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Lesson 4 - The Structure and Scope of Operations (Chapter 5)

• Dr. Suanu Bliss Wikina

Key Questions

• What do we mean by the ‘structure’ and ‘scope’ of operations’ supply

networks?

• What configuration should a supply network have?

• How much capacity should operations plan to have?

• Where should operations be located?

• How vertically integrated should an operation’s network be?

• How do operations decide what to do in-house and what to outsource?

Structure and Scope of Operations’ Supply Networks

• Structure relates to the shape and form of the network

• Scope is the extent the operation performs the network’s activities by itself instead of requesting a supplier to do them

• A supply network is setting an opersation in terms of all the other operations with which it interacts

• Materials, parts, ideas, information, and people flow through the network of customer-supplier relationships formed by these operations

Structure and Scope - Key points to note

• Structure and scope are strongly related, and so decisions related to them are often interrelated

• Decisions on both structure and scope are composed of a number of other constituent decisions

• For structure: configuration, capacity, and location

• For scope: vertical integration and outsourcing

• Structure and scope decisions are strategic

What determines an operation’s structure and scope?

• Structure • How should the network be configured?

• What physical capacity should each part of the network have?

• Where should each part of the newtwork be located?

• Scope • The extent and nature of the operation’s vertical integration

• The nature and degree of outsourcing it engages in

Importance of Structure and Scope

• It helps to provide an understanding of competitiveness

• It helps identify significant links in the network

• It helps focus on long-term issues

What configuration should a supply network have?

• Configuration is a determination of overall pattern, shape or arrangement of the operations of the network

• Disintermediation – cutting out intermediaries – bypassing customers or suppliers to deal directly with customers’ customers or suppliers’ suppliers, ex. travel industry

• Co-opetition – the idea of cooperation or competition between the four players within a network: suppliers, customers, competitors, and complementors

Supply network configurations cont’d

• The idea of a business ecosystem emanates from the linkages and interrelationships between the elements (businesses) if they must survive- they need to be flexible, adaptive, and innovative

• Dyads and triads • Dyads – interaction between two specific operations in a network

• Triads – especially relevant in a service supply network when an operation outsources the delivery of some aspects of their service to specialist providers, who then deals directly with customers on behalf of the focal operation.

How much capacity should operations plan to have?

• How much capacity an operation will have depends on forecasting current and future demand

• When there is need to address changes in demand, capacity decisions to be taken include:

• Choosing the optimum capacity level for each site

• Balancing the capacity levels of the operations in the network

• Timing the changes in the capacity of each part of the network

• Although large scale operations have cost advantages over smaller units, there are also advantages that smaller scale operations can exploit

Where should operations be located?

• Location decisions usually have an impact on operation’s costs and ability to serve its customers and therefore its revenues

• Reasons for location decisions: • Changes in demand

• Changes in supply

• Location decisions are determined by: • Costs of labor, land, energy, and transportation

• Labor skills availability

• Community factors

• The suitability of the site itself

• Image of the location

• Convenience for customers

How vertically integrated should an operation’s network be?

• Vertical integration is the extent to which an organization owns the network of which it is a part

• An organization’s vertical integration strategy can be defined by: • The direction of the integration

• The extent of the process span of integration

• The balance among the vertically integrated stages

• There are advantages and disadvantages with vertical integration

How do operations decide what to do in-house and what to outsource?

Figure 5.11

The decision logic of outsourcing source: Slack, Brandon-Jones & Johnston (2016)

Performance

objective

‘Do it yourself’

In-house supply

‘Buy it in’

Outsourced supply

Quality The origins of any quality

problems usually easier to

trace in-house and

improvement can be more

immediate but can be some

risk of complacency.

Supplier may have specialized

knowledge and more

experience, also may be

motivated through market

pressures, but communication

more difficult.

Speed Can mean synchronized

schedules which speeds

throughput of materials and

information, but if the operation

has external customers,

internal customers may be low

priority.

Speed of response can be built

into the supply contract where

commercial pressures will

encourage good performance,

but there may be significant

transport/delivery delays.

How outsourcing may affect performance

objectives (1 of 3)

Performance

objective

‘Do it yourself’

In-house supply

‘Buy it in’

Outsourced supply

Dependability Easier communications can

help dependability, but, if the

operation also has external

customers, internal customers

may receive low priority.

Late delivery penalties in the

supply contract can encourage

good delivery performance, but

organizational barriers may

inhibit in communication.

Flexibility Closeness to the real needs of

a business can alert the in-

house operation to required

changes, but the ability to

respond may be limited by the

scale and scope of internal

operations.

Outsource suppliers may be

larger with wider capabilities

than in-house suppliers and

more ability to respond to

changes, but may have to

balance conflicting needs of

different customers.

How outsourcing may affect performance

objectives (2 of 3)

Performance

objective

‘Do it yourself’

In-house supply

‘Buy it in’

Outsourced supply

Cost In-house operations do not

have to make the margin

required by outside suppliers

so the business can capture

the profits which would

otherwise be given to the

supplier, but relatively low

volumes may mean that it is

difficult to gain economies of

scale or the benefits of process

innovation.

Probably the main reason why

outsourcing is so popular.

Outsourced companies can

achieve economies of scale

and they are motivated to

reduce their own costs

because it directly impacts on

their profits, but costs of

communication and

coordination with supplier need

to be taken into account.

How outsourcing may affect performance

objectives (3 of 3)