SUPPLY CHAIN MANAGEMENT (SCM)

Based on:
 Slack et al (2004) Chapters 6 & 13
 TMTCTW,Womack et al (1990)
 Takeishi & Fujimoto(2002) -Modularisation in the Auto Industry
 Slack et al suggest taking a supply
network approach where the
operation is set in the context of all
the other operations it interacts with.
SUPPLY CHAINS –
WHAT ARE THEY

Obviously involves both supply and

demand side organisations.
 Total and Immediate Supply Networks

“Second tier” “First tier” Suppliers “First tier” Customers “Second tier”
Suppliers Customers

The Operation

Supply side of the Demand side of the

network network

The Total Supply

The Immediate Supply Network
Network

Internal Supply Networks

 • Key benefits suggested from taking this type of
perspective are:
• Helps see how company can compete effectively.
• Seeks to look beyond immediate supplies and
SUPPLY CHAINS customers to understand competitive
requirements.
• Identifies significant links.
• Seeks to identify which parts of network
contribute to the objectives valued by
customer.
 Can have large impact on business
operations

Can total as much as 25% of the

product’s selling price.

LOCATION
When all costs are considered, location
may alter total operating expenses as
much as 50%.

Locations change very infrequently

 Expanding an existing facility instead
of moving,

Maintaining current sites while

adding another facility elsewhere.

Closing the existing facility and

moving to another location.
OPTIONS
Also Industry dependant:

• Industrial – Minimising costs

• Retail / Professional services – maximising
revenue
• Warehousing - Cost and logistical advantage
DECISIONS

Heizer, J., Render, B., Munson, C. and Sachan, A., 2017.

 ELEMENTS FOR LOCATION DECISION

• Labour Productivity – need consider if long term advantage and if technology

will affect it, eg automation a future date.
𝐿𝑎𝑏𝑜𝑢𝑟 𝐶𝑜𝑠𝑡 𝐷𝑎𝑦
• Labour Productivity = 𝑃𝑟𝑜𝑑𝑢𝑐𝑡𝑖𝑜𝑛 𝑢𝑛𝑖𝑡𝑠 𝑝𝑒𝑟 𝑑𝑎𝑦= Labour Cost per Unit
• Tangible and intangible cost (labour, material, taxes, depreciation, education
levels, health, public transportation)
• Exchange rate & Currency risk, dependent upon sales agreement, location &
suppliers,
• Political Risks, values and culture.
• Proximity to Markets, Suppliers and Competitors
CLUSTERING

Heizer, J., Render, B., Munson, C. and Sachan, A., 2017.

 SELECTING A LOCATION

Going to look at Four Methods:

1. The factor-rating method,
2. Locational cost–volume analysis,
3. The centre-of-gravity method
4. The Load Distance Technique
THE FACTOR-RATING METHOD
 LOCATIONAL COST–VOLUME ANALYSIS

1. Determine the fixed and variable cost for each location.

2. Plot the costs for each location, with costs on the vertical axis of the graph
and annual volume on the horizontal axis.
3. Select the location that has the lowest total cost for the expected production
volume.
 EXAMPLE

Locational cost–volume analysis Selling Price £ 120.00

Fixed Cost Variable Cost/Unit Unit Production Vol Total Cost Total Rev. LA - LB LB- LC
Location A £ 30,000.00 £ 75.00 2000 £ 180,000.00 £ 60,000.00 1000 2500
Location B £ 60,000.00 £ 45.00 2000 £ 150,000.00 £ 90,000.00
Location C £ 110,000.00 £ 25.00 2000 £ 160,000.00 £ 80,000.00
 Location Cost Comparision
£600,000.00

£500,000.00

£400,000.00

0
u
--' £300,000.00
i=!
�

£200,000.00

£100,000.00

£-
1 2 3 4 5 6 7 8
VOLUME INK

-Location A -Location B -Location C

 CENTRE OF GRAVITY METHOD

• Takes account the location of customers, the volume of goods shipped the
costs to find optimum location.
• Minimises transportation costs, especially relevant to Synro and JIT suppliers
• Need to determine coordinates of supply point (To Customer)
 EXAMPLE

Centre Of Gravity
Demand X Y
Location A 10000 100 200
Location B 10000 300 50
Location C 10000 200 300
Location D 10000 400 50
CoG Point 250 150
 Centre Of Gravity
350

300

250

200

·;.
<(
>

150

100

50

0
0 50 100 150 200 250 300 350 400 450 500
X Axis
 LOAD & DISTANCE TECHNIQUE

In this method, a single set of location coordinates is not identified. Instead, various locations are evaluated using a load-
distance value that is a measure of weight and distance. For a single potential location, a load-distance value is computed as
follows:

where
LD = the load-distance value
li = the load expressed as a weight, number of trips, or units being shipped from the proposed site to location i
di = the distance between the proposed site and location i
The distance di in this formula can be the travel distance, if that value is known, or can be determined from a map. It can also
be computed using the following formula for the straight-line distance between two points, which is also the hypotenuse of a
right triangle:

where
(x, y) = coordinates of proposed site
(xi, yi) = coordinates of existing facility
The load-distance technique is applied by computing a load-distance value for each potential facility location. The implication
is that the location with the lowest value would result in the minimum transportation cost and thus would be preferable.

http://www.prenhall.com/divisions/bp/app/russellcd/PROTECT/CHAPTERS/CHAP09/HEAD06.HTM
 LOAD &
DISTANCE
EXAMPLE
 SUPPLY CHAINS

• Helps company focus on long term position in the network.

• Need to review chain for weaknesses and decide long term strategy
to the situation.
• Replace or assist seem to be the clear choices, but taking a longer
term view on the relative advantages of each decision is required.
 GLOBAL
SUPPLY
LOCATIONS
 NETWORK DESIGN DECISIONS

• Two important design decisions are:

• (1) Network configuration:
• Shape, ordered (1st tier, 2nd tier etc), unordered,
• Make or buy vertical integration
 SERVICEIRETAILIPROFESSIONA L GOODS-PRODUCING
REVENUE FOCUS • •
Volume/rev,enue Tangible co·s1:s
Drawing area; purchasing power Transportation cost of raw material
Competition; advertisinglpniciing Shiipment cost of finitshed goods
Physical quality Energy and utility cost labor; raw material;
Parking/access; �ec urirty/I ight ing; appearance/ taxes, and so on
image Intangible and futur,e costs
Cost determinants Attitude toward u11 ion
Rent Quality of life
Management caliber Educatiion expenditures by state
Operation policies (hours, wage rates) Quality of state and local government

Regression models to determine importance of Transportatlion method

various factors Factor-rating me1hod
Factor-ratling method Locational cost-volume analiysiiS
Traffic counts c rossoVier charts
Demographic analysns of drawing area
Purchais.ing power analysis of area
Center-of-gravity method
Geographic infonmatio11 sys.terns
ASSUMPTIONS ASSUMPTIONS,
location i1s a major determinant of revenue Location i1s a major determirnant of cos1
High cus1omer-interactlion nssues are rnitical Most majm costs can be identif1ied explicit� for
Costs are rellativelly constant for a given area; each site
therefore. the revenue function is critlical Low customer contact allows forus on the identifiable
costs
Intangible costs can lbe evaluated
 Direction, extent and balance of
vertical integration

Should excess capacity be used

to supply other companies?

Raw Component Assembly

material maker operation Wholesaler Retai ler
suppliers

Narrow process span

Wide process span

Backward integration Forward integration
Up stream Downstream
v ertical v ertical
integration integration
 NETWORK DESIGN DECISIONS

• Vertical integration:
• No one does everything
• Decisions are normally made on cost, expertise, flexibility issues.
• Key decision are based upon:
• Direction of expansion
• Extent of process span required
• Balance among the VI stages
 NETWORK DESIGN DECISIONS

OBJECTIVE Vertically integrated in- No vertical integration –

house supply outsourced supply

Quality Easy to trace problems More experience, but other

Improvements more market pressures.
immediate. Communication of problems
Possibility of complacency more difficult

Speed Closer synchronisation of Can be built into contract

schedules Possibility of transport delays
Internal/external customer
conflict
Dependability Better communication Can be built into contract
achieved Possibility of transport delays
Internal/external customer
conflict
Flexibility Closeness to operations Enhanced ability to respond
Response may be limited by Conflicts of different
scope of internal ops. customers
Cost Able to retain supplier profit Can achieve economies of
Difficult to achieve suppliers scale.
economies of scale Additional costs need to be
taken into account.
 (2) The location of operations

Supply-side Demand-side
Operation
factors factors

Labour costs Labour skills

Land costs Suitability of

site
Energy costs
Image
Transportation
costs Convenience
for customers
Community
factors
 LEVELS OF LOCATION DECISION

• Three levels are often used:

• Region/country
• Area of region/country
• Largely a revisiting of the factors which were used to decide the
country.

• Specific site within the area.

• Available sites, shape, access, utilities, room for expansion etc all are
required to be considered.
 Major benefits can be achieved
from managing supply chains to
satisfy end customers.

SUPPLY CHAIN Therefore three objectives of

MANAGEMENT supply chain management are:

Individual
organisations will
have own objective
1. Focus on of satisfying
immediate
satisfying end customer.

customer: Need to be aware

of how all can
satisfy end
customer.
 Focus on
managing Focus on analysis
the SC of problems in
correctly: chain, bottlenecks,
high inventory
buffers etc.

Removal of
problems and
SUPPLY CHAIN waste in SC is
MANAGEMENT important.

Pull
Lean –supply
approach Transparency

Defined supply level agreements

Continuous Improvement
 • Ability to cope with uncertainty and
disruption
• Flexibility can be considered as agility.
• Agility considered as:
• Market focus
Focus on • Leanness
SUPPLY CHAIN
SC • Fast movement of goods and
MANAGEMENT flexibility:
information
• Creative in finding ways of adapting
• Possible conflict with ‘lean’ and
‘agility’
• Lean could bring about rigidity due
to reducing inventories, - not
flexible to market changes.
 JIT production requires deliveries
once/twice a day rather than
once/twice a month.

FOCUS ON Supplier performance on delivery

and quality is essential otherwise
‘LEAN SUPPLY’ system will stop.

Therefore new relationships

between customer and supplier
are suggested.
 SUPPLY STRATEGIES

Ford - ‘Do it all yourself’

• Problems with coordinating Ford - ‘Lowest Bidder’
• Dedicated factory in downturn • Lowest bidder, 1 yr. contract

1920s 1980s
1913 1950s

Sloan - ‘dedicated parts making division’ Both approaches used by mass production
• Imposes cost/efficiency of market whilst maintaining organisations.
co-ordination
 SUPPLY STRATEGIES

Womack et al (1990)
Context dependant suggest neither work very
well!!
• Size of organisation • Cost of part is not key but
• Existing investment relationship with
supplier.
 SUPPLY STRATEGIES

Mass Production: Detail design done before Characteristics of

suppliers are involved. Relationship
Price
Delivery schedule
Quality
Short term contract
 Outcomes

• Suppliers tempted to bid low to secure

business
• Once gained contract go back and increase
price.
• Problems encountered in assembly
SUPPLY STRATEGIES • No trust in relationship - regarding product
data
• Supplier under cost pressure from buyer who
does not understand process.
• No incentive to communicate learning with
others.
 Change in supply
Lean Approach
system.

SUPPLY Selected not on

Suppliers selected
from start-
STRATEGIES bid, but on past
performance.
normally suppliers
on existing
models/parts

Fewer suppliers
involved, say 300
(1000-2500 in
mass system)
 TIERED HIERARCHY

OEM

First Tier First Tier First Tier

Second Tier Second Tier Second Tier

Third Tier Third Tier

 First Tier take on responsibility
for elements of supply chain,
development of modular system,
i.e seats, etc

SUPPLY
STRATEGY
Issues-
• OEM may know little about parts
• Limited delegation of detail design to
supplier, not high tech or sensitive parts.
• Long term relationship based upon
open framework based on cost, price
and profit.
 • Assembler sets price of car
Price • Work backwards to
determine how it can be
setting- done, whilst making profit
for both.

LEAN SUPPLY IN
PRACTICE
Work • , kaizen, value engineering
etc
together • Openness about costs -
to reduce suppliers’ need to make
cost- profit has to be respected.
 • Declining prices over model life.
• Awareness that costs should fall in subsequent
yrs
• Key in doing so is ability to retain some profit
from improvements.
• Price set at 1200yen - 1st year
LEAN SUPPLY IN PRACTICE
• Improvements allow it to be made for
1100 yen, pay 1150 yen - both share
profits
• Independent supplier improvement to
1080 yen - keeps profits.
 LEAN SUPPLY IN PRACTICE

Quality Number of Suppliers

No incoming inspection Japan -170, West - 509-442 per plant.
Accepted that problems should be sorted quickly
as no safety net. Work on basis of problem
solving not inquisition.
Can switch % of business as a penalty.