Supply Chain Design &

Planning.

By: Ohud Altalhi.

- 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 that managers should step back and looks at
the supply chain as a whole and formulates strategies and
processes that maximize the total supply chain value-
adding and minimizes the total supply chain costs.
Supply Chain Configuration:
Supply chain configuration represents how the
participating company members of the chain
are connected with each other to deliver the
product or service to the end customer.

 Toan OEM, how many suppliers it uses, how the

suppliers are grouped or categorized or tiered,
where do they geographically located, the
ownership and independence of the suppliers, the
choice of distribution channels are all the
configuration issues for the supply chain.
The fact is that companies do have the choice to
configure their supply chains in the way they
believe are most appropriate and beneficial.
However there is no single ‘best’ configuration
for all supply chains. It all depends on the
industry sectors, market environment, stages of
product cycle.

The evolution of global multinationals’ network

could be an interesting example to understand the
relevance of supply chain configuration.
Supply chain configuration can also be observed
from the network relationship perspective.
 When the OEM forms its supply network through
tiered suppliers and tiered distributor with medium
and long term stability, it can be called the ‘Stable
Network.’ When the OEM does not have many of
those long term tiered suppliers and customers, but
instead uses dynamic and mostly short term suppliers
and distributors to achieve high level of operational
flexibility and strategic agility, it can be called the
‘Dynamic Network.’ The two broad types of network
configuration can be illustrated in figure x.
 In comparison, the stable network has more control over its
suppliers and distributors’ operations than the dynamic network.
An unexpected misunderstanding in the dynamic network may
result in unrecoverable product defects. Along with it, there is
higher risk in operational cost control and quality standard.
 However, the dynamic network is much more flexible than
stable network in that it can quickly form a new network in the
supply market to cater for the changed demand both in volume
and in variety. It also has a better ability to upgrade
technology and foster innovative processes.
 Which network configuration is better? It all depends on the
objectives and desired characteristics of the network in the
business context.
Extent of Vertical Integration:
 Much of the supply chain design is determined by the
extent of vertical integration.

 Vertical integration is defined as the single ownership

of consecutive activities along the supply chain.

 On the other hand if it owns a number of tiers of

suppliers and customers, it is regarded as having a large
extent of vertical integration.
 It was very rigid in product line
modification.
 no flexibility in responding to demand
changes (due to fixed production capacity).
a supply chain’s extent of vertical integration has
always had profound impact on its development.
To large extent a company’s strategy, operation and
performance will depend on the right design of the
supply chain configuration. Nevertheless, depending
on the nature of industry, product lifecycle and
competitive environment, the architecture design of
supply chain can vary significantly.
Generally, process based industry such as oil industry
and chemical industry tends to be more vertically
integrated; and the technology intensive electronics
industry tends to be less vertically integrated.
Outsourcing & Offshoring:
 On the opposite direction of vertical integration is
vertical disintegration where the supply chain comprises
of many independent participating members.
 The OEM does not have a large extent of vertically
integrated consecutive operations.
 In fact for a vertically disintegrated supply chain,
considerable part of the OEM’s operations are
outsourced to the independent external suppliers in order
to achieve maximized value adding and minimized total
cost for the supply chain.
 The decision and processes of moving any strategically
significant operations out to the external suppliers is
called outsourcing.
There are two points to clarify from the definition.
First, outsourcing is not just a decision of make or
buy, but also a process that including identifying
the potential suppliers, contractual negotiation,
regular evaluation and review of the outsourced
operation. Second, not all operations that carried
out by the external suppliers are suitable to be
classified as outsourcing; only the strategically
significant operations can be classified as
outsourcing. For example, to a manufacturing
supply chain, outsourcing some key components
manufacturing operations is strategically
significant; but the external catering service
supply used by the same company is not.
Outsourcing has many other potential benefits:

1- Focus on and further developing the core competences.

2- Further differentiated competitive edge.
3- Increasing business flexibility, thus supply chain flexibility.
4- Improved supply chain responsiveness.
Example of outsourcing is the Benetton
Group which is a leading edge garment supply
chain in the world. It has the presence in over
120 countries. Its core business is fashion
apparel. But, 80% of its manufacturing
operation is outsourced to thousands of
independent small manufactures. This helped
the Benetton group to reduce its manufacturing
cost, synchronize the supply chain capacity
with the fluctuated market demand.
From an OEM perspective the supply
chain is less vertically integrated if more
operations are outsourced.
Similarly, less outsourcing means higher
level of vertical integration.
Another closely related concept in supply chain
architecture design is called ‘offshoring’.
Offshoring is defined as moving the on-shore
operations to offshore locations in order to take
the advantages of local resources, and to reduce
operating cost.
The types of outsourcing business can be broadly
observed in three categories
Business process outsourcing (BPO)
1- Marketing / call centr outsourcing
2- R & D process outsourcing
3- Engineering process outsourcing (EPO)
4- HR and recruitment process outsourcing
5- Knowledge process outsourcing (KPO)

Business function outsourcing

1- Financial auditing
2- IT services
3- Logistics services
Facility and man power outsourcing
1- Capital equipment leasing
2- Free length experts hiring
Here is a set of common steps of outsourcing processes:

1) Understand competitive environment.

2) Clarify the strategic objectives and processes.
3) Analyzing the market needs.
4) Identify internal resources and competencies.
5) Make or buy decision making.
6) Identifying strategic suppliers.
7) Deciding on the relationships.
8) Performance evaluation and reviewing.
Nevertheless, outsourcing like many other management activities is not without any
risks. Far from it, the biggest concern of outsourcing is perhaps the risk that it
brings about.

1- Negative impact on company’s personnel.

2- Loss control over key strategic design task, sub-
system or component, resulting in negative impact
on the company’s competitiveness.
3- Risk of severe business disruption due to failed
supply from single sourced suppliers.
4- Short term approach to outsourcing may inhibits
continuous improvement and long term investment.
5- Foreign currency exchange risk if involves
overseas suppliers.