Supply Chain Design and Planning:

 Managers should formulate strategies and processes that maximize the total supply chain value-adding and
minimizes the total supply chain costs.
 The key contents of such architecture design and planning include configuration, extent of vertical integration,
strategic outsourcing, location decisions, capacity planning, and dealing with bullwhip effect

Supply Chain Configuration

 Connection of participating members

 Deliver the product or service to the end customer.

 suppliers connected to OEM

 No single ‘best’ configuration for all supply chains. It all depends on the industry sectors,
market environment, stages of product cycle and so on.

Supply chain configuration can also be observed from the network relationship
perspective.

 When the OEM forms its supply network through tiered suppliers and tiered distributor with
medium and long term stability, it can be called the ‘Stable Network.’ When the OEM does
not have many of those long term tiered suppliers and customers, but instead uses dynamic
and mostly short term suppliers and distributors to achieve high level of operational
flexibility and strategic agility, it can be called the ‘Dynamic Network.’ The two broad types
of network configuration can be illustrated in figure x.

The tiered stable network has more control over its suppliers and distributors’ operations than the
dynamic network.
There is higher risk in operational cost control and quality standard.

Vertical Integration:

 Much of the supply chain design is determined by the extent of vertical integration.

 Vertical integration is defined as the single ownership of consecutive activities along the
supply chain.

 If an OEM does not have ownership of its suppliers and customers, it is regarded as having a
narrow span of vertical integration.

 If it owns a number of tiers of suppliers and customers, it is regarded as having a large extent
of vertical integration. Obviously it could also be a forward integrated one or backward
integrated one as shown in figure 4.

Figure 4. The extent of vertical

integration
 Supply chain’s extent of vertical integration has always had profound impact on its
development.
Outsourcing and Offshoring:

 Vertical disintegration where the supply chain comprises of many independent participating
members and the OEM does not have a large extent of vertically integrated consecutive
operations.

 Considerable part of the OEM’s operations are outsourced to the independent external
suppliers in order to achieve maximised value adding and minimised total cost for the supply
chain. Hence, like the vertical integration, outsourcing is also a supply chain architecture
design issue.

 Outsourcing or strategic outsourcing is commonly known as the “make-or-buy” decision

aiming at a reduced cost.

 The decision and processes of moving any strategically significant operations out to the
external suppliers is called outsourcing.

Two points

 First indentifying the potential suppliers, contractual negotiation, regular evaluation and
review of the outsourced operation.

 Second, only the strategically significant operations can be classified as outsourcing.

 Maximizing the value adding and minimizing the total cost.

Focus on and further developing the core competences

• Further differentiated competitive edge
• Increasing business flexibility, thus supply chain flexibility
• Improved supply chain responsiveness
• Raise the entry barrier through focused investment
• Enhanced ROI or ROE through downsizing the fixed asset
 From an OEM perspective the supply chain is less vertically integrated if more operations
are outsourced. Similarly, less outsourcing means higher level of vertical integration.
 This is largely due to the continuous growth of global market volatility which drives the
supply chains to become more flexible and agile, and the less vertically integrated supply
chain offers precisely that flexibility.

Offshoring
 Supply chain architecture design is called ‘offshoring’.
 Offshoring is defined as moving the on-shore operations to offshore locations in order to
take the advantages of local resources, and to reduce operating cost or create market
presence.
 It is therefore recommended that managers should set up and follow an appropriate process
to make the outsourcing decisions and execute the decisions. Here is a set of common steps
of outsourcing processes:
 1) Understand competitive environment
2) Clarify the strategic objectives and processes
3) Analysing the market needs
4) Identify internal resources and competencies
5) Make or buy decision making
6) Identifying strategic suppliers
7) Deciding on the relationships
8) Performance evaluation and reviewing

To give managers some hands-on support in outsourcing decision making. Many tools have been
developed by the academics and practitioners alike. They are very useful to get the managers started
to create tools or frameworks that tailored to their own business cases. Those tools clarify the
decision criteria, visualise the decision progress, communicate the ideas, and document the decisions
process. Two of those tools are shown in Figure 6 and Figure 7.

Figure 6. The logic decision tool for out sourcing (adopted from Nigel Slack
2005)
Far from it, the biggest concern of outsourcing is perhaps the risk that it brings about.

• Negative impact on company’s personnel

• Loss control over key strategic design task, sub-system or component, resulting in
negative impact on the company’s competitiveness.
• Could creating tomorrow’s competition
• Risk of severe business disruption due to failed supply from single sourced suppliers
• Tactical, short term approach to outsourcing may inhibits continuous
improvement and long term investment
• Intellectual property right risks
• Foreign currency exchange risk if involves overseas suppliers

When the capital or financial circumstance changes like the one in the economic downturn, the
outsourcing decision may have to be revised accordingly. Internal development of technologies and
technical competences could also affect the outsourcing decisions.

Location Decisions:

 Location decision is about the geographical positioning of the supply chain functions (such
as assembly and distribution).

 To better serving the customers and further reducing the operational cost in the supply
chain.

 Without doubt, a location decision will have profound impact on labour cost, material cost,
taxation, currency exposure, financial and legal regulations and so on. These will further
lead toward the significant changes in business outcomes, supply chain performance, and
even environmental consequences.
 Figure 8. factors influence the
operational location decisions.

Total supply chain cost consists broadly two components: the physical cost and market cost (as
shown in figure 9).

Figure 9. Supply chain total cost

 The physical cost includes the production cost, logistics cost, material cost, labour cost,
taxation cost, energy cost and so on.

 The market cost looks at all the loss or cost incurred by the inappropriate supply chain
market mediation.
 Figure 10. the weighted scoring method. (source: Slack [Link]. 2006)

Step 1

Identifying the criteria which will be used to evaluate the various locations. Obviously, the criteria
what are chosen must serve the strategic intention of the decision maker, and depend on the specific
circumstances surrounding the location.

© UBS 2010. All rights reserved.

Step 2

Establish the relative importance of each criterion through discussion and brain storming. Then assign
the weighting factors to each of them. The total sum of the weighting scores must equal to 100, thus
the scores will conveniently represent the proportion of the weight in term of percentage.

Step 3

Rate each of the alternative locations against the criteria based on a defined scale. The scale could
be between 1 to 9 or 0 to 100, where 1 or 0 represent the worst possible score and 9 or 100 the best.
The scoring is normally subjective and hence it is more reliable if a group of people join the scoring
together.

Step 4

Multiply the weighting allocated to each criterion by the score in each location. Then for each
location the overall score becomes the sum of (score for each criterion x weight for each criterion).
The highest overall scored location is regarded as the most appropriate one.

Capacity Planning:

 Which form of the landscape is the most beautiful one for the supply chain. The answer to
this question surely cannot come from one company’s capacity planning, as the landscape is
formed along with others. This means supply chain capacity planning differs from
organisational capacity planning in that it is coordinated endeavour.
 To carry out the capacity planning in real-world supply chain, however, one needs to
deal with it in three levels.
 The first is the company’s internal capacity planning and management, which could be
understood as the internal supply chain capacity management.
 The second level is the company’s external capacity coordination and synchronisation with
the other members of the same supply chain, which can also be understood as the supply
chain’s internal capacity planning.
 The third level is the supply chain’s capacity responsiveness to the market demand changes,
which can be understood as the capacity synchronisation between the supply chain and the
customer demand.

At the level 1

Managers will have to manage the company internal capacity synchronisation to achieve the capacity
planning objectives. This is because the desired capacity for the supply chain will eventually to be
executed and implemented by each and every individual participating member of the supply chain.
Thus for an organisation to achieve supply chain capacity planning, it must also be able to manage
and synchronise the organisational internal capacities. This simply means that each functional silo
will need to be coordinated with each other to avoid bottlenecks or over-capacity throughout. This
also means to make use of the safety inventories, manage smaller batch sizes and keep synchronised
flows of materials.
At the level 2

The key to achieved optimised capacity for a supply chain lies in its external synchronisation. The
need for synchronise the capacities of each participating member is very simple. It is to reduce and
eliminate the waste incurred by the redundant capacities and to eliminate possible risks of short
supply due to the bottlenecks. However, when it comes to actually achieving these supply chain wide
capacity synchronisation, difficulties cannot be underestimated. First, a truly synchronised capacity
can only be achieved when the involving members are strategically aligned and operationally
integrated with each other. Second, to achieve a synchronised capacity for the supply chain, the
participating organisation may have to re-structure its assets and even make some capital investment;
without a committed long term close partnership, such capital investment and asset re-deployment is
unlikely to be achieved swiftly. Third, capacity synchronisation can only be a result of matured,
culturally embedded and technically compatible operating systems across the supply chain.

At the level 3

The whole supply chain’s capacity must be synchronised with the market demand changes, and
market demand change is often unknown or uncertain. Forecasting has long been used to assist the
planning of the supply chain’s capacity but with limited successes. The credential of the analytical
forecasting methods has not lived to its promises. As the result forecasting is either lucky or wrong.
Thus supply chain managers must resort to other more effective means of managing capacity
synchronisation and ultimately the supply chain responsiveness. Last two decades have seen some
encouraging progress in achieving high level of supply chain responsiveness. Today, supply chains
are more active in creating and developing flexible capacity and flexible structure through
outsourcing, vertical disintegration, virtual networks, and sharing and pooling resources, to name
just a few. But so far there is no single silver bullet discovered in this respect. The ways that
industries manage their own capacity and responsiveness varies significantly.

Bullwhip Effect

The bullwhip effect is a very common phenomenon which has many negative impacts on the supply
chain performances. Understanding the bullwhip effect is therefore essential to the supply chain
design and planning.
  Bullwhip effect is also known as Forrester Effect as Jay Forrester (1961) showed that this was
so by modelling supply chain mathematically and he called it industrial dynamics.

 What happened basically is that when the small demand ripple in the market place is felt by
the retailer at the end of the supply chain, the retailer will then start adjusting their orders to
the wholesalers, and the wholesaler in turn will adjust its orders to the distributer, and the
distributer to the factory. One would imagine when the factory receives the orders, it will
have the equally small changes. Unfortunately, it could not be farther from the truth. The
small ripples have been significantly amplified stage by stage towards the upstream of the
supply chain. When it reaches the factory or components manufacture the magnitude of
fluctuation becomes unrecognisable. Figure 11 shows such changes.

Basically, the bullwhip effect has three key characteristics.

 The first is oscillation. The demand, orders or inventories move up and down in an
alternative pattern.
 The second is amplification. The magnitude of the alteration and fluctuation increases as it
travels to the upstream end of the supply chain.
 The third is phase lag. The cycle of peaks and troughs of one stage also tends to lag behind
the one in the previous stage. Those characteristics can be clearly demonstrated by a supply
chain simulation game.

The Beer Game

To illustrate the bullwhip effect in the supply chain dynamics, MIT Sloan School of Management
created a so called Beer Distribution Game or just Beer Game. The Beer Game is the most widely
played game in business schools around the world. Many modified versions have also been
developed and used extensively, but the one shown in this book is the original version. Despite the
variation of the games played around world, the key features and the learning points remain largely
the same.
 The game is a role playing simulation of a supply chain originally developed by Jay Forrester in the
late 1950s to introduce students of the concept of system dynamics and its management. The game is
played on a board portraying a typical supply chain (figure 12). The supply chain distributes beers
and has four sectors: retailer, wholesaler, distributor, and factory. One or two persons manage each
sector. A deck of cards represents customer demand. Each week, customers demand beers from the
retailer; the retailer fills the order out of inventory. The retailer in turn orders beer from the
wholesaler, who ships the requested beer from the wholesale stocks. Likewise the wholesaler orders
and receives beer from the distributor, who in turn orders and receives beer from the factory, and the
factory produces beer. At each stage there are order processing and shipping delays. Each link in the
supply chain has the same structure.
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 Figure 12. The beer game board

The players’ objective is to minimize the total cost for their company. Inventory holding costs are
usually set to $0.50 per case per week, and stock out costs (costs for having a backlog of unfilled
orders) are $1.00 per case per week. The task facing each player is a typical example of the stock
management problem. Players must keep their inventory as low as possible while avoiding
backlogs. To fulfil the incoming orders the inventory has to be depleted, so the players must place
replenishment orders in order to adjust their inventory to a desired level. There is a delay between
placing and receiving orders, just like in real-world business case, creating unfilled orders. There are
also shipping delays that even the supplier despatched the goods it will take time to arrive, which is
often the case in real-world. This results in the inability to adjust the inventory level quick enough to
avoid the backlogs.

Clearly, the game is far simpler than any real supply chain. There are no random events – no
machine breakdowns, and transport problems, or strikes. There are no capacity constraints or financial
limitations. Above all the structure of the supply chain is visible to all, which is rarely the case in real
life. Players can readily inspect the board to see how much inventory is in the transit or held by their
teammates. The game is typically played with a very simple pattern of customer demand. Starting
from 4 cases per week for the first few weeks and then jumped to 8 cases per week and stays there
until the end.

Despite the apparent simplicity of the game, people do extremely poorly. For most of the first time
player average costs are typically an astonishing 10 times greater than optimum. Figure x shows the
typical results of the game. In all cases customer orders are essentially constant except for the small
step increase near the start. In all cases the response of the supply chain is unstable. The oscillation,
amplification and phase lag observed in real supply chains are clearly visible in the displayed result.
In the period of 20-25 weeks, the average amplification ratio of factory production relative to
customer order is a factor of 4.
 Figure 13. Typical results of the Beer Game (Sterman, 2001).

Most interesting, the patterns of behaviour generated in the game are remarkably similar. Starting
with the retailer, in the 20 weeks or so, inventories decline throughout the supply chain, and most
players developed a backlog of unfilled orders (negative net inventory). In response, a wave of
orders moves through the chain, growing larger at each stage. Eventually, factory production surges,
and inventories throughout the supply chain start to rise. But inventory does not stabilize at the cost-
minimising level near zero. Instead, inventory significantly overshoots. Players responded by
slashing orders, often cutting them to zero for extended periods. Inventory eventually peaks and
start decline again. These behaviours are all the more remarkable because there is no oscillation in
customer demand. The oscillation arises as the consequence of the players activities. Although plays
are free to place orders in any way they wish, the vast majority behave in a remarkably uniformed
fashion.

The causes of the bullwhip effect are systemic.

In real-world supply chain operations, there will be even more factors that worsening the bullwhip
effect, such as batching, facility breakdown, poor maintenance, inappropriate scheduling and
communication, poor capacity coordination, market disruptions and many more.
 How to alleviate the bullwhip effect? There is no single cure-all recipe.
But there are some commonly agreeable countermeasures to the bullwhip
effect:

• Improve information sharing through EDI (electronic data

interchange), POS (point of sale systems), and web-based IS
(information systems).
• Reducing batch ordering
• Coordinating capacity and production planning
• Apply appropriate safety stocks to insulate the oscillation
• Reducing inventory level through JIT (just in time), VMI (vendor
managed inventory), QR (quick response).

All those approaches must be executed cohesively in an integrated manor.

A bullwhip effect proof supply chain will also call for a very high degree
of inter-organisational collaboration by which systematic coordination in
capacity planning, inventory management, cost-to-serve, lead-time
reduction and responsiveness can be effectively achieved.
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