Operations Management: Processes and

Supply Chains
Thirteenth Edition, Global Edition

Chapter 12
Supply Chain Design

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Learning Goals (1 of 2)
12.1 Explain the competitive pressures to consider when creating
an effective supply chain.
12.2 Calculate the critical supply chain performance measures.
12.3 Describe the strategic options for supply chain design and
how autonomous supply chains can play a role.

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Learning Goals (2 of 2)
12.4 Explain the strategy of mass customization and its
implications for supply chain design.
12.5 Understand the considerations firms make when deciding
which processes to outsource.

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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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Creating an Effective Supply Chain (1 of 2)
• Identifying external competitive and internal
organizational pressures
– Dynamic sales volumes
– Customer service and quality expectations
– Service/product proliferation
– Emerging markets

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Creating an Effective Supply Chain (2 of 2)
Figure 12.1 Creating an Effective Supply Chain

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Manufacturing Supply Chain
Figure 12.2 Supply Chain for a Manufacturing Firm

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Supply Chain Efficiency Curve
Figure 12.3 Supply Chain Efficiency Curve

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Measuring Supply Chain Performance (1 of 2)
Inventory Measures

 Average   Number of   Number of 

     Value of     Value of 
 aggregate    units of item   each unit    units of item   ea ch unit 
 inventory   A typically on     B typically on   
    
  of item A     of item B 

 value   hand   hand 

Average aggregate inventory value

Weeks of supply =
Weekly sales (at cost)

Annual sales (at cost)

Inventory turnover =
Average aggregate inventory value

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Example 1 (1 of 3)
The 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 1 (2 of 3)
Figure 12.4 Calculating Inventory Measures Using Inventory
Estimator Solver

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Example 1 (3 of 3)
The average aggregate inventory value of $2 million translates
into 10.4 weeks of supply and 5 turns per year, calculated as
follows:
$2 million
Weeks of supply = = 10.4 weeks
($10 million) (52 weeks)

$10 million
Inventory turns = = 5 turns year
$2 million

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Measuring Supply Chain Performance (2 of 2)
• Financial measures
– Total revenue
– Cost of goods sold
– Operating expenses
– Cash flow
– Working capital
– Return on assets (ROA)

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SCM Decisions Affecting ROA
Figure 12.5 How Supply Chain Decisions Can Affect ROA

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Strategic Options for Supply Chain
Design (1 of 2)
• Efficient supply chains
– Make-to-stock (MTS)
• Responsive supply chains
– Assemble-to-order (ATO)
– Make-to-order (MTO)
– Design-to-order (DTO)

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Strategic Options for Supply Chain
Design (2 of 2)
Table 12.1 Environments Best Suited for Efficient and Responsive
Supply Chains

Factor Efficient Supply Chains Responsive Supply Chains

Predictable, low forecast Unpredictable, high forecast
Demand
errors errors
Development speed, fast delivery
Low cost, consistent quality,
Competitive priorities times, customization, volume
on-time delivery
flexibility, variety, top quality
New-service/product
Infrequent Frequent
introduction
Contribution margins Low High
Product variety Low High

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Supply Chain Designs (1 of 2)
Figure 12.6 Supply Chain Design for Make-to-Stock Strategy

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Supply Chain Designs (2 of 2)
Figure 12.7 Supply Chain Design for Assemble-to-Order Strategy

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Design Features
Table 12.2 Design Features for Efficient and Responsive Supply
Chains
Responsive Supply
Factor Efficient Supply Chains
Chains
Assemble-to-order, make-
Make-to-stock standardized
to-order, or design-to-order
Operation strategy services or products; emphasize
customized services or
high volumes
products; emphasize variety
Capacity cushion Low High
As needed to enable fast
Inventory investment Low; enable high inventory turns
delivery time
Shorten, but do not increase
Lead time Shorten aggressively
costs
Emphasize fast delivery
Emphasize low prices, consistent
Supplier selection time, customization, variety,
quality, on-time delivery
volume flexibility, top quality

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Supply Chain Design Link to Processes
Figure 12.8 Linking Supply Chain Design to Processes and
Service/Product Characteristics

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SKUs and Variability
Figure 12.9 Annual Volume versus Variability in Weekly Demands for
a Firm’s SKUs

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Autonomous Supply Chains
• Autonomous Supply Chains
– Advanced analytics
– Artificial intelligence (AI) and machine learning
– Robotics
– Internet of Things (IoT)

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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 Customization
• Competitive advantages
– Managing customer relationships
– Eliminating finished goods inventory
– Increasing perceived value of services or products
• Supply chain design for mass customization
– Assemble-to-order strategy
– Modular design
– Postponement
▪ Channel Assembly

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Outsourcing Processes (1 of 2)
• Outsourcing
– Paying suppliers and distributors to perform processes and
provide needed services and materials
• Offshoring
– A supply chain strategy that involves moving processes to
another country
• Next-Shoring
– A supply chain strategy that involves locating processes in
close proximity to customer demand or product R&D

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Outsourcing Decision Factors
• Comparative Labor Costs

• Rework and Product Returns

• Logistics Costs

• Tariffs and Taxes

• Market Effects

• Labor Laws and Unions

• Internet

• Energy Costs

• Access to Low-Cost Capital

• Supply Chain Complexity

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Outsourcing Potential Pitfalls
• Pulling the Plug too Quickly
• Technology Transfer
• Process Integration

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Outsourcing Processes (2 of 2)
• Vertical integration
– Backward integration
– Forward integration
• Make-or-buy decisions
– A managerial choice between whether to outsource a
process or do it in-house.

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Example 2 (1 of 2)
Thompson 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 in ton-miles?

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Example 2 (2 of 2)

Fm  Fb 1,500,000  250,000
Q= =
Cb  Cm 8.50  4.50

= 312,500 ton - miles

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Solved Problem (1 of 3)
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.

Category Part Average Unit

a. What is the average aggregate Number Level Value
inventory value?
Raw materials 1 15,000 $ 3.00
b. How many weeks of supply does 2 2,500 5.00
Raw materials

the firm maintain? Raw materials

3 3,000 1.00
Work-in-process 4 5,000 14.00
c. What was the inventory turnover
last year? 5 4,000 18.00
Work-in-process

Finished goods 6 2,000 48.00

7 1,000 62.00
Finished goods

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Solved Problem (2 of 3)
a.​
Part Average Unit Total
× =
Number Level Value Value
1 15,000 × $3.00 = $45,000

2 2,500 × 5.00 = 12,500

3 3,000 × 1.00 = 3,000

4 5,000 × 14.00 = 70,000

5 4,000 × 18.00 = 72,000

6 2,000 × 48.00 = 96,000

7 1,000 × 62.00 = 62,000

Average aggregate inventory value = $360,500

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Solved Problem (3 of 3)
$3,410,000
b. Average weekly sales at cost =
52 weeks
$65,577

week

Average aggregate inventory value

Weeks of supply =
Weekly sales (at cost)

$360,500
= = 5.5 weeks
$65,577

Annual sales (at cost)

c. Inventory turnover =
Average aggregate inventory value

$3,410,000
= = 9.5 turns
$360,500

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