Lecture 5 Supply Chain Network Analysis and Design

Introduction

As firms continue their searches for new ways to lower costs and improve service to their customers, the issue of where to locate logistics and manufacturing facilities has never been more complex or critical.

In addition to enhancing the efficiency and effectiveness of a logistics/supply chain operation, the redesign of a firm’s overall network can help to differentiate a firm in the marketplace.

The Need for Long-Range Planning

In the short run, a firm’s logistics/supply chain network and the locations of its key facilities are fixed.

Site availability, leases, contracts, and investments make changing facility locations impractical in the short run.

In the long run, however, the design of the overall network must be thought of as variable.

Strategic Importance of Logistics/Supply Chain Network Design

All businesses operate in a very dynamic environment in which change is the only constant.

It is questionable whether any existing logistics/supply chain network can be truly up to date.

Changing Customer Service Requirements

Logistical requirements of customers are changing in numerous ways.

Some customers have intensified their demands for more efficient and more effective logistics services.

Others are seeking relationships with suppliers who can take logistical capabilities and performance to new, unprecedented levels.

As a result, the need to reevaluate and redesign logistics/supply chain networks is of great contemporary interest.

While customer service requirements may experience change, the types of customers served may also evolve over time.

Shifting Locations of Customer and/or Supply Markets

U.S. population shifts

service and cost requirements of move to JIT-based manufacturing

the European Union

continuing searches for lower-cost manufacturing

growing economic importance of China and the Asia-Pacific

sourcing of raw materials from offshore suppliers

Other factors driving design change

Change in Corporate Ownership

Cost Pressures

Competitive Capabilities

Corporate Organizational Change

Optimization Models

precise mathematical procedures that are guaranteed to find the “best,” or optimum, solution

optimization approaches essentially select an optimal course of action from a number of feasible alternatives

Simulation Models:

Simulation is defined as “the process of designing a model of a real system and conducting experiments with this model for the purpose either of understanding the behavior of the system or of evaluating various strategies within the limits imposed by a criterion or set of criteria for the operation of the system

Heuristic Models

Heuristic models are able to accommodate broad problem definitions, but they do not provide an optimum solution.

The use of a heuristic approach can help to reduce a problem to a manageable size and search automatically through various alternatives in an attempt to find a better solution.

To reduce the number of location alternatives, the decision maker should incorporate into the heuristic program site characteristics considered to be optimal.

Other Transportation Factors:

Commercial Zone is a specific blanket area, the transportation definition of a particular city or town.

Foreign Trade Zone (FTZ) is a geographic area into which importers can enter a product and hold it without paying duties—and only paying duties or customs when is it shipped into U.S. customs territory.

Transit Privilege permits the shipper to stop a shipment in transit and to perform some function that physically changes the product’s characteristic.

Types and Importance of Items and Service Purchased:

Generics are low-risk, low-value items and services that typically do not enter the final product.

Commodities are items or services that are low in risk but high in value. Basic production materials (bolts), basic packaging (exterior box), and transportation services are examples of commodities that enhance the profitability of the company but pose a low risk.

Distinctives are high-risk, low-value items and services such as engineered items, parts that are available from only a limited number of suppliers, or items that have a long lead time.

Criticals are high-risk, high-value items that give the final product a competitive advantage in the marketplace

Strategic Sourcing MethodologyFive core principles are recognized as key drivers to achieve the

desired levels of value: Assess the total Develop individual sourcing strategies Evaluate internal requirements Focus on supplier economics Drive continuous improvement

Seven key steps are included in the overall strategic sourcing methodology:

Step 1: Project Planning and Kickoff, which suggests that a formal start to the strategic sourcing process is warranted.

Step 2: Profile Spend, to develop an accurate understanding of requirements.

Identify or reevaluate needs Define and evaluate user requirements Decide whether to make or buy

Seven key steps are included in the overall strategic sourcing methodology Step 3: Assess Supply Market

very critical step in the strategic sourcing process all potential sources of supply are identified

a thorough assessment of a supply market identify all possible suppliers prescreen all possible sources

Step 4: Develop Sourcing Strategy develop a sourcing strategy

establish whether a supplier has the capabilities RFP provides specific information as to what the buying

company

Seven key steps are included in the overall strategic sourcing methodology Step 5: Execute Sourcing Strategy

begins with an evaluation of the suppliers that remain following the RFI and RFP processes and culminates in the award of a contract.

Step 6: Transition and Integrate Important elements of this step are the finalization of the

contractual agreement, planning the transition process, and receipt or delivery of the product or service.

Step 7: Measure and Improve Performance very important, involves making a post purchase

performance evaluation.

Managing Sourcing and Procurement Processes

Determine the type of purchase

Determine the necessary levels of investment

Perform the procurement process

Evaluate the effectiveness of the strategic sourcing process Were the user’s needs satisfied? Was the investment necessary?

Supplier/Vendor Evaluation and Relationships

supplier/vendor relationships are a vital part of successful procurement strategies

partnership/alliance concept

competitive advantage of the company

Certifications and Registrations

TQM a strategy in which entire organization focused on an examination of

process variability and continuous improvement

Six Sigma is similar to TQM its approach involves training experts

ISO 9000 making sure that companies have standard processes in place that

they follow

e-Sourcing and e-Procurement

the use of electronic capabilities to conduct activities and processes relating to procurement and sourcing

Advantages

Disadvantages

e-Commerce Models Sell-side system:

Online businesses selling to individual companies or consumers

Electronic marketplace: Represents a seller-operated service that consists of a number of

electronic catalogs from vendors within a market Buy-side system

This buyer-controlled e-procurement or e-commerce service

Online trading community: maintained by a third-party technology vendor where multiple

buyers and multiple sellers in a given market can conduct business

Production Tradeoffs

Processes that can produce a range of products are said to have economies of scope.

Low-volume production runs of a wide variety of products are required to meet changing customer demand.

Tradeoffs between production processes for goods and the costs involved in manufacturing them must also be understood.

Production and supply chain costs vary for make-to-stock, assemble-to-order, and build-to-order products.

Production Challenges

Intensified competition, more demanding customers, and relentless pressure for efficiency as well as adaptability

Competitive pressures for many established manufacturers and service providers

Customers’ demand for choice and rapidly changing tastes

Production Strategies Machine flexibility

general purpose machines and equipment staffed by cross-trained workers provide the ability to produce different types of products

Routing flexibility provides managers with a choice between machines for a part’s

next operation Offshoring

activity be relocated to a contract manufacturer in another country Adaptive manufacturing

provides companies with the ability to replace planning and replanning with execution based on real-time demand

Production Planning Three planning timeframes:

Long-range plans covering a year or more, focus on major decisions regarding

capacity and aggregate production plans Medium-range plans

span 6 to 18 months and involve tactical decisions regarding employment levels and similar issues

Short-range plans ranging from a few days to a few weeks

Production Process Layout facility layout

involves the arrangement of machines, storage areas, and other resources within the four walls of a manufacturing or an assembly facility.

successful layout is one that does the following: Reduces bottlenecks in moving people or materials Minimizes materials-handling costs Reduces hazards to personnel Utilizes labor efficiently Increases morale and ease of supervision Utilizes available space effectively and efficiently Provides flexibility Facilitates coordination and face-to-face communication

Production Process Layouts Project layout

fixed location layout where the product remains in place for the duration of production

Workcenter process-focused layout that groups together similar equipment or

functions Manufacturing cell

process-focused layout that dedicates production areas to a narrow range of products that are similar in processing requirements

Assembly line product-focused layout in which machines and workers are

arranged according to the progressive sequence of operations Continuous process facilities

similar to assembly lines, with product flowing through a predetermined sequence of stops.

Packaging

design issues can affect labor and facility efficiency

can provide another level of product differentiation

design impacts ability to use space and equipment

ease of handling during materials handling and transportation

protecting the goods in the package

Production Metrics

use of measurements and key performance indicators (KPIs)

Using KPIs that are too narrow

Encouraging wrong outcomes

Focusing on issues that are not key priorities

should be properly aligned with corporate objectives

Production Metrics Total cost

all money spent on manufacturing must be summarized and the

total compared to the previous period

Total Cycle Time total cycle time is a measure of manufacturing performance that is

calculated by studying major purchased components and determining the total days on hand of each one

Delivery performance is the percentage of customer orders shipped when the customer

requested them to be shipped

Production Metrics

Quality This may vary by company but it must focus on quality from the

perspective of the customer. Safety

The standard metrics of accident/incident frequency, severity, and cost are important to monitor, with continuous improvement (i.e., reduction) as the goal.

Manufacturing Execution Systems (MES)

central software used to monitor and control production operations

linked to other enterprise tools like ERP systems, product life cycle management tools, and scheduling and planning systems