➢ MODULE 6

➢ SUPPLY CHAIN DESIGN AND PLANNING

➢ Introduction
➢ One of the important issues in supply chain management is to design and plan out the overall
architecture of the supply chain network and the value adding flows that go through it. This means
managers should formulate strategies & processes that maximize the total value-adding and
minimize the total supply chain costs.
➢ Introduction
➢ The key contents of such architecture design and planning include configuration, extent of vertical
integration, strategic outsourcing, location decisions, capacity planning, and dealing with bullwhip
effect.
➢ Contents of Supply Chain Design
➢ Supply Chain Configuration
➢ Extent of Vertical Integration
➢ Outsourcing and Offshoring
➢ Location Decisions
➢ Capacity Planning
➢ Bullwhip Effect
➢ Supply Chain Configuration
➢ It represents how the participating company members of the chain are connected with each other
to deliver the product or service to the end customers.

➢ Extent of Vertical Integration

➢ Vertical Integration – is defined as the single ownership of consecutive activities along the supply
chain.
➢ If the company do not have ownership of its suppliers and distributors, it is having a narrow span
of vertical integration.
➢ If the company owns a number of suppliers & distributors it regarded as having large extent of
vertical integration
➢ Extent of Vertical Integration
➢ Outsourcing & Offshoring
➢ Outsourcing – is the decision and the process to obtain the supply of a product or service external
to the organization that has strategic significance.
➢ Organization may contract some of its in-house operations to its external suppliers
➢ Outsourcing & Offshoring
➢ Offshoring – defined as moving the on-shore operation to offshore locations in order to take the
advantages of local resources, and to reduce operating cost or create market presence.
➢ Outsourcing & Offshoring
➢ Location Decisions
➢ Location Decisions – is about the geographical positioning of the supply chain functions (such as
assembly and distribution).
➢ It is normally done for the purpose of better serving the customers and further reducing the
operational cost in the supply chain.
➢ Location Decisions
➢ Capacity Planning
➢ Capacity Planning – is the key to identify and open up the supply chain capacity bottleneck.
➢ When one bottleneck capacity has been increased, logically the next smallest capacity link will
become the bottleneck.
➢ Bullwhip Effect
➢ Bullwhip Effect – refers to a supply chain-wide phenomenon that modest change of customer
demand is distorted and amplified toward the upstream end of the supply chain resulting in large
variations of orders placed upstream.
➢ Cost Components of Supply Chain
➢ Material cost including inbound transport – this includes all cost related to the purchase of materials
and the cost of transportation to bring the material to the factory.
➢ Conversion cost – it cover cost of converting raw and packaging materials to finished goods
including material wastages.
➢ Cost Components of Supply Chain
➢ Inventories (carrying cost) – refers to the cost of carrying stocks to include finance cost, storage
cost, overhead, insurance.
➢ Distribution cost – is the cost related to bringing goods to the consumer through the distribution
channels.
➢ Cost Components of Supply Chain
➢ Duties for imported materials/products – it covers payment of duties to the government based on
the Tariff Code.
➢ Duties for imported materials/products – it covers payment of duties to the government based on
the Tariff Code.
➢ Management, IT, Administrative, and other Cost.
➢ Supply Chain Value Proposition
➢ Total supply chain costs, rather than individual components, must be optimized to deliver superior
economics. In managing the chain, one does not only look at the individual cost component but
should consider the cost of the total system.
➢ Supply Chain Value Proposition
➢ The price that the customer is willing to pay for goods or services is related to the material
specification or level of service needed.
➢ Cost in the supply chain can be affected by the level of inventories across the chain, thus, needs to
ensure that the optimum level of stocks is maintained.
➢ Supply Chain Value Proposition
➢ Cycle time for each activity should be reduced as the longer it is, the higher will be the cost.
➢ Effort to improve forecast accuracy should be taken seriously as wide levels of variability increases
safety stock levels.

➢ MODULE 7

➢ SUPPLY CHAIN DRIVERS AND METRICS

➢ Introduction
➢ To understand how company can improve supply chain performance in terms of
responsiveness and efficiency, we must examine the logistical and cross-functional drivers of
supply chain performance: facilities, inventory, transportation, information, sourcing, and pricing
➢ Drivers of Supply Chain Performance
➢ Facilities – are the actual physical locations in the supply chain network where product is
stored, assembled, or fabricated. The two major parts of facilities are production sites and storage
sites. Decisions regarding the role, location, capacity, and flexibility of facilities have a
significant impact on the supply chain.
➢ Drivers of Supply Chain Performance
➢ Inventory - it encompasses all raw materials, work in process, and finished goods within
a supply chain. Changing inventory policies can dramatically alter the supply chain’s efficiency
and responsiveness.
➢ Drivers of Supply Chain Performance
➢ Transportation – entails moving inventory from point to point in the supply chain.
Transportation can take the form of many combination of modes and routes, each with own
performance characteristics.
➢ Drivers of Supply Chain Performance
➢ Information – consists of data and analysis concerning facilities, inventory,
transportation, costs, prices, and customers throughout the supply chain. Information is
potentially the biggest driver of performance in the supply chain because it directly affects each
of the other drivers.
➢ Drivers of Supply Chain Performance
➢ Sourcing – is the choice of who will perform a particular supply chain activity such as
production, storage, transportation, or the management of information. At the strategic level,
these decisions determine what functions a firm performs and what functions the firm outsources.
➢ Drivers of Supply Chain Performance
➢ Pricing – determines how much a firm will charge for goods and services that it makes
available in the supply chain. Pricing affects the behavior of the buyer, thus affecting supply
chain performance.
➢ Supply Chain Decision Making Framework
➢ Role of Facilities in Supply Chain
➢ Facilities – are a key driver of supply chain performance in terms of responsiveness and
efficiency. Example, companies can gain economies of scale when product is manufactured &
stored in only one location; this centralization increase efficiency, however, comes at the expense
of responsiveness, if customers located from production site.
➢ Components of Facilities Decisions
➢ Role – for production facilities, firms must decide whether they will be flexible,
dedicated, or a combination of the two. Flexible capacity can be used for many types of products
but is often less efficient, whereas dedicated capacity can be used for only a limited number of
products but is more efficient
➢ Components of Facilities Decisions
➢ Location – a basic trade-off here is whether to centralize in order to gain economies of
scale or to decentralize to become more responsive by being closer to the customer. Companies
must also consider a hose of issues related to the various characteristics of the local area in which
the facility is situated.
➢ Components of Facilities Decisions
➢ Capacity – a large amount of excess capacity allows the facility to be very flexible and to
respond to wide swings in the demand placed on it. Excess capacity, however, cost money and
therefore can decrease efficiency. Company must make a trade-off to determine the right amount
of capacity to have each of its facilities.
➢ Facilities-Related Metrics
➢ Capacity
➢ Utilization
➢ Cycle Time of Production
➢ Product Variety
➢ Processing/set-up/down/idle time
➢ Average Production Batch Size
➢ Production Service Level
➢ Role of Inventory in Supply Chain
➢ Inventory – an important role that inventory plays in the supply chain is to increase the
amount of demand that can be satisfied by having the product ready & available when the
customer wants it. Another role of inventory plays is to reduce cost by exploiting economies of
scale that may exist during production and distribution.
➢ Components of Inventory Decisions
➢ Cycle Inventory–is the average amount of inventory used to satisfy demand between
receipts of supplier shipments. Companies produce or purchase in large lots for economies of
scale in production, transportation, or purchasing process. However increase in lot size also
comes an increase in carrying cost.
➢ Components of Inventory Decisions
➢ Safety Inventory – is inventory held in case demand exceeds expectation; it is held to
counter uncertainty. Because demand is uncertain and may exceed expectation, however,
companies hold safety inventory to satisfy unexpectedly high demand. Therefore, company face
trade-off between cost of having too much inventory or cost of losing sales due to not having
enough inventory
➢ Components of Inventory Decisions
➢ Seasonal Inventory - is built up to counter predictable variability in demand. Companies
using seasonal inventory build up inventory in periods of low demand and store it for periods of
high demand when they will not have the capacity to produce all that is demanded. The basic
trade-off, the cost of carrying the additional seasonal inventory versus the cost of having a more
flexible production rate.
➢ Components of Inventory Decisions
➢ Level of product availability - is the fraction of demand that is served on time from
product held in inventory. A high level of product availability provides a high level of
responsiveness but increases cost because a lot of inventory. In contrast, a low level of product
availability lowers inventory holding cost but results in a higher fraction of customers who are
not served on time. The basic trade-off the cost of inventory to increase product availability and
the loss from not serving customers on time.
➢ Role of Transportation in Supply Chain
➢ Transportation - moves product between different stages in a supply chain. Faster
transportation allows a supply chain to be more responsive but reduces its efficiency. The type of
transportation a company uses also affects the inventory and facility locations in the supply chain.
➢ Components of Transportation Decisions
➢ Transportation network - is the collection of transportation modes, locations, and routes
along which product can be shipped. A company must decide whether transportation from a
supply source will be direct to the demand point or will go through intermediate consolidation
points. Finally, companies must also decide on the design of transportation that will be used.
➢ Components of Transportation Decisions
➢ Mode of Transportation - is the manner in which a product is moved from one location
in the supply chain network to another. Companies can choose between air, truck, rail, sea, and
pipeline as modes of transport for products. Today, information goods can also be sent via the
Internet. Each mode has different characteristics with respect to the speed, size of shipments, cost
of shipping, and flexibility that lead companies to choose one particular mode over the others.
➢ Role of Communication in Supply Chain
➢ Information - serves as the connection between various stages of a supply chain, allowing
them to coordinate and maximize total supply chain profitability. Like all the other drivers,
however, even with information, companies reach a point when they must make the trade-off
between efficiency and responsiveness.
➢ Components of Communication Decisions
➢ Push Versus Pull - Push systems generally require information in the form of elaborate
material requirements planning (MRP) systems to take the master production schedule and roll it
back, creating schedules for suppliers with part types, quantities, and delivery dates. Pull systems
require information on actual demand to be transmitted extremely quickly throughout the entire
chain so that production and distribution of products may reflect real demand accurately.
➢ Components of Communication Decisions
➢ Supply Chain Coordination - occurs when all stages of a supply chain work toward the
objective of maximizing total supply chain profitability based on shared information. Lack of
coordination can result in a significant loss of supply chain profit. Coordination among different
stages in a supply chain requires each stage to share appropriate information with other stages.
➢ Components of Communication Decisions
➢ Forecasting - is the art and science of making projections about what future demand and
conditions will be. Obtaining forecasting information frequently means using sophisticated
techniques to estimate future sales or market conditions. Managers must decide to what extent
they will rely on forecasts to make decisions.
➢ Components of Communication Decisions
➢ Enabling Technologies - many technologies exist to share and analyze information in the
supply chain. Managers must decide which technologies to use and how to integrate these
technologies into their companies and their partners' companies. The consequences of these
decisions are becoming more and more important as the capabilities of these technologies grow.
➢ Role of Sourcing in Supply Chain
➢ Sourcing - is the set of business processes required to purchase goods and services.
Managers must first decide which tasks will be outsourced and those that will be performed
within the firm. For each outsourced task, the manager must decide whether to source from a
single supplier or a portfolio of suppliers.
➢ Components of Sourcing Decisions
➢ In-House or Outsource - it is best to outsource if the growth in total supply chain profit is
significant with little additional risk. Within a task such as transportation, managers must decide
whether to outsource all of it, outsource only the responsive component, or outsource only the
efficient component. Once again, the decision should be based in part on the growth in total
supply chain profitability.
➢ Components of Sourcing Decisions
➢ Supplier Selection - manager must then identify the criteria along which suppliers will be
evaluated and how they will be selected. For the selection process, managers must decide whether
they will use direct negotiations or resort to an auction. If an auction is used, it must be structured
to ensure the desired outcome.
➢ Components of Sourcing Decisions
➢ Procurement - is the process in which the supplier sends product in response to customer
orders. Managers must decide on the structure of procurement of direct as well as indirect
materials, and strategic as well as general materials. In each case, it is important to identify the
critical mechanism for increasing supply chain profits.
➢ Role of Pricing in Supply Chain
➢ Pricing - is the process by which a firm decides how much to charge customers for its
goods and services. Pricing affects the customer segments that choose to buy the product, as well
as the customer's expectations. This directly affects the supply chain in terms of the level of
responsiveness required as well as the demand profile that the supply chain attempts to serve.
➢ Components of Pricing Decisions
➢ Pricing and Economies of Scale - most supply chain activities display economies of scale.
Changeovers make small production runs more expensive per unit than large production runs.
Loading and unloading costs make it cheaper to deliver a truckload to one location than four. In
each case, the provider of the supply chain activity must decide how to price it appropriately to
reflect these economies of scale
➢ Components of Pricing Decisions
➢ Fixed Price Versus Menu Pricing - a firm must decide whether it will charge a fixed price
for its supply chain activities or have a menu with prices that vary with some other attribute, such
as the response time or location of delivery. If marginal supply chain costs or the value to the
customer vary significantly along some attribute, it is often effective to have a pricing menu.

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Supply%20Chain%20Management%20-%20Strategy,%20Planning%20and%20Operations-
Sunil%20Chopra.pdf
➢ Basic Steps to Achieving Strategic Fit
➢ Understanding the Customer and Supply Chain Uncertainty: First, a company must
understand the customer needs for each targeted segment and the uncertainty the supply chain
faces in satisfying these needs. These needs help the company define the desired cost and service
requirements. The supply chain uncertainty helps the company identify the extent of the
unpredictability of demand, disruption, and delay that the supply chain must be prepared for.
➢ Basic Steps to Achieving Strategic Fit
➢ Understanding the Supply Chain Capabilities: there are many types of supply chains,
each of which is designed to perform different tasks well. A company must understand what its
supply chain is designed to do well.
➢ Basic Steps to Achieving Strategic Fit
➢ Achieving Strategic Fit: If a mismatch exists between what the supply chain does
particularly well and the desired customer needs, the company will either need to restructure the
supply chain to support the competitive strategy or alter its competitive strategy.
➢ Obstacles to Achieving Strategic Fit
➢ Increasing Variety of Products - product proliferation is rampant today. With customers
demanding ever more customized products, manufacturers have responded with mass
customization and even segment-of-one (companies view each customer as an independent
market segment) views of the market.
➢ Obstacles to Achieving Strategic Fit
➢ Decreasing Product Life Cycles - Today there are products whose life cycles can be
measured in months, compared to the old standard of years. This decrease in product life cycles
makes the job of achieving strategic fit more difficult, as the supply chain must constantly adapt
to manufacture and deliver new products, in addition to coping with these products' demand
uncertainty.
➢ Obstacles to Achieving Strategic Fit
➢ Increasingly Demanding Customers - customers are constantly demanding improvements
in delivery lead times, cost, and product performance. If they do not receive these improvements,
they move on to new suppliers. This tremendous growth in customer demands (not necessarily
demand) means that the supply chain must provide more just to maintain its business.
➢ Obstacles to Achieving Strategic Fit
➢ Globalization - supply chains today are more likely than ever to be global. Establishing a
global supply chain creates many benefits, such as the ability to source from a global base of
suppliers who may offer better or cheaper goods than were available in a company's home nation.
Globalization, however, also adds stress to the chain, because facilities within the chain are
farther apart, making coordination much more difficult.