Supply Chain Design - Important Points - Summary - Krajewski - 12th Edition

Chapter 12 Supply Chain Design

Learning Goals

Explain Strategic importance of supply Chain design

Supply Chains for Services and Manufacturing

Identify the nature of supply chains for service providers as well as manufacturers

Measuring Supply Chain Performance

Calculate the critical supply chain performance measures

Explain how efficient supply chains differ from responsive supply chains and the environment best suited for each type of supply chain.

Explain the strategy of mass customization and its implications for supply chain design

Outsourcing Processes, Vertical Integration. Make or Buy Decisions

Analyze a make or buy decision using break-even-analysis

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A supply chain is the interrelated series of processes within a firm and across different firms that produces a service or product to the satisfaction of customers. More specifically, it is a network of service, material, monetary, and information flows that link a firm’s customer relationship, order fulfillment, and supplier relationship processes to those of its suppliers and customers.

Supply chain is responsible for customer satisfaction through its supply of products and services.

Supply chain management, the synchronization of a firm’s processes with those of its suppliers and customers to match the flow of materials, services, and information with demand, is an important management task in most organizations. A key part of supply chain management is supply chain design. The design of the supply chain has to enable the firm to meet the competitive priorities of the 

firm’s operations strategy.

Creating an Effective Supply Chain

An effective supply chain can be created by the recognition of external competitive pressures and judgments  sales, marketing, and product development departments regarding possible alternatives that are technically and financially feasible for the organization.

These pressures or trends that are to be recognized in the environment are: (1) dynamic sales volumes (periodic changes in demand), (2) customer service and quality expectations (they are increasing and customers are willing to pay competitive rates), (3) service/product proliferation (number of products and services to be offered by a firm are increasing), and (4) emerging markets (new consumption and supply locations are changing the market positions).

Supply Chains for Services and Manufacturing

Every firm or organization is a member of some supply chain.

The supply chain design for manufacturers has to focus on control of inventory by managing the quantities in the flow of materials. The typical manufacturer spends more than 60 percent of its total income from sales on purchased services and materials, whereas the typical service provider spends only 30 to 40 percent. 

Measuring Supply Chain Performance

Supply chains are to be designed for a specified performance which can be measured. Managers need performance measures to assess the implications of changes to supply chains. Inventory measures and financial measures are used to monitor supply chain performance and evaluate alternative supply chain designs.


1. Average aggregate inventory value = average inventory of each SKU multiplied by its value,
summed over all SKUs held in stock.

2. Weeks of supply = Average aggregate inventory value/Weekly sales (at cost)

3. Inventory turnover = Annual sales (at cost)/Average aggregate inventory value

Strategic Options for Supply Chain Design

A supply chain is  a network of firms. Each firm in the chain has to  design its own supply
chain.  Two distinct designs are available as strategic options:  efficient supply chains and responsive supply chains.

Efficient Supply Chains
Efficient supply chain design can be used in case of items with highly predictable demand (low forecast error). Many essential items of daily consumption have predictable demands. Ex: Food items, toiletries etc.

Made to stock production is the popular design for efficient supply chains.

Make-to-stock (MTS): The product is produced in response to  a sales forecast and sold to the customer from a finished goods stock through a retailer. The focus of the MTS supply chain is on efficient service, material, monetary, and information flows; and keeping inventories to a minimum in the supply chain. There is intense competition in these products and price becomes market winner. Contribution margins are low, hence efficiency is important to remain profitable in the business. Efficient supply chains are used wherein the competitive priorities are consistent quality and on-time delivery on the customer side and low-cost operations on the firm side.

Responsive Supply Chains

Responsive supply chains are designed to react quickly and service markets profitably even though they are uncertainties in demand. They work best when firms offer a great variety of services or products and demand predictability is low.

There are three types of designs for responsive supplychain: .Assemble-to-order (ATO):, Make-to-order (MTO):, and Design-to-order (DTO)

Mass Customization

A mass customization strategy when pursued in production and marketing  has three important competitive advantages.

Customer Relationships. Mass customization is based on detailed inputs from customers or data of customer behavior. The objective is to produce and deliver a product that satisfies the unique desires of a customer. By collecting data systematically and continuously, the firm can learn a lot about its customers. A significant competitive advantage is realized through this accumulated data and  the close customer relationships based on a strategy of mass customization.

Finished Goods Inventory. In mass customization, the final product is produced to a customer’s order and it is more efficient than producing to a forecast because forecasts are not perfect. The process has to be designed to have everything needed to produce the order quickly once it is received and the specification of the item is given.

Increase in Value of Services or Products. With mass customization, consumer often see  a higher value for the product in comparison to a standard product. This perception gives higher revenue to firms and provides  a bigger margin.

Outsourcing Processes, Vertical Integration. Make or Buy Decisions

How many of the processes involved in producing a saleable product or service should a firm own and operate? The answer to the question determines the extent of the firm’s vertical integration. The more processes  the organization performs itself, the more vertically integrated it is. If it does not perform some processes itself, it has to outsource them. It has to employ suppliers and distributors to perform those processes and provide needed services and materials.

What prompts a firm to outsource? It is the realization that another firm can perform the outsourced process more efficiently and with better quality than it can. Therefore external suppliers are added to the supply chains and internal suppliers (sections/shops/departments) are reduced.

Offshoring is a supply chain strategy that involves moving processes to another country.

Make-or-Buy Decisions

When managers opt for more vertical integration, less outsourcing occurs. The decisions related to vertical integration or outsourcing were earlied referred to as make-or-buy decisions. A make decision means more vertical integration and a buy decision means more outsourcing.

PART III: MANAGING SUPPLY CHAINS - Krajewski 12 Edition Chapters

12. Supply Chain Design

13. Supply Chain Logistic Networks

14. Supply Chain Integration

15. Supply Chain Sustainability

Supply Chain Management: Chopra and Meindl's Book Chapters - Important Points

Top Global Companies for Supply Chain Excellence - Supply Chain Strategies and Initiatives 

Index to Summaries of all Chapters of Krajewski's Book

Operations Management - Krajewski - 12th Edition - Chapter Summaries - Important Points