Chapter 3

1. Chapter 3 Network and System Design

2. Objectives • After reading the chapter and reviewing the materials presented the students will be able to: • Understand how to manage processes across the supply chain. • Describe the stages of supply chain integration • Explain enterprise resource planning (ERP) as a systems integration technology.

3. The Supply Chain System • The supply chain network design includes the physical structure and business processes included in the system. • The information technology (IT) design, enables data sharing, communication, and process synchronization. • IT is the backbone of the supply chain management (SCM) that enables managing processes. • Together the supply chain network design and the IT system design support the supply chain strategy.

4. What is a Business Process? • A business process is a structured set of activities or steps with specified outcomes. • The customer service process may involve a series of well coordinated activities, such as billing and invoicing, handling product returns, providing real time information on promised shipping dates, and product availability. • For processes to be effective and efficient, organizational functions must work together and be well coordinated.

5. Managing Supply Chain Processes • The transactional view focuses on making supply chain processes more efficient and effective based on quantitative metrics. This can be achieved through supply chain network redesign to promote speed and eliminate redundancy, by standardizing transactions to improve efficiency, and implementing better information technology to improve transfer of information and improve accuracy. • The relationship view focuses on managing relationships across the supply chain. This involves managing relationships between people and organizations, and linking up processes across organizations of the supply chain.

6. Understanding Processes: Theory of Constraints (TOC) • The premise behind Theory of Constraints (TOC) is that every system has one or more limiting factors that is preventing it from further achieving its goal. • The TOC process seeks to identify the constraint and restructure to eliminate its impact. • The system cannot produce any more than the output of its bottleneck or constraining activity. • If we want to increase output, we need to find ways of increasing the capacity of the bottleneck or constraint. • When the constraint changes, identify the new constraint and continue the steps, as this is a never ending process.

7. System Variation • Every system or process has variations. • First, attempts should be made to reduce or eliminate as much variation as possible. This requires identifying the source of variability in the system, such as workers or equipment, and correcting the problem. • Second, it may be possible to create buffers to deal with this variation. Buffers in the form of excess inventories can be placed before and after highly variable activities. • Third, managers can deal with the variation by designing more flexibility in the process to respond to the variation. This may be in the form of flexible technology or cross training workers.

8. Capacity Implications • Capacity refers to the maximum amount of output that can be achieved by a process over a specified period of time. • Healthcare clinic measures capacity in terms of patients seen per day, restaurants in customers served, and delivery companies in terms of packages delivered. • Design capacity is the maximum output rate that can be achieved by a facility. This is achieved through overtime, overstaffing, or subcontracting. • Effective capacity is the maximum output rate that can be sustained under normal conditions.

9. Integration of Supply Chain Processes • There are 3 stages of supply chain integration. Stage 1 represents complete functional independence, while stage 3 represents complete process integration. Companies in stage 2 have internal functional cooperation and coordination but not across the supply chain. • However companies do not go through this evolution willingly as it requires significant organizational change and restructuring. • Rather, they typically evolve in response to competitive pressures and threats.

10. Designing Supply Chain Networks • All firms belong to one or more supply chains that begin with the source of raw materials and end with consumption. • Two aspects of the supply chain that are important are the actual physical structure of the network, and the management of the network. • Perishable products have a shorter and more streamlined supply chain. • Sourcing a standard component that is a commodity with many suppliers does not require relationship building.

11. Designing Segmented Structures • High levels of product diversity makes forecasting demand more difficult and inevitably results in either excess inventory or stock-outs. • Major retailers demand in-stock levels in excess of 98%, placing high delivery expectations on suppliers. • Wal-Mart has two supply chain structures: one for fast moving items and another for slow moving items. • Quick time to market matters much more to short life cycle merchandise than to long lasting products. • Design multiple supply chain segments to meet identified requirements. • Once the segments have been created, details of putting them in practice must be established.

12. IT as an enabler of SCM • Information technology (IT) enables communication, storage, and processing of data within and between firms. • It is also used to organize information to help managers with decision making. • To manage its inventory, Wal-Mart uses an IT system called Retail Link, which enables suppliers to see the exact number of their products on every shelf of every store. • Enterprise resource planning (ERP) has enabled sharing of information and data across the enterprise for better decision making.

13. What is ERP? • The purpose of ERP is to facilitate the flow of information between all business functions inside the boundaries of the organization and manage the connections to other members of the supply chain. • ERP systems typically tie together all business processes such as sales, production, inventory management, warehousing, delivery, accounting, billing, and human resource management. • An ERP system uses a central database allowing every department within a business or even supply chain to store and retrieve information in real time.

14. ERP Configuration • Fully customizing an ERP package can be very expensive and complicated. • It can also be time consuming and can significantly delay implementation of an integrated system. • The advantage of modular design is flexibility as it permits implementation of some functions but not others.

15. ERP Implementation • Implementing ERP software is typically too complex for in house developers who lack the required skills, and it is better to hire outside consultants who are knowledgeable in implementing these systems. • The advantage of ERP systems is that they are modular and do not all need to be implemented at once. • The benefit of ERP systems is that it enables the supply chain to function as a unified system.

16. Summary • The supply chain network design includes the physical structure and business processes included in the system. • The information technology (IT) design, enables data sharing, communication, and process synchronization. • A business process is a structured set of activities or steps with specified outcomes. • The premise behind Theory of Constraints (TOC) is that every system has one or more limiting factors that is preventing it from further achieving its goal. • If we want to increase output, we need to find ways of increasing the capacity of the bottleneck or constraint. • Capacity refers to the maximum amount of output that can be achieved by a process over a specified period of time. • 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. • There are 3 stages of supply chain integration. Stage 1 represents complete functional independence, while stage 3 represents complete process integration. Companies in stage 2 have internal functional cooperation and coordination but not across the supply chain. • The purpose of ERP is to facilitate the flow of information between all business functions inside the boundaries of the organization and manage the connections to other members of the supply chain. • The benefit of ERP systems is that it enables the supply chain to function as a unified system.

17. Home Work • 1. What is the premise behind the theory of constraints (TOC)? • 2. What is the difference between design capacity and effective capacity? • 3. What is the purpose of enterprise resource planning (ERP)?