Week 5,6 Discussion 1 & 2

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Chapter 5: Goods and Service Design Chapter Introduction Book Title: Operations and Supply Chain Management Printed By: Washburn Kelly ([email protected]) © 2019 Cengage, Cengage Learning, Inc.

Chapter Introduction

Fuel efficiency and environmental concerns are important in developing nations as the number of vehicles on their streets continues to rise.

Frank Bienewald/Getty Images

Learning Objectives

After studying this chapter, you should be able to:

Describe the steps involved in designing goods and services.

Explain the concept and application of quality function deployment.

Describe how the Taguchi loss function, reliability, design for manufacturability, and design for sustainability are used for designing manufactured goods.

Explain the five elements of service-delivery system design.

Describe the four elements of service-encounter design.

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5-6 Explain how goods and service design concepts are integrated at LensCrafters.

In developing markets such as China and India, consumers can’t afford large, expensive cars, much less drive them in overcrowded population centers. Fuel efficiency as well as environmental concerns are also important, as developing nations seek to cap carbon emissions even as the number of vehicles on their streets continues to rise. But these consumers are not willing to buy inferior cars that simply cost less. Rather, like most of us, they want low-cost vehicles that are designed to meet their needs and still have high quality, reliability, and style—in other words, have value. Consumers in India, for instance, need cars that maximize passenger room because they use their autos primarily as family vehicles to drive around town; by contrast, in the West, with its better roads and routine long-distance driving, cargo capacity matters more. Indian drivers are willing to pay a bit more for cars that offer the latest in comfort, safety, and utility, but not for cars with power windows and locks or fancy sound systems. Automatic transmissions are desirable in India and China—nobody wants to keep pressing the clutch and shifting gears in the inevitable stop-and-go traffic—but powerful engines are not. Succeeding in developing markets, therefore, requires rethinking from start to finish how new cars should be designed and built. It calls for a deep understanding of the unique needs of consumers and the ability to assemble the combination of power trains, bodies, features, and options that best match those desires—at affordable prices.

What Do You Think?

How important are design and value in your purchasing decisions? Provide some examples for goods and services.

Perhaps the most important strategic decision that any firm makes involves the design and development of new goods and services, and the value chain structure and processes that make and deliver them. In fact, decisions about what goods and services to offer and how to position them in the marketplace often determine the ultimate growth, profitability, and success of the firm. Every design project—a new automobile or cell phone, a new online or financial service, even a new pizza—is a series of trade-offs: between technology and functionality, between ambition and affordability, between the desires of the people creating the object and the needs of the people using it.

In today’s world, the complexity of customer benefit packages requires a high level of coordination throughout the value chain. As the authors of the opening anecdote about automobile design note, design for value “involves a series of complex, varied, carefully thought-out decisions about which types of engines to use; which equipment should be

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Every design project—a new automobile or cell phone, a new online or financial service, even a new pizza—is a series of trade-offs: between technology and functionality, between ambition and affordability, between the desires of the people creating the object and the needs of the people using it.

standard; what safety add-ons to include; how parts and materials are engineered; and which designs are most attractive to the target customer base.” At the other end of the value chain, sales and maintenance, and even financing, should also be examined for new ideas: Given limited dealer networks, might roving mechanics be sent out to perform regular maintenance? Could entire extended families enter into financing deals for new cars? Similar questions apply to the design of every good and service.

Chapter 5: Goods and Service Design Chapter Introduction Book Title: Operations and Supply Chain Management Printed By: Washburn Kelly ([email protected]) © 2019 Cengage, Cengage Learning, Inc.

© 2020 Cengage Learning Inc. All rights reserved. No part of this work may by reproduced or used in any form or by any means - graphic, electronic, or mechanical, or in any other manner - without the written permission of the copyright holder.

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Chapter 5: Goods and Service Design: 5-1 Designing Goods and Services Book Title: Operations and Supply Chain Management Printed By: Washburn Kelly ([email protected]) © 2019 Cengage, Cengage Learning, Inc.

5-1 Designing Goods and Services To design and improve goods and services, most companies use some type of structured process. The typical goods and services development processes are shown in Exhibit 5.1. In general, the designs of both goods and services follow a similar path. The critical differences lie in the detailed product and process design phases.

Exhibit 5.1

An Integrated Framework for Goods and Service Design

Steps 1 and 2—Strategic Mission, Analysis, and Competitive Priorities

Strategic directions and competitive priorities should be consistent with and support the firm’s mission and vision. These steps require a significant amount of research and innovation involving marketing, engineering, operations, and sales functions, and should

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involve customers, suppliers, and employees throughout the value chain. The data and information that result from this effort provide the key input for designing the final customer benefit package.

Step 3—Customer Benefit Package Design and Configuration

Clearly, firms have a large variety of possible choices in configuring a customer benefit package (CBP). For example, when buying a new vehicle, an automobile dealer might include such options as leasing, free oil changes and/or maintenance, a performance driving school, free auto washes, service pickup and delivery, loaner cars, and so on.

Essentially, CBP design and configuration choices revolve around a solid understanding of customer needs and target markets, and the value that customers place on such attributes as the following:

Time—Many grocery stores now offer self-service checkout to reduce customer waiting time. Manufacturers such as Dell use the Internet to acquire customer information for more responsive product design.

Place—UPS has UPS Stores strategically located for customer convenience that also provide packaging services; many companies offer day-care centers on-site to provide convenience to their employees.

Information—Bank of America provides an Internet search capability for the best home equity loan. A business dedicated to providing guitar music books and videos (www.ChordMelody.com) offers a telephone hot line to speak with a professional guitarist for questions on selecting the proper instructional and performance material.

Entertainment—Some Dick’s Sporting Goods Stores provide a rock-climbing wall for children while other family members shop. A pianist serenades shoppers at Nordstrom’s department stores. Some minivans have built-in DVD players.

Exchange—Retail stores such as Best Buy allow customers to travel to the store and buy the goods, purchase goods on their websites and have them delivered, or purchase goods on their websites and have them ready to be picked up at the store.

Form—For manufactured goods, form is associated with the physical characteristics of the good and addresses the important customer need of aesthetics. An interior designer might use methods such as sketches, photographs, physical samples, or even computer-simulated renderings to show how a kitchen might be transformed.

A job-seeking service such as Monster.com provides pure information value, whereas buying an automobile or going on a vacation involves all six types.

Step 4—Detailed Goods, Services, and Process Design

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The process by which the service is created and delivered (i.e., “produced”) is, in essence, the service itself!

If a proposal survives the concept stage—and many do not—each good or service in the CBP, as well as the process that creates it, must be designed in more detail. This is where the designs of goods and services differ, as suggested by the alternate paths in Exhibit 5.1. The first three steps in Exhibit 5.1 are more strategic and conceptual in nature, whereas step 4 focuses on detailed design and implementation.

The design of a manufactured goods focuses on its physical characteristics—dimensions, materials, color, and so on. Much of this work is done by artists and engineers to translate customer requirements into physical specifications. This is the focus of step 4a in the exhibit. The process by which the good is manufactured (i.e., the configuration of machines and labor) can be designed as a separate activity (step 4b), with, of course, proper communication and coordination with the designers of the good.

The design of a service in steps 4c and 4d in Exhibit 5.1, however, cannot be done independently from the “process” by which the service is delivered. The process by which the service is created and delivered (i.e., “produced”) is, in essence, the service itself! For example, the steps that a desk clerk follows to check in a guest at a hotel represent the process by which the guest is served and (hopefully) experiences a sense of satisfaction. Thus, service design must be addressed from two perspectives—the service delivery system and the service encounter— as noted in steps 4c and 4d in Exhibit 5.1.

Engines like this are designed and digitally analyzed as part of the prototype testing process.

© 06photo/ Shutterstock.com

For both goods and services, this phase usually includes prototype testing. Prototype testing (is the process by which a model (real or simulated) is constructed to test the

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product’s performance under actual operating conditions, as well as consumer reactions to the prototypes.) is the process by which a model (real or simulated) is constructed to test the product’s performance under actual operating conditions, as well as consumer reactions to the prototypes. For example, at General Motors (GM), parts are designed and digitally analyzed using special software; one-third scale models are produced, assembled, and tested in a wind tunnel to evaluate the aerodynamics of automobile designs. Today, many companies use advanced technology to perform rapid prototyping—the process of building prototypes quickly to reduce product development cost and time to market. GM has a laboratory where 15 specialists take part orders from GM design centers all over the world, build them within hours, and then express ship them back, allowing designers and engineers to quickly evaluate them.

Step 5—Market Introduction/Deployment

In this step, the final bundle of goods and services—the customer benefit package—is advertised, marketed, and offered to customers. For manufactured goods, this includes making the item in the factory and shipping it to warehouses or wholesale and retail stores; for services, it might include hiring and training employees or staying open an extra hour in the evening. For many services it means building sites such as branch banks or hotels or retail stores.

LaRosa’s Pizzeria: Understanding the Voice of the Customer

LaRosa’s Pizzeria, a regional chain of informal Italian restaurants in the greater Cincinnati area, realized that customers know what they want. To gather information to help design a new restaurant configuration, LaRosa’s went out to current and potential customers and noncustomers in nonmarket areas to acquire the voice of the customer. Here are some real examples of customers’ experiences at other restaurants that LaRosa’s clearly wanted to avoid:

“So there I was, like herded cattle, standing on the hard concrete floor, cold wind blasting my ankles every time the door opened, waiting and waiting for our name to be called.”

“And then I saw a dirty rag being slopped around a dirty table.”

“I swear! The salad looked like the server ran down to the river bank and picked weeds and grass—I’m never going back!”

“When they’re that age, going to the bathroom is a full-contact sport—they’re reaching and grabbing at everything, and you’re trying to keep them from touching anything because the bathroom is so dirty.”

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The marketplace is a graveyard of missed opportunities: poorly designed goods and services and failed execution resulting from ineffective operations.

© Rawpixel.com/ Shutterstock.com

In the last example, what the customer really was saying is “The bathroom tells me what the kitchen might be like. Do I really want to eat here?” Clean bathrooms turned out to be the most important customer requirement that the company learned from listening to the voice of the customer.

What are the implications of the other customer comments? Interestingly, none of these comments revolves totally around the physical good (food) itself; service- facility and service-encounter quality are clearly important customer requirements!

Step 6—Marketplace Evaluation

The marketplace is a graveyard of missed opportunities: poorly designed goods and services and failed execution resulting from ineffective operations. The final step in designing and delivering a customer benefit package is to constantly evaluate how well the goods and services are selling, and customers’ reactions to them.

Chapter 5: Goods and Service Design: 5-1 Designing Goods and Services Book Title: Operations and Supply Chain Management Printed By: Washburn Kelly ([email protected]) © 2019 Cengage, Cengage Learning, Inc.

© 2020 Cengage Learning Inc. All rights reserved. No part of this work may by reproduced or used in any form or by any means - graphic, electronic, or mechanical, or in any other manner - without the written permission of the copyright holder.

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Chapter 5: Goods and Service Design: 5-2 Customer-Focused Design Book Title: Operations and Supply Chain Management Printed By: Washburn Kelly ([email protected]) © 2019 Cengage, Cengage Learning, Inc.

5-2 Customer-Focused Design The design of a good or service should reflect customer wants and needs, which are often termed customer requirements. Customer requirements, as expressed in the customer’s own words, are called the voice of the customer (Customer requirements, as expressed in the customer’s own words) . The design process must translate the voice of the customer into specific technical features that characterize a design and provide the “blueprint” for manufacturing or service delivery. Technical features are generally expressed in the language of designers and engineers; examples include the type and amount of materials, size and shape of parts, strength requirements, service procedures to follow, and employee behavior during service interactions. An effective approach for doing this is called quality function deployment. Quality function deployment (QFD) (is an approach to guide the design, creation, and marketing of goods and services by integrating the voice of the customer into all decisions.) is an approach to guide the design, creation, and marketing of goods and services by integrating the voice of the customer into all decisions. QFD can be applied to a specific manufactured good or service, or to the entire CBP. The process is initiated with a matrix, which, because of its structure (as shown in Exhibit 5.2), is often called the House of Quality.

Exhibit 5.2

The House of Quality

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In the house of quality, the relationship matrix is the main building. The attic represents the technical features, and the basement represents technical feature priorities. The voice of the customer, customer requirement priorities and competitive evaluation are the supporting structures of the house of quality.

Building a House of Quality begins by identifying the voice of the customer and technical features of the design and listing them in the appropriate places in the diagram. As shown in Exhibit 5.2, the voice of the customer and the technical features create a matrix structure in the center of the diagram. By evaluating how each technical feature relates to each customer requirement (using a scale such as “very strong,” “strong,” “weak,” or “no relationship”), designers can determine how well a design reflects the actual customer requirements. This might be based on expert experience, customer surveys, or other experiments. The lack of a relationship between a customer requirement and any of the technical features would suggest that the final good or service will have difficulty in meeting customer needs. Similarly, if a technical feature does not relate to any customer requirement, it may be unnecessary in the design. The roof of the House of Quality shows the interrelationships between any pair of technical features, and these relationships help in answering questions such as “How does a change in one product characteristic affect others?” This can help refine a design and evaluate trade-offs in design decisions.

Using the House of Quality: Building a Better Pizza

A restaurant wants to develop a “signature” pizza. The voice of the customer in this case consists of four attributes. The pizza should be tasty, healthy, and visually appealing, and should provide good value. The “technical features” that can be designed into this particular product are price, size, amount of cheese, type of additional toppings, and amount of additional toppings. The symbols in the matrix in the exhibit at the right show the relationships between each customer requirement and technical feature. For example, taste bears a moderate relationship with amount

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of cheese and a strong relationship with type of additional toppings. In the roof, the price and size area seem to be strongly related (as size increases, the price must increase). The competitive evaluation shows that competitors are currently weak on nutrition and value, so those attributes can become key selling points in a marketing plan if the restaurant can capitalize on them. Finally, at the bottom of the house are targets for the technical features based on an analysis of customer-importance ratings and competitive ratings. The features with asterisks are the ones to be “deployed,” or emphasized, in subsequent design and production activities.

House of Quality Example for a Pizza

House of quality for a pizza. The voice of the customer consists of taste, nutrition, visual appeal and good value. The technical features are price, size, amount of cheese, type of topping, and amount of topping. The relationship between the various factors are as follows. Taste to: price, blank; size, blank; amount of cheese, weak; type of topping, very strong; amount of topping, weak. Nutrition to: price, blank; size, blank; amount of cheese, very strong; type of topping, weak; amount of topping, strong. Visual appeal to: price, blank; size, very strong; amount of cheese, blank; type of topping, weak; amount of topping, very strong. Good value: price, very strong; size, strong; amount of cheese, blank; type of topping, blank; amount of topping, blank. On the right, customer importance, and competitive evaluation by us, competitor ay and competitor b are listed, with 1 = low and 5 = high. Taste: customer importance, 4; competitive evaluation us, 3, competitive evaluation ay, 4; competitive evaluation b, 5. Nutrition: customer importance, 4; competitive evaluation us, 3, competitive evaluation ay, 2; competitive evaluation b, 3. Visual appeal: customer importance, 3; competitive evaluation us, 3, competitive evaluation ay, 5; competitive evaluation b, 4. Good value: customer importance, 5; competitive evaluation us, 4, competitive evaluation ay, 3; competitive evaluation b, 4. At the bottom, our priorities, the priorities of ay, the priorities of b, and deployment are listed for the technical features. Price: our priority, 5; competitor ay, 2; competitor

To the right of the relationship matrix is an assessment of the importance of each customer requirement and how competitors’ products compare with the proposed design in terms of meeting the voice of the customer. This helps identify key “selling points” and features that would help to differentiate the good or service from competitors’ products.

The final step (bottom of the House) is to identify those technical features that have the strongest relationships to customer requirements, have poor competitive performance, or will be strong selling points. This helps prioritize those technical features that should be “deployed,” or paid the most attention to during subsequent design and production or

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b, 3; deployment, yes. Size: our priority, 4; competitor ay, 5; competitor b, 4; deployment, yes. Amount of cheese: our priority, 4; competitor ay, 3; competitor b, 4; deployment, no. Type of topping: our priority, 4; competitor ay, 2; competitor b, 3; deployment, no. Amount of topping: our priority, 5; competitor ay, 4; competitor b, 3; deployment, yes.

service delivery activities. This will ensure that the voice of the customer will be maintained in subsequent detailed design, manufacturing or service, and control activities.

QFD has been used successfully by many companies, such as Mitsubishi, Toyota, Motorola, Xerox, IBM, Procter & Gamble, and AT&T. Toyota, for example, reduced start-up costs by over 60 percent and product development time by one-third using QFD.

Chapter 5: Goods and Service Design: 5-2 Customer-Focused Design Book Title: Operations and Supply Chain Management Printed By: Washburn Kelly ([email protected]) © 2019 Cengage, Cengage Learning, Inc.

© 2020 Cengage Learning Inc. All rights reserved. No part of this work may by reproduced or used in any form or by any means - graphic, electronic, or mechanical, or in any other manner - without the written permission of the copyright holder.

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Chapter 5: Goods and Service Design: 5-3 Designing Manufactured Goods Book Title: Operations and Supply Chain Management Printed By: Washburn Kelly ([email protected]) © 2019 Cengage, Cengage Learning, Inc.

5-3 Designing Manufactured Goods For a manufactured good such as an automobile, computer, or textbook, design involves determining technical specifications such as dimensions, tolerances, materials, and purchased components; or choice of fonts and page layout for a textbook. This step also requires coordination with operations managers to ensure that manufacturing processes can produce the design (step 4b of Exhibit 5.1). Many different tools and techniques are used to support product design activities; we review some of the most important ones in this section.

Chapter 5: Goods and Service Design: 5-3 Designing Manufactured Goods Book Title: Operations and Supply Chain Management Printed By: Washburn Kelly ([email protected]) © 2019 Cengage, Cengage Learning, Inc.

© 2020 Cengage Learning Inc. All rights reserved. No part of this work may by reproduced or used in any form or by any means - graphic, electronic, or mechanical, or in any other manner - without the written permission of the copyright holder.

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Chapter 5: Goods and Service Design: 5-3a Tolerance Design and the Taguchi Loss Function Book Title: Operations and Supply Chain Management Printed By: Washburn Kelly ([email protected]) © 2019 Cengage, Cengage Learning, Inc.

5-3a Tolerance Design and the Taguchi Loss Function

For most manufactured goods, design blueprints specify a target dimension (called the nominal), along with a range of permissible variation (called the tolerance); for example, 0.500 ± 0.020 cm. The nominal dimension is 0.500 cm but may vary anywhere in the range from 0.480 to 0.520 cm. This is sometimes called the goal-post model (see Exhibit 5.3). Tolerance design involves determining the acceptable tolerance. Narrow tolerances improve product functionality and performance, but tend to raise manufacturing costs because they usually require higher-precision technology. Wide tolerances, on the other hand, reduce costs, but may have a negative impact on product performance. Thus, designers must consider these trade-offs and should use sound scientific and engineering approaches to optimizing tolerances rather than simply setting them judgmentally.

Exhibit 5.3

Traditional Goal-Post View of Conforming to Specifications

Genichi Taguchi, a Japanese engineer, maintained that the traditional practice of setting design specifications is inherently flawed. The goal-post model assumes that any value within the tolerance range is acceptable, but those outside are not. In the previous example, what is the real difference between 0.479 and 0.481? Not much; the impact of either value on the performance characteristic of the product would be about the same, yet a part having the dimension of 0.481 would be acceptable, whereas the other would not be. In reality, neither value is close to the nominal specification. Taguchi argued that the smaller the variation from the nominal specification, the better the quality. In turn, products are more consistent and fail less frequently, and thus are less costly in the long run.

Taguchi measured quality as the variation from the target value of a design specification and then translated that variation into an economic “loss function” that expresses the cost of variation in monetary terms. This approach can be applied to both goods and services.

Taguchi proposed measuring the loss resulting from the deviation from the target by a quadratic function so that larger deviations cause increasingly larger losses. The loss function is

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[5.1]

where

is the monetary value of the loss associated with deviating from the target, ;

is the actual value of the dimension; and

is a constant that translates the deviation into dollars.

Exhibit 5.4 illustrates this Taguchi loss function. The constant, , is estimated by determining the cost of repair or replacement if a certain deviation from the target occurs. Problems 5.1 and 5.2 show an example of the Taguchi loss function and how it can be used to set design tolerances.

Exhibit 5.4

Nominal-Is-Best Taguchi Loss Function

Solved Problem 5.1

Cassette tapes are still used in some handheld recording devices and in less expensive portable musical instrument recording devices. The desired speed of a cassette tape is 1.875 inches per second. Any deviation from this value causes a change in pitch and tempo and thus poor sound quality. Suppose that adjusting the tape speed under warranty when a customer complains and returns a device costs a manufacturer $20. Based on past information, the company knows the average customer will return a device if the tape speed is off the target by at least 0.15 inch per second; in other words, when the speed is either 2.025 or 1.725. Find the Taguchi loss function.

Solution:

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The loss associated with a deviation of from the target is . To find the loss function for any value of , we substitute these values into Equation 5.1 and solve for :

and thus the loss function is

For example, if the actual speed is 1.925 inches per second, the Taguchi loss function estimates that the economic loss will be

. Some, but not all, customers might perceive poor sound quality for this small of a deviation and return the product for adjustment, so the average loss is smaller. Exhibit 5.5 shows a portion of the Excel Taguchi template that can be used to perform these calculations.

Exhibit 5.5

Excel Taguchi Template.xlsx-Microsoft Excel

Solved Problem 5.2

For the scenario in Solved Problem 5.1, suppose that a technician tests the tape speed prior to packaging and can adjust the speed to the target of 1.875 at a cost of $5. What should the economic specification limits be?

Solution:

The accompanying table shows the loss associated with tape speeds from 1.725 to 2.025.

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Tape Speed, Tape Speed,

1.725 $20.00

1.740 $16.20

1.755 $12.80

1.770 $9.80

1.785 $7.20

1.800 $5.00

1.815 $3.20

1.830 $1.80

1.845 $0.80

1.860 $0.20

1.875 $0

1.890 $0.20

1.905 $0.80

1.920 $1.80

1.935 $3.20

1.950 $5.00

1.965 $7.20

1.980 $9.80

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Tape Speed,

1.995 $12.80

2.010 $16.20

2.025 $20.00

Note that if the tape speed is less than 1.800 or greater than 1.950, the loss incurred by not adjusting the tape is greater than $5. Therefore, it is more economical to inspect and adjust the tape if the actual speed is outside of these limits. If the speed is greater than 1.800 or less than 1.950 (shown in red), then clearly it costs more to inspect and adjust than to simply ship the unit as is. Therefore, 1.800 and 1.950 represent the economical design specifications that the company should try to achieve. The Excel Taguchi template computes these economic specifications using a break-even analysis approach in rows 15–19, as shown in Exhibit 5.6.

Exhibit 5.6

Economic Design Specifications Using the Excel Taguchi Spreadsheet Template

Chapter 5: Goods and Service Design: 5-3a Tolerance Design and the Taguchi Loss Function Book Title: Operations and Supply Chain Management

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Printed By: Washburn Kelly ([email protected]) © 2019 Cengage, Cengage Learning, Inc.

© 2020 Cengage Learning Inc. All rights reserved. No part of this work may by reproduced or used in any form or by any means - graphic, electronic, or mechanical, or in any other manner - without the written permission of the copyright holder.

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Chapter 5: Goods and Service Design: 5-3b Design for Reliability Book Title: Operations and Supply Chain Management Printed By: Washburn Kelly ([email protected]) © 2019 Cengage, Cengage Learning, Inc.

5-3b Design for Reliability

Everyone expects their car to start each morning and their computer to work without crashing. Reliability (is the probability that a manufactured good, piece of equipment, or system performs its intended function for a stated period of time under specified operating conditions.) is the probability that a manufactured good, piece of equipment, or system performs its intended function for a stated period of time under specified operating conditions. Reliability applies to services as well as manufacturing; a system could be a service process where each stage (work activity or station) is analogous to a component part in a manufactured good.

Reliability is a probability, that is, a value between 0 and 1. For example, a reliability of 0.97 indicates that, on average, 97 out of 100 times the item will perform its function for a given period of time under specified operating conditions. Often, reliability is expressed as a percentage simply to be more descriptive (97 percent reliable). Reliability can be improved by using better components or by adding redundant components. In either case, costs increase; thus, trade-offs must be made.

Many manufactured goods consist of several components that are arranged in series but are assumed to be independent of one another, as illustrated in Exhibit 5.7. If one component or process step fails, the entire system fails. If we know the individual reliability,

, for each component, , we can compute the total reliability of an -component series system, . If the individual reliabilities are denoted by and the system reliability is denoted by , then

[5.2]

Exhibit 5.7

Structure of a Serial System

The structure of a serial system consists of component 1 to component n arranged in series.

Other designs consist of several parallel components that function independently of each other, as illustrated in Exhibit 5.8. The entire system will fail only if all components fail; this is an example of redundancy. The system reliability of an -component parallel system is computed as

[5.3]

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Exhibit 5.8

Structure of a Parallel System

Structure of a Parallel System

Many other systems are combinations of series and parallel components. To compute the reliability of such systems, first compute the reliability of the parallel components using Equation 5.3 and treat the result as a single series component; then use Equation 5.2 to compute the reliability of the resulting series system. These formulas can help designers and engineers assess the reliability of proposed designs and optimize their performance.

Automotive Gremlins

Have you even encountered mysterious noises and rattles in your engine or transmission? While some might attribute such mischievous behavior to gremlins, there is usually an engineering explanation. In transmissions, for example, which consist of many gears and other parts in a “stack-up” assembly, the lack of precision tolerances can lead to problems in performance such as gear clashes upon shifting and, eventually, premature failure. When the parts in the assembly are at the high end of the tolerance range, the stack-up becomes too tight; if they are at the low end of the tolerance range, the stack-up is too loose. In either case, drivers will notice the difference. This is why Taguchi advocated producing parts on the nominal specification with minimal variation.

Chapter 5: Goods and Service Design: 5-3b Design for Reliability Book Title: Operations and Supply Chain Management Printed By: Washburn Kelly ([email protected]) © 2019 Cengage, Cengage Learning, Inc.

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Chapter 5: Goods and Service Design: 5-3c Design for Manufacturability Book Title: Operations and Supply Chain Management Printed By: Washburn Kelly ([email protected]) © 2019 Cengage, Cengage Learning, Inc.

5-3c Design for Manufacturability

Many aspects of product design can adversely affect manufacturability and, hence, quality. Some parts may be designed with features difficult to fabricate repeatedly or with unnecessarily tight tolerances. Some parts may lack details for self-alignment or features for correct insertion. In other cases, parts so fragile or so susceptible to corrosion or contamination may be damaged in shipping or by internal handling. Sometimes a design simply has more parts than are needed to perform the desired functions, which increases the chance of assembly error. Thus, problems of poor design may show up as errors, poor yield, damage, or functional failure in fabrication, assembly, test, transport, and end use.

Solved Problem 5.3

Consider a new laboratory blood analysis machine consisting of three major subassemblies: A, B, and C. The manufacturer is evaluating the preliminary design of this piece of equipment. The reliabilities of each subassembly are shown in Exhibit 5.9.

Exhibit 5.9

Subassembly Reliabilities

To find the reliability of the proposed product design, we note that this is a series system and use Equation 5.2:

Now suppose that the original subassembly B (with a reliability of 0.91) is duplicated, creating a parallel (backup) path as shown in Exhibit 5.10. (Assume equipment software switches to the working subassembly B.) What is the reliability of this configuration? Using Equation 6.3, the reliability of the parallel system for subassembly B is . Now we replace the parallel subsystem with its equivalent series component. We use Equation 5.2 to compute the reliability of the equipment as

, or 96.2 percent. The reliability of the total product increases from 88.3 percent to 96.2 percent for an absolute increase of 7.9 percent.

Exhibit 5.10

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Modified Design

Design for manufacturability (DFM) (is the process of designing a product for efficient production at the highest level of quality.) is the process of designing a product for efficient production at the highest level of quality. One way of doing this is through product simplification. Product simplification (is the process of trying to simplify designs to reduce complexity and costs and thus improve productivity, quality, flexibility, and customer satisfaction.) is the process of trying to simplify designs to reduce complexity and costs and thus improve productivity, quality, flexibility, and customer satisfaction. The simpler the design, the fewer opportunities for error, the faster the flow time, the better the chance of high process efficiency, and the more reliable the manufactured good or service process. For example, the redesign of the Cadillac Seville rear-bumper assembly reduced the number of parts by half and cut assembly time by 57 percent, to less than eight minutes, saving the company over $450,000 annually in labor costs. Because many of the eliminated parts were squeak- and rattle-causing fasteners, nuts, bolts, and screws, the change also improved the quality of the car.

Toyota: Simple Design Simplifies Operations

Manufacturing complexity is driven by choices and options. For the Toyota Venza, simplicity is key. In effect, there is one model that is available in four versions: a four-cylinder engine with front-wheel drive or all-wheel drive, or a six-cylinder engine with the same. Not only does this design strategy give consumers a nicely equipped vehicle right from the get-go, but it also makes things comparatively easier at the Toyota Georgetown assembly plant by reducing the complexity of assembling a much larger variety of different models and options.

Chapter 5: Goods and Service Design: 5-3c Design for Manufacturability Book Title: Operations and Supply Chain Management Printed By: Washburn Kelly ([email protected]) © 2019 Cengage, Cengage Learning, Inc.

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Chapter 5: Goods and Service Design: 5-3d Design for Sustainability Book Title: Operations and Supply Chain Management Printed By: Washburn Kelly ([email protected]) © 2019 Cengage, Cengage Learning, Inc.

5-3d Design for Sustainability

Environmental concerns are placing increased pressure on design. Pressures from environmental groups clamoring for “socially responsible” designs, states and municipalities that are running out of space for landfills, and consumers who want the most for their money have caused designers and managers to look carefully at the concept of Design for Environment. Design for Environment (DfE) (is the explicit consideration of environmental concerns during the design of goods, services, and processes, and includes such practices as designing for recycling and disassembly.) is the explicit consideration of environmental concerns during the design of goods, services, and processes, and includes such practices as designing for recycling and disassembly. For example, Energy Star dishwashers use advanced technology to get your dishes clean while using less water and energy. A dishwasher built in 1994 uses considerably more water per cycle than today’s Energy Star–certified models and costs an extra $40 a year in electrical utility bills. In addition, an Energy Star dishwasher results in a reduction of 1,140 pounds of carbon dioxide that is released to the air due to less demand on electrical power and water plants. One aspect of designing for sustainability is designing products that can easily be repaired and refurbished or otherwise salvaged for reuse.

Chapter 5: Goods and Service Design: 5-3d Design for Sustainability Book Title: Operations and Supply Chain Management Printed By: Washburn Kelly ([email protected]) © 2019 Cengage, Cengage Learning, Inc.

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Chapter 5: Goods and Service Design: 5-4 Service-Delivery System Design Book Title: Operations and Supply Chain Management Printed By: Washburn Kelly ([email protected]) © 2019 Cengage, Cengage Learning, Inc.

5-4 Service-Delivery System Design As we illustrated in Exhibit 5.1, the design of services revolves around designing the service-delivery system and service encounters. Service-delivery system design (includes facility location and layout, the service-scape, service process and job design, technology and information support systems, and organizational structure.) includes facility location and layout, the servicescape, service process and job design, and technology and information support systems. Integrating all of these elements is necessary to design a service that provides value to customers and can create a competitive advantage. A poor choice on any one of these components, such as technology or job design, can degrade service system efficiency and effectiveness.

Chapter 5: Goods and Service Design: 5-4 Service-Delivery System Design Book Title: Operations and Supply Chain Management Printed By: Washburn Kelly ([email protected]) © 2019 Cengage, Cengage Learning, Inc.

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Chapter 5: Goods and Service Design: 5-4a Facility Location and Layout Book Title: Operations and Supply Chain Management Printed By: Washburn Kelly ([email protected]) © 2019 Cengage, Cengage Learning, Inc.

5-4a Facility Location and Layout

Location affects a customer’s travel time and is an important competitive priority in a service business. Health clinics, rental car firms, post offices, health clubs, branch banks, libraries, hotels, emergency service facilities, retail stores, and many other types of service facilities depend on good location decisions. Starbucks Coffee shops, for example, are ubiquitous in many cities, airports, and shopping malls. The layout of a facility affects process flow, costs, and customer perception and satisfaction.

Pepsi: From Plastic- to Plant-Based Bottles

Pepsi introduced new soft-drink bottles made entirely from plant material such as switch grass, pine bark, and corn husks instead of oil-based plastic. The new bottles look, feel, and protect the drink inside exactly the same as Pepsi’s current bottles. Pepsi is conducting tests of the bottles, and after it can be sure that it can successfully produce them on a large scale, Pepsi will begin to convert all of its products—billions of bottles each year—to the new design. Pepsi noted that the cost to research and design the new bottle was in the millions of dollars.

© Huzaime/ Shutterstock.com

Chapter 5: Goods and Service Design: 5-4a Facility Location and Layout Book Title: Operations and Supply Chain Management Printed By: Washburn Kelly ([email protected]) © 2019 Cengage, Cengage Learning, Inc.

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McDonald’s servicescape helps to establish its brand image.

Chapter 5: Goods and Service Design: 5-4b Servicescape Book Title: Operations and Supply Chain Management Printed By: Washburn Kelly ([email protected]) © 2019 Cengage, Cengage Learning, Inc.

5-4b Servicescape

The servicescape (is all the physical evidence a customer might use to form an impression.) is all the physical evidence a customer might use to form an impression. The servicescape also provides the behavioral setting where service encounters take place. People around the world, for example, recognize the servicescape of McDonald’s restaurants. The building design (golden arches), decorative schemes and colors, playground, menu board, packaging, employee uniforms, drive-through, and so on all support McDonald’s competitive priorities of speed, consistency, cleanliness, and customer service. The standardization and integration of the servicescape and service processes enhance efficiency. McDonald’s servicescape helps establish its brand image.

A servicescape has three principal dimensions:

1. Ambient conditions—made manifest by sight, sound, smell, touch, and temperature. These are designed into a servicescape to please the five human senses. For example, Starbucks decided to quit serving a warm breakfast in all Starbucks stores because the egg-and-cheese breakfast sandwiches were interfering with the aroma of the coffee in stores.

2. Spatial layout and functionality—how furniture, equipment, and office spaces are arranged. This includes building footprints and facades, streets, and parking lots. A law firm would probably design various conference areas for conversations to take place in a quiet and private setting; a children’s hospital would probably include safe, enclosed play areas for kids.

3. Signs, symbols, and artifacts—the more explicit signals that communicate an image about a firm. Examples include mission statements and diplomas on a wall, a prominently displayed company logo on company vehicles, a trophy case of awards, letterhead, and company uniforms. Luxury automobile dealers offer free food and soft drinks instead of vending machines.

Great Customer Service the Disney Way

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Perhaps we should call it the “Disney Wow“ because that’s what the Disney organization seeks to do in creating outstanding customer service. They pay great attention to every detail of a customer’s experience, from the overall servicescape to every service encounter with a cast member, all designed to create a “Wow!” in the customer’s mind. For instance, guests who forget where they parked but remember their arrival time can be helped by a Disney employee because a record is kept of the time that each row in the parking lot is filled. Disney shares its knowledge with other organizations—for example, by working with the National Football League to create great experiences at the Super Bowl.

Some servicescapes, termed lean servicescape environments (provide service using simple designs (e.g., online outlets or FedEx kiosks).) , are very simple. Online ticket outlets and Federal Express drop-off kiosks would qualify as lean servicescape environments, as both provide service from one simple design. More complicated designs and service systems are termed elaborate servicescape environments. (provide service using more

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complicated designs and service systems (e.g., hospitals,airports, and universities).) Examples include hospitals, airports, and universities.

Chapter 5: Goods and Service Design: 5-4b Servicescape Book Title: Operations and Supply Chain Management Printed By: Washburn Kelly ([email protected]) © 2019 Cengage, Cengage Learning, Inc.

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Chapter 5: Goods and Service Design: 5-4c Service Process and Job Design Book Title: Operations and Supply Chain Management Printed By: Washburn Kelly ([email protected]) © 2019 Cengage, Cengage Learning, Inc.

5-4c Service Process and Job Design

Service process design (is the activity of developing an efficient sequence of activities to satisfy both internal and external customer requirements.) is the activity of developing an efficient sequence of activities to satisfy both internal and external customer requirements. Service process designers must concentrate on developing procedures to ensure that things are done right the first time, that interactions between customers and service providers are simple and quick, and that human error is avoided. Fast-food restaurants, for example, have carefully designed their processes for a high degree of accuracy and fast response time. New hands-free intercom systems, better microphones that reduce ambient kitchen noise, and screens that display a customer’s order are all focused on these requirements.

In many services, the customer and service provider coproduce the service, which makes service process and job design more uncertain and challenging. For example, customers can slow down or upset service providers and other customers at any time. Therefore, managers need to anticipate potential service upsets—including those caused by customers —and develop appropriate responses such as providing extra capacity, training service providers on proper behavior, and empowering them to deal with problems when they occur. Superior service management training is critical for excellent service process and job design.

Chapter 5: Goods and Service Design: 5-4c Service Process and Job Design Book Title: Operations and Supply Chain Management Printed By: Washburn Kelly ([email protected]) © 2019 Cengage, Cengage Learning, Inc.

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Chapter 5: Goods and Service Design: 5-4d Technology and Information Support Systems Book Title: Operations and Supply Chain Management Printed By: Washburn Kelly ([email protected]) © 2019 Cengage, Cengage Learning, Inc.

5-4d Technology and Information Support Systems

Hard and soft technologies are important factors in designing services to ensure speed, accuracy, customization, and flexibility. Nurses, airline flight attendants, bank tellers, police, insurance claims processors, dentists, auto mechanics and service-counter personnel, engineers, hotel room maids, financial portfolio managers, purchasing buyers, and waiters are just a few examples of job designs that are highly dependent on accurate and timely information.

A First-Class Servicescape

Emirates Airlines has introduced First-Class Private Suites on all of their A380 and A340-500 aircraft, and on most Boeing 777s. The suites provide an unparalleled servicescape for upper-echelon travelers. They include privacy doors, a personal mini-bar, seats that convert into a fully flat bed with mattress, a vanity table and mirror, up to 2,000 channels of the latest movies and TV shows on demand, and even an A380 Shower Spa.

© lev radin/ Shutterstock.com

Chapter 5: Goods and Service Design: 5-4d Technology and Information Support Systems Book Title: Operations and Supply Chain Management Printed By: Washburn Kelly ([email protected]) © 2019 Cengage, Cengage Learning, Inc.

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Chapter 5: Goods and Service Design: 5-5 Service-Encounter Design Book Title: Operations and Supply Chain Management Printed By: Washburn Kelly ([email protected]) © 2019 Cengage, Cengage Learning, Inc.

5-5 Service-Encounter Design Service-encounter design (focuses on the interaction, directly or indirectly, between the service provider(s) and the customer.) focuses on the interaction, directly or indirectly, between the service provider(s) and the customer. It is during these points of contact with the customer that perceptions of the firm and its goods and services are created. Service- encounter design and job design are frequently done in iterative improvement cycles.

The principal elements of service-encounter design are

customer-contact behavior and skills;

service-provider selection, development, and empowerment;

recognition and reward; and

service recovery and guarantees.

These elements are necessary to support excellent performance and create customer value and satisfaction.

Chapter 5: Goods and Service Design: 5-5 Service-Encounter Design Book Title: Operations and Supply Chain Management Printed By: Washburn Kelly ([email protected]) © 2019 Cengage, Cengage Learning, Inc.

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Chapter 5: Goods and Service Design: 5-5a Customer-Contact Behavior and Skills Book Title: Operations and Supply Chain Management Printed By: Washburn Kelly ([email protected]) © 2019 Cengage, Cengage Learning, Inc.

5-5a Customer-Contact Behavior and Skills

Customer contact (refers to the physical or virtual presence of the customer in the service- delivery system during a service experience.) refers to the physical or virtual presence of the customer in the service-delivery system during a service experience. Customer contact is measured by the percentage of time the customer must be in the system relative to the total time it takes to provide the service. Systems in which the percentage of customer contact is high are called high-contact systems; (Systems in which the percentage of customer contact is high) those in which it is low are called low-contact systems (those in which it is low.) . , Examples of high-contact systems are estate planning and hotel check-in; examples of low-contact systems are construction services and package sorting and distribution.

Many low-contact systems, such as processing an insurance policy in the backroom, can be treated much like an assembly line, whereas service-delivery systems with high customer contact are more difficult to design and control. One reason for this is the variation and uncertainty that people (customers) introduce into high-contact service processes. For example, the time it takes to check a customer into a hotel can be affected by special requests (e.g., a king bed or handicapped-accessible room) and questions that customers might ask the desk clerk. Low-customer-contact systems are essentially free of this type of customer-induced uncertainty and therefore are capable of operating at higher levels of operating efficiency. High-customer-contact areas of the organization are sometimes described as the “front room or front office” and low-customer-contact areas as “back room or back office.”

Customer-contact requirements (are measurable performance levels or expectations that define the quality of customer contact with representatives of an organization.) are measurable performance levels or expectations that define the quality of customer contact with representatives of an organization. These might include such technical requirements as response time (answering the telephone within two rings), service management skills such as cross-selling other services, and/or behavioral requirements (using a customer’s name whenever possible). Walt Disney Company, highly recognized for extraordinary customer service, clearly defines expected behaviors in its guidelines for guest service, which include making eye contact and smiling, greeting and welcoming every guest, seeking out guests who may need assistance, providing immediate service recovery, displaying approachable body language, focusing on the positive rather than rules and regulations, and thanking each and every guest.

Chapter 5: Goods and Service Design: 5-5a Customer-Contact Behavior and Skills Book Title: Operations and Supply Chain Management

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Printed By: Washburn Kelly ([email protected]) © 2019 Cengage, Cengage Learning, Inc.

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Companies must carefully select customer-contact employees, train them well, and empower them to meet and exceed customer expectations.

Chapter 5: Goods and Service Design: 5-5b Service-Provider Selection, Development, and Empowerment Book Title: Operations and Supply Chain Management Printed By: Washburn Kelly ([email protected]) © 2019 Cengage, Cengage Learning, Inc.

5-5b Service-Provider Selection, Development, and Empowerment

Companies must carefully select customer-contact employees, train them well, and empower them to meet and exceed customer expectations. Many companies begin with the recruiting process, selecting those employees who show the ability and desire to develop good customer relationships. Major companies such as Procter & Gamble seek people with excellent interpersonal and communication skills, strong problem-solving and analytical skills, assertiveness, stress tolerance, patience and empathy, accuracy and attention to detail, and computer literacy.

Empowerment (means giving people authority to make decisions based on what they feel is right, to have control over their work, to take risks and learn from mistakes, and to promote change.) means giving people authority to make decisions based on what they feel is right, to have control over their work, to take risks and learn from mistakes, and to promote change. At The Ritz-Carlton Hotel Company, no matter what their normal duties are, employees must assist a fellow service provider who is responding to a guest’s complaint or wish if such assistance is requested. Ritz-Carlton employees can spend up to $2,000 to resolve complaints, with no questions asked. However, the actions of empowered employees should be guided by a common vision. That is, employees require a consistent understanding of what actions they may or should take.

Chapter 5: Goods and Service Design: 5-5b Service-Provider Selection, Development, and Empowerment Book Title: Operations and Supply Chain Management Printed By: Washburn Kelly ([email protected]) © 2019 Cengage, Cengage Learning, Inc.

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Chapter 5: Goods and Service Design: 5-5c Recognition and Reward Book Title: Operations and Supply Chain Management Printed By: Washburn Kelly ([email protected]) © 2019 Cengage, Cengage Learning, Inc.

5-5c Recognition and Reward

After a firm hires, trains, and empowers excellent service providers, the next challenge is how to motivate and keep them. Research has identified key motivational factors to be recognition, advancement, achievement, and the nature of the work itself. A good compensation system can help to attract, retain, and motivate employees. Other forms of recognition such as formal and informal employee and team recognition, preferred parking spots, free trips and extra vacation days, discounts and gift certificates, and a simple “thank you” from supervisors are vital to achieving a high-performance workplace.

L.L. Bean: Service Guarantee

In 1916, Mr. L.L. Bean placed the following notice on the wall of his store—“I do not consider a sale complete until goods are worn out and customers still satisfied.” Today, L.L. Bean’s explicit service guarantee is “Our products are guaranteed to give 100 percent satisfaction in every way. Return anything purchased from us at any time if it proves otherwise. We do not want you to have anything from L.L. Bean that is not completely satisfactory.” L.L. Bean continues by saying, “From kayaks to slippers, fly rods to sweaters, everything we sell at L.L. Bean is backed by the same rock solid guarantee of satisfaction. It’s been that way since our founder sold his very first pair of Bean Boots in 1912. Whether you purchased your item on llbean.com, by mail, by phone or at one of our stores, visit any L.L. Bean retail store for fast and friendly service.” L.L. Bean’s website and call center give detailed instructions on returns and exchanges, including free shipping in some situations. L.L. Bean makes it as easy as possible for customers to invoke the service guarantee.

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Chapter 5: Goods and Service Design: 5-5c Recognition and Reward Book Title: Operations and Supply Chain Management Printed By: Washburn Kelly ([email protected]) © 2019 Cengage, Cengage Learning, Inc.

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Chapter 5: Goods and Service Design: 5-5d Service Guarantees and Recovery Book Title: Operations and Supply Chain Management Printed By: Washburn Kelly ([email protected]) © 2019 Cengage, Cengage Learning, Inc.

5-5d Service Guarantees and Recovery

Despite all efforts to satisfy customers, every business experiences unhappy customers. A service upset (service upset is any problem a customer has—real or perceived—with the service-delivery system and includes terms such as service failure, error, defect, mistake, and crisis.) is any problem a customer has—real or perceived—with the service-delivery system and includes terms such as service failure, error, defect, mistake, and crisis. Service upsets can adversely affect business if not dealt with effectively.

A service guarantee (is a promise to reward and compensate a customer if a service upset occurs during the service experience.) is a promise to reward and compensate a customer if a service upset occurs during the service experience. Many organizations—for example, Federal Express and Disney—have well-publicized service guarantees to gain competitive advantage. An explicit service guarantee is in writing and included in service provider publications and advertisements. Taco Bell and Hampton Inns use explicit service guarantees to differentiate themselves from competitors. Implicit guarantees are not in writing but are implied in everything the service provider does. Premium service providers such as The Ritz-Carlton Hotel Company and many engineering, consulting, and medical organizations use implicit service guarantees. Objectives of service guarantees include setting customer expectations prior to experiencing the service, setting employee performance expectations, reducing customer risk, allowing premium pricing, forcing operational improvement, building customer loyalty and brand image, and increasing sales and revenue.

Service guarantees are carefully designed and offered prior to the customer experiencing the service. A good service guarantee includes determining what services to include, procedures for the customer and service provider to invoke the guarantee, and the best economic payout amount. Clearly, the best a firm can hope for is never to have to invoke a service guarantee; thus, the firm must design its processes and operational capability to minimize service upsets.

Nevertheless, service upsets occasionally occur. When this happens, companies need to recover the customer’s trust and confidence. Service recovery (is the process of correcting a service upset and satisfying the customer.) is the process of correcting a service upset and satisfying the customer. Service recovery should begin immediately after a service upset occurs and when the customer is visibly upset; the longer customers wait, the angrier they might get. Service-recovery processes should be clearly documented, and employees should be trained and empowered to use them whenever necessary. Service providers need to listen carefully to determine the customer’s feelings and then respond sympathetically, ensuring that the issue is understood. Then they should make every effort to resolve the

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problem quickly, provide a simple apology, and perhaps offer compensation such as free meals or discount coupons.

Chapter 5: Goods and Service Design: 5-5d Service Guarantees and Recovery Book Title: Operations and Supply Chain Management Printed By: Washburn Kelly ([email protected]) © 2019 Cengage, Cengage Learning, Inc.

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Chapter 6: Supply Chain Design Chapter Introduction Book Title: Operations and Supply Chain Management Printed By: Washburn Kelly ([email protected]) © 2019 Cengage, Cengage Learning, Inc.

Chapter Introduction

For the Gap and other clothing manufacturers, the supply chain has significant implications for social responsibility and sustainability.

© Sandratsky Dmitriy/ Shutterstock.com

Learning Objectives

After studying this chapter, you should be able to:

Explain the concept of a global supply chain and describe the key design decisions.

Describe the key trade-offs that managers must consider in designing supply chains, and how to evaluate outsourcing and offshoring decisions.

Describe how Inditex/Zara designs and operates its supply chain.

Explain the types of decisions required and criteria used to locate facilities in supply chains, and be able to apply the center of gravity method.

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6-5 Explain how the transportation model can be used to help optimize costs in supply chains.

Many of you have probably shopped at apparel stores such as the Gap, Old Navy, or Banana Republic. Apparel supply chains typically begin at farms that grow raw materials such as cotton. Textile mills then weave the raw materials into fabrics for making T-shirts, jeans, and other clothing items. Factories then cut and sew the fabrics into finished goods, which are then transported to retail stores for sale to consumers. For clothing manufacturers, which rely greatly on manual labor, the supply chain has significant implications for social responsibility and sustainability.

The Gap is one company that takes this seriously. As they note: “Gap Inc. seeks to ensure that the people working at various points along the supply chain are treated with fairness, dignity and respect—an aspiration that is born out of the belief that each life is of equal value, whether the person is sitting behind a sewing machine at a factory that produces clothes for Gap Inc., working at one of our stores, or wearing a pair of our jeans. We know that our efforts to improve the lives of people who work on behalf of our company help us run a more successful business. People who work a reasonable number of hours in a safe and healthy environment not only have a better quality of life, but they also tend to be more productive and deliver higher-quality products than those who work in poor conditions.”

What Do You Think?

What percentage of the clothes in your closet do you think are produced in other countries? What do you think the structures of the manufacturers’ supply chains look like? Do clothing firms have a responsibility to improve work conditions and sustainability practices wherever they do business?

We introduced the concept of a supply chain in Chapter 1, noting that a supply chain is a key subsystem of a value chain that focuses primarily on the physical movement of goods and materials along with supporting information through the supply, production, and distribution processes. Organizations face numerous decisions in designing their supply chains. These decisions include the number, type, and location of manufacturing plants, distribution centers, retail stores, and customer service or technical support centers; the selection of suppliers; ways of managing information flow throughout the supply chain; and the integration of all the pieces into an effective, efficient system. The location of factories, distribution centers, and service facilities establishes the infrastructure for the supply chain and has a major impact on profitability.

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The location of factories, distribution centers, and service facilities establishes the infrastructure for the supply chain and has a major impact on profitability.

Poor supply chain design can undermine the strategy of the firm and can easily result in lower revenue, market share, and profits. As a firm’s product lines and markets change or expand, the design or redesign of supply chains becomes even more a critical issue. In addition, as companies merge and consolidate, they face many challenges and must reevaluate their supply chains and locations of facilities.

In this chapter, we focus on the design of the supply chain that sets the infrastructure for day-to-day operating decisions. In Chapter 12, we will focus on managing such tasks as sourcing and purchasing, supplier relationships, logistics and transportation, managing inventory, dealing with risk, and cost analysis in supply chains.

Chapter 6: Supply Chain Design Chapter Introduction Book Title: Operations and Supply Chain Management Printed By: Washburn Kelly ([email protected]) © 2019 Cengage, Cengage Learning, Inc.

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Chapter 6: Supply Chain Design: 6-1 Global Supply Chains Book Title: Operations and Supply Chain Management Printed By: Washburn Kelly ([email protected]) © 2019 Cengage, Cengage Learning, Inc.

6-1 Global Supply Chains Although not every organization operates in the global business environment, modern technology and distribution have made it feasible and attractive for both large and small companies to develop supply chains that span international boundaries. A multinational enterprise (A multinational enterprise is an organization that sources, markets, and produces its goods and services in several countries to minimize costs, and to maximize profit, customer satisfaction, and social welfare.) is an organization that sources, markets, and produces its goods and services in several countries to minimize costs, and to maximize profit, customer satisfaction, and social welfare. Examples of multinational enterprises include British Petroleum, General Electric, United Parcel Service, Siemens, Procter & Gamble, Toyota, and the International Red Cross. Their value chains provide the capability to source, market, create, and deliver their goods and services to customers worldwide.

Multinational enterprises operate complex supply chains that challenge operations managers. In today’s global business environment, good supply chain design can lead to major reductions in total supply chain costs and improvements in customer response time.

Chapter 6: Supply Chain Design: 6-1 Global Supply Chains Book Title: Operations and Supply Chain Management Printed By: Washburn Kelly ([email protected]) © 2019 Cengage, Cengage Learning, Inc.

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Chapter 6: Supply Chain Design: 6-1a Decisions in Supply Chain Design Book Title: Operations and Supply Chain Management Printed By: Washburn Kelly ([email protected]) © 2019 Cengage, Cengage Learning, Inc.

6-1a Decisions in Supply Chain Design

Operations managers must make numerous decisions in designing global supply chains. Some of the major decisions, which are not inclusive of all the issues and decisions that global supply chain executives face, are summarized in Exhibit 6.1. Many of these decisions are strategic and should support an organization’s strategy, mission, and competitive priorities. Others, such as selecting transportation modes and measuring performance, are tactical and influence how supply chains are managed on a day-to-day basis; these issues are addressed in Chapter 12. We will briefly discuss each of these.

Exhibit 6.1

Supply Chain Design Decisions

1. Strategy. What is our supply chain strategy to meet the slower growth of industrialized countries and more rapid growth of emerging economies while considering cultural differences?

2. Control. Do we centralize or decentralize control of the supply chain?

3. Location. Where do we locate facilities such as research and development offices, call centers, and warehouse and distribution centers in the supply chain to provide efficiencies and improve customer value?

4. Sustainability. How do we champion economic, environmental, and social sustainability goals and practices in global supply chains?

5. Technology. Do we share our technology and intellectual property with suppliers and partners in other countries? If so, how do we protect intellectual property, patents, and rights?

6. Digital content. How do we build and integrate digital content and e- commerce capabilities into goods and services and the supply chain?

7. Sourcing. From whom do we purchase raw materials, parts, and subassemblies?

8. Logistics and transportation. What transportation modes (i.e., ship, air, rail, or truck) should we use to maximize service and minimize costs?

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9. Outsourcing. What supply chain activities do we keep in-house or outsource to suppliers (either domestically or abroad)? Do we outsource to contract manufacturers or use third-party logistics providers?

10. Managing risk. How do we address supply chain risks and disruptions? What is our risk mitigation plan?

11. Measuring performance. What performance metrics should we use in managing supply chains?

Strategy—Supply chains should support an organization’s strategy, mission, and competitive priorities. In Chapter 3, we provided an overall framework for developing corporate, marketing, and operations strategy and subsequent design decisions. Executives, for example, might choose a supply chain that is highly efficient versus one that is more flexible for its particular industry and market. Different types of supply chains may better fit the slower growth of industrialized countries or the more rapid growth of emerging economies.

Control—A second supply chain design decision is centralization versus decentralization. The operational structure (The operational structure of a supply chain is the configuration of resources such as suppliers, factories, warehouses, distributors, technical support centers, engineering design and sales offices, and communication links.) of a supply chain is the configuration of resources such as suppliers, factories, warehouses, distributors, technical support centers, engineering design and sales offices, and communication links. Different management skills are required for different operational structures. For example, Walmart’s global supply chain, though very large, is focused on purchasing and distribution, and is controlled from a centralized location in Bentonville, Arkansas. In contrast, General Electric’s supply chain, which encompasses such diverse businesses as medical imaging, jet engines, and electrical power generation, are all quite different. Each business is a profit center with its own unique market and operating conditions. Consequently, the operational structure is decentralized globally.

Location—The location of facilities in a supply chain has a significant impact on cost and customer service. Later in this chapter we will discuss how to evaluate location decisions and present some simple approaches and quantitative models that aid in these decisions.

Sustainability—Sustainability is a key issue in supply chains, and we often hear about this in the media (often quite negatively). We introduced the basic ideas of sustainability in Chapter 1. Sustainability issues, concepts, and methods are

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A single supplier often provides economies of scale and the ability to form close partnerships; however, multiple suppliers lower the risk of a supply disruption.

highlighted throughout this book. Upward of 60 to 70 percent of a company’s carbon footprint is found along their supply chains.

Technology—Dealing with intellectual property is an important issue for multinational enterprises. Technology often provides a competitive edge, and licensing it to firms in other countries can lead to risks. Protecting and honoring patents from other countries is also a constant topic in global trade negotiations. And, as noted in Chapter 1, patents do not protect services.

Digital content—Digital content in goods and services is becoming increasingly important. Products such as automobiles, appliances, or cell phones are often enhanced with digital content by means of the “Internet of Things.”

Sourcing—Selecting suppliers from whom to purchase is a key design decision that also ties closely with the location decision. A key sourcing decision is whether to use a single source or multiple sources. A single supplier often provides economies of scale and the ability to form close partnerships; however, multiple suppliers lower the risk of a supply disruption.

Logistics and transportation—Transportation is more complex in global supply chains. Global shipments often require multiple modes of transportation, such as water shipping, air, rail, and truck. The transportation infrastructure may vary considerably in foreign countries. The coast of China, for example, enjoys much better transportation, distribution, and retail infrastructures than the interior of the country.

Outsourcing—Many companies outsource activities such as manufacturing, logistics and transportation, information systems, and technical support to suppliers either domestically or abroad. These decisions have a major impact on product and supply chain cost and control, and the trade-offs are seldom easy to make.

Managing risks—In Chapter 12, we discuss risk management of the supply chain. These risks are both strategic and tactical and require every company to develop a risk mitigation strategy and plan.

Measuring performance—Almost every chapter contains concepts and methods for measuring performance at all levels of the organization. We will focus on measuring supply chain performance in Chapter 12.

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Chapter 6: Supply Chain Design: 6-1a Decisions in Supply Chain Design Book Title: Operations and Supply Chain Management Printed By: Washburn Kelly ([email protected]) © 2019 Cengage, Cengage Learning, Inc.

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Chapter 6: Supply Chain Design: 6-2 Supply Chain Design Trade-Offs Book Title: Operations and Supply Chain Management Printed By: Washburn Kelly ([email protected]) © 2019 Cengage, Cengage Learning, Inc.

6-2 Supply Chain Design Trade-Offs Executives have many trade-offs to consider when designing a supply chain. We see many examples of different supply chain design structures in a variety of industries. For example, most major airlines and trucking firms such as United Airlines and UPS operate “hub-and- spoke” systems; some firms such as Apple and Nike depend on contract manufacturers to manufacture almost 100 percent of their physical goods; while others like Harley Davidson and Allen-Edmonds Shoe Corporation produce almost 100 percent of their manufactured goods in company-owned factories. Here we discuss some key design trade-offs in supply chains.

Chapter 6: Supply Chain Design: 6-2 Supply Chain Design Trade-Offs Book Title: Operations and Supply Chain Management Printed By: Washburn Kelly ([email protected]) © 2019 Cengage, Cengage Learning, Inc.

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Chapter 6: Supply Chain Design: 6-2a Efficient and Responsive Supply Chains Book Title: Operations and Supply Chain Management Printed By: Washburn Kelly ([email protected]) © 2019 Cengage, Cengage Learning, Inc.

6-2a Efficient and Responsive Supply Chains

Supply chains can be designed from two strategic-perspectives—providing high efficiency and low cost, or providing agile response. Efficient supply chains (are designed for efficiency and low cost by minimizing inventory and maximizing efficiencies in process flow.) are designed for efficiency and low cost by minimizing inventory and maximizing efficiencies in process flow. A focus on efficiency works best for goods and services with highly predictable demand, stable product lines with long life cycles that do not change frequently, and low contribution margins. In designing an efficient supply chain, for example, an organization would seek to balance capacity and demand, resulting in low levels of inventory; might use only a few, large distribution centers (as opposed to small ones) to generate economies of scale; and use optimization models that minimize costs of routing products from factory through distribution centers to retail stores and customers. Examples of companies that run efficient supply chains are Procter & Gamble and Walmart.

On the other hand, responsive supply chains (focus on flexibility and responsive service and are able to react quickly to changing market demand and requirements.) focus on flexibility and responsive service and are able to react quickly to changing market demand and requirements. A focus on flexibility and response is best when demand is unpredictable; product life cycles are short and change often because of product innovations; fast response is the main competitive priority; customers require customization; and contribution margins are high. Responsive supply chains have the ability to quickly respond to market changes and conditions faster than traditional supply chains; are supported by information technology that provides real-time, accurate information to managers across the supply chain; and use information to identify market changes and redirect resources to address these changes. Companies such as Apple and Nordstrom are examples of companies having responsive supply chains.

Chapter 6: Supply Chain Design: 6-2a Efficient and Responsive Supply Chains Book Title: Operations and Supply Chain Management Printed By: Washburn Kelly ([email protected]) © 2019 Cengage, Cengage Learning, Inc.

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Chapter 6: Supply Chain Design: 6-2b Push and Pull Systems Book Title: Operations and Supply Chain Management Printed By: Washburn Kelly ([email protected]) © 2019 Cengage, Cengage Learning, Inc.

6-2b Push and Pull Systems

Two ways to configure and run a supply chain are as a push system or pull system. A supply chain can be viewed from “left to right”—that is, materials, information, and goods are moved or pushed downstream from supplier to customer. A push system (produces goods in advance of customer demand using a forecast of sales and moves them through the supply chain to points of sale, where they are stored as finished-goods inventory.) produces goods in advance of customer demand using a forecast of sales and moves them through the supply chain to points of sale, where they are stored as finished-goods inventory. Examples of push systems are “big-box” retailers such as Best Buy and department stores such as Macy’s. A push system has several advantages, such as immediate availability of goods to customers and the ability to reduce transportation costs by using full-truckload shipments to move goods to distribution centers. However, some disadvantages exist. Forecasting can be difficult when customer demand changes quickly, which either can result in higher costs from excessive stock or out-of-stock conditions. Push systems work best when sales patterns are consistent and when there are few distribution centers and products.

In contrast, viewing the supply chain from “right to left” and transferring demand to upstream processes is sometimes referred to as a demand chain or pull system. A pull system (produces only what is needed at upstream stages in the supply chain in response to customer demand signals from downstream stages.) produces only what is needed at upstream stages in the supply chain in response to customer demand signals from downstream stages. Physical goods are “pulled” by customer demand through each stage of the supply chain. That is, ideally, if we sell one unit, we make one unit; if we sell ten units, we make ten units; and so on. This minimizes inventory and production costs. Pull systems generally reduce the chances of having excessive inventory, but can result in shortages if customer demand suddenly increases or if schedules are missed. Pull systems are more effective when there are many production facilities, many points of distribution, and many products.

Dell, for example, introduced the idea of a make-to-order supply chain design to the computer industry and has long been recognized for outstanding practices in this area. Dell pulls component parts into its factories based on actual customer orders and carries no finished goods inventory, relying on information technology to drive its supply chain. This also provides the customer with the newest technology rather than a finished computer that has been sitting in a warehouse for months. Suppliers’ component part delivery schedules must match Dell’s factory assembly schedules, which in turn must be integrated with shipping schedules. Each factory worldwide is rescheduled every two hours, and at the same time updates are sent to all third-party suppliers and logistics providers.

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Other examples of pull systems are airplane manufacturers such as Boeing, and manufacturers of custom machine tools. Pull systems are becoming easier to manage because of better information technology such as cloud computing. Having up-to-date data on sales, manufacturing, shipments en route, and so on can help to eliminate inventories and move toward more effective pull system configurations.

Many supply chains are combinations of push and pull systems. This can be seen in the simplified version of several supply chains in Exhibit 6.2. The point in the supply chain that separates the push system from the pull system is called the push–pull boundary (The point in the supply chain that separates the push system from the pull system.) . For a company like Dell, the push–pull boundary is very early in the supply chain, where suppliers store inventory for frequent deliveries to Dell factories. Dell also ships directly to the customer, skipping the distributors and retailers. General Motors stores finished goods closer to the customer, at dealers. General Motors pushes finished goods from its factories to the dealer. Dealers might install various options to customize the automobile for the customer. Customers pull the finished goods from the dealer. Thus, the push–pull boundary for General Motors is at the dealers.

Exhibit 6.2

Supply Chain Push–Pull Systems and Boundaries

The location of the push–pull boundary can affect a supply chain’s responsivity. Many firms try to push as much of the finished product as possible close to the customer to speed up response and reduce work-in-process inventory requirements. Postponement (is the process of delaying product customization until the product is closer to the customer at the end of the supply chain.) is the process of delaying product customization until the product is closer to the customer at the end of the supply chain. An example is a manufacturer of refrigerators that have different door styles and colors. A postponement strategy would be to

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manufacture the refrigerator without the door and maintain inventories of doors at the distribution centers. When orders arrive, the doors can be quickly attached to the left or right side of the refrigerator and the unit can be shipped. This postponement approach allows customers to buy exactly what they need while manufacturers reduce their inventory and installation costs.

Although supply chains can have a profoundly positive effect on business performance, supply chain initiatives do not always work out as one would hope. Nike, for example, spent about $500 million on developing a global supply chain over the last couple of decades, and only now is it beginning to reap the benefits of this long, costly supply chain design and improvement initiative.

Chapter 6: Supply Chain Design: 6-2b Push and Pull Systems Book Title: Operations and Supply Chain Management Printed By: Washburn Kelly ([email protected]) © 2019 Cengage, Cengage Learning, Inc.

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Chapter 6: Supply Chain Design: 6-2c Vertical Integration, Outsourcing, and Offshoring Decisions Book Title: Operations and Supply Chain Management Printed By: Washburn Kelly ([email protected]) © 2019 Cengage, Cengage Learning, Inc.

6-2c Vertical Integration, Outsourcing, and Offshoring Decisions

One of the most important strategic decisions a firm can make about its supply chain is whether to vertically integrate or outsource key business processes and functions. Vertical integration (refers to the process of acquiring and consolidating elements of a value chain to achieve more control.) refers to the process of acquiring and consolidating elements of a value chain to achieve more control. Some firms might consolidate all processes for a specific product or product line in a single facility; for example, Henry Ford’s early factories did everything from steelmaking to final assembly. Although such a strategy provides more control, it adds more complexity to managing the supply chain. In contrast, today’s automobile production is characterized by a complex network of suppliers. Decentralizing supply chain activities lessens the control that a firm has over cost, quality, and other important business metrics, and often leads to higher levels of risk. In the Zara/Inditex example, we will see that the company uses a high degree of vertical integration to control many of the major stages of its supply chain.

Companies must decide whether to integrate backward (acquiring suppliers) or forward (acquiring distributors), or both. Backward integration (refers to acquiring capabilities toward suppliers) refers to acquiring capabilities toward suppliers, whereas forward integration (refers to acquiring capabilities toward distribution, or even customers.) refers to acquiring capabilities toward distribution, or even customers. Large companies such as Motorola, Siemens, and Sony have the resources to build facilities in foreign countries and develop a high level of vertical integration. Their objective is to own or control most, if not all, of the supply chain. Many large chemical manufacturers, for example, such as DuPont, British Petroleum, Haimen Jiangbin, and GFS Chemicals, are buying raw material suppliers and integrating backward. At the same time, chemical companies in industrial countries are acquiring smaller and more profitable specialty manufacturers of chemicals and advanced materials, a form of forward integration. Recently, Delta Air Lines purchased a $150 million refinery in an effort to reduce its expenses for jet fuel—the largest expense for an airline, and also the most difficult to forecast and manage.

Outsourcing (is the process of having suppliers provide goods and services that were previously provided internally.) is the process of having suppliers provide goods and services that were previously provided internally. Outsourcing is the opposite of vertical integration in the sense that the organization is shedding (not acquiring) a part of its organization. The organization that outsources does not have ownership of the outsourced process or function. Some large U.S. banks and airlines, for example, have outsourced their telephone call service centers to third-party suppliers within or outside the United States.

The United States has experienced three waves of outsourcing:

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The first wave, several decades ago, involved the exodus of goods-producing jobs from the United States in many industries. Companies relied on foreign factories for the production of computer components, electronics, and many other goods. Gibson Guitars, for example, produces its Epiphone line in Korea.

The second wave involved simple service work such as standard credit card processing, billing, keying information into computers, and writing simple software programs. Accenture, for example, has information technology and bookkeeping operations in Costa Rica.

The third and current wave involves skilled knowledge work such as engineering design, graphic artists, architectural plans, call center customer service representatives, and computer chip design. For example, Fluor Corporation of Aliso Viejo, California, uses engineers and draftspeople in the Philippines, Poland, and India to develop detailed blueprints and specs for industrial construction and improvement projects.

Many supply chains use contract manufacturing for their outsourcing strategy. A contract manufacturer (is a firm that specializes in certain types of goods-producing activities, such as customized design, manufacturing, assembly, and packaging, and works under contract for end users.) is a firm that specializes in certain types of goods-producing activities, such as customized design, manufacturing, assembly, and packaging, and works under contract for end users. Outsourcing to contract manufacturers can offer significant competitive advantages such as access to advanced manufacturing technologies, faster product time- to-market, customization of goods in regional markets, and lower total costs resulting from economies of scale. The main disadvantage of using a contract manufacturer is that the client firm gives up control and its technology to the contract manufacturer. We will discuss break-even analysis for outsourcing decisions in the next section. Finally, the degree of vertical integration forward or backward in the supply chain is an important decision for executives of the firm.

Many firms also use third-party logistics (3PL) providers (are businesses that provide integrated services that might include packaging, warehousing, inventory management, and transportation.) —businesses that provide integrated services that might include packaging, warehousing, inventory management, and transportation. 3PLs can leverage business intelligence and analytics to create efficiencies and economies of scale in the supply chain (see the box on Greatwide Logistics Services). Zappos is a good example of using 3PLs for customer deliveries, returns, and some inbound shipping from Asian factories. Toshiba used to have repair locations across the country, whereas UPS warehoused its parts. UPS suggested that Toshiba move its repair technicians into UPS facilities, which resulted in a 24-hour turnaround for computer repairs. It also saved transportation costs, lowered inventories, and reduced the carbon footprint. 3PLs provide many services that help integrate and coordinate different parts of a supply chain.

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Greatwide Logistics Services—A 3PL Provider

Greatwide Logistics Services, which was formed by consolidating nine regional 3PLs in the United States, works with six of the top 10 grocery retailers and wholesalers in the United States, as well as such customers as Walmart, Tyson, and Nordstrom. It uses business analytics to forecast demand and build models to leverage the capacity of its nationally centralized system, which uses satellites to track the locations of 5,000 truck tractors and over 10,000 trailers. By combining different customer needs and schedules, shipments can piggyback on another customer’s shipment or use trucks on the return leg of a regular run. This leads to higher efficiency and cost savings for all customers. As one example, efficient routing and coordination of vendor delivery dates have led to a 21 percent reduction in transportation costs for one private-label spice manufacturer.

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Chapter 6: Supply Chain Design: 6-2c Vertical Integration, Outsourcing, and Offshoring Decisions Book Title: Operations and Supply Chain Management Printed By: Washburn Kelly ([email protected]) © 2019 Cengage, Cengage Learning, Inc.

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Chapter 6: Supply Chain Design: 6-2d The Economics of Outsourcing Decisions Book Title: Operations and Supply Chain Management Printed By: Washburn Kelly ([email protected]) © 2019 Cengage, Cengage Learning, Inc.

6-2d The Economics of Outsourcing Decisions

The simplest outsourcing decision is make versus buy. This is usually based on economics, and break-even analysis can be used to provide insight into the best decision. If a company decides to make a part, it typically incurs fixed costs associated with purchasing equipment or setting up a production line, as well as a variable cost per unit. Fixed costs do not vary with volume and often include costs of a building, buying, or leasing equipment, and administrative costs. However, the variable cost per unit will normally be more if the work is outsourced to some external supplier. Variable costs are a function of the quantity produced and might include labor, transportation, and materials costs.

Define

Then

[6.1]

[6.2]

If the total cost of outsourcing is less than the total cost of in-house production, then clearly outsourcing is the better decision; if not, then the firm should produce in-house.

We may also find the break-even quantity to identify the ranges of values for which outsourcing or in-house production would be the best decision. To find the break-even quantity, set the total cost of production equal to the total cost of outsourcing and solve for Q:

The break-even quantity is

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[6.3]

If Q is less than , then the least-cost decision is to outsource; otherwise, it is to produce in-house. Whenever the anticipated volume is greater than , the firm should produce the part in-house; otherwise it is best to outsource.

Allen-Edmonds Shoe Corporation: Not Everyone Offshores

At a time when more than 98 percent of all shoes sold in the United States are made in other countries, Allen-Edmonds Shoe Corp. is a lonely holdout against offshoring. Moving to China could have saved the company as much as 60 percent. However, John Stollenwerk, chief executive, will not compromise on quality and believes that Allen-Edmonds can make better shoes and serve customers faster in the United States. An experiment in producing one model in Portugal resulted in lining that wasn’t quite right and stitching that wasn’t as fine. Stollenwerk noted “We could take out a few stitches and you’d never notice it—and then we could take out a few more. Pretty soon you’ve cheapened the product, and you don’t stand for what you’re about.” Instead, Allen-Edmonds invested more than $1 million to completely overhaul its manufacturing process into a leaner, more efficient system that could reduce the cost of each pair of shoes by 5 percent. One year after implementing its new production processes, productivity was up 30 percent; damages were down 14 percent; and order fulfillment neared 100 percent, enabling the company to serve customers better than ever.

Allen-Edmonds Shoe Corporation: Not Everyone Offshores

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Chapter 6: Supply Chain Design: 6-2d The Economics of Outsourcing Decisions Book Title: Operations and Supply Chain Management Printed By: Washburn Kelly ([email protected]) © 2019 Cengage, Cengage Learning, Inc.

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Chapter 6: Supply Chain Design: 6-2e Offshoring and Reshoring Book Title: Operations and Supply Chain Management Printed By: Washburn Kelly ([email protected]) © 2019 Cengage, Cengage Learning, Inc.

6-2e Offshoring and Reshoring

Offshoring (is the building, acquiring, or moving of process capabilities from a domestic location to another country location while maintaining ownership and control.) is the building, acquiring, or moving of process capabilities from a domestic location to another country location while maintaining ownership and control. Offshoring differs from outsourcing in that the firm maintains ownership of the facility in another country.

Offshoring decisions involve determining what value creation, support, and/or general management processes should move to other countries. For example, a company might move a soda-bottling factory from the United States to India. The company benefits from lower wages, avoiding country trade tariffs, and access to local markets and customers. Recently, we have seen a number of foreign firms offshore and build factories in the United States. For example, the British company Rolls-Royce makes jet engine parts in the United States for assembly in Europe and Asia, taking advantage of lower energy costs and a more stable economic environment; Mercedes, BMW, Lexus, and others produce vehicles in the United States, Mexico, and Canada to be closer to customers.

Some global trade experts recommend keeping some primary processes or key parts of a manufacturing process out of foreign lands to protect the firm’s core competencies. We can pose four possible scenarios. In the first scenario, all key processes remain in the home country, even though the firm sells its products overseas. An example would be Harley- Davidson. The second scenario represents a low degree of offshoring in which some noncritical support processes are moved overseas. Examples would be Microsoft and American Express.

A third scenario is for a company to offshore many of its primary as well as support processes while keeping its management processes consolidated at the corporate headquarters as Coca-Cola and FedEx do. Finally, truly global multinational firms such as Procter & Gamble, General Electric, and Honda locate all of their key processes across the globe for more effective coordination and local management. The global alignments, of course, may change over time. The third and fourth scenarios might leave the firm vulnerable to protecting trade secrets or losing first-hand knowledge of how to manufacture their own products.

The decision to offshore involves a variety of economic and noneconomic issues. Exhibit 6.4 summarizes the key issues in these decisions.

Exhibit 6.4

Things to Consider when Making Offshore Decisions

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When many manufacturers began offshoring to Asia in the early 1990s, they were focused strictly on low labor cost. This cost differential is narrowing. In addition, offshoring can create numerous problems. For instance, the logistics of shipping from Asia can be complex. Travel expenses for executives and other employees needed to teach or monitor operations can mount up. Quality is more difficult to control, as is enforcing intellectual property rights. Some foreign manufacturers, for example, began using inferior materials or parts despite contractual agreements. When all these factors are considered, some argue that the total cost of production in the United States is actually cheaper. As a result, many firms are bringing operations back to the United States.

Reshoring (is the process of moving operations back to a company’s domestic location.) is the process of moving operations back to a company’s domestic location. For example, American Giant, an apparel company that makes popular sweatshirts, moved its sourcing back to the United States from India and found that it is easier to manage the supply chain. When solvents caused blotting on T-shirts at the Los Angeles factory, the issue was fixed in just a few hours with only about 10 yards of fabric wasted; had the company been sourcing fabric from India, it could have taken weeks, resulting in a loss of thousands of yards of fabric. A nonprofit organization, the Reshoring Initiative (www.reshorenow.org) seeks to revitalize U.S. manufacturing by helping companies better understand the total cost of offshoring, so they can make more informed decisions.

Solved Problem 6.1

Suppose that a manufacturer needs to produce a custom aluminum housing for a special customer order. Because it currently does not have the equipment necessary to make the housing, it would have to acquire machines and tooling at a fixed cost (net of salvage value after the project is completed) of $250,000. The variable cost of production is estimated to be $20 per unit. The company can outsource the housing to a metal fabricator at a cost of $35 per unit. The customer order is for 12,000 units. What should it do?

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Solution:

Using Equation 6.1, we find that the total cost of production is

Using Equation 6.2, the total cost of outsourcing is

Therefore, outsourcing is less expensive. Alternatively, using Equation 6.3, we obtain

In this case, because the customer order is only for 12,000 units, which is less than the break-even point , the least-cost decision is to outsource the component.

Exhibit 6.3 shows the results of using the Excel Break-Even Template available in MindTap to compute the costs and find the optimal decision. The Excel Goal Seek tool may be used to find the break-even point. Select Goal Seek from the appropriate Excel menu, and a small dialog box will appear. In the “Set Cell” field, enter B15 (or simply click on this cell); in the “To Value” field, enter 0; and in the “By changing cell” field, enter B4 (or again, simply click on the cell). When you click OK, Excel will find the production volume in cell B4 that results in a cost difference of 0 in cell B15. This is the break-even point.

Exhibit 6.3

Excel Break-Even Template

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Chapter 6: Supply Chain Design: 6-2e Offshoring and Reshoring Book Title: Operations and Supply Chain Management Printed By: Washburn Kelly ([email protected]) © 2019 Cengage, Cengage Learning, Inc.

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Chapter 6: Supply Chain Design: 6-5 Supply Chain Optimization Book Title: Operations and Supply Chain Management Printed By: Washburn Kelly ([email protected]) © 2019 Cengage, Cengage Learning, Inc.

6-5 Supply Chain Optimization Supply chain optimization (is the process of ensuring that a supply chain operates at the highest levels of efficiency and effectiveness.) is the process of ensuring that a supply chain operates at the highest levels of efficiency and effectiveness. This includes minimizing the total costs of manufacturing and transportation, which might consider sourcing, distribution, and placement of inventory throughout the supply chain. Sophisticated mathematical tools are used to model complex transportation configurations and conduct “what-if” analyses to evaluate alternative supply chain strategies. Some typical uses of such a system are investigating the “what-if” effects of changes in demand and volume; changes in transportation modes and costs; transportation and labor strikes, natural disasters, and energy shortages; plant-capacity expansion proposals; new product lines; deletion of product lines; price changes and discounts; emerging global or local markets; transportation using public versus private carriers; and facility size, type, mix, and location(s). Supply chain optimization can become very complex and requires sophisticated mathematical modeling app.

The transportation problem (The transportation problem is a special type of linear optimization model that arises in planning the distribution of goods and services from several supply points to several demand locations.) is a special type of linear optimization model that arises in planning the distribution of goods and services from several supply points to several demand locations. Usually the quantity of goods available at each supply location (origin) is limited, and a specified quantity of goods is needed at each demand location (destination). With a variety of shipping routes and differing transportation costs for the routes, the objective is to determine how many units should be shipped from each origin to each destination so that all destination demands are satisfied with a minimum total transportation cost.

Solved Problem 6.4

Let us consider the problem faced by Foster Generators, Inc. Currently, Foster has three plants: one in Cleveland, Ohio, one in Bedford, Indiana, and one in York, Pennsylvania. Generators produced at the plants (origins) are shipped to distribution centers (destinations) in Boston, Chicago, St. Louis, and Lexington, Kentucky. The supply chain manager needs to know the best way to distribute the product from the plants to the distribution centers.

Using a typical, one-month planning period, the production capacities at the three plants are shown in Exhibit 6.10. Forecasts of monthly demand at the four distribution centers are shown in Exhibit 6.11. Note that the total production capacity

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must be at least as large as the total demand in order to meet the forecasted demand. The transportation cost per unit for each route is shown in Exhibit 6.12.

Exhibit 6.10

Foster Generators Production Capacities

Origin Plant Production Capacity (units)

1 Cleveland 5,000

2 Bedford 6,000

3 York 4,000

Total 15,000

Exhibit 6.11

Foster Generators Monthly Forecast

Destination Distribution Center

Demand Forecast (units)

1 Boston 6,000

2 Chicago 4,000

3 St. Louis 2,000

4 Lexington 1,500

Total 13,500

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Exhibit 6.12

Foster Generators Transportation Cost per Unit

Destination

Origin Boston Chicago St. Louis Lexington

Cleveland $3 $2 $7 $6

Bedford 7 5 2 3

York 2 5 4 5

A convenient way of summarizing the transportation-problem data is with a table such as the one shown in Exhibit 6.13. Note that the 12 cells in the table correspond to the 12 possible shipping routes from the three origins to the four destinations. We denote the amount shipped from origin i to destination j by the variable . The entries in the column at the right of the table represent the supply available at each plant, and the entries at the bottom represent the demand at each distribution center. The entry in the upper-right corner of each cell represents the per-unit cost of shipping over the corresponding route.

Exhibit 6.13

Foster Generators Transportation Table

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Looking across the first row of this table, we see that the amount shipped from Cleveland to all destinations cannot exceed 5,000, or . Similarly, the amount shipped from Bedford to all destinations cannot exceed 6,000, or . Finally, the amount shipped from York to all destinations cannot exceed 4,000, or .

We also must ensure that each destination receives the required demand. Thus, the amount shipped from all origins to Boston must equal 6,000, or

. For Chicago, St. Louis, and Lexington, we have similar constraints:

If we ship units from Cleveland to Boston, we incur a total shipping cost of . By summing the costs associated with each shipping route, we have the total cost expression that we want to minimize:

By including nonnegativity restrictions, for all variables, we have modeled the transportation problem as a linear optimization model. Supplementary Chapter C describes how to set up a linear optimization model on a spreadsheet and use Excel Solver to find an optimal solution. The solution, which has a minimum cost of $33,500, is shown in Exhibit 6.14.

Exhibit 6.14

Foster Generators Excel Solver Solution

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Chapter 6: Supply Chain Design: 6-5 Supply Chain Optimization Book Title: Operations and Supply Chain Management Printed By: Washburn Kelly ([email protected]) © 2019 Cengage, Cengage Learning, Inc.

© 2020 Cengage Learning Inc. All rights reserved. No part of this work may by reproduced or used in any form or by any means - graphic, electronic, or mechanical, or in any other manner - without the written permission of the copyright holder.