Transcript Prepared by: Sheena ray

Session 2:
Chapter 6: Supply Network Design
PREPARED BY: SHEENA RAY
The Supply Network
Perspective
 Supply Network: The network of supplier and
customer operations that have relationships
with an operation.
 Supply Side: The chains of suppliers ,
suppliers’ suppliers etc, that provide parts ,
information or services to an operation.
 Demand Side: The chains of customers,
customers’ customers etc. that receive the
products and services provided by an
operation.
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The Supply Network
Perspective
 First tier – The description applied to suppliers and
customers who are in immediate relationships with
an operations with no intermediary operations.
 Second Tier – The description applied to suppliers
and customers who are separated from the
operation only by first tier suppliers and customers.
 Immediate supply network – The suppliers and
customers who have direct contact with an
operation.
 Total Supply Network – All the suppliers and
customers who are involved in supply chains that
pass through an operation.
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Why consider the whole
supply network
1.It helps an understanding of competitiveness
2.It helps identify significant links in a network
Downstream: The other operations in a supply
chain between the operation being
considered and the end customer.
Upstream : The other operations in a supply
chain that are towards the supply side of the
operation.
 3.It helps focus on long term issues
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Design Decisions in Supply
networks
 1. How should the network be configured ? This has two
aspects. 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.
 Outsourcing – The practice of contracting out to a supplier ,
work previously done within the operation.
 Vertical Integration – The extent to which an operation
chooses to own the network of processes that produce a
product or service, the term is often associated with the ‘do
or buy ‘ decision.
 2. Where should each part of the network owned by the
company be located. Should they be near the suppliers or
near the raw materials or somewhere close by. This decision
is called the operations location decision
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Design Decisions in Supply
Network
 3.What physical capacity should each part of the
network owned by the company have at any
point in time? How large should the factory be?
If it expands, should it do so in large capacity
steps or small ones? Should it make sure that is
always has more capacity than anticipated
demand or less? These decisions are called long
term capacity management decisions.
 Long Term Capacity Management –The set of
decisions that determine the level of physical
capacity of an operation considers to be long
term; this will vary between industries, but is
usually in excess of one year.
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Configuring the Supply
Network
 1. Changing the shape of the supply network
 2.Disintermediation
 3. Co-opetition
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Configuring the Supply
network
 1. Changing the scope of the supply network –
Reconfiguring a supply network involves parts of the
operation being merged-not necessarily in the sense
of ownership of any parts of an operation, but rather
in the way responsibility is allocated for carrying out
activities.
 The most common example of network
reconfiguration has come through the many
companies that have recently reduced the number
of direct suppliers. The complexity of dealing with
many hundreds of suppliers may both be expensive
for an operation , prevent the operation from
developing a close relationship with a supplier. It is
not easy to be close to hundreds of suppliers
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Configuring the supply
network
 2. 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’ supplier. ‘ Cutting out
the middlemen’ in this way is called
disintermediation.
 Example : Internet has allowed some
suppliers to ‘disintermediate’ traditional
retailers in supplying goods and services to
customers.
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Configuring the supply
network
 3. 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.
 All players in the network, can be both friends
and enemies at different times. The term
used to capture this idea is ‘ co – opetition’ .
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In-house or Outsource ? Do or Buy?
The Vertical Integration Decision
 Outsourcing or ‘ do or buy decision’ or vertical
integration
Vertical Integration can be defined in terms of
three factors:
 1.The direction of vertical integration
 2. The extent of Vertical Integration
 3.The balance among stages
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Making the outsourcing/
vertical integration
 Whether it is referred to as do or buy, vertical
integration or no vertical integration, in
house or outsourced supply, the choice facing
operations is rarely simple.
 Yet the question itself is relatively simple,
even if the decision itself is not: Does in house
or outsourced supply in a particular set of
circumstances give the appropriate
performance objectives that it requires to
compete more effectively in its markets?
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Deciding whether to
Outsource
 Although the effect of outsourcing on the operation’s performance
objective i.e. s important, there are other factors that companies
take into account when deciding whether outsourcing an activity is a
sensible option.
 1. If an activity has a long term strategic importance to a company.
 2.A company has specialized skills or knowledge of an activity.
 3. A company’s operations performance is already too superior to
any potential supplier.
 4.But even if its current performance is below that of potential
suppliers, it might not outsource the activity if it feels it could
significantly improve its performance.
 Refer to Table 6.1 – How In – house and out sourced supply may
affect an operation’s performance objective.
 Figure 6.4 – The decision logic of outsourcing
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The location of capacity
 It was Lord Sieff, one time boss of Marks and
Spencer , the UK based UK retail organiser ,
who said, ‘ There are three important things
in retailing – location , location and location.
 Location decisions will usually have an effect
on an operations’ costs as well as its ability to
serve its customers and therefore its
revenues.
 Location decisions once taken , are difficult to
undo.
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Reasons for location
decisions
 Two stimuli often cause organizations to change
locations:
 1.Changes in 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; the last two options will involve a location
decision.
 High – visibility operations may not have the choice
of expanding on the same site to meet rising
demand.
 2. Changes in Supply: Changes in cost ,or availability,
of the supply of inputs to the operation is the other
stimulus for relocation.
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The objectives of the
location decision
 The aim of the location decision is to achieve
an appropriate balance between 3 related
objectives:
 The spatially variable costs of the operation
Spatially variable costs – The costs that are
significant in the location decision that vary
with geographical position.
 The service the operation is able to provide to
its customers
 The revenue potential of the operation
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The Objectives Of The
Location Decision
 In making decisions about where to locate an operation ,
operation managers are concerned with minimizing
spatially variable costs and maximizing revenue / customer
service.
Fixed Costs – are costs that do not change in response to
changes to activity levels.
Variable costs – Costs that change in proportion to changes of
activity.
 Location affects both of these but not equally for all types
of operation.
 However factors affecting costs and revenue are different
for products and services.
 For products location of its production are unlikely to affect
its revenue. Services, meanwhile , often have both costs
and revenues affected by location.
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 The Location decision for any
operation is determined by the
relative strength of supply side
and demand side factors.
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Supply Side Influences
 Labour Costs
 Land Costs
 Energy Costs\
 Transportation Costs
 Community Factors
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Supply Side Influences
 Community Factors are those influences on an
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operation’s costs which derive from social, political
and economic environment of its site. These include:
Local tax rates
Capital movement restrictions
Government Financial assistance
Political Stability
Local attitudes to Inward Investment
Language
Local amenities
Availability of Support Services
History of Labour relations and behavior
Environmental restrictions and Waste disposal
Planning Procedures and restrictions
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Demand Side Influences
 Labour Skills
 The Suitability of the site itself
 Image of the location
 Convenience for Customers
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Location techniques
 Although operations managersmust exercise
considerable judgement in the choice of
alternative locations, there are some
systematic and quantitative techniques which
can help the decision process.
 We comprehend one method hereThe Weighted Score Method
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Location techniques –
Weighted Score Method
 Weighted Score Method -A technique for comparing the
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attractiveness of alternative locations that allocates a
score to the factors that are significant in the decision and
weights each score by the significance of the factor.
The procedure involves, first of all identifying the criteria
which will be used to evaluate the various locations.
Second, it involves establishing the relative importance
of each criterion and giving weighting factors to them.
Third, it means rating each location according to each
criterion.
The scale of the score is arbitrary.
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