B203A - Q. Week 2 – Chapter 6
Q1) Discuss in some details the supply network perspective,
explaining the different tiers by applying an example from your own
experience.
■ The main advantage is that it helps any operation to understand how it
can compete effectively within the network. This is because a supply
network approach requires operations managers to think about their
suppliers and their customers as operations. It can also help to identify
particularly significant links within the network and hence identify long-term
strategic changes which will affect the operation.
A supply network perspective means setting an operation in the context of
all the other operations with which it interacts, some of which are its
suppliers and its customers. Materials, parts, other information, ideas and
sometimes people all flow through the network of customer–supplier
relationships formed by all these operations. On its supply side an
operation has its suppliers of parts, or information, or services. These
suppliers themselves have their own suppliers who in turn could also have
suppliers, and so on. On the demand side the operation has customers.
These customers might not be the final consumers of the operation’s
products or services; they might have their own set of customers. On the
supply side is a group of operations that directly supply the operation; these
are often called first-tier suppliers. They are supplied by second-tier
suppliers. However, some second-tier suppliers may also supply an
operation directly, thus missing out a link in the network. Similarly, on the
demand side of the network, ‘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. The suppliers and customers who have direct contact with an
operation are called its immediate supply network, whereas all the
operations which form the network of suppliers’ suppliers and customers’
customers, etc., are called the total supply network.
Figure 6.2 illustrates the total supply network for two operations. First is a
plastic homeware (kitchen bowls, food containers, etc.) manufacturer. Note
that on the demand side the homeware manufacturer supplies some of its
basic products to wholesalers which supply retail outlets. However, it also
supplies some retailers directly with ‘made-to-order’ products. Along with
the flow of goods in the network from suppliers to customers, each link in
the network will feed back orders and information to its suppliers. When
stocks run low, the retailers will place orders with the wholesaler or directly
with the manufacturer. The wholesaler will likewise place orders with the
manufacturer, which will in turn place orders with its suppliers, which will
replenish their own stocks from their suppliers. It is a two-way process with
goods flowing one way and information flowing the other. It is not only
manufacturers that are part of a supply network. The second (service)
operation, an operation which manages an enclosed shopping mall, also
has suppliers and customers that themselves have their own suppliers and
customers. Figure 6.2 shows the supply network for an operation which
manages an enclosed shopping mall.
Q2) Organizations are considering the whole supply network for a
number of reasons. Discuss the statement.
There are three important reasons for taking a supply network perspective:
It helps an understanding of competitiveness. Immediate customers
and immediate suppliers, quite understandably, are the main concern to
competitively minded companies. Yet sometimes they need to look beyond
these immediate contacts to understand why customers and suppliers act
as they do. Any operation has only two options if it wants to understand its
ultimate customers’ needs at the end of the network. It can rely on all the
intermediate customers and customers’ customers, etc., which form the
links in the network between the company and its end-customers.
Alternatively, it can look beyond its immediate customers and suppliers.
Relying on one’s immediate network is seen as putting too much faith in
someone else’s judgement of things which are central to an organization’s
own competitive health.
It helps identify significant links in the network. The key to
understanding supply networks lies in identifying the parts of the network
which contribute to those performance objectives valued by end-customers.
Any analysis of networks must start, therefore, by understanding the
downstream end of the network. After this, the upstream parts of the
network which contribute most to end-customer service will need to be
identified. But they will not be equally significant. For example, the
important end-customers for domestic plumbing parts and appliances are
the installers and service companies that deal directly with domestic
consumers. They are supplied by ‘stock holders’ which must have all parts
in stock and deliver them fast. Suppliers of parts to the stock holders can
best contribute to their end-customers’ competitiveness partly by offering a
short delivery lead time but mainly through dependable delivery. The key
players in this example are the stock holders. The best way of winning endcustomer business in this case is to give the stock holder prompt delivery
which helps keep costs down while providing high availability of parts.
It helps focus on long-term issues. There are times when circumstances
render parts of a supply network weaker than its adjacent links. A major
machine breakdown, for example, or a labour dispute might disrupt a whole
network. Should its immediate customers and suppliers exploit the
weakness to enhance their own competitive position, or should they
tolerate the problems, and hope the customer or supplier will eventually
recover? A long-term supply-network view would be to weigh the relative
advantages to be gained from assisting or replacing the weak link.
Q3) Where should an operation be located? Discuss in terms of the
Demand-side influences. Give examples for each.
■ The stimuli which act on an organization during the location decision can
be divided into supply-side and demand-side influences. Supply-side
influences are the factors such as labour, land and utility costs which
change as location changes. Demand-side influences include such things
as the image of the location, its convenience for customers and the
suitability of the site itself.
Supply-side influences
Labour costs. The costs of employing people with particular skills can vary
between different areas in any country, but are likely to be more significant
when international comparisons are made. Labour costs can be expressed
in two ways. The ‘hourly cost’ is what firms have to pay workers on average
per hour. However, the ‘unit cost’ is an indication of the labour cost per unit
of production. This includes the effects both of productivity differences
between countries and of differing currency exchange rates. Exchange rate
variation can cause unit costs to change dramatically over time. Yet in spite
of this, labour costs exert a major influence on the location decision,
especially in some industries such as clothing, where labour costs as a
proportion of total costs are relatively high.
Land costs. The cost of acquiring the site itself is sometimes a relevant
factor in choosing a location. Land and rental costs vary between countries
and cities. At a more local level, land costs are also important. A retail
operation, when choosing ‘high-street’ sites, will pay a particular level of
rent only if it believes it can generate a certain level of revenue from the
site.
Energy costs. Operations which use large amounts of energy, such as
aluminium smelters, can be influenced in their location decisions by the
availability of relatively inexpensive energy. This may be direct, as in the
availability of hydroelectric generation in an area, or indirect, such as lowcost coal which can be used to generate inexpensive electricity.
Transportation costs. Transportation costs include both the cost of
transporting inputs from their source to the site of the operation, and the
cost of transporting goods from the site to customers. Whereas almost all
operations are concerned to some extent with the former, not all operations
transport goods to customers; rather, customers come to them (for
example, hotels). Even for operations that do transport their goods to
customers (most manufacturers, for example), we consider transportation
as a supply-side factor because as location changes, transportation costs
also change. Proximity to sources of supply dominates the location
decision where the cost of transporting input materials is high or difficult.
Food processing and other agriculture-based activities, for example, are
often carried out close to growing areas. Conversely, transportation to
customers dominates location decisions where this is expensive or difficult.
Civil engineering projects, for example, are constructed mainly where they
will be needed.
Community factors. Community factors are those influences on an
operation’s costs which derive from the social, political and economic
environment of its site. These include:
● local tax rates
● capital movement restrictions
● government financial assistance
● government planning assistance
● political stability
● local attitudes to ‘inward investment’
● language
● local amenities (schools, theatres, shops, etc.)
● availability of support services
● history of labour relations and behaviour
● environmental restrictions and waste disposal
● planning procedures and restrictions.
Q4) Where should an operation be located? Discuss in terms of the
Supply-side influences. Give examples for each.
■ The stimuli which act on an organization during the location decision can
be divided into supply-side and demand-side influences. Supply-side
influences are the factors such as labour, land and utility costs which
change as location changes. Demand-side influences include such things
as the image of the location, its convenience for customers and the
suitability of the site itself.
Demand-side influences
Labour skills. The abilities of a local labour force can have an effect on
customer reaction to the products or services which the operation
produces. For example, ‘science parks’ are usually located close to
universities because they hope to attract companies that are interested in
using the skills available at the university.
The suitability of the site itself. Different sites are likely to have different
intrinsic characteristics which can affect an operation’s ability to serve
customers and generate revenue. For example, the location of a luxury
resort hotel which offers up-market holiday accommodation is very largely
dependent on the intrinsic characteristics of the site. Located next to the
beach, surrounded by waving palm trees and overlooking a picturesque
bay, the hotel is very attractive to its customers. Move it a few kilometres
away into the centre of an industrial estate and it rapidly loses its attraction.
Image of the location. Some locations are firmly associated in customers’
minds with a particular image. Suits from Savile Row (the centre of the upmarket bespoke tailoring district in London) may be no better than highquality suits made elsewhere but, by locating its operation there, a tailor
has probably enhanced its reputation and therefore its revenue. The
product and fashion design houses of Milan and the financial services in
the City of London also enjoy a reputation shaped partly by that of their
location.
Convenience for customers. Of all the demand-side factors, this is, for
many operations, the most important. Locating a general hospital, for
instance, in the middle of the countryside may have many advantages for
its staff, and even perhaps for its costs, but it clearly would be very
inconvenient to its customers. Those visiting the hospital would need to
travel long distances. Because of this, general hospitals are located close
to centres of demand. Similarly with other public services and restaurants,
stores, banks, petrol filling stations etc., location determines the effort to
which customers have to go in order to use the operation. Locations which
offer convenience for the customer are not always obvious. In the 1950s
Jay Pritzker called into a hotel at Los Angeles airport for a coffee. He found
that, although the hotel was full, it was also for sale. Clearly there was
customer demand but presumably the hotel could not make a profit. That is
when he got the idea of locating luxury hotels which could command high
revenues at airports where there was always demand. He called his hotel
chain Hyatt; it is now one of the best-known hotel chains in the world.
Q5) Briefly explain the reasons for location of capacity and the
objectives of the location decision. Use examples to support your
argument.
The aim of the location decision is to achieve an appropriate balance
between three related objectives:
● the spatially variable costs of the operation (spatially variable means
that something changes with geographical location);
● the service the operation is able to provide to its customers;
● the revenue potential of the operation.
In for-profit organizations the last two objectives are related. The
assumption is that the better the service the operation can provide to its
customers, the better will be its potential to attract custom and therefore
generate revenue. In not-for-profit organizations, revenue potential might
not be a relevant objective and so cost and customer service are often
taken as the twin objectives of location. In making decisions about where to
locate an operation, operations managers are concerned with minimizing
spatially variable costs and maximizing revenue and customer service.
Location affects both of these but not equally for all types of operation. For
example, with most products, customers may not care very much where
they were made. Location is unlikely to affect the operation’s revenues
significantly. However, the costs of the operation will probably be very
greatly affected by location. Services, on the other hand, often have both
costs and revenues affected by location. The location decision for any
operation is determined by the relative strength of supply-side and
demand-side factors (see Fig. 6.5).
Q6) Explain in details how managers use the weighted-score method
as a systematic and a quantitative technique to evaluate the various
locations.
The procedure involves, first of all, identifying the criteria which will be used
to evaluate the various locations. Second, it involves establishing the
relative importance of each criterion and giving weighting factors to them.
Third, it means rating each location according to each criterion. The scale
of the score is arbitrary. In our example we shall use 0 to 100, where 0
represents the worst possible score and 100 the best.
Example:
An Irish company which prints and makes specialist packaging materials
for the pharmaceutical industry has decided to build a new factory
somewhere in the Benelux countries so as to provide a speedy service for
its customers in continental Europe. In order to choose a site it has decided
to evaluate all options against a number of criteria, as follows:
● the cost of the site;
● the rate of local property taxation;
● the availability of suitable skills in the local labour force;
● the site’s access to the motorway network;
● the site’s access to the airport;
● the potential of the site for future expansion.
After consultation with its property agents the company identifies three sites
which seem to be broadly acceptable. These are known as sites A, B and
C. The company also investigates each site and draws up the weightedscore table shown in Table 6.2. It is important to remember that the scores
shown in Table 6.2 are those which the manager has given as an indication
of how each site meets the company’s needs specifically. Nothing is
necessarily being implied regarding any intrinsic worth of the locations.
Likewise, the weightings are an indication of how important the company
finds each criterion in the circumstances it finds itself. The ‘value’ of a site
for each criterion is then calculated by multiplying its score by the
weightings for each criterion.
For location A, its score for the ‘cost-of-site’ criterion is 80 and the
weighting of this criterion is 4, so its value is 80 × 4 = 320. All these values
are then summed for each site to obtain its total weighted score.
Table 6.2 indicates that location C has the highest total weighted score and
therefore would be the preferred choice. It is interesting to note, however,
that location C has the lowest score on what is, by the company’s own
choice, the most important criterion – cost of the site. The high total
weighted score which location C achieves in other criteria, however,
outweighs this deficiency. If, on examination of this table, a company
cannot accept what appears to be an inconsistency, then either the weights
which have been given to each criterion, or the scores that have been
allocated, do not truly reflect the company’s preference.