heizer om10 ch11-supply chain

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1111 Supply-Chain ManagementSupply-Chain Management

11 - 1© 2011 Pearson Education, Inc. publishing as Prentice Hall

PowerPoint presentation to accompany PowerPoint presentation to accompany Heizer and Render Heizer and Render Operations Management, 10e Operations Management, 10e Principles of Operations Management, 8ePrinciples of Operations Management, 8e

PowerPoint slides by Jeff Heyl

OutlineOutlineGlobal Company Profile: Darden RestaurantsThe Supply Chain’s Strategic Importance


Supply Chain RiskEthics and SustainabilitySupply-Chain Economics

Make-or-Buy DecisionsOutsourcing

Outline Outline –– ContinuedContinued

Supply-Chain StrategiesMany SuppliersFew Suppliers


Vertical IntegrationJoint VenturesKeiretsu NetworksVirtual Companies

Outline Outline –– ContinuedContinuedManaging the Supply Chain

Issues in an Integrated Supply ChainOpportunities in an Integrated Supply Chain


E-ProcurementOnline CatalogsAuctionsRFQsRealtime Inventory Tracking


Vendor SelectionVendor EvaluationVendor Development


Negotiations


Logistics ManagementDistribution SystemsThird-Party Logistics


Cost of Shipping AlternativesSecurity and JIT

Measuring Supply-Chain Performance

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Learning ObjectivesLearning ObjectivesWhen you complete this chapter you When you complete this chapter you should be able to:should be able to:

1. Explain the strategic importance of the supply chain


the supply chain2. Identify six supply-chain strategies3. Explain issues and opportunities in

the supply chain4. Describe the steps in vendor

selection

Learning ObjectivesLearning ObjectivesWhen you complete this chapter you When you complete this chapter you should be able to:should be able to:

5. Explain major issues in logistics management


management6. Compute percent of assets

committed to inventory and inventory turnover

Darden RestaurantsDarden Restaurants

Largest publicly traded casual dining company in the worldServes over 400 million meals


Serves over 400 million meals annually in more than 1,800 restaurants in the US and CanadaAnnual sales of $6.7 billionOperations is the strategy

Darden RestaurantsDarden Restaurants

Sources food from five continents and thousands of suppliersFour distinct supply chains


pp yOver $1.5 billion spent annually in supply chainsCompetitive advantage achieved through superior supply chain

SupplySupply--Chain ManagementChain Management

The objective is to build a chain of The objective is to build a chain of suppliers that focuses on suppliers that focuses on

maximizing value to the ultimate maximizing value to the ultimate


ggcustomercustomer

The Supply Chain’s The Supply Chain’s Strategic Importance Strategic Importance

Supply chain management is the integration of the activities that procure materials and services


procure materials and services, transform them into intermediate

goods and final products, and deliver them through a distribution system

Competition is no longer between Competition is no longer between companies; it is between supply chainscompanies; it is between supply chains

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Supply Chain ManagementSupply Chain Management

1. Transportation vendors2. Credit and cash transfers3. Suppliers

Important activities include determiningImportant activities include determining


3. Suppliers4. Distributors 5. Accounts payable and receivable6. Warehousing and inventory7. Order fulfillment8. Sharing customer, forecasting, and

production information

A Supply Chain for BeerA Supply Chain for Beer

11 - 14© 2011 Pearson Education, Inc. publishing as Prentice HallFigure 11.1

How Supply Chain How Supply Chain Decisions Impact StrategyDecisions Impact Strategy

Low-Cost Strategy

Response Strategy

Differentiation Strategy

Supplier’s goal

Supply demand at lowest possible cost

Respond quickly to changing requirements

Share market research; jointly develop


poss b e cost(e.g., Emerson Electric, Taco Bell)

equ e e tsand demand to minimize stockouts (e.g., Dell Computers)

jo t y de e opproducts and options (e.g., Benetton)

Primary selection criteria

Select primarily for cost

Select primarily for capacity, speed, and flexibility

Select primarily for product development skills

Table 11.1


Low-Cost Strategy

Response Strategy


Process charact-eristics

Maintain high average utilization

Invest in excess capacity and flexible

Modular processes that lend


e st cs ut at o e b eprocesses

e dthemselves to mass customization

Inventory charact-eristics

Minimize inventory throughout the chain to hold down cost

Develop responsive system with buffer stocks positioned to ensure supply

Minimize inventory in the chain to avoid obsolescence

Table 11.1


Low-Cost Strategy

Response Strategy


Lead-time charact-eristics

Shorten lead time as long as it does not

Invest aggressively to reduce

Invest aggressively to reduce


e st cs t does otincrease costs

educeproduction lead time

educedevelopment lead time

Product-design charact-eristics

Maximize performance and minimize costs

Use product designs that lead to low setup time and rapid production ramp-up

Use modular design to postpone product differentiation as long as possible

Table 11.1

Supply Chain RiskSupply Chain Risk

More reliance on supply chains means more riskFewer suppliers increase dependence


Compounded by globalization and logistical complexityVendor reliability and quality risksPolitical and currency risks

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Supply Chain RiskSupply Chain Risk

Mitigate and react to disruptions in1. Processes2. Controls


3. Environment

Supply Chain RiskSupply Chain RiskReducing risk in supply chains

Process risk at McDonald’sProcess risk at FordC t l t D d R t t


Controls at Darden RestaurantsControl risk at BoeingEnvironmental risk at Hard Rock CaféEnvironmental risk at Toyota

Ethics and SustainabilityEthics and Sustainability

Personal ethicsInstitute for Supply Management Principles and Standards

Ethi ithi th l h i


Ethics within the supply chainEthical behavior regarding the environment

Principles and Standards for Principles and Standards for Ethical Supply Management Ethical Supply Management

ConductConduct

LOYALTY TO YOUR ORGANIZATIONLOYALTY TO YOUR ORGANIZATION


JUSTICE TO THOSE WITH WHOM YOU JUSTICE TO THOSE WITH WHOM YOU DEALDEAL

FAITH IN YOUR PROFESSIONFAITH IN YOUR PROFESSION

Table 11.2


ConductConduct1.1. PERCEIVED IMPROPRIETYPERCEIVED IMPROPRIETY Prevent the intent and

appearance of unethical or compromising conduct in relationships, actions and communications


Table 11.2

communications2.2. CONFLICTS OF INTERESTCONFLICTS OF INTEREST Ensure that any

personal, business or other activity does not conflict with the lawful interests of your employer

3.3. ISSUES OF INFLUENCEISSUES OF INFLUENCE Avoid behaviors or actions that may negatively influence, or appear to influence, supply management decisions


ConductConduct4.4. RESPONSIBILITIES TO YOUR EMPLOYERRESPONSIBILITIES TO YOUR EMPLOYER

Uphold fiduciary and other responsibilities using reasonable care and granted authority to deliver value to your employer


Table 11.2

value to your employer5.5. SUPPLIER AND CUSTOMER RELATIONSHIPS SUPPLIER AND CUSTOMER RELATIONSHIPS

Promote positive supplier and customer relationships

6.6. SUSTAINABILITY AND SOCIAL RESPONSIBILITYSUSTAINABILITY AND SOCIAL RESPONSIBILITYChampion social responsibility and sustainability practices in supply management

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ConductConduct7.7. CONFIDENTIAL AND PROPRIETARY CONFIDENTIAL AND PROPRIETARY

INFORMATIONINFORMATION Protect confidential and proprietary information


Table 11.2

8.8. RECIPROCITYRECIPROCITY Avoid improper reciprocal agreements

9.9. APPLICABLE LAWS, REGULATIONS AND APPLICABLE LAWS, REGULATIONS AND TRADE AGREEMENTSTRADE AGREEMENTS Know and obey the letter and spirit of laws, regulations and trade agreements applicable to supply management


ConductConduct10.10.PROFESSIONAL COMPETENCEPROFESSIONAL COMPETENCE Develop skills,

expand knowledge and conduct business that demonstrates competence and promotes the

l t f i


Table 11.2

supply management profession

Supply Chain EconomicsSupply Chain EconomicsSupply Chain Costs as a Percent of SalesSupply Chain Costs as a Percent of Sales

Industry % PurchasedAll industry 52A t bil 67


Table 11.3

Automobile 67Food 60Lumber 61Paper 55Petroleum 79Transportation 62

Supply Chain EconomicsSupply Chain EconomicsDollars of additional sales needed to equal $1 Dollars of additional sales needed to equal $1 saved through the supply chainsaved through the supply chain

Percent of Sales Spent in the Supply Chain


Percent Net Profitof Firm 30% 40% 50% 60% 70% 80% 90%

2 $2.78 $3.23 $3.85 $4.76 $6.25 $9.09 $16.674 $2.70 $3.13 $3.70 $4.55 $5.88 $8.33 $14.296 $2.63 $3.03 $3.57 $4.35 $5.56 $7.69 $12.508 $2.56 $2.94 $3.45 $4.17 $5.26 $7.14 $11.11

10 $2.50 $2.86 $3.33 $4.00 $5.00 $6.67 $10.00

Table 11.4

MakeMake--oror--Buy DecisionsBuy Decisions

Choice between internal production and external sources


OutsourcingOutsourcing

Transfers traditional internal activities and resources of a firm to outside vendorsUtili th ffi i th t


Utilizes the efficiency that comes with specializationFirms outsource information technology, accounting, legal, logistics, and production

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Supply Chain StrategiesSupply Chain StrategiesNegotiating with many suppliersLong-term partnering with few suppliersV ti l i t ti


Vertical integrationJoint venturesKeiretsuVirtual companies that use suppliers on an as needed basis

Many SuppliersMany SuppliersCommonly used for commodity productsPurchasing is typically based on price


priceSuppliers compete with one anotherSupplier is responsible for technology, expertise, forecasting, cost, quality, and delivery

Few SuppliersFew SuppliersBuyer forms longer term relationships with fewer suppliersCreate value through economies of scale and learning curve


gimprovementsSuppliers more willing to participate in JIT programs and contribute design and technological expertiseCost of changing suppliers is huge

Vertical IntegrationVertical Integration

Raw material (suppliers) Iron ore Silicon Farming

Backward integration Steel

Vertical Integration Examples of Vertical Integration

11 - 34© 2011 Pearson Education, Inc. publishing as Prentice HallFigure 11.2

Current transformation Automobiles Integrated

circuits Flour milling

Forward integration Distribution systems Circuit boards

Finished goods (customers) Dealers

Computers Watches

CalculatorsBaked goods

Vertical IntegrationVertical IntegrationDeveloping the ability to produce goods or service previously purchasedIntegration may be forward, towards the customer, or backward, towards suppliers


suppliersCan improve cost, quality, and inventory but requires capital, managerial skills, and demandRisky in industries with rapid technological change

Joint VenturesJoint Ventures

Formal collaborationEnhance skillsSecure supply


Secure supplyReduce costs

Cooperation without diluting brand or conceding competitive advantage

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Keiretsu NetworksKeiretsu NetworksA middle ground between few suppliers and vertical integrationSupplier becomes part of the company coalitionOften provide financial support for


Often provide financial support for suppliers through ownership or loansMembers expect long-term relationships and provide technical expertise and stable deliveriesMay extend through several levels of the supply chain

Virtual CompaniesVirtual Companies

Rely on a variety of supplier relationships to provide services on demandFl id i ti l b d i th t


Fluid organizational boundaries that allow the creation of unique enterprises to meet changing market demandsExceptionally lean performance, low capital investment, flexibility, and speed

Managing the Supply ChainManaging the Supply Chain

There are significant management issues in controlling a supply chain involving many independent organizations


Mutual agreement on goalsTrustCompatible organizational cultures

Issues in an Integrated Issues in an Integrated Supply ChainSupply Chain

Local optimizationLocal optimization - focusing on local profit or cost minimization based on limited knowledgeI ti ( l i ti titI ti ( l i ti tit


Incentives (sales incentives, quantity Incentives (sales incentives, quantity discounts, quotas, and promotions)discounts, quotas, and promotions) -push merchandise prior to saleLarge lotsLarge lots - low unit cost but do not reflect sales

Bullwhip effectBullwhip effect - stable demand becomes lumpy orders through the supply chain

Opportunities in an Opportunities in an Integrated Supply ChainIntegrated Supply Chain

Accurate “pull” dataLot size reduction


Lot size reductionSingle stage control of replenishmentVendor managed inventory (VMI)


Collaborative planning, forecasting, and


replenishment (CPFR)Blanket ordersStandardization

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PostponementDrop shipping and special


Drop shipping and special packagingPass-through facilityChannel assembly

Radio Frequency TagsRadio Frequency TagsRadio Frequency Tags: Keeping the Shelves StockedRadio Frequency Tags: Keeping the Shelves Stocked

Supply chains work smoothly when sales are steady, but often break down when confronted by a sudden surge in demand. Radio frequency ID (or RFID) tags can change that by providing real-time information about what’s happening on store shelves. Here’s how the system works for Proctor & Gamble’s Pampers.


EE--ProcurementProcurement

Uses the internet to facilitate purchasingEl t i d i d f d


Electronic ordering and funds transfer

Electronic data interchange (EDI)Advanced shipping notice


Online catalogs1. Catalogs provided by vendors2 C t l bli h d b


2. Catalogs published by intermediaries

3. Exchanges provided by buyers

Internet Trading ExchangesInternet Trading ExchangesHealth care products – ghx.comRetail goods – gnx.comDefense and aerospace products –exostar com


exostar.comFood, beverage, consumer products – transora.comSteel and metal products –metalsite.comHotels – avendra.com

EE--ProcurementProcurementAuctions

Maintained by buyers, sellers, or intermediariesLow barriers


Low barriers to entryIncrease in the potential number of buyers

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RFQsCan make requests for quotes (RFQs) less costly


( ) yImproves supplier selection

Real-time inventory tracking

Vendor SelectionVendor SelectionVendor evaluation

Critical decisionFind potential vendorsDetermine the likelihood of them


Determine the likelihood of them becoming good suppliers

Vendor DevelopmentTrainingEngineering and production helpEstablish policies and procedures

Vendor EvaluationVendor EvaluationCriteria Weights

Scores (1-5)

Weight x Score

Engineering/research/innovation skills .20 5 1.0Production process capability (flexibility/technical assistance)

.15 4 .6

Distribution/delivery capability .05 4 .2


Quality systems and performance .10 2 .2Facilities/location .05 2 .1Financial and managerial strength (stability and cost structure)

.15 4 .6

Information systems capability (e-procurement, ERP)

.10 2 .2

Integrity (environmental compliance/ ethics)

.20 5 1.0

Total 1.00 3.9

Vendor SelectionVendor SelectionNegotiations

CostCost--Based Price ModelBased Price Model - supplier opens books to purchaserMarketMarket--Based Price ModelBased Price Model - price


MarketMarket Based Price ModelBased Price Model price based on published, auction, or indexed priceCompetitive BiddingCompetitive Bidding - used for infrequent purchases but may make establishing long-term relationships difficult

Logistics ManagementLogistics ManagementObjective is to obtain efficient operations through the integration of all material acquisition, movement, and storage activities


Is a frequent candidate for outsourcingAllows competitive advantage to be gained through reduced costs and improved customer service

Distribution SystemsDistribution SystemsTruckingTrucking

Moves the vast majority of Moves the vast majority of manufactured goodsmanufactured goodsChief advantage is flexibilityChief advantage is flexibility


Chief advantage is flexibilityChief advantage is flexibilityRailroadsRailroads

Capable of carrying large loadsCapable of carrying large loadsLittle flexibility though Little flexibility though containers and piggybacking containers and piggybacking have helped with thishave helped with this

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Distribution SystemsDistribution SystemsAirfreight

Fast and flexible for light loadsMay be expensive


Distribution SystemsDistribution Systems

WaterwaysTypically used for bulky, low-value cargo


Used when shipping cost is more important than speed

Distribution SystemsDistribution Systems

PipelinesUsed for transporting oil, gas, and other chemical products


ThirdThird--Party LogisticsParty Logistics

Outsourcing logistics can reduce costs and improve delivery reliability and speedCoordinate supplier inventory with


Coordinate supplier inventory with delivery servicesMay provide warehousing, assembly, testing, shipping, customs

Cost of Shipping Cost of Shipping AlternativesAlternatives

Product in transit is a form of inventory and has a carrying cost


Faster shipping is generally more expensive than slower shippingWe can evaluate the two costs to better understand the trade-off

Cost of Shipping Cost of Shipping AlternativesAlternatives

Value of connectors = $1,750.00Holding cost = 40% per yearSecond carrier is 1 day faster and $20 more expensive


Daily cost of holding product = x /365

Annual holding

costProduct

value

= (.40 x $1,750)/ 365 = $1.92

Since it costs less to hold the product one day longer than it does for the faster shipping ($1.92 < $20), we should use the cheaper, slower shipper

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Security and JITSecurity and JITBorders are becoming more open in the U.S. and around the worldMonitoring and controlling stock moving through supply chains is more important than ever


than everNew technologies are being developed to allow close monitoring of location, storage conditions, and movement

Measuring SupplyMeasuring Supply--Chain Chain PerformancePerformance

Typical FirmsBenchmark

Firms

Lead time (weeks) 15 8


Table 11.6

Time spent placing an order 42 minutes 15 minutes

Percentage of late deliveries 33% 2%

Percentage of rejected material 1.5% .0001%

Number of shortages per year 400 4


Assets committed to inventory

Percent i d i

Total inventory investment


invested in inventory

= x 100investmentTotal assets

Investment in inventory = $11.4 billionTotal assets = $44.4 billion

Percent invested in inventory = (11.4/44.4) x 100 = 25.7%


Inventory as a % of Total Assets(with exceptional performance)

Manufacturing 15%(Toyota 5%)


Table 11.7

(Toyota 5%)Wholesale 34%

(Coca-Cola 2.9%)Restaurants 2.9%

(McDonald’s .05%)Retail 27%

(Home Depot 25.7%)


Inventory turnover

Cost of goods sold


Inventory turnover =

Cost of goods soldInventory

investment


Examples of Annual Inventory TurnoverFood, Beverage, Retail Manufacturing


Table 11.8

Anheuser Busch 15 Dell Computer 90Coca-Cola 14 Johnson Controls 22Home Depot 5 Toyota (overall) 13McDonald’s 112 Nissan (assembly) 150

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Inventory turnover

Net revenue $32.5Cost of goods sold $14 2


Cost of goods sold $14.2Inventory:

Raw material inventory $.74Work-in-process inventory $.11Finished goods inventory $.84

Total inventory investment $1.69


Inventory turnover

Net revenue $32.5Cost of goods sold $14 2I t t

Cost of goods sold





Inventory turnover = Inventory investment

= 14.2 / 1.69 = 8.4


Inventory turnover

Net revenue $32.5Cost of goods sold $14 2I t t

Cost of goods soldAverage weekly





Inventory turnover = Inventory investment

= 14.2 / 1.69 = 8.4Weeks of supply =

Inventory investmentAverage weekly cost of

goods sold

= 1.69 / .273 = 6.19 weeks

Average weekly cost of goods sold = $14.2 / 52 = $.273

The SCOR ModelThe SCOR ModelProcesses, metrics and best practices

Plan: Demand/Supply planning and Management


Source: Identify, select, manage, and assess sources

Make: Manage production execution, testing and packaging

Deliver: Invoice, warehouse, transport and install

Return: Raw material Return: Finished goods

Figure 11.3


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heizer om10 ch11-supply chain

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