Chapter Three
Design of Operations
Network
The two prominent operations with which operation interacts are;
a) Its suppliers who provide input for the transformation process of operation, and b) Its customers who generate demand for
goods and service produces by operation.
Interaction with Operations
On supply side an operation has its suppliers of raw materials or parts, or services.
First tier suppliers: Those suppliers who supply directly to operation.
Second tier suppliers: Those suppliers who supplies to ‘first tier’ suppliers.
Supply side of the
operations
On demand side the operation has customers.
First tier customers: Those customer who directly receive goods and services from
operation.
Second tier customers: Those customers who receive goods and services from
customers of operation.
Demand Side of
Operations
Immediate Supply Network: Those
suppliers and customers who have direct contact with operation.
Total Supply Network: All the suppliers’
suppliers and customers’ customers are called the ‘total supply network’.
Supply Network
Total Supply network of a plastic home ware manufacturer
Plastic homeware manufacturer First tier suppliers
Packaging supplier Plastic stockist
First tier customers
Wholesaler Second tier
suppliers
Ink supplier Cardboard
company Chemical company
Second tier customers
Retailer
Retailer
Direct supply Information
There are three important reasons for taking the whole supply network into consideration.
It helps a company to understand how it can compete effectively.
It helps to identify particularly significant links in the network:
It helps the company to focus on its long-term position in the network.
Why consider the whole network
What is involved in configuring a supply network?
There are three important design decisions to understand before configuring a supply network.
How should the network be configured?
Where should the parts of network owned by the company be located?
What physical capacity should each part of network owned by the company have at any point in time?
Configuring a Supply
Network
Configuring the network
The questions to be addressed are;
a) how much to influence the shape which network might take, and
b) how much of the network should the operation own.
Configuring the Network
Changing the shape of network
The objective here is to reduce the number of suppliers with whom operation has direct contact.
The complexity of dealing with many suppliers may both be expensive and
Also hinder operation to develop close relationship with supplier.
Shape of the Network
Unordered supply network
Ordered Supply Network
Vertical Integration
Vertical integration is the extent to which an organization owns the network.
In this case organization makes decision on supply side whether to purchase parts from suppliers or manufacture itself and
Similarly on demand side it makes decision reach directly to end customers by taking over the middleman.
Vertical integration
The direction of vertical integration depends
upon organization’s decision to what extent it takes over supply side and the demand side of the network.
Backward vertical integration: The strategy of expanding on the supply side of the network.
It is also called upstream vertical integration.
Forward vertical integration: The strategy of expanding on demand side. It is also called downstream vertical integration.
Direction of Vertical Integration
The span of integration
Extent – Narrow process span Extent – Wide process span
Direction – Upstream vertical integration
Direction – Downstream vertical integration Wholesaler
Raw material
suppliers Component maker Assembly
operation Retailer
Quality: One would like to know whether vertical integration ensure better quality due to closeness of operations to its customers. Acting against this could be the danger that in- house quality checks may be less effectives compared to those with external suppliers.
Speed: Closeness of operations can increase the speed of supplies however acting against this could be less importance to internal customers compared to external where there is threat if not supplied on time the external customer may take business elsewhere.
Effects of Vertical Integration
Dependability: Vertical integration improves communication regarding delivery promises. Danger against this could be overlooking internal customers’ delivery requirements as there is no threat of internal customers trading with competitors if not satisfied.
Flexibility: Upstream vertical integration provides potential to guide technological developments as well as denying them to competitors. Similarly downstream vertical integration give potential for product or services to be developed according to end customers requirements again providing competitive advantage. Danger against this could be management’s attention divided too thinly.
Effects of Vertical Integration
Costs: Vertical integration can provide cost saving by sharing resources for example research and development or logistics etc. However danger against this could be possibility of
reduction in demand which could eventually increase unit cost.
Effects of Vertical
Integration
