OPERATIONS

MANAGEMENT
Goods, Services and Value Chains
CHAPTER 9

Supply Chain Design

DAVID A. COLLIER
AND
JAMES R. EVANS

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2007 Thomson South-Western

Chapter 9 Learning Objectives

1. To understand the components of a supply chain,
the key functions of supply chain management,
and how supply chains fit into overall value
chains by examining a case study of Dell.
2. To understand the common types of metrics used
to evaluate supply chain performance and how
they are calculated, to see how the cash-to-cash
conversion cycle helps to explain supply chain
performance, and to understand the bullwhip
effect.
3. To understand the scope of issues involved in
designing supply chains, the difference between
efficient versus responsive supply chains and
push versus pull systems, the role of contract
manufacturers, and design of multi-site supply
Operations Management,
2e/Ch.
8 Facility
and Work Design
chains
for
services.
2007 Thomson South-Western

Chapter 9 Learning Objectives

4. To understand the basic criteria and decision
models used to design supply chain networks and
make location decisions.
5. To be able to apply simple quantitative methods
and models to help locate goods-producing or
service-providing facilities.
6. To understand key design issues relating to the
design of supply chain management systems,
including the selection of transportation services,
supplier evaluation, technology selection, and
inventory management.

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Chapter 9 Supply Chain Design

Value (Supply) Chain Purpose:

The basic purpose of a supply
chain is to coordinate the flow of
materials, services, and
information along the elements of
the supply chain to maximize
customer value.
U.S. Economy: $1.1 trillion in
inventory ($400 billion at retail,
$290 billion at wholesale, and
$450 at manufacturers) for sales
of $3.2 trillion.

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Chapter 9 Supply Chain Design

Three Views of Value/Supply

Chains:
Input/Output View
Pre- and Post-Production Services
View
Hierarchical Chain Structure

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Exhibit
2.1

The Value Chain Input/Output View

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Exhibit
2.3

Pre- and Postservice View of the Value

Chain

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Chapter 9 Supply Chain Design

Understanding Supply Chains

Supply chain management is the
management of all activities that
facilitate the fulfillment of a customer
order for a manufactured good to
achieve satisfied
customers at a reasonable cost.

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Exhibit
9.1

Typical Goods-Producing Hierarchical Supply Chain View

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Exhibit
9.2

Supply Chain Structure in the Automotive Industry

The automobile industry is an excellent example of

an OEM.

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Chapter 9 Supply Chain Design

The Supply Chain Operations Reference

(SCOR)
Model is based on five basic functions in SCM:
1. Plan: developing a strategy that balances
resources with requirements.
2. Source: procuring goods and services to
meet planned or actual demand.
3. Make: transforming goods and services to a
finished state to meet demand.
4. Deliver: managing orders, transportation,
and distribution to provide the goods and
services.
5. Return: customer returns, maintenance,
dealing with excess goods
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Chapter 9 Supply Chain Design

The Value (Supply) Chain and Dell

Dell sells highly customized personal computer,
servers, computer workstations, and peripherals.
Computers are assembled only in response to
individual orders purchased through a direct sales
model.
Dells value chain electronically links customers,
suppliers, assembly operations, and shippers.
Preproduction services focused on gaining the
customer include corporate partnerships, technical
support, and strong supplier relationships.
Postproduction services focus on keeping the
customer, including billing, shipping, returns, and
support.
Operationstechnical
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Chain Design
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Exhibit
9.3

A Value Chain Model of Dell, Inc.

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Chapter 9 Supply Chain Design

Understanding and Measuring Supply

Chain Performance
Supply chain metrics balance customer
requirements and internal supply chain
efficiency.
Delivery reliability is measured by perfect
order fulfillment.
Responsiveness is measured by order
fulfillment lead time or perfect delivery
fulfillment.
Customer-related measures measure the
level of customer satisfaction.
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Exhibit
9.4

Common Metrics Used to Measure

Supply Chain Performance

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Chapter 9 Supply Chain Design

Supply chain efficiency measures include:

Inventory Turnover (IT) =
Cost of goods sold /Average inventory value (Eq. 9.1)
Inventory Days Supply (IDS) = Average total
inventory/Cost of goods sold per day
(Eq. 9.2)
Cost of Goods Sold per Day (CGS/D) =
Cost of goods sold value/Operating days per year (Eq. 9.3)
Revenue per Day (R/D) =
Total revenue/Operating days per year
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(Eq. 9.7)
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Chapter 9 Supply Chain Design

Supply chain efficiency measures include:

Cash-to-Cash Conversion Cycle = IDS + ARDS - APDS
(Eq. 9.4)
Accounts Receivable Days Supply (ARDS) =
Accounts receivable value/Revenue per day (Eq. 9.5)
Accounts Payable Days Supply (ARDS) =
Accounts payable value/Revenue per day

(Eq. 9.6)

Revenue per Day (R/D) =

Total revenue/Operating days per year

(Eq. 9.7)

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Chapter 9 Dells Supply Chain Cash-to-Cash Conversion

Cycle

For 2003, Dell's cost of goods sold per day was CGS/D = $29.1
billion/365 days per year = $79,726.
The inventory days supply, which Dell calls "inventory
velocity," was IDS = $306,000/$79,726 = 3.8 days.
Dell's revenue per day using was R/D = $35.4 billion/365 days
per year = $96,986.
ARDS = $2,586,000/$96,986 = 26.8 days
APDS = $5,989,000/$96,986 = 61.8 days.
Therefore, in 2003, Dell's cash-to-cash conversion cycle is
C2C = 3.8 days + 26.8 days 61.8 days = - 31.2 days.

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Chapter 9 Dells Supply Chain Cash-to-Cash Conversion

Cycle

Therefore, in 2003, Dell's cash-to-cash conversion

cycle is C2C = 3.8 days + 26.8 days 61.8 days =
- 31.2 days.
The negative value means that Dell receives
customers payments (accounts receivable) 31.2
days, on average, before Dell has to pay its
suppliers (accounts payable).
This means that Dell's value chain is a self-funding
cash model!

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Exhibit
9.5

Dell Computers Cash-to-Cash Conversion

Cycles 1996 to 2003

Cash-to-Cash Conversion Cycle: inventory days supply

(IDS) plus accounts receivable days supply (ARDS)
minus accounts payable days supply (APDS)

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Exhibit
9.6

Dells 2003 Negative Cash-to-Cash

Conversion Cycle

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Chapter 9 Supply Chain Design

The bullwhip effect results from

order amplification in the supply
chain; a phenomenon that occurs
when each member of a supply chain
orders up to buffer its own
inventory.
Many firms counteract this
phenomenon by modifying the
supply chain infrastructure and
operational processes.
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Exhibit
7.7
9.7

Order Amplification for HP Printers

Source: Callioni, Gianpaolo, and Billington, Corey, Effective Collaboration, OR/MS Today, October 2001, pp. 3439.

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Chapter 9 Supply Chain Design

The Bullwhip Effect (continued)

The time lags associated with
information and material flow cause a
mismatch between actual customer
demand and the supply chains
ability to satisfy that demand as each
component of the supply chain seeks
to manage its operations from its
own perspective.
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Chapter 9 Supply Chain Design

Designing the Supply Chain

Efficient supply chains are
designed for efficiency and low cost
by minimizing inventory and
maximizing efficiencies in process
flow.
Responsive supply chains focus
on flexibility and responsive service
and are able to react quickly to
changing market demand and
requirements.

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Chapter 9 Supply Chain Design

Designing the Supply Chain

A push system produces goods in

advance of customer demand using
a forecast of sales and moves them
through supply chain to points of
sale where they are stored as
finished goods inventory.
A pull system produces only what is
needed at upstream stages in the
supply chain in response to customer
demand signals from downstream
stages.
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Exhibit
9.8
Supply Chain
Push-Pull
Systems and
Boundaries

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Chapter 9 Supply Chain Design

Designing the Supply Chain

Postponement is the process of delaying
product customization until the product is
closer to the customer at the end of the
supply chain.
An example is a manufacturer of
dishwashers that would manufacture the
dishwasher without the door, and maintain
inventories of doors at the distribution
centers. When orders arrive, the doors
can be quickly attached and the unit can
be shipped. This would reduce inventory
requirements.

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Chapter 9 Supply Chain Design

Designing the Supply Chain

A contract manufacturer is a firm that
specializes in certain types of goodsproducing activities, such as customized
design, manufacturing, assembly, and
packaging, and works under contract for
end users.
Some of the major global contract
manufacturers are Flextronics International
Ltd., Solectron, Jabil Circuit, Hon Hai
Precision Industrial, Celestica Inc., and
Sanmina-SCI Corporation.
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Chapter 9 Supply Chain Design

Designing the Supply Chain

Outsourcing to contract
manufacturers can offer significant
competitive advantages, such as access
to advanced manufacturing technologies,
faster product time-to-market,
customization of goods in regional
markets, and lower total costs resulting
from economies of scale.

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Chapter 9 Supply Chain Design

Multi-site management is the process of

managing geographically dispersed serviceproviding facilities.
McDonald's Corporation has over 30,000
stores in 121 countries.
Bank of America has over 16,000 ATMs and
5,700 branch banks in the United States.
Federal Express operates over one million
drop off mailboxes in 215 countries.
Supply chains are vital to the operation of
multisite management organizations.
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Chapter 9 Supply Chain Design

Location Decisions in Supply Chains

Location decisions can have a profound effect on
supply chain performance and a firms
competitive advantage.
The type of facility and its location affects the
supply chain structure.
Location decisions in supply and value chains are
based on both
economic (facility costs, operating costs, and
transportation costs) and
non-economic (labor availability, legal and
political factors, community environment) factors.
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Chapter 9 Supply Chain Design

Location Decisions in Supply

Chains
Four basic decisions:
global (nation) location,
regional location,
district/community location,
local site selection.
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Exhibit
9.9

Example Location Factors for Site Selection

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Chapter 9 Supply Chain Design

Location Scoring Model

Scoring model consists of a list
of major location criteria, each of
which is partitioned into several
levels, and an assigned score to
each level that reflects its relative
importance.
Model assumes that each factor is
equal in importance, however
weights can be placed on each
score to provide differentiation.

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Chapter 9 Supply Chain Design

Center of Gravity Method

Center of gravity method
determines the X and Y coordinates
(location) for a single facility.
Takes into account locations,
demand, and transportation costs to
arrive at the best location.
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Exhibit 9.10
Facility
Location
Scoring
Model

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Exhibit 9.11 Taylor Paper Products Plant and

Customer Locations: Center of Gravity Method

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Exhibit 9.12 Excel Spreadsheet for Taylor Paper Products

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Chapter 9 Supply Chain Design

Transportation Model
Used if all facility locations are
fixed.
Determines lowest-cost of
distributing goods from supply
points (origins) to demand
locations (destinations)

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Exhibit 9.13 Transportation Model Spreadsheet for Arnoff

Enterprises (Arnoff Enterprises.xls)

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Exhibit 9.14 Optimal Distribution Plan if Denver

Warehouse Is Closed

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Chapter 9 Supply Chain Design

Network Location Models

Selecting the best facility location,
accounting for travels times on
public roads.
Locations are called nodes and
volume, distance, time or cost
between nodes are called arcs
Goal is to minimize cost, distance
traveled, and response and delivery
time
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Exhibit 9.15 Zone Connections for Marymount Township

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Chapter 9 Supply Chain Design

Selecting Transportation Services

Services include rail, motor, air,
water, and pipeline.
Critical factors include speed,
accessibility, cost, and capability.

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Chapter 9 Supply Chain Design

Supplier Evaluation
Many companies segment suppliers
based on their importance to the
business and manage them
accordingly.
Texas Instruments measures
suppliers quality performance by
parts per million defective, on time
deliveries, and cost of ownership.
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Exhibit 9.16 Comparison of Transportation Modes

(Note: The best ranking is 1.)

Selecting Transportation
Services

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Chapter 9 Supply Chain Design

Selecting Technology

Selecting the appropriate technology

is critical for both planning and
design of supply chains as well as
execution.
Electronic data interchange and
Internet links streamline information
flow between customers and
suppliers and increase the velocity of
supply chains.
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Chapter 9 Supply Chain Design

Inventory Management
An efficient distribution system
allows a company to operate with
lower inventory levels, which reduces
costs and provides high levels of
service to customers.
Vendor managed inventory is
becoming a popular concept where
the vendor monitors and manages
the inventory for the customer.
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Chapter 9 Solved Problem #1

Evaluate the cash-to-cash conversion cycle for a
company that has sales of $3.5 million, Cost of Goods
Sold equal to $2.8 million, 250 operating days a year,
total average on hand inventory of $460,000, accounts
receivable equal to $625,000, and accounts payable of
$900,100. What can you conclude about the
companys operating practices?
Solution
Using Equations 9.1 to 9.7 we computed the following:
CGS/D=Cost of goods sold value = $2,800,000 =
$11,200/day
Operating days per year
250
R/D = Total revenue (sales) = $3,500,000 = $14,000
Operationsday
Management, 2e/Ch. Operating
8 Facility and Work Design days per year
per
250
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Chapter 9 Solved Problem #1

Solution (Continued)
IDS = Average total inventory = $460,000 = 41.1
days Cost of goods sold per day $11,200
IT = Cost of goods sold value = $2,800,000 = 6.1
turnsAverage inventory value
$460,000
ARDS= Accounts receivable value = $625,000=
44.6 days Revenue (sales) per day
$14,000
APDS = Accounts payable value = $900,100 = 64.3
days Revenue (sales) per day
$14,000
Cash-to-Cash Conversion Cycle = IDS + ARDS
APDS = 41.1 + 44.6 - 64.3 = + 21.4 days.
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Chapter 9 Solved Problem #1

Solution (Continued)
The firm receives the customer's payments
(accounts receivable), on average, 21.4 days "after"
it must pay its bills to suppliers (accounts payable).
If by improving inventory and/or accounts receivable
systems and practices, the firm can shorten the 85.7
days to 64.3 days, theoretically it should not have to
borrow funds to support its inventory levels.
All of these numbers should be compared to industry
and competitor performance standards.
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Chapter 9 Solved Problem #2

A pizza restaurant wants to build a satellite
kitchen in a nearby suburb. Which site
would be the best?
Because sites are fixed, we need to evaluate
the total weighted time from each site to the
customer zone. Total weighted times are:
Site A: 26,700
Site B: 23,500
Site C: 30,500
Site B appears to be the best location
because it minimizes total weighted travel
time.

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Chapter 9 Solved Problem #3

An automobile dealership in a large city had
four locations spread around the Standard
Metropolitan Area some as far as 60 miles
apart. Each location had a dealership
showroom, maintenance and repair service
with a parts stockroom, and used and new
vehicle lots. The coordinates in miles on an
X-Y grid of each city location are shown
below with the number of major parts sold
each month as the third coordinate. That is,
Paris (20,50, 34) is X-axis = 20 miles, Y- axis
= 50 miles, and 34 parts are sold per month.
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Chapter 9 Solved Problem #3

Solution Solved Problem # 3

Using Equation 9.8 and 9.9 we obtain:
Center of gravity X-axis =
20(34)+60(36)+70(56)+90(28) = 60.3
34 + 36 + 56 + 28
Center of gravity Y-axis =
50(34)+40(36)+55(56)+30(28) = 45.8
34 + 36 + 56 + 28
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Chapter 9 Solved Problem #3

Solution
To minimize the weighted distance among
the four user locations the center-of-gravity
method gives X coordinate = 60.3 miles and
Y-coordinate = 45.8 miles. This location is a
good place to start the search for property to
locate a warehouse. In fact, these ideal
coordinates (60.3, 45.8) are very close to the
Hickory location (60, 40) so consideration
should be given to add a central warehouse
on this property if space is available.
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Exhibit 9.17 University Campus Map Problem # 13

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Exhibit 9.18 Binghamton City Data -- Problem # 20

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Exhibit 9.19 R. K. Martin Case Distribution Data

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