Supply Chain Design

Let’s begin this week’s lesson on supply chain design with defining supply chain:
– Interrelated series of processes within a firm and across different firms that
produces a service or product to the satisfaction of customers.
– A network of service, material, monetary, and information flows that link a firm’s
customer relationship, order fulfillment, and supplier relationship processes to
those of its suppliers and customers.

For manufacturing organizations, the supply chain includes raw material manufacturers, sub-
assembly manufacturers, component manufacturers, packaging suppliers, delivery services, and
the customer.

For a service provider, the supply chain includes sub-contractors, delivery services, and
customers.

Effective and cooperative supply chains result in tight control of inventory, which leads to a
reduction in inventory, which positively affects your organization’s bottom line.

Although tighter control of inventory and inventory reduction is typically the goal, there are
times when excess inventory may be necessary. Let’s explore this:
Inventory Level Pressures:
• Small
– Minimizes money tied up in inventory
– Minimizes carrying costs
• Large
– Customer satisfaction
– Minimizes stock-outs
– Minimizes backorders
– Minimizes ordering costs
Let’s now further define the types of inventory:
Raw Materials: this category of inventory includes those materials at the “beginning” of the
process, including molten metal being cast or formed, raw plastic pellets, wood, oil, etc.
Work-In-Process (WIP) Inventory: this category of inventory includes all the inventory within
your organization, including sub-assemblies, assemblies, parts, etc.
Finished Goods: this category of inventory includes items that are ready for sale. Items ready
for customer use.

Now let’s take a look at how supply chain performance can be measured:
• Average aggregate inventory value
• Weeks of supply
• Inventory turnover (turns)
• Financial measures

And, the decision every operations manager has to consider: “make” or “buy”.
Would it be better for your organization to make a sub-assembly, or buy it from another firm?
“Make” advantages: controlling inventory and costs, holding expertise within your organization,
opportunity to save costs.
“Buy” advantages: no need to upskill within your organization (which comes at a cost), no need
to expand your number of employees or space needed, no need to re-invent the wheel.

In conclusion, managing your organization’s supply chain, by partnering with your suppliers,
distributors, and possibly your customers, will lead to a decrease in inventory and a positive
effect on your bottom line.