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Chapter 11 – Supply Chain Management
PowerPoint presentation to accompany Heizer/Render Principles of Operations Management, 7e Operations Management, 9e
© 2008 Prentice Hall, Inc. 11 – 1
When you complete this chapter you should be able to:
1. Explain the strategic importance of the supply chain 2. Identify five supply chain strategies 3. Explain issues and opportunities in the supply chain 4. Describe approaches to supply chain negotiations
© 2008 Prentice Hall, Inc. 11 – 2
When you complete this chapter you should be able to:
Evaluate supply chain performance
Compute percent of assets committed to inventory
Compute inventory turnover
© 2008 Prentice Hall, Inc.
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Inc.Darden Restaurants Largest publicly traded casual dining company in the world Serves over 300 million meals annually in more than 1. 11 – 4 .400 restaurants in the US and Canada Annual sales of $2.4 billion Operations is the strategy © 2008 Prentice Hall.
refrigerated foods. restaurant supplies Over $1. Inc.Darden Restaurants Sources food from five continents and thousands of suppliers Four distinct supply chains: seafood.5 billion spent annually in supply chains Competitive advantage achieved through superior supply chain © 2008 Prentice Hall. baked goods. 11 – 5 .
transparent and efficient SC © 2008 Prentice Hall. 11 – 6 . Inc.Darden Restaurants Supply chains have the same common characteristics: • Supplier qualification • Product tracking system • Independent audits • Employ JIT delivery Receive competitive advantage through rapid.
Inc. 11 – 7 . transform them into intermediate goods and the final product. it is between supply chains © 2008 Prentice Hall. and deliver them to customers Competition is no longer between companies.The Supply Chain’s Strategic Importance Supply chain management is the integration of the activities that procure materials and services.
Supply Chain Management
Important activities include determining
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
© 2008 Prentice Hall, Inc. 11 – 8
A Supply Chain for Beer
© 2008 Prentice Hall, Inc. 11 – 9
Global Supply Chain Issues Global Supply-Chain Issues
Supply chains in a global environment must be:
– Flexible enough to react to sudden changes in parts availability, distribution, or shipping channels, import duties, and currency rates
– Able to use the latest computer and transmission technologies to schedule and manage the shipment of parts in and finished products out
– Staffed with local specialists to handle duties, trade, freight, customs and political issues
© 2008 Prentice Hall, Inc.
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stockouts (e.. 11 – 11 .. and flexibility Select primarily for product development skills Primary selection criteria Table 11. requirements jointly develop and demand to products and minimize options (e. Inc. Benetton) Dell Computers) Select primarily for capacity. Emerson Electric..g.g.1 © 2008 Prentice Hall. Taco Bell) Select primarily for cost Response Strategy Differentiation Strategy Respond quickly Share market to changing research.g.How Supply Chain Decisions Impact Strategy Low-Cost Strategy Supplier’s goal Supply demand at lowest possible cost (e. speed.
Inc. 11 – 12 .How Supply Chain Decisions Impact Strategy Low-Cost Strategy Process characteristics Maintain high average utilization Response Strategy Invest in excess capacity and flexible processes Differentiation Strategy Modular processes that lend themselves to mass customization Minimize inventory in the chain to avoid obsolescence Inventory characteristics Minimize inventory throughout the chain to hold down cost Develop responsive system with buffer stocks positioned to ensure supply Table 11.1 © 2008 Prentice Hall.
1 © 2008 Prentice Hall. 11 – 13 . Inc.How Supply Chain Decisions Impact Strategy Low-Cost Strategy Lead-time characteristics Shorten lead time as long as it does not increase costs Response Strategy Invest aggressively to reduce production lead time Differentiation Strategy Invest aggressively to reduce development lead time Productdesign characteristics 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.
Supply Chain Economics Supply Chain Economics • Supply chain is a costly activity. • Affects quality of final product • Aids strategy of low cost. and differentiation SC must be managed efficiently! 11-14 © 2008 Prentice Hall. response. Inc. 11 – 14 . so savings in SC costs directly increases profit.
Supply Chain Economics Supply Chain Costs as a Percent of Sales Industry All industry Automobile Food Lumber Paper Petroleum Transportation % Purchased 52 67 60 61 55 79 62 Table 11.2 © 2008 Prentice Hall. 11 – 15 . Inc.
00 Table 11.23 $3.56 $5.29 $12.85 $3.67 90% $16.00 70% $6.86 50% $3.26 $5.45 $3.09 $8.50 40% $3.70 6 $2.69 $7.50 $11.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% 2 $2. Inc.00 80% $9.17 $4. 11 – 16 .11 $10.55 $4.25 $5.33 60% $4.33 $7.57 $3.13 $3.3 © 2008 Prentice Hall.56 10 $2.63 8 $2.14 $6.88 $5.76 $4.67 $14.70 $3.35 $4.78 4 $2.03 $2.94 $2.
if the profit is increased to 6%. Inc. • How much sales should be made to receive the same profit when $1 saving is made in the SC? What is the solution. thus the system is more efficient now? • © 2008 Prentice Hall.Supply Chain Economics Hau Lee Furniture spends 50% of its sales in the SC and has a net profit of 4%. 11 – 17 .
Inc. and • Develop. 11 – 18 . price. evaluate. and determine the best supplier. and delivery for those products and services 11-18 © 2008 Prentice Hall.Objectives of the Purchasing Function • Help identify the goods and services that can be best obtained externally.
4. Inc. 2.Make-or-Buy Decisions Reasons for Making 1. 7. Maintain core competence Lower production cost Unsuitable suppliers Assure adequate supply (quantity or delivery) Utilize surplus labor or facilities Obtain desired quality Remove supplier collusion Obtain unique item that would entail a prohibitive commitment for a supplier 9. 8. Increase or maintain size of company © 2008 Prentice Hall. 3. 6. Protect personnel from a layoff 10.4 11 – 19 . 5. Protect proprietary design or quality 11. Table 11.
Preserve supplier commitment 4. Lower acquisition cost 3. Inc. Item is protected by a patent or trade secret © 2008 Prentice Hall.4 11 – 20 .Make-or-Buy Decisions Reasons for Buying 1. Reciprocity 10. Obtain technical or management ability 5. Inadequate managerial or technical resources 9. Table 11. Reduce inventory costs 7. Inadequate capacity 6. Frees management to deal with its core competence 2. Ensure alternative sources 8.
legal. vendor is an expert in that specialty. accounting. and production There is no tangible product or transfer of title. logistics. only resources (facilities. Inc.Outsourcing Transfers traditional internal activities and resources of a firm to outside vendors Utilizes the efficiency that comes with specialization. © 2008 Prentice Hall. people. Firms outsource information technology. equipment) are transferred. 11 – 21 .
culture. Inc.. © 2008 Prentice Hall. Institute for Supply Management has developed a detailed set of principles and standards for ethical behavior. Ex: Friendship b/w sales people and customers . Opportunities for unethical behavior are enormous and temptations are high. traditional values: Ex: Gap Inc.Ethics in the Supply Chain Ethical decisions are critical to long term success of SC.bribery? Many companies have strict rules and codes of conduct that define acceptable behavior. 11 – 22 . 50% factories in Africa operate w/o proper safety devices. reports that 10-15% of Chinese factories are subject to psychological or verbal abuse. In global SC’s there are additional ethical issues: labor laws.
Avoid the intent and appearance of unethical or compromising practice in relationships. and communications Demonstrate loyalty to the employer by diligently following the lawful instructions of the employer. using reasonable care and granted authority Avoid any personal business or professional activity that would create a conflict between personal interests and the interests of the employer Table 11. actions. 11 – 23 2. 3.5 © 2008 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 1. Inc.
7. or appear to influence. Promote positive supplier relationships through courtesy and impartiality Avoid improper reciprocal agreements Table 11. 6. and the acceptance of gifts. credits. entertainment. 11 – 24 . Avoid soliciting or accepting money.Principles and Standards for Ethical Supply Management Conduct 4. favors. Inc. loans.5 © 2008 Prentice Hall. or preferential discounts. supply management decisions Handle confidential or proprietary information with due care and proper consideration of ethical and legal ramifications and government regulations 5. or services from present or potential suppliers that might influence.
disadvantaged. your organization’s policies. and minority-owned businesses 10. Inc. Enhance the stature of the supply management profession Table 11. Know and obey the letter and spirit of laws applicable to supply management Encourage support for small. 11 – 25 . and practices. 9. Conduct supply management activities in accordance with national and international laws.Principles and Standards for Ethical Supply Management Conduct 8. customs. Acquire and maintain professional competence 11. and these ethical principles and standards of conduct 12.5 © 2008 Prentice Hall.
11 – 26 . Inc. They affect long-term competitive position Negotiating with many suppliers Long-term partnering with few suppliers Vertical integration Keiretsu networks Virtual companies that use suppliers on an as needed basis © 2008 Prentice Hall.Supply Chain Strategies Plans to help achieve company mission.
expertise. cost. forecasting. Inc. and delivery Almost no information sharing Infrequent large lots Delivery to receiving dock Long term relationship is not the goal! Disadvantage: © 2008 Prentice Hall. order goes to the low bider. quality. Supplier is responsible for technology. Suppliers aggresively compete with one another. 11 – 27 .Many Suppliers • Commonly used for commodity products Purchasing is typically based on price.
small lots Delivery to point of use Disadvantages: Cost of changing partner is high There might be problems with poor supplier performance Suppliers can make other alliances. 11 – 28 . & Giant Manufacturing Co.Few Suppliers Buyer forms longer term relationships with fewer suppliers Create value through economies of scale and learning curve improvements. contribute design and technological expertise Frequent. Inc. Ex: Schwinn Bicycle Co. © 2008 Prentice Hall. in the long run! Suppliers participate in JIT programs.
Vertical Integration Vertical Integration Raw material (suppliers) Backward integration Current transformation Examples of Vertical Integration Iron ore Silicon Farming Steel Automobiles Integrated circuits Flour milling Forward integration Distribution systems Circuit boards Finished goods (customers) Dealers Computers Watches Calculators Baked goods Figure 11. Inc.2 © 2008 Prentice Hall. 11 – 29 .
Inc. towards suppliers Can improve cost. and timely delivery. managerial skills. towards the customer. Ford Motor manufactures its own radios. Texas Instruments produce integrated circuits as well as flat screens. quality. decrease inventory Most beneficial when the company has large market share and components are highly integrated Disadvantages Requires capital. Integration may be forward. .Vertical Integration Developing the ability to produce goods or service previously purchased. calculators. and demand Risky in industries with rapid technological change 11 – 30 © 2008 Prentice Hall. Ex. or backward.
11 – 31 .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 © 2008 Prentice Hall. Inc.
hiring personnel. low capital investment.Virtual Companies Vertical integration has many drawbacks. 11 – 32 . long term. collaborators Results in specialized management expertise. designing products. Ex: Cloth designers give licence to the manufacturer who rents space.Evaluating performance © 2008 Prentice Hall. Inc. Relationship: short term. Disadvantages: . providing consulting services. include partners. subcontact other services. Ex: doing payroll.Selecting the companies to join the alliance . lease sewing m/c’s.. contract for labor. so find good flexible suppliers and rely on variety of supplier relationships.Sharing revenues . flexibility and speed. distributing products.
Inc. management of seperate and independent organizations may result in serious inefficiencies.Managing the Supply Chain Substantial efficiencies are possible by integration of the SC . 11 – 33 . However. Significant management issues in controlling a SC Mutual agreement on goals: not on just contact terms Trust: information sharing Compatible organizational cultures: strengthen the relationship with formal and informal contacts © 2008 Prentice Hall.
Distortions in an Integrated Supply-Chain Local optimization .low unit cost but do not reflect sales All result in increased bullwhip effect! © 2008 Prentice Hall.focusing on local profit or cost minimization based on limited knowledge Incentives (sales incentives. Inc.push merchandise prior to sale Large lots . quantity discounts. quotas. and promotions) . 11 – 34 .
etc • Decreases customer service and profitability A well running SC is based on accurate information about how many products are truly being pulled through the system. © 2008 Prentice Hall. Inc. shipping.Bullwhip effect Increasing fluctuation in orders towards the upper supply chain. 11 – 35 . Results in: • Increases cost of inventory.
Ex: share point-of-sales (POS) info and computer assisted ordering CAO • Reduction of lot size by aggressive management Ex: develop economical shipments of small size discounts based on annual volume reduce cost of ordering • Single stage control of replenishment A member is resposible for the inventory management of the whole chain like a retailer. 11 – 36 . © 2008 Prentice Hall. distributor or manufacturer.Opportunities for effective management in an Integrated SC • Generation of accurate “pull” data. Inc.
11 – 37 . Radio frequency ID (or RFID) tags can change that by providing real-time information about what’s happening on store shelves. but often break down when confronted by a sudden surge in demand. Here’s how the system works for Proctor & Gamble’s Pampers. Inc. © 2008 Prentice Hall.Radio Frequency Tags Radio Frequency Tags: Keeping the Shelves Stocked Supply chains work smoothly when sales are steady.
Ex: HP Printers © 2008 Prentice Hall. • Blanket orders A contract to purchase certain orders from the vendor. Supplier delivers directly to the purchaser’s using department. 11 – 38 . Inc.Opportunities for effective management in an Integrated SC • Vendor managed inventory (VMI) use of a local supplier to maintain inventory for the manufacturer or retailer. • Standardization Use standard components that do not have slight variations. • Postponement Delaying any modification or customization to the later stages of production.
Often run by logistics firms • Channel assembly Postpones final assembly of a product so the distribution channel can assemble it. but functions as a holding area and shipping hub.. etc. labels. 11 – 39 . • Pass through facility A distribution center where merchandise is held. tested and shipped.Opportunities for effective management in an Integrated SC • Drop shipping and special packaging Supplier will ship directly to the end consumer to be assembled. Use of special packaging. their bar codes. Ex: Dell Computers. © 2008 Prentice Hall. Inc. optimal placement of labels.
© 2008 Prentice Hall. enhances organization’s competitive advantage. For nonblanket orders. Inc. Reduces total cycle time. catalogs and ordering procedures on internet enhance the communicating features. Internet is used to communicate order releases to suppliers. especially for blanket orders.E-Procurement Use of internet to facilitate purchasing. paperwork. A SC may contain many of the above techniques within automated purchasing systems. integrates SC. 11 – 40 .
Inc. Applies to any business application. 11 – 41 . like purchasing Provides format for order date. showing that the vendor is ready to ship. Advanced shipping notice (ASN) A shipping notice delivered directly from vendor to purchaser.E-Procurement Environments. etc. Components Traditional Tehniques Electronic data interchange (EDI) A standardized data transmittal format for computerized communications b/w organizations. quantity. due date. Modern Techniques Online catalogs Auctions RFQs Real time inventory tracking © 2008 Prentice Hall.
11 – 42 . defense and aerospace. food beverage&consumer products © 2008 Prentice Hall. retail goods.E-Procurement Online catalogs Provide information about products and cost comparisons among suppliers in electronic form Standard items may be purchased by online catalogs Catalogs are available in three versions Catalogs provided by vendors Catalogs published by intermediaries Ex: www.eksenbilgisayar.com Exchanges provided by buyers Ex: Global healthcare exchange. Inc.
E-Procurement Auctions Maintained by buyers. sellers. 11 – 43 . or intermediaries Use lower barriers for entry Increase in the potential number of buyers © 2008 Prentice Hall. Inc.
engineering drawings Real-time inventory tracking E-procurement supported by bar codes and RFID can provide economical inventory tracking on the shop floor.E-Procurement RFQ: Request for Quote When purchasing requirements are nonstandard. . RFQ preparation is too time consuming! E-Procurement can make it less costly Improves supplier selection Ex: GE has extensive database of vendors. in warehouses and in logistics 11 – 44 © 2008 Prentice Hall. Inc. deliver. quality.
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 © 2008 Prentice Hall. 11 – 45 . Inc.
20 .15 .9 11 – 46 . Inc.0 3.0 .2 .Vendor Evaluation Criteria Engineering/research/innovation skills Production process capability (flexibility/technical assistance) Weights .00 4 2 5 . .10 .10 .2 1.05 4 2 2 .2 . ERP) Integrity (environmental compliance/ ethics) Total © 2008 Prentice Hall.1 Financial and managerial strength (stability and cost structure) Information systems capability (eprocurement.6 .05 .20 1.15 Scores (1-5) 5 4 Weight x Score 1.6 Distribution/delivery capability Quality systems and performance Facilities/location .
Used for infrequent purchases but may make establishing long-term relationships difficult © 2008 Prentice Hall. auction. Competitive Bidding – often appropriate when suppliers don’t wish to discuss costs or where near perfect markets do not exist. price based on time and materials or on fixed cost plus escalation clause for materials and labor changes of the vendor.Negotiation Strategies for Vendor Selection Cost-Based Price Model . or indexed price. Ex: paper prices are available on line at official board markets site. Inc.supplier opens books to purchaser.price based on published. Market-Based Price Model . 11 – 47 .
Inc. and storage activities Is a frequent candidate for outsourcing Allows competitive advantage to be gained through reduced costs and improved customer service © 2008 Prentice Hall.Logistics Management Objective is to obtain efficient operations through the integration of all material acquisition. movement. 11 – 48 .
Inc.Distribution Systems 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 © 2008 Prentice Hall. 11 – 49 .
11 – 50 . Inc.Distribution Systems Airfreight Fast and flexible for light loads May be expensive © 2008 Prentice Hall.
lowvalue cargo Used when shipping cost is more important than speed © 2008 Prentice Hall.Distribution Systems Waterways Typically used for bulky. Inc. 11 – 51 .
Distribution Systems Pipelines Used for transporting oil. and other chemical products © 2008 Prentice Hall. gas. Inc. 11 – 52 .
Third-Party Logistics Outsourcing logistics can reduce costs and improve delivery reliability and speed Logistics firm can coordinate supplier inventory with delivery services FedEx provide warehousing. Inc. customs for Dell Computer © 2008 Prentice Hall. assembly. 11 – 53 . shipping. testing.
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 © 2008 Prentice Hall. 11 – 54 . Inc.
slower shipper © 2008 Prentice Hall.750)/ 365 = $1.750 Holding cost = 40% per year Second carrier (airfreight) is 1 day faster and $20 more expensive Daily cost of = Annual x Product /365 holding holding product value cost = (. 11 – 55 .92 < $20). we should use the cheaper.92 Since it costs less to hold the product one day longer than it does for the faster shipping ($1.40 x $1. Inc.Cost of Shipping Alternatives: Connectors to be shipped from San Jose to Singapore Value of connectors = $1.
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.Logistics.S. 11 – 56 . and JIT Borders are becoming more open in the U. Security. storage conditions. and movement © 2008 Prentice Hall. Inc.
Inc.5% 400 .6 © 2008 Prentice Hall.Measuring Supply Chain Performance Typical Firms Lead time (weeks) Time spent placing an order Percentage of late deliveries 15 42 minutes 33% Benchmark Firms 8 15 minutes 2% Percentage of rejected material Number of shortages per year 1. 11 – 57 .0001% 4 Table 11.
Inc.4) x 100 = 25.Measuring Supply Chain Performance Assets committed to inventory Percent invested in = inventory Total inventory investment Total assets x 100 Investment in inventory = $11.4 billion Percent invested in inventory = (11.7% © 2008 Prentice Hall.4 billion Total assets = $44. 11 – 58 .4/44.
9%) 20% 34% Restaurants (McDonald’s .9% 27% Table 11.7 11 – 59 . 2.7%) © 2008 Prentice Hall. Inc.Measuring Supply Chain Performance Inventory as a % of Total Assets (with exceptional performance) Manufacturing (Toyota 5%) Wholesale (Coca-Cola 2.05%) Retail (Home Depot 25.
11 – 60 .Measuring Supply Chain Performance Inventory turnover Inventory turnover = Cost of goods sold Inventory investment Weeks of supply (its reciprocal) © 2008 Prentice Hall. Inc.
Beverage. Retail Anheuser Busch Coca-Cola Home Depot McDonald’s 15 14 5 112 Manufacturing Dell Computer Johnson Controls Toyota (overall) Nissan (assembly) 90 22 13 150 Table 11.Measuring Supply Chain Performance Examples of Annual Inventory Turnover Food. Inc. 11 – 61 .8 © 2008 Prentice Hall.
5 $14. Inc.2 $.11 $.69 © 2008 Prentice Hall.Measuring Supply Chain Performance PepsiCo Company-2005 annual report Inventory turnover billions Net revenue Cost of goods sold Inventory: Raw material inventory Work-in-process inventory Finished goods inventory Total inventory investment $32.74 $.84 $1. 11 – 62 .
Inc.74 = 14.2 / 1.2 Inventory turnover Inventory investment Inventory: Raw material inventory $.5 Cost of goods sold Cost of goods sold = $14.4 Work-in-process inventory $. 11 – 63 .11 Finished goods inventory $.69 = 8.84 Total inventory investment $1.Measuring Supply Chain Performance Inventory turnover Net revenue $32.69 © 2008 Prentice Hall.
69 = 1. Inc.2 Average Inventory turnover = $14.11 Weeks of supply = Average $.69 / .Measuring Supply Chain Performance Inventory turnover Net revenue $32.273 cost of goods soldInventory /investment Inventory: Raw material inventory $.5 Cost of goods sold Cost of goods weekly sold = $14.4 Work-in-process inventory $.69 investment Inventory = 8.2 / 1.74 = 14.2 52 = $.273 = 6. 11 – 64 .84 Finished goods inventory weekly cost of Total inventory investment goods sold $1.19 weeks © 2008 Prentice Hall.
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