Lesson 8 - Supply Network Design

6.
Chapter 6 Supply network design:

Supply Networks
Location Decisions
Digital Stock
6.1
Slack, Chambers and Johnston, Operations Management, 6th Edition, Nigel Slack, Stuart Chambers, and Robert Johnston 2010
6.2
Supply network design

Operations strategy
Supply Network Design network design

Layout and flow
Design Planning and control
Improvement
Process technology
People, jobs and organization Product/service design
6.2
6.3
Key teaching objectives

To establish the idea of supply networks. To describe vertical integration as the extent to which a company wishes to own parts of its supply network. To identify the main factors on the location decision.
6.3
6.4
Key operations questions

In Chapter 6 Supply network design Slack et al. identify the following key questions: Why should an organization take a total supply network perspective? What is involved in configuring a supply network? Where should an operation be located?
How much capacity should an operation plan to have?
6.4
6.5
Introduction
Every operation is part of a larger and interconnected

network of other operations
This supply network will include suppliers suppliers and

customers customers and so on.
At a strategic level, operations managers are involved in

designing the shape and form of their network. objectives. This helps the operation to decide how it wants to influence the overall shape of its network, the location of each operation, and how it should manage its overall capacity within the network
6.5
Network design starts with setting the networks strategic
6.6
Operations in practice
Michael Dell started in 1984 by cutting out the middle man and delivering computers direct to the customer.
Using its direct selling methods, Dell went on to become the number one computer maker.
Most of the reasons for Dells success come from the way Dell configures its supply networks. Dells supply network model being adapted to take account of market changes (products now available in stores).
6.6
6.7
Case study: Dell - no operating model lasts forever How did Dell gain advantage from its original operating model? networks
The purpose of this example is to demonstrate that capabilities can be developed notwithstanding what may seem like unpromising circumstances. Dell were forced into adopting a different supply network configuration (bypassing conventional retailer channels) as the only way that they could compete with the low prices being offered by their more established rivals. However, rather than simply seeing this strategy as the only feasible option, they actively explored whether it would be possible to gain benefits from having no retail outlets. The lesson here is that, there are often potential positives and negatives to every strategic option. Just because one is forced into an unorthodox competitive stance does not necessarily mean that the potential negatives of a strategy outweigh the more obvious positives. By being both energetic and creative, Dell managed to turn the disadvantages of having no retail outlets into a set of advantages built upon having direct contact with their consumers. Why did it have to change its original operating model? Clearly its investment in a radically different supply chain configuration, although it gave it significant advantage in its early days, is now proving to be less than ideal for the new markets. When the radical supply chain model was set up, it was not at all obvious that the market would change in the way that it has with a far greater emphasis on design aesthetics and the merging of computing and entertainment products. To some extent, the market has changed because of the action of competitors, most notably Apple who have educated consumers to the importance of good aesthetic design. It is difficult to untangle two issues, both of which may explain Dells dilemma. The first is the lack of fit between the companys supply chain configuration and the way markets are moving (as mentioned previously). The second is that Dell, unlike its early days, is a large and mature company which may have lost some of its cutting edge simply because of the growth that has come from its previous success. But dont write off Dell yet. This example in the text should be taken as a warning of how core rigidities go along with core competencies. It is certainly intended to be Dells obituary . Nevertheless, there are some points which are worth thinking about from Dells dilemma. Slack, Chambers and Johnston, Operations Management, 6th Edition, Nigel Slack, Stuart Chambers, and Robert Johnston 2010
6.7
6.8
Operations network for a plastic homeware company

Second tier suppliers Chemical company First tier suppliers First tier customers Wholesaler Plastic stockist Retailer Plastic homeware manufacturer Second tier customers
Cardboard company
Ink supplier Packaging supplier
Retailer
Direct supply Information

6.8
6.9
Operations network for a shopping mall

Second tier suppliers First tier suppliers First tier customers
Second tier customers
Recruitment agency
Security services Cleaning services Retailers Retail customers
Cleaning materials supplier
Shopping mall
Equipment supplier
Maintenance services
Direct supply Information
6.9
6.10
Operations performance should be seen as a whole supply chain issue
Benefits of looking at the whole supply chain include: It helps an understanding of competitiveness. It helps to identify the significant links in the network It helps focus on long-term issues.
6.10
6.11
Design decisions in supply network networks The supply-network view is useful because it prompts three
particularly important design decisions:
1. How should the network be configured? This means, first, how can an operation influence the shape which the network might take? Second, how much of the network should the operation own? This may be called the outsourcing, vertical integration or do-or-buy decision. Where should each part of the network be located? If the homeware company builds a new factory, should it be close to its suppliers or close to its customers, or somewhere in between? This decision is called the operations location decision. What physical capacity should each part of the network have? How large should the homeware factory be? Should it expand in large-capacity steps or small ones? These type of decisions are called long-term capacity management decisions.
2.
3.
6.11
6.12
Configuring the supply network

Changing the shape of the supply network
Reconfiguring a supply network sometimes involves parts of the operation being merged not necessarily in the sense of a change of ownership of any parts of an operation, but rather in the way responsibility is allocated for carrying out activities, e.g. reduced the number of direct suppliers, thus allowing development of closer relationships with suppliers.
Disintermediation
Another trend in some supply networks is that of companies within a network bypassing customers or suppliers to make contact directly with customers customers or suppliers suppliers. Cutting out the middlemen in this way is called disintermediation.
Co-opetition
One approach to thinking about supply networks sees any business as being surrounded by four types of players: suppliers, customers, competitors and complementors.
6.12
6.13
In-house or outsource? Do or buy? The vertical integration decision No single business does everything that is required to produce its products and services: Bakers do not grow wheat or even mill it into flour.
Banks do not usually do their own credit checking: they retain the services of specialist credit checking agencies that have the specialized information systems and expertise to do it better. This process is called business process outsourcing (BPO). The reason for doing this is often primarily to reduce cost. The outsourcing decision determines the operation should do itself and what should it buy in? This is often referred to as the do-or-buy decision when individual components or activities are being considered, or vertical integration when it is the ownership of whole operations that is being decided. Vertical integration is the extent to which an organization owns the network of which it is a part. It usually involves an organization assessing the wisdom of acquiring suppliers or customers.
6.13
6.14
Direction, extent and balance of vertical integration
Balance should excess capacity be used to supply other companies? Raw material suppliers
Component maker
Assembly operation
Wholesaler
Retailer
Extent Narrow process span Extent Wide process span
Direction Upstream vertical integration
Direction Downstream vertical integration
6.14
6.15
Deciding whether to outsource or not
Is activity of strategic importance
Does No company have No specialized knowledge
Is companys operations performance superior?
No
Is significant operations No performance improvement likely? Yes
Explore outsourcing this activity
Yes
Yes
Yes
Explore keeping this activity in-house
6.15
6.16
Facility Location
There are three important things in retailing location, location and location, Lord Sieff - Marks and Spenser boss. Location of a facility is critical to the success of any business. For example, mis-locating a fire service station can slow down the average journey time of the fire crews in getting to the fires; locating a factory where there is difficulty attracting labour with appropriate skills will affect the effectiveness of the factorys operations. Location decisions will usually have an effect on an operations costs as well as its ability to serve its customers (and therefore its revenues). Also, location decisions, once taken, are difficult to undo. The costs of moving an operation can be hugely expensive and the risks of inconveniencing customers very high. No operation wants to move very often.
6.16
6.17
Importance of Location
o Up to 25% of the products selling cost
o Once a company commits to a location, many costs are fixed and difficult to change, e.g. Energy Labor o Location depends on the type of business
Manufacturing minimizing cost Retail and professional services maximizing revenue Warehouse cost and speed of delivery
6.17
6.18
Reasons for Location Decisions

Two stimuli often cause organizations to change locations:
changes in demand for their goods and services, and changes in supply of their inputs.
A: Changes in demand 1. A shift in customer demand. For example, as garment manufacture moved to Asia, suppliers of zips, threads, etc. started to follow them.
2. Changes in the volume of demand To meet higher demand, an operation could expand its existing site, or choose a larger site in another location, or keep its existing location and find a second location for an additional operation;
.
6.18
6.19
Reasons for Location Decisions
B: Changes in supply. 1. Changes in the availability of the supply of inputs to the operation.
For example, a mining or oil company will need to relocate as the minerals it is extracting become depleted.
2. Changes in the cost of the supply of inputs to the operation.

A manufacturing company might choose to relocate its operations to a part of the world where labour costs are low, because the equivalent resources (people) in its original location have become relatively expensive.
6.19
6.20
Location Options / Alternatives

Expansion of an existent facility.
Only possible if there exists enough space at the current site. Attractive alternative when the current facility location is good enough for the company. Lower costs than other options
Start a new facility in a new area.

Sometimes this is a more advantageous option than the previous one (if there are problems related to loss of focus on the companys objectives).
Shut down of a facility and (or not) starting of a new one somewhere else. Moving production from one plant to other.
6.20
6.21
Location Case Studies

Case 1: Ikea has not opened a center in Valencia before and feels now is the right time.
Case 2: After a fire at its painting facility in Stutgart, Schefenacker AG, the biggest rear view mirror manufacturer in the world, decides to open a new facility in Mosonmagyorovar (Hungary). It will be the third painting facility of this type after (USA and South Korea). Case 3: Grupo F Segura, following the requirements of their clients (mainly VW group) opens a factory in Hungary. Case 4: Ford Motor Company is to decide where to assemble the next generation of Ford Focus and Ford Fiesta. Case 5: Zara UK is opening a new store in Canary Wharf, a new upmarket retail park.
6.21
6.22
LOCATION DECISIONS
PROXIMITY TO MARKETSS
Service organizations (drug stores, restaurants, post offices) find proximity to market is the primary location factor Manufacturing useful to be close to customers when transporting finished goods is expensive or difficult
PROXIMITY TO SUPPLIERS
Firms locate near their raw materials and suppliers because of: Perishability of goods, Transportation costs, Bulkness of goods
PROXIMITY TO COMPETITORS
Clustering the location of competing companies near each other, often because of a critical mass of information, talent, venture capital, or natural resources
6.22
6.23
Supply-side and demand-side factors in location decisions

The location decision for any operation is determined by the relative strength of supply-side and demand-side factors. Supply-side factors which vary to influence costs as location varies. For example: labour costs land costs energy costs transportation costs community /business environment factors (e.g. local tax rates) The operation Demand-side factors which vary to influence customer service/revenue as location varies. For example: labour skills suitability of site Image convenience for customers
6.23
6.24
Supply-Side Factors
Labour costs. The costs of employing people with particular skills can vary between different
areas in any country, but are likely to be more significant when international comparisons are made.
Land costs. The cost of acquiring the site itself is sometimes a relevant factor in choosing a
location. Land and rental costs vary between countries and cities. At a more local level, land costs are also important. A retail operation, when choosing high-street sites, will pay a particular level of rent only if it believes it can generate a certain level of revenue from the site.
Energy costs. Operations which use large amounts of energy, such as aluminium smelters, can
be influenced in their location decisions by the availability of relatively inexpensive energy.
Transportation costs. Transportation costs include both the cost of transporting inputs from
their source to the site of the operation, and the cost of transporting goods from the site to customers. Whereas almost all operations are concerned to some extent with the former, not all operations transport goods to customers; rather, customers come to them (for example, hotels).
Community factors. Community factors are those influences on an operations costs which
derive from the social, political and economic environment of its site. These include: local tax rates, capital movement restrictions, government financial assistance government planning assistance, political stability, local attitudes to inward investment language, local amenities (schools, theatres, shops, etc.), availability of support services history of labour relations and behaviour, environmental restrictions and waste disposal planning procedures and restrictions. Slack, Chambers and Johnston, Operations Management, 6th Edition,
6.24
Nigel Slack, Stuart Chambers, and Robert Johnston 2010
6.25
Demand-Side Factors
Labour skills. The abilities of a local labour force can have an effect on customer reaction to
the products or services which the operation produces. For example, science parks are usually located close to universities because they hope to attract companies that are interested in using the skills available at the university.
The suitability of the site itself. Different sites are likely to have different intrinsic
characteristics which can affect an operations ability to serve customers and generate revenue. For example, the location of a luxury resort hotel which offers up-market holiday accommodation is very largely dependent on the intrinsic characteristics of the site. Located next to the beach, surrounded by waving palm trees and overlooking a picturesque bay, the hotel is very attractive to its customers. Move it a few kilometres away into the centre of an industrial estate and it rapidly loses its attraction.
Image of the location. Some locations are firmly associated in customers minds with a
particular image. Suits from Savile Row (the centre of the up-market bespoke tailoring district in London) may be no better than high-quality suits made elsewhere but, by locating its operation there, a tailor has probably enhanced its reputation and therefore its revenue. Convenience for customers. Of all the demand-side factors, this is, for many operations, the most important. Locating a general hospital, for instance, in the middle of the countryside may have many advantages for its staff, and even perhaps for its costs, but it clearly would be very inconvenient to its customers. Because of this, general hospitals are located close to centres of demand. Similarly with other public services and restaurants, stores, banks, petrol filling stations etc., location determines the effort to which customers have to go in order to use the operation.
6.25
6.26
Location Techniques
Although operations managers must exercise considerable judgement in the choice of alternative locations, there are some systematic and quantitative techniques which can help the decision process. We describe three here the weighted-score method and the centre-of-gravity, and locational break-even analysis method.
6.26
6.27
Centroid / Center of Gravity Method

The centroid / center of gravity method is used for locating single facilities that considers existing facilities, the distances between them, and the volumes of goods to be shipped between them Used to find a site that minimizes transportation cost This methodology involves formulas used to compute the coordinates of the two-dimensional point that meets the distance and volume criteria stated above
11-27
6.27
6.28
Centroid / Center of Gravity Method

150 120 90 60 30
30
60
90
120
150
Cx =
d V V
ix i
Cy =
d V V
iy i
Cx , Cy = Gravity Center co-ordinates dix , diy = coordinates of existing facilities Vi = Volume of goods moved from/to i
6.28
6.29
Center of Gravity Method Steps
6.29
6.30
Example: Centroid / Center of Gravity Method
11-30
Centroid method example

Several automobile showrooms are located according to the following grid which represents coordinate locations for each showroom
Y Q
(790,900)
S ho wro o m
No o f Z-Mo b ile s s o ld p e r mo nth 1250 1900 2300
D
(250,580)
A D
A
(100,200) (0,0)
Q
X
Question: What is the best location for a new Z-Mobile warehouse/temporary storage facility considering only distances and quantities sold per month? Slack, Chambers and Johnston, Operations Management, 6th Edition,
6.30
Nigel Slack, Stuart Chambers, and Robert Johnston 2010
6.31

Determining Existing Facility Coordinates
Y Q
(790,900)
11-31
To begin, you must identify the existing facilities on a twodimensional plane or grid and determine their coordinates.
(0,0)
D
(250,580)
A
(100,200)
S ho wro o m
No o f Z-Mo b ile s s o ld p e r mo nth 1250 1900 2300
You must also have the volume information on the business activity at the existing facilities.
A D Q
6.31
6.32

Determining the Coordinates of the New Facility (continued)
You then compute the new coordinates using the formulas:
Cx = 100(1250) + 250(1900) + 790(2300) 2,417,000 = = 443.49 1250 + 1900 + 2300 5,450
11-32
200(1250) + 580(1900) + 900(2300) 3,422,000 Cy = = = 627.89 1250 + 1900 + 2300 5,450
You then take the coordinates and place them on the map:
Y Q
(790,900)
D
(250,580)
A
(100,200) (0,0)
6.32
New location of facility Z about (443,628)
S ho wro o m
No o f Z-Mo b ile s s o ld p e r mo nth 1250 1900
A D
Q Operations Management 2300 , 6th Edition, XSlack, Chambers and Johnston, Nigel Slack, Stuart Chambers, and Robert Johnston 2010
6.33
Factor-Rating Method
Most widely used location technique Useful for service & industrial locations Rates locations using factors (critical success factors)
Intangible (qualitative) factors
Example: Education quality, labor skills
Tangible (quantitative) factors

Example: Short-run & long-run costs
6.33
6.34
Factor-Rating Method
Most popular because a wide variety of factors can be included in the analysis Six steps in the method
Develop a list of relevant factors called critical success factors Assign a weight to each factor (which should add up to 1 or 100 % ) Develop a scale / rating for each factor (1-5) (1 = poor, 5 = excellent) Score each location for each factor (out of 100%) Multiply score by weights for each factor for each location Recommend the location with the highest point score
6.34
6.35
Factor-Rating Example
Critical Success Factor Scores (out of 100) Weight France Denmark
Weighted Scores France Denmark
Labor availability and attitude.25

People-to car ratio Per capita income .05
70 50 85 75 60
60 60 80 70 70
(.25)(70) = 17.5 (.25)(60) = 15.0 (.05)(50) = 2.5 (.05)(60) = 3.0
.10 Tax structure.39 Education and health .21 Totals 1.00
(.10)(85) = 8.5 (.10)(80) = 8.0 (.39)(75) = 29.3 (.39)(70) = 27.3 (.21)(60) = 12.6 (.21)(70) = 14.7 70.4 68.0
6.35
6.36
Locational Break-Even Analysis

Method of cost-volume analysis used for industrial locations Steps
Determine fixed & variable costs for each location Plot total cost for each location Select location with lowest total cost for expected production volume Must be above break-even
6.36
6.37
Locational Break-Even Analysis Example

Three locations:
City
Fixed Cost
Variable Cost $75 $45 $25
Total Cost $180,000 $150,000 $160,000
Akron $30,000 Bowling Green $60,000 Chicago $110,000 Selling price = $120 Expected volume = 2,000 units
Total Cost = Fixed Cost + Variable Cost x Volume
6.37
6.38
Locational Break-Even Analysis Example

$180,000 $160,000 $150,000 $130,000 $110,000 $80,000 $60,000 $30,000 $10,000 | 0
Annual cost
Akron lowest cost

| |
Bowling Green lowest cost

| | |
Chicago lowest cost

|
500
1,000
1,500
2,000
2,500
3,000
Volume
6.38
6.39
End
End
6.39

Lesson 8 - Supply Network Design

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6.

Chapter 6 Supply network design:

Supply network design

Supply Network Design network design

Design Planning and control

People, jobs and organization Product/service design

Key teaching objectives

Key operations questions

How much capacity should an operation plan to have?

Every operation is part of a larger and interconnected

This supply network will include suppliers suppliers and

At a strategic level, operations managers are involved in

Network design starts with setting the networks strategic

Operations network for a plastic homeware company

Direct supply Information

Operations network for a shopping mall

Second tier customers

Security services Cleaning services Retailers Retail customers

Cleaning materials supplier

Operations performance should be seen as a whole supply chain issue

Configuring the supply network

Direction, extent and balance of vertical integration

Extent Narrow process span Extent Wide process span

Direction Upstream vertical integration

Direction Downstream vertical integration

Deciding whether to outsource or not

Is activity of strategic importance

Does No company have No specialized knowledge

Is companys operations performance superior?

Is significant operations No performance improvement likely? Yes

Explore outsourcing this activity

Explore keeping this activity in-house

Reasons for Location Decisions

Reasons for Location Decisions

2. Changes in the cost of the supply of inputs to the operation.

Location Options / Alternatives

Start a new facility in a new area.

Location Case Studies

Supply-side and demand-side factors in location decisions

Nigel Slack, Stuart Chambers, and Robert Johnston 2010

Centroid / Center of Gravity Method

Centroid / Center of Gravity Method

Center of Gravity Method Steps

Example: Centroid / Center of Gravity Method

Centroid method example

No o f Z-Mo b ile s s o ld p e r mo nth 1250 1900 2300

Nigel Slack, Stuart Chambers, and Robert Johnston 2010

Example: Centroid / Center of Gravity Method

No o f Z-Mo b ile s s o ld p e r mo nth 1250 1900 2300

Example: Centroid / Center of Gravity Method

200(1250) + 580(1900) + 900(2300) 3,422,000 Cy = = = 627.89 1250 + 1900 + 2300 5,450

New location of facility Z about (443,628)

No o f Z-Mo b ile s s o ld p e r mo nth 1250 1900

Tangible (quantitative) factors

Weighted Scores France Denmark

Labor availability and attitude.25

(.25)(70) = 17.5 (.25)(60) = 15.0 (.05)(50) = 2.5 (.05)(60) = 3.0

.10 Tax structure.39 Education and health .21 Totals 1.00

Locational Break-Even Analysis

Locational Break-Even Analysis Example

Variable Cost $75 $45 $25

Total Cost $180,000 $150,000 $160,000

Total Cost = Fixed Cost + Variable Cost x Volume

Locational Break-Even Analysis Example