2. Chapter 11: Strategic Leadership Chapter 7 Network integration

3. Chapter 11: Strategic Leadership Contents Introduction Network integration and supply chain design Supply chain configuration and functional requirements Stages of supply chain design and implementation Factors to take into account in supply chain design Modelling approaches Concluding remarks

4. Chapter 11: Strategic Leadership Learning outcomes Understand how supply chain design facilitates network integration. Explain why and when network redesign is required. Know what the different stages in network design and implementation entail. Apply the main network design and implementation steps. Identify the major factors to be taken into account during network design and in locating facilities. Apply the centre-of-gravity method for single-facility locations. Know which modelling approaches and techniques are applicable for network design.

5. Chapter 11: Strategic Leadership Introduction Supply chain network design can have a major impact an organisation’s competitiveness. Network provides the veins, or channels, through which inventory flows. Main network activities are movement, storage and transformation. Extends from the supply sources to the consumers of final products. Decisions relating to the supply chain network have a significant effect for a relatively long period of time. 80 per cent of a supply chain’s cost structure is determined by network design.

6. Chapter 11: Strategic Leadership Supply chain network

7. Chapter 11: Strategic Leadership Network integration and supply chain design Network integration requires the right design and configuration. Involves the structural dimensions of the network as well as the careful selection of the members in the supply chain. Relates to decisions regarding customer service; inventory policy; transportation modes; and the location and size of stocking points. Key considerations include availability of sources of supply, manufacturing facilities and where the target markets are located. Consider and evaluate a number of alternative supply chain networks (cost benefit trade-offs).

8. Chapter 11: Strategic Leadership Stage-gate model for supply chain design

9. Chapter 11: Strategic Leadership Supply chain design Supply chain network may be relatively simple or very complex. Supply chain attributes that determine supply chain complexity: customer base; product portfolio; supplier base; manufacturing (process, scale and variety); logistics scope (inbound and outbound); and systems/applications used. Supply chain network design is generally not a regular activity (carried out every few years). Capacity utilisation, throughput and inventory turnover: indicators used to evaluate how effective supply chain design is.

10. Chapter 11: Strategic Leadership Supply chain design (continued) Key determinants of supply chain network structure: Markets Marketing strategy and competitive requirements Market segments, customers targeted, anticipated demand Facilities Number, size and location Geographic placement of production facilities, stocking points and transfer facilities Sources of supply Location and number of sources of material, goods and services Standardisation of major equipment, spare parts Transport Physical link between customers and suppliers Enabling the flow of materials and resources Transport decision’s major impact

11. Chapter 11: Strategic Leadership Supply chain configuration and functional requirements Design decision areas: Network design and optimisation Network operations analysis Policy formulations and optimisation Design for robustness (preparedness for risk)

12. Chapter 11: Strategic Leadership Network design and optimisation Determine the basic structure of the supply chain Goal: identify the lowest total-cost network design

13. Chapter 11: Strategic Leadership Network design and optimisation (continued)

14. Chapter 11: Strategic Leadership Network operations analysis How will the supply chain operate in the real world with all its variability (variability in demand, supply and transportation)? Network simulation is used. Supply chain activities are evaluated for capacity, operation philosophy and some basic functional requirements.

15. Chapter 11: Strategic Leadership Policy formulations and optimisation Establish best operating rules (policies). Rules about whether or not inventory should be kept for various products, and how much and where inventory should be kept. Other examples: will full truckload shipments suffice or are less than truckload shipments needed? Whether to make or buy components/sub- assemblies.

16. Chapter 11: Strategic Leadership Design for robustness Supply chains encounter some unforeseen disruptions, unplanned events or things that might go wrong (e.g. strikes, breakdowns and storms). Risk assessment and contingency planning; methods to deal with such eventualities. Ensure that the network does not perform poorly under other-than-expected conditions. Some deviations from the original assumptions: What if marketing was wrong about demand? What if the cost of supply doubles? What seemed like a good idea given forecasted conditions may kill the company under other conditions.

17. Chapter 11: Strategic Leadership Stages of supply chain design and implementation Stages and steps in supply chain network design and implementation

18. Chapter 11: Strategic Leadership Assessment stage Business orientation: Business strategy, ownership, value-chain structure. Alternatives business scenarios being considered. Existing supply chain strategies and philosophy. Product and market information. Supply chain network alternatives: Supply chain alternatives are developed and proposed. Primary focus is on possible supply chain networks (inbound and outbound), basic configuration and assessing key supply chain role players. Structured from a variety of the following available elements: storage and production facility locations; transport lanes and modes, etc. First-order trade-offs between cost and service levels.

19. Chapter 11: Strategic Leadership Design stage Conceptual supply chain flow design: Most feasible and effective supply chain alternatives are developed and refined; conceptual design proposal. Prime focus is on inventory flow, buffer locations, infrastructure required and first-order functional and operational requirements (each elements or activities). Aim to balance the capacity across all activities. Risk assessment Detailed functional design of the supply chain: Detailed functional and/or operations design are refined and finalised for the supply chain proposed. Focus on: finalising the supply chain configuration; functional and operations design; clarification with potential external suppliers, customers and internal departments.

20. Chapter 11: Strategic Leadership Implementation stage Infrastructure establishment and construction: Detailed supply chain functional design put into operation Channels are prepared for commencing operations Communication plays a vital role (alignment) Operating procedures established Commercial, operations and service-level agreements Commence new operation: Commencement of activities along the supply chain Sales and operations planning (S&OP) fulfils key role Sound communication plan (status, ramp-up, etc.) Conduct a pre-operation audit

21. Chapter 11: Strategic Leadership Operation stage Post-implementation evaluation Compare the actual configuration and performance with what was originally intended Operations assessment and benchmarking Customer-satisfaction survey Philosophy of continuous improvement

22. Chapter 11: Strategic Leadership Factors to take into account in supply chain design Understanding a specific business’s context Interdependencies with other related supply chains Master agreements within an organisation Country-specific logistics infrastructure Factors that influence location decisions... (next slide)

23. Chapter 11: Strategic Leadership Factors that influence location decisions

24. Chapter 11: Strategic Leadership Modelling approaches Approximate methods Mathematical optimisation Simulation Heuristics

25. Chapter 11: Strategic Leadership Weighted-factor rating method A popular approximate method used to compare the attractiveness of several alternatives against a number of quantitative and qualitative dimensions. The main steps to follow include: identifying the factors; assigning weights to each factor (0,00–1,00; all weights add to 1); subjectively rating each alternative against each factor (0–100; 100 being the best); multiplying the factor rating by the weight, then adding the weighted scores; and selecting the alternative with the highest total weighted score.

26. Chapter 11: Strategic Leadership Weighted-factor rating method (example)

27. Chapter 11: Strategic Leadership Centre-of-gravity method Involves mapping a number of locations on an x-, y- coordinate grid and then finding a central location closest to all. x-coordinate = sum of (each location’s x-coordinate x weight) total weight y-coordinate = sum of (each location’s y-coordinate x weight) total weight

28. Chapter 11: Strategic Leadership Centre of gravity method (example)

29. Chapter 11: Strategic Leadership Concluding remarks Designing an optimal supply chain network is one of the cornerstones of competitive world-class organisations. Network integration focuses on: physical structure and arrangement of supply chain activities; right interfacing; and balancing of capacity. Many supply chains networks have purely evolved over time, making then less efficient and effective. Design and implementation goes through stages to ensure sound decision making. Many factors that influence design should be taken into account.