:
= 10.4 weeks
$2 million
($10 million)/(52 weeks)
Weeks of supply =
= 5 turns/year
$10 million
$2 million
Inventory turns =

12. Average aggregate inventory value
Application 12.1
A recent accounting statement showed total inventories (raw materials + WIP + finished goods) to be $6,821,000. This year’s “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)
= 2.8 turns
$19,200,000
$6,821,000
Inventory turnover =

13. Measuring Supply Chain Performance
Financial measures
Total revenue
Cost of goods sold
Operating expenses
Cash flow
Working capital
Return on assets (ROA)

14. SCM Decisions Affecting ROA
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 income
Improve profits with greater revenue and lower costs
Return on assets (ROA)
Increase ROA with higher net income and fewer total 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 cash flows
Improve positive cash flows by reducing lead times and backlogs
Inventory
Increase inventory turnover
Total assets
Achieve the same or better performance with fewer assets
Figure 12.6

15. Strategic Options for Supply Chain Design
Efficient supply chains
Make-to-stock (MTS)
Responsive supply chains
Assemble-to-order (ATO)
Make-to-order (MTO)
Design-to-order (DTO)

16. Environments Factor Efficient Supply Chains Responsive Supply Chains
Demand
Predictable, 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
Infrequent
Frequent
Contribution margins
Low
High
Product variety
Table 12.1

17. Supply to forecasted demand
Supply Chain Designs
Make-to-Stock Strategy
Order based on forecast
Order based on forecast
Customer order
Component Supplier
Manufacturer
Finished
Goods
Inventory
Customer
Supply to forecasted demand
Supply to forecast
Ship to order
Figure 12.7

18. Standardized Component
Supply Chain Designs
Assemble-to-Order Strategy
Customer order
Order based on forecast
Supply as needed
Customer
Component Supplier
Standardized Component
Inventory
Fabrication
Assembly
Supply to
Forecasted
Demand
Supply as needed
Figure 12.8

19. Design Features Factor Efficient Supply Chains
Responsive Supply Chains
Operation strategy
Make-to-stock or standardized services or products; emphasize high volumes
Assemble-to-order, make-to-order, or customized service or products; emphasize variety
Capacity cushion
Low
High
Inventory investment
Low; enable high inventory turns
As needed to enable fast delivery time
Lead time
Shorten, but do not increase costs
Shorten aggressively
Supplier selection
Emphasize low prices, consistent quality, on-time delivery
Emphasize fast delivery time, customization, variety, volume flexibility, top quality
Table 12.2

20. Supply Chain Design Link to Processes
Job
Small Batch
Large Batch
Line
Continuous Flow
Process
Efficient Supply Chain
Responsive Supply Chain
Increasing supply chain flexibility
Increasing service/product volume
Service/Product Characteristics
Figure 12.9
Customized
Standardized

21. What is Mass Customization?
A strategy whereby a firm’s highly divergent processes generate a wide variety of customized services or products at reasonably low costs.

22. 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
Channel Assembly

23. Outsourcing Processes
Paying suppliers and distributors to perform processes and provide needed services and materials
Offshoring
A supply chain strategy that involves moving processes to another country
Next-Shoring
A supply chain strategy that involves locating processes in close proximity to customer demand or product R&D

24. Outsourcing Decision Factors
Comparative Labor Costs
Rework and Product Returns
Logistics Costs
Tariffs and Taxes
Market Effects
Labor Laws and Unions
Internet
Energy Costs
Access to Low Cost Capital
Supply Chain Complexity

25. Outsourcing Potential Pitfalls
Pulling the Plug too Quickly
Technology Transfer
Process Integration

26. Outsourcing Processes
Vertical integration
Backward integration
Forward integration
Make-or-buy decision

27. Example 12.2
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. Thompson’s 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?

28. Example 12.2 Fm – Fb 1,500,000 – 250,000 cb – cm Q = 8.50 – 4.50 =
= 312,500 ton-miles

29. Solved Problem
A firm’s 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 year’s average inventory level for each item, along with its value.
Category
Part Number
Average Level
Unit Value
Raw materials 1
15,000
$ 3.00 2
2,500
5.00 3
3,000
1.00
Work-in-process 4
5,000
14.00 5
4,000
18.00
Finished goods 6
2,000
48.00 7
1,000
62.00
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?

30. Solved Problem Part Number Average Level Unit Value Total Value a.1
15,000 
$ 3.00 = 2
2,500
5.00 3
3,000
1.00 4
5,000
14.00 5
4,000
18.00 6
2,000
48.00 7
1,000
62.00
Average aggregate inventory value
$ 45,000
12,500
3,000
70,000
72,000
96,000
62,000
$360,500

31. Average aggregate inventory value Average aggregate inventory value
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