Supply Network Design

Supply Network Design

The Supply Network Perspective

A supply network perspective means setting an operation in the context of all the operations with which it interacts, some of which are its suppliers and its customers. Materials, parts, other information, ideas and sometimes people all flow through the network of customer-supplier relationships formed by all these operations. On its supply side an operation has its suppliers of parts, or information, or services. These suppliers themselves : have their own suppliers who in turn could also have suppliers, and so on.

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On the demand side the operation has customers. These customers might not be the final consumers of the operation's products or services; they might have their own set of customers.

•On the supply side is a group of operations that directly supply the operation; these are often called first-tier suppliers. They are supplied by second-tier suppliers. However, some second-tier suppliers may also supply an operation directly, thus missing out a link in the network. Similarly, on the demand side of the network, 'first-tier' customers are the main customer group for the operation.

These in turn supply 'second-tier' customers, although again the operation may at times supply second-tier customers directly. The suppliers and customers who have direct contact with an operation are called its immediate supply network, whereas all the operations which form the network of suppliers' suppliers and customers‘ customers, etc. , are called the total supply network. Homeware manufacturer supplies some of its basic products to wholesalers which supply retail outlets. However, it also supplies some retailers directly with 'made-to-order' products.

Along with the flow of goods in the network from suppliers to customers, each link in the network will feed back orders and information to its suppliers. When stocks run low, the retailers will place orders with the wholesaler or directly with the manufacturer. The wholesaler will likewise place orders with the manufacturer, which will in turn place orders with its suppliers, which will replenish their own stocks from their suppliers. It is a two-way process with goods flowing one way and information flowing the other. It is not only manufacturers that are part of a supply network.

The second (service) operation, an operation which manages an enclosed shopping mall, also has suppliers and customers that themselves have their own suppliers and customers. Figure 6. 2 shows the supply network for an operation which manages an enclosed shopping mall. Why consider the whole supply network? •There are three important reasons for taking a supply network perspective:

•It helps an understanding of competitiveness. Immediate customers and immediate suppliers, quite understandably, are the main concern to competitively minded companies.

Yet sometimes they need to look beyond these immediate contacts to understand why customers and suppliers act as they do. Any operation has only two options if it wants to understand its ultimate customers' needs at the end of the network. It can rely on all the intermediate customers and customers' customers, etc. , which form the links in the network between the company and its end-customers. Alternatively, it can look beyond its immediate customer and suppliers. Relying on one's immediate network is seen as putting too much faith in someone else's judgment of things which are central to an organization's own competitive health. It helps identify significant links in the network. The key to understanding supply networks lies in identifying the parts of the network which contribute to those performance objectives valued by end-customers. Any analysis of networks must start, therefore, by understanding the downstream end of the network. After this, the upstream parts of the network which contribute most to end-customer service will need to be identified. But they will not be equally significant. For example, the important end-customers for domestic plumbing parts and appliances are the installers and service companies that deal directly with domestic consumers.

They are supplied by 'stock holders' which must have all parts in stock and deliver them fast. Suppliers of parts to the stock holders can best contribute to their end-customers' competitiveness partly by offering a short delivery lead time but mainly through dependable delivery. The key players in this example are the stock holders. The best way of winning end-customer business in this case is to give the stock holder prompt delivery which helps keep costs down while providing high availability of parts. •It helps focus on long-term issues. There are times when circumstances render parts of a supply network weaker than its adjacent links.

A major machine breakdown, for example, or a labour dispute might disrupt a whole network. Should its immediate customers and suppliers exploit the weakness to enhance their own competitive position, or should they tolerate the problems, and hope the customer or supplier will eventually recover? A long-term supply-network view would be to weigh the relative advantages to be gained from assisting or replacing the weak link. Design decisions in supply networks •The supply-network view is useful because it prompts three particularly important design decisions.

These are the most strategic of all the design decisions treated in this part of the book. It is necessary to understand them at this point, however, because, as well as having a particularly significant impact on the strategy of the organization, they set the context in which all other process design decisions are made. The three decisions are: •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. 2- Where should each part of the network be located? If the home ware 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.

•3-What physical capacity should each part of the network have? How large should the home war factory be? Should it expand in large-capacity steps or small ones? These types of decisions are called long-term capacity management decisions.

•Note that all three of these decisions rely on assumptions regarding the level of future demand. The supplement to this chapter explores forecasting in more detail

Deciding whether to outsource

•Although the effect of outsourcing on the operation's performance objective is important, there are other factors that companies take into account when deciding if outsourcing an activity is a sensible option. For example, if an activity has long-term strategic importance to a company, it is unlikely to outsource it. For example, a retailer might choose to keep the design and development of its web site in-house even though specialists could perform the activity at less cost because it plans to move into web-based retailing at some point in the future.

Nor would a company usually outsource an activity where it had specialized skills or knowledge. For example, a company making laser printers may have built up specialized knowledge in the production of sophisticated laser drives. •This capability may allow it to introduce product or process innovations in the future. It would be foolish to 'give away' such capability. After these two more strategic factors have been considered the company's operations performance can be taken into account.

Obviously if its operations performance is already too superior to any potential supplier, it would be unlikely to outsource the activity. But also even if its performance was currently below that of potential suppliers, it may not outsource the activity if it feels that it could significantly improve its performance. Figure 6. 3 illustrates this decision logic. Outsourcing and offshoring •Two supply network strategies that are often confused are those of outsourcing and off-shoring Outsourcing means deciding to buy-in products or services rather than perform the activities in-house.

Off-shoring means obtaining products and services from operations that are based outside one's own country. Of course, one may both outsource and offshore as illustrated in Figure 6. 4. Offshoring is very closely related to outsourcing and the motives for each may be similar. Offshoring to a lower-cost region of the world is usually done to reduce an operation’s overall costs as is outsourcing to a supplier that has greater expertise or scale or both. Critical commentary •In many Instances there has been fierce opposition to companies outsourcing some off their processes.

Trade unions often point out that the only reason that outsourcing companies can do the job at lower cost is that they either reduce salaries or reduce working conditions, or both. Furthermore, they say, flexibility is only achieved by reducing job security. Employees who were once part of a large and secure corporation could find themselves as far less secure employees of a less benevolent employer with a philosophy of permanent cost-cutting. Even some proponents of outsourcing are quick to point out the problems.

There can be significant obstacles, including understandable resistance from staff who find themselves 'outsourced'. Some companies have also been guilty of 'outsourcing a Problem' . In other words, having failed to manage a process well themselves, they ship it out rather than face up to why the process was problematic in the first place. There is also evidence that, although long-term costs can be brought down when a process is outsourced, there may be an initial period when costs rise as both sides learn how to manage the new arrangement. The Location of capacity It was reputedly Lord Sieff, one-time boss of Marks and Spencer, the UK-based retail organization, who said, 'There are three important things in retailing - location, location and location', and any retailing operation knows exactly what he meant. Get the location wrong and it can have a significant impact on profits, or service. For example, misallocating 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 factory's operations.

Location decisions will usually have an effect on an operation's 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. •Reasons for location decisions Not all operations can logically justify their location. Some are where they are for historical reasons. Yet even the operations that are 'there because they're there' are implicitly making a decision not to move.

Presumably their assumption is that the cost and disruption involved in changing location would outweigh any potential benefits of a new location. Two stimuli often cause organizations to change locations: changes in demand for their goods and services, and changes in supply of their inputs. Changes in demand A change in location may be prompted by customer demand shifting. For example, as garment manufacture moved to Asia, suppliers of zips, threads, etc. started to follow them. Changes in the volume of demand can also prompt relocation.

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. A dry cleaning service may attract only marginally more business by expanding an existing site because it offers a local, and therefore convenient, service. Finding a new location for an additional operation is probably its only option for expansion.

Changes in supply. The other stimulus for relocation is changes in the cost, or 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. 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. Sometimes a business might choose to relocate to release funds if the value of the land it occupies is worth more than an alternative, equally good, location.

The objectives of the location decision

•The aim of the location decision is to achieve an appropriate balance between three related objectives:

•The Spatially variable costs the operation (spatially variable means that something changes with geographical location); •the service the operation is able to provide to its customers;

•the revenue potential of the operation.

•In for-profit organizations the last two objectives are related. The assumption is that the better the service the operation can provide to its customers, the better will be its potential to attract custom and therefore generate revenue.

In not-for-profit organizations, revenue potential might not be a relevant objective and so cost and customer service are often taken as the twin objectives of location. In making decisions about where to locate an operation, operations managers are concerned with minimizing spatially variable costs and maximizing revenue and customer service. Location affects both of these but not equally for all types of operation. For example, with most products, customers may not care very much where they were made. Location is unlikely to affect the operation's revenues significantly.

However the costs of the operation will probably be very greatly affected by location. Services, on the other hand, often have both costs and revenues affected by location. The location decision for any operation is determined by the relative strength of supply-side and demand-side factors (see Fig. 6. 5). Location techniques Although operations managers must exercise considerable judgement in the choice of alterative locations, there are some systematic and quantitative techniques which can help the decision process.

We describe two here - the weighted-score method and the centre-of-gravity method.

•Weighted-score method The procedure involves, first of dl, 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 raring each location according to each criterion. The scale of the score is arbitrary. In our example we shall use 0 to 100, where 0 represents the worst possible score and 100 the best. Worked example An Irish company which prints and makes specialist packaging materials for the pharmaceutical industry has decided to build a new factory somewhere in the Benelux countries so as to provide a speedy service for its customers in continental Europe. In order to choose a site it has decided to evaluate all options against a number of criteria, as follows:

•the cost of the site;

•the rate of local property taxation;

•the availability of suitable skills in the local labour force;

•the site's access to the motorway network;

•the site's access to the airport; the potential of the site for future expansion. After consultation with its property agents the company identifies three sites which seem to be broadly acceptable. These are known as sites A, B and C. The company also investigates each site and draws up the weighted-score table shown in Table 6. 2. It is important to remember that the scores shown in Table 6. 2 are those which the manager has given as an indication of how each site meets the company's needs specifically. Nothing is necessarily being implied regarding any intrinsic worth of the locations. Likewise, the weightings are an indication of how important the company finds each criterion in the circumstances it finds itself. The 'value' of a site for each criterion is then calculated by multiplying. its score by the weightings for each criterion. • •For location A, its score for the 'cost-of-site' criterion is 80 and the weighting of this criterion is 4, so its value is •80 X 4 = 320. All these values are then summed for each site to obtain its total weighted score. • •Table 6. 2 indicates that location C has the highest total weighted score and therefore would be the preferred choice.

It is interesting to note, however, that location C has the lowest score on what is, by the company's own choice, the most important criterion - cost of the site. The high total weighted score which location C achieves in other criteria, however, outweighs this deficiency. If, on examination of this table, a company cannot accept what appears to be an inconsistency, then either the weights which have been given to each criterion, or the scores that have been allocated, do not truly 1 reflect the company's preference. ?

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