This a question about operations management due day is Sartuday

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    • Ch. 10, Case: Brunswick Distribution, Inc. Case
    e: Brunswick Distribution, Inc. Case
  • This case is on Page 381-383 I will upload the file.E-book will be in the file
  • just answer question in the book two pages will be okChapter_10_Supply_Chain_Design.pdf 

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360 PART 3 MANAGING SUPPLY CHAINS and chargers can be added, or the products can be repackaged to meet the requirements for retailer displays. Finally, the products can be shipped to thousands of retail outlets in the United States, Latin America, and the Caribbean. The redesigned supply chain not only improves the flow of products from origin to destination, it also provides Nikon with timely information of the status of shipments and advance notices of their delivery throughout the extent of the supply chain, including the retailers. Armed with this information, Nikon can make adjustments to delivery times to accommodate sales opportunities that otherwise would be missed. Despite the complexity of the supply chain, products leaving Nikon manufacturing facilities can now be on a retailer’s shelves in as few as two days. Sources: UPS Supply Chain Solutions: Nikon Focuses on Supply Chain Innovation—and Makes New Product Distribution a Snap,, 2005;, 2011 LEARNING GOALS After reading this chapter, you should be able to:  Explain the strategic importance of supply chain design.  Identify the nature of supply chains for service providers, as well as for manufacturers.  Define the critical supply chain performance measures.  Explain the strategy of mass customization and its impli-  Define the important decision factors to be considered when employing an outsourcing or offshoring strategy.  Explain how efficient supply chains differ from responsive supply chains and the environments best suited for each type of supply chain. cations for supply chain design. Nikon, partnering with third-party logistics provider UPS, is an excellent example of how a supply chain design Designing a firm’s supply chain to meet the competitive priorities of the firm’s operations strategy. supply chain can be successfully tailored to the market needs of a dynamic product. A supply chain is the interrelated series of processes within a firm and across different firms that produces a service or product to the satisfaction of customers. More specifically, it is a network of service, material, monetary, and information flows that link a firm’s customer relationship, order fulfillment, and supplier relationship processes to those of its suppliers and customers. It is important to note, however, that a firm such as Nikon may have multiple supply chains, depending on the mix of services or products it produces. A supplier in one supply chain may not be a supplier in another supply chain because the service or product may be different or the supplier may simply be unable to negotiate a successful contract. The firm’s operations strategy and competitive priorities guide its supply chain choices. Figure 10.1 shows the three major areas of focus in creating an effective supply chain. 1.  FIGURE 10.1 Creating an Effective Supply Chain Link Service/Products with Internal Processes. Parts 1 and 2 of this text have shown how firms coordinate internal process decisions with the competitive priorities of the services or products covered in the operations strategy. 2. Link Services/Products with the External Supply Chain. The competitive priorities assigned to the firm’s services or products must be reflected in the design of the network of suppliers. 3. Link Services/Products with Customers, Suppliers and Supply Chain Processes. The firm’s processes that enable it to develop what customers want, interact with suppliers, deliver services or products, interact with customers, address environmental and ethical issues, and provide the information and planning tools needed to execute the operations strategy are the glue that binds the effective supply chain. Service/Product Link Services/Products with External Supply Chain Link Services/Products with Internal Processes Processes Supply Chain Link Services/Products with Customers, Suppliers, and Supply Chain Processes SUPPLY CHAIN DESIGN CHAPTER 10 361 Total costs Supply chain management, the synchronization Inefficient of a firm’s processes with those of its suppliers and supply chain customers to match the flow of materials, services, operations and information with demand, is a critical skill Area of improved in most organizations. A key part of supply chain operations management is supply chain design, which seeks to design a firm’s supply chain to meet the competitive priorities of the firm’s operations strategy. To get a better understanding of the importance of supply chain design, consider Figure 10.2, which conceptually shows the challenges facing supply Reduce costs chain managers. The blue line is an efficiency curve, which shows the trade-off between costs and perNew supply chain efficiency curve with formance for the current supply chain design if the changes in design supply chain is operated as efficiently as it can be. and execution Now, suppose that your firm plots its actual costs and performance, as indicated by the red dot. It is Improve far off of the efficiency curve, which is not an unperformance common occurrence. The challenge is to move operations into the tinted area, as close to the curve Supply chain performance as possible, which can be accomplished by better forecasting, inventory management, operations  FIGURE 10.2 planning and scheduling, and resource planning. We have already discussed inventory manageSupply Chain Efficiency Curve ment; the other topics will follow. However, quantum steps in improvement can be obtained by improving the design of the supply chain in accordance with a sound operations strategy, which moves the curve as shown by the dashed red line. The goal is to reduce costs as well as increase performance. Design issues include placement of inventories, mass customization, outsourcing, Creating Value through supply chain collaboration, supplier selection, closed-loop supply chains, and facility location, Operations Management which are just some of the topics we discuss in this and the next two chapters. In this chapter, we will also discuss the important measures of supply chain performance and show how sound supply chain design can improve key financial measures. Using Operations to Compete Project Management Supply Chain Design across the Organization Creating a global supply chain involves more than supply chain managers designing the infrastructure or finding the best suppliers. There are also internal organizational pressures from groups such as sales, marketing, and product development that need to be recognized. These pressures are (1) dynamic sales volumes, (2) customer service levels, and (3) service/product proliferation. Dynamic sales volumes One of the most costly operating aspects of supply chains is trying to meet the needs of volatile sales volumes. Often this involves excessive inventories, underutilized personnel, or more expensive delivery options to meet customer demands on time. While sometimes these volatile demands are caused by external sources such as the customers themselves, they are often caused internally by end-of-month sales promotions. Supply chain design should involve close collaboration between top level managers across the organization so that unnecessary costly supply chain options are avoided. We will discuss the implications of supply chain dynamics in more depth in Chapter 12, “Supply Chain Integration.” Customer service levels We have discussed customer service levels as they relate to an organization’s internal inventories in Chapter 9, “Supply Chain Inventory Management.” Here we focus on the organizational pressures emanating from the sales and marketing groups for superior service levels for the organization’s customers. Questions such as “What service level should be guaranteed?” or “How speedy must our deliveries be?” need collaborative discussion from the sales, marketing, and finance groups. The answers to these questions impinge on the design of the supply chain, particularly its points of supply and the choice of suppliers. Service/product proliferation The sales and marketing groups provide the momentum to create new services or products because they are closely in touch with customers and their needs. The survival of any organization depends on the development of new markets. However, adding more services or products often adds complexity to the supply chain. It is not an unusual circumstance to find that a relatively large proportion of SKUs contribute only a small percentage of the revenues. Generally, these niche services or products have low volumes and therefore cost more to produce, market, and deliver. A thoughtful balance needs to be struck between the cost of operating the supply chain and the need to market new services and products. Managing Processes Process Strategy Process Analysis Quality and Performance Capacity Planning Constraint Management Lean Systems Managing Supply Chains Supply Chain Inventory Management Supply Chain Design Supply Chain Location Decisions Supply Chain Integration Supply Chain and the Environment Forecasting Operations Planning and Scheduling Resource Planning 362 PART 3 MANAGING SUPPLY CHAINS The design of a supply chain must be a collaborative effort from the CEO down. All functional areas have a stake in an organization’s supply chains. Supply Chains for Services and Manufacturing Every firm or organization is a member of some supply chain. In this section, we show the similarities and differences between supply chains for services and manufacturing. Chuck Pefley/Alamy Services Supply chain design for a service provider is driven by the need to provide support for the essential elements of the various services it delivers. Consider the example of Flowers-on-Demand, a florist with 27 retail stores in the greater Boston metropolitan area.1 Customers can place orders for customized floral arrangements by visiting one of the stores, using a toll-free number, or going to the florist’s Web page. The 800 number and the Web page are operated by a local Internet services company, which takes orders and relays them to the florist. The arrangements are produced at a distribution center, and deliveries are made using either local couriers, or FedEx, if the delivery is outside of the Boston area. Fresh flowers, flown in from all over the world, are used in the arrangements. What differentiates Flowers-on-Demand from floral wire services, such as Teleflora or FTD, is that it assembles all the arrangements and can ship out-of-area orders for next-day delivery anywhere in the country. To do business, the florist must have a supply chain that provides retail stores, a delivery center, computers, point-of-sale equipment, and employees. It must purchase flowers that are sourced globally as well as arrangement materials, such as An employee at a warehouse for a commercial flower farm packages flowers for local delivpots, baskets, greeting cards, and packing mateery. The farm acts as a supplier to grocery stores and retail florists. rials. The florist must arrange the flowers per the customer’s order and ensure that the arrangement is delivered as specified by the customer, using local services or FedEx. The design of its supply chain must provide convenience, which is facilitated by the location of the retail outlets and the opportunity to place orders via the Internet or the toll-free number. Figure 10.3 illustrates a simplified supply chain for the florist. Each of the suppliers, of course, has its own supply chain (not shown). For example, the supplier for the arrangement materials may get baskets from one supplier and pots from another. The suppliers in the florist’s supply chain play an integral role in its ability to meet its competitive priorities, such as top quality, delivery speed, and customization. Manufacturing A fundamental purpose of supply chain design for manufacturers is to control inventory by managing the flow of materials. The typical manufacturer spends more than 60 percent of its total income from sales on purchased services and materials, whereas the typical service provider spends only 30 to 40 percent. Because materials comprise such a large component of the sales dollar, manufacturers can reap large profits with a small reduction in the cost of materials, which makes supply chain management a key competitive weapon. The supply chain for a manufacturing firm can be complicated, as Figure 10.4 illustrates. However, the supply chain depicted is an oversimplification because many companies have hundreds, if not thousands, of suppliers. In this example, the firm is in Ireland and deals with an international supply chain. In addition, it owns its distribution and transportation services. Suppliers are often identified by their position in the supply chain. Here, tier 1 suppliers provide 1The florist depicted is real; however, the name has been changed. SUPPLY CHAIN DESIGN Flowers: Local/International Packaging Maintenance services FedEx delivery service Arrangement materials Local delivery service Internet service  FIGURE 10.3 Supply Chain for a Florist Flowers-on-Demand florist Home customers Commercial customers major subassemblies that are assembled by the manufacturing firm, tier 2 suppliers provide tier 1 suppliers with components, and so on. Not all companies have the same number of levels in their supply chains. For example, companies that engineer products to customer specifications normally do not have distribution centers as part of their supply chains. Such companies often ship products directly to their customers. Tier 3 Poland Tier 2 Germany USA Canada USA Germany Malaysia Australia Mexico Tier 1 Mexico China West Coast Raw materials Components Assembly Distribution centers Ireland USA  FIGURE 10.4 Supply Chain for a Manufacturing Firm Major subassemblies USA Manufacturer Ireland East Coast CHAPTER 10 East Europe West Europe Measures of Supply Chain Performance Managers need performance measures to assess the implications of changes to a supply chain. Before discussing the major supply chain design decisions, we define the typical inventory measures and financial measures used to monitor supply chain performance and evaluate alternative supply chain designs. Retail 363 364 PART 3 MANAGING SUPPLY CHAINS Inventory Measures average aggregate inventory value The total average value of all items held in inventory for a firm. All methods of measuring inventory begin with a physical count of units, volume, or weight. However, measures of inventories are reported in three basic ways: (1) average aggregate inventory value, (2) weeks of supply, and (3) inventory turnover. The average aggregate inventory value is the total average value of all items held in inventory by a firm. We express the dollar values in this inventory measure at cost because we can then sum the values of individual items in raw materials, work-in-process, and finished goods. Final sales dollars have meaning only for final services or products and cannot be used for all inventory items. It is an average because it usually represents the inventory investment over some period of time. Suppose a retailer holds items A and B in stock. One unit of item A may be worth only a few dollars, whereas one unit of item B may be valued in the hundreds of dollars because of the labor, technology, and other value-added operations performed in manufacturing the product. This measure for an inventory consisting of only items A and B is Average aggregate Number units of item A Value of each = a ba b + inventory value typically on hand unit of item A a weeks of supply An inventory measure obtained by dividing the average aggregate inventory value by sales per week at cost. Summed over all items in an inventory, this total value tells managers how much of a firm’s assets are tied up in inventory. Manufacturing firms typically have about 25 percent of their total assets in inventory, whereas wholesalers and retailers average about 75 percent. To some extent, managers can decide whether the aggregate inventory value is too low or too high by historical or industry comparisons or by managerial judgment. However, a better performance measure would take demand into account because it would show how long the inventory resides in the firm. Weeks of supply is an inventory measure obtained by dividing the average aggregate inventory value by sales per week at cost. (In some low-inventory operations, days or even hours are a better unit of time for measuring inventory.) The formula (expressed in weeks) is Weeks of supply = inventory turnover An inventory measure obtained by dividing annual sales at cost by the average aggregate inventory value maintained during the year. Number of units of item B Value of each b ba typically on hand unit of item B Average aggregate inventory value Weekly sales 1at cost2 Although the numerator includes the value of all items a firm holds in inventory (raw materials, WIP, and finished goods), the denominator represents only the finished goods sold—at cost rather than the sale price after markups or discounts. This cost is referred to as the cost of goods sold. Inventory turnover (or turns) is an inventory measure obtained by dividing annual sales at cost by the average aggregate inventory value maintained during the year, or Inventory turnover = Annual sales 1at cost2 Average aggregate inventory value The “best” inventory level, even when expressed as turnover, cannot be determined easily. A good starting point is to benchmark the leading firms in an industry. EXAMPLE 10.1 MyOMLab Tutor 10.1 in MyOMLab provides a new example to practice the calculation of inventory measures. Calculating Inventory Measures The Eagle Machine Company averaged $2 million in inventory last year, and the cost of goods sold was $10 million. Figure 10.5 shows the breakout of raw materials, work-in-process, and finished goods inventories. The best inventory turnover in the company’s industry is six turns per year. If the company has 52 business weeks per year, how many weeks of supply were held in inventory? What was the inventory turnover? What should the company do? SUPPLY CHAIN DESIGN Cost of Goods Sold Weeks of Operation CHAPTER 10 $10,000,000 52 Item Number Raw Materials Work in Process Finished Goods 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 Average Level 1,400 1,000 400 2,400 800 320 160 280 240 400 60 40 50 20 40 Unit Value $50.00 $32.00 $60.00 $10.00 $15.00 $700.00 $900.00 $750.00 $800.00 $1,000.00 $2,000.00 $3,500.00 $2,800.00 $5,000.00 $4,200.00 Total Average Weekly Sales at Cost Weeks of Supply Inventory Turnover Total Value $70,000 $32,000 $24,000 $24,000 $12,000 $224,000 $144,000 $210,000 $192,000 $400,000 $120,000 $140,000 $140,000 $100,000 $168,000 $2,000,000  FIGURE 10.5 Calculating Inventory Measures Using Inventory Estimator Solver $192,308 10.4 5.0 SOLUTION The average aggregate inventory value of $2 million translates into 10.4 weeks of supply and 5 turns per year, calculated as follows: Weeks of supply = Inventory turns = $2 million = 10.4 weeks 1$10 million2/152 weeks2 $10 million = 5 turns / year $2 million DECISION POINT The analysis indicates that management must improve the inventory turns by 20 percent. Management should improve its order fulfillment process to reduce finished goods inventory. Supply chain operations can also be improved to reduce the need to have so much raw materials and work-in-process inventory stock. It will take an inventory reduction of about 16 percent to achieve the target of 6 turns per year. However, inventories would not have to be reduced as much if sales increased. If the sales department targets an increase in sales of 8 percent ($10.8 million), inventories need only be reduced by 10 percent ($1.8 million) to get 6 turns a year. Management can now do sensitivity analyses to see what effect reductions in the inventory of specific items or increases in the annual sales have on weeks of supply or inventory turns. Financial Measures How the supply chain is designed and managed has a huge financial impact on the firm. Inventory is an investment because it is needed for future use. However, inventory ties up funds that might be used more profitably in other operations. Figure 10.6 shows how supply chain decisions can affect financial measures. Total Revenue Supply chain performance measures related to time, which is a critical dimension of supply chain operations, have financial implications. Many service providers and manufacturers measure the percent of on-time deliveries of their services or products to their customers, as well as services and materials from their suppliers. Increasing the percent of on-time deliveries to customers, for example, will increase total revenue because satisfied customers will buy more services and products from the firm. 365 366 PART 3 MANAGING SUPPLY CHAINS Total revenue Increase sales through better customer service Cost of goods sold Reduce costs of transportation and purchased materials Net income Improve profits with greater revenue and lower costs Operating expenses Reduce fixed expenses by reducing overhead associated with supply chain operations Return on assets (ROA) Increase ROA with higher net income and fewer total assets Net cash flows Improve positive cash flows by reducing lead times and backlogs Working capital Reduce working capital by reducing inventory investment, lead times, and backlogs Inventory Increase inventory turnover Fixed assets Reduce the number of warehouses through improved supply chain design FIGURE 10.6  How Supply Chain Decisions Can Affect ROA Total assets Achieve the same or better performance with fewer assets Cost of Goods Sold Being able to buy materials or services at a better price and transform them more efficiently into services or products will improve a firm’s cost of goods sold measure and ultimately its net income. These improvements will also have an effect on contribution margin, which is the difference between price and the variable costs to produce a service or good. Reducing production, material, transportation, and poor quality costs increases the contribution margin, allowing for greater profits. Contribution margins are often used as inputs to decisions regarding the portfolio of services or products the firm offers. Operating Expenses Selling expenses, fixed expenses, and depreciation are considered operating expenses. Designing a supply chain with minimal capital investment can reduce depreciation charges. Changes to the supply chain infrastructure can have an effect on overhead, which is considered a fixed expense. Cash Flow The supply chain design can improve positive net cash flows by focusing on reducing lead times and backlogs of orders. The Internet brings another financial measure related to cash flows to the forefront: Cash-to-cash is the time lag between paying for the services and materials needed to produce a service or product and receiving payment for it. The shorter the time lag, the better the cash flow position of the firm because it needs less working capital. The firm can then use the freed-up funds for other projects or investments. Redesigning the order placement process, so that payment for the service or product by the customer is made at the time the order is placed, can reduce the time lag. By contrast, billing the customer after the service is performed or the order is shipped increases the need for working capital. The goal is to have a negative cash-tocash situation, which is possible when the customer pays for the service or product before the firm has to pay for the resources and materials needed to produce it. In such a case, the firm must have supplier inventories on consignment, which allows it to pay for materials as it uses them. Working Capital Weeks of inventory and inventory turns are reflected in another financial measure, working capital, which is money used to finance ongoing operations. Decreasing weeks of supply or increasing inventory turns reduces the working capital needed to finance inventories. Reductions in working capital can be accomplished by improving the customer relationship, order fulfillment, or supplier relationship processes. For example, reducing supplier lead times has the effect of reducing weeks of supply and increasing inventory turns. Matching the input and output flows of materials is easier because shorter-range, more reliable forecasts of demand can be used. SUPPLY CHAIN DESIGN CHAPTER 10 367 Return on Assets Designing and managing the supply chain so as to reduce the aggregate inventory investment or fixed investments such as warehouses will reduce the total assets portion of the firm’s balance sheet. An important financial measure is return on assets (ROA), which is net income divided by total assets. Consequently, reducing aggregate inventory investment and fixed investments, or increasing net income by better cost management, will increase ROA. Techniques for reducing inventory, transportation, and operating costs related to resource usage and scheduling are discussed in the chapters to follow. We now turn to a discussion of several major supply chain design decisions and their implications for a firm’s performance. Inventory Placement A fundamental supply chain design decision that affects performance is where to locate an inventory of finished goods. Placing inventories can have strategic implications, as in the case of international companies locating distribution centers (DCs) in foreign countries to preempt local competition by reducing customer delivery times. However, the issue for any firm producing standardized products is where to position the inventory in the supply chain. At one extreme, the firm could use centralized placement, which means keeping all the inventory of a product at a single location, such as a firm’s manufacturing plant or a warehouse, and shipping directly to each of its customers. The advantage would come from what is referred to as inventory pooling, which is a reduction in inventory and safety stock because of the merging of uncertain and variable demands from the customers. A higher-than-expected demand from one customer can be offset by a lowerthan-expected demand from another so that the total demand remains fairly stable. A disadvantage of placing inventory at a central location, however, is the added cost of shipping smaller, uneconomical quantities directly to customers over long distances. Another approach is to use forward placement, which means locating stock closer to customers at a warehouse, DC, wholesaler, or retailer. Forward placement can have two advantages— faster delivery times and reduced transportation costs—that can stimulate sales. However, as inventory is placed closer to the customer, such as at a DC, the pooling effect of the inventories is reduced because safety stocks for the item must increase to take care of uncertain demands at each DC, rather than just a single location. Nonetheless, the time to get the product to the customer is reduced. Consequently, service to the customer is quicker, and the firm can take advantage of larger, less costly shipments to the DCs from the manufacturing plant, at the expense of larger overall inventories. Mass Customization A firm’s supply chain must be capable of addressing certain competitive priorities that will win orders from customers. Often customers want more than a wide selection of standard services or products; they want a personalized service or product and they want it fast. For example, suppose you want to paint your living room a new color. You need to complement all of the existing furnishings, wall decorations, and carpet. You go to your local paint retail store and select a color from a stack of books that spans every color of the rainbow. The store can give you all the paint you need in your selected color while you wait. How can the store provide that service economically? Certainly the store cannot stock thousands of colors in sufficient quantities for any job. The store stocks the base colors and pigments separately and mixes them as needed, thereby supplying an unlimited variety of colors without maintaining the inventory required to match each customer’s particular color needs. The paint retailer is practicing a strategy known as mass customization, whereby a firm’s highly divergent processes generate a wide variety of customized services or products at reasonably low costs. Essentially, the firm allows customers to select from a variety of standard options to create the service or product of their choice. Competitive Advantages A mass customization strategy has three important competitive advantages.  Managing Customer Relationships. Mass customization requires detailed inputs from customers so that the ideal service or product can be produced. The firm can learn a lot about its customers from the data it receives. Once customers are in the database, the firm can keep track of them over time. A significant competitive advantage is realized through these close customer relationships based on a strategy of mass customization.  Eliminating Finished Goods Inventory. Producing to a customer’s order is more efficient than producing to a forecast because forecasts are not perfect. The trick is to have everything centralized placement Keeping all the inventory of a product at a single location such as a firm’s manufacturing plant or a warehouse and shipping directly to each of its customers. inventory pooling A reduction in inventory and safety stock because of the merging of variable demands from customers. forward placement Locating stock closer to customers at a warehouse, DC, wholesaler, or retailer. 368 PART 3 MANAGING SUPPLY CHAINS ROBERTO GONZALEZ KRT/Newscom you need to produce the order quickly. A technology some firms use for their order placement process is a software system called a configurator, which gives firms and customers easy access to data relevant to the options available for the service or product. Dell uses a configurator that allows customers to design their own computer from a set of standard components that are in stock. Once the order is placed, the product is assembled and then delivered. Using sales promotions, the firm can exercise some control over the requirements for the inventory of components by steering customers away from options that are out of stock in favor of options that are in stock. This capability takes pressure off the supply chain while keeping the customer satisfied. Service providers also take advantage of mass customization to reduce the level of inventory. British Airways is trying to personalize the service of customers once they are on board. It has a software system that tracks the preferences of its most favored customers down to the magazines they read. This information allows the airline to more accurately plan what to pack on each flight. This information saves the airline a significant amount of money because it does not pack amenities passengers do not want.  Increasing Perceived Value of Services or Products. With mass customization, customers can have it their way. In general, mass customization often has a higher value in the mind of the customer than it actually costs to produce. This perception allows firms to charge prices that provide a nice margin. At My Twinn doll company, kids can create their own doll online. Artisans can even match the doll face to the child’s face from a photo you supply. My Twinn continues to market clothing accessories as the doll “grows up” with its human twin. Supply Chain Design for Mass Customization How does mass customization affect the design of supply chains? We address three major considerations. FIGURE 10.7  Supply Chain Design for Assemble-to-Order Strategy Assemble-to-Order Strategy The underlying process design is an assemble-to-order strategy. This strategy involves two stages in the provision of the service or product. Initially, standardized components are produced or purchased and held in stock. This stage is important because it enables the firm to produce or purchase these standard items in large volumes to keep the costs low. In the second stage, the firm assembles these standard components to a specific customer order. In mass customization, this stage must be flexible to handle a large number of potential combinations, and be capable of producing the order quickly and accurately. For example, for My Twinn customized dolls, customers can choose from more than 325,000 different doll combinations. To ensure accuracy, the Web site takes the customer through the required choices and allows the customer to see the doll as the various options are chosen. Figure 10.7 shows how the customer Order based on forecast Component Supplier Supply to forecasted demand Customer order Standardized Component Inventory Supply as needed Fabrication Supply as needed Assembly Customer SUPPLY CHAIN DESIGN CHAPTER 10 369 order is transmitted to the fabrication and assembly operations and that standardized purchased components are taken to the point of fabrication or assembly as needed for the order. Notice that there is no finished goods inventory. Modular Design The service or product must have a modular design that enables the “customization” the customer desires. This approach requires careful attention to service/product designs so that the final service or product can be assembled from a set of standardized modules economically and fast in response to a customer order. Postponement Finally, successful mass customizers postpone the task of differentiating a service or product for a specific customer until the last possible moment. Postponement is a concept whereby some of the final activities in the provision of a service or product are delayed until the orders are received. Doing so allows the greatest application of standard modules before specific customization is done. Postponement is a key decision because it specifies where in the supply chain volume-oriented, standardized operations are separated from custom-oriented, assembly operations. Sometimes the final customization occurs in the last step. The assemble-to-order strategy and postponement can be extended to supply chains. The costs of inventory and transportation often determine the extent to which a manufacturer uses postponement in the supply chain. With postponement, manufacturers can avoid inventory buildup. Some firms take advantage of a process called channel assembly, whereby members of the distribution channel act as if they were assembly stations in the factory. Distribution centers or warehouses can perform the last-minute customizing operations after specific orders have been received. That was the case with Nikon in the chapter opener. UPS added batteries and chargers or repackaged the digital cameras to specific retailer requests just before delivering the orders. Channel assembly is particularly useful when the required customizing has some geographical rationale, such as language differences or technical requirements. In general, beyond the inventory advantages, the advantage of postponement in the distribution channel is that the firm’s plants can focus on the standardized aspects of the product, while the distributor can focus on customizing a product that may require additional components from local suppliers. channel assembly The process of using members of the distribution channel as if they were assembly stations in the factory. Outsourcing Processes All businesses buy at least some inputs to their processes (such as professional services, raw materials, or manufactured parts) from other producers. Most businesses also purchase services to get their products to their customers. How many of the processes that produce those purchased items and services should a firm own and operate instead? The answer to that question determines the extent of the firm’s vertical integration. The more processes in the supply chain that the organization performs itself, the more vertically integrated it is. If it does not perform some processes itself, it must rely on outsourcing, or paying suppliers and distributors to perform those processes and provide needed services and materials. When managers opt for more vertical integration, by definition less outsourcing occurs. These decisions are sometimes called make-or-buy decisions, with a make decision meaning more vertical integration and a buy decision meaning more outsourcing. After deciding what to outsource and what to do in-house, management must find ways to coordinate and integrate the various processes and suppliers involved. Example 10.2 shows how break-even analysis, which can be found in Supplement A, “Decision Making,” can be used for the make-or-buy decision. outsourcing Paying suppliers and distributors to perform processes and provide needed services and materials. make-or-buy decision A managerial choice between whether to outsource a process or do it in-house. Using Break-Even Analysis for the Outsourcing Decision EXAMPLE 10.2 Thompson manufacturing produces industrial scales for the electronics industry. Management is considering outsourcing the shipping operation to a logistics provider experienced in the electronics industry. Thompson’s annual fixed costs of the shipping operation are $1,500,000, which includes costs of the equipment and infrastructure for the operation. The estimated variable cost of shipping the scales with the in-house operation is $4.50 per ton-mile. If Thompson outsourced the operation to Carter Trucking, the annual fixed costs of the infrastructure and management time needed to manage the contract would be $250,000. Carter would charge $8.50 per ton-mile. What is the break-even quantity? MyOMLab SOLUTION From Supplement A, “Decision Making,” the formula for the break-even quantity yields Fm - Fb Q = cb - cm Tutor A.2 in MyOMLab provides a new example to practice break-even analysis on make-or-buy decisions. = 1,500,000 - 250,000 = 312,500 ton@miles 8.50 - 4.50 Active Model A.2 in MyOMLab provides additional insight on the make-or-buy decision and its extensions. MyOMLab 370 PART 3 MANAGING SUPPLY CHAINS DECISION POINT Thompson management must now assess how many ton-miles of product will likely be shipped now and in the future. If that estimate is less than 312,500 ton-miles, the best option is to outsource the operation to Carter Trucking. Vertical Integration backward integration A firm’s movement upstream toward the sources of raw materials, parts, and services through acquisitions. forward integration Acquiring more channels of distribution, such as distribution centers (warehouses) and retail stores, or even business customers. Vertical integration can be in two directions. Backward integration represents a firm’s movement upstream in the supply chain toward the sources of raw materials, parts, and services through acquisitions, such as a major grocery chain having its own plants to produce house brands of ice cream, frozen pizza dough, and peanut butter. Backward integration has the effect of reducing the risk of supply. Forward integration means that the firm acquires more channels of distribution, such as its own distribution centers (warehouses) and retail stores. It can also mean that the firm goes even farther by acquiring its business customers. A firm chooses vertical integration when it has the skills, volume, and resources to hit the competitive priorities better than outsiders can. Doing the work within its organizational structure may mean better quality and more timely delivery, as well as taking better advantage of the firm’s human resources, equipment, and space. Extensive vertical integration is generally attractive when input volumes are high because high volumes allow task specialization and greater efficiency. It is also attractive if the firm has the relevant skills and views the processes that it is integrating as particularly important to its future success. However, care must be exercised that excessive vertical integration does not lead to a loss of focus for the firm in delivering value in its core business. Management must identify, cultivate, and exploit its core competencies to prevail in global competition. Recall that core competencies reflect the collective learning of the organization, especially its ability for coordinating diverse processes and integrating multiple technologies. They define the firm and provide its reason for existence. Management must be constantly attentive to bolstering core competencies, perhaps by looking upstream toward its suppliers and downstream toward its customers and acquiring those processes that support its core competencies—those that allow the firm to organize work and deliver value better than its competitors. To do otherwise poses a risk that the firm will lose control over critical areas of its business. Outsourcing offshoring A supply chain strategy that involves moving processes to another country. Notwithstanding the arguments in favor of increased vertical integration, some firms outsource important processes such as accounting, marketing, or manufacturing. Many firms outsource payroll, security, cleaning, and other types of services, rather than employ personnel to provide these services. Outsourcing is a particularly attractive option to those firms that have low volumes. What prompts a firm to outsource rather than vertically integrate? An outsourcing firm realizes that another firm can perform the outsourced process more efficiently and with better quality than it can. They opt to add external suppliers to their supply chains rather than to keep internal suppliers. However, the outsourcing decision is a serious one because the firm can lose the skills and knowledge needed to conduct the process. All learning about process advancements is left to the outsourcing partner, which makes it difficult to ever bring that process back into the firm. The strategy of globalizing a firm adds a new dimension to the development of supply chains and the use of outsourcing. Offshoring is a supply chain strategy that involves moving processes to another country. As such, offshoring is more encompassing than outsourcing because it also includes vertical integration by locating internal processes in other countries. Firms are motivated to initiate operations offshore by the market potential and the cost advantages it provides. The firm may be able to create new markets because of its presence in other countries and its ability to offer competitive prices due to its cost efficiencies. Competitive priorities other than low costs, such as delivery speed to distant customers, can drive the decision, too. Decision Factors The decision to outsource or offshore a process is complex and involves a number of factors.  Comparative Labor Costs. Some countries such as China and India have traditionally held a huge edge when it comes to labor costs. In India, the salary for a computer programmer is much less than that of a programmer in the United States with comparable skills. In China, the average monthly wages are much less than those in Japan. However, the advantage of SUPPLY CHAIN DESIGN CHAPTER 10 371 doing business in these and other low-wage countries is eroding as wages in those countries rise due to increased demands. In some cases, the labor-cost advantage may only be a shortterm one because of local economic conditions, such as the lowered wage structures in the United States because of the recession of 2008.  Rework and Product Returns. While labor wage rates may be low in a particular location, the quality of workmanship must also be considered. Internal rework costs and the cost of product returns may offset the advantage in wage rates.  Logistics Costs. Even if labor costs are not favorable, it may still be less costly to outsource or offshore final assembly processes to other countries to reduce the logistical costs of delivering products to international customers. Moving processes closer to the customer and using more local suppliers reduces the cost of transporting the final product to its ultimate destination. Using shipping or air transportation can be costly because of their dependence on oil. The savings in logistical costs can offset the higher labor costs in those countries.  Tariffs and Taxes. Some countries offer tax incentives to firms that do business within their borders. Tariffs can also be a stumbling block for firms looking to do business in a country. Sometimes they are high enough that the firm decides to assemble the products in that country rather than export the products in.  Market Effects. Not to be overlooked is the potential advantage of offshoring a process in a location where the presence of the firm can have a positive effect on local sales.  Labor Laws and Unions. Some countries have fewer unions or restrictions on the flexible use of labor. The ability to use workers to perform a number of different tasks without restrictions can be important to firms trying to achieve flexibility in operations and reduce costs. Nonetheless, firms must be cognizant of local labor laws and customs and strive to achieve a high level of ethical behavior when doing business in other countries.  Internet. The Internet reduces the transaction costs of managing distant partners or operations. Potential Pitfalls Even though outsourcing may appear to offer some big advantages, it also has some pitfalls that should be carefully explored before using this strategy.  Pulling the Plug Too Quickly. A major mistake is to decide to outsource a process before making a good-faith effort to fix the existing one. We discussed many ways to improve processes in parts 1 and 2 of this text; these methods should be explored first. It is not always the case that outsourcing is the answer, even if local labor wages far exceed those of other countries. Make sure you really need to outsource in order to accomplish your operations strategy.  Process Integration. Despite the power of the Internet, it is difficult to fully integrate outsourced processes with the firm’s other processes. Time, distance, and communication can be formidable hurdles, especially if the supplier is on the other side of the world. Managing offshore processes will not be the same as managing processes located next door. Often considerable managerial time must be expended to coordinate offshore processes. Managerial Practice 10.1 reveals outsourcing on a global scale can be challenging for management. Qilai Shen/In Pictures/Corbis  Technology Transfer. Often an outsourcing strategy involves creating a joint venture with a company in another country. With a joint venture, two firms agree to jointly produce a service or product together. Typically, a transfer of technology takes place to bring one partner up to speed regarding the service or product. The danger is that the firm with the technology advantage will essentially be setting up the other firm to be a future competitor. Employees work on the Wuling minivan engine assembly line at the SAIC GM Wuling Automobile Co., Ltd. factory in Liuzhou, Guangxi Province, China. SAIC got a license to use GM’s technical knowledge for the design and manufacture of automobiles. PART 3 MANAGING SUPPLY CHAINS MANAGERIAL PRACTICE 10.1 Building a Supply Chain for the Dreamliner Suppose that you had the freedom to totally design the supply chain for one of the most highly anticipated airliners of modern times. The airliner, the Boeing 787 Dreamliner, is a super-efficient commercial airplane that can carry up to 330 passengers on routes as long as 8,000 nautical miles at speeds up to 850 miles per hour. It is constructed with carbon-fiber composite materials, which are lightweight and not susceptible to corrosion or fatigue like aluminum. This plane uses 50 percent composite materials; Boeing used only 10 to 12 percent in the 777. Boeing’s goal was to bring the most complex machine in mass production to market in just over 4 years, or 2 years less time than other projects. Boeing had two options for the design of the supply chain: (1) Produce about 50 percent of the plane in-house, including the wing and fuselage as in existing Boeing planes, and run the risk that production lead times will suffer because of capacity constraints; or (2) outsource about 85 percent of the plane, essentially only constructing the vertical fin in-house, and manage the global suppliers responsible for design as well as production of major components. Boeing selected option 2. There are some good reasons for this choice. First, a number of big customers for the 787, such as India and Japan, require that significant portions of the aircraft must be manufactured in their countries. Using major contractors within those countries satisfies the requirement. Second, a shortage of high-quality engineering talent also puts pressure on outsourcing. Third, the sheer complexity of the airplane makes it necessary to share the load. Boeing, even with all of its resources, could not build all of the components and pieces in one facility or region. Finally, work on the plane can proceed concurrently, rather than sequentially, thereby saving time and money. For example, the modular design of the plane allows Boeing to utilize flexible tooling to move planes through the factory much more quickly. The suppliers design and deliver the subsystems on a just-in-time basis where they are “snapped” together by a smaller number of factory workers in a matter of days rather than a month, the typical time for a plane of that complexity. Boeing chose to design its supply chain with 43 top-tier suppliers on three continents. Outsourcing so much responsibility requires a lot of managerial attention; you have to know what is going on in each factory at all times. As expected with something so complex, major glitches popped up like gremlins. The first Dreamliner to show up at Boeing’s factory was missing tens AP Photo/John Froschauer 372 The first Boeing 787 Dreamliner takes shape in the final assembly plant in Everett, Washington. The new commercial airplane is assembled with major components produced worldwide. of thousands of parts. Supplier problems ranged from language barriers to problems caused by some contractors who outsourced major portions of their assigned work and then experienced problems with their suppliers. The first fuselage section, the big multi-part cylindrical barrel that encompasses the passenger seating area, failed in company testing, causing Boeing to make more sections than planned and to reexamine quality and safety concerns. Software programs designed by a variety of manufacturers had trouble talking to one another and the overall weight of the airplane was too high, especially the carbon-fiber wing. These and many other glitches caused major delays in the promised deliveries of the first 787s. The in-service date for the 787 is now set at late-2011 or even 2012, more than three years behind schedule. Did the advantages of collaboration on such a large scale outweigh the loss of logistical and design control? The jury is still out on that question; however, Boeing’s customers are not happy with all of the delays. Nonetheless, Boeing has more than 843 orders for the Dreamliner. Source: Elizabeth Rennie, “Beyond Borders,” APICS Magazine (March 2007), pp. 34–38; Stanley Holmes, “The 787 Encounters Turbulence,” Business Week (June 19, 2006), pp. 38–40; J. Lynn Lunsford, “Boeing Scrambles to Repair Problems With New Plane,” The Wall Street Journal (December 7, 2007), p. A1. “Boeing 787 Dreamliner,” Strategic Implications A supply chain is, of course, a network of firms. Thus, each firm in the chain should design its own supply chains to support the competitive priorities of its services or products. Even though extensive technologies such as the Internet, computer-assisted design, flexible manufacturing, and automated warehousing have been applied to all stages of the supply chain, the performance of many supply chains remains dismal. A study of the U.S. food industry estimated that poor coordination among supply chain partners wastes $30 billion annually. One possible cause for failures is that managers do not understand the nature of the demand for their services or products and, therefore, cannot design supply chains to satisfy those demands. Two distinct designs used to competitive advantage are efficient supply chains and responsive supply chains. Table 10.1 shows the environments that best suit each design. Efficient Supply Chains The nature of demand for the firm’s services or products is a key factor in the best choice of supply chain strategy. Efficient supply chains work best in environments where demand is highly predictable, such as demand for staple items purchased at grocery stores or demand for a package delivery service. SUPPLY CHAIN DESIGN TABLE 10.1 CHAPTER 10 373 ENVIRONMENTS BEST SUITED FOR EFFICIENT AND RESPONSIVE SUPPLY CHAINS Factor Efficient Supply Chains Responsive Supply Chains Demand Predictable, low forecast errors Unpredictable, high forecast errors Competitive priorities Low cost, consistent quality, on-time delivery Development speed, fast delivery times, customization, volume flexibility, variety, top quality New-service/product introduction Infrequent Frequent Contribution margins Low High Product variety Low High Common Designs There is one popular design for efficient supply chains.  Build-to-stock (BTS): The product is built to a sales forecast and sold to the customer from a finished goods stock. The end customer has no individual inputs into the configuration of the product and typically purchases the product from a retailer. Examples include groceries, books, appliances, and housewares. The focus of the BTS supply chain is on efficient service, material, monetary, and information flows; and keeping inventories to a minimum. Because of the markets the firms serve, service or product designs last a long time, new introductions are infrequent, and variety is small. Such firms typically produce for markets in which price is crucial to winning an order. Contribution margins are low and efficiency is important. Consequently, efficient supply chains have competitive priorities of low-cost operations, consistent quality, and on-time delivery. Responsive Supply Chains Responsive supply chains are designed to react quickly in order to hedge against uncertainties in demand. They work best when firms offer a great variety of services or products and demand predictability is low. Common Designs There are three popular designs for responsive supply chains.  Make-to-order (MTO): The product is based on a standard design; however, component production and manufacture of the final product is linked to the customer’s specifications. Examples include custom made clothing, such as that offered by Land’s End and Tommy Hilfiger, pre-designed houses, and commercial aircraft, such as Boeing as depicted in Managerial Practice 10.1.  Design-to-order (DTO): The product is designed and built entirely to the customer’s specifications. This supply chain allows customers Roslan Rahman/AFP/Getty Images  Assemble-to-order (ATO): The product is built to customer specifications from a stock of existing components. Customers can choose among various standard components in arriving at their own products; however they have no control over the design of the components. Assembly is delayed until the order is received. This is the design mass customizers use as depicted in Figure 10.7. Examples include Dell’s approach to customizing desktops and laptops and automobile manufacturers who offer a selection of options with each model. Efficient supply chains need to keep logistical costs to a minimum. Here vessels loaded with containers berth at Singapore’s Keppel Port, one of the world’s most efficient, and busiest, sea ports. 374 PART 3 MANAGING SUPPLY CHAINS to design the product to fit their specific needs. Examples include large construction projects, women’s designer dresses, custom made men’s suits, and original architecture house construction. To stay competitive, firms in a responsive supply chain frequently introduce new services or products. Nonetheless, because of the innovativeness of their services or products, they enjoy high contribution margins. Typical competitive priorities for responsive supply chains are development speed, fast delivery times, customization, variety, volume flexibility, and top quality. The firms may not even know what services or products they need to provide until customers place orders. In addition, demand may be short-lived, as in the case of fashion goods. The focus of responsive supply chains is reaction time, which helps avoid keeping costly inventories that ultimately must be sold at deep discounts. A firm may need to utilize both types of supply chains, especially when it focuses its operations on specific market segments or it can segment the supply chain to achieve two different requirements. For example, the supply chain for a standard product, such as an oil tanker, has different requirements than that for a customized product, such as a luxury liner, even though both are ocean-going vessels and both may be manufactured by the same company. You might also see elements of efficiency and responsiveness in the same supply chain. For example, Gillette uses an efficient supply chain to manufacture its products so that it can utilize a capitalintensive manufacturing process, and then it uses a responsive supply chain for the packaging and delivery processes to be responsive to retailers. The packaging operation involves customization in the form of printing in different languages. Just as processes can be broken into parts, with different process structures for each, supply chain processes can be segmented to achieve optimal performance. The Design of Efficient and Responsive Supply Chains Table 10.2 contains the basic design features for efficient and responsive supply chains. The more downstream in an efficient supply chain that a firm is, the more likely it is to have a line-flow strategy that supports high volumes of standardized services or products. Consequently, suppliers in efficient supply chains should have low capacity cushions because high utilization keeps the cost per unit low. High inventory turns are desired because inventory investment must be kept low to achieve low costs. Firms should work with their suppliers to shorten lead times, but care must be taken to use tactics that do not appreciably increase costs. For example, lead times for a supplier could be shortened by switching from rail to air transportation; however, the added cost may offset the savings obtained from the shorter lead times. Suppliers should be selected with emphasis on low prices, consistent quality, and on-time delivery. Because of low capacity cushions, disruptions in an efficient supply chain can be costly and must be avoided. Figure 10.8 shows that firms with large batch, line, or continuous processes are more likely to be part of an efficient supply chain. By contrast, firms in a responsive supply chain should be flexible and have high capacity cushions. WIP inventories should be positioned in the chain to support delivery speed, but inventories of expensive finished goods should be avoided. Firms should aggressively work with their suppliers to shorten lead times because it allows them to wait longer before committing to a customer order—in other words, it gives them greater flexibility. Firms should select suppliers to support the competitive priorities of the services or products provided, which in this case would include the ability to provide quick deliveries, customize services or components, adjust volumes TABLE 10.2 DESIGN FEATURES FOR EFFICIENT AND RESPONSIVE SUPPLY CHAINS Factor Efficient Supply Chains Responsive Supply Chains Operation strategy Make-to-stock standardized services or products; emphasize high volumes Assemble-to-order, make-to-order, or design-to-order customized services or products; emphasize variety Capacity cushion Low High Inventory investment Low; enable high inventory turns As needed to enable fast delivery time Lead time Shorten, but do not increase costs Shorten aggressively Supplier selection Emphasize low prices, consistent quality, on-time delivery Emphasize fast delivery time, customization, variety, volume flexibility, top quality SUPPLY CHAIN DESIGN Process Large Batch Incr easi Resp onsi ve Chai Supply n Line ng s upp ly ch ain Continous Flow 375  FIGURE 10.8 Linking Supply Chain Design to Processes and Service/ Product Characteristics flex ib ility Effic eas ing serv ice/ ient S Cha upply in prod uct volu quickly to match demand cycles, offer variety, and provide top quality. Figure 10.8 shows that firms with job or small batch processes are more likely to be a part of a responsive supply chain. Poor supply chain performance often is the result of using the wrong supply chain design for the services or products provided. A common mistake is to use an efficient supply chain in an environment that calls for a responsive supply chain. Over time, a firm may add options to its basic service or product, or introduce variations, so that the variety of its offerings increases dramatically and demand for any given service or product predictability drops. Yet, the firm continues to measure the performance of its supply chain as it always has, emphasizing efficiency, even when contribution margins would allow a responsive supply chain design. Clearly, aligning supply chain operations to the firm’s competitive priorities has strategic implications. me Brooks Kraft/Sygma/Corbis Customized Small Batch Incr Standardized Services/Product Characteristics Job CHAPTER 10 Gillette uses both supply chain designs: efficient and responsive. The capital intensive processes in its Boston factory support an efficient supply chain to keep costs down. Gillette uses a responsive supply chain for packaging and delivery to service its retail customers. LEARNING GOALS IN REVIEW  Explain the strategic importance of supply chain design. Review Figures 10.1 and 10.2 for the big picture of supply chain design. The section “Supply Chain Design across the Organization,” pp. 361–362, reveals the internal functional pressures that impinge on supply chain design.  Identify the nature of supply chains for service providers, as well as for manufacturers. See the section “Supply Chain for Services and Manufacturing,” pp. 362–363, and Figures 10.3 and 10.4 for examples.  Define the critical supply chain performance measures. The section “Measures of Supply Chain Performance,” pp. 363–367, discusses the important inventory and financial measures. Be sure to understand Example 10.1 and the Solved Problem.  Explain the strategy of mass customization and its implications for supply chain design. The section “Mass Customization,” pp. 367–369, describes the competitive advantages and the implications for supply chain design.  Define the important decision factors to be considered when employing an outsourcing or offshoring strategy. Outsourcing and offshoring are discussed in detail in the section “Outsourcing Processes,” pp. 369–372. Be sure to review Example 10.2, which uses break-even analysis for the make-or-buy decision. Managerial Practice 10.1 shows how complex the outsourcing decision can become.  Explain how efficient supply chains differ from responsive supply chains and the environments best suited for each type of supply chain. Review the section “Strategic Implications,” pp. 372–375. Be sure to understand Tables 10.1 and 10.2. 376 PART 3 MANAGING SUPPLY CHAINS MyOMLab helps you develop analytical skills and assesses your progress with multiple problems on break-even analysis and outsourcing. MyOMLab Resources Titles Link to the Book Video Inventory and Textbooks Clif Bar: Supply Chain Strategic Implications Strategic Implications Active Models A.1 Break-Even Analysis A.2 Make-or-Buy Decision Outsourcing Processes Outsourcing Processes; Example 10.2 (pp. 369–370) OM Explorer Solvers Inventory Estimator Measures of Supply Chain Performance; Example 10.1 (pp. 364–365); Figure 10.5 (p. 365) Case: Brunswick Distribution, Inc. (pp. 381–383) Financial Measures Analyzer OM Explorer Tutors A.1 Break-Even, Evaluating Products and Services A.2 Break-Even Evaluating Processes 10.1 Calculating Inventory Measures F.4 NPV, IRR, Payback Outsourcing Processes POM for Windows Break-Even Analysis Financial Analysis Outsourcing Processes; Example 10.2 (pp. 369–370) Measures of Supply Chain Performance; Case: Brunswick Distributors, Inc. (pp. 381–383) Tutor Exercise 10.1 Calculating inventory measures under different scenarios Inventory Measures; Example 10.1 (pp. 364–365) Virtual Tours 10.1 Yamaha Construction 10.2 Jagger Yarn Strategic Implications Supply Chains for Services and Manufacturing; Figures 10.3 and 10.4 (p. 363) MyOMLab Supplement F. Financial Analysis Measures of Supply Chain Performance; Case: Brunswick Distributors, Inc. (pp. 381–383) Internet Exercise 10.1 Walmart Strategic Implications Outsourcing Processes; Example 10.2 (pp. 369–370) Measures of Supply Chain Performance; Example 10.1 (pp. 364–365) Measures of Supply Chain Performance; Case: Brunswick Distribution, Inc. (pp. 381–383) Key Equations Image Library Key Equations 1. Average aggregate inventory value = average inventory of each SKU multiplied by its value, summed over all SKUs held in stock. 2. Weeks of supply = 3. Inventory turnover = 4. Make-or-buy break-even quantity: Q = Average aggregate inventory value Weekly sales 1at cost2 Annual sales 1at cost2 Average aggregate inventory value Fm - Fb cb - cm Key Terms average aggregate inventory value 364 backward integration 370 centralized placement 367 channel assembly 369 forward integration 370 forward placement 367 inventory pooling 367 inventory turnover 364 make-or-buy decision 369 offshoring 370 outsourcing 369 supply chain design 361 weeks of supply 364 SUPPLY CHAIN DESIGN CHAPTER 10 377 Solved Problem A firm’s cost of goods sold last year was $3,410,000, and the firm operates 52 weeks per year. It carries seven items in inventory: three raw materials, two work-in-process items, and two finished goods. The following table contains last year’s average inventory level for each item, along with its value. a. What is the average aggregate inventory value? b. How many weeks of supply does the firm maintain? c. What was the inventory turnover last year? Category Raw materials Work-in-process Finished goods Part Number Average Level Unit Value 1 15,000 $3.00 2 2,500 5.00 3 3,000 1.00 4 5,000 14.00 5 4,000 18.00 6 2,000 48.00 7 1,000 62.00 SOLUTION a. b. Part Number Average Level 1 15,000 * $3.00 = $ 45,000 2 2,500 * 5.00 = 12,500 3 3,000 * 1.00 = 3,000 4 5,000 * 14.00 = 70,000 5 4,000 * 18.00 = 72,000 6 2,000 * 48.00 = 96,000 7 1,000 * 62.00 = 62,000 Average aggregate inventory value = $360,500 Total Value Average weekly sales at cost = $3,410,000/52 weeks = $65,577/week Weeks of supply = c. Unit Value Inventory turnover = Average aggregate inventory value $360,500 = = 5 .5 weeks Weekly sales 1at cost2 $65,577 Annual sales 1at cost2 Average aggregate inventory value = $3,410,000 = 9.5 turns $360,500 Discussion Questions 1. Explain how a firm can reduce costs while improving the performance of its supply chain. 2. The Walmart retail chain sells standardized items and enjoys great purchasing clout with its suppliers, none of which it owns. The Limited retail chain sells fashion goods and owns Mast Industries, which is responsible for producing many of the items sold in The Limited stores. The Limited boasts that it can go from the concept for a new garment to the store shelf in 1,000 hours. Compare and contrast the implications for supply chain design for these two retail systems. 3. Canon, a Japanese manufacturer of photographic equipment, decided against offshoring and kept its manufacturing and new product development processes in Japan, which has relatively high labor costs. In contrast, GM, headquartered in the United States, has a joint venture with Shanghai Auto Industry Corporation (SAIC) to produce cars in China. Given our discussion of outsourcing, offshoring, and supply chain design, discuss how these two seemingly diverse decisions could be supportive of each company’s operations strategy. 378 PART 3 MANAGING SUPPLY CHAINS Problems The OM Explorer and POM for Windows software is available to all students using the 10th edition of this textbook. Go to to download these computer packages. If you purchased MyOMLab, you also have access to Active Models software and significant help in doing the following problems. Check with your instructor on how best to use these resources. In many cases, the instructor wants you to understand how to do the calculations by hand. At the least, the software provides a check on your calculations. When calculations are particularly complex and the goal is interpreting the results in making decisions, the software replaces entirely the manual calculations. 1. EBI Solar uses a high-tech process to turn silicon wafers into tiny solar panels. These efficient and inexpensive panels are used to power low-energy hand-held electronic devices. Last year, EBI Solar turned their inventory 4.5 times and had a cost of goods sold of $2.5 million. Assuming 52 business weeks per year: accounting statement shows the following inventory investment by category: raw materials, $3,129,500; work-inprocess, $6,237,000; and finished goods, $2,686,500. This year’s cost of goods sold will be about $32.5 million. Assuming 52 business weeks per year, express total inventory as a. Weeks of supply b. Inventory turns 4. One product line has 10 turns per year and an annual sales volume (at cost) of $985,000. How much inventory is being held, on average? 5. The Bawl Corporation supplies alloy ball bearings to auto manufacturers in Detroit. Because of its specialized manufacturing process, considerable work-in-process and raw materials are needed. The current inventory levels are $2,470,000 and $1,566,000, respectively. In addition, finished goods inventory is $1,200,000 and sales (at cost) for the current year are expected to be about $48 million. Express total inventory as a. Express last year’s average inventory in weeks of supply. b. After several supply chain improvement initiatives, inventory investment has dropped across all inventory categories. While EBI’s cost of goods sold is not expected to change from last year’s level, the value of raw materials has dropped to $100,500; work-in-process to $25,800; and finished goods to $16,200. Assuming 52 business weeks per year, express EBI’s current total inventory level in weeks of supply and inventory turns. 2. Buzzrite, a retailer of casual clothes, ended the current year with annual sales (at cost) of $48 million. During the year, the inventory of apparel turned over six times. For the next year, Buzzrite plans to increase annual sales (at cost) by 25 percent. a. What is the increase in the average aggregate inventory value required if Buzzrite maintains the same inventory turnover during the next year? b. What change in inventory turns must Buzzrite achieve if, through better supply chain management, it wants to support next year’s sales with no increase in the average aggregate inventory value? 3. Jack Jones, the materials manager at Precision Enterprises, is beginning to look for ways to reduce inventories. A recent a. Weeks of supply b. Inventory turns 6. The following data were collected for a retailer: Cost of goods sold $3,500,000 Gross profit $700,000 Operating costs $500,000 Operating profit $200,000 Total inventory $1,200,000 Fixed assets $750,000 Long-term debt $300,000 Assuming 52 business weeks per year, express total inventory as a. Weeks of supply b. Inventory turns Advanced Problems Problems 8, 10, 11, and 12 require prior reading of Supplement A, “Decision Making.” 7. Sterling, Inc., operates 52 weeks per year, and its cost of goods sold last year was $6,500,000. The firm carries eight items in inventory: four raw materials, two work-in-process items, and two finished goods. Table 10.3 shows last year’s average inventory levels for these items, along with their unit values. TABLE 10.3 Category Raw materials a. What is the average aggregate inventory value? b. How many weeks of supply does the firm have? Work-in-process c. What was the inventory turnover last year? Finished goods STERLING INVENTORY ITEMS Part Number Average Inventory Units Value per Unit RM-1 20,000 $1 RM-2 5,000 5 RM-3 3,000 6 RM-4 1,000 8 WIP-1 6,000 10 WIP-2 8,000 12 FG-1 1,000 65 FG-2 500 88 SUPPLY CHAIN DESIGN 8. A large global automobile manufacturer is considering outsourcing the manufacturing of a solenoid used in the transmission of its SUVs. The company estimates that annual fixed costs of manufacturing the part in-house, which include equipment, maintenance, and management, amounts to $6 million. The variable costs of labor and material are $5.00 per unit. The company has an offer from a major subcontractor to produce the part for $8.00 per unit. However, the subcontractor wants the company to share in the costs of the equipment. The automobile company estimates that the total cost would be $4 million, which also includes management oversight for the new supply contact. a. How many solenoids would the automobile company need per year to make the in-house option least costly? b. What other factors, besides costs, should the automobile company consider before revising its supply chain for SUVs? 9. Dogs-R-Us and K-9, Inc. are two retail stores that cater to the needs of dog owners in the greater Charleston area. There is healthy competition between these two establishments. Both operate 52 weeks a year and both sell approximately the same type and dollar value of items. Table 10.4 provides the cost of goods sold, the average inventory level, and unit value of each item sold in the two stores. a. Compare the two retail stores in terms of average aggregate inventory value. b. Compare the two retail stores in terms of weeks of supply. c. Compare the two retail stores in terms of inventory turnover. 10. Black Bear Outfitters is an international supplier of outdoor gear for families. Currently, the company uses a logistical provider to provide warehouse services and handle packages destined for ground delivery. The contract calls for $9 million in annual fixed charges, which covers the provider’s overhead and warehouse costs, and TABLE 10.4 CHAPTER 10 variable costs of $15 per package shipped. Recently, Black Bear Outfitters found a warehouse it could lease at a cost of $16 million per year, which includes lease costs, labor, and management oversight. Furthermore, the company found another provider who would deliver packages from the warehouse for $6.00 per package. Considering only costs, how many packages must Black Bear Outfitters ship to make the vertical integration into warehouse operations beneficial? 11. At the BlueFin Bank corporate headquarters, management was discussing the potential of outsourcing the processing of credit card transactions to DataEase, an international provider of banking operational services. Processing of the transactions at BlueFin has been a costly element of the annual profit and loss statement and the continual investment in equipment to keep up to date has been draining capital reserves. Based upon initial study and negotiations, DataEase will charge $0.02 more per transaction than BlueFin’s cost per transaction, and DataEase will want $12 million per year to cover equipment and overhead costs associated with the contract. BlueFin has yet to develop an estimate for the annual overhead and fixed costs associated with processing the transactions. These costs include supervision, administrative support, maintenance, equipment depreciation, and overhead. If BlueFin must process 20 million transactions per year, how high must those fixed costs be before it would pay to use DataEase? 12. A global manufacturer of electrical switching equipment (ESE) is considering outsourcing the manufacturing of an electrical breaker used in the manufacturing of switch boards. The company estimates that the annual fixed cost of manufacturing the part in-house, which includes equipment, maintenance, and management, amounts to $8 million. The variable cost of labor and materials are $11.00 per breaker. The company has an offer from a major subcontractor to produce the part for $16.00 per breaker. INVENTORY DATA FOR DOGS-R-US AND K-9, INC. STORES Cost of Goods Sold Category DOGS-R-US K-9, INC. $560,000.00 $640,000.00 Value per Unit Average Inventory in Units Value per Unit 200 $55.00 140 $55.00 1,200 $2.50 250 $2.50 Pet Feeders 50 $12.50 20 $12.50 Flea & Tick 350 $7.50 75 $7.50 Dog Kennels 10 $65.00 2 $65.00 Dog Pens 10 $220.00 3 $220.00 Patio Pet Doors 5 $120.00 2 $120.00 Dog Ramps 5 $150.00 2 $150.00 Pet Strollers 10 $40.00 2 $40.00 1,400 $4.50 150 $4.50 250 $2.20 100 $2.20 Dog Beds Dog Bones & Treats Pet Supplements Dog Toys Average Inventory in Units 379 380 PART 3 MANAGING SUPPLY CHAINS a. How many breakers would the electrical switching equipment company need per year to make the in-house option the least costly? b. Assume the subcontractor wants the company to share in the costs of the equipment. The ESE company estimates that the total annual cost would be $5 million, which also includes management oversight for the new supply contract. For this concession, the subcontractor will drop EXPERIENTIAL LEARNING Scenario Sonic Distributors produces and sells music CDs. The CDs are pressed at a single facility (factory), issued through the company’s distribution center, and sold to the public from various retail stores. The goal is to operate the distribution chain at the lowest total cost. Materials (available from instructor) the per unit price to $12.00. Under this assumption, how many breakers would the ESE company need per year to make the in-house option least costly? c. If the ESE manufacturer is expecting to use 1,500,000 breakers per year, which option (make in-house, use subcontractor without sharing in the cost of equipment, use subcontractor with sharing in the cost of equipment) is the least costly? Sonic Distributors Costs Holding cost per unit per day Distribution Center: $0.50/CD/day Factory: $0.25/CD/day Pipeline inventory cost Assume that pipeline cost can be ignored for this exercise (consider it zero). Ordering cost (retailers and distributors) $20/order Factory setup cost (to run an order) $50 (Note: Cost is per order, not per day, because even though successive orders from distributors are for the same item, the factory is busy fabricating other items between orders.) Stockout (lost margin) cost Retail Store: $8 per CD sale lost in a period Retail and distributor purchase order forms Factory work order forms Factory and distributor materials delivery forms Inventory position worksheets A means of generating random demand (typically a pair of dice) Setup Each team is in the business of manufacturing music CDs and distributing them to retail stores where they are sold. Two or more people play the role of retail outlet buyers. Their task is to determine the demand for the CDs and order replenishment stock from the distributor. The distributor carries forward-placed stock obtained from the factory. The factory produces in lot sizes either to customer order or to stock. Tasks Retail outlets: $1.00/CD/day $0 for backorders for shortages from the factory or shipping new orders Shipping cost Divide into teams of four or five. Two or three people operate the retail stores. Because other products are already being distributed through this chain and because CDs are light and take up little volume, consider the cost to be zero. One person operates the distribution center. One person schedules production at the factory. Conditions Every day, as play progresses, the participants at each level of the supply chain estimate demand, fill customer orders, record inventory levels, and decide how much to order or produce and when to place orders with their supplier. Starting inventory Retail stores each have 15 CDs Costs and Conditions Lot-sizing restrictions Retail outlets and distribution centers— no minimum order. Any amount may be stored. Factory production lot sizes and capacity—produce in minimum lots of 20. Maximum capacity: 200/day. Outstanding orders None Distribution center has 25 CDs Factory has 100 CDs Unless your instructor indicates otherwise, the following costs and conditions hold. Delays Ordering Delay. One day to send an order from a retail store to the distributor or from the distributor to the factory (that is, 1 day is lost between placing an order and the recipient acting on it). No delay occurs in starting up production once an order has been received (but 1 day is needed for delivery of an order from the distributor to the factory). SUPPLY CHAIN DESIGN Delivery Delay. One-day shipping time between the distributor and a retail store or between the factory and the distributor (that is, 1 day is lost between shipping an order and receiving it). Run the Exercise For simplicity’s sake, assume all transactions take place simultaneously at the middle of the day. For every simulated day, the sequence of play goes as follows. Retailers a. Each retailer receives any shipment due in from its distributor (1 day after shipment) and places it in sales inventory (adds the quantity indicated on any incoming Material Delivery Form from the distributor—after its 1-day delay—to the previous day’s ending inventory level on the Retailer’s Inventory Position Worksheet). (Note: For the first day of the exercise, no order will come in.) b. The retailers each determine the day’s retail demand (the quantity of CDs requested) by rolling a pair of dice. The roll determines the number demanded. c. Retailers fill demand from available stock, if possible. Demand is filled by subtracting it from the current inventory level to develop the ending inventory level, which is recorded. If demand exceeds supply, sales are lost. Record all lost sales on the worksheet. d. Retailers determine whether an order should be placed. If an order is required, the desired quantity of CDs is written on a Retail Store Purchase Order, which is forwarded to the distributor (who receives it after a 1-day delay). If an order is made, it should be noted on the worksheet. Retailers may also desire to keep track of outstanding orders separately. Distributor a. The distributor receives any shipment due in from the factory and places the CDs in available inventory (adds the quantity indicated on any incoming Material Delivery Form from the factory—after its 1-day delay—to the previous day’s ending inventory level on the distributor’s inventory position worksheet). b. All outstanding backorders are filled (the quantity is subtracted from the current inventory level indicated on the worksheet) and prepared for shipment. CDs are shipped by filling out a Distribution Center Material Delivery Form indicating the quantity of CDs to be delivered. CHAPTER 10 381 c. The distributor uses the purchase orders received from the retail stores (after the designated 1-day delay) to prepare shipments for delivery from available inventory. Quantities shipped are subtracted from the current level to develop the ending inventory level, which is recorded. If insufficient supply exists, backorders are generated. d. The distributor determines whether a replenishment order should be placed. If an order is required, the quantity of CDs is written on a Distribution Center Purchase Order, which is forwarded to the factory (after a 1-day delay). If an order is made, it should be noted on the worksheet. The distributor may also desire to keep track of outstanding orders separately. Factory a. The factory places any available new production into inventory (adds the items produced the previous day to the previous day’s ending inventory level on the Factory Inventory Position Worksheet). b. All outstanding backorders are filled (the quantity is subtracted from the current inventory level indicated on the worksheet) and prepared for shipment. CDs are shipped by filling out a Factory Material Delivery Form, indicating the quantity of CDs to be delivered. c. The factory obtains the incoming distributor’s purchase orders (after the designated 1-day delay) and ships them from stock, if it can. These amounts are subtracted from the current values on the inventory worksheet. Any unfilled orders become backorders for the next day. d. The factory decides whether to issue a work order to produce CDs either to stock or to order. If production is required, a Factory Work Order is issued, and the order is noted on the inventory worksheet. Remember that a setup cost applies to each production order. It is important to keep careful track of all production in process. Remember, once an order has been placed, it cannot be changed and no partial shipments can be made. For each day, record your ending inventory position, backorder or lost sales amount, and whether an order was made (or a production run initiated). After everyone completes the transactions for the day, the sequence repeats, beginning at retailer step (a). Your instructor will tell you how many simulated days to run the exercise. When the play is stopped, find the cumulative amount of inventory and other costs. You can do so by summing up the numbers in each column and then multiplying these totals by the costs previously listed. Use the total of these costs to assess how well your team operated the distribution chain. Source: This exercise was developed by Larry Meile, Carroll School of Management, Boston College. By permission of Larry Meile. CASE Brunswick Distribution, Inc. Alex Brunswick, CEO of Brunswick Distribution, Inc. (BDI), looked out his office window at another sweltering day and wondered what could have gone wrong at his company. He just finished reviewing his company’s recent financial performance and noticed something that worried him. BDI had experienced a period of robust growth over the last 4 years. “What could be going wrong?” he thought to himself. “Our sales have been growing at an average rate of 8 percent over the last 4 years but we still appear to be worse off than before.” He sat back in his chair with a heavy sigh and continued reviewing the report on his desk. Sales had risen consistently over the past 4 years but the future was uncertain. Alex Brunswick was aware that part of the past growth had largely been the result of a few competitors in the region going out of business, a situation that was unlikely to continue. Net earnings, however, had been declining for the last 3 years and were expected to decline next year. Brunswick was determined to turn his company around within the next 3 years. He sat back from his desk and buzzed his personal assistant: “Carla, could you ask Marianna and Bradley to come up?” Background The distribution business, in its simplest form, involves the purchase of inventory from a variety of manufacturers and its resale to retailers. Over the last 3 to 5 years, demands on inventory changed considerably; neither 382 PART 3 MANAGING SUPPLY CHAINS manufacturers nor retailers want to handle inventory, leaving distributors to pick up the slack. In addition, an increased tendency of retailers to order directly from manufacturers placed further strain on the profitability of distributorships in general. After humble beginnings in a shed behind the house of Brunswick’s grandmother, the company moved to a 10,000 square-foot leased facility. Ten years ago, BDI began distributing high-end appliance products to supplement its low-margin products. BDI entered into an agreement with KitchenHelper Corp., a large manufacturer of high-end kitchen appliances, located 35 miles from Moline, Illinois, to distribute KitchenHelper appliances to customers in the region. Over the years BDI enjoyed steady growth and expanded its area of coverage. Currently, Brunswick was covering an area with a radius of 200 miles from the company’s main facility. Given the rapid growth, BDI purchased the leased facility and made additions to bring its capacity to 30,000 square feet. The demise of several of its competitors resulted in the acquisition of new retailer customers and some new product lines. Traditional ordering in the retailer-distributor-manufacturer chain took place via fax or telephone. Brunswick considered implementing an Internet-based ordering system but was unsure of the potential operational and marketing benefits that it could provide. Concerns Market Direct competition from distributors increased over the past 5 years. As a result, the most successful distributors adopted a value-added strategy in order to remain competitive. Retailers want dependable delivery to support sales promotions and promises to customers. They also want the freedom to hold sales promotions at any time as competitive conditions dictate and with only short notice to distributors. They also want the opportunity to choose from a wide variety of appliances. Nonetheless, many orders are won on the basis of price and lost on the basis of delivery problems. as the market stabilizes,” he said. In order to meet this challenge, BDI must evaluate a number of alternative options. Some of the possible options might include expanding current systems and, when necessary, developing new systems that interface with suppliers, customers, and commercial transportation resources to gain total asset visibility. Before making any investment decision, Brunswick reminded them that BDI would have to evaluate any new capital requirements, as well as the expected contribution to the company’s bottom line and market share, that any option might provide. Exhibit 1 shows the income statement for the current year. Investing in New Infrastructure Bradley Pulaski, vice president of operations, said, “Since Associated Business Distribution Corp. ceased operations 4 years ago, we have been inundated with phone calls and e-mails from potential customers across the Midwest looking for an alternative to ABD’s services. These requests come not only from former ABD customers, but also from potential customers that have not dealt with either ABD or us in the past. We cannot adequately service this market from our current warehouse because the customers do not want to wait for lengthy deliveries. We are currently servicing some customers in that region; however, I do not think we can keep them much longer because of delayed deliveries. In order to take advantage of this opportunity, we would have to construct a new storage facility to complement our already strained resources and ’forward position’ inventory to shorten our delivery times to customers on short notice. We are challenged by an inadequate infrastructure far too small for our requirements. We only have the Moline warehouse at this time.” The addition of new facilities would provide BDI with an opportunity for increased penetration in key industrial markets in the upper Midwest where the company has had a limited presence. EXHIBIT 1  Financial Company Income Statement ($000’s) Manufacturers commonly demand payment in 30 to 45 days and provide no financing considerations. Retailers, on the other hand, pay in 50 to 60 days. This difference often leaves BDI in a cash-poor situation that puts an unnecessary strain on its current operating loan. The company’s borrowing capacity has almost been exhausted. Any additional financing will have to be sought from alternative sources. Given BDI’s financial situation, any additional financing will be issued at a higher charge than the company’s existing debt. Revenue Operations Inventory turnover also presented a problem for the past 5 years. In the past 2 years, however, a significant downturn in turnover occurred. This trend seems likely to continue. Orders from retailers come in as their customers near completion of construction or renovations. Even though historical information provided a good benchmark of future sales, the changing market lessened the reliability of the information. The changes also affect BDI’s ordering. Manufacturers require projections 60, 90, and 120 days out in order to budget their production. Sometimes penalties are assessed when BDI changes an order after it is placed with a manufacturer. Strategic Issues As Marianna and Bradley walked into Brunswick’s office, he was still pondering the report. “Grab a seat,” he grunted. They knew they were going to have a long day. Brunswick quickly briefed them on why he had summoned them, and they all immediately dove into a spirited discussion. Brunswick pointed out that BDI would need to be properly structured to deal with the recession and the reality of today’s market. “We need to be well-positioned for growth 33,074 Cost of Goods Sold Shipping costs 8,931 Direct materials 5,963 Direct labor and other 6,726 Total 21,620 Gross Profit 11,454 Operating Expenses Selling expenses 2,232 Fixed expenses 2,641 Depreciation 1,794 Total 6,667 Earnings before Interest and Taxes 4,787 Interest expense Earnings before Taxes 3,949 Taxes @ 35% Net Income 838 1,382 2,567 SUPPLY CHAIN DESIGN The financing resources for this option would be a challenge, given that BDI was approaching its credit limit with its principal bank. Additional financing from larger banks in Chicago, however, was not ruled out. It would be expensive (with current interest rates for long-term loans starting at 11 percent). According to Bradley, this option would cost $2 million for property and $10 million for plant and equipment. The new warehouse facilities would be depreciated over 20 years. The 20-year loan would be repaid with a single balloon payment at the end of the loan. With the additional infrastructure, BDI would be able to increase its annual sales by $4,426,000. In addition, delivery lead times to customers in the region would be reduced from 5 days to 2 days, which would be very competitive. Because of the added warehouse capacity, BDI could also increase the number of brands and models of appliances to better serve the retailers’ needs for more variety. However, certain categories in the costs of goods sold would also increase. Total annual shipping costs, which include supplier deliveries to the warehouse as well as deliveries to the customer, would increase by $955,000. Annual materials costs (for the sold appliances) and labor costs would each increase by 6 percent. Total assets would increase from $30,170,000 to $43,551,000. This increase takes into account changes to inventory investment, which would become $7,200,000, accounts receivable, property, and plant and equipment. Streamlining the Distribution System Marianna Jackson, the vice president of logistics, stated, “I believe there is an opportunity to capitalize on the void left by our fallen rivals by utilizing a cost-efficient distribution system. We do not need a new facility; we can continue to serve the customers in the Midwest as best we can. However, what we do need is an efficient distribution system. We are holding a considerable amount of stock that has not moved simply because of our inefficient inventory systems. One of our top priorities is working diligently with the inventory control department to keep what we need and dispose of what we do not need. This approach will allow us to use the space recovered from the unneeded items for automated warehouse equipment that will enable us to become more efficient. Everything we do and every dollar we spend affects our customers. We need to keep our prices competitive. Our cost of operations is our customers’ cost. Our goal is to enable customers to spend their resources on readiness and the tools of their trade, not logistics. This option will not help us much with product variety or delivery speed; however, it will increase our on-time delivery performance and improve our flexibility to respond to changes in retailer orders to support their sales programs.” The option of having an integrated center, comprised of sophisticated automation systems, advanced materials handling equipment, and specially developed information technology, would provide BDI with both the versatility and capacity to offer improved products and services to Brunswick’s CHAPTER 10 383 customers. The system would support real-time ordering, logistics planning and scheduling, and after-sales service. When an order is received through a call center at Brunswick’s offices in Moline, it will be forwarded to a logistics center for processing. The customer is given a delivery date based on truck availability. Orders would be grouped by destination so that trucks could be efficiently loaded to maximize the truck capacity. The order would then be scheduled for delivery and the customer notified of the estimated arrival. This new information technology would improve BDI’s reliability in delivering the products when promised. The system also includes an automatic storage and retrieval system (AS/RS). The AS/RS selects a customer order and moves it to a dock for loading on a truck headed for the customer’s location. The capital costs for this system would be $7 million, which would be depreciated over a 10-year period. The operating costs, including training, would run at $0.5 million each year. These costs would be considered fixed expenses by Brunswick. The improved system, however, would have tremendous cost savings. Marianna estimated that the system would save up to 16 percent in shipping expenses and 16 percent in labor expenses annually. Total assets would increase from $30,170,000 to $35,932,000 to account for changes in accounts receivables and equipment. Aggregate inventories would be only $4,500,000 because of the reduced need for safety stock inventories. BDI could finance this option using a 10-year loan at a 10 percent rate of interest. The loan would be repaid with a balloon payment at the end of the loan. These savings would come from more efficient handling of customers’ orders by the call center, better planning and scheduling of shipments, and improved communication with the warehouse and the customer, resulting in a dramatic reduction in the shipping costs in the supply chain. Additional savings would result from the reduction in personnel costs; fewer operators would be required. Marianna Jac...
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