Supply Chain Design Chapter 10 Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall10- 01

Supply Chain DesignChapter 10

Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall 10- 01

What is Supply Chain Design?

Supply Chain Design

Designing a firm’s supply chain to meet the competitive priorities of the firm’s operations strategy.

10- 02Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall

Service/Product

Processes Supply Chain

Link Services/Products with Internal Processes

Link Services/Products with External Supply Chain

Link Services/Products with Customers, Suppliers, and Supply Chain Processes

Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall

Creating an Effective Supply Chain

10- 03

Supply Chain Efficiency Curve


Tota

l cos

ts

Supply chain performance

New supply chain efficiency curve with changes in design and execution

Inefficient supply chain operations Area of

improved operations

Improve perform-ance

Reduce costs

Supply Chain Design Pressures

• Dynamic sales volumes

• Customer service levels

• Service/product proliferation

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Service Supply Chain


Homecustomers

Homecustomers

Commercialcustomers

Commercialcustomers

Flowers-on-Demand floristFlowers-on-Demand florist

PackagingPackaging Flowers: Local/International

Flowers: Local/International

Arrangement materials

Arrangement materials

FedEx delivery service

FedEx delivery service

Local delivery service

Local delivery service

Internetservice

Internetservice

Maintenance services

Maintenance services

Manufacturing Supply Chain


East Coast West Coast East Europe West Europe Retail

USA Ireland Distribution centers

ManufacturerIreland Assembly

Poland USA Canada Australia MalaysiaTier 3 Raw materials

Germany Mexico USA ChinaTier 2 Components

Germany Mexico USATier 1Major

subassemblies

Inventory Measures

Average aggregate inventory

value

= +

Value of each

unit of item B

Number of units of item B typically on

hand

Value of each

unit of item A

Number of units of item A typically on

hand

Weeks of supply = Average aggregate inventory valueWeekly sales (at cost)

Inventory turnover = Annual sales (at cost)Average aggregate inventory value


Example 10.1

The Eagle Machine Company averaged $2 million in inventory last year, and the cost of goods sold was $10 million.

The breakout of raw materials, work-in-process, and finished goods inventories is on the following slide.

The best inventory turnover in the company’s industry is six turns per year. If the company has 52 business weeks per year, how many weeks of supply were held in inventory? What was the inventory turnover? What should the company do?


Example 10.1


Example 10.1

The average aggregate inventory value of $2 million translates into 10.4 weeks of supply and 5 turns per year, calculated as follows:

Weeks of supply =

Inventory turns =

= 10.4 weeks$2 million($10 million)/(52 weeks)

= 5 turns/year$10 million$2 million


Application 10.1A recent accounting statement showed total inventories (raw materials + WIP + finished goods) to be $6,821,000. This year’s “cost of goods sold” is $19.2 million. The company operates 52 weeks per year. How many weeks of supply are being held? What is the inventory turnover?


= = 18.5 weeks$6,821,000($19,200,000)/(52 weeks)

Inventory turnover = = 2.8 turns$19,200,000$6,821,000


• Financial measures–Total revenue–Cost of goods sold –Operating expenses–Cash flow–Working capital–Return on assets (ROA)

Measures of Supply Chain Financial Performance


SCM Decisions Affecting ROA


Return on assets (ROA)

Increase ROA with higher net income

and fewer total assets

Total assetsAchieve the same

or better performance with

fewer assets

Working capitalReduce working

capital by reducing inventory investment,

lead times, and backlogs

Fixed assetsReduce the number

of warehouses through improved

supply chain design

Net incomeImprove profits

with greater revenue and lower

costs

Total revenueIncrease sales through

better customer service

Cost of goods soldReduce costs of

transportation and purchased materials

Operating expensesReduce fixed expenses by

reducing overhead associated with supply

chain operations

Net cash flowsImprove positive cash flows by

reducing lead times and backlogs

InventoryIncrease inventory turnover

Inventory Placement

• Centralized placement

• Inventory pooling

• Forward placement


What is Mass Customization?

Mass customization

A strategy whereby a firm’s highly divergent processes generate a wide variety of customized services or products at reasonably low costs.

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Mass Customization

• Competitive advantages– Managing customer relationships– Eliminating finished goods inventory– Increasing perceived value of services or products

• Supply chain design for mass customization– Assemble-to-order strategy– Modular design– Postponement


Component supplier

Standardized component inventory

Order based on forecast

Fabrication Assembly Customer

Customer order

Supply to forecasted demand Supply as needed

Supply as needed

Supply Chain Design for Assemble-to-Order Strategy


Outsourcing Processes

• Make-or-buy decision

• Vertical integration–Backward integration–Forward integration

• Outsourcing–Offshoring


Outsourcing Decision Factors

• Comparative Labor Costs• Rework and Product Returns• Logistics Costs• Tariffs and Taxes• Market Effects• Labor Laws and Unions• Internet


Outsourcing Potential Pitfalls

• Pulling the Plug too Quickly

• Technology Transfer

• Process Integration


Example 10.2

Thompson manufacturing produces industrial scales for the electronics industry. Management is considering outsourcing the shipping operation to a logistics provider experienced in the electronics industry. Thompson’s annual fixed costs of the shipping operation are $1,500,000, which includes costs of the equipment and infrastructure for the operation. The estimated variable cost of shipping the scales with the in-house operation is $4.50 per ton-mile. If Thompson outsourced the operation to Carter Trucking, the annual fixed costs of the infrastructure and management time needed to manage the contract would be $250,000. Carter would charge $8.50 per ton-mile. What is the break-even quantity?


Example 10.2

Q =Fm – Fbcb – cm

= 312,500 ton-miles

=1,500,000 – 250,0008.50 – 4.50


Strategic Implications

• Efficient supply chains – Build-to-stock

• Responsive supply chains– Assemble-to-order– Make-to-order– Design-to-order


Environments


Factor Efficient Supply Chains Responsive Supply Chains

Demand Predictable, low forecast errors

Unpredictable, high forecast errors

Competitive priorities

Low cost, consistent quality, on-time delivery

Development speed, fast delivery times,

customization, volume flexibility, variety, top

quality

New-service/product

introduction

Infrequent Frequent

Contribution margins

Low High

Product variety Low High

Design Features


Factor Efficient Supply Chains Responsive Supply Chains

Operation strategy Make-to-stock or standardized services or

products; emphasize high volumes

Assemble-to-order, make-to-order, or customized

service or products; emphasize variety

Capacity cushion Low HighInventory

investmentLow; enable high inventory

turnsAs needed to enable fast

delivery time

Lead time Shorten, but do not increase costs

Shorten aggressively

Supplier selection Emphasize low prices, consistent quality, on-time

delivery

Emphasize fast delivery time, customization,

variety, volume flexibility, top quality

Job Small Batch Large Batch Line Continuous Flow

Process

Efficient Supply Chain

Responsive Supply Chain

Increasing supply chain flexibility

Increasing service/product volume

Serv

ice/

Prod

uct C

hara

cter

istic

s

Stan

dard

ized

Cust

omiz

ed

Supply Chain Design Link to Processes


Solved Problem A firm’s cost of goods sold last year was $3,410,000, and the firm operates 52 weeks per year. It carries seven items in inventory: three raw materials, two work-in-process items, and two finished goods. The following table contains last year’s average inventory level for each item, along with its value.

a. What is the average aggregate inventory value?

b. How many weeks of supply does the firm maintain?

c. What was the inventory turnover last year?

Category Part Number

Average Level

Unit Value

Raw materials 115,000 $ 3.00

22,500 5.00

33,000 1.00

Work-in-process

45,000 14.00

54,000 18.00

Finished goods 62,000 48.00

71,000 62.00


Solved Problem a.

Part Number Average Level Unit Value Total Value

1 15,000 $ 3.00 =

2 2,500 5.00 =

3 3,000 1.00 =

4 5,000 14.00 =

5 4,000 18.00 =

6 2,000 48.00 =

7 1,000 62.00 =

Average aggregate inventory value =Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall 10 - 29

Solved Problem a.

$ 45,000

12,500

3,000

70,000

72,000

96,000

62,000

$360,500

Part Number Average Level Unit Value Total Value

1 15,000 $ 3.00 =

2 2,500 5.00 =

3 3,000 1.00 =

4 5,000 14.00 =

5 4,000 18.00 =

6 2,000 48.00 =

7 1,000 62.00 =

Average aggregate inventory value =


Solved Problem

b. Average weekly sales at cost = $3,410,000/52 weeks= $65,577/week


= = 5.5 weeks$360,500$65,577

c. Inventory turnover =Annual sales (at cost)

Average aggregate inventory value

= = 9.5 turns$3,410,000$360,500



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Supply Chain Design Chapter 10 Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall10- 01