Supply-Chain Management PDF

11 - 1© 2011 Pearson Education, Inc. publishing as Prentice Hall
11 Supply-Chain
Management
PowerPoint presentation to accompany
Heizer and Render
Operations Management, 8e

11 - 2© 2011 Pearson Education, Inc. publishing as Prentice Hall
Outline
 The Supply Chain’s Strategic Importance
 Supply Chain Risk
 Ethics and Sustainability
 Supply-Chain Economics
 Make-or-Buy Decisions
 Outsourcing
 Supply-Chain Strategies
 Many Suppliers
 Few Suppliers
 Vertical Integration
 Joint Ventures
 Keiretsu Networks
 Virtual Companies

11 - 3© 2011 Pearson Education, Inc. publishing as Prentice Hall
Outline – Continued
 Managing the Supply Chain
 Issues in an Integrated Supply Chain
 Opportunities in an Integrated Supply Chain
 E-Procurement
 Online Catalogs
 Auctions
 RFQs
 Realtime Inventory Tracking
 Vendor Selection
 Vendor Evaluation
 Vendor Development
 Negotiations

11 - 4© 2011 Pearson Education, Inc. publishing as Prentice Hall
Outline – Continued
 Logistics Management
 Distribution Systems
 Third-Party Logistics
 Cost of Shipping Alternatives
 Security and JIT
 Measuring Supply-Chain Performance

11 - 5© 2011 Pearson Education, Inc. publishing as Prentice Hall
Learning Objectives
When you complete this chapter you should be able
to:
1. Explain the strategic importance of the supply chain
2. Identify six supply-chain strategies
3. Explain issues and opportunities in the supply chain
4. Describe the steps in vendor selection
5. Explain major issues in logistics management
6. Compute percent of assets committed to inventory
and inventory turnover

11 - 6© 2011 Pearson Education, Inc. publishing as Prentice Hall
Supply-Chain Management
The objective is to build a chain of
suppliers that focuses on maximizing
value to the ultimate customer

11 - 7© 2011 Pearson Education, Inc. publishing as Prentice Hall
The Supply Chain’s Strategic
Importance
Supply chain management is the integration
of the activities that procure materials and
services, transform them into intermediate
goods and final products, and deliver them
through a distribution system
Competition is no longer between
companies; it is between supply chains

11 - 8© 2011 Pearson Education, Inc. publishing as Prentice Hall
Supply Chain Management
1. Transportation vendors
2. Credit and cash transfers
3. Suppliers
4. Distributors
5. Accounts payable and receivable
6. Warehousing and inventory
7. Order fulfillment
8. Sharing customer, forecasting, and
production information
Important activities include determining

11 - 9© 2011 Pearson Education, Inc. publishing as Prentice Hall
A Supply Chain for Beer
Figure 11.1

11 - 10© 2011 Pearson Education, Inc. publishing as Prentice Hall
How Supply Chain Decisions
Impact Strategy
Low-Cost Strategy Response Strategy Differentiation
Strategy
Supplier’s
goal
Supply demand at
lowest possible
cost (e.g.,
Emerson
Electric, Taco
Bell)
Respond quickly to
changing
requirements and
demand to
minimize
stockouts (e.g.,
Dell Computers)
Share market
research; jointly
develop products
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

11 - 11© 2011 Pearson Education, Inc. publishing as Prentice Hall
How Supply Chain Decisions
Impact Strategy
Low-Cost Strategy Response Strategy Differentiation
Strategy
Process
charact-
eristics
Maintain high
average
utilization
Invest in excess
capacity and
flexible processes
Modular processes
that lend
themselves 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

11 - 12© 2011 Pearson Education, Inc. publishing as Prentice Hall
How Supply Chain Decisions
Impact Strategy
Low-Cost Strategy Response Strategy Differentiation
Strategy
Lead-time
charact-
eristics
Shorten lead time
as long as it does
not increase
costs
Invest aggressively
to reduce
production lead
time
Invest aggressively
to reduce
development 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

11 - 13© 2011 Pearson Education, Inc. publishing as Prentice Hall
Supply Chain Risk
 More reliance on supply chains means more risk
 Fewer suppliers increase dependence
 Compounded by globalization and logistical
complexity
 Vendor reliability and quality risks
 Political and currency risks
▶ Research and assess possible risks
▶ Innovative planning
▶ Reduce potential disruptions
▶ Prepare responses for negative events
▶ Flexible, secure supply chains
▶ Diversified supplier base
Risk and Mitigation
Tactics

11 - 14© 2011 Pearson Education, Inc. publishing as Prentice Hall
Supply Chain Risk
Mitigate and react to disruptions in
1. Processes (raw material and component
availability, quality, and logistics)
2. Controls (management metrics and reliable
secure communication for financial transactions,
product designs, and logistics scheduling)
3. Environment (customs duties, tariffs, security
screening, natural disaster, currency fluctuations,
terrorist attacks, and political issues)

11 - 15© 2011 Pearson Education, Inc. publishing as Prentice Hall
Supply Chain Risk
Reducing risk in supply chains
 Process risk at McDonald’s
 Process risk at Ford
 Controls at Darden Restaurants
 Control risk at Boeing
 Environmental risk at Hard Rock Café
 Environmental risk at Toyota

11 - 16© 2011 Pearson Education, Inc. publishing as Prentice Hall
Ethics and Sustainability
The three aspects of ethics in supply-
chain
 Personal ethics
 Institute for Supply Management
Principles and Standards
 Ethics within the supply chain
 Ethical behavior regarding the environment
Ethical decision are critical for long-term success of any
organization

11 - 17© 2011 Pearson Education, Inc. publishing as Prentice Hall
Principles and Standards for Ethical
Supply Management Conduct
LOYALTY TO YOUR ORGANIZATION
JUSTICE TO THOSE WITH WHOM YOU
DEAL
FAITH IN YOUR PROFESSION
Table 11.2

11 - 18© 2011 Pearson Education, Inc. publishing as Prentice Hall
Principles and Standards for Ethical
Supply Management Conduct
Table 11.2
1. PERCEIVED IMPROPRIETY Prevent the intent and appearance of
unethical or compromising conduct in relationships, actions and
communications
2. CONFLICTS OF INTEREST Ensure that any personal, business or
other activity does not conflict with the lawful interests of your
employer
3. ISSUES OF INFLUENCE Avoid behaviors or actions that may
negatively influence, or appear to influence, supply management
decisions
4. RESPONSIBILITIES TO YOUR EMPLOYER Uphold fiduciary and
other responsibilities using reasonable care and granted authority
to deliver value to your employer
5. SUPPLIER AND CUSTOMER RELATIONSHIPS Promote positive
supplier and customer relationships

11 - 19© 2011 Pearson Education, Inc. publishing as Prentice Hall
Principles and Standards for Ethical
Supply Management Conduct
Table 11.2
6. SUSTAINABILITY AND SOCIAL RESPONSIBILITY Champion
social responsibility and sustainability practices in supply
management
7. CONFIDENTIAL AND PROPRIETARY INFORMATION Protect
confidential and proprietary information
8. RECIPROCITY Avoid improper reciprocal agreements
9. APPLICABLE LAWS, REGULATIONS AND TRADE AGREEMENTS
Know and obey the letter and spirit of laws, regulations and trade
agreements applicable to supply management
10. PROFESSIONAL COMPETENCE Develop skills, expand
knowledge and conduct business that demonstrates competence
and promotes the supply management profession

11 - 20© 2011 Pearson Education, Inc. publishing as Prentice Hall
Ethics and Sustainability
To ensure that sustainability is reflected in the
performance of second- and third-tier
suppliers, enforcement can be done by
 In-house inspectors
 Third-party auditors
 Governmental agencies
 Non-governmental organizations

11 - 21© 2011 Pearson Education, Inc. publishing as Prentice Hall
Supply Chain Economics
Supply Chain Costs as a Percent of Sales
Table 11.3
Industry % Purchased Industry % Purchased
All industry 52
Automobile 67 Beverages 52
Food 60 Chemical 62
Lumber 61 Metals 65
Paper 55 Restaurants 35
Petroleum 79
Transportation 62

11 - 22© 2011 Pearson Education, Inc. publishing as Prentice Hall
Supply Chain Economics
Dollars of additional sales needed to equal $1 saved
through the supply chain
Percent of Sales Spent in the Supply Chain
Percent Net Profit
of Firm 30% 40% 50% 60% 70% 80% 90%
2 $2.78 $3.23 $3.85 $4.76 $6.25 $9.09 $16.67
4 $2.70 $3.13 $3.70 $4.55 $5.88 $8.33 $14.29
6 $2.63 $3.03 $3.57 $4.35 $5.56 $7.69 $12.50
8 $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

11 - 23
Supply Chain vs.
Sales Strategy
Hau Lee Furniture
60% of sales $ in supply chain
Current gross profit = $10,000
Increase profits to $15,000 (50%)
CURRENT
SITUATION
SUPPLY CHAIN
STRATEGY
SALES
STRATEGY
Sales $100,000 $100,000 $125,000
Cost of materials $60,000 (60%) $55,000 (55%) $75,000 (60%)
Production costs $20,000 (20%) $20,000 (20%) $25,000 (20%)
Fixed costs $10,000 (10%) $10,000 (10%) $10,000 (8%)
Profit $10,000 (10%) $15,000 (15%) $15,000 (12%)
25% increase
in sales
8.3% reduction in
supply chain costs

11 - 24© 2011 Pearson Education, Inc. publishing as Prentice Hall
Make-or-Buy Decisions
 A Choice between producing a component or
service in-house or purchasing it from an
outside source
 Evaluate alternative suppliers and provide
current, accurate and complete data
 Focus not just on the analytical reasoning but
on identifying the core competencies of the
organization

11 - 25© 2011 Pearson Education, Inc. publishing as Prentice Hall
Outsourcing
 Transfers traditional internal activities and
resources of a firm to outside vendors
 Utilizes the efficiency that comes with
specialization
 Firms outsource information technology,
accounting, legal, logistics, and production

11 - 26© 2011 Pearson Education, Inc. publishing as Prentice Hall
Supply Chain Strategies
 Negotiating with many suppliers
 Long-term partnering with few suppliers
 Vertical integration
 Joint ventures
 Keiretsu
 Virtual companies that use suppliers on an
as needed basis

11 - 27© 2011 Pearson Education, Inc. publishing as Prentice Hall
Many Suppliers
 Commonly used for commodity products
 Purchasing is typically based on price
 Suppliers compete with one another
 Supplier is responsible for technology,
expertise, forecasting, cost, quality, and
delivery

11 - 28© 2011 Pearson Education, Inc. publishing as Prentice Hall
Few Suppliers
 Buyer forms longer term relationships with
fewer suppliers
 Create value through economies of scale and
learning curve improvements
 Suppliers more willing to participate in JIT
programs and contribute design and
technological expertise
 Cost of changing suppliers is huge

11 - 29© 2011 Pearson Education, Inc. publishing as Prentice Hall
Vertical Integration
Figure 11.2
Raw material
(suppliers) Iron ore Silicon Farming
Backward
integration Steel
Current
transformation Automobiles Integrated
circuits Flour milling
Forward integration Distribution
systems Circuit boards
Finished goods
(customers) Dealers
Computers
Watches
Calculators
Baked goods
Vertical Integration Examples of Vertical Integration

11 - 30© 2011 Pearson Education, Inc. publishing as Prentice Hall
Vertical Integration
 Developing the ability to produce goods or service
previously purchased
 Integration may be forward, towards the customer, or
backward, towards suppliers
 Can improve cost, quality, and inventory but requires
capital, managerial skills, and demand
 Risky in industries with rapid technological change

11 - 31© 2011 Pearson Education, Inc. publishing as Prentice Hall
Joint Ventures
 Formal collaboration
 Enhance skills
 Secure supply
 Reduce costs
 Cooperation without diluting brand or
conceding competitive advantage

11 - 32© 2011 Pearson Education, Inc. publishing as Prentice Hall
Keiretsu Networks
 A middle ground between few suppliers and
vertical integration
 Supplier becomes part of the company coalition
 Often provide financial support for suppliers
through ownership or loans
 Members expect long-term relationships and
provide technical expertise and stable deliveries
 May extend through several levels of the supply
chain

11 - 33© 2011 Pearson Education, Inc. publishing as Prentice Hall
Virtual Companies
 Rely on a variety of supplier relationships to
provide services on demand
 Fluid organizational boundaries that allow the
creation of unique enterprises to meet
changing market demands
 Exceptionally lean performance, low capital
investment, flexibility, and speed

11 - 34© 2011 Pearson Education, Inc. publishing as Prentice Hall
Managing the Supply Chain
 Mutual agreement on goals
 Trust
 Compatible organizational cultures
There are significant management issues in
controlling a supply chain involving many
independent organizations

11 - 35© 2011 Pearson Education, Inc. publishing as Prentice Hall
Issues in an Integrated Supply
Chain
 Local optimization - focusing on local profit or
cost minimization based on limited knowledge
 Incentives (sales incentives, quantity discounts,
quotas, and promotions) - push merchandise
prior to sale
 Large lots - low unit cost but do not reflect sales
 Bullwhip effect - stable demand becomes lumpy
orders through the supply chain

11 - 36© 2011 Pearson Education, Inc. publishing as Prentice Hall
Opportunities in an Integrated
Supply Chain
 Accurate “pull” data
 Lot size reduction
 Single stage control of
replenishment
 Vendor managed inventory (VMI)
 Collaborative planning, forecasting,
and replenishment (CPFR)
 Blanket orders

11 - 37© 2011 Pearson Education, Inc. publishing as Prentice Hall
Opportunities in an Integrated
Supply Chain
 Standardization
 Postponement
 Drop shipping and special packaging
 Pass-through facility
 Channel assembly

11 - 38© 2011 Pearson Education, Inc. publishing as Prentice Hall
Radio Frequency Tags
Radio 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.

11 - 39© 2011 Pearson Education, Inc. publishing as Prentice Hall
E-Procurement
 Uses the internet to facilitate purchasing
 Electronic ordering and funds transfer
 Electronic data interchange (EDI)
 Advanced shipping notice
 Online catalogs
1. Catalogs provided by vendors
2. Catalogs published by intermediaries
3. Exchanges provided by buyers
 RFQs
 Can make requests for quotes (RFQs) less costly
 Improves supplier selection
 Real-time inventory tracking

11 - 40© 2011 Pearson Education, Inc. publishing as Prentice Hall
Internet Trading Exchanges
 Health care products – ghx.com
 Retail goods – gnx.com
 Defense and aerospace products – exostar.com
 Food, beverage, consumer products –
transora.com
 Steel and metal products – metalsite.com
 Hotels – avendra.com

11 - 41© 2011 Pearson Education, Inc. publishing as Prentice Hall
E-Procurement
 Auctions
 Maintained by buyers, sellers, or intermediaries
 Low barriers
to entry
 Increase in
the potential
number of
buyers

11 - 42© 2011 Pearson Education, Inc. publishing as Prentice Hall
Vendor Selection
 Vendor evaluation
 Critical decision
 Find potential vendors
 Determine the likelihood of them becoming good
suppliers
 Vendor Development
 Training
 Engineering and production help
 Establish policies and procedures

11 - 43© 2011 Pearson Education, Inc. publishing as Prentice Hall
Vendor Evaluation
Criteria Weights
Scores
(1-5)
Weight x
Score
Engineering/research/innovation skills .20 5 1.0
Production process capability
(flexibility/technical assistance)
.15 4 .6
Distribution/delivery capability .05 4 .2
Quality systems and performance .10 2 .2
Facilities/location .05 2 .1
Financial 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

11 - 44© 2011 Pearson Education, Inc. publishing as Prentice Hall
Vendor Selection
 Negotiations – for developing contractual
relationships
 Cost-Based Price Model - supplier opens books to
purchaser
 Market-Based Price Model - price based on
published, auction, or indexed price
 Competitive Bidding - used for infrequent
purchases but may make establishing long-term
relationships difficult

11 - 45© 2011 Pearson Education, Inc. publishing as Prentice Hall
Logistics Management
 Objective is to obtain efficient operations through the
integration of all material acquisition, movement, and
storage activities
 Is a frequent candidate for outsourcing
 Allows competitive advantage to be gained through
reduced costs and improved customer service

11 - 46© 2011 Pearson Education, Inc. publishing as Prentice Hall
Distribution Systems
 Airfreight
 Fast and flexible for light loads
 May be expensive
 Waterways
 Typically used for bulky, low-value cargo
 Used when shipping cost is more important
than speed
 Pipelines
 Used for transporting oil, gas, and other chemical products
 Trucking
 Moves the vast majority of manufactured goods
 Chief advantage is flexibility
 Railroads
 Capable of carrying large loads
 Little flexibility though containers and piggybacking have helped with this

11 - 47© 2011 Pearson Education, Inc. publishing as Prentice Hall
Third-Party Logistics
 Outsourcing logistics can reduce costs and improve
delivery reliability and speed
 Coordinate supplier inventory with delivery services
 May provide
warehousing,
assembly, testing,
shipping, customs

11 - 48© 2011 Pearson Education, Inc. publishing as Prentice Hall
Cost of Shipping Alternatives
 Product in transit is a form of inventory and
has a carrying cost
 Faster shipping is generally more expensive
than slower shipping
 We can evaluate the two costs to better
understand the trade-off

11 - 49© 2011 Pearson Education, Inc. publishing as Prentice Hall
Cost of Shipping Alternatives
Value of connectors = $1,750.00
Holding cost = 40% per year
Second carrier is 1 day faster and $20 more expensive
Daily cost of
holding product = x /365
Annual
holding
cost
Product
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 JIT
 Borders are becoming more open in the U.S. and
around the world
 Monitoring and controlling stock moving
through supply chains is more important than
ever
 New technologies are
being developed to
allow close monitoring
of location, storage
conditions, and
movement

11 - 51© 2011 Pearson Education, Inc. publishing as Prentice Hall
Measuring Supply-Chain
Performance
Table 11.6
Typical Firms
Benchmark
Firms
Lead time (weeks) 15 8
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

11 - 52© 2011 Pearson Education, Inc. publishing as Prentice Hall
Measuring Supply-Chain
Performance
 Assets committed to inventory
Percent
invested in
inventory = x 100
Total inventory
investment
Total assets
Investment in inventory = $11.4 billion
Total assets = $44.4 billion
Percent invested in inventory = (11.4/44.4) x 100 = 25.7%

11 - 53© 2011 Pearson Education, Inc. publishing as Prentice Hall
Measuring Supply-Chain
Performance
Table 11.7
Inventory as a % of Total Assets
(with exceptional performance)
Manufacturing 15%
(Toyota 5%)
Wholesale 34%
(Coca-Cola 2.9%)
Restaurants 2.9%
(McDonald’s .05%)
Retail 27%
(Home Depot 25.7%)

11 - 54© 2011 Pearson Education, Inc. publishing as Prentice Hall
Measuring Supply-Chain
Performance
 Inventory turnover
Inventory
turnover =
Cost of goods sold
Inventory
investment

11 - 55© 2011 Pearson Education, Inc. publishing as Prentice Hall
Measuring Supply-Chain
Performance
Table 11.8
Examples of Annual Inventory Turnover
Food, Beverage, Retail Manufacturing
Anheuser Busch 15 Dell Computer 90
Coca-Cola 14 Johnson Controls 22
Home Depot 5 Toyota (overall) 13
McDonald’s 112 Nissan (assembly) 150

11 - 56© 2011 Pearson Education, Inc. publishing as Prentice Hall
Measuring Supply-Chain
Performance
 Inventory turnover
Net revenue $32.5
Cost of goods sold $14.2
Inventory:
Raw material inventory $.74
Work-in-process inventory $.11
Finished goods inventory $.84
Total inventory investment $1.69

11 - 57© 2011 Pearson Education, Inc. publishing as Prentice Hall
Measuring Supply-Chain
Performance
 Inventory turnover
Net revenue $32.5
Cost of goods sold $14.2
Inventory:
Raw material inventory $.74
Work-in-process inventory $.11
Finished goods inventory $.84
Total inventory investment $1.69
Inventory turnover = Cost of goods sold
Inventory investment
= 14.2 / 1.69 = 8.4

11 - 58© 2011 Pearson Education, Inc. publishing as Prentice Hall
Measuring Supply-Chain
Performance
 Inventory turnover
Net revenue $32.5
Cost of goods sold $14.2
Inventory:
Raw material inventory $.74
Work-in-process inventory $.11
Finished goods inventory $.84
Total inventory investment $1.69
Inventory turnover = Cost of goods sold
Inventory investment
= 14.2 / 1.69 = 8.4
Weeks of supply = Inventory investment
Average weekly cost of
goods sold
= 1.69 / .273 = 6.19 weeks
Average weekly
cost of goods sold = $14.2 / 52 = $.273

11 - 59© 2011 Pearson Education, Inc. publishing as Prentice Hall
The SCOR Model
 A set of processes, metrics and best practices
developed by the supply-chain council
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