Chapter 6 Supply Network Design

Slack, Chambers and Johnston, Operations Management 5th Edition © Nigel Slack, Stuart Chambers, and Robert Johnston 2007

Chapter 6

Supply network design

Source: Getty Images



Process design


Layout and flow

Process technology

Job design

Product/service design

Operations strategy

Design Improvement

Planning and control

Operations management


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

There are many reasons for Dell’s success but most of them comefrom the way Dell configures its supply networks

Source: Corbis/ Gianni Giansanti/ Sygma


Plastic homeware

manufacturer

Operations network for a plastic homeware company

First-tier suppliers

Packaging supplier

Plastic stockist

First-tier customers

Wholesaler

Second-tier suppliers

Ink supplier

Cardboard company

Chemical company

Second-tier customers

Retailer

Retailer

Direct supplyInformation


Operations network for a shopping mall

First-tier suppliers

Cleaning services

Security services

Maintenance services

Shopping mall

First-tier customers

Retailers

Second-tier customers

Retail customers

Direct supplyInformation

Second-tier suppliers

Recruitment agency

Cleaning materials supplier

Equipment supplier


Operations performance should be seenas 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


Direction, extent and balance of vertical integration

Extent – Narrow process span

Extent – Wide process span

Direction – Upstream vertical integration

Direction – Downstream vertical

integration

WholesalerRaw

material suppliers

Component maker

Assembly operation

Retailer

Balance – Should excess capacity be used to supply other companies?


The decision logic of outsourcing

Is activity of strategic

importance?

Explore keeping this activity in-house

Yes Yes

Does company have

specialized knowledge?

NoIs company’s

operations performance

superior?

Yes

NoIs significant operations

performance improvement

likely?

Yes

No Explore outsourcing this activity

No


Supply-side and demand-side factorsin location decisions

Theoperation

Examples of supply-side factors that vary with location, influencing costs

labour costsland costsenergy coststransportation costscommunity factors

Examples of demand-sidefactors that vary withlocation, influencingcustomer service/revenue

labour skillssuitability of siteimageconvenience for customers


Labour

Transport

Fabric

Supplies

Customs duties

€15.55France

€14.33Portugal

€11.43Turkey

€11.43Thailand

€11.13Morocco

€10.82Romania

€10.37China

€9.60Myanmar

Cost in euros2 4 6 8 10 12 14 160

Cost breakdown of a shirt made in various countriesand sold in France


Location – Where is the market?

Population density

Low High


The balance of capacity

Capacity can either lead or lag demand

Inventory can be used to smooth out the peaks

Spare capacity can be used to supply other operations

The danger of this is that the original operation may receive a lower level of service


Unit cost curves for individual service centres of varying capacities

5 10 15Average number of bays in use

Re

al c

ost p

er

cust

om

er

serv

ed

Cost curve for 5 bay service centre



‘Economy of scale’ curve for hotel

capacityDiseconomies

of scaleEconomies

of scale


Capacity lags demand

Vo

lum

eTime

Capacity leads demand

Vo

lum

e

Time

Capacity leading demand and capacity lagging demand

DemandDemand

Capacity

Capacity


Vo

lum

e

Time

Smoothing with inventory

Demand

Capacity


Key Terms Test

Demand sideThe chains of customers, customers’ customers, etc., that

receive the products and services produced by an operation.

First-tierThe description applied to suppliers and customers who are in

immediate relationships with an operation with no intermediary operations.

Second-tierThe description applied to suppliers and customers who are

separated from the operation only by first-tier suppliers and customers.


Key Terms Test

Immediate supply networkThe suppliers and customers who have direct contact with

an operation.

Total supply networkAll the suppliers and customers who are involved in supply

chains that ‘pass through’ an operation.

DownstreamThe other operations in a supply chain between the

operation being considered and the end customer.


Key Terms Test

UpstreamThe other operations in a supply chain that are towards the

supply side of the operation.

OutsourcingThe practice of contracting out to a supplier work previously

done within the operation.

Vertical integrationThe extent to which an operation chooses to ‘own’ the

network of processes that produce a product or service; often associated with the ‘do or buy’ decision.


Key Terms Test

LocationThe geographical position of an operation or process.

Long-term capacity managementThe set of decisions that determine the level of physical capacity

of an operation in whatever the operation considers to be ‘long-term’; this varies between industries, but is usually in excess of one year.

DisintermediationThe emergence of an operation in a supply network that

separates two operations that were previously in direct contact.


Key Terms Test

Spatially variable costsThe costs that are significant in the location decision that vary with

geographical position.

Weighted-score methodA technique for comparing the 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.

Centre-of-gravity methodA technique that uses the physical analogy of balance to determine

the geographical location that balances the weighted importance of the other operations with which the one being located has a direct relationship.


Key Terms Test

Fixed-cost breaksThe volumes of output at which it is necessary to invest in

operations facilities that bear a fixed cost.

Economies of scaleThe manner in which the costs of running an operation

decrease as it gets larger.

Diseconomies of scaleA term used to describe the extra costs that are incurred in

running an operation as it gets larger.


Key Terms Test

Capacity leadingThe strategy of planning capacity levels such that they are

always greater than or equal to forecast demand.

Capacity laggingThe strategy of planning capacity levels such that they are

always less than or equal to forecast demand.

Chapter 6 Supply Network Design

Documents

stuart chambers

robert johnston

edition nigel slack

customers slack

operations network

control slack

supply networks slack

significant operations