Chapter Six - Supply Chain Design

CHAPTER 6: SUPPLY CHAIN DESIGN
 A multinational enterprise is an organization that sources, markets, and produces its goods and services in
several countries to minimize costs, maximize profit, customer satisfaction, and social welfare.
 Decisions in supply chain design include:

o Strategy- Supply chains should support an organization’s strategy, mission, and competitive
priorities.
o Control- The operational structure of a supply chain is the configuration of resources, such as
suppliers, factories, warehouses, distributors, technical support centers, engineering design and
sales offices, and communication links. It includes decision on centralization or decentralization.
o Location- The location of facilities has a significant impact on cost, customer service, and data
reliability.
o Sustainability- Sustainability issues must be addressed in the supply chain design of organizations.
o Technology- Dealing with intellectual property is an important issue for multinational companies.
Technology often provides a competitive edge, and licensing it to firms in other countries can lead to
risks.
o Digital Content- Products such as car, appliances, or cellphone is a bundle of physical goods and
services that is often enhanced with other services by means of “Internet of things”.
o Sourcing- Selecting suppliers from whom to purchase is a key design decision that ties closely with
the location decision. A key sourcing decision is whether to use a single source or multiple sources.
A single source can help build close partnerships and economies of scale. On the other hand,
multiple suppliers lower the risk of supply disruption.
o Logistics and Transportation- Global shipments often require multiple modes of transportation.
o Managing Risks- Risks are both strategic and tactical and require every company to develop a risk
mitigation strategy and plan.
o Measuring Performance- Performance must be measured at all levels of the organization.
o Outsourcing- To procure something from outside sources
 A blockchain is a distributed database network that holds records of digital data and events in a way that
makes them tamper-resistant. With blockchain, enhanced traceability is achieved. Although one problem
of blockchain is that it cannot see whether data is inaccurate or fraudulent.
Supply Chain Design Trade-Offs

a. Efficient and Responsive Supply Chains
 Efficient Supply Chain- are designed for efficiency and low cost by minimizing inventory and maximizing
efficiencies in process flow.
 Responsive Supply Chains- focuses on flexibility and responsive service and are able to react quickly to
changing market demand and requirements
b. Push and Pull Systems

 Push system- produces goods in advance of customer demand using a forecast of sales and moves
them through the supply chain to points of sale, where they are stored as finished-goods inventory.
Advantages  immediate availability of goods
 reducing transportation costs by using full-truckload shipments to move
goods to distribution centers
Disadvantages  when sales patterns are inconsistent, it can lead to higher costs from
excessive stock or out-of-stock conditions
 Pull System- produces only what is needed at upstream stages in the supply chain in response to
customer demand signals from downstream stages
Advantages  Minimizes inventory and production costs
 Reduces the chances of having excessive inventory
Disadvantages  Can result to shortages when schedules or demands are missed
 Push-pull boundary- point in the supply chain that separates the push system from the pull system
 Postponement- process of delaying product customization until the product is closer to the customer at
the end of the supply chain
c. Vertical Integration and Outsourcing

 Vertical integration- process of acquiring and consolidating elements of a value chain to achieve more
control
 Backward integration- process of acquiring capabilities toward suppliers
 Forward integration- acquiring capabilities toward distribution, or even customers
 Outsourcing- process of having suppliers provide goods and services that were previously provided
internally
 Contract Manufacturer- firm that specializes in certain types of goods-producing activities under contract
for end-users
 Third-Party Logistic Providers- businesses that provide integrated services that might include packaging,
warehousing, inventory management, and transportation
d. The Economics of Outsourcing Decision

 Formulas:
o Total Cost-in-House(TCI)= FCI + CI x Q
where: FCI- Fixed cost in-house
CI- unit cost in-house
Q- quantity
o Total Cost to Outsourcing(TCO)= FCO + CI x Q

where: FCO- Fixed cost of outsourcing
CI- unit cost of outsourcing
Q- quantity
o Cost difference= TCI – TCO
e. Offshoring and Reshoring

 Offshoring- building, acquiring, or moving of process capabilities from a domestic location to another
country location while maintaining ownership and control
 Reshoring- process of moving operations back to the company’s domestic location
 Proximity Sourcing- your outsources are located within your proximity
Location Decisions
 Multisite management- process of managing geographically dispersed service-providing facilities
a. Critical Factors in Location Decisions

Exhibit 6.7 shows location factors that affect a company’s decisions in choosing the location of their facilities.
b. Location Decision Process

 Global location decision involves evaluating the product portfolio, new market opportunities, changes in
regulatory laws and procedures, production and delivery economics, sustainability and the cost to locate
in different countries.
 Factors that affect the regional location decision include size of the target market, locations of major
customers, sources of materials and supply, labor availability and costs, degree of unionization, land,
construction, and utility costs, quality of life and climate.
 The community location decision involves selecting a specific city or community in which to locate. A
company would consider managers’ preferences, community services and taxes, available transportation
systems, banking services, and environmental impacts.
 For site location decisions, the factors to consider are site costs, proximity to transportation systems,
utilities, payroll, and local taxes, sustainability issues, and zoning restrictions.
 EPIC framework provides the structure for assessing various regions around the globe for supply chain
readiness from economic, political, infrastructural, and competence perspectives. The framework
measures and assesses the levels of “maturity” held by a geographic region with specific respect to its
ability to support supply chain activities. (Exhibit 6.3)
d. The Center of Gravity Method

 The center-of-gravity method determines the x and y coordinates(location) for a single facility.

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CHAPTER 6: SUPPLY CHAIN DESIGN

 Decisions in supply chain design include:

Supply Chain Design Trade-Offs

b. Push and Pull Systems

c. Vertical Integration and Outsourcing

d. The Economics of Outsourcing Decision

o Total Cost to Outsourcing(TCO)= FCO + CI x Q

o Cost difference= TCI – TCO

e. Offshoring and Reshoring

 Proximity Sourcing- your outsources are located within your proximity

a. Critical Factors in Location Decisions

b. Location Decision Process

d. The Center of Gravity Method

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