Supply Chine Design

“It’s not the organizations that are competing.

It’s the supply chains that are competing.” – Wael Safwat, SCMAO
 Introduction
understanding Supply Chain(SC) and Logistics

• Supply chain is the network of activities that

delivers a finished product or service to the
customer.
• These include sourcing raw materials and
parts, manufacturing and assembling the
products, warehousing, order entry and
tracking, distribution through the channels,
and delivery to the customer.
Cont..
• Supply chain is a network of connected and
interdependent organizations mutually and cooperatively
working together to control, manage and improve the
flow of materials and information from suppliers to end
users.
• Supply chain actors(basic participants in a supply
chain) are company (manufacturer or service
provider), suppliers and customers.
Cont…

Typical supply chain

Cont…
• Supply Chain Management (SCM) is the strategic
coordination of business functions within a business
organization and throughout its supply chain for the purpose
of integrating supply and demand management.
• SCM is the management of upstream and downstream
relationships with suppliers and customers to deliver
superior customer value at less cost to the supply chain as
a whole.
• SCM can also be termed as “Demand Network
Management:
 the chain is driven by market not suppliers
 the chain is replaced by network as there are multiple
suppliers ,customers and customers’ customers
Cont..
The goal of SCM
• to match supply to demand as effectively and
efficiently as possible.
• Efficient supply chain management must result in
tangible business improvements.
• It is characterized by a sharp focus on
1. Revenue growth
2. Better asset utilization (waste reduction)
3. Cost reduction.
4. Time reduction
5. Felxible resposnce
Cont…
Cont..
• The evolution of supply chain management has been characterized
by an increasing degree of integration of separate tasks;
• a trend underlined in the 1960s as a key area for future productivity
improvements since the system was highly fragmented.
• Although the logistics tasks have remained relatively similar, they
initially consolidated into two distinct functions related to materials
management and physical distribution during the 1970s and
1980s.
• This process moved further in the 1990s as globalization incited a
functional integration and the emergence of logistics in a true sense;
all the elements of the supply chain became part of a single
management perspective.
• However, only with the implementation of modern information and
communication technologies did a more complete integration
became possible with the emergence of supply chain management.
Cont…
• More recently, the growing level of automation of
supply chains has been a dominant element of the
evolution of both physical distribution and
materials management.
• This digitalization is particularly notable within
distribution centers that have experienced a
remarkable push towards automation such as
storage, materials handling, and packaging.
• Automation may eventually lead to automated
delivery vehicles.
Cont…
Components of Supply Chain Management (SCM)
• This involves discerning the members of the supply chain,
dimensions of the network and the different business
processes.
Supply Chain Integration
• Internal Process Integration: collaboration among the
company’s functional groups.
• Backward Process Integration: collaboration with 1st-tier and
2nd-tier (leading companies) suppliers.
• Forward Process Integration: collaboration with 1st-tier
customers.
• Complete Integration: collaboration from the “suppliers’
supplier to the customers’ customer.”
Cont…
Cont…
Cont…
Cont…
Cont…
Cont..
Cont…
• Logistics is the part of a supply chain involved with the
forward and reverse flow of goods, services, cash, and
information.
• Logistics is the process of planning, implementing, and
controlling the efficient, effective flow and storage of goods,
services, and related information from point of origin to point
of consumption for the purpose of conforming to customer
requirements (Council of Logistics Mgt)
• Logistics management includes management of inbound and
outbound transportation, material handling, warehousing,
inventory, order fulfillment and distribution, third-party
logistics, and reverse logistics (the return of goods from
customers).
Cont…
Cont…
• Inbound logistics: Moving materials into the firm
from the suppliers.
• Outbound logistics: Moving materials out to the
customer.
• Materials Management (Intra or in-house
logistic): Moving materials within the organization.
• Reverse logistics is the movement of goods or
items from the end-users back to the producers or
any concerned parties for return, servicing and
repair, reprocessing and refurbishing for resale,
recycling or recovering, or proper disposal.
Cont…
Third-Party Logistics (3PL)
• Outsourced logistics
• Mainly in the outbound part
• Allows organizations to take advantage of
“best-in class” service of 3PL (for efective
integration)
Cont…
Supply Chain Vs. Value Chain
• A value chain is a set of interrelated activities a
company uses to create a competitive advantage.
• A supply chain is an integration of all the activities,
persons, and business through which a product is
transferred from one place to another.
• Value Chain refers to a chain of activities that is
indulged in adding value to the product in every
single step till it reaches the final customer.
Cont…
• The term ‘Value Chain’
was used by Michael
Porter in his book:
"Competitive Advantage:
Creating and Sustaining
superior Performance"
(1985).
• Porter distinguishes
between primary
activities and support
activities.
 Understanding and Measuring
Supply Chain Performance
• Performance measurement is the process of assessing
progress toward achieving predetermined goals.
• The role of performance measures within organisations is
to evaluate, control and improve their processes in order
to ensure the achievement of their goals and objectives.
• Performance measures are employed to determine the
effectiveness and efficiency of an existing system.
• Achieving efficiency and effectiveness objectives
requires a set of standards to compare to actual
performance.
• These standards are called metrics.
Cont…

Key Reasons for SC Metrics

 Meeting customer expectations
 Improving supply chain capability
Enhancing asset performance
Instilling workforce cooperation
Enriching the stakeholders
Cont…
Cont…
Performance Categories
Four major categories:
• time,
• quality,
• cost, and
• supporting metrics (flexibility ,
responsiveness….)
Cont…
SCM performance measurement model
Cash velocity
Balanced Score Card (BSC)
Supply Chain Operation Reference (SCOR)
The logistics Scoreboard
Activity Based Costing (ABC)
Economic Value Added (EVA)
Cont…
Balanced Scorecard (BSC) model
• The idea of the BSC was introduced first by
Kaplan & Norton in 1992 .
It has four Perspectives
1) How do customers see us? (customer perspective)
2) What must we excel at? (internal business perspective)
3) Can we continue to improve and create value?
(innovation and learning perspective)
4) How do we look to shareholders?(financial
perspective)
Cont…
Cont…
Cont…
Supply Chain Operation Reference (SCOR)
• It helps to create a common vision for managing and
coordinating five primary Sc processes.
• These processes are Plan, Source, Make Deliver and
Return.
• Plan: the process of aligning the supply chain with
financial plan.
• Source: the process of selecting suppliers, establishing
policies, scheduling deliveries and assessing performance.
• Make: the process of scheduling production, measuring
performance, managing inventory, and configuring the
network.
Cont…

• Deliver: Processes that provide finished

goods and services to customers. Emphasis is
on order management, warehouse
management, and transportation management.
• Return: Processes associated with the return of
products for any reason, and includes post
delivery customer support. Emphasis is on
reverse logistics and long-term customer
support.
Cont….
Cont…
 Supply Chain Design

• Decisions about the structure of the firm’s supply

chain and what process each stage will perform to
meet the competitive priorities of the firm’s
operations strategy.
• Strategic decision about the supply chain
Location and capabilities of facilities
Products to be made or stored at various location
Modes of transportations
Information systems.
• Its also known Supply chain Network
Cont…
Cont…
• The SC network consists of suppliers, warehouses, distribution
centers and retail outlets as well as raw materials, work-in-
process inventory and finished products that flow between the
facilities
• It is all about “creating a network that incorporates all the
facilities, means of production, products, and transportation
assets owned by the organization or those not owned by the
organization but which immediately support the supply chain
operations and product flow”.
• Reducing the cost of the supply chain is a strategic move that
supply chain actors need to focus at.
• It has been suggested that 80% of supply chain costs are
determined by location of facilities and the flow of product between
the facilities.
Cont…
Cont…
Distribution in the Supply Chain
• Distribution refers to the steps taken to move
and store a product from the supplier stage to a
customer stage in a SC.
• Distribution occurs between every pair of stages
in the SC.
 Raw materials and components are moved from
suppliers to manufacturers, whereas finished
products are moved from the manufacturer to
the end consumer.
Cont…

• Distribution is a key driver of the overall

profitability of a firm because it directly impacts
both the supply chain cost and the customer
experience.
Distribution related costs form about 10.5 percent of the
economy and about 20 percent of the cost of manufacturing
for some developed countries.
• The choice of distribution network can be used to
achieve a variety of supply chain objectives
ranging from low cost to high responsiveness.
• As a result, companies in the same industry often
select very different distribution networks.
Cont…
Factors Influencing Distribution Network Design
• At the highest level, performance of a distribution network should
be evaluated along two dimensions:
1. Customer needs that are met.
2. Cost of meeting customer needs
• Although customer service consists of many components, those
are influenced by the structure of the distribution network are:
Response time: – The time between when a customer places an
order and receives delivery.
Product variety: – The number of different
products/configuration that a customer desires from the
distribution network.
Availability: – The probability of having a product in stock
when a customer order arrives
Cont…
 Customer experience: includes the easy with which
the customer can place and receive their order.
 Order visibility: is the ability of the customer to
track their order from placement to delivery.
 Return-ability: is the easy with which a customer
can return unsatisfactory merchandise and the ability
of the network to handle such returns.
 Changing the distribution network design
affects the supply chain costs of inventories,
transportation, facilities and handling, and
information.
Cont…
Distribution Strategies
• Typically, three distinct outbound distribution strategies
are utilized:
1. Direct shipment. In this strategy, items are shipped directly from
the supplier to the retail stores without going through distribution
centers.
2. Warehousing. This is the classical strategy in which warehouses
keep stock and provide customers with items as required.
3. Cross-docking. In this strategy, items are distributed
continuously from suppliers through warehouses to customers.
However, the warehouses rarely keep the items for more than 10
to 15 hours.
Cont…
Design options for a Distribution Network
• There are six distinct distribution network designs that
may be used to move products from factory to
customer.
These are:
i. Manufacturer storage with direct shipping;
ii. Manufacturer storage with direct shipping and in-transit
merge;
iii. Distributor storage with package carrier delivery;
iv. Distributor storage with last mile delivery;
v. Manufacturer/distributor storage with customer pickup; and
vi. Retailer storage with customer pickup.
Cont…
 Cont..
• The performance characteristics of the distribution design options are
measured based on:

Cost factor Service factor

 Inventory  Response time
 Transportation  Product variety
 Facilities and handling  Customer experience
 Information  Order visibility
 Return-ability
 Factors Influencing
Network Design Decisions

Strategic
Technological
Macroeconomic
Political
Infrastructure
Competitive
Logistics and facility costs (Operational factors).
Cont…
Strategic Factors
 Convenience stores; many facilities for
responsiveness
 Discount stores; few large facilities for
effectiveness (low cost)
 Different locations playing different role
lower priced for mass markets,
focus on responsiveness and produce higher-priced new
design, with high variability.
Cont…

Technological factors
• Expensive dedicated production technologies will require large
production volumes and therefore a more centralized production
network (e.g., chip production).
• Lower fixed cost facilities can be duplicated more easily (e.g.,
bottling factories).
• In case of non-homogeneous demand, technological flexibility
facilitates consolidation of production to a few manufacturing
facilities.
• The more cumbersome the transfer of raw material, the closer the
facility must be to the source site (e.g., factories processing
minerals)
Cont…
Macro economic factors
 Tariffs, Taxes, incentives, and exchange rates
 Tariffs: Any duties that must be paid when products and/or equipment are moved across
international, state or city boundaries.
 High tariffs necessitate localized production.
 Presently, there is a systematic effort to open the markets to global competition through
the World Trade Organization Policies (WTO) and regional agreements (COMESA, etc.)
 Tax incentives: a reduction in tariffs or taxes that countries, states and cities often provide
to encourage firms to locate their facilities in specific areas.
 Tax incentives can be focusing on certain Industries, Technologies, and Regions
 Quotas: Limits on import volumes placed by different countries in an effort to protect
their local industry. Sometimes there is also some requirement on minimum local
content. (e.g. African Growth Opportunity Act - AGOA)
 Fluctuation in exchange rates has a significant impact on the profits of any supply chain
serving global markets.
Cont…
Political factors
 Political stability, clear legal system, signing international treatments.
 The political stability of the country under consideration plays a significant role in the
location choice.
Infrastructure
• Availability of skilled labor
• Availability of transportation facilities
– Ports
– Airports
– Rail
– Highways
• Availability of necessary utilities
– Power
– Water
– Sewage
– Telecommunications / IT
 Cont…
Competitive factors
 Companies must consider competitors’ strategy, size, and location when designing their SC
networks.
 Should the location be close to competitors or far from them?
• Positive Externalities: Instances where collocation of multiple firms benefits all of them, since
 They share the cost of the necessary infrastructure
 And the collocation can stimulate demand for all of them
 Examples: industrial parks
• Locating to “split the market”: For companies that
 Do not have price control, and
 Try to maximize their market share by minimizing their distance from the customer.
• Consider a situation where customers are uniformly located along the line segment between 0
and 1 and two firms compete based on their distance from the customer.
• If total demand is 1 and Firm 1 locates at point a and Firm 2 locates at point 1-b, the demand at
the two firms, d1 and d2, is given by
a b

Total demand = 1
D1 = a + (1-b-a)/2 = (1+a-b)/2 =>a = b = 1/2
D2 = 1-a-(1-b-a)/2 = (1+b-a)/2
Cont…

Customer response time and local presence

 Convenience stores must locate close to customer while the
discount stores do not need to be close, customers are ready
to travel to buy larger quantities with lower prices.
 With faster transportation options, facilities can be
consolidated and away from customers.
Logistics and facility costs
 Inventory, transportation and facility cost should be
considered together.
Cont…
 A Framework for
Network Design Decisions
Cont…

• Managers use network design models in two

different situations:
1. Models are used to decide on locations where
facilities will be established and the capacity to be
assigned to each facility.
2. Models are used to assign current demand to the
available facilities and identify lanes along which
product will be transported
• SCOR model is the most common model on the design of
supply chain network.
 Practical issues in network design
decisions
• Do not underestimate the life-span of the
facilities
• Do not ignore the cultural issues and
implications
• Do not ignore the quality of life issues
• Focus on tax and tariffs and incentives
 Key requirement in supply chain design

1. Optimize Levels of Product Integration:

2. Leverage Industry Standards:
3. Minimize Premium Freight:
4. Design for Life Cycle:
5. Configure the selected Supply Chain:
6. Design for Demand & Supply Planning:
7. Minimize Inventory Costs:
8. Optimize Order Management:
9. Minimize Warranty/Service Costs:

https://www.sdcexec.com/software-technology/article/10289661/ibm-design-for-supply-chain