Copyright 2011 John Wiley & Sons, Inc.

Chapter 3

Network and System Design

3-1

Lecture Outline

3-2

• The Supply Chain System

• Understanding Processes: Theory of Constraints (TOC)

• Integration of Supply Chain Processes

• Designing Supply Chain Networks

• Enterprise Resource Planning (ERP)

Copyright 2011 John Wiley & Sons, Inc.

The Supply Chain System

3-3

A supply chain can be viewed as a system of processes that cut across organizations and deliver customer value, rather than as a series of separate organizations and functions.

Copyright 2011 John Wiley & Sons, Inc.

Processes Across theSupply Chain

Network and information technology (IT) design support supply chain strategy for the system

3-4Copyright 2011 John Wiley & Sons, Inc.

Supply Chain Strategy

SC NetworkDesign IT Design

Processes Across theSupply Chain Continued

• Supply Chain Strategy

– long-range plan for the system

• Supply Chain Network Design

– design of the network structure and business process

• Information Technology (IT) Design

– enables data sharing, communication, and process synchronization

3-5Copyright 2011 John Wiley & Sons, Inc.

What is a Business Process?

A business process is a structured set of activities or steps with specified outcomes

– processes involve many organizational functions

– every process has structural and resource constraints limiting output

3-6Copyright 2011 John Wiley & Sons, Inc.

Theory of Constraints

The Theory of Constraints (TOC) was introduced by Dr. Eliyahu Goldratt in his book The Goal

• Premise of TOC– every system has at least one constraint

• Objective– identify the constraint and restructure the

organization to eliminate its impact

3-7Copyright 2011 John Wiley & Sons, Inc.

System Constraints

A system cannot produce more than its constraining activity which is sometimes called the “bottleneck”

Output is related to how system activities are linked

• Activities can be linked:

– serially

– in parallel

3-8Copyright 2011 John Wiley & Sons, Inc.

Serial Process Example

3-9Copyright 2011 John Wiley & Sons, Inc.

Consider the following distribution network:

Maximum output per day = 50,000 units

Consider the following distribution network:

Maximum output per day = 64,000 units

Parallel Process Example

3-10Copyright 2011 John Wiley & Sons, Inc.

Steps of Constraint Management

1. Identify the constraint

2. Exploit the constraint

3. Subordinate all other processes to the above decision

4. Elevate the constraint

5. When the constraint changes, return to Step 1

6. Engage in continuous improvement3-11Copyright 2011 John Wiley & Sons, Inc.

System Variation

• Every system or process has variation

– output varies

– activities vary

– equipment and facilities vary

• Variation is a problem

– consumes resources

– adds complexity and uncertainty

3-12Copyright 2011 John Wiley & Sons, Inc.

Managing Process Variation

Process variation can be managed three ways:

– reduce or eliminate variation

– create buffers to deal with the variation

– design more flexibility into the process to respond to the variation

3-13Copyright 2011 John Wiley & Sons, Inc.

Capacity Implications

Linked supply chain organizations need to match capacities to avoid bottlenecks

Two common measures:

• Design Capacity– maximum output rate that can be achieved

• Effective Capacity– maximum output rate that can be sustained

under normal conditions3-14Copyright 2011 John Wiley & Sons, Inc.

Capacity utilization indicates how much of capacity is actually being used

Calculation:

Utilization effective = (100%)

Utilization design = (100%)

Actual output

Effective Capacity

Capacity Utilization

3-15Copyright 2011 John Wiley & Sons, Inc.

Actual output

Design Capacity

A warehouse can process a maximum of 100,000 orders/day with overtime labor. The facility is designed to process 70,000 orders/day under normal conditions. In June, the facility processed 80,000 orders/day.

Capacity Utilization Example

3-16Copyright 2011 John Wiley & Sons, Inc.

Calculate effective and design capacity utilization for the month of June

Utilization effective = (100%) = 114.3%

Utilization design = (100%) = 80%

80,000

70,000

Capacity Utilization Example Continued

3-17Copyright 2011 John Wiley & Sons, Inc.

80,000

100,000

Integration of Supply Chain Processes

Companies move through a set of integration stages as their supply chain strategy evolves

Three Stages:

1. Complete functional independence

2. Internal functional cooperation and coordination, but not across the supply chain

3. True supply chain integration

3-18Copyright 2011 John Wiley & Sons, Inc.

Stages of Supply Chain Integration

3-19Copyright 2011 John Wiley & Sons, Inc.

Vertical Integration vs. Coordination

• Vertical Integration– ownership of upstream suppliers and

downstream customers

• Focus on Core Competencies– less important activities are outsourced

– companies must coordinate processes between multiple supply chain entities

– cooperation supplants historical adversarial supplier relationships

3-20Copyright 2011 John Wiley & Sons, Inc.

Supply Chain Networks

Two important aspects of the supply chain network:

• Physical structure of the network

• Management of the network

3-21Copyright 2011 John Wiley & Sons, Inc.

Supply Chain Structure

Three elements define supply chain network structure:

1. Number of companies in the supply chain

2. Structural dimensions of the network

3. Number of process links across the supply chain

3-22Copyright 2011 John Wiley & Sons, Inc.

Supply Chain Structure Continued

Factors affecting supply chain network structure:

– product type

– product characteristics

– number of available suppliers

– availability of raw materials

– ease of access to customers

3-23Copyright 2011 John Wiley & Sons, Inc.

Supply Chain Network Management

Not all supply chain branches and links need to be managed equally

– identify and manage key process links across the supply chain

– manage processes across entire supply chain

– integrate activities into SCM processes

3-24Copyright 2011 John Wiley & Sons, Inc.

Designing Segmented Structures

• Segmented supply chains help manage varying customer requirements in a network

• Each segment will result in a different supply chain structure

3-25Copyright 2011 John Wiley & Sons, Inc.

Designing Segmented Structures Continued

• Three-step approach:

1. Identify key drivers of operational complexity

2. Design differentiated supply chain segments tailored to these unique complexities

3. Create a customized end-to-end operational blueprint and performance metrics for each supply chain segment

3-26Copyright 2011 John Wiley & Sons, Inc.

Ways to Segment Supply Chains

• Segment Examples:

– Fast-moving vs. slow-moving products

– Fast growth vs. slow-growth products

– Traditional vs. innovation versus online channel

– High priority customers vs. low priority customers

– Low-volume/low variability vs. low-volume/high variability

– High-volume/low variability vs. high-volume/high variability

3-27Copyright 2011 John Wiley & Sons, Inc.

Role of Information Technology

IT enables the linking of processes across the supply chain

– enables communication

– provides storage

– organizes information

– provides visibility

– processes data within and between firms

3-28Copyright 2011 John Wiley & Sons, Inc.

Enterprise Resource Planning (ERP)

ERP systems are a fully integrated computer-based technology used by organizations to manage resources throughout the supply chain

ERP is an Information Technology

3-29Copyright 2011 John Wiley & Sons, Inc.

ERP Continued

ERP systems consolidate all business processes into an enterprise-wide system that

– operates in real time

– uses a single, centralized database

– utilizes a standard format for inputted data

– is comprised of modules for business processes

3-30Copyright 2011 John Wiley & Sons, Inc.

ERP Modules

ERP modules can be selected based on the needs of the business

• ERP Modules:

– Manufacturing

– Finance

– Human Resources

3-31Copyright 2011 John Wiley & Sons, Inc.

– Supply Chain Management

– Project Management

– Customer Relationship Management (CRM)

ERP Components

ERP modules include multiple components designed for a specific purpose

• Example components of a Supply Chain Management Module:

– Inventory

– Order Entry

– Purchasing

3-32Copyright 2011 John Wiley & Sons, Inc.

– Supply Chain Planning

– Supplier Scheduling

– Product Inspection

ERP Configuration

ERP system configurations:

• Fully Customized

• Standardized “off-the-shelf” modules

• Mix of Customized and Standardized

3-33Copyright 2011 John Wiley & Sons, Inc.

ERP Implementation

Implementation Steps:

1. map current business processes

2. identify ERP modules to match processes

3. identify steps to efficiently unify modules with processes

4. further refine unity

3-34Copyright 2011 John Wiley & Sons, Inc.

Review

1. A supply chain can be viewed as a system of processes. SCM involves managing these processes.

2. A business process is a structured set of activities or steps with specified outcomes.

3. The transactional view of supply chains focuses on the efficiency and effectiveness of managing supply chain processes.

3-35Copyright 2011 John Wiley & Sons, Inc.

Review Continued

4. The relationship view of supply chains focuses on managing relationships across the supply chain.

5. TOC explains how to manage a system. According to TOC every system has at least one constraint. A constraint is anything that prevents the system from being able to achieve its goal and is sometimes called the “bottleneck.” A system should be improved by managing the constraint.

3-36Copyright 2011 John Wiley & Sons, Inc.

Review Continued

6. Design capacity is the maximum output rate that can be achieved by a facility. Effective capacity is the maximum output rate that can be sustained under normal conditions.

7. ERP systems are a fully integrated computer-based technology used by organizations to manage resources throughout the supply chain.

3-37Copyright 2011 John Wiley & Sons, Inc.

Copyright 2011 John Wiley & Sons, Inc.All rights reserved. Reproduction or translation of this work beyond that permitted in section 117 of the 1976 United States Copyright Act without express permission of the copyright owner is unlawful. Request for further information should be addressed to the Permission Department, John Wiley & Sons, Inc. The purchaser may make back-up copies for his/her own use only and not for distribution or resale. The Publisher assumes no responsibility for errors, omissions, or damages caused by the use of these programs or from the use of the information herein.

3-38