LO 7 Supply Chain MANAGEMENT DKment.pptx

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Operations Management: Sustainability
and Supply Chain Management
Fourth Canadian Edition
LO 7
Supply-Chain Management
& Competitive Advantage
Copyright © 2023 Pearson Canada Inc.

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Learning Outline
• The Supply Chain’s Strategic Importance
• Sourcing Issues: Make-or-Buy and Outsourcing (Six Sourcing Strategies)
• Importance of Logistics Management in Operations
• Ethics and Sustainable Supply Chain Management
• Measuring Supply Chain Performance

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Supply-Chain Management - Objective
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
• The ultimate objective is to build a chain/network of supply chain
partners that focuses on maximizing value to the customer

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The Supply Chain’s Strategic Importance
• Competitive Advantage – A well-optimized supply chain enables
businesses to respond quickly to market changes, deliver products faster,
and reduce operational inefficiencies, setting them apart from competitors.
• Cost Reduction & Profitability – Effective SCM minimizes costs associated
with procurement, production, transportation, and warehousing, ultimately
improving profit margins.
• Customer Satisfaction & Retention – Reliable and agile supply chains
ensure timely delivery of goods, minimize stockouts, and enhance product
quality, leading to improved customer experiences.

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• Resilience & Risk Management – Businesses with strong supply chain
strategies can better handle disruptions (e.g., global crises, supplier failures,
transportation delays) by diversifying suppliers and implementing
contingency plans.
• Sustainability & Ethical Responsibility – Modern supply chains integrate
environmental and social governance (ESG) principles, helping companies
comply with regulations, reduce carbon footprints, and enhance corporate
reputation.
• Innovation – Strategic supply chains leverage technology (e.g., AI, IoT,
blockchain) to improve efficiency, streamline operations, and support new
business models such as e-commerce and direct-to-consumer sales.
• Global Expansion – Businesses with robust SCM capabilities can expand
into new markets by managing international logistics, trade regulations, and
supplier networks effectively.

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Supply Chain Management - Activities
Important activities include determining
1. Transportation vendors
2. Suppliers
3. Distributors
4. Accounts payable and receivable
5. Warehousing and inventory
6. Order fulfillment
7. Sharing customer, forecasting, and production information
8. Credit and cash transfers/handling

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Supply Chain Economics
Table 11.1 Supply Chain Costs as a Percentage of Sales
Industry % Purchased
Automobile 67
Beverages 52
Chemical 62
Food 60
Lumber 61
Metals 65
Paper 55
Petroleum 79
Restaurants 35
Transportation 62

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Low-Cost Strategy Response Strategy Differentiation Strategy
Primary supplier
selection criteria
• Cost • Capacity
• Speed
• Flexibility
• Product development
skills
• Willing to share
information
• Jointly and rapidly
develop products
Supply chain
inventory
• Minimize inventory to
hold down costs
• Use buffer stocks to
ensure speedy supply
• Minimize inventory to
avoid product
obsolescence
Distribution
network
• Inexpensive
transportation
• Sell through discount
distributors/ Retailers
• Fast transportation
• Provide premium
customer service
• Gather and
communicate market
research data
• Knowledgeable sales
staff
Product design
characteristics
• Maximize performance
• Minimize cost
• Low setup time
• Rapid production ramp-
up
• Modular design to aid
product differentiation
Table 11.2 How Operations Strategy Impacts Supply Chain Decisions*

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Sourcing Issues: Make-or-Buy
Make (produce goods and services internally)
• When a company chooses to make a product or service in-house, it retains
full control over production and quality
Advantages Disadvantages
 Quality Control  High Initial Investment
 Flexibility  Capacity Constraints
 Cost Savings  Limited Specialization/ Knowledge
 Intellectual Property (IP) Protection  Increased pressure on operations

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Buy (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
Advantages Disadvantages
 Cost Efficiency  Loss of Control
 Focus on Core Competencies  Effects on Quality
 Access to Expertise & Technology  Increased Supply Chain Risks
 Better levels of scalability  Hidden Costs

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Six Key Sourcing Strategies used in Operations
1) Negotiating with many suppliers
2) Long-term partnering with few suppliers
3) Vertical integration
4) Joint ventures
5) Keiretsu
6) Virtual companies (that use suppliers on an as needed basis)

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Increasing Supply Base (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

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Long Term Relationship - 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

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Vertical integration is a business strategy where a company expands its control
over different stages of its supply chain. Instead of relying on third parties, the
company takes ownership of suppliers (backward integration) or distribution
channels (forward integration).
• Way of 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, necessary resources and consistent demand
• Risky in industries with rapid technological change
Vertical Integration

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Joint Ventures
A Joint Venture (JV) is when two or more companies form a partnership
to achieve a shared goal while remaining independent businesses. It is a
formal agreement where both parties share resources, risks, and profits
for a specific project or business activity.
• Formal collaboration
– Enhance skills
– Secure supply
– Reduce costs
• Cooperation without diluting brand or conceding competitive advantage

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Keiretsu Networks
A network of businesses that work closely together to support each other,
forming a long-term partnership instead of just a simple buyer-supplier
relationship.
• A middle ground between few suppliers (alliance) 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
Eg: Toyota: Denso (automotive parts), Bridgestone (tires)

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Virtual Companies
A Virtual Company is a type of operations that does not own significant
physical assets like factories, offices, or warehouses. Instead, it relies on a
network of suppliers and service providers to function.
• 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

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E-Procurement
• Uses the internet to facilitate purchasing
• Electronic ordering and funds transfer
• Digital Catalogues
• e-Auctions
• e-RFQs
• Real-time inventory tracking

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Logistics Management
Logistics Management is the planning, execution, and control of
the movement and storage of materials, goods, and services
throughout the supply chain. It is a crucial function in Operations
Management that ensures products reach the right place, at the
right time, in the right condition, and at the lowest possible cost.
• 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

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Role of Logistics in Operations Management
• Ensuring Material Flow (Inbound Logistics)
Deliver the right materials at the right time to ensure uninterrupted production.
– Minimizes production downtime
– Enhances production efficiency
– Production schedule compliance
• Optimizing Capacity Utilization in Operations
Align logistics operations with production planning and capacity management to
maximize output efficiency
– Synchronized logistics

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• Cost Optimization & Profitability
Efficient logistics reduces total operating costs, improving profitability
– lower storage and transportation costs
– Optimized inventory management
– minimizes stockouts and overstocking
Eg: Walmart’s logistics strategy focuses on cross-docking
• Customer Satisfaction & Service Excellence (Outbound)
Logistics ensures on-time delivery, product availability, and seamless returns,
which directly impact customer satisfaction.
– better order fulfillment rates (reliable logistics)

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• Risk Management & Resilience in Operations
Helps operations withstand during times of supply chain disruptions like supplier
failures, geopolitical issues, product defects
– Diversifying suppliers and transport routes
– Adjusting logistics infrastructure to positive risks
– Product Recalls & Reverse Logistics
• Supporting Sustainability in Operations
Minimizing environmental impact of operations by optimizing supply chain
transportation and energy use.
– Reduces carbon footprint
– Enhances brand reputation
– Meets regulatory compliance

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Distribution Systems/ Modes in Logistics
• Trucking
– Moves the vast majority of manufactured goods
– Chief advantage is flexibility
• Railroads
– Capable of carrying large loads
– Little flexibility though containers and piggybacking have helped with this
• Airfreight
– Fast and flexible for light loads
– May be expensive

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• Waterways
– Typically used for bulky, low-value cargo
– Used when shipping cost is more important
than speed
• Pipelines
– Used for transporting oil, gas, and other chemical products

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Third-Party Logistics
Third-Party Logistics (3PL) refers to outsourcing logistics operations to
specialized companies that manage transportation, warehousing, inventory,
and distribution on behalf of businesses.
• Outsourcing logistics can reduce costs and improve delivery reliability and
speed
• Coordinate supplier inventory with delivery services
• May provide warehousing, assembly, testing, shipping, customs
• Helps streamlining operations and supply chain (lean principles)

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Benefits of 3PL
Cost Reduction – Businesses save money by avoiding investments in
warehouses, trucks, and logistics staff.
Improved Delivery Speed– 3PL companies specialize in efficient
transportation & warehousing
Better Reliability – 3PL providers can facilitate better supply chain
coordination & efficiency.
Scalability & Flexibility – Businesses can adjust their logistics needs as
demand changes.
Global Reach – Many 3PLs handle customs, international shipping, and
compliance, making global expansion easier.

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Measuring Operations /Supply-Chain Performance (KPIs)
Percentage of Assets Committed to Inventory
• Total Assets include cash, receivables, property, equipment, and inventory.
• This KPI is critical for financial and operational efficiency because:
– Lower inventory percentages indicate better inventory management and a
leaner supply chain.
– Higher inventory percentages suggest higher storage costs, potential
inefficiencies, or business model requirements (e.g., retail stores need large
inventories).

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Table 11.5 Inventory as Percentage of Total Assets (with examples of exceptional
performance)
Manufacturer
(Toyota 5%)
15%
Wholesale
(Coca-Cola 2.9%)
34%
Restaurants
(McDonald’s 0.05%)
2.9%
Retail
(Home Depot 25.7%)
27%

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Inventory Turnover Ratio
• Where
• Measures how efficiently a company sells and replaces its inventory over
a period.
• A high turnover rate indicates efficient inventory management, while a low
turnover suggests overstocking or slow-moving inventory.

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Inventory Accuracy %
• Ensures that actual inventory matches recorded numbers in systems.
• Reduces stock discrepancies and financial losses.

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Days Inventory Outstanding (DIO)
• Measures how long inventory sits before being sold.
• Lower DIO = better cash flow & inventory management.

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Stockout Rate
• Measures the frequency of running out of inventory.
• Lower is better (prevents lost sales and customer dissatisfaction).

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On Time Delivery (OTD)
• Measures percentage of shipments delivered on time.
• Key for customer satisfaction & service reliability.

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Freight Cost Per Unit
• Helps in controlling logistics expenses.
• Lower cost = efficient shipping & carrier management.

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Perfect Order Rate
• Measures error-free orders (on-time, correct items, proper
documentation).
• Higher rates indicate superior supply chain performance.

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Perfect Order Rate
• Measures error-free orders (on-time, correct items, proper
documentation).
• Higher rates indicate superior supply chain performance.

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Supplier On Time Delivery (OTD)
• Evaluates supplier reliability in delivering materials on schedule.

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Purchase Order Cycle Time
• Measures speed of procurement processes.
• Faster cycle times reduce delays & improve production flow.

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Order Fulfillment Cycle Time
• Shorter fulfillment times improve customer satisfaction and
competitiveness.

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Customer Order Fill Rate
• Measures how often customers receive complete orders.
• Higher fill rates improve customer satisfaction and competitiveness.

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Supply Chain Cost %
• Lower percentages indicate efficient operations & cost control.
• Higher rates indicates possibility for streamlining

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Cash to Cash Cycle Time
Cash to Cash Cycle Time = Days Inventory Outstanding (DIO)
+ Days Sales Outstanding (DSO)
− Days Payables Outstanding (DPO)
• Days Inventory Outstanding (DIO) → The average number of days
inventory is held before being sold.
• Days Sales Outstanding (DSO) → The average number of days it takes
to collect payment from customers.
• Days Payables Outstanding (DPO) → The average number of days a
company takes to pay suppliers.

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