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By
Tauseef Iqbal Khan
Faculty Member- IQRA University
Introduction
• Both the structure and the scope of an operation’s supply network
are decisions that shape how the operation interacts with its
markets, its suppliers, in fact with the world in general
• No operation exists in isolation. All operations are part of a larger
and interconnected network of operations. This is called the
operation’s supply network
• It will include the operation’s suppliers and customers, as well as
suppliers’ suppliers and customers’ customers, and so on
• At a strategic level, operations managers are involved in deciding
how much of the network it should own. This is called the scope of
the operation
• They are also concerned with the shape and form of their network.
This is called the structure of the network
Chapter 4 Operations Scope And
Structure
Learning Objective
• Supply network design and capacity planning
• Supply network design
• Supply network configuration
• Operations location decisions
• Fundamental issues in capacity planning for
the supply network
Supply Networks
• A supply network is an interconnection of
organizations that relate to each other through
upstream and downstream linkages between the
different processes and activities that produce
value in the form of products and services to the
ultimate consumer
• In other words, a supply network is the means of
setting an operation in the context of all the
other operations with which it interacts, some of
which are its suppliers and its customers
Supply Networks
• Suppliers that directly supply the operation are often
called first-tier suppliers
• Second-tier suppliers supply them; however, Similarly,
‘first-tier’ customers are the main customer group for
the operation. These in turn supply ‘second-tier’
customers, although again the operation may at times
supply second-tier customers directly like in case of
second-tier customers
• The suppliers and customers who have direct contact
with an operations are called its immediate supply
network
Two-way Flow Through The Network
• Materials, parts, information, ideas and
sometimes people all flow through the network
of customer–supplier relationships formed by all
these operations (Forward Flow)
• But also along with the forward flow of
transformed resources (materials, information
and customers) in the network, each customer–
supplier linkage will feed back orders and
information (Reverse Flow) So flow is a two-way
process with items flowing one way and
information flowing the other
It Is Important To Consider The Whole
Supply Network
• It helps an understanding of competitiveness
• It helps identify significant links in the network
• It helps focus on long-term issues
The Scope & Structure Of An
Operation’s Supply Network
• The scope of an operation’s activities within the
network is determined by two decisions
The extent and nature of the operation’s vertical
integration
The nature and degree of outsourcing it engages in
• The structure of an operation’s supply network is
determined by three sets of decisions
How should the network be configured?
The long-term capacity decision
The location decision?
Vertical Integration
• The scope of an operation’s supply network
determines the extent that an operation does
things itself and the extent that it will rely on
other operations to do things for it.
• This is often referred to as ‘vertical
integration’ when it is ownership of whole
operations that are being decided, or
‘outsourcing’ when individual activities are
being considered
An Organization's Vertical Integration
Strategy
• The direction of any integration (backward or ‘upstream’ vertical
integration) or (forward or ‘downstream’ vertical integration)
• Backward vertical integration, by allowing an organization to take
control of its suppliers.
• Forward vertical integration, on the other hand, takes an
organization closer to its markets
• The balance among the vertically integrated stages – This is not
strictly about the ownership of the network. It refers to the amount
of the capacity at each stage in the network that is devoted to
supplying the next stage
• So a totally balanced network relationship is one where one stage
produces only for the next stage in the network and totally satisfies
its requirements.
Advantages & Disadvantages Of
Vertical Integration
Advantages
• It secures dependable access to supply or
markets
• It may reduce costs
• Vertical integration also reduces the ‘transaction
costs’ of dealing with suppliers and customers.
Transaction costs are expenses, other than price,
which are incurred in the process of buying and
selling
• It may help to improve product or service quality
Advantages and disadvantages of
vertical integration
Disadvantages
• It creates an internal monopoly. Internal supply is
less subject to the normal competitive forces that
keep operations motivated to improve
• You can’t exploit economies of scale
• It results in loss of flexibility
• It cuts you off from innovation
• It distracts you from core activities (loss of focus)
Outsourcing
• Outsourcing is also known as the ‘do-or-buy’
decision
• Although most companies have always
outsourced some of their activities, a larger
proportion of direct activities are now bought
from suppliers
• Also many indirect and administrative processes
are now outsourced. This is often referred to as
Business Process Outsourcing (BPO)
Operation’s Performance Objective
Performance Make Buy (Outsourced)
Objective
Quality •Easy to track Quality Issues •Market Expertise
•Danger of Complacency •Difficulty in
communication
Speed •Through synchronized •Can built pressure on third
schedules party to accelerate