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Supply-Chain
        11                                    Management

       PowerPoint presentation to accompany
       Heizer and Render
       Operations Management, 10e
       Principles of Operations Management, 8e

       PowerPoint slides by Jeff Heyl




© 2011 Pearson Education, Inc. publishing as Prentice Hall   11 - 1
Supply-Chain Management

              The objective is to build a chain of
                  suppliers that focuses on
               maximizing value to the ultimate
                          customer




© 2011 Pearson Education, Inc. publishing as Prentice Hall   11 - 2
The Supply Chain’s
                       Strategic Importance
            Supply chain management is the
             integration of the activities that
             procure materials and services,
            transform them into intermediate
          goods and final products, and deliver
           them through a distribution system
         Competition is no longer between
       companies; it is between supply chains
© 2011 Pearson Education, Inc. publishing as Prentice Hall   11 - 3
Supply Chain Management
        Important activities include determining
                     1. Transportation vendors
                     2. Credit and cash transfers
                     3. Suppliers
                     4. Distributors
                     5. Accounts payable and receivable
                     6. Warehousing and inventory
                     7. Order fulfillment
                     8. Sharing customer, forecasting, and
                        production information
© 2011 Pearson Education, Inc. publishing as Prentice Hall   11 - 4
A Supply Chain for Beer




                                                             Figure 11.1
© 2011 Pearson Education, Inc. publishing as Prentice Hall        11 - 5
How Supply Chain
            Decisions Impact Strategy
                                      Low-Cost                   Response        Differentiation
                                      Strategy                    Strategy          Strategy
       Supplier’s              Supply demand                 Respond quickly Share market
        goal                    at lowest                     to changing      research;
                                possible cost                 requirements     jointly develop
                                (e.g., Emerson                and demand to    products and
                                Electric, Taco                minimize         options (e.g.,
                                Bell)                         stockouts (e.g., Benetton)
                                                              Dell Computers)

       Primary                 Select primarily              Select primarily   Select primarily
        selection               for cost                      for capacity,      for product
        criteria                                              speed, and         development
                                                              flexibility        skills


                                                                                         Table 11.1
© 2011 Pearson Education, Inc. publishing as Prentice Hall                                         11 - 6
How Supply Chain
            Decisions Impact Strategy
                                      Low-Cost                   Response        Differentiation
                                      Strategy                    Strategy          Strategy
       Process                 Maintain high                 Invest in excess   Modular
        charact-                average                        capacity and      processes that
        eristics                utilization                    flexible          lend
                                                               processes         themselves to
                                                                                 mass
                                                                                 customization

       Inventory               Minimize                      Develop            Minimize
         charact-               inventory                     responsive         inventory in the
         eristics               throughout the                system with        chain to avoid
                                chain to hold                 buffer stocks      obsolescence
                                down cost                     positioned to
                                                              ensure supply


                                                                                        Table 11.1
© 2011 Pearson Education, Inc. publishing as Prentice Hall                                         11 - 7
How Supply Chain
            Decisions Impact Strategy
                                      Low-Cost                  Response          Differentiation
                                      Strategy                   Strategy            Strategy
       Lead-time               Shorten lead                  Invest              Invest
        charact-                time as long as                aggressively to     aggressively to
        eristics                it does not                    reduce              reduce
                                increase costs                 production lead     development
                                                               time                lead time

       Product-                Maximize                      Use product         Use modular
        design                  performance                   designs that        design to
        charact-                and minimize                  lead to low         postpone
        eristics                costs                         setup time and      product
                                                              rapid               differentiation
                                                              production          as long as
                                                              ramp-up             possible


                                                                                          Table 11.1
© 2011 Pearson Education, Inc. publishing as Prentice Hall                                          11 - 8
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



© 2011 Pearson Education, Inc. publishing as Prentice Hall   11 - 9
Supply Chain Risk
           Mitigate and react to disruptions in
                      1. Processes
                      2. Controls
                      3. Environment




© 2011 Pearson Education, Inc. publishing as Prentice Hall   11 - 10
Supply Chain Risk
              Reducing risk in supply chains
                          Process risk at McDonald’s
                          Process risk at Ford
                          Controls at Darden Restaurants
                          Control risk at Boeing
                          Environmental risk at Hard Rock
                           Café
                          Environmental risk at Toyota

© 2011 Pearson Education, Inc. publishing as Prentice Hall   11 - 11
Ethics and Sustainability
            Personal ethics
                        Institute for Supply Management
                         Principles and Standards
            Ethics within the supply chain
            Ethical behavior regarding the
             environment




© 2011 Pearson Education, Inc. publishing as Prentice Hall   11 - 12
Principles and Standards for
             Ethical Supply Management
                       Conduct

           LOYALTY TO YOUR ORGANIZATION
                JUSTICE TO THOSE WITH WHOM
                          YOU DEAL
                      FAITH IN YOUR PROFESSION


                                                             Table 11.2
© 2011 Pearson Education, Inc. publishing as Prentice Hall           11 - 13
Supply Chain Economics
          Supply Chain Costs as a Percent of Sales

                      Industry                               % Purchased
                      All industry                               52
                      Automobile                                 67
                      Food                                       60
                      Lumber                                     61
                      Paper                                      55
                      Petroleum                                  79
                      Transportation                             62
                                                                           Table 11.3
© 2011 Pearson Education, Inc. publishing as Prentice Hall                              11 - 14
Supply Chain Economics
          Dollars of additional sales needed to equal $1
          saved through the supply chain


                                                  Percent of Sales Spent in the Supply Chain
            Percent Net Profit
                 of Firm       30%                       40%     50%     60%     70%     80%      90%
                    2          $2.78                     $3.23   $3.85   $4.76   $6.25   $9.09   $16.67
                    4          $2.70                     $3.13   $3.70   $4.55   $5.88   $8.33   $14.29
                    6          $2.63                     $3.03   $3.57   $4.35   $5.56   $7.69   $12.50
                    8          $2.56                     $2.94   $3.45   $4.17   $5.26   $7.14   $11.11
                    10         $2.50                     $2.86   $3.33   $4.00   $5.00   $6.67   $10.00


                                                                                         Table 11.4
© 2011 Pearson Education, Inc. publishing as Prentice Hall                                            11 - 15
Make-or-Buy Decisions
        Choice between internal production
         and external sources




© 2011 Pearson Education, Inc. publishing as Prentice Hall   11 - 16
Outsourcing
         Transfers traditional internal
          activities and resources of a firm to
          outside vendors
         Utilizes the efficiency that comes
          with specialization
         Firms outsource information
          technology, accounting, legal,
          logistics, and production

© 2011 Pearson Education, Inc. publishing as Prentice Hall   11 - 17
Supply Chain Strategies
              Negotiating with many suppliers
              Long-term partnering with few
               suppliers
              Vertical integration
              Joint ventures
              Keiretsu
              Virtual companies that use
               suppliers on an as needed basis
© 2011 Pearson Education, Inc. publishing as Prentice Hall   11 - 18
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
© 2011 Pearson Education, Inc. publishing as Prentice Hall   11 - 19
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
© 2011 Pearson Education, Inc. publishing as Prentice Hall   11 - 20
Vertical Integration
      Vertical Integration                                   Examples of Vertical Integration
       Raw material
       (suppliers)                         Iron ore                 Silicon           Farming


       Backward
       integration                         Steel


       Current                                                          Integrated
       transformation                      Automobiles                    circuits    Flour milling


                                               Distribution
       Forward integration                      systems             Circuit boards


       Finished goods                                                  Computers
       (customers)                         Dealers                      Watches       Baked goods
                                                                       Calculators

                                                                                           Figure 11.2
© 2011 Pearson Education, Inc. publishing as Prentice Hall                                            11 - 21
Vertical Integration
        Developing the ability to produce goods
         or service previously purchased
        Integration may be forward, towards the
         customer, or backward, towards
         suppliers
        Can improve cost, quality, and inventory
         but requires capital, managerial skills,
         and demand
        Risky in industries with rapid
         technological change

© 2011 Pearson Education, Inc. publishing as Prentice Hall   11 - 22
Joint Ventures
        Formal collaboration
                    Enhance skills
                    Secure supply
                    Reduce costs
        Cooperation without diluting brand
         or conceding competitive
         advantage

© 2011 Pearson Education, Inc. publishing as Prentice Hall   11 - 23
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
© 2011 Pearson Education, Inc. publishing as Prentice Hall   11 - 24
Virtual Companies

         Rely on a variety of supplier
          relationships to provide services on
          demand
         Fluid organizational boundaries that
          allow the creation of unique enterprises
          to meet changing market demands
         Exceptionally lean performance, low
          capital investment, flexibility, and speed


© 2011 Pearson Education, Inc. publishing as Prentice Hall   11 - 25
Managing the Supply Chain
        There are significant management issues in
        controlling a supply chain involving many
        independent organizations

               Mutual agreement on goals
               Trust
               Compatible organizational cultures



© 2011 Pearson Education, Inc. publishing as Prentice Hall   11 - 26
Issues in an Integrated
                         Supply Chain
         Local optimization - focusing on local
          profit or cost minimization based on
          limited knowledge
         Incentives (sales incentives, quantity
          discounts, quotas, and promotions) -
          push merchandise prior to sale
         Large lots - low unit cost but do not
          reflect sales
                    Bullwhip effect - stable demand becomes
                     lumpy orders through the supply chain
© 2011 Pearson Education, Inc. publishing as Prentice Hall     11 - 27
Opportunities in an
                    Integrated Supply Chain
                      Accurate “pull” data
                      Lot size reduction
                      Single stage control of
                       replenishment
                      Vendor managed inventory
                       (VMI)

© 2011 Pearson Education, Inc. publishing as Prentice Hall   11 - 28
Opportunities in an
                    Integrated Supply Chain
                      Collaborative planning,
                       forecasting, and
                       replenishment (CPFR)
                      Blanket orders
                      Standardization


© 2011 Pearson Education, Inc. publishing as Prentice Hall   11 - 29
Opportunities in an
                    Integrated Supply Chain
                      Postponement
                      Drop shipping and special
                       packaging
                      Pass-through facility
                      Channel assembly


© 2011 Pearson Education, Inc. publishing as Prentice Hall   11 - 30
Radio Frequency Tags
                      Radio Frequency Tags: Keeping the Shelves Stocked
      Supply chains work smoothly when sales are steady, but often break down when confronted by a sudden
      surge in demand. Radio frequency ID (or RFID) tags can change that by providing real-time information
      about what’s happening on store shelves. Here’s how the system works for Proctor & Gamble’s Pampers.




© 2011 Pearson Education, Inc. publishing as Prentice Hall                                                11 - 31
E-Procurement

             Uses the internet to facilitate
              purchasing
             Electronic ordering and funds
              transfer
                         Electronic data interchange (EDI)
                         Advanced shipping notice



© 2011 Pearson Education, Inc. publishing as Prentice Hall    11 - 32
E-Procurement

                Online catalogs
                           1. Catalogs provided by vendors
                           2. Catalogs published by
                              intermediaries
                           3. Exchanges provided by buyers




© 2011 Pearson Education, Inc. publishing as Prentice Hall   11 - 33
Internet Trading Exchanges
                Health care products – ghx.com
                Retail goods – gnx.com
                Defense and aerospace products –
                 exostar.com
                Food, beverage, consumer products
                 – transora.com
                Steel and metal products –
                 metalsite.com
                Hotels – avendra.com
© 2011 Pearson Education, Inc. publishing as Prentice Hall   11 - 34
E-Procurement
       Auctions
                   Maintained by buyers, sellers,
                    or intermediaries
                   Low barriers
                    to entry
                   Increase in
                    the potential
                    number of
                    buyers

© 2011 Pearson Education, Inc. publishing as Prentice Hall   11 - 35
E-Procurement

                   RFQs
                              Can make requests for quotes
                               (RFQs) less costly
                              Improves supplier selection
                   Real-time inventory tracking




© 2011 Pearson Education, Inc. publishing as Prentice Hall    11 - 36
Vendor Selection
          Vendor evaluation
                      Critical decision
                      Find potential vendors
                      Determine the likelihood of them
                       becoming good suppliers
          Vendor Development
                      Training
                      Engineering and production help
                      Establish policies and procedures
© 2011 Pearson Education, Inc. publishing as Prentice Hall   11 - 37
Vendor Evaluation
                                                                               Scores   Weight
       Criteria                                                      Weights    (1-5)   x Score
       Engineering/research/innovation skills                          .20       5       1.0
       Production process capability                                   .15       4        .6
       (flexibility/technical assistance)
       Distribution/delivery capability                                .05       4        .2
       Quality systems and performance                                 .10       2        .2
       Facilities/location                                             .05       2        .1
       Financial and managerial strength                               .15       4        .6
       (stability and cost structure)
       Information systems capability (e-                              .10       2        .2
       procurement, ERP)
       Integrity (environmental compliance/                            .20       5       1.0
       ethics)
                                                             Total    1.00               3.9
© 2011 Pearson Education, Inc. publishing as Prentice Hall                                     11 - 38
Vendor Selection
          Negotiations
                      Cost-Based Price Model - supplier
                       opens books to purchaser
                      Market-Based Price Model - price
                       based on published, auction, or
                       indexed price
                      Competitive Bidding - used for
                       infrequent purchases but may make
                       establishing long-term relationships
                       difficult
© 2011 Pearson Education, Inc. publishing as Prentice Hall    11 - 39
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
© 2011 Pearson Education, Inc. publishing as Prentice Hall   11 - 40
Distribution Systems
                 Trucking
                             Moves the vast majority of
                              manufactured goods
                             Chief advantage is flexibility
                 Railroads
                             Capable of carrying large loads
                             Little flexibility though
                              containers and piggybacking
                              have helped with this
© 2011 Pearson Education, Inc. publishing as Prentice Hall      11 - 41
Distribution Systems
                 Airfreight
                             Fast and flexible for light loads
                             May be expensive




© 2011 Pearson Education, Inc. publishing as Prentice Hall        11 - 42
Distribution Systems
          Waterways
                     Typically used for bulky, low-
                      value cargo
                     Used when shipping cost is more
                      important
                      than speed




© 2011 Pearson Education, Inc. publishing as Prentice Hall   11 - 43
Distribution Systems
              Pipelines
                          Used for transporting oil, gas,
                           and other chemical products




© 2011 Pearson Education, Inc. publishing as Prentice Hall   11 - 44
Third-Party Logistics
        Outsourcing logistics can reduce costs
         and improve delivery reliability and
         speed
        Coordinate supplier inventory with
         delivery services
        May provide
         warehousing,
         assembly, testing,
         shipping, customs

© 2011 Pearson Education, Inc. publishing as Prentice Hall   11 - 45
Cost of Shipping
                                   Alternatives
            Product in transit is a form of
             inventory and has a carrying cost
            Faster shipping is generally more
             expensive than slower shipping
            We can evaluate the two costs to
             better understand the trade-off


© 2011 Pearson Education, Inc. publishing as Prentice Hall   11 - 46
Cost of Shipping
                                   Alternatives
         Value of connectors = $1,750.00
         Holding cost = 40% per year
         Second carrier is 1 day faster and $20 more
         expensive

                 Daily cost of = Annual x Product /365
                                 holding
                holding product            value
                                  cost
                                                         = (.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
© 2011 Pearson Education, Inc. publishing as Prentice Hall                               11 - 47
Security and JIT
     Borders are becoming more open in the
      U.S. and around the world
     Monitoring and controlling stock moving
      through supply chains is more important
      than ever
     New technologies are
      being developed to
      allow close monitoring
      of location, storage
      conditions, and
      movement
© 2011 Pearson Education, Inc. publishing as Prentice Hall   11 - 48
Measuring Supply-Chain
                     Performance
                                                                             Benchmark
                                                             Typical Firms     Firms

        Lead time (weeks)                                         15             8

        Time spent placing an order                           42 minutes     15 minutes

        Percentage of late deliveries                            33%            2%

        Percentage of rejected material                          1.5%         .0001%

        Number of shortages per year                             400             4


                                                                               Table 11.6
© 2011 Pearson Education, Inc. publishing as Prentice Hall                                  11 - 49
Measuring Supply-Chain
                     Performance
         Assets committed to inventory

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

           Investment in inventory = $11.4 billion
           Total assets = $44.4 billion

   Percent invested in inventory = (11.4/44.4) x 100 = 25.7%

© 2011 Pearson Education, Inc. publishing as Prentice Hall                             11 - 50
Measuring Supply-Chain
                     Performance
                           Inventory as a % of Total Assets
                             (with exceptional performance)
                           Manufacturing                     15%
                            (Toyota 5%)
                           Wholesale                         34%
                            (Coca-Cola 2.9%)
                           Restaurants                       2.9%
                            (McDonald’s .05%)
                           Retail                            27%
                            (Home Depot 25.7%)
                                                                    Table 11.7

© 2011 Pearson Education, Inc. publishing as Prentice Hall                11 - 51
Measuring Supply-Chain
                     Performance
         Inventory turnover
                                                             Cost of goods sold
                               Inventory
                                turnover =                       Inventory
                                                                investment




© 2011 Pearson Education, Inc. publishing as Prentice Hall                        11 - 52
Measuring Supply-Chain
                     Performance
                       Examples of Annual Inventory Turnover
        Food, Beverage, Retail                                   Manufacturing
        Anheuser Busch                                 15        Dell Computer                   90
        Coca-Cola                                      14        Johnson Controls                22
        Home Depot                                           5   Toyota (overall)                13
        McDonald’s                                  112          Nissan (assembly)          150


                                                                                    Table 11.8

© 2011 Pearson Education, Inc. publishing as Prentice Hall                                        11 - 53
Measuring Supply-Chain
                     Performance
          Inventory turnover

               Net revenue                                          $32.5
               Cost of goods sold                                   $14.2
               Inventory:
                  Raw material inventory                     $.74
                  Work-in-process inventory                  $.11
                  Finished goods inventory                   $.84
               Total inventory investment                           $1.69



© 2011 Pearson Education, Inc. publishing as Prentice Hall                  11 - 54
Measuring Supply-Chain
                     Performance
          Inventory turnover

               Net revenue                             $32.5
                                       Cost of goods sold
               Cost of goods sold =
                Inventory turnover                     $14.2
               Inventory:             Inventory investment
                  Raw material inventory        $.74
                                   = 14.2 / 1.69 = 8.4
                  Work-in-process inventory $.11
                  Finished goods inventory      $.84
               Total inventory investment              $1.69



© 2011 Pearson Education, Inc. publishing as Prentice Hall     11 - 55
Measuring Supply-Chain
                     Performance
          Inventory turnover

               Net revenue                                $32.5
                                        Cost of goods sold
               Cost of goods weekly
                     Average sold
                Inventory turnover =                      $14.2
                                         = $14.2 / 52 = $.273
               Inventory: goods soldInventory investment
                    cost of
                  Raw material inventory        $.74
                                   = 14.2 / 1.69 investment
                                      Inventory = 8.4
                  Work-in-process inventory $.11
                Weeks of supply =
                  Finished goods inventory weekly cost of
                                     Average $.84
               Total inventory investment goods sold $1.69
                                                         = 1.69 / .273 = 6.19 weeks

© 2011 Pearson Education, Inc. publishing as Prentice Hall                            11 - 56
The SCOR Model
        Processes, metrics and best practices

                                 Plan: Demand/Supply planning and Management




           Source: Identify,                       Make: Manage            Deliver: Invoice,
           select, manage, and                     production execution,   warehouse, transport
           assess sources                          testing and packaging   and install




                     Return: Raw material                                  Return: Finished goods




                                                                                      Figure 11.3
© 2011 Pearson Education, Inc. publishing as Prentice Hall                                          11 - 57

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mcdonalds supply chain

  • 1. Supply-Chain 11 Management PowerPoint presentation to accompany Heizer and Render Operations Management, 10e Principles of Operations Management, 8e PowerPoint slides by Jeff Heyl © 2011 Pearson Education, Inc. publishing as Prentice Hall 11 - 1
  • 2. Supply-Chain Management The objective is to build a chain of suppliers that focuses on maximizing value to the ultimate customer © 2011 Pearson Education, Inc. publishing as Prentice Hall 11 - 2
  • 3. The Supply Chain’s Strategic Importance Supply chain management is the integration of the activities that procure materials and services, transform them into intermediate goods and final products, and deliver them through a distribution system Competition is no longer between companies; it is between supply chains © 2011 Pearson Education, Inc. publishing as Prentice Hall 11 - 3
  • 4. Supply Chain Management Important activities include determining 1. Transportation vendors 2. Credit and cash transfers 3. Suppliers 4. Distributors 5. Accounts payable and receivable 6. Warehousing and inventory 7. Order fulfillment 8. Sharing customer, forecasting, and production information © 2011 Pearson Education, Inc. publishing as Prentice Hall 11 - 4
  • 5. A Supply Chain for Beer Figure 11.1 © 2011 Pearson Education, Inc. publishing as Prentice Hall 11 - 5
  • 6. How Supply Chain Decisions Impact Strategy Low-Cost Response Differentiation Strategy Strategy Strategy Supplier’s Supply demand Respond quickly Share market goal at lowest to changing research; possible cost requirements jointly develop (e.g., Emerson and demand to products and Electric, Taco minimize options (e.g., Bell) stockouts (e.g., Benetton) Dell Computers) Primary Select primarily Select primarily Select primarily selection for cost for capacity, for product criteria speed, and development flexibility skills Table 11.1 © 2011 Pearson Education, Inc. publishing as Prentice Hall 11 - 6
  • 7. How Supply Chain Decisions Impact Strategy Low-Cost Response Differentiation Strategy Strategy Strategy Process Maintain high Invest in excess Modular charact- average capacity and processes that eristics utilization flexible lend processes themselves to mass customization Inventory Minimize Develop Minimize charact- inventory responsive inventory in the eristics throughout the system with chain to avoid chain to hold buffer stocks obsolescence down cost positioned to ensure supply Table 11.1 © 2011 Pearson Education, Inc. publishing as Prentice Hall 11 - 7
  • 8. How Supply Chain Decisions Impact Strategy Low-Cost Response Differentiation Strategy Strategy Strategy Lead-time Shorten lead Invest Invest charact- time as long as aggressively to aggressively to eristics it does not reduce reduce increase costs production lead development time lead time Product- Maximize Use product Use modular design performance designs that design to charact- and minimize lead to low postpone eristics costs setup time and product rapid differentiation production as long as ramp-up possible Table 11.1 © 2011 Pearson Education, Inc. publishing as Prentice Hall 11 - 8
  • 9. 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 © 2011 Pearson Education, Inc. publishing as Prentice Hall 11 - 9
  • 10. Supply Chain Risk  Mitigate and react to disruptions in 1. Processes 2. Controls 3. Environment © 2011 Pearson Education, Inc. publishing as Prentice Hall 11 - 10
  • 11. Supply Chain Risk  Reducing risk in supply chains  Process risk at McDonald’s  Process risk at Ford  Controls at Darden Restaurants  Control risk at Boeing  Environmental risk at Hard Rock Café  Environmental risk at Toyota © 2011 Pearson Education, Inc. publishing as Prentice Hall 11 - 11
  • 12. Ethics and Sustainability  Personal ethics  Institute for Supply Management Principles and Standards  Ethics within the supply chain  Ethical behavior regarding the environment © 2011 Pearson Education, Inc. publishing as Prentice Hall 11 - 12
  • 13. Principles and Standards for Ethical Supply Management Conduct LOYALTY TO YOUR ORGANIZATION JUSTICE TO THOSE WITH WHOM YOU DEAL FAITH IN YOUR PROFESSION Table 11.2 © 2011 Pearson Education, Inc. publishing as Prentice Hall 11 - 13
  • 14. Supply Chain Economics Supply Chain Costs as a Percent of Sales Industry % Purchased All industry 52 Automobile 67 Food 60 Lumber 61 Paper 55 Petroleum 79 Transportation 62 Table 11.3 © 2011 Pearson Education, Inc. publishing as Prentice Hall 11 - 14
  • 15. Supply Chain Economics Dollars of additional sales needed to equal $1 saved through the supply chain Percent of Sales Spent in the Supply Chain Percent Net Profit of Firm 30% 40% 50% 60% 70% 80% 90% 2 $2.78 $3.23 $3.85 $4.76 $6.25 $9.09 $16.67 4 $2.70 $3.13 $3.70 $4.55 $5.88 $8.33 $14.29 6 $2.63 $3.03 $3.57 $4.35 $5.56 $7.69 $12.50 8 $2.56 $2.94 $3.45 $4.17 $5.26 $7.14 $11.11 10 $2.50 $2.86 $3.33 $4.00 $5.00 $6.67 $10.00 Table 11.4 © 2011 Pearson Education, Inc. publishing as Prentice Hall 11 - 15
  • 16. Make-or-Buy Decisions  Choice between internal production and external sources © 2011 Pearson Education, Inc. publishing as Prentice Hall 11 - 16
  • 17. Outsourcing  Transfers traditional internal activities and resources of a firm to outside vendors  Utilizes the efficiency that comes with specialization  Firms outsource information technology, accounting, legal, logistics, and production © 2011 Pearson Education, Inc. publishing as Prentice Hall 11 - 17
  • 18. Supply Chain Strategies  Negotiating with many suppliers  Long-term partnering with few suppliers  Vertical integration  Joint ventures  Keiretsu  Virtual companies that use suppliers on an as needed basis © 2011 Pearson Education, Inc. publishing as Prentice Hall 11 - 18
  • 19. 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 © 2011 Pearson Education, Inc. publishing as Prentice Hall 11 - 19
  • 20. 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 © 2011 Pearson Education, Inc. publishing as Prentice Hall 11 - 20
  • 21. Vertical Integration Vertical Integration Examples of Vertical Integration Raw material (suppliers) Iron ore Silicon Farming Backward integration Steel Current Integrated transformation Automobiles circuits Flour milling Distribution Forward integration systems Circuit boards Finished goods Computers (customers) Dealers Watches Baked goods Calculators Figure 11.2 © 2011 Pearson Education, Inc. publishing as Prentice Hall 11 - 21
  • 22. Vertical Integration  Developing the ability to produce goods or service previously purchased  Integration may be forward, towards the customer, or backward, towards suppliers  Can improve cost, quality, and inventory but requires capital, managerial skills, and demand  Risky in industries with rapid technological change © 2011 Pearson Education, Inc. publishing as Prentice Hall 11 - 22
  • 23. Joint Ventures  Formal collaboration  Enhance skills  Secure supply  Reduce costs  Cooperation without diluting brand or conceding competitive advantage © 2011 Pearson Education, Inc. publishing as Prentice Hall 11 - 23
  • 24. 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 © 2011 Pearson Education, Inc. publishing as Prentice Hall 11 - 24
  • 25. Virtual Companies  Rely on a variety of supplier relationships to provide services on demand  Fluid organizational boundaries that allow the creation of unique enterprises to meet changing market demands  Exceptionally lean performance, low capital investment, flexibility, and speed © 2011 Pearson Education, Inc. publishing as Prentice Hall 11 - 25
  • 26. Managing the Supply Chain There are significant management issues in controlling a supply chain involving many independent organizations  Mutual agreement on goals  Trust  Compatible organizational cultures © 2011 Pearson Education, Inc. publishing as Prentice Hall 11 - 26
  • 27. Issues in an Integrated Supply Chain  Local optimization - focusing on local profit or cost minimization based on limited knowledge  Incentives (sales incentives, quantity discounts, quotas, and promotions) - push merchandise prior to sale  Large lots - low unit cost but do not reflect sales  Bullwhip effect - stable demand becomes lumpy orders through the supply chain © 2011 Pearson Education, Inc. publishing as Prentice Hall 11 - 27
  • 28. Opportunities in an Integrated Supply Chain  Accurate “pull” data  Lot size reduction  Single stage control of replenishment  Vendor managed inventory (VMI) © 2011 Pearson Education, Inc. publishing as Prentice Hall 11 - 28
  • 29. Opportunities in an Integrated Supply Chain  Collaborative planning, forecasting, and replenishment (CPFR)  Blanket orders  Standardization © 2011 Pearson Education, Inc. publishing as Prentice Hall 11 - 29
  • 30. Opportunities in an Integrated Supply Chain  Postponement  Drop shipping and special packaging  Pass-through facility  Channel assembly © 2011 Pearson Education, Inc. publishing as Prentice Hall 11 - 30
  • 31. Radio Frequency Tags Radio Frequency Tags: Keeping the Shelves Stocked Supply chains work smoothly when sales are steady, but often break down when confronted by a sudden surge in demand. Radio frequency ID (or RFID) tags can change that by providing real-time information about what’s happening on store shelves. Here’s how the system works for Proctor & Gamble’s Pampers. © 2011 Pearson Education, Inc. publishing as Prentice Hall 11 - 31
  • 32. E-Procurement  Uses the internet to facilitate purchasing  Electronic ordering and funds transfer  Electronic data interchange (EDI)  Advanced shipping notice © 2011 Pearson Education, Inc. publishing as Prentice Hall 11 - 32
  • 33. E-Procurement  Online catalogs 1. Catalogs provided by vendors 2. Catalogs published by intermediaries 3. Exchanges provided by buyers © 2011 Pearson Education, Inc. publishing as Prentice Hall 11 - 33
  • 34. Internet Trading Exchanges  Health care products – ghx.com  Retail goods – gnx.com  Defense and aerospace products – exostar.com  Food, beverage, consumer products – transora.com  Steel and metal products – metalsite.com  Hotels – avendra.com © 2011 Pearson Education, Inc. publishing as Prentice Hall 11 - 34
  • 35. E-Procurement  Auctions  Maintained by buyers, sellers, or intermediaries  Low barriers to entry  Increase in the potential number of buyers © 2011 Pearson Education, Inc. publishing as Prentice Hall 11 - 35
  • 36. E-Procurement  RFQs  Can make requests for quotes (RFQs) less costly  Improves supplier selection  Real-time inventory tracking © 2011 Pearson Education, Inc. publishing as Prentice Hall 11 - 36
  • 37. Vendor Selection  Vendor evaluation  Critical decision  Find potential vendors  Determine the likelihood of them becoming good suppliers  Vendor Development  Training  Engineering and production help  Establish policies and procedures © 2011 Pearson Education, Inc. publishing as Prentice Hall 11 - 37
  • 38. Vendor Evaluation Scores Weight Criteria Weights (1-5) x Score Engineering/research/innovation skills .20 5 1.0 Production process capability .15 4 .6 (flexibility/technical assistance) Distribution/delivery capability .05 4 .2 Quality systems and performance .10 2 .2 Facilities/location .05 2 .1 Financial and managerial strength .15 4 .6 (stability and cost structure) Information systems capability (e- .10 2 .2 procurement, ERP) Integrity (environmental compliance/ .20 5 1.0 ethics) Total 1.00 3.9 © 2011 Pearson Education, Inc. publishing as Prentice Hall 11 - 38
  • 39. Vendor Selection  Negotiations  Cost-Based Price Model - supplier opens books to purchaser  Market-Based Price Model - price based on published, auction, or indexed price  Competitive Bidding - used for infrequent purchases but may make establishing long-term relationships difficult © 2011 Pearson Education, Inc. publishing as Prentice Hall 11 - 39
  • 40. 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 © 2011 Pearson Education, Inc. publishing as Prentice Hall 11 - 40
  • 41. Distribution Systems  Trucking  Moves the vast majority of manufactured goods  Chief advantage is flexibility  Railroads  Capable of carrying large loads  Little flexibility though containers and piggybacking have helped with this © 2011 Pearson Education, Inc. publishing as Prentice Hall 11 - 41
  • 42. Distribution Systems  Airfreight  Fast and flexible for light loads  May be expensive © 2011 Pearson Education, Inc. publishing as Prentice Hall 11 - 42
  • 43. Distribution Systems  Waterways  Typically used for bulky, low- value cargo  Used when shipping cost is more important than speed © 2011 Pearson Education, Inc. publishing as Prentice Hall 11 - 43
  • 44. Distribution Systems  Pipelines  Used for transporting oil, gas, and other chemical products © 2011 Pearson Education, Inc. publishing as Prentice Hall 11 - 44
  • 45. Third-Party Logistics  Outsourcing logistics can reduce costs and improve delivery reliability and speed  Coordinate supplier inventory with delivery services  May provide warehousing, assembly, testing, shipping, customs © 2011 Pearson Education, Inc. publishing as Prentice Hall 11 - 45
  • 46. Cost of Shipping Alternatives  Product in transit is a form of inventory and has a carrying cost  Faster shipping is generally more expensive than slower shipping  We can evaluate the two costs to better understand the trade-off © 2011 Pearson Education, Inc. publishing as Prentice Hall 11 - 46
  • 47. Cost of Shipping Alternatives Value of connectors = $1,750.00 Holding cost = 40% per year Second carrier is 1 day faster and $20 more expensive Daily cost of = Annual x Product /365 holding holding product value cost = (.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 © 2011 Pearson Education, Inc. publishing as Prentice Hall 11 - 47
  • 48. Security and JIT  Borders are becoming more open in the U.S. and around the world  Monitoring and controlling stock moving through supply chains is more important than ever  New technologies are being developed to allow close monitoring of location, storage conditions, and movement © 2011 Pearson Education, Inc. publishing as Prentice Hall 11 - 48
  • 49. Measuring Supply-Chain Performance Benchmark Typical Firms Firms Lead time (weeks) 15 8 Time spent placing an order 42 minutes 15 minutes Percentage of late deliveries 33% 2% Percentage of rejected material 1.5% .0001% Number of shortages per year 400 4 Table 11.6 © 2011 Pearson Education, Inc. publishing as Prentice Hall 11 - 49
  • 50. Measuring Supply-Chain Performance  Assets committed to inventory Percent Total inventory invested in = investment x 100 inventory Total assets Investment in inventory = $11.4 billion Total assets = $44.4 billion Percent invested in inventory = (11.4/44.4) x 100 = 25.7% © 2011 Pearson Education, Inc. publishing as Prentice Hall 11 - 50
  • 51. Measuring Supply-Chain Performance Inventory as a % of Total Assets (with exceptional performance) Manufacturing 15% (Toyota 5%) Wholesale 34% (Coca-Cola 2.9%) Restaurants 2.9% (McDonald’s .05%) Retail 27% (Home Depot 25.7%) Table 11.7 © 2011 Pearson Education, Inc. publishing as Prentice Hall 11 - 51
  • 52. Measuring Supply-Chain Performance  Inventory turnover Cost of goods sold Inventory turnover = Inventory investment © 2011 Pearson Education, Inc. publishing as Prentice Hall 11 - 52
  • 53. Measuring Supply-Chain Performance Examples of Annual Inventory Turnover Food, Beverage, Retail Manufacturing Anheuser Busch 15 Dell Computer 90 Coca-Cola 14 Johnson Controls 22 Home Depot 5 Toyota (overall) 13 McDonald’s 112 Nissan (assembly) 150 Table 11.8 © 2011 Pearson Education, Inc. publishing as Prentice Hall 11 - 53
  • 54. Measuring Supply-Chain Performance  Inventory turnover Net revenue $32.5 Cost of goods sold $14.2 Inventory: Raw material inventory $.74 Work-in-process inventory $.11 Finished goods inventory $.84 Total inventory investment $1.69 © 2011 Pearson Education, Inc. publishing as Prentice Hall 11 - 54
  • 55. Measuring Supply-Chain Performance  Inventory turnover Net revenue $32.5 Cost of goods sold Cost of goods sold = Inventory turnover $14.2 Inventory: Inventory investment Raw material inventory $.74 = 14.2 / 1.69 = 8.4 Work-in-process inventory $.11 Finished goods inventory $.84 Total inventory investment $1.69 © 2011 Pearson Education, Inc. publishing as Prentice Hall 11 - 55
  • 56. Measuring Supply-Chain Performance  Inventory turnover Net revenue $32.5 Cost of goods sold Cost of goods weekly Average sold Inventory turnover = $14.2 = $14.2 / 52 = $.273 Inventory: goods soldInventory investment cost of Raw material inventory $.74 = 14.2 / 1.69 investment Inventory = 8.4 Work-in-process inventory $.11 Weeks of supply = Finished goods inventory weekly cost of Average $.84 Total inventory investment goods sold $1.69 = 1.69 / .273 = 6.19 weeks © 2011 Pearson Education, Inc. publishing as Prentice Hall 11 - 56
  • 57. The SCOR Model  Processes, metrics and best practices Plan: Demand/Supply planning and Management Source: Identify, Make: Manage Deliver: Invoice, select, manage, and production execution, warehouse, transport assess sources testing and packaging and install Return: Raw material Return: Finished goods Figure 11.3 © 2011 Pearson Education, Inc. publishing as Prentice Hall 11 - 57