Process Lock-in: Is your supply network working for your organization?

Supply Network Design

The true competition among manufacturers lies not in their products or services, but in their supply networks. This is where real competitive advantage can be found. A well-structured supply network is what transforms chaos into order. Each operation is part of a larger, interconnected web of activities, and the most critical and scarce resource in any supply network is time. Unlike other resources, time cannot be stored or reworked if wasted. The only way to reclaim time is by reducing and eliminating non-value-adding activities within the network. This focus on efficiency and optimization is what sets successful manufacturers apart.

Customer tiers and Supplier tiers

The supply network is all about coordinating activities to create value for other operations within the network. To fully benefit from it, it's crucial to analyze both customer tiers and supplier tiers. This analysis helps uncover critical relationships within the network and highlights the upstream and downstream operations that significantly impact the end customer service. By identifying these critical connections, manufacturers can better optimize their supply networks to deliver maximum value.

Market changes

Understanding market changes involves examining three critical dimensions: supply network configuration, location of operations, and capacity management. Firstly, the supply network configuration determines the structure and pattern of the network, detailing various operations and the extent of the manufacturer’s ownership. This involves strategic decisions about outsourcing, offshoring, vertical integration, and whether to build or buy.

Secondly, the location of operations is crucial. Identifying optimal locations within the supply network helps maximize efficiency and responsiveness. Lastly, capacity management ensures that the supply network can effectively meet demand fluctuations by managing resources and capabilities. By focusing on these dimensions, organizations can better adapt to market changes and optimize their supply networks for sustained competitive advantage.

Disintermination

Disintermediation in the supply network involves eliminating the middleman between the supplier and the customer. This streamlining aims to create direct, more efficient connections. When a manufacturer focuses on value creation, it should benefit the entire supply network. Destroying supplier value to increase customer benefits can lead to disruptions and inefficiencies. Relationships within the supply network should embrace "coopetition," a blend of competition and cooperation. This balance ensures that all parties work together to create value while still maintaining a competitive edge. This balance is essential to sustaining a healthy and efficient supply network.

Quality, Speed, Dependability, Flexibility and Cost

Outsourcing, offshoring, vertical integration, and build or buy decisions are made based on the manufacturer's objectives and circumstances. These decisions are typically evaluated within the framework of quality, speed, dependability, delivery flexibility, and cost performance. However, these factors can sometimes be in opposition, with some favoring performance improvement while others may hinder it.

Location

Additionally, the strategic importance of the operation, the potential for improvement, and the relative significance of the operation are considered. Motives for outsourcing and offshoring often align, primarily aiming to lower costs. This holistic approach ensures that decisions regarding the supply network are aligned with the organization's goals and contribute to its overall success.

The location of a manufacturing facility is often influenced by a combination of supply and demand factors. Three main objectives guide this decision-making process:

1.    Variable Cost of Operation: This involves assessing the operational costs associated with establishing and running the facility. Factors such as labor costs, energy expenses, and transportation costs are taken into account.

2.    Services Provided to Customers: The location is chosen based on how well it facilitates the provision of services to customers, ensuring efficient and timely delivery of products.

3.    Revenue Potential: Evaluating the revenue-generating potential of the operation in relation to its location, market accessibility, and potential customer base.

Supply-side factors such as labor costs, energy expenses, transportation costs, and community factors are crucial considerations. On the demand side, factors like labor skills and the overall image of the location play a significant role.

To pinpoint the best location for a manufacturing facility, companies often rely on two main methodologies: the weighted score location method and the center of gravity location method. These approaches offer structured frameworks for evaluating various factors and aligning decisions with the organization's goals and context.

Weighted Score Location

In the weighted score method, the process unfolds in three key stages: Firstly, relevant criteria for evaluating potential locations are identified. These might include factors like labor availability, transportation infrastructure, proximity to suppliers and customers, regulatory environment, and operating costs.

Next, each criterion is assigned a weight reflecting its relative importance to the organization's objectives. This weighting typically involves assigning values on a scale of 1 to 5, with higher weights indicating greater significance. Finally, each potential location is assessed against these criteria, generating scores based on how well they perform in each aspect. These scores are then multiplied by their respective weights and totaled, providing a quantitative measure of each location's suitability.

The Center of Gravity Location

Conversely, the center of gravity method focuses primarily on transportation costs. It operates on the premise that a location's value is determined by the aggregate transportation expenses to and from that point. By identifying the geographical center of gravity based on transportation distances and volumes, companies can identify locations that minimize overall transportation costs.

These methodologies offer companies valuable insights into the optimal location for their manufacturing facilities, enabling them to make informed decisions that streamline supply chain operations and enhance competitiveness.

Capacity management

Manufacturing facilities must carefully assess and determine their capacities. Across all types of operations, there's a principle known as economies of scale, where operating costs decrease as capacity increases. However, when capacities are mismatched, facilities can experience diseconomies of scale, where operating costs rise beyond a certain level of capacity. This is important as aligning capacity with demand optimizes efficiency and minimizes costs.

Demand Capacity

Maintaining a balance between demand and capacity is crucial for manufacturing entities as overcapacity leads to low capacity utilization, driving up costs. Achieving this balance requires matching capacities across all processes in the network. Failure to do so means the network's capacity is constrained by its slowest operation. Therefore, optimizing capacity across all processes ensures efficient operations and cost-effective production.

Leading and lagging Capacity

Determining capacity changes is a task typically managed by operations. Leading strategies aim to enhance the ability to meet demand, while lagging strategies focus on maximizing capacity utilization. Balancing between these two approaches effectively can lead to efficient inventory management, potentially resulting in a zero inventory operation. However, relying on inventory to offset demand-capacity imbalances often raises working capital requirements, posing risks such as stock obsolescence and deterioration. Therefore, finding the right equilibrium between leading and lagging strategies is crucial for optimizing operations while mitigating associated risks.

Scale Capacity

Expanding capacity requires a careful assessment, typically through a break-even analysis. This analysis is essential because additional capacity units represent a fixed cost that is incurred upfront, before any further activity can proceed in the operation. By conducting a break-even analysis, manufacturers can determine the point at which the additional revenue generated from increased capacity equals the additional costs incurred, helping to inform decisions about the feasibility and timing of capacity expansion initiatives.

A well-functioning supply network is the cornerstone of success for modern manufacturing organizations. By optimizing operations, fostering cooperation, and staying agile in the face of market changes, organizations can unlock their full potential and thrive in today's competitive landscape.