CHAPTER THREE

SUPPLY CHAIN OPERATIONS:

MAKING & DELIVERING
 Brief Contents

3.1 Make 3.2 Deliver

– Product Design – Order
– Production Management
Scheduling – Delivery
– Facility
Scheduling
Management
– Delivery Source
 Learning Outcomes

After completing this chapter you will:

• Gain a basic understanding of supply chain operations involved
in making and delivering products
• Understand how product design affects the supply chain that
supports that product
• Appreciate the balancing act between utilization rates, inventory
levels and customer service that is inherent in production
scheduling.
• Be able to apply the four rules of efficient order management
• Assess different delivery scheduling options.
 3.1. Introduction
• As stated in the preceeding Figure 3.1: SCOR Model
chapters, per the SCOR
model companies perform
operations in one or more
of these four categories of
chain activities as illustrated
in figure 3.1.
• This chapter looks at Make
and Deliver activities.
• NOTE: this simplified SCOR
model treats Returns as a
sub-category of the Deliver
category.
• Many companies and the SCs they
participate in serve customers who are
growing more sophisticated every year
and demanding higher levels of service.
• Continuous improvements to the
operations are needed to deliver the
efficiency and responsiveness that
evolving SCs require.
 3.2. Make
• As indicated in Unit 2, the Make category
of SC Operation includes the activities
required to develop and build the products
and services that a supply chain provides.
• Operations that we discuss in this category
are:
1) product design,
2) production scheduling, and
3) facility and management.
 3.2.1. Product Design /Make
• Product designs and selections of the
components needed to build these products are
based on the technology available and product
performance requirements.
• Until recently, little thought was given to how the
design of a product and the selection of its
components affect the SC required to make the
product.
• Yet these costs can become 50 percent or more
of the product’s cost.
 Cont…
• When considering product design from a SC perspective
the aim is to design products with fewer parts, simple
designs, and modular construction from generic sub-
assemblies.
• This way the parts can be obtained from a small group of
preferred suppliers.
• Inventory can be kept in the form of generic sub-
assemblies at appropriate locations in the SC.
• There will not be the need to hold large finished goods
inventories because customer demand can be met
quickly by assembling final products from generic sub-
assemblies as customer orders arrive.
 Cont…
• The SC required to support a product is molded by the
product’s design.
• The more flexible, responsive, and cost efficient the SC is,
the more likely the product will succeed in its market.
• Product design defines the shape of the SC and this has a
great impact on the cost and availability of the product.
• If product design, procurement, and manufacturing
people can work together in the design of a product, there
is a tremendous opportunity to create products that will be
successful and profitable.
 Cont…
• Differences:
• Design people are concerned with meeting the
customer requirements.
• Procurement people are interested in getting the best
prices from a group of pre-screened preferred
suppliers.
• Manufacturing unit is looking for simple fabrication and
assembly methods and long production runs.
• Cross-functional product design teams with
representatives from these three groups have the
opportunity to blend the best insights from each group.
 Cont…

• Cross functional teams can review the new product

design and discuss the relevant issues.
 Can existing preferred suppliers provide the components
needed?
 How many new suppliers are needed?
 What opportunities are there to simplify the design and
reduce the number of suppliers?
 What happens if a supplier stops producing a certain
component?
 How can the assembly of the product be made easier?
• At the same time they are reviewing product
designs, a cross functional team can evaluate
existing preferred suppliers and manufacturing
facilities.
 What components can existing suppliers provide?
 What are their service levels and technical support
capabilities?
 How large a workforce and what kind of skills are needed
to make the product?
 How much capacity is needed and which facilities should
be used?
• A product design that does a good job of
coordinating the three perspectives will
result in a product that can be supported
by an efficient SC.
• This will give the product a fast time to
market and a competitive cost.
 3.2.2. Production Scheduling
• Allocates available capacity (equipment, labor,
and facilities) to the work that needs to be done.
• The goal is to use available capacity in the most
efficient and profitable manner.
• The production scheduling operation is a process
of finding the right balance between several
competing objectives:
– High Utilization Rates—often means long production
runs and centralized manufacturing and distribution
centers. The idea is to generate and benefit from
economies of scale.
 Cont…
– Low Inventory Levels—usually means short
production runs and just-in-time delivery of
raw materials. The idea is to minimize the
assets and cash tied up in inventory.
– High Levels of Customer Service—Often
requires high levels of inventory or many short
production runs. The aim is to provide the
customer with quick delivery of products and
not to run out of stock in any product.
 Cont…
• When a single product is to be made in a dedicated
facility, scheduling means organizing operations as
efficiently as possible and running the facility at the
level required to meet demand for the product.
• When several different products are to be made in
a single facility or on a single assembly line, this is
more complex.
• Each product will need to be produced for some
period of time and then time will be needed to
switch over to production of the next product.
 Cont…
• The first step in scheduling a multi-product
production facility is to determine the economic lot
size for the production runs of each product.
• The second step is to set the right sequence of
production runs for each product.
• If inventory for a certain product is low relative to its
expected demand, then production of this product
should be scheduled ahead of other products that
have higher levels of inventory relative to their
expected demand
 Cont…
• A common technique is to schedule
production runs based on the concept of a
product’s “run-out time” -the number of
days or weeks it would take to deplete the
product inventory on hand given its
expected demand.
• The run-out time calculation for a product
is expressed as
• R = P/D where:
– R = run-out time
– P = number of units of product on hand
– D = product demand in units for a day or
week
 3.2.3. Facility Management
• All facility management decisions happen within
the constraints set by decisions about facility
locations.
• Location is one of the five SC drivers.
• It is usually quite expensive to shut down a facility
or to build a new one, so companies live with the
consequences of decisions they make about
where to locate their facilities.
• Ongoing facility management takes location as a
given and focuses on how best to use the
capacity available.
• This involves making decisions in three
areas:
– 1. The Role Each Facility Will Play
– 2. How Capacity Is Allocated in Each
Facility
– 3. The Allocation of Suppliers and
Markets to Each Facility
 Cont…
• If a facility is designated to perform only a single
function or serve only a single market, it usually
cannot easily be shifted to perform a different
function or serve a different market if SC needs
change.
• Capacity allocation decisions result in the
equipment and labor that is employed at the facility.
• It is easier to change capacity allocation decisions
than to change location decisions, but still it is not
cost effective to make frequent changes in
allocation.
• So, once decided, capacity allocation
strongly influences SC performance and
profitability.
• Allocating too little capacity to a facility
creates inability to meet demand and loss
of sales.
• Too much capacity in a facility results in
low utilization rates and higher SC costs.
 3.3. Deliver
• These operations encompass the activities that
are part of receiving customer orders and
delivering products to customers.
• The three operations are:
1) order management,
2) product delivery, and
3) return processing.
• These are the operations that constitute the core
connections between companies in a supply
chain.
 3.3.1.Order Management
• Order management is the process of passing order
information from customers back through the SC
from retailers to distributors to service providers and
producers.
• This process also includes passing information about
order delivery dates, product substitutions, and back
orders forward through the SC to customers.
• This process has long relied on the use of the
telephone and paper documents such as purchase
orders, sales orders, change orders, pick tickets,
packing lists, and invoices.
 Cont…
• A company generates a purchase order and calls a
supplier to fill the order.
• The supplier who gets the call either fills the order from
its own inventory or sources required products from other
suppliers.
• Companies now deal with multiple tiers of suppliers,
outsourced service providers, and distribution-channel
partners.
• This complexity has evolved in response to changes in
the way products are sold, increased customer service
expectations, and the need to respond quickly to new
market demands.
 Cont…
• Modern order management focuses on
techniques to enable faster and more
accurate movement of order-related data.
• The order-management process needs to
do exception handling and provide people
with ways to quickly spot problems and
give them the information they need to
take corrective action.
• This means the processing of routine
orders should be automated and orders
that require special handling because of
issues such as insufficient inventory,
missed delivery dates, or customer
change requests need to be brought to the
attention of people who can handle these
issues.
Basic principles that guide efficient order
management operations:
1. Enter the Order Data Once and Only Once—Capture
the data electronically as close to its original source
as possible and do not manually reenter the data as it
moves through the SC.
2. Automate the Order Handling— Automatically send
orders to appropriate fulfillment locations. People do
only exception handling
3. Make Order Status Visible—Let customers and
service agents see orders status information
automatically whenever they want.
4. Use Integrated Order Management Systems—
electronically connect Order management systems
with other related systems to maintain data integrity.
 3.3.2. Delivery Scheduling
• The delivery scheduling operation is of course
strongly affected by the decisions made
concerning the modes of transportation that
will be used.
• The delivery-scheduling process works within
the constraints set by transportation decisions.
• For most modes of transportation there are
two types of delivery methods: direct
deliveries and milk run deliveries.
 Cont…
• Direct deliveries are deliveries made from
one originating location to one receiving
location
• Milk run deliveries are deliveries that are
routed to either bring products from a
single originating location to multiple
receiving locations or deliveries that bring
products from multiple originating
locations to a single receiving location.
• Scheduling milk run deliveries is a much
more complex task than scheduling direct
deliveries.
• Decisions must be made about delivery
quantities of different products, about the
frequency of deliveries, and most importantly
about the routing and sequencing of pickups
and deliveries.
 Delivery Sources
• Deliveries can be made to customers from
two sources:
a) Single-Product Locations
b) Distribution Centers
• Single-product locations are facilities such
as factories or warehouses where a single
product or a narrow range of related items
are available for shipment.
• These facilities are appropriate when there
is a predictable and high level of demand
for the products they offer and where
shipments will be made only to customer
locations that can receive the products in
large, bulk amounts.
• They offer great economies of scale when
used effectively.
 Cont…
• Distribution centers are facilities where bulk
shipments of products arrive from single-product
locations.
• When suppliers are located a long distance away
from customers, the use of a distribution center
provides for economies of scale in long-distance
transportation to bring large amounts of products to
a location close to the final customers.
• The distribution center may warehouse inventory
for future shipment or it may be used primarily for
cross-docking
 3.3.3. Return Processing
• This process is also known as reverse
logistics.
• All SCs have to deal with returns.
• The most common circumstances are:
 the wrong products were delivered;
 the products that were delivered were damaged
in transit or were defective from the factory; and
 more product was delivered than was needed
by the customer
 Cont…
• Companies and SCs as a whole need to
keep track of the kinds of returns that
happen, their frequency, and if the return
rates are rising or falling.
• Return processing should be efficient, yet
at the same time remember that if other
SC activities are managed effectively there
will not be the need for a lot of return
processing.
• Optimizing the return process can become an
exercise in improving the efficiency of a process
that should not be happening in the first place.
• If return rates are increasing it is far more
effective to find and fix the sources of the
problems that make returns necessary.
• One area where returns are a value-added
activity for the entire SC is where product
recycling comes into play