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LECTURER: ROMALDO ISAAC LEWIS (MBA) Part 3 (MANAGING SUPPLY CHAINS) Chapter No.11, SUPPLY CHAIN DESIGN ________________________________________________________________________ OBJECTIVES Upon successful completion of this chapter, students will be able to: Identify the nature of supply chains for service providers, as well as for manufactures. Define they design issue associated with supply chain processes. Define the critical supply chain inventory and financial measures. Explain the strategic importance of supply chain design and give real examples of its application in service situations. Explain how efficient supply chains differ from responsive supply chains and the environments best suited for each type of supply chain. Fedex is an excellent example of how a firm designs its supply chain to be reactive to major disruptions and natural disasters, a capability that also gains a competitive advantage. A Supply chain is the interrelated series of processes within a firm and across different firms that produces a service or product to the satisfaction of the customers. More specifically, it is a network of service, material, monetary, and supplier relationship processes to those of its suppliers and customers. It is important to note, however, that a firm such as Fedex may have multiple supply chains, depending on the mix of services or products it produces. A supplier in one supply chain may not be a supplier in another supply chain because the service or product may be different or the supplier may simply be unable to negotiate a successful contract. The firms operations strategy and competitive priorities guide its supply chain choices. Supply Chain Management is the synchronization of a firms processes with those of its suppliers and customers to match the flow of materials, services, and information with demand. A key part of supply chain management is to develop a strategy to mobilize and provide for all the resources in the supply chain to meet customer demand now and in the future. In this chapter we focus on supply chain design, an essential aspect of supply chain strategy, which seeks to design a firms supply chain to meet the competitive priorities of the firms operations strategy. Figure No.1 Supply Chain Efficiency Curve
Inefficient supply chain operations Area of improved operations

New supply chain efficiency curve with changes in design and execution
Reduce cost

Improve performance

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Supply chain performance

1. SUPPLY CHAIN DESIGN ACROSS THE ORGANIZATION (Page 324 to Page 325) Supply chains permeate the entire organization. It is hard to envision a process in a firm that is not in some way affected by the design of the supply chain. Supply chain must be managed to coordinate the inputs with the outputs in a firm to achieve the appropriate competitive priorities of the firms enterprise processes. The internet offers firms an alternative to traditional methods for managing the supply chain. However, the firm must be committed to redesigning its information flows throughout the organization, especially the customer relationship, order fulfillment, and supplier relationship processes. These processes intersect all of the traditional functional areas of the firm. A supply chain strategy is essential for service as well as manufacturing firms. In fact, service providers are beginning to realize the potential benefits of redesigning their supply chain processes. For example, hospitals have notoriously held to old-fashioned approaches for purchasing and materials management. Even with the advent of group purchasing organizations and centralized buying groups, such as Premier, Inc., a typical hospital collects orders from throughout the hospital for medical supplies and equipment ranging from latex gloves to operating tables. Often the merchandise is chosen from a slack of outdated catalogs. 2. SUPPLY CHAIN FOR SERVICES AND MANUFATURING (Page 325 to Page 326) Every firm or organization is a member of some supply chain. In this section we show the similarities and differences between supply chains for services and manufacturing. 2.1 Services Supply chain design for a service provider is driven by the need to provide support for the essential elements of the various services it delivers. Consider the example of Flowers-on-Demand, a florist with 27 retail stores in the greater Boston metropolitan area. Customers can place orders for customized floral arrangements by visiting one of the stores, using a toll free number, or going to the florists Web-page. The 800 number and the Web page are operated by a local Internet services company, which takes orders and relays them to the florist. The arrangement is produce at a distribution center, and deliveries are made using either local courier, or Fedex, if the delivery is outside of the Boston area. Fresh flowers, flown in from all over the world, are used in the arrangements. What differences Flowers-on-Demand from floral wire services, such as Teleflora or FTD, is that it assembles all the arrangement and can ship out-of-area orders for next day delivery anywhere in the country. To do business, the florist must have a supply chain that provides retail stores, a delivery center, computers, point-of-sale equipment, and employees. It must purchase flowers that are sourced globally as well as arrangement materials, such as pots, basket, greeting cards, and packing materials. The florist must arrange the flowers per the customers order and ensure that the arrangement is delivered as specific by the customer, using local services or Fedex. The design of its supply chain must provide convenience, which is facilitated by the location of the retail outlets and the opportunity to place orders via the internet or toll-free number.

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Figure No.2 Supply Chain for a florist

Packaging Flowers: Local /International Arrangement Materials

Maintenance Service

FedEx delivery Service

Local delivery Service

Internet Service

Flowers-on-Demand Florist

Home Customers

Commercial Customers

2.2 Manufacturing A fundamental purpose of supply chain design for manufactures is to control inventory by managing the flow of materials. The typical manufacturer spends more than 60 percent of its total income from sales on purchase services and materials, whereas the typical service provider spends 30 to 40 percent. Because materials comprise such a large component of the sales dollar, manufacturers can reap large profits with a small reduction in the cost of materials, which makes supply chain management a key competitive weapon. The supply chain for a manufacturing firm can be complicated; however, the supply chain depicted is an oversimplification because many companies have hundred, if not thousands, of suppliers. In this example, the firm is in Ireland and deals with an international supply chain. In addition, it owns its distribution and transportation services. Suppliers are often identified by their position in the supply chain. Here, tier 1 suppliers provide major subassemblies that are assembled by the manufacturing firm, tier 2 suppliers provide tier1 suppliers with components, and so on. Not all companies have the same number of levels in their supply chains. For example, companies that engineer products to customer specification normally do not have distribution centers as part of their supply chains. Such companies often ship products directly to their customers. 3. INVENTORY AND SUPPLY CHAINS (Page 326 to Page 327) The value of supply chain management becomes apparent when the complexity of the supply chain is recognized. The performance of numerous suppliers determines the inward flow of materials and services to a firm. The performance of the firm determines the outward flow of services or products to the next stage of the supply chain. The flow of materials, however, determines inventory levels. Too much inventory can happen to the best companies. For example, one year, overestimated the amount of demand for Kermit the frog telephones and ended up with a 50-week supply, which contributed to a strain on warehouse operations and service to the customers. Improved forecasting processes, selective outsourcing of OM is all about the production of goods and services through efficient processes Page 3

warehouses operations, and state of the art automation and mechanization improve the flow of materials through Amazon.coms facilities and consequently improved the efficiency and performance of the supply chain. Figure No.3 Supply Chain for a Manufacturing firm
T r3 ie






R M aw aterials

T r2 ie





Cmo ts o p nen

T r1 ie




M ajor su assemlies b b


A b ssemly



D u istrib tion cen ters

East Coast

West Coast

East Europe

West Europe

R etail

Inventory is a stock of materials used to satisfy customers demand or to support the production of services or goods. The flow of water in a tank raises the water level. The inward flow of water represents input materials, such as steel, component parts, office supplies, or a finish product. The water level represents the amount of inventory held at a plant, service facility, warehouse, or retail outlet. The flow of water from the tank lowers the water level in the tank. The outward flow of water represents demands for materials in inventory, such as customer orders for a huffy bicycle or service requirement for supplies such as soap, food, or furnishings. The rate of the outward flows also reflects the ability of the firm to match the demand for service or products. Another possible outward flow is that of scarp, which also lowers the level of useable inventory. Together, the difference between input flow rate and the output flow rate determines the inventory. Inventories rise when more material flows into the rank than flows out; they fall when more materials flows out than flows in. 3.1 Pressures for small Inventories Inventory Cost Holdings. It refers to the cost of capital and the variable costs of keeping items on hand , such as storage and handling, taxes, insurance, and shrinkage. OM is all about the production of goods and services through efficient processes Page 4

Cost of Capital Storage and Handling Costs Taxes, Insurance, and Shrinkage

3.2 Pressures for Large Inventories Customer Service Ordering Cost Setup Cost Labor and Equipment Utilization Transportation Cost Payment to Suppliers

3.3 Types of Inventory a) Cycle Inventory. The portion of total inventory that varies directly with lot size 1. The lot size, Q, varies directly with the elapse time (or cycle) between orders. If the lot is ordered every 5 weeks, the average lot size must equal 5 weeks demand. 2. The longer the time between orders for a given item, the greater the cycle inventory must be At the beginning of the interval, the cycle inventory is at its maximum, or Q. At the end of the interval, just before a new lot arrives, cycle inventory drops to its minimum, or 0. The average cycle inventory is the average of these two extremes. b) Safe Stock Inventory. To avoid customer service problems and the hidden costs of unavailable components, companies hold safety stock. Safety stock inventory is surplus inventory that protects against uncertainties in demand, lead time, and supply changes. The portion of total inventory that varies directly with lot size. c) Anticipation Inventory. It refers to inventory used to absorb uneven rates of demand or supply d) Pipeline Inventory. It refers to inventory that is created when an order for an item is issued but not yet placed in inventory. Pipe line Inventory = DL = dL Problem 1. A plant makes monthly shipment of electric drills to a warehouse in average lot size of 280 drills. The wholesalers average demand is 70 drills a week, and the lead time from the plant is 3 weeks. The wholesaler must pay for inventory from the moment the plant makes a shipment. If the wholesaler is willing to increase its purchase quantity to 350 units, the plant will give priority to the wholesaler and guarantee a lead time of only 2 weeks. What is the effect on the wholesalers cycle and pipeline inventory? Solution: Cycle Inventory = Q/2 = 280/2 = 140 drills

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Pipe line Inventory = DL = dL = (70 drills/week) (3 weeks) = 210 drills Average Lot Size = 350, Demand = 70, Lead Time =2: Cycle Inventory = 175, Pipeline = 140

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