20121 Global Gl b l operations and supply ti d l chain management

Sessions 5-6

Operations Decision Areas: Structural Decisions and network Design

Prof. Prof Silvia Zamboni

Supply chain management

Link to other disciplines

Transport economics Operations research / Systems

Engineering

Operations management

Logistics and supply chain management

Geography

Quality management Information technology Supply management and procurement

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Marketing g

Supply Chain Management S l Ch i M t

The Supply Chain is the network of organizations that are involved, through upstream and downstream linkages, in the different processes and activities that produce value in the form of product and services in the hands of the ultimate consumer. The Supply Chain includes: the chains of suppliers, providing inputs to the operations; the chains of customers, receiving outputs from the operation; other operations that may compete or cooperate cooperate.

Focal Company

Second tier suppliers Silvia Zamboni 2011

Firs tier suppliers

Competitors - Collaborators

First tier customers

Second tier customers

Supply Ch i M S l Chain Management: D fi iti t Definitions

The central idea of Supply Chain Management (SCM) is to apply a total system approach to managing the flow of information materials and information, materials, services from raw materials suppliers, through factories and warehouses, to the end customers. Supply Chain Management is the integration of key business processes from the end user through original suppliers that provide products, services, and information that add value for customers and stakeholders. t k h ld Successful SCM requires cross-functional integration of key business p processes within the firm and across the network of firms that comprise p the supply chain.

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The S Th Supply Ch i N t l Chain Network k

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Supply Chain Operations Reference Model (SCOR)

Developed by Supply Chain Council (SCC Independent, not-for-profit corporation organized in 1996) 1996). Started with 69 voluntary companies; now close to 1000 members. SCC Objective: To develop a standard supply-chain process reference model enabling g pp y partners, by , y effective communication among the supply chain p Using standard terminology to better communicate and learn the supply chain issues Using standard metrics to compare and measure their performances

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Supply Chain Operations Reference Model (SCOR)

The Primary Use of SCOR: T describe, measure and evaluate supply chain configurations. To d ib d l t l h i fi ti SCOR contains: Standard descriptions of management processes A framework of relationships among the standard processes Standard metrics to measure process performance Management practices that produce best-in-class performance

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Supply Chain Operations Reference Model (SCOR): Boundaries

SCOR spans: All customer i t t interactions, from order entry through paid i ti f d t th h id invoice. i All product (physical material and service) transactions, from suppliers supplier to customers customer, including equipment, supplies, spare parts, bulk product, software, etc. All market interactions, from the understanding of aggregate demand to the fulfillment of each order SCOR does not attempt to describe every business process or activity, including: Sales and marketing (demand generation) Research and technology development P d t development Product d l t Some elements of post-delivery customer support
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Supply Chain Operations Reference Model pp y p (SCOR): Major Management Processes

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Supply Chain Operations Reference Model pp y p (SCOR): Major Management Processes

Plan Processes that balance aggregate demand and supply to develop a course of action which best meets sourcing production and delivery requirements sourcing, Balance resources with requirements Establish/communicate plans for the whole supply chain 10
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Supply Chain Operations Reference Model pp y p (SCOR): Major Management Processes

Source Processes that procure goods and services to meet planned or actual demand Schedule deliveries (receive, verify, transfer) Make Processes that transform product to a finished state to meet planned or actual demand Schedule production

Deliver D li Processes that provide finished goods and services to meet planned or actual demand, typically including order management, transportation management, and distribution management Warehouse management from receiving and picking product to load and ship product. 2011 11 Silvia Zamboni

Supply Chain Operations Reference Model pp y p (SCOR): Major Management Processes

Return Processes associated with returning or receiving returned products Manage Return business rules
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Some graphical t l S hi l tools

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and IT process map tools

(created in ARIS EasySCOR)
Suppliers Supplier Suppliers Assemble/ Package Distribution Centers Geo Ports of Entry

Americas--->

Europe--->

Asia--->

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Source make deliver Source-make-deliver Network design in supply chain

The operation strategy: operations decision areas Structural decisions and network design Structures allocation and capacity p y Number and location of structures Roles and specialization of structures (technology) Vertical integration

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The Th operations decision areas ti d i i

CORPORATE STRATEGY

BUSINESS STRATEGY

OPERATIONS STRATEGY

STRUCTURAL DECISIONS 1. 2. 3. 4. Capacity Facilities Technology Sourcing

OPERATIONS DECISION AREAS

INFRASTRUCTURAL DECISIONS 1. 2. 3. 4. Workforce Organization Quality Operating System

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Operations strategy is .. O ti t t i

the decisions which shape the long-term capabilities of the companys operations and their contribution to overall strategy through the on-going reconciliation of market requirements and operations resources k t i t d ti

Source: Nigel Slack, Michael Lewis 2003

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Operation strategy
The strategic reconciliation of market requirements with operations resources
Tangible and Intangible Resources Operations p Capabilities Operations Strategy Decision Areas Performance Objectives Customer Needs

Market Positioning

Operations Processes Understanding resources and processes Strategic decisions Required performance

Competitors Actions Understanding markets

Source: Nigel Slack, Michael Lewis 2003

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Operation strategy
The strategic reconciliation of market requirements with operations resources

OPERATIONS RESOURCES

MARKET REQUIREMENTS

Difficult to change Technically constrained t i d Complex

Dynamic Heterogeneous Ambiguous

Source: Nigel Slack, Michael Lewis 2003

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The Th operations decision areas ti d i i

CORPORATE STRATEGY

BUSINESS STRATEGY

Long term horizon!!!

OPERATIONS STRATEGY

STRUCTURAL DECISIONS 1. 2. 3. 4. Capacity Facilities Technology Sourcing

OPERATIONS DECISION AREAS

INFRASTRUCTURAL DECISIONS 1. 2. 3. 4. Workforce Organization Quality Operating System

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Operations: structural decisions Physical Supply Chain Network Planning

Structures allocation and capacity Which markets have to be served by each facility? Which suppliers for each facility? How much capacity to provide for each facility? How to handle excess of demand?

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Number and location of structures How many facilities are needed? Where do they have to be located? Is it better to centralize or decentralize? How to deal with a supply network expansion?

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Roles and specialization of structures (technology) Which is the role of each structure in achieving supply network strategic hi i l t k t t i objectives? Which activities have to be carried out by each facility? Which degree of automation? Which layout?

Vertical integration Which part of the network should be directly owned (make or buy decisions)? Which activities have to be outsourced? Which (strategic) suppliers?
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Operations: structural decisions (1) Structures allocation and capacity

Which markets have to be served by each facility? Which suppliers for each facility? How much capacity to provide for each facility? How to handle excess of demand?
Structures allocation and capacity Roles and specialization of structures (technology)
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Number and location of structures

Vertical integration
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Decisions concerning allocation and structures capacity t t it ALLOCATION and CAPACITY DECISIONS
Allocation: which market has to be served by which warehouse/plant Capacity: size of each warehouse/plant, it is the maximum level of value-added activity that an operation, or process, or facility is capable of over a period of time.

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Operations: structural decisions CAPACITY

Demand forecasts are one of the main inputs to capacity management. Capacity leading: is the strategy of planning capacity levels such that they are always greater than forecast demand (always sufficient capacity to meet demand fully, customers are satisfied; plant utilization is relatively low, therefore unit costs are high). Capacity lagging: is the strategy of planning capacity levels such that they are always less than forecast demand (the plant is working at full capacity, therefore unit costs are minimized; potential insufficient capacity to meet demand fully, customers could be dissatisfied).

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Capacity dynamic strategy: The life-cycle effect on capacity strategies

Source: Operations strategy, Nigel Slack, Michael Lewis, 2002

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Capacity l di strategy C it leading t t

Source: Operations strategy, Nigel Slack, Michael Lewis, 2002

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Capacity leading strategy p y g gy PROS and CONS

Advantages
Always sufficient capacity to meet demand, demand revenues are maximized and customer are satisfied Most of the time there is a capacity cushion which can absorb extra demand levels if forecast is pessimistic Any critical start-up problems with new plants are less likely to affect supply to customer

Disadvantages
Utilization of the plans is always relatively low so costs will be high low, Risk of even greater (or even permanent) over-capacity if ) y demand does not reach forecast levels Capital spending on plant early

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Capacity l C it lagging strategy i t t

Source: Operations strategy, Nigel Slack, Michael Lewis, 2002

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Capacity lagging strategy p y gg g gy PROS and CONS

Advantages
Always sufficient demand to keep the plants working at full capacity capacity, so unit costs are minimized y Overcapacity problems are minimized if forecasts are optimistic Capital spending on the plants is delayed

Disadvantages
Insufficient capacity to meet demand fully therefore reduced fully, revenue and dissatisfied customers No ability to exploit short term increases in demand Under-supply Under supply position even worse if there are start-up problems with the new plants

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Operations: structural decisions (2) Number and location of structures

How many facilities are needed? y Where do they have to be located? Is it better to centralize or decentralize? How to deal with a supply network expansion?
Structures allocation and capacity Roles and specialization of structures (technology)
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Number and location of structures

Vertical integration
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Operations: structural decisions Facility location

Location is the geographical positioning of an operation. Facility location decisions have a long-term impact on supply chains performances, because it is very expensive to shut down a facility or move it to a different location. A good location decision can help a company be responsive while keeping its costs low. In contrast, a poorly located facility makes it very difficult for a firm to perform close to the efficient frontier.

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Facility location Main strategic factors

In order to choose the right location for a facility managers have to consider, consider among others: Skills and competences of workers Cost of workers Cost of facility Availability of infrastructure Distribution and transportation costs Raw materials and suppliers availability Tax incentives and financial opportunities Import / Export taxes
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Elica Group example The company

Elica, founded in 1970 by Ermanno Casoli, is the parent p y p y company of a Group which is today the world leader in the production of domestic kitchen hoods and market leader in terms of units sold. p g , It is also a European leader in the design, manufacture and sale of motors for kitchen hoods, boilers, refrigerators and ovens for domestic use. Revenues: Euro 335.1 million (in 2009) EBITDA: Euro 20.1 million Group net profit: Euro 0.2 million.

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Elica products High-end segment

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Elica products Low-end segment

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Facility location strategic factors ELICA Group

Skills and competences of workers Knowledge of the final market Reputation Specialized and skilled labour Cost of workers p Distribution and transportation costs Proximity to the target market

Import / Export taxes Proximity to the target market

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Cost of workers Labour intensive plants Proximity to the target customer

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ELICA Group Gutmann-exklusiv

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Elica Groups distribution network Group s Direct presence

Proximity to the target market Knowledge of the final market Reputation Import / Export taxes Distribution and transportation costs t Proximity to the target market

Import / Export taxes Proximity to the target market Low cost labour to serve US market
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Facility location
Factors impact on cost, service and revenues
Factors impacting on costs:
Labor L b cost t Real estate costs Power supply costs Logistics costs (of inbound and outbound transport) Local peculiarities (taxation, industrial/intellectual copyright, political stability, incentives to investments, investments labor unions relations, relations laws, availability of services and infrastructures)

Factors impacting on service and revenues:

Skilled labour g p p Location fits the strategic purpose Corporate reputation (especially for services) Accessibility and comfort for A ibili d f f customers (parking, easily reached, catchment area, etc)

http://www.wto.org/english/tratop_e/region_e/rta_plurilateral_map_e.htm?group_selected=122 Silvia Zamboni 2011

World Regions and Trade Organizations

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Knowledge accessibility example Global industrial zone

Minnesota Medical Lane (medical instruments) Watches and watches p components

Textile machinery producers New Yorks Ceramic Valley

California Sylicon Valley

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Infrastructure accessibility example Plaza Logistica, Zaragoza

Source: http://www.plazalogistica.com/
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Decisions concerning the location of structures in a dynamic environment

The decision of changing the location or capacity of the existing structures p would be based upon: Changing demand volumes: i.e. in response to a rising demand, possibilities are: 1. use external capacity outsourcing to a provider; 2. increase the size of existing structures; 3. shut down existing and rebuild a larger one; 4. k keep the existing structures and build a new one h d b ld Changing input markets: cost and availability of inputs may change, i.e. raw materials and labor. h i t i l dl b Changing customers demand (output), i.e. Just In Time delivery with structures closer to the customers ones customer s ones.
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Tesco Homeplus South Korea

Tesco is a food and grocery retailer, headquartered in Hertfordshire (UK). The company operates in Europe, the US and Asia and employs about p y p p , p y 470,000 people.

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Source: http://www.youtube.com/watch?v=fGaVFRzTTP4

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Operations: structural decisions (3) Roles and specialization of structures (technology)

Which is the role of each structure in achieving supply network strategic objectives? Which activities have to be carried out by each facility? Which degree of automation? Which layout?
Structures allocation and capacity Roles and specialization of structures (technology)
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Number and location of structures

Vertical integration
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Operations: structural decisions Degree of automation

High degree of automation: highly automated equipment and machines (higher productivity, lower flexibility (it depends on the flexibility of the equipment installed), indirect tasks for t k f workers: machine set-ups, controls, k hi t t l maintenance, improvements, etc.)

L Low d degree of automation: l b intensive f t ti labor i t i production environments (higher flexibility, lower productivity)
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Global production management (Kasra Ferdows)

Source: http://www.youtube.com/watch?v=9jks0YQnrTA
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Operations and Globalization O ti d Gl b li ti

International context: one of the critical issues for a company is i no l longer where t produce a product, b t where t perform h to d d t but h to f individual production tasks within an international context. It is important for a company to identify the mission and the strategic role of each facility that is part of its global operations. For example, a toy maker is more likely to have the production of its toy robot components located all over the world: its plastic body produced in Malaysia, speakers in Korea, motors for legs in Taiwan, voice recognition software in USA, assembling in China, and finishing, inspection, packing and storage for worldwide distribution in Dubai Dubai.
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Why do firms manufacture abroad? Wh d fi f t b d?

Reduce direct and indirect costs Reduce t R d taxes Reduce logistics costs Overcome tariff barriers Provide better customer service Spread foreign exchange risks Build alternative supply resources Preempt potential competitors Learn from local suppliers Learn from foreign customers Learn from competitors Learn from foreign research centers Attract talent globally
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Most tangible reasons

Most intangible reasons

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Operations and Globalization O ti d Gl b li ti

There are companies that manage their foreign plants to benefit only from tariff and trade concessions cheap labor capital subsidies and concessions, labor, subsidies, reduced logistics costs.

There are companies that expect much more from their foreign factories and they use them to get closer to their customers and suppliers to suppliers, attract skilled and talented employees, and to create center of excellence and expertise for the entire company.

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Operations and Globalization O ti d Gl b li ti

The difference between the two approaches lies in the way the managers answer to a simple but fundamental question: simple, fundamental,

How can a factory located outside a y companys home country be used as a competitive weapon not only in the markets p p y that it directly serves but also in every market served by the company? y p y

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Defining the Si Strategic Roles D fi i th Six St t i R l

In order to reduce the complexity of defining the strategic role played by a foreign firm lets first try to classify the different roles by answering to firm, let s basic questions about each factory:

What i th Wh t is the primary strategic reason f i t t i for the factorys location? What is the scope of its current activities?
Based on the answers to these questions, its possible to use a framework to classifying plants and to determine their strategic roles in a global p ( , ) operation context (Ferdows, 1997).
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The Th scope of the plant f th l t

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The Th scope of the plant f th l t

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The Th scope of the plant f th l t

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The Th scope of the plant f th l t

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The Th scope of the plant f th l t

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The Th scope of the plant f th l t

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Paths to higher strategic roles Increasing site competence

Stage 3. Taking a global mandate

Stage 2. Developing external resources

Stage 1. I St 1 Improving the inside i th i id

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Ferdowsmodel (1988, 1997) ( , ) Production plants strategic role

High

Site competence extent

Low Access to low-cost production

Source:Silvia Zamboni 2011 Ferdows (1997)

Access to skills and knowledge

Proximity to market
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Primary strategic reason for the site

Ferdowsmodel (1988, 1997) ( , ) Production plants strategic role

6. Lead factory High 2. 2 Source factory 4. Contributor factory

Site competence extent

1. Off-shore factory 3. Server factory Low Access to low-cost production

Source:Silvia Zamboni 2011 Ferdows (1997)

5. Outpost f t 5 O t t factory Access to skills and knowledge Proximity to market

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Primary strategic reason for the site

The role of foreign factories: g OFFSHORE FACTORY

Offshore factory: is established to produce specific items (to be worked or to be sold) at low cost cost. Investments in technological and managerial resources are kept at the minimum required for production. Little development or engineering occurs at the site, outbound logistics are very simple, managers rarely choose suppliers or negotiate prices, accounting and finance staffs provide data to managers in the home country. Its managers follow the instructions, methods, and plans handed down to them; such a factory is not expected to be innovative. ; y p

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The role of foreign factories: g SOURCE FACTORY

Source factory: the primary purpose is again low-cost production, but its strategic role is broader than that of an offshore factory. factory Managers have greater authority over procurement, production planning, process changes, product customization decisions, product redesign decisions, outbound logistics. This factory has the same ability to produce products or components as the best factory in the companys global network, but is located in places where production costs are relatively low, infrastructures relatively developed, and skilled workers are available.

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The role of foreign factories: g SERVER FACTORY

Server factory: supplies specific national or regional markets, with a limited authority and competence. competence It provides a way to overcome tariff barriers and to reduce taxes, logistics costs, or exposure to foreign-exchange fluctuations. Its authority and competence are limited, although it has a little autonomy to make minor modifications in products and production methods in order to feet local conditions.

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The role of foreign factories: g CONTRIBUTOR FACTORY

Contributor factory: supplies specific national or regional markets, and is responsible of product and process engineering as well as of the development and choices of suppliers. It has its own development, engineering and production capabilities. It also has the authority over procurement decisions and participates in the choice of key suppliers for the company.

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The role of foreign factories: g OUTPOST FACTORY

Outpost factory: its primary role is to collect information. It is placed in an area where advanced suppliers, competitors, research laboratories, or customers are located. y y y products and have Because every factory obviously must make p markets to serve, virtually all outpost factories have a secondary strategic role (for example as a server or an offshore).

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The role of foreign factories: g LEAD FACTORY

Lead factory: creates new products, processes, and technologies for the entire network. network It taps into skills and technological resources not only to collect data for headquarters, but also to transform the knowledge it gathers into useful process and products. The managers not only have a decisive voice in the choice of key suppliers but also they often participate in joint development work with them. Many of its employees stay in direct contact with end customers, y pp , , machinery suppliers, research laboratories, and other center of knowledge.

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Evolution path to higher strategic roles HPs factory in Singapore

Global center of knowledge for the entire company for keyboards and inkjet printers
Singapore, 1990s

Singapore, 1980s

Calculators and keyboards HPs factory reduced the number of components in its calculators p by redesigning the product, including its application-specific integrated circuits JIT with its suppliers
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Singapore, 1970

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Evolution path to higher strategic roles NCRs factory in Dundee, Scotland

Automated teller machines The plant redesigned major sections of the teller machines it built to make them easier to manufature (center of expertise for the entire company) Automated teller machines Local supplies from 50% to pp 80%. Development and production of ATMs for EU and for market worldwide.

Dundee, Scotland, 1990 S tl d 1990s

Dundee, Scotland, 1980s

Dundee, Scotland, 1960s

Mainframe computers M i f t and cash registers

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Evolution path to higher strategic roles SONYs factory in Bridgen, Wales

Develop of supplier base i E b in Europe (from Japan). 90% of supplies from EU. Customization for EU market. Design and develop four common platforms for diff f different TV systems t t used in Europe.

Bridgen, Wales, 1980s

Bridgen, Wales, 1973

Selling in EU buying subassemblies f from Sony in Japan.

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Nurturing N t i growth th

Review periodically the strategic role of each plant in the global network l b l t k Construct a map of existing network and the current roles of each factory, and compare it with a map of the desired factory network based on the companys evolving business strategy. Increase the capacity (scope) of foreign factories to absorb and create knowledge Maintain a critical mass of precious resources in one location (specialization, world-class specialty)

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Operations: structural decisions ( ) p (4) Vertical integration

Which part of the network should be directly owned (make or buy decisions)? Which activities have to be outsourced? Which (strategic) suppliers?
Structures allocation and capacity Roles and specialization of structures (technology)
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Number and location of structures

Vertical integration
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Make B M k or Buy strategic decisions t t i d i i

One of the main principles, on which the firm can base its decision, is to make internally the products and/or components that can be classified by core-products for the company. Core products are produced th k t th core competences of C d t d d thanks to the t f the firm, that is all the specific talents, skills, and knowledge sets that differentiate the company from its competitor and give it an advantage in the eye of the customer. So the firm should identify what manufacturing activities lie in its set of core competences and what product or component should t f t d h t d t t h ld be purchased from outside suppliers, because they are not core for the company.
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Make B M k or Buy strategic decisions t t i d i i

Strateg impor gic rtance

High Strategic core competences

Strategic deficiency

Nonstrategic Low competencies L i Company

Common knowledge k l d Supplier(s)

Supply effectiveness
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Make B M k or Buy strategic decisions t t i d i i

Strateg impor gic rtance

High Strategic core Strategiccore competences

Strategic deficiency

MAKE EXPLOIT or O o ? MIGRATE

Nonstrategic Low competencies L i Company

MANAGE RISK ? ACQUIRE BUY

Common knowledge k l d Supplier(s)

Supply effectiveness
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Common mistakes when outsourcing C i t k h t i

Underestimating the skills required Having a poor understanding of the supplier capabilities g Overlooking transaction costs Decision making by single individuals without input from other areas of the organization

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Making network design decisions in practice

Do not underestimate the life span of facilities (a decade or more) L Long t term consequences, future demand and costs, technology f t d d d t t h l scenarios Consider the cultural implications Do not ignore quality of life issues They influence the workforce available and its morale (especially in relocations) Focus on tariffs and tax incentives when locating facilities Ex. Ireland and low taxes for high tech industry
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