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Operations Management Supply Network Design Notes

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A supply network perspective means setting an operation in the context of all the other operations with which it interacts, some of which are its suppliers and its customers.

Materials, parts, other information, ideas and sometimes people all flow through the network of customer supplied relationships formed by all these operations.

On its supply side an operation has its suppliers of parts, or information or services. These suppliers themselves have their own suppliers who in turn could also have suppliers.

On the demand side the operation has customers. These customers might not be final customers of the operations products or services; they might have their own set of customers.

On the supply side is a group of operations that directly supply the operation. These are called first tier suppliers. They are supplied by second tier suppliers. However some second tier suppliers may also supply an operation directly thus missing out a link in the network.

On the demand side of the network, first tier customers are the main customer group for the operation. Those in turn supply second tier customers, although h the operation may at times supply second tier customers directly.

The suppliers and customers who have direct contact with an operation are called its immediate supply network, whereas all the operations which form the network of supplier's suppliers and customer's customers are called the total supply network.

Why Consider the Whole supply Network?

There are three key reasons for taking a supply network perspective: o

It helps an understanding of competitiveness

Immediate customers and immediate suppliers are the main concern to competitively minded companies.

Sometimes they need to look beyond these immediate contacts to understand why customers and suppliers act as they do.

An operation has two options if it wants to understand its ultimate customer needs at the end of the network. It can rely on intermediate customers and customer's customers which form the links in the network between the company and its end customers. Alternatively it can look beyond its immediate customers and suppliers.


Relying on one's immediate network is seen as putting too much faith in someone else's judgement of things which are central to an organisations own competitive health.

It helps identify significant links in the network


The key to understanding supply networks lies in identifying the parts of the network which contribute to those performance objectives valued by end customers. Any analysis of networks must start by understanding the downstream end of the network. After this the upstream parts of the network which contribute most to end customer service will need to be identified but they will not be equally significant.

It helps focus on long term issues

There are times when circumstances render parts of a supply network weaker than its adjacent links.

Design Decisions in Supply Networks

The supply network view is useful because it prompts three particularly important design decisions: o


Where should each part of the network be located. Should it be close to customers or suppliers. This is called the operations location decision.


How the network should be configured. This means first how an operation can influence the shape which the network might take. Second, how much of the network should the operation own. This may be called outsourcing, vertical integration or do or buy decision.

What physical capacity should each part of the network have. Should it expand in large capacity steps or small ones. These are called long term capacity management decisions.

All three of these decisions rely on assumptions regarding the level of future demand.


Changing the shape of the supply network o

Even when an operation does not directly own, or even control, other operations in its network, it may still wish to change the shape of the network.



This involves attempting to manage network behaviour by reconfiguring the network so as to change the scope of the activities performed in each operation and the nature of the relationships between them. Reconfiguring a supply network sometimes involves parts of the operation being merged in the way responsibility is allocated for carrying out activities.

Disintermediation o


Another trend in some supply networks is that of companies within a network bypassing customers or suppliers to make direct contact with customer's customers or supplier's suppliers. Cutting out the middleman in this way is called disintermediation.

Co-opetition o

One approach to thinking about supply networks sees business as being surrounded by four types of players; suppliers, customers, competitors and complementors.


Complementors enable ones products or services to be valued more by customers because they can also have the complementor's products or services as opposed to when they have yours alone.


Competitors make the customers value your product less when they can have their product or service rather than yours alone.


Harnessing the value of suppliers is just as important as listening to the needs of customers. In the long term it creates value for the total network to find ways of increasing value for suppliers as well as customers.


All the players in the network can be both friends and enemies and different times and the term used to capture this idea is co-opetition.

In House of Outsource? Do or Buy? The Vertical Integration Decision

No single business does everything it is required to produce its products or services.

Outsourcing has become an important decision for most businesses because although companies have always outsourced some of their activities, a larger proportion of direct activities are now being bought from suppliers.

Also many indirect processes are now being outsourced. This is often referred to as business process outsourcing.

The do or buy decision is what the company should do itself and what it should buy in when individual components or activities are being considered

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