CHAPTER 10

SUPPLY CHAIN STRATEGY

1
 Supply Chain Strategy

Supply chain management

Competitive advantage
Aligning product and supply chain strategy

2
 Supply Chain
A supply chain represents all the stages at which
value is added in producing and delivering a
product or service from suppliers (and their
suppliers) to customers (and their customers).

3
4
 Supply Chain Management
Supply chain management is the coordination of
the following functions and activities along the
supply chain:
Planning and managing of supply and demand
Acquiring material
Warehousing
Inventory control and distribution
Producing and scheduling the product or service
Delivery and customer service
5
Supply Chain Database and Planning
Forecasting
Chapter 13
Aggregate Planning
Chapter 14
Supply Chain
Database Inventory Control
Chapters 15,16
Operations Scheduling
Chapter 17
6
 Supply Chain Management and
Competitive Advantage
Competitive advantage may be obtained
with a total systems approach to managing
flow of information, materials and services
along the supply chain

7
8
 Investment in Supply Chain

High profit margin (high tech products)

Reduce stockout
Invest in reducing lead time along the supply chain
Low profit margin (staple products)
Reduce cost
Increase resource utilization, minimize inventory,
select vendors on the basis of cost and quality, design
products that can be produced

9
 Matching Supply Chain
with Products
Functional Innovative
Products Products
Efficient
Supply-Chain Match Mismatch

Responsive
Mismatch Match
Supply-Chain

10
 CHAPTER 11
STRATEGIC CAPACITY
MANAGEMENT

11
 Strategic Capacity Management

Capacity
Planning issues
Capacity additions
Determining capacity requirements

12
 Capacity

Output over a certain time period

Peak? Average? Design capacity?
Best operating level
Design capacity, minimum average cost
Capacity utilization
Capacity Used

Best Operating Level

13
 Planning Issues
Economies and Diseconomies of scale
Advantage and disadvantage of capacity
Learning curve
Another advantage of capacity
Focussed factories
A strategy to remove the disadvantage of capacity
Capacity flexibility
A strategy to deal with demand uncertainty

14
 Economies and Diseconomies of
Scale

250
room 1000
Average cost per unit

hotel room
500 hotel
room
hotel
Best Best
operating Best operating
level operating level
level
Economies of scale Diseconomies of scale

15
 Learning Curve
An example of 80% learning
Processing time per unit

curve
1st unit 100 hours
2nd unit 80 hours
4th unit 64 hours

Units produced
16
 Learning Curve

Yx = Kxn
where
x = Unit number
Yx = time required for the xth unit
K = time required for the first unit
n = log b/log 2, where b is the percentage rate of
improvement

17
 Learning Curve
Contract to produce 35 computers
K = 18 hours
Learning rate = 80%
What is time for the 9th unit? 35 units?

Y9 = (18)(9)log(0.8)/log(0.2)
= (18)(0.493) (See Exhibit TN4.5, p. 138)
= 8.874hrs

Y1++ Y35 = (18)(15.64) (See Exhibit TN4.6, p. 139)

= 281.52hrs
18
 Focussed Factories
Theory
A production facility is the most efficient when it
concentrates on a fairly limited set of tasks
objectives
An implication
Instead of building one huge plant, build several
smaller plants
An example
Plant 1: Production of components
Plant 2: Assembly
19
 Capacity Flexibility: Flexible
Workers
Machines
Enter

Worker 2
Worker
3
Worker 1

Exit

Key: Product route

Worker route
20
 Capacity Flexibility: Flexible Machine

A CNC
Hobbing
Machine
Many tools in the tool magazine
Tools are changed instantaneously
Thus, products with different designs are produced without
long setup times 21
 Capacity Additions

Maintaining system balance

Frequency of capacity additions
Too frequent: installation, training, premium for up
to date technology, loss of production time
Too infrequent: cost of excess capacity
External sources of capacity
Subcontracting
Capacity sharing
22
 Maintaining System Balance

To
Inputs 1 2 3
customers
200/hr 50/hr 200/hr

(a) Operation 2 a bottleneck

To
Inputs 1 2 3
customers
200/hr 200/hr 200/hr

(b) All operations bottlenecks 23

 Capacity Expansion Strategies
Lead strategy Lag strategy
Units Capacit Units
y

Demand
Time Time
Add average
Units

Demand

Time
Determining Capacity Requirements

Estimate capacity requirements

Identify gaps
Develop alternatives
Evaluate the alternatives
Decision tree is a tool used to evaluate
alternatives

25
 A Decision Tree Example

Text Chapter 11 Problem 5

Expando Inc. is considering the possibility of building a facility.
Small facility: costs $8 million. If demand is low, revenue will be
$10 million. If demand is high revenue will be $12 million.
Large facility: costs $9 million. If demand is low, revenue will be
$10 million. If demand is high revenue will be $14 million.
The probability of demand being high is 0.40 and the probability of
it being low is 0.60
Not constructing a new facility would not generate any additional
revenue.

26
 igh $12 million
H
4 0 )
(0.

mi ll
(0. 6

n
$8 Sma
llio
0)
Low $10 million
Do Nothing
$0
$9 Larg

h $14 million
Hig
mi e

0 )
llio

(0. 4
n

(0. 6
0)
Low $10 million

27
 igh $12 million
H
4 0 )
$10.8 (0.
million
mi ll
(0. 6

n
$8 Sma
llio
0)
Low $10 million
Do Nothing
$0
$9 Larg

h $14 million
Hig
mi e

0 )
llio

(0. 4
n

(0. 6
0)
Low $10 million

28
 igh $12 million
H
4 0 )
$10.8 (0.
million
mi ll
(0. 6

n
$8 Sma
llio
0)
Low $10 million
Do Nothing
$0
$9 Larg

h $14 million
Hig
mi e

0 )
llio

(0. 4
$11.6
n

million
(0. 6
0)
Low $10 million

29
 igh $12 million
H
4 0 )
$10.8 (0.
million
mi ll
(0. 6

n
$8 Sma
llio
0)
Low $10 million
$2.8 Do Nothing
$0
million
$9 Larg

h $14 million
Hig
mi e

0 )
llio

(0. 4
$11.6
n

million
(0. 6
0)
Low $10 million

Build the small facility with expected value = $2.8 million 30

 Reading and Exercises
Chapter 10 (Supply Chain Strategy)
up to p. 413
Chapter 11 (Strategic Capacity Management)
up to p. 440
Problem 6
Technical Note 4 (Learning Curves)
up to p. 141
Problems 1,4
31