Hapter 6: Source: Getty Images

Chapter 6
Supply network design
Source: Getty Images
Slack, Chambers and Johnston, Operations Management 5th Edition Nigel Slack, Stuart Chambers, and Robert Johnston 2007
Supply network design
Process design
Operations
Supply network design strategy
Layout Operations
and flow management
Design Improvement
Process Job
technology design Planning and
control
Product/service
design
Operations in practice
Source: Corbis/ Gianni Giansanti/ Sygma
Michael Dell started in 1984 by cutting out the middle man and
delivering computers direct to the customer
Using its direct selling methods, Dell went on to become the number
one computer maker
There are many reasons for Dells success but most of them come
from the way Dell configures its supply networks
Operations network for a plastic homeware company
Second-tier First-tier First-tier Second-tier

suppliers suppliers customers customers
Chemical Wholesaler
company Plastic Retailer
stockist
Cardboard Plastic
company homeware
manufacturer Retailer
Packaging
Ink
supplier
supplier
Direct supply
Information
Operations network for a shopping mall
Second-tier First-tier First-tier Second-tier

suppliers suppliers customers customers
Recruitment
agency Security
services
Cleaning
materials Cleaning Shopping Retailers Retail
supplier services mall customers
Equipment Maintenance
supplier services
Direct supply
Information
Operations performance should be seen
as a whole supply chain issue
Benefits of looking at the whole supply chain include
It helps an understanding of competitiveness

It helps to identify the significant links in the network
It helps focus on long-term issues
Direction, extent and balance of vertical integration
Balance Should excess capacity

be used to supply other companies?
Raw
material Component Assembly Wholesaler Retailer
suppliers maker operation
Extent Narrow process span

Extent Wide process span
Direction Direction
Upstream vertical Downstream vertical
integration integration
The decision logic of outsourcing
Does Is companys Is significant

Is activity of No company have No No operations No Explore
strategic operations outsourcing
specialized performance performance
importance? knowledge? improvement this activity
superior?
likely?
Yes Yes Yes Yes
Explore keeping this activity in-house
Supply-side and demand-side factors
in location decisions
Examples of supply-side Examples of demand-side

factors that vary with factors that vary with
location, influencing costs location, influencing
customer service/revenue
labour costs The
land costs operation labour skills
energy costs suitability of site
transportation costs image
community factors convenience for customers
Cost breakdown of a shirt made in various countries
and sold in France
France 15.55
Portugal 14.33
Turkey 11.43
Thailand 11.43
Labour
Morocco 11.13
Transport
Romania 10.82
Fabric
China 10.37 Supplies
Myanmar 9.60 Customs duties
0 2 4 6 8 10 12 14 16
Cost in euros
Location Where is the market?
Population
density
Low High
The balance of capacity
Capacity can either lead or lag demand
Inventory can be used to smooth out the peaks
Spare capacity can be used to supply other

operations
The danger of this is that the original operation

may receive a lower level of service
Unit cost curves for individual service centres of
varying capacities
Real cost per customer served Cost curve for 5
bay service centre
Cost curve for 10
Cost curve for 15
bay service centre
bay service centre
Economy of scale
curve for hotel
Economies Diseconomies
capacity
of scale of scale
5 10 15
Average number of bays in use
Capacity leading demand and capacity lagging demand
Capacity leads demand Capacity lags demand
Capacity
Volume
Volume
Demand Demand
Capacity
Time Time
Smoothing with inventory
Capacity
Volume
Demand
Time
Key Terms Test
Demand side
The chains of customers, customers customers, etc., that
receive the products and services produced by an operation.
First-tier
The description applied to suppliers and customers who are in
immediate relationships with an operation with no
intermediary operations.
Second-tier
The description applied to suppliers and customers who are
separated from the operation only by first-tier suppliers and
customers.
Key Terms Test
Immediate supply network
The suppliers and customers who have direct contact with
an operation.
Total supply network

All the suppliers and customers who are involved in supply
chains that pass through an operation.
Downstream
The other operations in a supply chain between the
operation being considered and the end customer.
Key Terms Test
Upstream
The other operations in a supply chain that are towards the
supply side of the operation.
Outsourcing
The practice of contracting out to a supplier work previously
done within the operation.
Vertical integration
The extent to which an operation chooses to own the
network of processes that produce a product or service;
often associated with the do or buy decision.
Key Terms Test
Location
The geographical position of an operation or process.
Long-term capacity management

The set of decisions that determine the level of physical capacity
of an operation in whatever the operation considers to be
long-term; this varies between industries, but is usually in
excess of one year.
Disintermediation
The emergence of an operation in a supply network that
separates two operations that were previously in direct
contact.
Key Terms Test
Spatially variable costs
The costs that are significant in the location decision that vary with
geographical position.
Weighted-score method
A technique for comparing the attractiveness of alternative locations
that allocates a score to the factors that are significant in the
decision and weights each score by the significance of the factor.
Centre-of-gravity method
A technique that uses the physical analogy of balance to determine
the geographical location that balances the weighted importance
of the other operations with which the one being located has a
direct relationship.
Key Terms Test
Fixed-cost breaks
The volumes of output at which it is necessary to invest in
operations facilities that bear a fixed cost.
Economies of scale
The manner in which the costs of running an operation
decrease as it gets larger.
Diseconomies of scale
A term used to describe the extra costs that are incurred in
running an operation as it gets larger.
Key Terms Test
Capacity leading
The strategy of planning capacity levels such that they are
always greater than or equal to forecast demand.
Capacity lagging
The strategy of planning capacity levels such that they are
always less than or equal to forecast demand.

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Chapter 6

Supply network design

Source: Getty Images

Source: Corbis/ Gianni Giansanti/ Sygma

Second-tier First-tier First-tier Second-tier

Second-tier First-tier First-tier Second-tier

Benefits of looking at the whole supply chain include

It helps an understanding of competitiveness

Balance Should excess capacity

Extent Narrow process span

Does Is companys Is significant

Yes Yes Yes Yes

Explore keeping this activity in-house

Examples of supply-side Examples of demand-side

Myanmar 9.60 Customs duties

Capacity can either lead or lag demand

Inventory can be used to smooth out the peaks

Spare capacity can be used to supply other

The danger of this is that the original operation

Capacity leads demand Capacity lags demand

Total supply network

Long-term capacity management

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