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© 2008 Prentice Hall, Inc. 11 – 1
Operations
Management
Chapter 11 –Chapter 11 –
Supply ChainSupply Chain
ManagementManagement
PowerPoint presentation to accompanyPowerPoint presentation to accompany
Heizer/RenderHeizer/Render
Principles of Operations Management, 7ePrinciples of Operations Management, 7e
Operations Management, 9eOperations Management, 9e
© 2008 Prentice Hall, Inc. 11 – 2
OutlineOutline
 Global Company Profile:Global Company Profile:
Darden RestaurantsDarden Restaurants
 The Supply Chain’s StrategicThe Supply Chain’s Strategic
ImportanceImportance
 Global Supply Chain IssuesGlobal Supply Chain Issues
 Supply Chain EconomicsSupply Chain Economics
 Make-or-Buy DecisionsMake-or-Buy Decisions
 OutsourcingOutsourcing
© 2008 Prentice Hall, Inc. 11 – 3
Outline – ContinuedOutline – Continued
 Ethics in the Supply ChainEthics in the Supply Chain
 Supply Chain StrategiesSupply Chain Strategies
 Many SuppliersMany Suppliers
 Few SuppliersFew Suppliers
 Vertical IntegrationVertical Integration
 Keiretsu NetworksKeiretsu Networks
 Virtual CompaniesVirtual Companies
© 2008 Prentice Hall, Inc. 11 – 4
Outline – ContinuedOutline – Continued
 Managing the Supply ChainManaging the Supply Chain
 Issues in an Integrated Supply ChainIssues in an Integrated Supply Chain
 Opportunities in an IntegratedOpportunities in an Integrated
Supply ChainSupply Chain
 E-ProcurementE-Procurement
 Online CatalogsOnline Catalogs
 AuctionsAuctions
 RFQsRFQs
 Realtime Inventory TrackingRealtime Inventory Tracking
© 2008 Prentice Hall, Inc. 11 – 5
Outline – ContinuedOutline – Continued
 Vendor SelectionVendor Selection
 Vendor EvaluationVendor Evaluation
 Vendor DevelopmentVendor Development
 NegotiationsNegotiations
© 2008 Prentice Hall, Inc. 11 – 6
Outline – ContinuedOutline – Continued
 Logistics ManagementLogistics Management
 Distribution SystemsDistribution Systems
 Third-Party LogisticsThird-Party Logistics
 Cost of Shipping AlternativesCost of Shipping Alternatives
 Logistics, Security, and JITLogistics, Security, and JIT
 Measuring Supply ChainMeasuring Supply Chain
PerformancePerformance
© 2008 Prentice Hall, Inc. 11 – 7
Learning ObjectivesLearning Objectives
When you complete this chapter youWhen you complete this chapter you
should be able to:should be able to:
1.1. Explain the strategic importance ofExplain the strategic importance of
the supply chainthe supply chain
2.2. Identify five supply chain strategiesIdentify five supply chain strategies
3.3. Explain issues and opportunities inExplain issues and opportunities in
the supply chainthe supply chain
4.4. Describe approaches to supplyDescribe approaches to supply
chain negotiationschain negotiations
© 2008 Prentice Hall, Inc. 11 – 8
Learning ObjectivesLearning Objectives
When you complete this chapter youWhen you complete this chapter you
should be able to:should be able to:
 Evaluate supply chain performanceEvaluate supply chain performance
 Compute percent of assetsCompute percent of assets
committed to inventorycommitted to inventory
 Compute inventory turnoverCompute inventory turnover
© 2008 Prentice Hall, Inc. 11 – 9
Darden RestaurantsDarden Restaurants
 Largest publicly traded casualLargest publicly traded casual
dining company in the worlddining company in the world
 Serves over 300 million mealsServes over 300 million meals
annually in more than 1,400annually in more than 1,400
restaurants in the US and Canadarestaurants in the US and Canada
 Annual sales of $2.4 billionAnnual sales of $2.4 billion
 Operations is the strategyOperations is the strategy
© 2008 Prentice Hall, Inc. 11 – 10
Darden RestaurantsDarden Restaurants
 Sources food from five continentsSources food from five continents
and thousands of suppliersand thousands of suppliers
 Four distinct supply chainsFour distinct supply chains
 Over $1.5 billion spent annually inOver $1.5 billion spent annually in
supply chainssupply chains
 Competitive advantage achievedCompetitive advantage achieved
through superior supply chainthrough superior supply chain
© 2008 Prentice Hall, Inc. 11 – 11
The Supply Chain’sThe Supply Chain’s
Strategic ImportanceStrategic Importance
Supply chain management is theSupply chain management is the
integration of the activities thatintegration of the activities that
procure materials and services,procure materials and services,
transform them into intermediatetransform them into intermediate
goods and the final product, andgoods and the final product, and
deliver them to customersdeliver them to customers
Competition is no longer betweenCompetition is no longer between
companies; it is between supply chainscompanies; it is between supply chains
© 2008 Prentice Hall, Inc. 11 – 12
Supply Chain ManagementSupply Chain Management
1.1. Transportation vendorsTransportation vendors
2.2. Credit and cash transfersCredit and cash transfers
3.3. SuppliersSuppliers
4.4. DistributorsDistributors
5.5. Accounts payable and receivableAccounts payable and receivable
6.6. Warehousing and inventoryWarehousing and inventory
7.7. Order fulfillmentOrder fulfillment
8.8. Sharing customer, forecasting, andSharing customer, forecasting, and
production informationproduction information
Important activities include determiningImportant activities include determining
© 2008 Prentice Hall, Inc. 11 – 13
A Supply Chain for BeerA Supply Chain for Beer
Figure 11.1Figure 11.1
© 2008 Prentice Hall, Inc. 11 – 14
Global Supply Chain IssuesGlobal Supply Chain Issues
 React to sudden changes in partsReact to sudden changes in parts
availability, distribution, or shippingavailability, distribution, or shipping
channels, import duties, and currency rateschannels, import duties, and currency rates
 Use the latest computer and transmissionUse the latest computer and transmission
technologies to schedule and manage thetechnologies to schedule and manage the
shipment of parts in and finished productsshipment of parts in and finished products
outout
 Staff with local specialists who handleStaff with local specialists who handle
duties, freight, customs and political issuesduties, freight, customs and political issues
Supply chains in a global environmentSupply chains in a global environment
must be able tomust be able to
© 2008 Prentice Hall, Inc. 11 – 15
How Supply ChainHow Supply Chain
Decisions Impact StrategyDecisions Impact Strategy
Low-CostLow-Cost
StrategyStrategy
ResponseResponse
StrategyStrategy
DifferentiationDifferentiation
StrategyStrategy
Supplier’sSupplier’s
goalgoal
Supply demandSupply demand
at lowestat lowest
possible costpossible cost
(e.g., Emerson(e.g., Emerson
Electric, TacoElectric, Taco
Bell)Bell)
Respond quicklyRespond quickly
to changingto changing
requirementsrequirements
and demand toand demand to
minimizeminimize
stockouts (e.g.,stockouts (e.g.,
Dell Computers)Dell Computers)
Share marketShare market
research;research;
jointly developjointly develop
products andproducts and
options (e.g.,options (e.g.,
Benetton)Benetton)
PrimaryPrimary
selectionselection
criteriacriteria
Select primarilySelect primarily
for costfor cost
Select primarilySelect primarily
for capacity,for capacity,
speed, andspeed, and
flexibilityflexibility
Select primarilySelect primarily
for productfor product
developmentdevelopment
skillsskills
Table 11.1Table 11.1
© 2008 Prentice Hall, Inc. 11 – 16
How Supply ChainHow Supply Chain
Decisions Impact StrategyDecisions Impact Strategy
Low-CostLow-Cost
StrategyStrategy
ResponseResponse
StrategyStrategy
DifferentiationDifferentiation
StrategyStrategy
ProcessProcess
charact-charact-
eristicseristics
Maintain highMaintain high
averageaverage
utilizationutilization
Invest in excessInvest in excess
capacity andcapacity and
flexibleflexible
processesprocesses
ModularModular
processes thatprocesses that
lendlend
themselves tothemselves to
massmass
customizationcustomization
InventoryInventory
charact-charact-
eristicseristics
MinimizeMinimize
inventoryinventory
throughout thethroughout the
chain to holdchain to hold
down costdown cost
DevelopDevelop
responsiveresponsive
system withsystem with
buffer stocksbuffer stocks
positioned topositioned to
ensure supplyensure supply
MinimizeMinimize
inventory in theinventory in the
chain to avoidchain to avoid
obsolescenceobsolescence
Table 11.1Table 11.1
© 2008 Prentice Hall, Inc. 11 – 17
How Supply ChainHow Supply Chain
Decisions Impact StrategyDecisions Impact Strategy
Low-CostLow-Cost
StrategyStrategy
ResponseResponse
StrategyStrategy
DifferentiationDifferentiation
StrategyStrategy
Lead-timeLead-time
charact-charact-
eristicseristics
Shorten leadShorten lead
time as long astime as long as
it does notit does not
increase costsincrease costs
InvestInvest
aggressively toaggressively to
reducereduce
production leadproduction lead
timetime
InvestInvest
aggressively toaggressively to
reducereduce
developmentdevelopment
lead timelead time
Product-Product-
designdesign
charact-charact-
eristicseristics
MaximizeMaximize
performanceperformance
and minimizeand minimize
costscosts
Use productUse product
designs thatdesigns that
lead to lowlead to low
setup time andsetup time and
rapidrapid
productionproduction
ramp-upramp-up
Use modularUse modular
design todesign to
postponepostpone
productproduct
differentiationdifferentiation
as long asas long as
possiblepossible
Table 11.1Table 11.1
© 2008 Prentice Hall, Inc. 11 – 18
Supply Chain EconomicsSupply Chain Economics
Supply Chain Costs as a Percent of SalesSupply Chain Costs as a Percent of Sales
Table 11.2Table 11.2
IndustryIndustry % Purchased% Purchased
All industryAll industry 5252
AutomobileAutomobile 6767
FoodFood 6060
LumberLumber 6161
PaperPaper 5555
PetroleumPetroleum 7979
TransportationTransportation 6262
© 2008 Prentice Hall, Inc. 11 – 19
Supply Chain EconomicsSupply Chain Economics
Dollars of additional sales needed to equal $1Dollars of additional sales needed to equal $1
saved through the supply chainsaved through the supply chain
Percent of Sales Spent in the Supply ChainPercent of Sales Spent in the Supply Chain
Percent Net ProfitPercent Net Profit
of Firmof Firm 30%30% 40%40% 50%50% 60%60% 70%70% 80%80% 90%90%
22 $2.78$2.78 $3.23$3.23 $3.85$3.85 $4.76$4.76 $6.25$6.25 $9.09$9.09 $16.67$16.67
44 $2.70$2.70 $3.13$3.13 $3.70$3.70 $4.55$4.55 $5.88$5.88 $8.33$8.33 $14.29$14.29
66 $2.63$2.63 $3.03$3.03 $3.57$3.57 $4.35$4.35 $5.56$5.56 $7.69$7.69 $12.50$12.50
88 $2.56$2.56 $2.94$2.94 $3.45$3.45 $4.17$4.17 $5.26$5.26 $7.14$7.14 $11.11$11.11
1010 $2.50$2.50 $2.86$2.86 $3.33$3.33 $4.00$4.00 $5.00$5.00 $6.67$6.67 $10.00$10.00
Table 11.3Table 11.3
© 2008 Prentice Hall, Inc. 11 – 20
Make-or-Buy DecisionsMake-or-Buy Decisions
1.1. Maintain core competenceMaintain core competence
2.2. Lower production costLower production cost
3.3. Unsuitable suppliersUnsuitable suppliers
4.4. Assure adequate supply (quantity or delivery)Assure adequate supply (quantity or delivery)
5.5. Utilize surplus labor or facilitiesUtilize surplus labor or facilities
6.6. Obtain desired qualityObtain desired quality
7.7. Remove supplier collusionRemove supplier collusion
8.8. Obtain unique item that would entail a prohibitiveObtain unique item that would entail a prohibitive
commitment for a suppliercommitment for a supplier
9.9. Protect personnel from a layoffProtect personnel from a layoff
10.10. Protect proprietary design or qualityProtect proprietary design or quality
11.11. Increase or maintain size of companyIncrease or maintain size of company
Reasons for MakingReasons for Making
Table 11.4Table 11.4
© 2008 Prentice Hall, Inc. 11 – 21
Make-or-Buy DecisionsMake-or-Buy Decisions
1.1. Frees management to deal with its coreFrees management to deal with its core
competencecompetence
2.2. Lower acquisition costLower acquisition cost
3.3. Preserve supplier commitmentPreserve supplier commitment
4.4. Obtain technical or management abilityObtain technical or management ability
5.5. Inadequate capacityInadequate capacity
6.6. Reduce inventory costsReduce inventory costs
7.7. Ensure alternative sourcesEnsure alternative sources
8.8. Inadequate managerial or technical resourcesInadequate managerial or technical resources
9.9. ReciprocityReciprocity
10.10. Item is protected by a patent or trade secretItem is protected by a patent or trade secret
Reasons for BuyingReasons for Buying
Table 11.4Table 11.4
© 2008 Prentice Hall, Inc. 11 – 22
OutsourcingOutsourcing
 Transfers traditional internalTransfers traditional internal
activities and resources of a firm toactivities and resources of a firm to
outside vendorsoutside vendors
 Utilizes the efficiency that comesUtilizes the efficiency that comes
with specializationwith specialization
 Firms outsource informationFirms outsource information
technology, accounting, legal,technology, accounting, legal,
logistics, and productionlogistics, and production
© 2008 Prentice Hall, Inc. 11 – 23
Ethics in the Supply ChainEthics in the Supply Chain
 Opportunities for unethical behaviorOpportunities for unethical behavior
are enormous and temptations are highare enormous and temptations are high
 Many companies have strict rules andMany companies have strict rules and
codes of conduct that definecodes of conduct that define
acceptable behavioracceptable behavior
 Institute for Supply Management hasInstitute for Supply Management has
developed a detailed set of principlesdeveloped a detailed set of principles
and standards for ethical behaviorand standards for ethical behavior
© 2008 Prentice Hall, Inc. 11 – 24
Principles and Standards forPrinciples and Standards for
Ethical Supply ManagementEthical Supply Management
ConductConduct
LOYALTY TO YOUR ORGANIZATIONLOYALTY TO YOUR ORGANIZATION
JUSTICE TO THOSE WITH WHOMJUSTICE TO THOSE WITH WHOM
YOU DEALYOU DEAL
FAITH IN YOUR PROFESSIONFAITH IN YOUR PROFESSION
Table 11.5Table 11.5
© 2008 Prentice Hall, Inc. 11 – 25
Principles and Standards forPrinciples and Standards for
Ethical Supply ManagementEthical Supply Management
ConductConduct
1.1. Avoid the intent and appearance of unethical orAvoid the intent and appearance of unethical or
compromising practice in relationships, actions, andcompromising practice in relationships, actions, and
communicationscommunications
2.2. Demonstrate loyalty to the employer by diligentlyDemonstrate loyalty to the employer by diligently
following the lawful instructions of the employer, usingfollowing the lawful instructions of the employer, using
reasonable care and granted authorityreasonable care and granted authority
3.3. Avoid any personal business or professional activity thatAvoid any personal business or professional activity that
would create a conflict between personal interests andwould create a conflict between personal interests and
the interests of the employerthe interests of the employer
Table 11.5Table 11.5
© 2008 Prentice Hall, Inc. 11 – 26
Principles and Standards forPrinciples and Standards for
Ethical Supply ManagementEthical Supply Management
ConductConduct
4.4. Avoid soliciting or accepting money, loans, credits, orAvoid soliciting or accepting money, loans, credits, or
preferential discounts, and the acceptance of gifts,preferential discounts, and the acceptance of gifts,
entertainment, favors, or services from present orentertainment, favors, or services from present or
potential suppliers that might influence, or appear topotential suppliers that might influence, or appear to
influence, supply management decisionsinfluence, supply management decisions
5.5. Handle confidential or proprietary information with dueHandle confidential or proprietary information with due
care and proper consideration of ethical and legalcare and proper consideration of ethical and legal
ramifications and government regulationsramifications and government regulations
6.6. Promote positive supplier relationships through courtesyPromote positive supplier relationships through courtesy
and impartialityand impartiality
7.7. Avoid improper reciprocal agreementsAvoid improper reciprocal agreements
Table 11.5Table 11.5
© 2008 Prentice Hall, Inc. 11 – 27
Principles and Standards forPrinciples and Standards for
Ethical Supply ManagementEthical Supply Management
ConductConduct
8.8. Know and obey the letter and spirit of laws applicable toKnow and obey the letter and spirit of laws applicable to
supply managementsupply management
9.9. Encourage support for small, disadvantaged, andEncourage support for small, disadvantaged, and
minority-owned businessesminority-owned businesses
10.10. Acquire and maintain professional competenceAcquire and maintain professional competence
11.11. Conduct supply management activities in accordanceConduct supply management activities in accordance
with national and international laws, customs, andwith national and international laws, customs, and
practices, your organization’s policies, and these ethicalpractices, your organization’s policies, and these ethical
principles and standards of conductprinciples and standards of conduct
12.12. Enhance the stature of the supply managementEnhance the stature of the supply management
professionprofession Table 11.5Table 11.5
© 2008 Prentice Hall, Inc. 11 – 28
Supply Chain StrategiesSupply Chain Strategies
 Negotiating with many suppliersNegotiating with many suppliers
 Long-term partnering with fewLong-term partnering with few
supplierssuppliers
 Vertical integrationVertical integration
 KeiretsuKeiretsu
 Virtual companies that useVirtual companies that use
suppliers on an as needed basissuppliers on an as needed basis
© 2008 Prentice Hall, Inc. 11 – 29
Many SuppliersMany Suppliers
 Commonly used for commodityCommonly used for commodity
productsproducts
 Purchasing is typically based onPurchasing is typically based on
priceprice
 Suppliers compete with oneSuppliers compete with one
anotheranother
 Supplier is responsible forSupplier is responsible for
technology, expertise, forecasting,technology, expertise, forecasting,
cost, quality, and deliverycost, quality, and delivery
© 2008 Prentice Hall, Inc. 11 – 30
Few SuppliersFew Suppliers
 Buyer forms longer termBuyer forms longer term
relationships with fewer suppliersrelationships with fewer suppliers
 Create value through economies ofCreate value through economies of
scale and learning curvescale and learning curve
improvementsimprovements
 Suppliers more willing to participateSuppliers more willing to participate
in JIT programs and contributein JIT programs and contribute
design and technological expertisedesign and technological expertise
 Cost of changing suppliers is hugeCost of changing suppliers is huge
© 2008 Prentice Hall, Inc. 11 – 31
Vertical IntegrationVertical Integration
Figure 11.2Figure 11.2
Raw materialRaw material
(suppliers)(suppliers) Iron oreIron ore SiliconSilicon FarmingFarming
Backward
integration SteelSteel
Current
transformation Automobiles
Integrated
circuits Flour milling
Forward integration DistributionDistribution
systemssystems Circuit boardsCircuit boards
Finished goodsFinished goods
(customers)(customers) DealersDealers
ComputersComputers
WatchesWatches
CalculatorsCalculators
Baked goodsBaked goods
Vertical IntegrationVertical Integration Examples of Vertical IntegrationExamples of Vertical Integration
© 2008 Prentice Hall, Inc. 11 – 32
Vertical IntegrationVertical Integration
 Developing the ability to produce goods orDeveloping the ability to produce goods or
service previously purchasedservice previously purchased
 Integration may be forward, towards theIntegration may be forward, towards the
customer, or backward, towards supplierscustomer, or backward, towards suppliers
 Can improve cost, quality, and inventoryCan improve cost, quality, and inventory
but requires capital, managerial skills, andbut requires capital, managerial skills, and
demanddemand
 Risky in industries with rapid technologicalRisky in industries with rapid technological
changechange
© 2008 Prentice Hall, Inc. 11 – 33
Keiretsu NetworksKeiretsu Networks
 A middle ground between few suppliersA middle ground between few suppliers
and vertical integrationand vertical integration
 Supplier becomes part of the companySupplier becomes part of the company
coalitioncoalition
 Often provide financial support forOften provide financial support for
suppliers through ownership or loanssuppliers through ownership or loans
 Members expect long-term relationshipsMembers expect long-term relationships
and provide technical expertise and stableand provide technical expertise and stable
deliveriesdeliveries
 May extend through several levels of theMay extend through several levels of the
supply chainsupply chain
© 2008 Prentice Hall, Inc. 11 – 34
Virtual CompaniesVirtual Companies
 Rely on a variety of supplierRely on a variety of supplier
relationships to provide services onrelationships to provide services on
demanddemand
 Fluid organizational boundaries thatFluid organizational boundaries that
allow the creation of unique enterprisesallow the creation of unique enterprises
to meet changing market demandsto meet changing market demands
 Exceptionally lean performance, lowExceptionally lean performance, low
capital investment, flexibility, and speedcapital investment, flexibility, and speed
© 2008 Prentice Hall, Inc. 11 – 35
Managing the Supply ChainManaging the Supply Chain
 Mutual agreement on goalsMutual agreement on goals
 TrustTrust
 Compatible organizational culturesCompatible organizational cultures
There are significant management issues inThere are significant management issues in
controlling a supply chain involving manycontrolling a supply chain involving many
independent organizationsindependent organizations
© 2008 Prentice Hall, Inc. 11 – 36
Issues in an IntegratedIssues in an Integrated
Supply ChainSupply Chain
 Local optimizationLocal optimization - focusing on local- focusing on local
profit or cost minimization based onprofit or cost minimization based on
limited knowledgelimited knowledge
 Incentives (sales incentives, quantityIncentives (sales incentives, quantity
discounts, quotas, and promotions)discounts, quotas, and promotions) --
push merchandise prior to salepush merchandise prior to sale
 Large lotsLarge lots - low unit cost but do not- low unit cost but do not
reflect salesreflect sales
 Bullwhip effectBullwhip effect - stable demand becomes- stable demand becomes
lumpy orders through the supply chainlumpy orders through the supply chain
© 2008 Prentice Hall, Inc. 11 – 37
Opportunities in anOpportunities in an
Integrated Supply ChainIntegrated Supply Chain
 Accurate “pull” dataAccurate “pull” data
 Lot size reductionLot size reduction
 Single stage control ofSingle stage control of
replenishmentreplenishment
 Vendor managed inventoryVendor managed inventory
 Blanket ordersBlanket orders
© 2008 Prentice Hall, Inc. 11 – 38
Opportunities in anOpportunities in an
Integrated Supply ChainIntegrated Supply Chain
 StandardizationStandardization
 PostponementPostponement
 Drop shipping and specialDrop shipping and special
packagingpackaging
 Pass-through facilityPass-through facility
 Channel assemblyChannel assembly
© 2008 Prentice Hall, Inc. 11 – 39
Radio Frequency TagsRadio Frequency Tags
Radio 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 suddenSupply 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 informationsurge 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.about what’s happening on store shelves. Here’s how the system works for Proctor & Gamble’s Pampers.
© 2008 Prentice Hall, Inc. 11 – 40
E-ProcurementE-Procurement
 Uses the internet to facilitateUses the internet to facilitate
purchasingpurchasing
 Electronic ordering and fundsElectronic ordering and funds
transfertransfer
 Electronic data interchange (EDI)Electronic data interchange (EDI)
 Advanced shipping noticeAdvanced shipping notice
© 2008 Prentice Hall, Inc. 11 – 41
E-ProcurementE-Procurement
 Online catalogsOnline catalogs
 Catalogs provided by vendorsCatalogs provided by vendors
 Catalogs published byCatalogs published by
intermediariesintermediaries
 Exchanges provided by buyersExchanges provided by buyers
© 2008 Prentice Hall, Inc. 11 – 42
Internet Trading ExchangesInternet Trading Exchanges
 Health care products – ghx.comHealth care products – ghx.com
 Retail goods – gnx.comRetail goods – gnx.com
 Defense and aerospace products –Defense and aerospace products –
exostar.comexostar.com
 Food, beverage, consumer productsFood, beverage, consumer products
– transora.com– transora.com
 Steel and metal products –Steel and metal products –
metalsite.commetalsite.com
 Hotels – avendra.comHotels – avendra.com
© 2008 Prentice Hall, Inc. 11 – 43
E-ProcurementE-Procurement
 AuctionsAuctions
 Maintained by buyers, sellers, orMaintained by buyers, sellers, or
intermediariesintermediaries
 Low barriersLow barriers
to entryto entry
 Increase inIncrease in
the potentialthe potential
number ofnumber of
buyersbuyers
© 2008 Prentice Hall, Inc. 11 – 44
E-ProcurementE-Procurement
 RFQs
Can make requests for quotes
(RFQs) less costly
Improves supplier selection
 Real-time inventory tracking
© 2008 Prentice Hall, Inc. 11 – 45
Vendor SelectionVendor Selection
 Vendor evaluationVendor evaluation
 Critical decisionCritical decision
 Find potential vendorsFind potential vendors
 Determine the likelihood of themDetermine the likelihood of them
becoming good suppliersbecoming good suppliers
 Vendor DevelopmentVendor Development
 TrainingTraining
 Engineering and production helpEngineering and production help
 Establish policies and proceduresEstablish policies and procedures
© 2008 Prentice Hall, Inc. 11 – 46
Vendor SelectionVendor Selection
 NegotiationsNegotiations
 Cost-Based Price ModelCost-Based Price Model - supplier- supplier
opens books to purchaseropens books to purchaser
 Market-Based Price ModelMarket-Based Price Model - price- price
based on published, auction, orbased on published, auction, or
indexed priceindexed price
 Competitive BiddingCompetitive Bidding - used for- used for
infrequent purchases but may makeinfrequent purchases but may make
establishing long-term relationshipsestablishing long-term relationships
difficultdifficult
© 2008 Prentice Hall, Inc. 11 – 47
Vendor EvaluationVendor Evaluation
CriteriaCriteria WeightsWeights
ScoresScores
(1-5)(1-5)
WeightWeight
x Scorex Score
Engineering/research/innovation skillsEngineering/research/innovation skills .20.20 55 1.01.0
Production process capabilityProduction process capability
(flexibility/technical assistance)(flexibility/technical assistance)
.15.15 44 .6.6
Distribution/delivery capabilityDistribution/delivery capability .05.05 44 .2.2
Quality systems and performanceQuality systems and performance .10.10 22 .2.2
Facilities/locationFacilities/location .05.05 22 .1.1
Financial and managerial strengthFinancial and managerial strength
(stability and cost structure)(stability and cost structure)
.15.15 44 .6.6
Information systems capability (e-Information systems capability (e-
procurement, ERP)procurement, ERP)
.10.10 22 .2.2
Integrity (environmental compliance/Integrity (environmental compliance/
ethics)ethics)
.20.20 55 1.01.0
TotalTotal 1.001.00 3.93.9
© 2008 Prentice Hall, Inc. 11 – 48
Logistics ManagementLogistics Management
 Objective is to obtain efficientObjective is to obtain efficient
operations through the integrationoperations through the integration
of all material acquisition,of all material acquisition,
movement, and storage activitiesmovement, and storage activities
 Is a frequent candidate forIs a frequent candidate for
outsourcingoutsourcing
 Allows competitive advantage toAllows competitive advantage to
be gained through reduced costsbe gained through reduced costs
and improved customer serviceand improved customer service
© 2008 Prentice Hall, Inc. 11 – 49
Distribution SystemsDistribution Systems
 TruckingTrucking
 Moves the vast majority ofMoves the vast majority of
manufactured goodsmanufactured goods
 Chief advantage is flexibilityChief advantage is flexibility
 RailroadsRailroads
 Capable of carrying large loadsCapable of carrying large loads
 Little flexibility thoughLittle flexibility though
containers and piggybackingcontainers and piggybacking
have helped with thishave helped with this
© 2008 Prentice Hall, Inc. 11 – 50
Distribution SystemsDistribution Systems
 AirfreightAirfreight
 Fast and flexible for light loadsFast and flexible for light loads
 May be expensiveMay be expensive
© 2008 Prentice Hall, Inc. 11 – 51
Distribution SystemsDistribution Systems
 WaterwaysWaterways
 Typically used for bulky, low-Typically used for bulky, low-
value cargovalue cargo
 Used when shipping cost is moreUsed when shipping cost is more
importantimportant
than speedthan speed
© 2008 Prentice Hall, Inc. 11 – 52
Distribution SystemsDistribution Systems
 PipelinesPipelines
 Used for transporting oil, gas,Used for transporting oil, gas,
and other chemical productsand other chemical products
© 2008 Prentice Hall, Inc. 11 – 53
Third-Party LogisticsThird-Party Logistics
 Outsourcing logistics can reduce costsOutsourcing logistics can reduce costs
and improve delivery reliability andand improve delivery reliability and
speedspeed
 Coordinate supplier inventory withCoordinate supplier inventory with
delivery servicesdelivery services
 May provideMay provide
warehousing,warehousing,
assembly, testing,assembly, testing,
shipping, customsshipping, customs
© 2008 Prentice Hall, Inc. 11 – 54
Cost of ShippingCost of Shipping
AlternativesAlternatives
 Product in transit is a form ofProduct in transit is a form of
inventory and has a carrying costinventory and has a carrying cost
 Faster shipping is generally moreFaster shipping is generally more
expensive than slower shippingexpensive than slower shipping
 We can evaluate the two costs toWe can evaluate the two costs to
better understand the trade-offbetter understand the trade-off
© 2008 Prentice Hall, Inc. 11 – 55
Cost of ShippingCost of Shipping
AlternativesAlternatives
Value of connectors =Value of connectors = $1,750.00$1,750.00
Holding costHolding cost = 40%= 40% per yearper year
Second carrier isSecond carrier is 11 day faster andday faster and $20$20 moremore
expensiveexpensive
Daily cost ofDaily cost of
holding productholding product == xx /365/365
AnnualAnnual
holdingholding
costcost
ProductProduct
valuevalue
= (.40 x $1,750)/ 365 = $1.92= (.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
© 2008 Prentice Hall, Inc. 11 – 56
Logistics, Security, and JITLogistics, Security, and JIT
 Borders are becoming more open in theBorders are becoming more open in the
U.S. and around the worldU.S. and around the world
 Monitoring and controlling stock movingMonitoring and controlling stock moving
through supply chains is more importantthrough supply chains is more important
than everthan ever
 New technologies areNew technologies are
being developed tobeing developed to
allow close monitoringallow close monitoring
of location, storageof location, storage
conditions, andconditions, and
movementmovement
© 2008 Prentice Hall, Inc. 11 – 57
Measuring Supply ChainMeasuring Supply Chain
PerformancePerformance
Table 11.6Table 11.6
Typical FirmsTypical Firms
BenchmarkBenchmark
FirmsFirms
Lead time (weeks)Lead time (weeks) 1515 88
Time spent placing an orderTime spent placing an order 4242 minutesminutes 1515 minutesminutes
Percentage of late deliveriesPercentage of late deliveries 33%33% 2%2%
Percentage of rejected materialPercentage of rejected material 1.5%1.5% .0001%.0001%
Number of shortages per yearNumber of shortages per year 400400 44
© 2008 Prentice Hall, Inc. 11 – 58
Measuring Supply ChainMeasuring Supply Chain
PerformancePerformance
 Assets committed to inventoryAssets committed to inventory
PercentPercent
invested ininvested in
inventoryinventory
= x= x 100100
Total inventoryTotal inventory
investmentinvestment
Total assetsTotal assets
Investment in inventoryInvestment in inventory = $11.4= $11.4 billionbillion
Total assetsTotal assets = $44.4= $44.4 billionbillion
Percent invested in inventoryPercent invested in inventory = (11.4/44.4) x 100 = 25.7%= (11.4/44.4) x 100 = 25.7%
© 2008 Prentice Hall, Inc. 11 – 59
Measuring Supply ChainMeasuring Supply Chain
PerformancePerformance
Table 11.7Table 11.7
Inventory as a % of Total AssetsInventory as a % of Total Assets
(with exceptional performance)(with exceptional performance)
ManufacturingManufacturing 20%20%
(Toyota 5%)(Toyota 5%)
WholesaleWholesale 34%34%
(Coca-Cola 2.9%)(Coca-Cola 2.9%)
RestaurantsRestaurants 2.9%2.9%
(McDonald’s .05%)(McDonald’s .05%)
RetailRetail 27%27%
(Home Depot 25.7%)(Home Depot 25.7%)
© 2008 Prentice Hall, Inc. 11 – 60
Measuring Supply ChainMeasuring Supply Chain
PerformancePerformance
 Inventory turnoverInventory turnover
InventoryInventory
turnoverturnover ==
Cost of goods soldCost of goods sold
InventoryInventory
investmentinvestment
© 2008 Prentice Hall, Inc. 11 – 61
Measuring Supply ChainMeasuring Supply Chain
PerformancePerformance
Table 11.8Table 11.8
Examples of Annual Inventory TurnoverExamples of Annual Inventory Turnover
Food, Beverage, RetailFood, Beverage, Retail ManufacturingManufacturing
Anheuser BuschAnheuser Busch 1515 Dell ComputerDell Computer 9090
Coca-ColaCoca-Cola 1414 Johnson ControlsJohnson Controls 2222
Home DepotHome Depot 55 Toyota (overall)Toyota (overall) 1313
McDonald’sMcDonald’s 112112 Nissan (assembly)Nissan (assembly) 150150
© 2008 Prentice Hall, Inc. 11 – 62
Measuring Supply ChainMeasuring Supply Chain
PerformancePerformance
 Inventory turnoverInventory turnover
Net revenueNet revenue $32.5$32.5
Cost of goods soldCost of goods sold $14.2$14.2
Inventory:Inventory:
Raw material inventoryRaw material inventory $.74$.74
Work-in-process inventoryWork-in-process inventory $.11$.11
Finished goods inventoryFinished goods inventory $.84$.84
Total inventory investmentTotal inventory investment $1.69$1.69
© 2008 Prentice Hall, Inc. 11 – 63
Measuring Supply ChainMeasuring Supply Chain
PerformancePerformance
 Inventory turnoverInventory turnover
Net revenueNet revenue $32.5$32.5
Cost of goods soldCost of goods sold $14.2$14.2
Inventory:Inventory:
Raw material inventoryRaw material inventory $.74$.74
Work-in-process inventoryWork-in-process inventory $.11$.11
Finished goods inventoryFinished goods inventory $.84$.84
Total inventory investmentTotal inventory investment $1.69$1.69
Inventory turnover =
Cost of goods sold
Inventory investment
= 14.2 / 1.69 = 8.4
© 2008 Prentice Hall, Inc. 11 – 64
Measuring Supply ChainMeasuring Supply Chain
PerformancePerformance
 Inventory turnoverInventory turnover
Net revenueNet revenue $32.5$32.5
Cost of goods soldCost of goods sold $14.2$14.2
Inventory:Inventory:
Raw material inventoryRaw material inventory $.74$.74
Work-in-process inventoryWork-in-process inventory $.11$.11
Finished goods inventoryFinished goods inventory $.84$.84
Total inventory investmentTotal inventory investment $1.69$1.69
Inventory turnoverturnover ==
Cost of goods sold
Inventory investment
= 14.2 / 1.69 = 8.4= 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

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Supply Chain Management English

  • 1. © 2008 Prentice Hall, Inc. 11 – 1 Operations Management Chapter 11 –Chapter 11 – Supply ChainSupply Chain ManagementManagement PowerPoint presentation to accompanyPowerPoint presentation to accompany Heizer/RenderHeizer/Render Principles of Operations Management, 7ePrinciples of Operations Management, 7e Operations Management, 9eOperations Management, 9e
  • 2. © 2008 Prentice Hall, Inc. 11 – 2 OutlineOutline  Global Company Profile:Global Company Profile: Darden RestaurantsDarden Restaurants  The Supply Chain’s StrategicThe Supply Chain’s Strategic ImportanceImportance  Global Supply Chain IssuesGlobal Supply Chain Issues  Supply Chain EconomicsSupply Chain Economics  Make-or-Buy DecisionsMake-or-Buy Decisions  OutsourcingOutsourcing
  • 3. © 2008 Prentice Hall, Inc. 11 – 3 Outline – ContinuedOutline – Continued  Ethics in the Supply ChainEthics in the Supply Chain  Supply Chain StrategiesSupply Chain Strategies  Many SuppliersMany Suppliers  Few SuppliersFew Suppliers  Vertical IntegrationVertical Integration  Keiretsu NetworksKeiretsu Networks  Virtual CompaniesVirtual Companies
  • 4. © 2008 Prentice Hall, Inc. 11 – 4 Outline – ContinuedOutline – Continued  Managing the Supply ChainManaging the Supply Chain  Issues in an Integrated Supply ChainIssues in an Integrated Supply Chain  Opportunities in an IntegratedOpportunities in an Integrated Supply ChainSupply Chain  E-ProcurementE-Procurement  Online CatalogsOnline Catalogs  AuctionsAuctions  RFQsRFQs  Realtime Inventory TrackingRealtime Inventory Tracking
  • 5. © 2008 Prentice Hall, Inc. 11 – 5 Outline – ContinuedOutline – Continued  Vendor SelectionVendor Selection  Vendor EvaluationVendor Evaluation  Vendor DevelopmentVendor Development  NegotiationsNegotiations
  • 6. © 2008 Prentice Hall, Inc. 11 – 6 Outline – ContinuedOutline – Continued  Logistics ManagementLogistics Management  Distribution SystemsDistribution Systems  Third-Party LogisticsThird-Party Logistics  Cost of Shipping AlternativesCost of Shipping Alternatives  Logistics, Security, and JITLogistics, Security, and JIT  Measuring Supply ChainMeasuring Supply Chain PerformancePerformance
  • 7. © 2008 Prentice Hall, Inc. 11 – 7 Learning ObjectivesLearning Objectives When you complete this chapter youWhen you complete this chapter you should be able to:should be able to: 1.1. Explain the strategic importance ofExplain the strategic importance of the supply chainthe supply chain 2.2. Identify five supply chain strategiesIdentify five supply chain strategies 3.3. Explain issues and opportunities inExplain issues and opportunities in the supply chainthe supply chain 4.4. Describe approaches to supplyDescribe approaches to supply chain negotiationschain negotiations
  • 8. © 2008 Prentice Hall, Inc. 11 – 8 Learning ObjectivesLearning Objectives When you complete this chapter youWhen you complete this chapter you should be able to:should be able to:  Evaluate supply chain performanceEvaluate supply chain performance  Compute percent of assetsCompute percent of assets committed to inventorycommitted to inventory  Compute inventory turnoverCompute inventory turnover
  • 9. © 2008 Prentice Hall, Inc. 11 – 9 Darden RestaurantsDarden Restaurants  Largest publicly traded casualLargest publicly traded casual dining company in the worlddining company in the world  Serves over 300 million mealsServes over 300 million meals annually in more than 1,400annually in more than 1,400 restaurants in the US and Canadarestaurants in the US and Canada  Annual sales of $2.4 billionAnnual sales of $2.4 billion  Operations is the strategyOperations is the strategy
  • 10. © 2008 Prentice Hall, Inc. 11 – 10 Darden RestaurantsDarden Restaurants  Sources food from five continentsSources food from five continents and thousands of suppliersand thousands of suppliers  Four distinct supply chainsFour distinct supply chains  Over $1.5 billion spent annually inOver $1.5 billion spent annually in supply chainssupply chains  Competitive advantage achievedCompetitive advantage achieved through superior supply chainthrough superior supply chain
  • 11. © 2008 Prentice Hall, Inc. 11 – 11 The Supply Chain’sThe Supply Chain’s Strategic ImportanceStrategic Importance Supply chain management is theSupply chain management is the integration of the activities thatintegration of the activities that procure materials and services,procure materials and services, transform them into intermediatetransform them into intermediate goods and the final product, andgoods and the final product, and deliver them to customersdeliver them to customers Competition is no longer betweenCompetition is no longer between companies; it is between supply chainscompanies; it is between supply chains
  • 12. © 2008 Prentice Hall, Inc. 11 – 12 Supply Chain ManagementSupply Chain Management 1.1. Transportation vendorsTransportation vendors 2.2. Credit and cash transfersCredit and cash transfers 3.3. SuppliersSuppliers 4.4. DistributorsDistributors 5.5. Accounts payable and receivableAccounts payable and receivable 6.6. Warehousing and inventoryWarehousing and inventory 7.7. Order fulfillmentOrder fulfillment 8.8. Sharing customer, forecasting, andSharing customer, forecasting, and production informationproduction information Important activities include determiningImportant activities include determining
  • 13. © 2008 Prentice Hall, Inc. 11 – 13 A Supply Chain for BeerA Supply Chain for Beer Figure 11.1Figure 11.1
  • 14. © 2008 Prentice Hall, Inc. 11 – 14 Global Supply Chain IssuesGlobal Supply Chain Issues  React to sudden changes in partsReact to sudden changes in parts availability, distribution, or shippingavailability, distribution, or shipping channels, import duties, and currency rateschannels, import duties, and currency rates  Use the latest computer and transmissionUse the latest computer and transmission technologies to schedule and manage thetechnologies to schedule and manage the shipment of parts in and finished productsshipment of parts in and finished products outout  Staff with local specialists who handleStaff with local specialists who handle duties, freight, customs and political issuesduties, freight, customs and political issues Supply chains in a global environmentSupply chains in a global environment must be able tomust be able to
  • 15. © 2008 Prentice Hall, Inc. 11 – 15 How Supply ChainHow Supply Chain Decisions Impact StrategyDecisions Impact Strategy Low-CostLow-Cost StrategyStrategy ResponseResponse StrategyStrategy DifferentiationDifferentiation StrategyStrategy Supplier’sSupplier’s goalgoal Supply demandSupply demand at lowestat lowest possible costpossible cost (e.g., Emerson(e.g., Emerson Electric, TacoElectric, Taco Bell)Bell) Respond quicklyRespond quickly to changingto changing requirementsrequirements and demand toand demand to minimizeminimize stockouts (e.g.,stockouts (e.g., Dell Computers)Dell Computers) Share marketShare market research;research; jointly developjointly develop products andproducts and options (e.g.,options (e.g., Benetton)Benetton) PrimaryPrimary selectionselection criteriacriteria Select primarilySelect primarily for costfor cost Select primarilySelect primarily for capacity,for capacity, speed, andspeed, and flexibilityflexibility Select primarilySelect primarily for productfor product developmentdevelopment skillsskills Table 11.1Table 11.1
  • 16. © 2008 Prentice Hall, Inc. 11 – 16 How Supply ChainHow Supply Chain Decisions Impact StrategyDecisions Impact Strategy Low-CostLow-Cost StrategyStrategy ResponseResponse StrategyStrategy DifferentiationDifferentiation StrategyStrategy ProcessProcess charact-charact- eristicseristics Maintain highMaintain high averageaverage utilizationutilization Invest in excessInvest in excess capacity andcapacity and flexibleflexible processesprocesses ModularModular processes thatprocesses that lendlend themselves tothemselves to massmass customizationcustomization InventoryInventory charact-charact- eristicseristics MinimizeMinimize inventoryinventory throughout thethroughout the chain to holdchain to hold down costdown cost DevelopDevelop responsiveresponsive system withsystem with buffer stocksbuffer stocks positioned topositioned to ensure supplyensure supply MinimizeMinimize inventory in theinventory in the chain to avoidchain to avoid obsolescenceobsolescence Table 11.1Table 11.1
  • 17. © 2008 Prentice Hall, Inc. 11 – 17 How Supply ChainHow Supply Chain Decisions Impact StrategyDecisions Impact Strategy Low-CostLow-Cost StrategyStrategy ResponseResponse StrategyStrategy DifferentiationDifferentiation StrategyStrategy Lead-timeLead-time charact-charact- eristicseristics Shorten leadShorten lead time as long astime as long as it does notit does not increase costsincrease costs InvestInvest aggressively toaggressively to reducereduce production leadproduction lead timetime InvestInvest aggressively toaggressively to reducereduce developmentdevelopment lead timelead time Product-Product- designdesign charact-charact- eristicseristics MaximizeMaximize performanceperformance and minimizeand minimize costscosts Use productUse product designs thatdesigns that lead to lowlead to low setup time andsetup time and rapidrapid productionproduction ramp-upramp-up Use modularUse modular design todesign to postponepostpone productproduct differentiationdifferentiation as long asas long as possiblepossible Table 11.1Table 11.1
  • 18. © 2008 Prentice Hall, Inc. 11 – 18 Supply Chain EconomicsSupply Chain Economics Supply Chain Costs as a Percent of SalesSupply Chain Costs as a Percent of Sales Table 11.2Table 11.2 IndustryIndustry % Purchased% Purchased All industryAll industry 5252 AutomobileAutomobile 6767 FoodFood 6060 LumberLumber 6161 PaperPaper 5555 PetroleumPetroleum 7979 TransportationTransportation 6262
  • 19. © 2008 Prentice Hall, Inc. 11 – 19 Supply Chain EconomicsSupply Chain Economics Dollars of additional sales needed to equal $1Dollars of additional sales needed to equal $1 saved through the supply chainsaved through the supply chain Percent of Sales Spent in the Supply ChainPercent of Sales Spent in the Supply Chain Percent Net ProfitPercent Net Profit of Firmof Firm 30%30% 40%40% 50%50% 60%60% 70%70% 80%80% 90%90% 22 $2.78$2.78 $3.23$3.23 $3.85$3.85 $4.76$4.76 $6.25$6.25 $9.09$9.09 $16.67$16.67 44 $2.70$2.70 $3.13$3.13 $3.70$3.70 $4.55$4.55 $5.88$5.88 $8.33$8.33 $14.29$14.29 66 $2.63$2.63 $3.03$3.03 $3.57$3.57 $4.35$4.35 $5.56$5.56 $7.69$7.69 $12.50$12.50 88 $2.56$2.56 $2.94$2.94 $3.45$3.45 $4.17$4.17 $5.26$5.26 $7.14$7.14 $11.11$11.11 1010 $2.50$2.50 $2.86$2.86 $3.33$3.33 $4.00$4.00 $5.00$5.00 $6.67$6.67 $10.00$10.00 Table 11.3Table 11.3
  • 20. © 2008 Prentice Hall, Inc. 11 – 20 Make-or-Buy DecisionsMake-or-Buy Decisions 1.1. Maintain core competenceMaintain core competence 2.2. Lower production costLower production cost 3.3. Unsuitable suppliersUnsuitable suppliers 4.4. Assure adequate supply (quantity or delivery)Assure adequate supply (quantity or delivery) 5.5. Utilize surplus labor or facilitiesUtilize surplus labor or facilities 6.6. Obtain desired qualityObtain desired quality 7.7. Remove supplier collusionRemove supplier collusion 8.8. Obtain unique item that would entail a prohibitiveObtain unique item that would entail a prohibitive commitment for a suppliercommitment for a supplier 9.9. Protect personnel from a layoffProtect personnel from a layoff 10.10. Protect proprietary design or qualityProtect proprietary design or quality 11.11. Increase or maintain size of companyIncrease or maintain size of company Reasons for MakingReasons for Making Table 11.4Table 11.4
  • 21. © 2008 Prentice Hall, Inc. 11 – 21 Make-or-Buy DecisionsMake-or-Buy Decisions 1.1. Frees management to deal with its coreFrees management to deal with its core competencecompetence 2.2. Lower acquisition costLower acquisition cost 3.3. Preserve supplier commitmentPreserve supplier commitment 4.4. Obtain technical or management abilityObtain technical or management ability 5.5. Inadequate capacityInadequate capacity 6.6. Reduce inventory costsReduce inventory costs 7.7. Ensure alternative sourcesEnsure alternative sources 8.8. Inadequate managerial or technical resourcesInadequate managerial or technical resources 9.9. ReciprocityReciprocity 10.10. Item is protected by a patent or trade secretItem is protected by a patent or trade secret Reasons for BuyingReasons for Buying Table 11.4Table 11.4
  • 22. © 2008 Prentice Hall, Inc. 11 – 22 OutsourcingOutsourcing  Transfers traditional internalTransfers traditional internal activities and resources of a firm toactivities and resources of a firm to outside vendorsoutside vendors  Utilizes the efficiency that comesUtilizes the efficiency that comes with specializationwith specialization  Firms outsource informationFirms outsource information technology, accounting, legal,technology, accounting, legal, logistics, and productionlogistics, and production
  • 23. © 2008 Prentice Hall, Inc. 11 – 23 Ethics in the Supply ChainEthics in the Supply Chain  Opportunities for unethical behaviorOpportunities for unethical behavior are enormous and temptations are highare enormous and temptations are high  Many companies have strict rules andMany companies have strict rules and codes of conduct that definecodes of conduct that define acceptable behavioracceptable behavior  Institute for Supply Management hasInstitute for Supply Management has developed a detailed set of principlesdeveloped a detailed set of principles and standards for ethical behaviorand standards for ethical behavior
  • 24. © 2008 Prentice Hall, Inc. 11 – 24 Principles and Standards forPrinciples and Standards for Ethical Supply ManagementEthical Supply Management ConductConduct LOYALTY TO YOUR ORGANIZATIONLOYALTY TO YOUR ORGANIZATION JUSTICE TO THOSE WITH WHOMJUSTICE TO THOSE WITH WHOM YOU DEALYOU DEAL FAITH IN YOUR PROFESSIONFAITH IN YOUR PROFESSION Table 11.5Table 11.5
  • 25. © 2008 Prentice Hall, Inc. 11 – 25 Principles and Standards forPrinciples and Standards for Ethical Supply ManagementEthical Supply Management ConductConduct 1.1. Avoid the intent and appearance of unethical orAvoid the intent and appearance of unethical or compromising practice in relationships, actions, andcompromising practice in relationships, actions, and communicationscommunications 2.2. Demonstrate loyalty to the employer by diligentlyDemonstrate loyalty to the employer by diligently following the lawful instructions of the employer, usingfollowing the lawful instructions of the employer, using reasonable care and granted authorityreasonable care and granted authority 3.3. Avoid any personal business or professional activity thatAvoid any personal business or professional activity that would create a conflict between personal interests andwould create a conflict between personal interests and the interests of the employerthe interests of the employer Table 11.5Table 11.5
  • 26. © 2008 Prentice Hall, Inc. 11 – 26 Principles and Standards forPrinciples and Standards for Ethical Supply ManagementEthical Supply Management ConductConduct 4.4. Avoid soliciting or accepting money, loans, credits, orAvoid soliciting or accepting money, loans, credits, or preferential discounts, and the acceptance of gifts,preferential discounts, and the acceptance of gifts, entertainment, favors, or services from present orentertainment, favors, or services from present or potential suppliers that might influence, or appear topotential suppliers that might influence, or appear to influence, supply management decisionsinfluence, supply management decisions 5.5. Handle confidential or proprietary information with dueHandle confidential or proprietary information with due care and proper consideration of ethical and legalcare and proper consideration of ethical and legal ramifications and government regulationsramifications and government regulations 6.6. Promote positive supplier relationships through courtesyPromote positive supplier relationships through courtesy and impartialityand impartiality 7.7. Avoid improper reciprocal agreementsAvoid improper reciprocal agreements Table 11.5Table 11.5
  • 27. © 2008 Prentice Hall, Inc. 11 – 27 Principles and Standards forPrinciples and Standards for Ethical Supply ManagementEthical Supply Management ConductConduct 8.8. Know and obey the letter and spirit of laws applicable toKnow and obey the letter and spirit of laws applicable to supply managementsupply management 9.9. Encourage support for small, disadvantaged, andEncourage support for small, disadvantaged, and minority-owned businessesminority-owned businesses 10.10. Acquire and maintain professional competenceAcquire and maintain professional competence 11.11. Conduct supply management activities in accordanceConduct supply management activities in accordance with national and international laws, customs, andwith national and international laws, customs, and practices, your organization’s policies, and these ethicalpractices, your organization’s policies, and these ethical principles and standards of conductprinciples and standards of conduct 12.12. Enhance the stature of the supply managementEnhance the stature of the supply management professionprofession Table 11.5Table 11.5
  • 28. © 2008 Prentice Hall, Inc. 11 – 28 Supply Chain StrategiesSupply Chain Strategies  Negotiating with many suppliersNegotiating with many suppliers  Long-term partnering with fewLong-term partnering with few supplierssuppliers  Vertical integrationVertical integration  KeiretsuKeiretsu  Virtual companies that useVirtual companies that use suppliers on an as needed basissuppliers on an as needed basis
  • 29. © 2008 Prentice Hall, Inc. 11 – 29 Many SuppliersMany Suppliers  Commonly used for commodityCommonly used for commodity productsproducts  Purchasing is typically based onPurchasing is typically based on priceprice  Suppliers compete with oneSuppliers compete with one anotheranother  Supplier is responsible forSupplier is responsible for technology, expertise, forecasting,technology, expertise, forecasting, cost, quality, and deliverycost, quality, and delivery
  • 30. © 2008 Prentice Hall, Inc. 11 – 30 Few SuppliersFew Suppliers  Buyer forms longer termBuyer forms longer term relationships with fewer suppliersrelationships with fewer suppliers  Create value through economies ofCreate value through economies of scale and learning curvescale and learning curve improvementsimprovements  Suppliers more willing to participateSuppliers more willing to participate in JIT programs and contributein JIT programs and contribute design and technological expertisedesign and technological expertise  Cost of changing suppliers is hugeCost of changing suppliers is huge
  • 31. © 2008 Prentice Hall, Inc. 11 – 31 Vertical IntegrationVertical Integration Figure 11.2Figure 11.2 Raw materialRaw material (suppliers)(suppliers) Iron oreIron ore SiliconSilicon FarmingFarming Backward integration SteelSteel Current transformation Automobiles Integrated circuits Flour milling Forward integration DistributionDistribution systemssystems Circuit boardsCircuit boards Finished goodsFinished goods (customers)(customers) DealersDealers ComputersComputers WatchesWatches CalculatorsCalculators Baked goodsBaked goods Vertical IntegrationVertical Integration Examples of Vertical IntegrationExamples of Vertical Integration
  • 32. © 2008 Prentice Hall, Inc. 11 – 32 Vertical IntegrationVertical Integration  Developing the ability to produce goods orDeveloping the ability to produce goods or service previously purchasedservice previously purchased  Integration may be forward, towards theIntegration may be forward, towards the customer, or backward, towards supplierscustomer, or backward, towards suppliers  Can improve cost, quality, and inventoryCan improve cost, quality, and inventory but requires capital, managerial skills, andbut requires capital, managerial skills, and demanddemand  Risky in industries with rapid technologicalRisky in industries with rapid technological changechange
  • 33. © 2008 Prentice Hall, Inc. 11 – 33 Keiretsu NetworksKeiretsu Networks  A middle ground between few suppliersA middle ground between few suppliers and vertical integrationand vertical integration  Supplier becomes part of the companySupplier becomes part of the company coalitioncoalition  Often provide financial support forOften provide financial support for suppliers through ownership or loanssuppliers through ownership or loans  Members expect long-term relationshipsMembers expect long-term relationships and provide technical expertise and stableand provide technical expertise and stable deliveriesdeliveries  May extend through several levels of theMay extend through several levels of the supply chainsupply chain
  • 34. © 2008 Prentice Hall, Inc. 11 – 34 Virtual CompaniesVirtual Companies  Rely on a variety of supplierRely on a variety of supplier relationships to provide services onrelationships to provide services on demanddemand  Fluid organizational boundaries thatFluid organizational boundaries that allow the creation of unique enterprisesallow the creation of unique enterprises to meet changing market demandsto meet changing market demands  Exceptionally lean performance, lowExceptionally lean performance, low capital investment, flexibility, and speedcapital investment, flexibility, and speed
  • 35. © 2008 Prentice Hall, Inc. 11 – 35 Managing the Supply ChainManaging the Supply Chain  Mutual agreement on goalsMutual agreement on goals  TrustTrust  Compatible organizational culturesCompatible organizational cultures There are significant management issues inThere are significant management issues in controlling a supply chain involving manycontrolling a supply chain involving many independent organizationsindependent organizations
  • 36. © 2008 Prentice Hall, Inc. 11 – 36 Issues in an IntegratedIssues in an Integrated Supply ChainSupply Chain  Local optimizationLocal optimization - focusing on local- focusing on local profit or cost minimization based onprofit or cost minimization based on limited knowledgelimited knowledge  Incentives (sales incentives, quantityIncentives (sales incentives, quantity discounts, quotas, and promotions)discounts, quotas, and promotions) -- push merchandise prior to salepush merchandise prior to sale  Large lotsLarge lots - low unit cost but do not- low unit cost but do not reflect salesreflect sales  Bullwhip effectBullwhip effect - stable demand becomes- stable demand becomes lumpy orders through the supply chainlumpy orders through the supply chain
  • 37. © 2008 Prentice Hall, Inc. 11 – 37 Opportunities in anOpportunities in an Integrated Supply ChainIntegrated Supply Chain  Accurate “pull” dataAccurate “pull” data  Lot size reductionLot size reduction  Single stage control ofSingle stage control of replenishmentreplenishment  Vendor managed inventoryVendor managed inventory  Blanket ordersBlanket orders
  • 38. © 2008 Prentice Hall, Inc. 11 – 38 Opportunities in anOpportunities in an Integrated Supply ChainIntegrated Supply Chain  StandardizationStandardization  PostponementPostponement  Drop shipping and specialDrop shipping and special packagingpackaging  Pass-through facilityPass-through facility  Channel assemblyChannel assembly
  • 39. © 2008 Prentice Hall, Inc. 11 – 39 Radio Frequency TagsRadio Frequency Tags Radio 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 suddenSupply 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 informationsurge 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.about what’s happening on store shelves. Here’s how the system works for Proctor & Gamble’s Pampers.
  • 40. © 2008 Prentice Hall, Inc. 11 – 40 E-ProcurementE-Procurement  Uses the internet to facilitateUses the internet to facilitate purchasingpurchasing  Electronic ordering and fundsElectronic ordering and funds transfertransfer  Electronic data interchange (EDI)Electronic data interchange (EDI)  Advanced shipping noticeAdvanced shipping notice
  • 41. © 2008 Prentice Hall, Inc. 11 – 41 E-ProcurementE-Procurement  Online catalogsOnline catalogs  Catalogs provided by vendorsCatalogs provided by vendors  Catalogs published byCatalogs published by intermediariesintermediaries  Exchanges provided by buyersExchanges provided by buyers
  • 42. © 2008 Prentice Hall, Inc. 11 – 42 Internet Trading ExchangesInternet Trading Exchanges  Health care products – ghx.comHealth care products – ghx.com  Retail goods – gnx.comRetail goods – gnx.com  Defense and aerospace products –Defense and aerospace products – exostar.comexostar.com  Food, beverage, consumer productsFood, beverage, consumer products – transora.com– transora.com  Steel and metal products –Steel and metal products – metalsite.commetalsite.com  Hotels – avendra.comHotels – avendra.com
  • 43. © 2008 Prentice Hall, Inc. 11 – 43 E-ProcurementE-Procurement  AuctionsAuctions  Maintained by buyers, sellers, orMaintained by buyers, sellers, or intermediariesintermediaries  Low barriersLow barriers to entryto entry  Increase inIncrease in the potentialthe potential number ofnumber of buyersbuyers
  • 44. © 2008 Prentice Hall, Inc. 11 – 44 E-ProcurementE-Procurement  RFQs Can make requests for quotes (RFQs) less costly Improves supplier selection  Real-time inventory tracking
  • 45. © 2008 Prentice Hall, Inc. 11 – 45 Vendor SelectionVendor Selection  Vendor evaluationVendor evaluation  Critical decisionCritical decision  Find potential vendorsFind potential vendors  Determine the likelihood of themDetermine the likelihood of them becoming good suppliersbecoming good suppliers  Vendor DevelopmentVendor Development  TrainingTraining  Engineering and production helpEngineering and production help  Establish policies and proceduresEstablish policies and procedures
  • 46. © 2008 Prentice Hall, Inc. 11 – 46 Vendor SelectionVendor Selection  NegotiationsNegotiations  Cost-Based Price ModelCost-Based Price Model - supplier- supplier opens books to purchaseropens books to purchaser  Market-Based Price ModelMarket-Based Price Model - price- price based on published, auction, orbased on published, auction, or indexed priceindexed price  Competitive BiddingCompetitive Bidding - used for- used for infrequent purchases but may makeinfrequent purchases but may make establishing long-term relationshipsestablishing long-term relationships difficultdifficult
  • 47. © 2008 Prentice Hall, Inc. 11 – 47 Vendor EvaluationVendor Evaluation CriteriaCriteria WeightsWeights ScoresScores (1-5)(1-5) WeightWeight x Scorex Score Engineering/research/innovation skillsEngineering/research/innovation skills .20.20 55 1.01.0 Production process capabilityProduction process capability (flexibility/technical assistance)(flexibility/technical assistance) .15.15 44 .6.6 Distribution/delivery capabilityDistribution/delivery capability .05.05 44 .2.2 Quality systems and performanceQuality systems and performance .10.10 22 .2.2 Facilities/locationFacilities/location .05.05 22 .1.1 Financial and managerial strengthFinancial and managerial strength (stability and cost structure)(stability and cost structure) .15.15 44 .6.6 Information systems capability (e-Information systems capability (e- procurement, ERP)procurement, ERP) .10.10 22 .2.2 Integrity (environmental compliance/Integrity (environmental compliance/ ethics)ethics) .20.20 55 1.01.0 TotalTotal 1.001.00 3.93.9
  • 48. © 2008 Prentice Hall, Inc. 11 – 48 Logistics ManagementLogistics Management  Objective is to obtain efficientObjective is to obtain efficient operations through the integrationoperations through the integration of all material acquisition,of all material acquisition, movement, and storage activitiesmovement, and storage activities  Is a frequent candidate forIs a frequent candidate for outsourcingoutsourcing  Allows competitive advantage toAllows competitive advantage to be gained through reduced costsbe gained through reduced costs and improved customer serviceand improved customer service
  • 49. © 2008 Prentice Hall, Inc. 11 – 49 Distribution SystemsDistribution Systems  TruckingTrucking  Moves the vast majority ofMoves the vast majority of manufactured goodsmanufactured goods  Chief advantage is flexibilityChief advantage is flexibility  RailroadsRailroads  Capable of carrying large loadsCapable of carrying large loads  Little flexibility thoughLittle flexibility though containers and piggybackingcontainers and piggybacking have helped with thishave helped with this
  • 50. © 2008 Prentice Hall, Inc. 11 – 50 Distribution SystemsDistribution Systems  AirfreightAirfreight  Fast and flexible for light loadsFast and flexible for light loads  May be expensiveMay be expensive
  • 51. © 2008 Prentice Hall, Inc. 11 – 51 Distribution SystemsDistribution Systems  WaterwaysWaterways  Typically used for bulky, low-Typically used for bulky, low- value cargovalue cargo  Used when shipping cost is moreUsed when shipping cost is more importantimportant than speedthan speed
  • 52. © 2008 Prentice Hall, Inc. 11 – 52 Distribution SystemsDistribution Systems  PipelinesPipelines  Used for transporting oil, gas,Used for transporting oil, gas, and other chemical productsand other chemical products
  • 53. © 2008 Prentice Hall, Inc. 11 – 53 Third-Party LogisticsThird-Party Logistics  Outsourcing logistics can reduce costsOutsourcing logistics can reduce costs and improve delivery reliability andand improve delivery reliability and speedspeed  Coordinate supplier inventory withCoordinate supplier inventory with delivery servicesdelivery services  May provideMay provide warehousing,warehousing, assembly, testing,assembly, testing, shipping, customsshipping, customs
  • 54. © 2008 Prentice Hall, Inc. 11 – 54 Cost of ShippingCost of Shipping AlternativesAlternatives  Product in transit is a form ofProduct in transit is a form of inventory and has a carrying costinventory and has a carrying cost  Faster shipping is generally moreFaster shipping is generally more expensive than slower shippingexpensive than slower shipping  We can evaluate the two costs toWe can evaluate the two costs to better understand the trade-offbetter understand the trade-off
  • 55. © 2008 Prentice Hall, Inc. 11 – 55 Cost of ShippingCost of Shipping AlternativesAlternatives Value of connectors =Value of connectors = $1,750.00$1,750.00 Holding costHolding cost = 40%= 40% per yearper year Second carrier isSecond carrier is 11 day faster andday faster and $20$20 moremore expensiveexpensive Daily cost ofDaily cost of holding productholding product == xx /365/365 AnnualAnnual holdingholding costcost ProductProduct valuevalue = (.40 x $1,750)/ 365 = $1.92= (.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
  • 56. © 2008 Prentice Hall, Inc. 11 – 56 Logistics, Security, and JITLogistics, Security, and JIT  Borders are becoming more open in theBorders are becoming more open in the U.S. and around the worldU.S. and around the world  Monitoring and controlling stock movingMonitoring and controlling stock moving through supply chains is more importantthrough supply chains is more important than everthan ever  New technologies areNew technologies are being developed tobeing developed to allow close monitoringallow close monitoring of location, storageof location, storage conditions, andconditions, and movementmovement
  • 57. © 2008 Prentice Hall, Inc. 11 – 57 Measuring Supply ChainMeasuring Supply Chain PerformancePerformance Table 11.6Table 11.6 Typical FirmsTypical Firms BenchmarkBenchmark FirmsFirms Lead time (weeks)Lead time (weeks) 1515 88 Time spent placing an orderTime spent placing an order 4242 minutesminutes 1515 minutesminutes Percentage of late deliveriesPercentage of late deliveries 33%33% 2%2% Percentage of rejected materialPercentage of rejected material 1.5%1.5% .0001%.0001% Number of shortages per yearNumber of shortages per year 400400 44
  • 58. © 2008 Prentice Hall, Inc. 11 – 58 Measuring Supply ChainMeasuring Supply Chain PerformancePerformance  Assets committed to inventoryAssets committed to inventory PercentPercent invested ininvested in inventoryinventory = x= x 100100 Total inventoryTotal inventory investmentinvestment Total assetsTotal assets Investment in inventoryInvestment in inventory = $11.4= $11.4 billionbillion Total assetsTotal assets = $44.4= $44.4 billionbillion Percent invested in inventoryPercent invested in inventory = (11.4/44.4) x 100 = 25.7%= (11.4/44.4) x 100 = 25.7%
  • 59. © 2008 Prentice Hall, Inc. 11 – 59 Measuring Supply ChainMeasuring Supply Chain PerformancePerformance Table 11.7Table 11.7 Inventory as a % of Total AssetsInventory as a % of Total Assets (with exceptional performance)(with exceptional performance) ManufacturingManufacturing 20%20% (Toyota 5%)(Toyota 5%) WholesaleWholesale 34%34% (Coca-Cola 2.9%)(Coca-Cola 2.9%) RestaurantsRestaurants 2.9%2.9% (McDonald’s .05%)(McDonald’s .05%) RetailRetail 27%27% (Home Depot 25.7%)(Home Depot 25.7%)
  • 60. © 2008 Prentice Hall, Inc. 11 – 60 Measuring Supply ChainMeasuring Supply Chain PerformancePerformance  Inventory turnoverInventory turnover InventoryInventory turnoverturnover == Cost of goods soldCost of goods sold InventoryInventory investmentinvestment
  • 61. © 2008 Prentice Hall, Inc. 11 – 61 Measuring Supply ChainMeasuring Supply Chain PerformancePerformance Table 11.8Table 11.8 Examples of Annual Inventory TurnoverExamples of Annual Inventory Turnover Food, Beverage, RetailFood, Beverage, Retail ManufacturingManufacturing Anheuser BuschAnheuser Busch 1515 Dell ComputerDell Computer 9090 Coca-ColaCoca-Cola 1414 Johnson ControlsJohnson Controls 2222 Home DepotHome Depot 55 Toyota (overall)Toyota (overall) 1313 McDonald’sMcDonald’s 112112 Nissan (assembly)Nissan (assembly) 150150
  • 62. © 2008 Prentice Hall, Inc. 11 – 62 Measuring Supply ChainMeasuring Supply Chain PerformancePerformance  Inventory turnoverInventory turnover Net revenueNet revenue $32.5$32.5 Cost of goods soldCost of goods sold $14.2$14.2 Inventory:Inventory: Raw material inventoryRaw material inventory $.74$.74 Work-in-process inventoryWork-in-process inventory $.11$.11 Finished goods inventoryFinished goods inventory $.84$.84 Total inventory investmentTotal inventory investment $1.69$1.69
  • 63. © 2008 Prentice Hall, Inc. 11 – 63 Measuring Supply ChainMeasuring Supply Chain PerformancePerformance  Inventory turnoverInventory turnover Net revenueNet revenue $32.5$32.5 Cost of goods soldCost of goods sold $14.2$14.2 Inventory:Inventory: Raw material inventoryRaw material inventory $.74$.74 Work-in-process inventoryWork-in-process inventory $.11$.11 Finished goods inventoryFinished goods inventory $.84$.84 Total inventory investmentTotal inventory investment $1.69$1.69 Inventory turnover = Cost of goods sold Inventory investment = 14.2 / 1.69 = 8.4
  • 64. © 2008 Prentice Hall, Inc. 11 – 64 Measuring Supply ChainMeasuring Supply Chain PerformancePerformance  Inventory turnoverInventory turnover Net revenueNet revenue $32.5$32.5 Cost of goods soldCost of goods sold $14.2$14.2 Inventory:Inventory: Raw material inventoryRaw material inventory $.74$.74 Work-in-process inventoryWork-in-process inventory $.11$.11 Finished goods inventoryFinished goods inventory $.84$.84 Total inventory investmentTotal inventory investment $1.69$1.69 Inventory turnoverturnover == Cost of goods sold Inventory investment = 14.2 / 1.69 = 8.4= 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