Operations Management - Chapter 6 Lecture - Supply Chain Design

Global Supply Chains

• A global supply chain is a network connecting raw material sourcing, component manufacturers, assembly plants, warehouses, distributors, and customers across continents.
• Many involve multinational enterprises that source goods/services across geopolitical boundaries for supply chain efficiencies and new markets. These efficiencies may include:
  • Lower labor and raw material costs
  • Lower tariffs & tax breaks and infrastructure subsidies
  • Economies of scale
  • Developing new and alternative suppliers
  • Selling goods/services in new markets

Decisions in Supply Chain Design

• Strategic decisions support organizational strategy, mission, and competitive priorities:
  • Strategy
  • Control
  • Location
  • Sustainability
  • Technology
  • Digital content
• Tactical decisions influence day-to-day supply chain management (More in Chapter 13):
  • Sourcing
  • Outsourcing
  • Logistics and transportation
  • Managing risk
  • Measuring performance

Supply Chain Design Decisions: Strategy

• Supply chains should support an organization’s strategy, mission, and competitive priorities (Refer to Chapter 3).
• Examples include:
  • Emphasizing competitive priorities
  • Building a sustainable, trusted supply chain
  • Designing a supply chain that considers cultural and growth differences between industrialized and emerging economies.

Supply Chain Design Decisions: Control

• The operational structure is comprised of resources such as:
  • Suppliers
  • Factories
  • Warehouses
  • Distributors
  • Technical support centers
  • Engineering design and sales offices
  • Communication links
• Examples of control decisions:
  • Centralize or decentralize supply chain control
  • Securing supplier and customer payments
  • Data access along the supply chain

Supply Chain Design Decisions: Location

• Facility location impacts cost, customer service, and data reliability.
• Examples include locating:
  • Research and development offices
  • Call centers
  • Warehouse and distribution centers for efficiency and customer value.
• Evaluation methods and quantitative models for location decisions will be discussed later.

Supply Chain Design Decisions: Sustainability

• Sustainability is a key issue in supply chains.
• Basic ideas are introduced in Chapter 1.
• Examples include:
  • Championing economic, environmental, and social sustainability goals and practices.

Supply Chain Design Decisions: Technology

• Intellectual property is important for multinational enterprises.
• Licensing technology can lead to risks.
• Protecting patents is a constant topic in trade negotiations.
• Patents do not protect services (see Chapter 1).
• Examples include:
  • Sharing technology and intellectual property with suppliers and partners.
  • Protecting intellectual property, patents, and rights.

Supply Chain Design Decisions: Digital Content

• Digital content in goods/services is increasingly important.
• Products are bundles of physical goods and services enhanced by the "Internet of Things."
• Examples include:
  • Building/integrating digital content and e-commerce capabilities.
  • Securing collaborative tools for global customers and vendors.

Supply Chain Design Decisions: Sourcing

• Supplier selection is a key design decision.
• A key decision is whether to use single or multiple sources:
  • Single supplier: economies of scale, close partnerships.
  • Multiple suppliers: lower risk of supply disruption.
• Examples include:
  • Deciding from whom to purchase raw materials, parts, and subassemblies.
  • Tracking returns and recalls.

Supply Chain Design Decisions: Logistics and Transportation

• Transportation is more complex in global supply chains.
• Global shipments often require multiple transportation modes.
• Transportation infrastructure varies in foreign countries.
• Examples include:
  • Ensuring shipment arrival at the correct destination.
  • Handling missing documents at customs.
  • Choosing transportation modes to maximize service and minimize costs.

Supply Chain Design: Other Tactical Decisions

• Other tactical decisions include:
  • Outsourcing: deciding which supply chain activities to keep in-house or outsource.
  • Managing risk: addressing and mitigating supply chain risks and disruptions.
  • Measuring performance: selecting performance metrics, securing digital records, and ensuring information flow.

Blockchain Technology and Supply Chains

• A blockchain is a distributed database network that holds tamper-resistant records of digital data and events.
• It records every transaction over multiple computers, making transactions transparent and secure.
  • A key advantage is that no single entity has total control.
• The goal is to maximize customer service at minimum costs while being:
  • Intelligent
  • Collaborative
  • Transparent
  • Secure

Global Supply Chain Example: Inditex/Zara

• Inditex is a global fashion retailer based in Spain, with Zara being the most recognized brand, having approximately 6,900 stores in over 85 countries.
• Inditex's global supply chain uses:
  • Pull system of supply chain design
  • Vertical integration
  • High supply chain control
  • Technology and business analytics
  • Proximity sourcing
  • Supply chain risk management
  • Sustainability management
  • Performance measurement

Zara’s Strategic Supply Chain Decisions

1. Zara defines a clear strategy and makes sourcing/location decisions based on it.
   • It favors keeping key operational activities (suppliers, warehouses) close to factories.
2. While outsourcing when appropriate, it maintains high supply chain control.
3. It uses technology and business analytics to run factories and design clothing faster.
4. Zara uses digital content for marketing and promoting products and philosophy.

Zara’s Tactical Supply Chain Decisions

5. Air transportation is integral for quick creation and delivery.
6. Zara carefully manages supply chain risks:
   • If a new design doesn't sell, orders are canceled within weeks, and a new design is pursued.
7. The firm works to champion sustainability wherever it can.
8. It measures supply chain performance through raw material and finished goods traceability.

Efficient and Responsive Supply Chains

• Supply chains can be designed for:
  • High efficiency and low cost
  • Agile responses
• Efficient supply chains:
  • Designed for efficiency and low cost by minimizing inventory and maximizing efficiency.
  • Best for goods/services with:
    • Highly predictable demand
    • Stable product lines with long life cycles
    • Low contribution margins
• Responsive supply chains:
  • Focus on flexibility and responsive service to react quickly to changing market demand.
  • Best when demand is unpredictable.

Push and Pull Systems

• Push system:
  • Produces goods in advance of customer demand using a sales forecast.
  • Moves goods through the supply chain to points of sale.
  • Effective for consistent sales patterns with few distribution centers and products.
• Pull system:
  • Produces only what is needed at upstream stages in response to customer demand signals from downstream stages.
  • Effective when there are many production facilities, distribution points, and products.

Push-Pull Systems and Boundaries

• Many supply chains combine push and pull systems.
• A push–pull boundary is the point that separates the push system from the pull system.
  • For Dell, the boundary is early in the supply chain.
  • General Motors pushes finished goods to dealers and stores them close to customers.

Postponement

• The location of the push–pull boundary affects a supply chain’s responsivity.
• Firms try to push as much of the finished product closer to the customer to:
  • Speed up response
  • Reduce work-in-process inventory requirements.
• Postponement is delaying product customization until closer to the customer.
  • Allows customers to buy exactly what they need.
  • Reduces manufacturer inventory and installation costs.

Vertical Integration and Outsourcing

• A firm must decide whether to vertically integrate or outsource.
• Vertical integration: acquiring and consolidating elements of a value chain for more control.
  • Backward integration: acquiring capabilities toward suppliers.
  • Forward integration: acquiring capabilities toward distribution or customers.
• Outsourcing: having suppliers provide goods/services previously provided internally.

The Three Waves of Outsourcing

1. Outsourcing goods-producing jobs from the United States
2. Outsourcing simple service work such as:
   • Standard credit card processing
   • Billing
   • Keying information into computers
   • Writing simple software programs
3. Outsourcing skilled knowledge work such as:
   • Engineering design
   • Graphic artists
   • Architectural plans
   • Call center customer service representatives
   • Computer chip design

Contract Manufacturing

• A contract manufacturer specializes in goods-producing activities, such as:
  • Customized design
  • Manufacturing, assembly, and packaging
  • Working under contract for end users.
• Advantages:
  • Access to advanced manufacturing technologies
  • Faster product time-to-market
  • Customization of goods in regional markets
  • Lower total costs due to economies of scale

Third-Party Logistics (3PL) Providers

• 3PL providers offer integrated services that might include:
  • Packaging
  • Warehousing
  • Inventory management
  • Transportation
• 3PL providers create efficiencies and economies of scale by leveraging:
  • Business intelligence
  • Analytics

Problem 6.1: Break-Even Analysis Outsourcing Decision

A firm considers manufacturing a part currently being outsourced:

• In-house: Fixed cost = 45,000, Unit cost = 130
• Outsourcing: Unit cost = 160
• Demand forecast = 1,200 units

1. Should the firm keep outsourcing?
2. Determine the break-even quantity.
3. What maximum price per part should the manufacturer pay the supplier if the forecast is 800 parts?

Model 6.1: Break-Even Analysis Outsourcing Decision

• Fixed cost of in-house manufacturing: FC_M = $45,000
• Fixed cost of outsourcing: FC_O = $0
• Unit cost of manufacturing in-house: UC_M = $130
• Unit cost of outsourcing: UC_O = $160
• Total cost in-house: TCM = FCM + UC_M \times Q = $45,000 + $130 \times 1,200 = $201,000
• Total cost to outsourcing: TCO = FCO + UC_O \times Q = $0 + $160 \times 1,200 = $192,000
• Cost difference: CD = TCM - TCO = $201,000 - $192,000 = $9,000

Solution 6.1: Break-Even Analysis Outsourcing Decision

1. Outsourcing is cheaper.

2. Break-even quantity: Q^* = \frac{FCM - FCO}{UCO - UCM} = \frac{$45,000 - $0}{$160 - $130} = 1,500 units. Produce in-house if demand exceeds 1,500 units.

3. Maximum price per part if the demand forecast is 800 parts:
   Q^* = \frac{FCM - FCO}{UCO - UCM}

   Q^* \times (UCO - UCM) = FCM - FCO

   Q^* \times UCO - Q^* \times UCM = FCM - FCO

   Q^* \times UCO = FCM + Q^* \times UCM - FCO

   UCO = \frac{FCM}{Q^} + UCM UCO = UCM + \frac{FCM - FC_O}{Q^} = $130 + \frac{$45,000}{800} = $186.25

Offshoring and Reshoring

• Offshoring: building, acquiring, or moving process capabilities from a domestic location to another country’s location while maintaining ownership and control.
  • Differs from outsourcing because the firm maintains ownership.
  • The decision involves various economic and noneconomic issues.
• Reshoring: moving operations back to a company’s domestic location.

Making Offshoring Decisions

Consider these factors when making the decision to offshore, sorted from economic to non-economic:

• Economic
  • Low labor costs
  • Lower import duties and fees
  • Lower capital costs
  • Grow global market share
  • Avoid national currency fluctuations
  • Preempt competitors from entering global market(s)
  • Hire worldwide skills and knowledge workers
• Non-Economic
  • Build robust value chain networks for global markets
  • Build relationships with government officials
  • Negative impact and media attention on remaining employees
  • Potential loss of intellectual property
  • Lose control of key processes
  • Develop secure sources of supply and reduce risks
  • Build relationships with suppliers
  • Avoid environmental regulations and laws
  • Possible political instability in offshore country
  • Lack of communication and/or technical skills
  • Learn foreign markets and culture

Location Decisions

• Facility networking and location focus on determining the best network and locations to:
  • Maximize service and revenue
  • Minimize costs
• Location decisions can be complex and must consider:
  • Shipping costs
  • Fixed operating costs
  • Revenue generation per customer
  • Facility labor and operating costs
  • Construction costs

Multisite Management

• Multisite management is managing geographically dispersed service-providing facilities.
• Criteria differ depending on the service:
  • For facilities customers travel to: minimize average/maximum distance or travel time.
  • For facilities that travel to customers: minimize customer response time.

Economic Factors in Location Decisions

• Location decisions are based on economic and noneconomic factors.
• Economic factors include:
  • Facility costs: construction, utilities, insurance, taxes, depreciation, maintenance.
  • Operating costs: fuel, direct labor, administrative personnel.
  • Transportation costs: moving goods and services, opportunity cost of customers coming to the facility.

Noneconomic Factors in Location Decisions

• Sometimes location decisions are based upon strategic objectives.
• New facilities must not be located far from sources of raw materials.
• Other noneconomic factors include:
  • Availability of labor, transportation services, and utilities
  • Climate, community environment, and quality of life
  • State and local legal and political factors

Location Decision Process

Facility location is typically conducted hierarchically and may involve some or all the following four basic decisions. Factors to consider at:

• Global
  *Product portfolio
  *New market opportunities
  *Changes in regulatory laws and procedures
  *Production and delivery economics
  *Sustainability
  *Cost to locate in different countries
• Regional
  *Size of the target market
  *Locations of major customers and sources of materials and supply
  *Labor availability and costs
  *Degree of unionization
  *Land, construction, and utility costs
  *Quality of life
  *Climate
• Community:
  • Managers’ preferences
  • Community services and taxes
  • Available transportation systems
  • Banking services
  • Environmental impacts
• Local site:
  • Site costs
  • Proximity to transportation systems
  • Utilities
  • Payroll and local taxes
  • Sustainability issues
    *Zoning restrictions

Problem 6.2: Making an Economical Local Decision

Data for operating costs of three possible locations for Fountains Manufacturing:

• Which location minimizes total costs, given annual production of 50,000 units?

Solution 6.2: Making an Economical Local Decision

Compute the total cost associated with annual production for each unit cost item (e.g., total direct material cost at Location 1: 8.50 \times 50,000 = $425,000).

• Location 2 has the minimum total manufacturing and distribution cost.

EPIC Framework

The EPIC framework assesses supply chain readiness through perspectives of economic (E), political (P), infrastructural (I), and competence (C).

• It measures a region's ability to support supply chain activities.

The Center-of-Gravity Method

The center-of-gravity method determines the x and y coordinates (location) for a single facility.

• The method considers locations, demand, and transportation costs to arrive at the best location.
• The center of gravity is defined as

X = \frac{\sum{xiVi}}{\sum{Vi}} Y = \frac{\sum{yiVi}}{\sum{Vi}}

Where

• X and Y are coordinates of the center of gravity
• xi and yi are coordinates of location i
• V_i is volume of goods and service moved to or from location i

Problem 6.3: Finding the Center of Gravity

Taylor Paper Products’ two factories are located near Cincinnati, Ohio, and in Kingsport, Tennessee. The company distributes paper stock to four major markets: Chicago, Pittsburgh, New York, and Atlanta.

• Taylor’s demand is relatively constant and can be forecast rather accurately. Use the center-of-gravity method to determine the coordinates for the location of an intermediate warehouse to service those markets.

Solution 6.3: Finding the Center of Gravity

Using the coordinates for the factories and markets on equations for X and Y, the center-of-gravity coordinates are computed as follows
X = \frac{58(400) + 80(300) + 30(200) + 90(100) + 127(300) + 65(100)}{400 + 300 + 200 + 100 + 300 + 100} = 76.29
Y = \frac{96(400) + 70(300) + 120(200) + 110(100) + 130(300) + 40(100)}{400 + 300 + 200 + 100 + 300 + 100} = 98.14$$

• By overlaying the center-of-gravity coordinates on a chart, managers can search the area for an appropriate location.

Location 6.3: Finding the Center of Gravity

The center-of-gravity facility location is near the border of southern Ohio and West Virginia. Managers can now search the location for an appropriate site.

Supply Chain Optimization

*Supply chain optimization is the process of ensuring that a supply chain operates at the highest levels of efficiency and effectiveness.

• It includes minimizing the total costs of manufacturing and transportation.
  *sourcing, distribution, and inventory placement throughout the supply chain.
• A transportation problem is a linear optimization model that helps plan the distribution of goods and services from supply points to demand locations.
  • A linear transportation model is the basis for more advanced supply chain optimization models.
  • An application of a transportation model is shown in Appendix E.