Operations Management

Professor: Nestor U. Salcedo

 Unit 11 of the basic bibliography
Learning Objectives

Unit 4. Supply Chain Management

1. The Supply Chain’s Strategic Importance
2. Sourcing Issues: Make-or-Buy vs. Outsourcing
3. Six Sourcing Strategies
4. Supply Chain Risk
5. Managing the Integrated Supply Chain
6. Building the Supply Base
7. Logistics Management
8. Distribution Management
9. Ethics and Sustainable Supply Chain Management
10. Measuring Supply Chain Performance

3 hour

Source of the presentation: Heizer and Render slides.

© 2017 Pearson
Supply-Chain Management

The objective of supply chain management

is to coordinate activities within the supply
chain to maximize the supply chain’s
competitive advantage and benefits to the
ultimate consumer
The Supply Chain’s Strategic Importance
• Coordination of all supply chain activities, TABLE 11.1
starting with raw materials and ending with Supply Chain Costs as a Percentage of Sales
a satisfied customer INDUSTRY % PURCHASED
• Includes suppliers, manufacturers and/or Automobiles 67
service providers, distributors, wholesalers,
Beverages 52
retailers, and final customer
Chemical 62
• Large portion of sales dollars spent on
purchases Food 60
• Supplier relationships increasingly Lumber 61
integrated and long term Metals 65
• Improve innovation, speed design, reduce Paper 55
costs Petroleum 79
• Managing supplier relationships has added Restaurants 35
emphasis Transportation 62
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 SALES STRATEGY
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%)
 A Supply Chain for Beer
Figure 11.1
 Supply Chain Management
TABLE 11.2 How Corporate Strategy Impacts Supply Chain Decisions
LOW COST RESPONSE STRATEGY DIFFERENTIATION STRATEGY
STRATEGY
Primary supplier • Cost • Capacity • Product development skills
selection criteria • Speed • Willing to share information
• Flexibility • Jointly and rapidly develop
products

Supply chain • Minimize • Use buffer stocks to • Minimize inventory to avoid

inventory inventory to hold ensure speedy product obsolescence
down costs supply

Distribution network • Inexpensive • Fast transportation • Gather and communicate

transportation • Provide premium market research data
• Sell through customer service • Knowledgeable sales staff
discount
distributors/retail
ers

Product design • Maximize • Low setup time • Modular design to aid product
characteristics performance • Rapid production differentiation
• Minimize cost ramp-up
Sourcing Issues
• Make-or-buy vs. outsourcing
• Choosing between obtaining
products and services
externally as opposed to
producing them internally
• Outsourcing
• Transfer traditional internal
activities and resources to
outside vendors
• Efficiency in specialization
• Focus on core competencies
Six Sourcing Strategies
1. Many suppliers
2. Few suppliers
3. Vertical integration
4. Joint ventures
5. Keiretsu networks
6. Virtual companies
Six Sourcing Strategies
1. 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
• Request for proposal for suppliers
2. 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
• Trade secrets and other alliances
Six Sourcing Strategies

3. Vertical Integration 4. Joint Ventures

• Developing the ability to produce goods or • Formal collaboration
service previously purchased
• Integration may be forward, towards the
• Enhance skills
customer, or backward, towards suppliers • Secure supply
• Can improve cost, quality, and inventory • Reduce costs
but requires capital, managerial skills, and
demand • Cooperation without diluting
• Risky in industries with rapid technological brand or conceding
change
competitive advantage
• Company can control the quality
consistence and realiavity of service
provided
Vertical Integration
Vertical Integration Examples of Vertical Integration
Raw material
(suppliers) Tree Harvesting

Backward integration Chipmakers Pulpmaking

Current International
transformation Pepsi Apple
Paper

End-User Paper
Forward integration Bottling Retail stores
Conversion

Finished goods
(customers)
Figure 11.2
Six Sourcing Strategies
5. 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
• Few supplyers and vertical integrations
6. 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
• Relationships may be short- or long-
term
• Exceptionally lean performance, low
capital investment, flexibility, and speed
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
Risk and Mitigation Tactics
• 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
TABLE 11.3 Supply Chain Risks and Tactics
RISK RISK REDUCTION TACTICS EXAMPLE
Supplier Use multiple suppliers; effective McDonald’s planned its supply
failure to contracts with penalties; chain 6 years before its opening in
deliver subcontractors on retainer; pre- Russia. Every plant—bakery, meat,
planning chicken, fish, and lettuce—is closely
monitored to ensure strong links.
Supplier Careful supplier selection, Darden Restaurants has placed
quality training, certification, and extensive controls, including third-
failure monitoring party audits, on supplier processes
and logistics to ensure constant
monitoring and reduction of risk.
Risk and Mitigation Tactics
TABLE 11.3 Supply Chain Risks and Tactics
RISK RISK REDUCTION TACTICS
Logistics Multiple/redundant
delays or transportation modes
damage and warehouses; secure
packaging; effective contracts
with penalties
Distribution Careful selection, monitoring,
and effective contracts with
penalties
EXAMPLE
Walmart, with its own trucking
fleet and numerous distribution
centers located throughout the
U.S., finds alternative origins and
delivery routes bypassing problem
areas.
Toyota trains its dealers around the
world, invoking principles of the
Toyota Production System to help
dealers improve customer service,
used-car logistics, and body and
paint operations.
Risk and Mitigation Tactics
TABLE 11.3 Supply Chain Risks and Tactics
RISK RISK REDUCTION TACTICS
Information Redundant databases; secure IT
loss or systems; training of supply chain
distortion partners on the proper
interpretations and uses of
information
Political Political risk insurance; cross-
country diversification;
franchising and licensing
EXAMPLE
Boeing utilizes a state-of-the-art
international communication
system that transmits engineering,
scheduling, and logistics data to
Boeing facilities and suppliers
worldwide.
Hard Rock Café reduces political
risk by franchising and licensing,
rather than owning, when the
political and cultural barriers seem
significant.
Risk and Mitigation Tactics
TABLE 11.3 Supply Chain Risks and Tactics
RISK RISK REDUCTION TACTICS
Economic Hedging to combat exchange rate
risk; purchasing contracts that
address price fluctuations
Natural Insurance; alternate sourcing;
catastrophes cross-country diversification
EXAMPLE
Honda and Nissan are moving
more manufacturing out of Japan
as the exchange rate for the yen
makes Japanese-made autos
more expensive.
Toyota, after its experience with
fires, earthquakes, and tsunamis,
now attempts to have at least
two suppliers, each in a different
geographical region, for each
component.
Security and JIT
• Shipments get misrouted, stolen, damaged, or
excessively delayed
• Technological innovations are improving
security and inventory management
• Location, motion sensors, broken seals, temperature
• Tracking can help expedite shipments
Managing the Integrated Supply Chain
ffec t o c curs
e
Issues Bullwhip rs are relayed Opportunities
h en o rde chain
w up p l y • Accurate “pull” data, shared
ug h the s
th ro
t e a ch step information
c re a s i nga
i n • Lot size reduction, shipping,
• Local optimization can magnify
fluctuations discounts, reduced ordering costs
• Incentives push merchandise into • Single stage control of
the supply chain for sales that have replenishment
not occurred • Single supply chain member
• Large lots reduce shipping costs but responsible for ordering
increase inventory holding and do • Vendor managed inventory (VMI)
not reflect actual sales
Managing the Integrated Supply Chain

Opportunities Opportunities
• Collaborative planning, • Postponement withholds
forecasting, and modification as long as possible
replenishment (CPFR) • Electronic ordering and funds
through the supply chain transfer speed transactions and
• Blanket orders against reduce paperwork
which actual orders are • Drop shipping and special
released packaging bypasses the seller
and reduces costs
• Standardization
Building the Supply Base
Supplier evaluation
• Finding potential suppliers
• Determine likelihood of their
becoming good suppliers
Supplier certification
1. Qualification
2. Education
3. Certification
Supplier development
• Integrate the supplier into the
system
• Quality requirements
• Product specifications
• Schedules and delivery
• Procurement policies
• Training
• Engineering and production help
• Information transfer procedures
Building the Supply Base

Negotiation Contracting
• A significant element in purchasing • Share risks, benefits, create incentives
• Highly valued skills Centralized purchasing
• Cost-based price model • Leverage volume
• Supplier opens books • Develop specialized staff
• Market-based price model • Develop supplier relationships
• Based on published, auction, or indexed • Maintain professional control
prices
• Devote resources to selection and
• Competitive bidding
negotiation
• Common policy for many purchases
• Does not generally foster long-term
• Reduce duplication of tasks
relationships • Promote standardization
Building the Supply Base
E-Procurement
• Speeds purchasing, reduces
costs, integrates supply chain
Online catalogs and exchanges
• Standard items or industry-
specific web sites
Online auctions
• Low barriers to entry
• Reverse auctions for buyers
• Price not always the most
important factor
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
Logistics Management: Shipping 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
• 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
• Multimodal
• Combines shipping methods
• Common, especially in international
shipments
• Aided by standardized containers
Logistics Management: Shipments and Warehousing
Cost and Speed of Shipments
• Faster shipping is generally
more expensive than slower
shipping
• Faster methods tend to
involve smaller shipment
sizes while slower methods
involve very large shipment
sizes
Warehousing
• May be expensive, but
alternatives may be more so
• Fundamental purpose is to
store goods
• May provide other functions
• Consolidation
• Break-bulk
• Cross-docking
• Channel assembly
Logistics Management: Third-Party Logistics (3PL)

• Outsourcing logistics can reduce

inventory, costs, and improve
delivery reliability and speed
• Coordinate supplier inventory
with delivery services
• May provide warehousing,
assembly, testing, shipping,
customs
Distribution Management
• The outbound flow of • Facilities, packaging, and
products logistics
1. Rapid response • Selection and development of
2. Product choice dealers or retailers
3. Service
• Downstream management as
• Increasing the number of important as upstream
facilities generally improves management
response time and customer
satisfaction
• Total costs are important
 Distribution Management
(a) Response Time (b) Cost $ (c) Cost, Revenue, and Profit

Revenue
Response time

Lowest cost Max

Total logistics cost Total logistics cost
profit
Time

$
$
Facility costs

Inventory costs
Transportation costs

1 2 3 4 5 1 2 3 4 5 1 2 3 4 5
Number of facilities Number of facilities Number of facilities

Figure 11.3
Ethics and Sustainable Supply Chain Management
• Personal ethics
• Critical to long term
success of an organization
• Supply chains particularly
susceptible
• Ethics within the supply chain
• Ethical behavior regarding the
environment
Institute for Supply Management
Principles and Standards
• Promote and uphold responsibilities to
one’s employer; positive supplier and
customer relationships; sustainability and
social responsibility; protection of
confidential and proprietary information;
applicable laws, regulations, and trade
agreements; and development of
professional competence
• Avoid perceived impropriety; conflicts of
interest; behaviors that negatively
influence supply chain decisions; and
improper reciprocal agreements
ISM Ethical Standards
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 do 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
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
Establishing Sustainability in Supply Chains
• Return or reverse logistics TABLE 11.4 Management Challenges of Reverse Logistics
ISSUE FORWARD LOGISTICS REVERSE LOGISTICS
• Sending returned products back
Forecasting Relatively More uncertain
up the supply chain for resale, straightforward
repair, reuse, remanufacture, Product quality Uniform Not uniform
recycling, or disposal Product packaging Uniform Often damaged
• Closed-loop supply chain Pricing Relatively uniform Dependent on many
factors
• Proactive design of a supply Speed Often very important Often not a priority
chain that tries to optimize all Distribution costs Easily visible Less directly visible
forward and reverse flows
Inventory Consistent Not consistent
• Prepares for returns prior to management
product introduction
Measuring Supply-Chain Performance

• Assets committed to inventory

Percentage
Total inventory investment
invested in = x 100
inventory Total assets

TABLE 11.5
► Home Depot had $11.4b inventory, Inventory as Percentage of Total Assets
total assets of $44.4b (with examples of exceptional performance)
Manufacturer (Toyota 5%) 15%
Percentage Wholesale (Coca-Cola 2.9%) 34%
11.4
invested in = x 100 = 25.7%
inventory 44.4 Restaurants (McDonald’s .05%) 2.9%
Retail (Home Depot 25.7%) 28%
Measuring Supply-Chain Performance

• Inventory turnover • From PepsiCo, Inc. Annual Report

Inventory Cost of goods sold Net revenue $32.5

turnover =
Inventory investment Cost of goods sold $14.2
Inventory:
Raw material inventory $.74
► Inventory investment Work-in-process inventory $.11
► Average of several periods Finished goods inventory $.84
► (beginning plus ending)/2 Total inventory investment $1.69

► Ending inventory

Inventory 14.2
turnover = 1.69
= 8.4
Measuring Supply-Chain Performance
TABLE 11.6 Examples of Annual Inventory Turnover
• Weeks of supply
FOOD, BEVERAGE, RETAIL
Anheuser Busch 15 Weeks Inventory investment
=
Coca-Cola 15 of supply
Annual cost of goods sold
Home Depot 5
52 weeks
McDonald’s 112
MANUFACTURING ► For PepsiCo
Dell Computer 90
Inventory investment = $1.69b
Johnson controls 22 Average weekly cost of goods sold = $14.2b /
Toyota (overall) 13 52 = $.273b
Nissan (assembly) 150 Weeks of supply = 1.69 / .273 = 6.19
weeks
Benchmarking the Supply Chain

Comparison with benchmark firms

Supply Chain Metrics in the Consumer • Benchmarking useful
TABLE 11.7 Packaged Goods Industry

TYPICAL BENCHMARK • May not be adequate

FIRMS FIRMS
• Audits may be necessary
Order fill rate 71% 98%
• Continuing communication,
Oder fulfillment lead time 7 3
(days) Understanding, Trust,
Cash-to-cash cycle time 100 30 Performance, Corporate strategy
(days)
Inventory days of supply 50 20
• Foster a mutual belief that “we
are in this together”
 The SCOR Model

Processes, metrics and best practices Figure 11.4

SCOR Model Metrics to Help Firms Benchmark Performance
TABLE 11.8 Against the Industry

PERFORMANCE
Plan: Demand/Supply planning and Management ATTRIBUTE SAMPLE METRIC CALCULATION
Supply chain Perfect order (Total perfect orders) / (Total
Source: Identify, Make: Manage Deliver: Invoice, reliability fulfillment number of orders)
select, manage, production warehouse,
and assess execution, testing transport and Supply chain Average order (Sum of actual cycle times for all
responsiveness fulfillment cycle time orders delivered) / (Total number
sources and packaging install of orders delivered)

Supply chain Upside supply chain Time required to achieve an

agility flexibility unplanned 20% increase in
Return: Raw material Return: Finished goods delivered quantities

Supply chain costs Supply chain Cost to plan + Cost to source +

management costs Cost to deliver + Cost to return
Supply chain asset Cash-to-cash cycle Inventory days of supply + Days of
management time receivables outstanding – Days of
payables outstanding