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2. Operations Management, 2e/Ch. 8 Facility and Work Design
©2007 Thomson South-Western
2 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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3. Operations Management, 2e/Ch. 8 Facility and Work Design
©2007 Thomson South-Western
3 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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4. Exhibit
2.1
The Value Chain – Input/Output View
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Operations Management, 2e/Ch. 8 Facility and Work Design
©2007 Thomson South-Western
4

5. Exhibit
2.3
Pre- and Postservice View of the Value Chain
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Operations Management, 2e/Ch. 8 Facility and Work Design
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5

6. Operations Management, 2e/Ch. 8 Facility and Work Design
©2007 Thomson South-Western
6 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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7. Exhibit
9.1
Typical Goods-Producing Hierarchical Supply Chain View
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Operations Management, 2e/Ch. 8 Facility and Work Design
©2007 Thomson South-Western
7

8. 8
Exhibit
9.2
Supply Chain Structure in the Automotive Industry
The automobile industry is an excellent example of an
OEM.
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Operations Management, 2e/Ch. 9 Supply Chain Design
©2007 Thomson South-Western

9. Operations Management, 2e/Ch. 8 Facility and Work Design
©2007 Thomson South-Western
9 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
Viwdietho .eexdcheoslse .gcooomds

10. • Dell’s value chain electronically links customers, suppliers,
10
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.
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 technical support.
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Operations Management, 2e/Ch. 9 Supply Chain Design
©2007 Thomson South-Western

11. 11
Exhibit
9.3
A Value Chain Model of Dell, Inc.
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Operations Management, 2e/Ch. 9 Supply Chain Design
©2007 Thomson South-Western

12. Operations Management, 2e/Ch. 8 Facility and Work Design
©2007 Thomson South-Western
12 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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13. 13
Exhibit
9.4
Common Metrics Used to Measure
Supply Chain Performance
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Operations Management, 2e/Ch. 9 Supply Chain Design
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14. Operations Management, 2e/Ch. 8 Facility and Work Design
©2007 Thomson South-Western
14 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 (Eq. 9.7)
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15. Operations Management, 2e/Ch. 8 Facility and Work Design
©2007 Thomson South-Western
15 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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16. Chapter 9 Dell’s 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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Operations Management, 2e/Ch. 9 Supply Chain Design
©2007 Thomson South-Western

17. Chapter 9 Dell’s 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
17
cash model!
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Operations Management, 2e/Ch. 9 Supply Chain Design
©2007 Thomson South-Western

18. Cash-to-Cash Conversion Cycle: inventory days’ supply (IDS)
18
Exhibit
9.5
Dell Computer’s Cash-to-Cash Conversion
Cycles 1996 to 2003
plus accounts receivable days’ supply (ARDS) minus
accounts payable days’ supply (APDS)
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Operations Management, 2e/Ch. 9 Supply Chain Design
©2007 Thomson South-Western

19. 19
Exhibit
9.6
Dell’s 2003 Negative Cash-to-Cash
Conversion Cycle
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Operations Management, 2e/Ch. 9 Supply Chain Design
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20. Operations Management, 2e/Ch. 8 Facility and Work Design
©2007 Thomson South-Western
20 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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21. 21
Exhibit
7.7
9.7
Order Amplification for HP Printers
Source: Callioni, Gianpaolo, and Billington, Corey, “Effective Collaboration,” OR/MS Today, October 2001, pp. 34–39.
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Operations Management, 2e/Ch. 9 Supply Chain Design
©2007 Thomson South-Western

22. Operations Management, 2e/Ch. 8 Facility and Work Design
©2007 Thomson South-Western
22 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 chain’s 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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23. Operations Management, 2e/Ch. 8 Facility and Work Design
©2007 Thomson South-Western
23 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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24. Operations Management, 2e/Ch. 8 Facility and Work Design
©2007 Thomson South-Western
24 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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25. 25
Exhibit
9S.u8pply Chain
Push-Pull
Systems and
Boundaries
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Operations Management, 2e/Ch. 9 Supply Chain Design
©2007 Thomson South-Western

26. Operations Management, 2e/Ch. 8 Facility and Work Design
©2007 Thomson South-Western
26 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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27. Operations Management, 2e/Ch. 8 Facility and Work Design
©2007 Thomson South-Western
27 Chapter 9 Supply Chain Design
Designing the Supply Chain
• A contract manufacturer is a firm that
specializes in certain types of goods-producing
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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28. Operations Management, 2e/Ch. 8 Facility and Work Design
©2007 Thomson South-Western
28 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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29. 29
Chapter 9 Supply Chain Design
• Multi-site management is the process of
managing geographically dispersed service-providing
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 Video.edhole.com organizations.
Operations Management, 2e/Ch. 9 Supply Chain Design
©2007 Thomson South-Western

30. Operations Management, 2e/Ch. 8 Facility and Work Design
©2007 Thomson South-Western
30 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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31. Operations Management, 2e/Ch. 8 Facility and Work Design
©2007 Thomson South-Western
31 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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32. 32
Exhibit
9.9
Example Location Factors for Site Selection
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Operations Management, 2e/Ch. 9 Supply Chain Design
©2007 Thomson South-Western

33. Operations Management, 2e/Ch. 8 Facility and Work Design
©2007 Thomson South-Western
33 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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34. Operations Management, 2e/Ch. 8 Facility and Work Design
©2007 Thomson South-Western
34 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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35. 35
Exhibit 9.10
Facility
Location
Scoring
Model
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Operations Management, 2e/Ch. 9 Supply Chain Design
©2007 Thomson South-Western

36. 36
Exhibit 9.11 Taylor Paper Products Plant and
Customer Locations: Center of Gravity Method
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37. 37
Exhibit 9.12 Excel Spreadsheet for Taylor Paper Products
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Operations Management, 2e/Ch. 9 Supply Chain Design
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38. Operations Management, 2e/Ch. 8 Facility and Work Design
©2007 Thomson South-Western
38 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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39. 39
Exhibit 9.13 Transportation Model Spreadsheet for Arnoff
Enterprises (Arnoff Enterprises.xls)
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©2007 Thomson South-Western

40. 40
Exhibit 9.14 Optimal Distribution Plan if Denver
Warehouse Is Closed
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41. Operations Management, 2e/Ch. 8 Facility and Work Design
©2007 Thomson South-Western
41 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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42. 42
Exhibit 9.15 Zone Connections for Marymount Township
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43. Operations Management, 2e/Ch. 8 Facility and Work Design
©2007 Thomson South-Western
43 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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44. Operations Management, 2e/Ch. 8 Facility and Work Design
©2007 Thomson South-Western
44 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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45. 45
Exhibit 9.16 Comparison of Transportation Modes
(Note: The best ranking is 1.)
Selecting Transportation Services
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46. Operations Management, 2e/Ch. 8 Facility and Work Design
©2007 Thomson South-Western
46 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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47. Operations Management, 2e/Ch. 8 Facility and Work Design
©2007 Thomson South-Western
47 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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48. Operations Management, 2e/Ch. 8 Facility and Work Design
©2007 Thomson South-Western
48 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 company’s 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 per day
Operating Video.edhole .dcaoyms per year 250

49. Operations Management, 2e/Ch. 8 Facility and Work Design
©2007 Thomson South-Western
49 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 turns
Average 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 - Video.edho 6l4e..3c o= m+ 21.4 days.

50. Operations Management, 2e/Ch. 8 Facility and Work Design
©2007 Thomson South-Western
50 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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51. Operations Management, 2e/Ch. 8 Facility and Work Design
©2007 Thomson South-Western
51 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. Video.edhole.com

52. Operations Management, 2e/Ch. 8 Facility and Work Design
©2007 Thomson South-Western
52 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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53. Operations Management, 2e/Ch. 8 Facility and Work Design
©2007 Thomson South-Western
53 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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54. Operations Management, 2e/Ch. 8 Facility and Work Design
©2007 Thomson South-Western
54 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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55. 55
Exhibit 9.17 University Campus Map Problem # 13
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56. 56
Binghamton City Exhibit 9.18 Data -- Problem # 20
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57. 57
R. K. Martin Case Exhibit 9.19 Distribution Data
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