Copyright 2013 Pearson Education Inc publishing as Prentice Hall 10 0 1 What is Supply Chain Design Supply Chain Design Designing a firms supply chain to meet the competitive priorities of the firms operations strategy ID: 703060
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Supply Chain DesignChapter 10
Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall
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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.
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Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall Slide3
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
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Creating an Effective Supply Chain
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Supply Chain Efficiency CurveCopyright ©2013 Pearson Education, Inc. publishing as Prentice Hall
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Total costs
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 Slide5
Supply Chain Design PressuresDynamic sales volumesCustomer service levelsService/product proliferation
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Service Supply ChainCopyright ©2013 Pearson Education, Inc. publishing as Prentice Hall
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Home
customers
Commercial
customers
Flowers-on-Demand florist
Packaging
Flowers:
Local/International
Arrangement materials
FedEx delivery service
Local delivery service
Internet
service
Maintenance servicesSlide7
Manufacturing Supply ChainCopyright ©2013 Pearson Education, Inc. publishing as Prentice Hall
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East Coast
West Coast
East Europe
West Europe
Retail
USA
Ireland
Distribution centers
Manufacturer
Ireland
Assembly
Poland
USA
Canada
Australia
Malaysia
Tier 3
Raw materials
Germany
Mexico
USA
China
Tier 2
Components
Germany
Mexico
USA
Tier 1
Major subassembliesSlide8
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 value
Weekly sales (at cost)
Inventory turnover =
Annual sales (at cost)
Average aggregate inventory value
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Example 10.1The 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?
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Example 10.1Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall
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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
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Application 10.1
A 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?
Weeks of supply =
Average aggregate inventory value
Weekly sales (at cost)
=
=
18.5 weeks
$6,821,000
($19,200,000)/(52 weeks)
Inventory turnover =
=
2.8 turns
$19,200,000
$6,821,000
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Financial measuresTotal revenueCost of goods sold Operating expensesCash flowWorking capital
Return on assets (ROA)Measures of Supply Chain Financial Performance
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SCM Decisions Affecting ROACopyright ©2013 Pearson Education, Inc. publishing as Prentice Hall
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Return on assets (ROA)
Increase ROA with higher net income and fewer total assets
Total assets
Achieve the same or better performance with fewer assets
Working capital
Reduce working capital by reducing inventory investment, lead times, and backlogs
Fixed assets
Reduce the number of warehouses through improved supply chain design
Net income
Improve profits with greater revenue and lower costs
Total revenue
Increase sales through better customer service
Cost of goods sold
Reduce costs of transportation and purchased materials
Operating expenses
Reduce fixed expenses by reducing overhead associated with supply chain operations
Net cash flows
Improve positive cash flows by reducing lead times and backlogs
Inventory
Increase inventory turnoverSlide15
Inventory PlacementCentralized placementInventory pooling
Forward placementCopyright ©2013 Pearson Education, Inc. publishing as Prentice Hall
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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 CustomizationCompetitive advantagesManaging customer relationshipsEliminating finished goods inventory
Increasing perceived value of services or productsSupply chain design for mass customizationAssemble-to-order strategyModular design
Postponement Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall 10 -
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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
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Outsourcing Processes
Make-or-buy decision
Vertical integrationBackward integrationForward integrationOutsourcing
Offshoring
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Outsourcing Decision FactorsComparative Labor CostsRework and Product ReturnsLogistics CostsTariffs and Taxes
Market EffectsLabor Laws and UnionsInternetCopyright ©2013 Pearson Education, Inc. publishing as Prentice Hall
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Outsourcing Potential PitfallsPulling the Plug too QuicklyTechnology TransferProcess Integration
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Example 10.2Thompson 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?
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Example 10.2
Q
=
F
m
–
F
b
c
b
–
c
m
=
312,500 ton-miles
=
1,500,000 – 250,000
8.50 – 4.50
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Strategic ImplicationsEfficient supply chains
Build-to-stock
Responsive supply chainsAssemble-to-orderMake-to-order
Design-to-order
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EnvironmentsCopyright ©2013 Pearson Education, Inc. publishing as Prentice Hall
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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
HighSlide26
Design FeaturesCopyright ©2013 Pearson Education, Inc. publishing as Prentice Hall
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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
High
Inventory investment
Low; enable high inventory turns
As 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 qualitySlide27
Job
Small Batch
Large Batch
Line
Continuous Flow
Process
Efficient Supply Chain
Responsive Supply Chain
Increasing supply chain flexibility
Increasing service/product volume
Service/Product Characteristics
Standardized
Customized
Supply Chain Design Link to Processes
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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
1
15,000
$ 3.00
2
2,500
5.00
3
3,000
1.00
Work-in-process
4
5,000
14.00
5
4,000
18.00
Finished goods
6
2,000
48.00
7
1,000
62.00
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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
=
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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
=
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Solved Problem
b. Average weekly sales at cost = $3,410,000/52 weeks
= $65,577/week
Weeks of supply =
Average aggregate inventory value
Weekly sales (at cost)
=
=
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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