UNIT III- SUPPLY CHAIN DESIGN AND PLANNING
Learning Objectives:
1. Understand the role of configuration in supply chain success.
2. Analyze the advantages and challenges of vertical integration.
3. Evaluate the impact of outsourcing and offshoring on supply chains.
4. Apply key factors to make informed location decisions for supply chains.
5. Evaluate how capacity planning impacts supply chain efficiency.
6. Analyze and propose solutions to the bullwhip effect.
Pre- test
Instructions:
Identify the term or concept being described in each of the following statements.
1. _____________________: The single ownership of consecutive activities along the supply chain.
2. _____________________: A supply chain configuration where the manufacturer forms its network with long-
term, tiered suppliers and distributors.
3. _____________________: The practice of transferring business operations, processes, or services from one
country to another, usually to a lower-cost area.
4. _____________________: A phenomenon where small fluctuations in demand at the retail level cause
progressively larger fluctuations in demand at higher levels of the supply chain.
5. _____________________: The amount of work an organization can complete in a specific period.
6. _____________________: A capacity planning strategy where resources are aligned with projected demand.
7. _____________________: The "make-or-buy" decision regarding internal functions.
8. _____________________: A supply chain configuration characterized by the use of dynamic and mostly short-
term suppliers and distributors.
9. _____________________: The geographic location of supply chain functions such as assembly and distribution.
10. _____________________: The total cost associated with the physical movement and transformation of goods
within a supply chain.
Supply Chain Configuration
- illustrates how the participating company members of the chain are joined together to deliver the
product or service to the ultimate client.
- To a manufacturer: how many suppliers it uses, how the suppliers are grouped or categorized or
tiered, where do they geographically located, the ownership and independence of the suppliers, the
choice of distribution channels are all the configuration issues for the supply chain
- companies do have the choice to configure their supply chains in the way they believe are most
appropriate and beneficial
- there is no single ‘best’ configuration for all supply chains because it depends on the industry sectors,
market environment, stages of the product cycle and etc.
Supply Chain Configuration Network Relationship:
1. Stable Network
- happens when the manufacturer forms its supply network through tiered suppliers and tiered
distributors with medium and long-term stability
- the tiered stable network has more control over its suppliers and distributors’ operations
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Manufacturer
2. Dynamic Network
- happens when the manufacturer does not have many of those long terms 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
- unexpected misunderstanding may result in unrecoverable product defects.
- there is higher risk in operational cost control and quality standard
- much more flexible than stable network in that it can quickly form a new network in the supply
market to cater for the changed demand both in volume and in variety
- has a better ability to upgrade technology and foster innovative processes
Manufacturer
Extent of Vertical Integration
Vertical Integration
- the single ownership of consecutive activities along the supply chain
- a well-integrated supply chain may not have a large extent of vertical integration
- If a manufacturer does not have ownership of its suppliers and customers, it is regarded as having a
narrow span of vertical integration
- if manufacturer owns a number of tiers of suppliers and customers, it is regarded as having a large
extent of vertical integration
- To a large extent a company’s strategy, operation and performance will depend on the right design
of the supply chain configuration
- depending on the nature of the industry, product lifecycle and competitive environment, the
architecture design of the supply chain can vary significantly
- process-based industry such as oil industry and chemical industry tends to be more vertically
integrated
- the technology-intensive electronics industry tends to be less vertically integrated
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Backward Integration Forward Integration
Materials Components Assembly by
Wholesaler Retailer
Supplier Maker Manufacturer
Narrow Span
Wide Span
Outsourcing and Offshoring
Outsourcing
- “make-or-buy” decision
- Some internal functions, such design, manufacturing, and marketing, may be outsourced to outside
suppliers by organizations.
- Most of the time, the choice to 'purchase' the business rather than to 'make' it is aiming to reduce cost
- not just a decision of make or buy, but also a process that including identifying the potential suppliers,
contractual negotiation, regular evaluation and review of the outsourced operation
- not all operations that carried out by the external suppliers are suitable to be classified as
outsourcing; only the strategically significant operations can be classified as outsourcing
Benefits of Outsourcing
1. Focus on and further developing the core competences
2. Further differentiated competitive edge
3. Increasing business flexibility, thus supply chain flexibility
4. Improved supply chain responsiveness
5. Raise the entry barrier through focused investment
6. Enhanced Return of Investment or Return of Equity through downsizing the fixed asset
Offshoring
- the practice of transferring business operations, processes, or services from one country to another
usually to a lower-cost area
- businesses strategically choose to relocate certain activities to other nations with cheaper labor costs,
allowing them to optimize their resources and remain competitive in a tough industry.
Outsourcing vs. offshoring
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Types of Outsourcing Business
A. Business process outsourcing (BPO)
1. Marketing/call center outsourcing
2. R & D process outsourcing
3. Engineering process outsourcing (EPO)
4. HR and recruitment process outsourcing
5. Knowledge process outsourcing (KPO)
B. Business function outsourcing
1. Financial auditing
2. IT services
3. Logistics services
C. Facility and man power outsourcing
1. Capital equipment leasing
2. Free length experts hiring
Common Steps of Outsourcing Processes:
1. Understand the competitive environment
2. Clarify the strategic objectives and processes
3. Analyzing 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
Logic Decision Tool for Outsourcing
Matrix Decision Tool for Outsourcing
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Risks in Outsourcing
1. Negative impact on the company’s personnel
2. Loss control over key strategic design tasks, sub-system or components, resulting in a negative impact on
the company’s competitiveness.
3. Could creating tomorrow’s competition
4. Risk of severe business disruption due to failed supply from single-sourced suppliers
5. Tactical, short-term approach to outsourcing may inhibit continuous improvement and long-term
investment
6. Intellectual property right risks
7. Foreign currency exchange risk if involves overseas suppliers
Location Decisions
- geographic location of supply chain functions such as assembly and distribution
- done for the purpose of better serving the customers and further reducing the operational cost in the
supply chain
- will have a profound impact on labor cost, material cost, taxation, currency exposure, financial and legal
regulations
Factors that Influence Operation Location Decision
Supply Chain Total Cost
- total supply chain cost consists broadly of two components: the physical cost and market cost
Physical Cost
- measures the whole operational efficiency of a supply chain
- involved cost that are necessary for the supply chain to transform the raw materials to the end
products for the consumer
- production cost, logistics cost, material cost, labor cost, taxation cost, energy cost, etc.
Market Cost
- loss or cost incurred by the inappropriate supply chain market mediation
Product Delivery Process (PDP) Cost
- If a supply chain failed to produce the products that are the right quantity for the market at the season,
delivered to the right location where customers find it convenient to access to, with right quality and
functions that they expect, at the right prices that they are willing to pay for, the supply chain will
make loss either on unsold products or unsatisfied customers
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Capacity Planning
Capacity
- amount of work an organization can complete in a specific period
Capacity Planning Process
- determines the production capacity required to satisfy shifting consumer demand
- design capacity is the optimal ability of a business entity to complete work within a specific time
frame
- estimate the production capacity to adapt to shifting demands for their goods
Types of Capacity Planning
1. Workforce
- have sufficient staff to handle the production’s anticipated future workload
- gives you information on whether you have the necessary number of people, skill set, and job roles to
meet demand
- helps the company deliver more initiatives on time and within budget while also delighting your
customers and preventing worker burnout
- employee burnout may result in increased turnover, more sick days, and decreased productivity
2. Project
- enables effective planning and finance of your diverse project demands
- helps in determining the impact of the objectives on your business
- the projects should remain within the budget while providing an accurate forecast which will help
the organization determine whether it handles its resources optimally
- can give a competitive edge through more revenue, less competition, and higher profit margin
3. Tool
- ensures that business has adequate facilities to finish jobs, including equipment for an assembly line
or machinery required to produce and distribute your product
- ensures utilizing the best resources available by providing access to the most effective techniques and
materials to execute the plans
- tools should be practical and easy to use while providing the accurate information needed to make
well-informed business decisions
Capacity Building Planning Strategies
1. Lag Strategy
- having adequate resources to satisfy actual demand rather than anticipated demand
- a conservative approach to capacity planning that guarantees the lowest possible costs
- potential drawback is that it can cause a delay in providing goods or services to clients
- may prevent you from achieving deadlines if you suddenly see a rush in orders or sign a big new client
who demands quick turnaround times
2. Lead Strategy
- have adequate resources to meet demand projections
- has higher risk than lag strategy
- calls for a one-time investment to boost capacity
- you keep all your clients satisfied and fulfill production lead time deadlines even if there is a sudden
increase in orders
- drawback is that if the booking volume stays the same, you will have additional personnel that you
may not need
3. Match Strategy
- falls between the lag and lead strategies
- helps the business plan strategic capacity more regularly
- keep a close eye on changes in the market and expected demand and can meet actual demand
- modify your capacity management using the acquired data to fulfill demand incrementally
Benefits of Capacity Planning
1. Reliability
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2. Staffing Retention
3. Larger Project Margins
4. Anticipating Team Skills
Steps in Creating Capacity Planning
1. Predict your future demand
- make an accurate estimate of work to be finished
- compare this estimate to the capacity the company currently have to get a sense of the resource
capacity needed to finish the job
- look at the changes in the industry and where to improve to attract more customers
- identify the demand for the product and how much it will increase or decrease in the future
2. Determine your current capacity limit
- look at the cross-functional team’s capacity and what they can accomplish in their available time
- factor in regular tasks like administrative work, email, meeting attendance, vacations and sick days
- Calculate the amount of time each team member will have to devote to the project
3. Gauge staff skills and abilities
- consider the skills and expertise of the staff members to complete the projects efficiently and
effectively
- must be well-versed in specific roles such as project management or customer service business for a
better user experience
- accurately analyze the company’s current resources and determine which staff members you can
allocate to specific projects
4. Consider the project requirement
- estimate how many staff will be required to complete the task
- count how many hours each staff member will work
- decide whether you need to recruit more employees
5. Choose what software to use
- determine whether investing in a custom software solution is more cost-effective than purchasing an
out-of-the-box software tool
- while spreadsheets and individual Gantt charts can plan capacity, utilizing specialized software is the
most efficient method for capacity and resource planning
- activities take place during a project, and the critical path gets drastically altered by a single staff
member being absent due to illness or a change in the project’s scope
- resources get frequently shared among several projects, impacting labor requirements
- resource planning software can automatically adjust capacity plans with just a few clicks
6. Align capacity with demand
- ensure you allocate enough staff to complete your current projects
- an accurate picture of the resource planning required can help save money by preventing excess
resource utilization
7. Allocate Resources
- consider distributing resources after you know what’s available, the project requirements, and the
business priorities
- capacity planning is a dynamic, continuing process
8. Analyze Key Performance Indicators
- several metrics, including your project’s KPIs, can measure the company’s performance
- an accurate assessment of your team’s performance is essential to making informed decisions about
current and future business performance
Levels of Supply Chain Capacity Planning
1. Level 1 - internal supply chain capacity management
- 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
- be able to manage and synchronize the organizational internal capacities
- each functional silo will need to be coordinated with each other to avoid bottlenecks or over-capacity
throughout
- make use of the safety inventories, manage smaller batch sizes and keep synchronized flows of
materials
2. Level 2 - supply chain’s external capacity planning
- to reduce and eliminate the waste incurred by the redundant capacities and to eliminate possible
risks of short supply due to the bottlenecks
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- a truly synchronized capacity can only be achieved when the involving members are strategically
aligned and operationally integrated with each other
- the participating organization may have to restructure 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
- capacity synchronization can only be a result of matured, culturally embedded and technically
compatible operating systems across the supply chain
3. Level 3 - capacity synchronization between the supply chain and customer demand
- The whole supply chain’s capacity must be synchronized with the market demand changes, and
market demand change is often unknown or uncertain
- forecasting has long been utilized but with limited successes
- 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
Bullwhip Effect
- a supply chain phenomenon describing how small fluctuations in demand at the retail level can cause
progressively larger fluctuations in demand at the wholesale, distributor, manufacturer and raw
material supplier levels
- capacity synchronization helps to alleviate the Bullwhip Effects in the supply chain
- also known as Forrester Effect as Jay Forrester (1961)
- increase of variability of orders related to the variability of consumer demand
- material and information do not flow steadily through the supply chain
Example of Bullwhip Effect
The bullwhip effect is observed when small fluctuations in consumer demand cause progressively
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larger fluctuations in orders and production up the supply chain. In this example, a 10% increase or decrease
in retail sales leads to much larger changes in distributor and factory orders (e.g., 30% and 45% increases, or
40% and 66% decreases). These amplified responses cause inefficiencies such as overstocking, stockouts, and
excess production, as each supply chain level overreacts to demand changes. The bullwhip effect illustrates how
small demand changes can spiral into large disruptions as they move through the supply chain.
Characteristics of Bullwhip Effect
1. Oscillation
- the wave-like amplification of small fluctuations in demand that occurs as it moves up the supply
chain
- The demand, orders or inventories move up and down in an alternative pattern
- Order and inventory quantities are subject to large fluctuations in amplitude even though consumer
demand remains constant
2. Amplification
- magnitude of the alteration and fluctuation increases as it travels to the upstream end of the supply
chain
- amplitude and variance of order quantities increase steadily from consumer to producer
- despite the fact that consumer demand remains constant, retailer demands increase, while order
quantities of the producer show a great variance
3. Phase Lag
- cycle of peaks and throughs of one stage also tends to lag behind the one in the previous stage
- order rate later peaks as one moves from the retailer to the producer
Causes of Bullwhip Effect
1. Demand forecasting errors
- when retailers miscalculate customer needs, the resulting distorted information can lead to
overordering or underordering
2. Order batches
- businesses consolidate multiple orders into larger, less frequent shipments.
3. Price fluctuations
- when customers anticipate price hikes, they may stock up on goods, leading to irregular ordering
patterns
4. Inventory Management Practices
- retailers, aiming to prevent stockouts, may overorder to maintain safety stock levels
5. Information Delays
- when participants are not promptly informed of changes in demand or inventory levels, they may
make decisions based on outdated data
How to Alleviate the Bullwhip Effect
1. Improve information sharing through EDI (electronic data interchange), POS (point of sale systems), and
web-based IS (information systems)
2. Reducing batch ordering
3. Coordinating capacity and production planning
4. Apply appropriate safety stocks to insulate the oscillation
5. Reducing inventory level through JIT (just in time), VMI (vendor managed inventory), QR (quick response).
A bullwhip effect proof supply chain will also call for a very high degree of inter-organizational collaboration
by which systematic coordination in capacity planning, inventory management, cost-to-serve, lead-time
reduction and responsiveness can be effectively achieved.
Guide Questions:
1. How does a well-designed supply chain configuration contribute to the success of a hospitality business?
2. What are the risks and benefits of outsourcing non-core activities in the hospitality industry? Provide
examples.
3. How can the hospitality industry mitigate the Bullwhip Effect to maintain operational efficiency?
4. What factors should be considered when making location decisions for key supply chain functions in a
hospitality business?
5. In the context of capacity planning, how can hospitality businesses ensure they have the right resources to
meet fluctuating guest demands during peak seasons?
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