1. Copyright 2011 John Wiley & Sons, Inc. Chapter 3 Network and System Design 3-1

2. Lecture Outline 3-2 The Supply Chain System Understanding Processes: Theory of Constraints (TOC) Integration of Supply Chain Processes Designing Supply Chain Networks Enterprise Resource Planning (ERP) Copyright 2011 John Wiley & Sons, Inc.

3. The Supply Chain System 3-3 A supply chain can be viewed as a system of processes that cut across organizations and deliver customer value, rather than as a series of separate organizations and functions. Copyright 2011 John Wiley & Sons, Inc.

4. Processes Across the Supply Chain Network and information technology (IT) design support supply chain strategy for the system 3-4 Copyright 2011 John Wiley & Sons, Inc. Supply Chain Strategy SC Network Design IT Design

5. Processes Across the Supply Chain Continued Supply Chain Strategy –long-range plan for the system Supply Chain Network Design –design of the network structure and business process Information Technology (IT) Design –enables data sharing, communication, and process synchronization 3-5 Copyright 2011 John Wiley & Sons, Inc.

6. What is a Business Process? A business process is a structured set of activities or steps with specified outcomes –processes involve many organizational functions –every process has structural and resource constraints limiting output 3-6 Copyright 2011 John Wiley & Sons, Inc.

7. Theory of Constraints The Theory of Constraints (TOC) was introduced by Dr. Eliyahu Goldratt in his book The Goal Premise of TOC –every system has at least one constraint Objective –identify the constraint and restructure the organization to eliminate its impact 3-7 Copyright 2011 John Wiley & Sons, Inc.

8. System Constraints A system cannot produce more than its constraining activity which is sometimes called the “bottleneck” Output is related to how system activities are linked Activities can be linked: –serially –in parallel 3-8 Copyright 2011 John Wiley & Sons, Inc.

9. Serial Process Example 3-9 Copyright 2011 John Wiley & Sons, Inc. Consider the following distribution network: Maximum output per day = 50,000 units

10. Consider the following distribution network: Maximum output per day = 64,000 units Parallel Process Example 3-10 Copyright 2011 John Wiley & Sons, Inc.

11. Steps of Constraint Management 1.Identify the constraint 2.Exploit the constraint 3.Subordinate all other processes to the above decision 4.Elevate the constraint 5.When the constraint changes, return to Step 1 6.Engage in continuous improvement 3-11 Copyright 2011 John Wiley & Sons, Inc.

12. System Variation Every system or process has variation –output varies –activities vary –equipment and facilities vary Variation is a problem –consumes resources –adds complexity and uncertainty 3-12 Copyright 2011 John Wiley & Sons, Inc.

13. Managing Process Variation Process variation can be managed three ways: –reduce or eliminate variation –create buffers to deal with the variation –design more flexibility into the process to respond to the variation 3-13 Copyright 2011 John Wiley & Sons, Inc.

14. Capacity Implications Linked supply chain organizations need to match capacities to avoid bottlenecks Two common measures: Design Capacity –maximum output rate that can be achieved Effective Capacity –maximum output rate that can be sustained under normal conditions 3-14 Copyright 2011 John Wiley & Sons, Inc.

15. Capacity utilization indicates how much of capacity is actually being used Calculation: Utilization effective = (100%) Utilization design = (100%) Actual output Effective Capacity Capacity Utilization 3-15 Copyright 2011 John Wiley & Sons, Inc. Actual output Design Capacity

16. A warehouse can process a maximum of 100,000 orders/day with overtime labor. The facility is designed to process 70,000 orders/day under normal conditions. In June, the facility processed 80,000 orders/day. Capacity Utilization Example 3-16 Copyright 2011 John Wiley & Sons, Inc.

17. Calculate effective and design capacity utilization for the month of June Utilization effective = (100%) = 114.3% Utilization design = (100%) = 80% 80,000 70,000 Capacity Utilization Example Continued 3-17 Copyright 2011 John Wiley & Sons, Inc. 80,000 100,000

18. Integration of Supply Chain Processes Companies move through a set of integration stages as their supply chain strategy evolves Three Stages: 1.Complete functional independence 2.Internal functional cooperation and coordination, but not across the supply chain 3.True supply chain integration 3-18 Copyright 2011 John Wiley & Sons, Inc.

19. Stages of Supply Chain Integration 3-19 Copyright 2011 John Wiley & Sons, Inc.

20. Vertical Integration vs. Coordination Vertical Integration –ownership of upstream suppliers and downstream customers Focus on Core Competencies –less important activities are outsourced –companies must coordinate processes between multiple supply chain entities –cooperation supplants historical adversarial supplier relationships 3-20 Copyright 2011 John Wiley & Sons, Inc.

21. Supply Chain Networks Two important aspects of the supply chain network: Physical structure of the network Management of the network 3-21 Copyright 2011 John Wiley & Sons, Inc.

22. Supply Chain Structure Three elements define supply chain network structure: 1.Number of companies in the supply chain 2.Structural dimensions of the network 3.Number of process links across the supply chain 3-22 Copyright 2011 John Wiley & Sons, Inc.

23. Supply Chain Structure Continued Factors affecting supply chain network structure: –product type –product characteristics –number of available suppliers –availability of raw materials –ease of access to customers 3-23 Copyright 2011 John Wiley & Sons, Inc.

24. Supply Chain Network Management Not all supply chain branches and links need to be managed equally –identify and manage key process links across the supply chain –manage processes across entire supply chain –integrate activities into SCM processes 3-24 Copyright 2011 John Wiley & Sons, Inc.

25. Designing Segmented Structures Segmented supply chains help manage varying customer requirements in a network Each segment will result in a different supply chain structure 3-25 Copyright 2011 John Wiley & Sons, Inc.

26. Designing Segmented Structures Continued Three-step approach: 1.Identify key drivers of operational complexity 2.Design differentiated supply chain segments tailored to these unique complexities 3.Create a customized end-to-end operational blueprint and performance metrics for each supply chain segment 3-26 Copyright 2011 John Wiley & Sons, Inc.

27. Ways to Segment Supply Chains Segment Examples: –Fast-moving vs. slow-moving products –Fast growth vs. slow-growth products –Traditional vs. innovation versus online channel –High priority customers vs. low priority customers –Low-volume/low variability vs. low-volume/high variability –High-volume/low variability vs. high-volume/high variability 3-27 Copyright 2011 John Wiley & Sons, Inc.

28. Role of Information Technology IT enables the linking of processes across the supply chain –enables communication –provides storage –organizes information –provides visibility –processes data within and between firms 3-28 Copyright 2011 John Wiley & Sons, Inc.

29. Enterprise Resource Planning (ERP) ERP systems are a fully integrated computer- based technology used by organizations to manage resources throughout the supply chain ERP is an Information Technology 3-29 Copyright 2011 John Wiley & Sons, Inc.

30. ERP Continued ERP systems consolidate all business processes into an enterprise-wide system that –operates in real time –uses a single, centralized database –utilizes a standard format for inputted data –is comprised of modules for business processes 3-30 Copyright 2011 John Wiley & Sons, Inc.

31. ERP Modules ERP modules can be selected based on the needs of the business ERP Modules: –Manufacturing –Finance –Human Resources 3-31 Copyright 2011 John Wiley & Sons, Inc. –Supply Chain Management –Project Management –Customer Relationship Management (CRM)

32. ERP Components ERP modules include multiple components designed for a specific purpose Example components of a Supply Chain Management Module: –Inventory –Order Entry –Purchasing 3-32 Copyright 2011 John Wiley & Sons, Inc. –Supply Chain Planning –Supplier Scheduling –Product Inspection

33. ERP Configuration ERP system configurations: Fully Customized Standardized “off-the-shelf” modules Mix of Customized and Standardized 3-33 Copyright 2011 John Wiley & Sons, Inc.

34. ERP Implementation Implementation Steps: 1.map current business processes 2.identify ERP modules to match processes 3.identify steps to efficiently unify modules with processes 4.further refine unity 3-34 Copyright 2011 John Wiley & Sons, Inc.

35. Review 1.A supply chain can be viewed as a system of processes. SCM involves managing these processes. 2.A business process is a structured set of activities or steps with specified outcomes. 3.The transactional view of supply chains focuses on the efficiency and effectiveness of managing supply chain processes. 3-35 Copyright 2011 John Wiley & Sons, Inc.

36. Review Continued 4.The relationship view of supply chains focuses on managing relationships across the supply chain. 5.TOC explains how to manage a system. According to TOC every system has at least one constraint. A constraint is anything that prevents the system from being able to achieve its goal and is sometimes called the “bottleneck.” A system should be improved by managing the constraint. 3-36 Copyright 2011 John Wiley & Sons, Inc.

37. Review Continued 6.Design capacity is the maximum output rate that can be achieved by a facility. Effective capacity is the maximum output rate that can be sustained under normal conditions. 7.ERP systems are a fully integrated computer-based technology used by organizations to manage resources throughout the supply chain. 3-37 Copyright 2011 John Wiley & Sons, Inc.

38. Copyright 2011 John Wiley & Sons, Inc. All rights reserved. Reproduction or translation of this work beyond that permitted in section 117 of the 1976 United States Copyright Act without express permission of the copyright owner is unlawful. Request for further information should be addressed to the Permission Department, John Wiley & Sons, Inc. The purchaser may make back-up copies for his/her own use only and not for distribution or resale. The Publisher assumes no responsibility for errors, omissions, or damages caused by the use of these programs or from the use of the information herein. 3-38