Supply Network Design

Question 1

Supply Network Design decisions:

Answer 1

 Network configuration
 Location and
 Capacity

Question 2

What does network configuration entail?

Answer 2

 Downstream/Upstream 
 Disintermediation
 Outsourcing
 Offshoring
 Vertical Integration

Question 3

define outsourcing

Answer 3

ownership = don't own assets
location = domestic

Domestic supplier delivers products and/or services

an arrangement in which one company provides services for another company that could also be, or usually have been, provided in-house

Question 4

define offshore outsourcing

Answer 4

ownership = don't own assets
location = international

Overseas supplier delivers products and/or services

Question 5

define domestic operations

Answer 5

ownership = own assets
location = domestic

focal company performs activities themselves

Question 6

define offshore operations

Answer 6

ownership = own assets
location = international

Focal company’s overseas operation delivers products and/or services

Question 7

Supply-side factors in location decisions

Answer 7

vary to influence costs as location varies:
e.g. 
labour costs
land costs
energy costs 
transportation costs 
community factors

Question 8

Demand-side factors in location decisions

Answer 8

vary to influence customer service / revenue
as location varies:
e.g. 
labour skills
suitability of site
image
convenience for customers

Question 9

Balance of capacity

Answer 9

Capacity can either lead (luxury products) or lag (lower segment) demand

Inventory can be used to smooth out the peaks

Spare capacity can be used to supply other operations.

Capacity is associated with economies of scale

Question 10

define structure

Answer 10

the shape and form of the network

Question 11

define scope

Answer 11

the extent that an operation decides to do the activities performed by the network itself, as opposed to requesting a supplier to do them.

Question 12

define supply network

Answer 12

an interconnection of organizations that relate to each other through upstream and downstream linkages between different processes and activities that produce value in the form of products and services to the ultimate consumer.

Question 13

Who is on the supple/demand side of an operation

Answer 13

Supply side
-Suppliers of parts/ services
first-tier suppliers
Second tier suppliers-

Demand side
- Customers
First-tier customers, main consumer group for the operation
Second-tier customers, but an operation may supply second tier directly

Question 14

define immediate supply network

Answer 14

the supplier and customers who have direct contact with an operation

Question 15

define total supply network

Answer 15

the operations that form the network of suppliers’ suppliers and customers’ customers

Question 16

define upstream

Answer 16

refers to the material inputs needed for production

Question 17

define downstream

Answer 17

is the opposite end, where products get produced and distributed

Question 18

Why is the structure and scope of an operation’s supply network important?

Answer 18

• It helps and understanding of competitiveness
• It helps to identify significant links in the network
• It helps focus on long-term issues

Question 19

The scope of an operation activities within the network is determined by two decisions

Answer 19

1. The extent and nature of the operations vertical integration
2. The nature and degree of outsourcing it engages in

Question 20

define disintermediation

Answer 20

companies within a network bypassing customer or suppliers to make contact directly with customers’ customers or suppliers’ suppliers

‘cutting out the intermediaries’

Develops new linkages in the supply network

Question 21

what is co-opetition

Answer 21

Competitors can be complementors and vice versa

Companies cooperate in increasing the total size of the market and compete for a share of that market

All the players in the network can be friends and enemies at different times

Question 22

define business ecosystem

Answer 22

an economic community supported by a foundation of interacting organizations an individuals- the organisms of the business world

Question 23

difference between business ecosystem and supply network

Answer 23

The inclusion in the idea of the ecosystem of businesses that may have no or little direct relationship with the main supply network, yet exist only because of that network.

They interact, complementing or contributing significant components of the value proposition for customers

Question 24

define dyadic interaction

Answer 24

the individual interaction between two specific operations in the network

Question 25

How much capacity should operations have?

Answer 25

high levels of capacity utilization; longer customer waiting time; reduced customer service

As the nominal capacity increases, the lowest cost point at first reduces

Question 26

3 strategies when deciding when to change capacity

Answer 26

• Capacity introduced generally to lead demand
-there is always sufficient capacity to meet forecast demand

• Capacity is introduced generally to lag demand
- demand is always equal to or greater than capacity

• Capacity is introduced to sometimes lead and sometimes lag demand
- inventory built up during the ‘lead’ times used to help meet demand during the ‘lag’ times
aka inventory soothing

Question 27

Advantages and disadvantages of capacity leading strategy

Answer 27

Advantages
• Always sufficient capacity to meet demand; revenue is maximized and customers satisfied

• ‘capacity cushion’ can absorb extra demand if forecasts are pessimistic
• Any critical start-up problems less likely to affect supply

Disadvantages
• Utilization of the plants is always relatively low, therefore costs will be high
• Risks of even greater over-capacity if demand does not reach forecast levels
• Capital spending on capacity will be early

Question 28

Advantages and disadvantages of capacity lagging strategy

Answer 28

advantages
• Always sufficient demand to keep the operation working at full capacity, therefore unit costs are minimized
• Over-capacity problems are minimized if forecasts prove optimistic
• Capital spending on the operation is delayed

disadvantages
• insufficient capacity to meet demand fully, = reduced revenue and dissatisfied customers
• No ability to exploit short-term increases in demand
• Under-supply position even worse if there are start-up problems with the new operations

Question 29

advantages and disadvantages of smoothing with inventory

Answer 29

advantages
• all demand is satisfied, = customers are satisfied and revenue is maximized
• Utilization of capacity is high and therefore costs are low
• Very short-term surges in demand can be met from inventories

disadvantages
• The cost of inventories can be high. This is especially serious at a time when the company requires funds for its capital expansion
• Risks of product deterioration and obsolescence

Question 30

Location decision determined by the relative strength of a number of factors:

Answer 30

Labour costs

Labour skills availability
- Skill abilities of a local population

Land costs
- Cost of acquiring site

Energy costs
- availability of inexpensive energy

Transportation costs
- inputs from source and output to customers

Community factors
- operation costs from social/ political/ economic environment e.g. tax

The suitability of the site itself

Image of the location

Convenience for customers
- close to demand?

Question 31

define vertical integration

Answer 31

extent to which an organization owns the network of which it is a part of

Question 32

factors of vertical integration

Answer 32

• The direction of integration
○ Strategy of expanding on the supply side is called backward or ‘upstream’ vertical integration
○ Expanding on the demand side is called forward or ‘downstream’ vertical integration

• The extent of the process span of integration

• The balance among the vertically integrated stages
○ amount of capacity in the network owned by the org.

Question 33

advantages of vertical integration

Answer 33

It secures dependable access to supply or markets
e.g. Downstream vertical integration can give a firm greater control over its market positioning

It may reduce costs
e.g. reduced transaction costs

It may help to improve product or service quality

It helps in understanding other activities in the supply network

Question 34

disadvantages of vertical integration

Answer 34

• Creates and internal monopoly
• Cannot exploit economies of scale
• Results in loss of flexibility
• Cuts you off from innovation
• Distracts you from core activities (loss of focus)

Question 35

define offshoring

Answer 35

means obtaining products and services from operations that are based outside one’s own country