1. 10/16/2010
Supply-Chain
11 Management Global Company Profile:
Outline
Darden Restaurants
The Supply Chain’s Strategic
Importance
PowerPoint presentation to accompany Supply Chain Risk
Heizer and Render
Operations Management, 10e
Principles of Operations Management, 8e
Ethics and Sustainability
PowerPoint slides by Jeff Heyl Supply-Chain Economics
Make-or-Buy Decisions
Outsourcing
© 2011 Pearson Education, Inc. publishing as Prentice Hall 11 - 1 © 2011 Pearson Education, Inc. publishing as Prentice Hall 11 - 2
Outline – Continued Outline – Continued
Managing the Supply Chain
Supply-Chain Strategies Issues in an Integrated Supply Chain
Many Suppliers Opportunities in an Integrated Supply
Few Suppliers Chain
Vertical Integration E-Procurement
Joint Ventures Online Catalogs
Keiretsu Networks Auctions
Virtual Companies RFQs
Realtime Inventory Tracking
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Outline – Continued Outline – Continued
Vendor Selection Logistics Management
Vendor Evaluation Distribution Systems
Vendor Development Third-Party Logistics
Negotiations Cost of Shipping Alternatives
Security and JIT
Measuring Supply-Chain
Performance
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2. 10/16/2010
Learning Objectives Learning Objectives
When 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 5. Explain major issues in logistics
the supply chain management
2. Identify six supply-chain strategies 6. Compute percent of assets
3. Explain issues and opportunities in committed to inventory and
the supply chain inventory turnover
4. Describe the steps in vendor
selection
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Darden Restaurants Darden Restaurants
Largest publicly traded casual Sources food from five continents
dining company in the world and thousands of suppliers
Serves over 400 million meals Four distinct supply chains
pp y
annually in more than 1,800 Over $1.5 billion spent annually in
restaurants in the US and Canada supply chains
Annual sales of $6.7 billion Competitive advantage achieved
Operations is the strategy through superior supply chain
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Supply-
Supply-Chain Management The Supply Chain’s
Strategic Importance
The objective is to build a chain of Supply chain management is the
suppliers that focuses on integration of the activities that
maximizing value to the ultimate
g procure materials and services,
services
customer 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
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3. 10/16/2010
Supply Chain Management A Supply Chain for Beer
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
Figure 11.1
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How Supply Chain How Supply Chain
Decisions Impact Strategy Decisions Impact Strategy
Low-Cost Response Differentiation Low-Cost Response Differentiation
Strategy Strategy Strategy Strategy Strategy Strategy
Supplier’s Supply demand Respond quickly Share market Process Maintain high Invest in excess Modular
goal at lowest to changing research; charact- average capacity and processes that
poss b e
possible cost equ e e ts
requirements jo t y develop
jointly de e op e st cs
eristics ut at o
utilization e be
flexible e d
lend
(e.g., Emerson and demand to products and processes themselves to
Electric, Taco minimize options (e.g., mass
Bell) stockouts (e.g., Benetton) customization
Dell Computers)
Inventory Minimize Develop Minimize
Primary Select primarily Select primarily Select primarily charact- inventory responsive inventory in the
selection for cost for capacity, for product eristics throughout the system with chain to avoid
criteria speed, and development chain to hold buffer stocks obsolescence
flexibility skills down cost positioned to
ensure supply
Table 11.1 Table 11.1
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How Supply Chain Supply Chain Risk
Decisions Impact Strategy
Low-Cost Response Differentiation More reliance on supply chains means
Strategy Strategy Strategy more risk
Lead-time Shorten lead Invest Invest
charact- time as long as aggressively to aggressively to Fewer suppliers increase dependence
e st cs
eristics it does not
t ot educe
reduce educe
reduce
increase costs production lead development Compounded by globalization and
time lead time
logistical complexity
Product- Maximize Use product Use modular
design
charact-
performance
and minimize
designs that
lead to low
design to
postpone
Vendor reliability and quality risks
eristics costs setup time and product
rapid differentiation Political and currency risks
production as long as
ramp-up possible
Table 11.1
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4. 10/16/2010
Supply Chain Risk Supply Chain Risk
Mitigate and react to disruptions in Reducing risk in supply chains
1. Processes Process risk at McDonald’s
2. Controls Process risk at Ford
3. Environment Controls t Darden Restaurants
C t l at D d R t t
Control risk at Boeing
Environmental risk at Hard Rock
Café
Environmental risk at Toyota
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Ethics and Sustainability Principles and Standards for
Ethical Supply Management
Personal ethics Conduct
Institute for Supply Management
Principles and Standards LOYALTY TO YOUR ORGANIZATION
Ethics ithi th
Ethi within the supply chain
l h i
JUSTICE TO THOSE WITH WHOM YOU
Ethical behavior regarding the DEAL
environment
FAITH IN YOUR PROFESSION
Table 11.2
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Principles and Standards for Principles and Standards for
Ethical Supply Management Ethical Supply Management
Conduct Conduct
1. PERCEIVED IMPROPRIETY Prevent the intent and 4. RESPONSIBILITIES TO YOUR EMPLOYER
appearance of unethical or compromising Uphold fiduciary and other responsibilities using
conduct in relationships, actions and reasonable care and granted authority to deliver
communications value to your employer
2. CONFLICTS OF INTEREST Ensure that any 5. SUPPLIER AND CUSTOMER RELATIONSHIPS
personal, business or other activity does not Promote positive supplier and customer
conflict with the lawful interests of your employer relationships
3. ISSUES OF INFLUENCE Avoid behaviors or 6. SUSTAINABILITY AND SOCIAL RESPONSIBILITY
actions that may negatively influence, or appear Champion social responsibility and sustainability
to influence, supply management decisions practices in supply management
Table 11.2 Table 11.2
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5. 10/16/2010
Principles and Standards for Principles and Standards for
Ethical Supply Management Ethical Supply Management
Conduct Conduct
7. CONFIDENTIAL AND PROPRIETARY 10. PROFESSIONAL COMPETENCE Develop skills,
INFORMATION Protect confidential and expand knowledge and conduct business that
proprietary information demonstrates competence and promotes the
8. RECIPROCITY Avoid improper reciprocal supply management profession
l t f i
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
Table 11.2 Table 11.2
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Supply Chain Economics Supply Chain Economics
Supply Chain Costs as a Percent of Sales Dollars of additional sales needed to equal $1
saved through the supply chain
Industry % Purchased
All industry 52
Percent of Sales Spent in the Supply Chain
Automobile
A t bil 67 Percent Net Profit
Food 60 of Firm 30% 40% 50% 60% 70% 80% 90%
2 $2.78 $3.23 $3.85 $4.76 $6.25 $9.09 $16.67
Lumber 61 4 $2.70 $3.13 $3.70 $4.55 $5.88 $8.33 $14.29
Paper 55 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
Petroleum 79
10 $2.50 $2.86 $3.33 $4.00 $5.00 $6.67 $10.00
Transportation 62
Table 11.3 Table 11.4
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Make-or-
Make-or-Buy Decisions Outsourcing
Choice between internal production Transfers traditional internal
and external sources activities and resources of a firm to
outside vendors
Utilizes th efficiency that comes
Utili the ffi i th t
with specialization
Firms outsource information
technology, accounting, legal,
logistics, and production
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6. 10/16/2010
Supply Chain Strategies Many Suppliers
Negotiating with many suppliers Commonly used for commodity
products
Long-term partnering with few
suppliers Purchasing is typically based on
price
Vertical i t
V ti l integration
ti
Suppliers compete with one
Joint ventures
another
Keiretsu
Supplier is responsible for
Virtual companies that use technology, expertise, forecasting,
suppliers on an as needed basis cost, quality, and delivery
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Few Suppliers Vertical Integration
Buyer forms longer term Vertical Integration Examples of Vertical Integration
Raw material
relationships with fewer suppliers (suppliers)
Iron ore Silicon Farming
Create value through economies of Backward
Steel
integration
scale and learning curve
g
improvements Current
Automobiles
Integrated
Flour milling
transformation circuits
Suppliers more willing to participate
Distribution
in JIT programs and contribute Forward integration
systems
Circuit boards
design and technological expertise Finished goods Computers
(customers) Dealers Watches Baked goods
Cost of changing suppliers is huge Calculators
Figure 11.2
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Vertical Integration Joint Ventures
Developing the ability to produce goods
or service previously purchased Formal collaboration
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, Cooperation without diluting brand
and demand or conceding competitive advantage
Risky in industries with rapid
technological change
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7. 10/16/2010
Keiretsu Networks Virtual Companies
A middle ground between few suppliers
and vertical integration
Rely on a variety of supplier
Supplier becomes part of the company relationships to provide services on
coalition demand
Often provide financial support for Fluid
Fl id organizational boundaries that
i ti lb d i th t
suppliers through ownership or loans allow the creation of unique enterprises
Members expect long-term relationships to meet changing market demands
and provide technical expertise and Exceptionally lean performance, low
stable deliveries capital investment, flexibility, and speed
May extend through several levels of the
supply chain
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Managing the Supply Chain Issues in an Integrated
Supply Chain
There are significant management issues in Local optimization - focusing on local
controlling a supply chain involving many profit or cost minimization based on
independent organizations limited knowledge
Incentives (sales incentives, quantity
I ti ( l i ti tit
Mutual agreement on goals discounts, quotas, and promotions) -
Trust push merchandise prior to sale
Compatible organizational cultures Large lots - low unit cost but do not
reflect sales
Bullwhip effect - stable demand becomes
lumpy orders through the supply chain
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Opportunities in an Opportunities in an
Integrated Supply Chain Integrated Supply Chain
Accurate “pull” data Collaborative planning,
Lot size reduction forecasting, and
replenishment (CPFR)
Single stage control of
replenishment Blanket orders
Vendor managed inventory Standardization
(VMI)
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8. 10/16/2010
Opportunities in an Radio Frequency Tags
Integrated Supply Chain 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.
Postponement
Drop shipping and special
packaging
Pass-through facility
Channel assembly
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E-Procurement E-Procurement
Uses the internet to facilitate Online catalogs
purchasing 1. Catalogs provided by vendors
Electronic ordering and funds
El t i d i df d 2. Catalogs published by
2 C t l bli h d b
transfer intermediaries
Electronic data interchange (EDI) 3. Exchanges provided by buyers
Advanced shipping notice
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Internet Trading Exchanges E-Procurement
Health care products – ghx.com Auctions
Retail goods – gnx.com Maintained by buyers, sellers,
or intermediaries
Defense and aerospace products –
exostar.com
exostar com Low barriers
to entry
Food, beverage, consumer products
– transora.com Increase in
the potential
Steel and metal products – number of
metalsite.com buyers
Hotels – avendra.com
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9. 10/16/2010
E-Procurement Vendor Selection
Vendor evaluation
RFQs Critical decision
Can make requests for quotes Find potential vendors
(
(RFQs) less costly
) y Determine the likelihood of them
Improves supplier selection becoming good suppliers
Real-time inventory tracking Vendor Development
Training
Engineering and production help
Establish policies and procedures
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Vendor Evaluation Vendor Selection
Scores Weight
Criteria Weights (1-5) x Score Negotiations
Engineering/research/innovation skills .20 5 1.0
Production process capability .15 4 .6
Cost-
Cost-Based Price Model - supplier
(flexibility/technical assistance) opens books to purchaser
Distribution/delivery capability .05 4 .2
Market-
Market-Based Price Model - price
Quality systems and performance .10 2 .2
based on published, auction, or
Facilities/location .05 2 .1
indexed price
Financial and managerial strength .15 4 .6
(stability and cost structure) Competitive Bidding - used for
Information systems capability (e- .10 2 .2 infrequent purchases but may make
procurement, ERP)
Integrity (environmental compliance/ .20 5 1.0
establishing long-term relationships
ethics) difficult
Total 1.00 3.9
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Logistics Management Distribution Systems
Objective is to obtain efficient Trucking
operations through the integration Moves the vast majority of
of all material acquisition, manufactured goods
movement, and storage activities Chief advantage is flexibility
Is a frequent candidate for Railroads
outsourcing
Capable of carrying large loads
Allows competitive advantage to Little flexibility though
be gained through reduced costs containers and piggybacking
and improved customer service have helped with this
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10. 10/16/2010
Distribution Systems Distribution Systems
Airfreight Waterways
Fast and flexible for light loads Typically used for bulky, low-
May be expensive value cargo
Used when shipping cost is more
important
than speed
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Distribution Systems Third-
Third-Party Logistics
Pipelines Outsourcing logistics can reduce costs
Used for transporting oil, gas, and improve delivery reliability and
and other chemical products speed
Coordinate supplier inventory with
delivery services
May provide
warehousing,
assembly, testing,
shipping, customs
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Cost of Shipping Cost of Shipping
Alternatives Alternatives
Value of connectors = $1,750.00
Product in transit is a form of Holding cost = 40% per year
inventory and has a carrying cost Second carrier is 1 day faster and $20 more
expensive
Faster shipping is generally more
Daily cost of = Annual x Product /365
expensive than slower shipping holding product holding
value
cost
We can evaluate the two costs to = (.40 x $1,750)/ 365 = $1.92
better understand the trade-off
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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11. 10/16/2010
Security and JIT Measuring Supply-Chain
Supply-
Borders are becoming more open in the
Performance
U.S. and around the world
Benchmark
Monitoring and controlling stock moving Typical Firms Firms
through supply chains is more important Lead time (weeks) 15 8
than ever
Time spent placing an order 42 minutes 15 minutes
New technologies are
Percentage of late deliveries 33% 2%
being developed to
allow close monitoring Percentage of rejected material 1.5% .0001%
of location, storage
Number of shortages per year 400 4
conditions, and
movement
Table 11.6
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Measuring Supply-Chain
Supply- Measuring Supply-Chain
Supply-
Performance Performance
Assets committed to inventory Inventory as a % of Total Assets
(with exceptional performance)
Percent Total inventory Manufacturing 15%
invested in =
i di investment x 100 (Toyota 5%)
inventory Total assets Wholesale 34%
(Coca-Cola 2.9%)
Investment in inventory = $11.4 billion Restaurants 2.9%
(McDonald’s .05%)
Total assets = $44.4 billion
Retail 27%
Percent invested in inventory = (11.4/44.4) x 100 = 25.7% (Home Depot 25.7%)
Table 11.7
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Measuring Supply-Chain
Supply- Measuring Supply-Chain
Supply-
Performance Performance
Inventory turnover Examples of Annual Inventory Turnover
Food, Beverage, Retail Manufacturing
Cost of goods sold
Inventory Anheuser Busch 15 Dell Computer 90
turnover = Inventory Coca-Cola 14 Johnson Controls 22
investment
Home Depot 5 Toyota (overall) 13
McDonald’s 112 Nissan (assembly) 150
Table 11.8
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12. 10/16/2010
Measuring Supply-Chain
Supply- Measuring Supply-Chain
Supply-
Performance Performance
Inventory turnover Inventory turnover
Net revenue $32.5 Net revenue $32.5
Cost of goods sold
Cost of goods sold $14.2
$14 2 Cost of goods sold =
Inventory turnover
I t t $14.2
$14 2
Inventory: Inventory: Inventory investment
Raw material inventory $.74 Raw material inventory $.74
Work-in-process inventory $.11 = 14.2 / 1.69 = 8.4
Work-in-process inventory $.11
Finished goods inventory $.84 Finished goods inventory $.84
Total inventory investment $1.69 Total inventory investment $1.69
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Measuring Supply-Chain
Supply- The SCOR Model
Performance Processes, metrics and best practices
Inventory turnover
Plan: Demand/Supply planning and Management
Net revenue $32.5
Cost of goods sold
Cost of goods weekly
Average sold
Inventory turnover =
I t t $14.2
$14 2
= $14.2 /investment
52 = $.273
Inventory: goods soldInventory
cost of Source: Identify, Make: Manage Deliver: Invoice,
select, manage, and production execution, warehouse, transport
Raw material inventory $.74 assess sources testing and packaging and install
Work-in-process = 14.2 / 1.69 = 8.4
Inventory investment
Weeks of supply = inventory $.11
Finished goods inventory weekly cost of
Average $.84
Total inventory investment goods sold $1.69 Return: Raw material Return: Finished goods
= 1.69 / .273 = 6.19 weeks
Figure 11.3
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