Supply Chain Management

Third Edition
Nada R. Sanders

Chapter #3

Network and system design

Learning Objectives
• Describe the supply chain as a system of processes.
• Understand how to manage processes across the supply chain.
• Explain system constraints and variation in managing a supply chain
network.
• Describe the stages of supply chain integration.
• Describe key factors in designing a supply chain structure.
• Explain enterprise resource planning (ERP) as a system integration
Technology

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Processes across the Supply Chain
• A supply chain can be viewed as a system of processes that cuts across
organizations and delivers customer value
• The focus is not just to manage each process within the organization, but to
manage processes across the entire supply chain
• Supply chain strategy provides the long-range plan for this entire system
• Two key components:
1. Supply chain network design
2. Information technology

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What Is a Business Process?
• A business process is a structured set of activities or steps with specified
outcomes
• Organizations, and entire supply chains, can be viewed as a collection of
processes
• If we want to improve the output, we must improve the process
o Process improvement involves making changes and enhancements to the process
• Every process has structural and resource constraints that limit its amount of
output
o Bottleneck
• For processes to be effective and efficient, organizational functions must work
together and be well coordinated

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Managing Supply Chain Processes
• All supply chain processes need to run efficiently
• This requires process thinking and requires managers to view the process
as a system designed to satisfy customer needs
• The transactional view focuses on making supply chain processes more
efficient and effective based on quantitative metrics
• The relationship view focuses on managing relationships across the supply
chain
• Each approach to managing processes across the supply chain has its
advantages

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Understanding Processes: Theory of Constraints (TOC)
• The premise behind the theory of constraints is that every system has one
or more limiting factors that are preventing it from further achieving its
goal
o Weakest link in a chain
• To improve, must identify that weakest link
o There is always at least one
• The whole system must be managed with this constraint in mind
• Basic principles of the TOC
o System constraints
o System variation
o Capacity implications

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System Constraints
• The basic principle of TO C is that every system has at least one constraint
• A constraint is anything that prevents the system from being able to
achieve its goal
o Called a bottleneck
• The system cannot produce any more than the output of its bottleneck
• It is critical to manage the constraints or bottlenecks in the system
• The constraint must always be busy, as time lost there is time lost in the
entire system

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A Serial Process

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A Serial Process Redesigned with one Parallel Process

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TOC Steps to Manage the Constraints
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

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System Variation
• Every process has variation
• Variation is simply variability in the amount of output that is produced or
processed
• Variation is a problem as it consumes resources
• Variation also adds complexity and uncertainty
• Process variation needs to be managed as it can create significant problems
for a system
1. Reduce or eliminate as much variation as possible
2. Create buffers to deal with the variation
3. Design more flexibility into the process to respond to the variation
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Capacity Implications
• Capacity refers to the maximum amount of output that can be achieved by
a process over a specified period of time
• In SCM, it is important to remember that different supply chain members
have different levels of capacity
• As we link organizations in the chain we need to make sure that levels of
capacity match

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Different Measures of Capacity
•

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Integration of Supply Chain Processes
Stages of Integration
• Traditionally organizations have viewed themselves as independent entities
• As companies evolve in their supply chain strategy, they typically move
through a set of integration stages
1. Complete functional independence (silo mentality)
2. Internal functional cooperation and coordination, but not across the supply chain
3. The concept of linkages and coordination extends beyond the boundaries of the firm
to supply chain partners

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Stages of Supply Chain Integration

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Vertical Integration versus Coordination
• Each organization in the supply chain network is dependent on the other
• Vertical integration involves ownership of upstream suppliers and
downstream customers
o This was once thought to be a desirable competitive strategy
o Increasingly, however, organizations have focused on core competencies
• Outsourcing is hiring an outside company to do certain tasks for a fee
o The trend is even toward “virtual” companies, where everything is outsourced
o This trend has significant implications for strategic issues of supply chain
management

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Designing Supply Chain Networks
Supply Chain Structure and Management
• There are two aspects of the supply chain network that are important
1. The actual physical structure of the network
2. Management of the network
• Each supply chain network structure is defined by three elements:
1. The number of companies that are part of the supply chain
2. The structural dimensions of the network
3. The number of process links across the supply chain
• Most companies belong to more than one supply chain network
• It is especially important to identify and manage key process links across the
chain

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Designing Segmented Structures
• Designing supply chain networks that provide a competitive advantage has
become increasingly difficult
• The reason is that most companies operate in global markets with rapidly
changing consumer expectations
• The supply chain implications of such a large product proliferation are vast
o Product diversity makes forecasting demand difficult and leads to excess inventory or
stockouts
o Supply chains have reduced their buffer stock
o Customers have high expectations
• Traditional “one-size-fits-all” supply chain structures cannot accommodate
these variations

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Three-Step Approach to Segment a Company’s Supply Chain
Network
1. Identify key drivers of operational complexity
2. Design differentiated supply chain segments tailored to address these
unique complexities
3. Create a customized end-to-end operational blueprint and performance
metrics for each supply chain segment

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Ways to Segment Supply Chains
• Fast-moving versus slow-moving products
• Fast-growth versus slow-growth products
• Traditional versus innovation versus online channel
• High-priority customers versus low-priority customers
• Low-volume/low-variability versus low-volume/high-variability
• High-volume/low-variability versus high-volume/high-variability

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Enterprise Resource Planning (ERP)
• IT as an Enabler of SCM
• What Is ERP?
• ERP Configuration
• ERP Implementation

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IT as an Enabler of SCM
• Information technology (IT) enables communication, storage, and
processing of data within and between firms
• IT is considered as an enabler of supply chain management
• IT enables the linking of processes across the supply chain and provides
visibility into supply chain activities at other points across the network
• A wide variety of information is needed for a supply chain to perform as a
coordinated system
• One of the most significant information technologies has been enterprise
resource planning (ERP), which has enabled sharing of information and
data across the enterprise
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What Is ERP?
• Enterprise Resource Planning (ERP) systems are a fully integrated
computer-based technology used by organizations to manage resources
throughout the supply chain
• The purpose of ERP is to facilitate the flow of information between all
business functions
• These systems integrate all functions of an enterprise
• They typically tie together all business processes, such as sales, production,
inventory management, warehousing, delivery, accounting, billing, and
human resource management

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ERP Configuration
• ERP systems can be configured in a number of ways
• Fully customizing an ERP package can be very expensive and complicated
• Applying standardized modules may force changes in the processes of the
organization to accommodate the modules themselves
• The advantage of modular design is flexibility
• The advantage of ERP is that its modules can exist as a system or can be
utilized in an ad hoc fashion

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ERP Implementation
• ERP software systems are complex
• Implementing ERP software is typically too complex for in-house
developers
• It is better to hire outside consultants
• ERP implementation is considerably more difficult than organizations
anticipate and often requires outside consultants and change management
professionals

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