Supply Chain Real Time

Operations Management
Chapter 11 Supply Chain Management

PowerPoint presentation to accompany Heizer/Render Principles of Operations Management, 7e Operations Management, 9e
2008 Prentice Hall, Inc. 11 1
Learning Objectives
When you complete this chapter you should be able to:
1. Explain the strategic importance of the supply chain 2. Identify five supply chain strategies 3. Explain issues and opportunities in the supply chain 4. Describe approaches to supply chain negotiations
Learning Objectives
When you complete this chapter you should be able to:
Evaluate supply chain performance
Compute percent of assets committed to inventory
Compute inventory turnover
2008 Prentice Hall, Inc.
11 3
Darden Restaurants
Largest publicly traded casual dining company in the world Serves over 300 million meals annually in more than 1,400 restaurants in the US and Canada Annual sales of $2.4 billion Operations is the strategy
Darden Restaurants
Sources food from five continents and thousands of suppliers
Four distinct supply chains: seafood, refrigerated foods, baked goods, restaurant supplies Over $1.5 billion spent annually in supply chains
Competitive advantage achieved through superior supply chain
Darden Restaurants
Supply chains have the same common characteristics: Supplier qualification Product tracking system Independent audits Employ JIT delivery
Receive competitive advantage through rapid, transparent and efficient SC
The Supply Chains Strategic Importance

Supply chain management is the integration of the activities that procure materials and services, transform them into intermediate goods and the final product, and deliver them to customers
Competition is no longer between companies; it is between supply chains

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
A Supply Chain for Beer
Figure 11.1
Global Supply-Chain Supply Chain Issues Global Issues

Supply chains in a global environment must be:
Flexible enough to react to sudden changes in parts availability, distribution, or shipping channels, import duties, and currency rates
Able to use the latest computer and transmission technologies to schedule and manage the shipment of parts in and finished products out
Staffed with local specialists to handle duties, trade, freight, customs and political issues
11-10
11 10
How Supply Chain Decisions Impact Strategy

Low-Cost Strategy Suppliers goal Supply demand at lowest possible cost (e.g., Emerson Electric, Taco Bell) Select primarily for cost Response Strategy Differentiation Strategy Respond quickly Share market to changing research; requirements jointly develop and demand to products and minimize options (e.g., stockouts (e.g., Benetton) Dell Computers) Select primarily for capacity, speed, and flexibility Select primarily for product development skills
Primary selection criteria
Table 11.1

Low-Cost Strategy Process characteristics Maintain high average utilization Response Strategy Invest in excess capacity and flexible processes Differentiation Strategy Modular processes that lend themselves to mass customization Minimize inventory in the chain to avoid obsolescence
Inventory characteristics
Minimize inventory throughout the chain to hold down cost
Develop responsive system with buffer stocks positioned to ensure supply
Table 11.1

Low-Cost Strategy Lead-time characteristics Shorten lead time as long as it does not increase costs Response Strategy Invest aggressively to reduce production lead time Differentiation Strategy Invest aggressively to reduce development lead time
Productdesign characteristics
Maximize performance and minimize costs
Use product designs that lead to low setup time and rapid production ramp-up
Use modular design to postpone product differentiation as long as possible

Table 11.1
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Supply Supply Chain Chain Economics Economics

Supply chain is a costly activity, so savings in SC costs directly increases profit. Affects quality of final product Aids strategy of low cost, response, and differentiation
SC must be managed efficiently!

11-14
Supply Chain Economics

Supply Chain Costs as a Percent of Sales Industry All industry Automobile Food Lumber Paper Petroleum Transportation % Purchased 52 67 60 61 55 79 62
Table 11.2

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% 2 $2.78 4 $2.70 6 $2.63 8 $2.56 10 $2.50 40% $3.23 $3.13 $3.03 $2.94 $2.86 50% $3.85 $3.70 $3.57 $3.45 $3.33 60% $4.76 $4.55 $4.35 $4.17 $4.00 70% $6.25 $5.88 $5.56 $5.26 $5.00 80% $9.09 $8.33 $7.69 $7.14 $6.67 90% $16.67 $14.29 $12.50 $11.11 $10.00
Table 11.3

Hau Lee Furniture spends 50% of its sales in the SC and has a net profit of 4%.
How much sales should be made to receive the same profit when $1 saving is made in the SC? What is the solution, if the profit is increased to 6%, thus the system is more efficient now?
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Objectives of the Purchasing Function
Help identify the goods and services that can be best obtained externally; and Develop, evaluate, and determine the best supplier, price, and delivery for those products and services
11-18
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Make-or-Buy Decisions
Reasons for Making
1. 2. 3. 4. 5. 6. 7. 8. Maintain core competence Lower production cost Unsuitable suppliers Assure adequate supply (quantity or delivery) Utilize surplus labor or facilities Obtain desired quality Remove supplier collusion Obtain unique item that would entail a prohibitive commitment for a supplier 9. Protect personnel from a layoff 10. Protect proprietary design or quality 11. Increase or maintain size of company
Table 11.4
11 19
Make-or-Buy Decisions
Reasons for Buying
1. Frees management to deal with its core competence 2. Lower acquisition cost 3. Preserve supplier commitment 4. Obtain technical or management ability 5. Inadequate capacity 6. Reduce inventory costs 7. Ensure alternative sources 8. Inadequate managerial or technical resources 9. Reciprocity 10. Item is protected by a patent or trade secret
Table 11.4
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Outsourcing
Transfers traditional internal activities and resources of a firm to outside vendors
Utilizes the efficiency that comes with specialization, vendor is an expert in that specialty.
Firms outsource information technology, accounting, legal, logistics, and production There is no tangible product or transfer of title, only resources (facilities, people, equipment) are transferred.
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Ethics in the Supply Chain

Ethical decisions are critical to long term success of SC. Opportunities for unethical behavior are enormous and temptations are high.
Ex: Friendship b/w sales people and customers ..bribery? Many companies have strict rules and codes of conduct that define acceptable behavior. Institute for Supply Management has developed a detailed set of principles and standards for ethical behavior. In global SCs there are additional ethical issues: labor laws, culture, traditional values: Ex: Gap Inc. reports that 10-15% of Chinese factories are subject to psychological or verbal abuse; 50% factories in Africa operate w/o proper safety devices.
Principles and Standards for Ethical Supply Management Conduct

LOYALTY TO YOUR ORGANIZATION JUSTICE TO THOSE WITH WHOM YOU DEAL FAITH IN YOUR PROFESSION 1. Avoid the intent and appearance of unethical or compromising practice in relationships, actions, and communications Demonstrate loyalty to the employer by diligently following the lawful instructions of the employer, using reasonable care and granted authority Avoid any personal business or professional activity that would create a conflict between personal interests and the interests of the employer
Table 11.5
2.
3.

4. Avoid soliciting or accepting money, loans, credits, or preferential discounts, and the acceptance of gifts, entertainment, favors, or services from present or potential suppliers that might influence, or appear to influence, supply management decisions Handle confidential or proprietary information with due care and proper consideration of ethical and legal ramifications and government regulations
5.
6.
7.
Promote positive supplier relationships through courtesy and impartiality

Avoid improper reciprocal agreements
Table 11.5

8. 9. Know and obey the letter and spirit of laws applicable to supply management Encourage support for small, disadvantaged, and minority-owned businesses
10. Acquire and maintain professional competence

11. Conduct supply management activities in accordance with national and international laws, customs, and practices, your organizations policies, and these ethical principles and standards of conduct 12. Enhance the stature of the supply management profession
Table 11.5
Supply Chain Strategies

Plans to help achieve company mission. They affect long-term competitive position Negotiating with many suppliers Long-term partnering with few suppliers
Vertical integration
Keiretsu networks Virtual companies that use suppliers on an as needed basis
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Many Suppliers
Commonly used for commodity products Purchasing is typically based on price. Suppliers aggresively compete with one another; order goes to the low bider. Supplier is responsible for technology, expertise, forecasting, cost, quality, and delivery Almost no information sharing Infrequent large lots Delivery to receiving dock Long term relationship is not the goal!
Disadvantage:
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Few Suppliers
Buyer forms longer term relationships with fewer suppliers Create value through economies of scale and learning curve improvements, in the long run! Suppliers participate in JIT programs, contribute design and technological expertise Frequent, small lots Delivery to point of use Disadvantages: Cost of changing partner is high There might be problems with poor supplier performance Suppliers can make other alliances. Ex: Schwinn Bicycle Co. & Giant Manufacturing Co.
Vertical Integration
Raw material (suppliers) Backward integration Current transformation
Examples of Vertical Integration

Iron ore Silicon Farming
Steel
Automobiles
Integrated circuits
Flour milling
Forward integration
Distribution systems
Circuit boards
Finished goods (customers)
Dealers
Computers Watches Calculators
Baked goods Figure 11.2
11 29
Developing the ability to produce goods or service previously purchased. Ex. Ford Motor manufactures its own radios. Texas Instruments produce integrated circuits as well as flat screens, calculators. Integration may be forward, towards the customer, or backward, towards suppliers Can improve cost, quality, and timely delivery, decrease inventory Most beneficial when the company has large market share and components are highly integrated
Disadvantages
Requires capital, managerial skills, and demand

Risky in industries with rapid technological change
11 30
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
Virtual Companies
Vertical integration has many drawbacks, so find good flexible suppliers and rely on variety of supplier relationships. Ex: doing payroll, hiring personnel, designing products, providing consulting services, distributing products, Relationship: short term, long term, include partners, collaborators Results in specialized management expertise, low capital investment, flexibility and speed.. Ex: Cloth designers give licence to the manufacturer who rents space, lease sewing m/cs, contract for labor, subcontact other services. Disadvantages: - Selecting the companies to join the alliance - Sharing revenues - Evaluating performance 2008 Prentice Hall, Inc.
11 32
Managing the Supply Chain

Substantial efficiencies are possible by integration of the SC . However, management of seperate and independent organizations may result in serious inefficiencies. Significant management issues in controlling a SC Mutual agreement on goals: not on just contact terms Trust: information sharing
Compatible organizational cultures: strengthen the relationship with formal and informal contacts
Distortions 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 All result in increased bullwhip effect!
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Bullwhip effect
Increasing fluctuation in orders towards the upper supply chain.
Results in:
Increases cost of inventory, shipping, etc Decreases customer service and profitability A well running SC is based on accurate information about how many products are truly being pulled through the system.
Opportunities for effective management in an Integrated SC

Generation of accurate pull data. Ex: share point-of-sales (POS) info and computer assisted ordering CAO
Reduction of lot size by aggressive management Ex: develop economical shipments of small size
discounts based on annual volume reduce cost of ordering Single stage control of replenishment A member is resposible for the inventory management of the whole chain like a retailer, distributor or manufacturer.
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 whats happening on store shelves. Heres how the system works for Proctor & Gambles Pampers.
11 37

Vendor managed inventory (VMI) use of a local supplier to maintain inventory for the manufacturer or retailer. Supplier delivers directly to the purchasers using department. Blanket orders A contract to purchase certain orders from the vendor. Standardization Use standard components that do not have slight variations. Postponement Delaying any modification or customization to the later stages of production. Ex: HP Printers

Drop shipping and special packaging
Supplier will ship directly to the end consumer to be assembled, tested and shipped. Ex: Dell Computers. Use of special packaging, labels, optimal placement of labels, their bar codes, etc..
Pass through facility

A distribution center where merchandise is held, but functions as a holding area and shipping hub. Often run by logistics firms
Channel assembly
Postpones final assembly of a product so the distribution channel can assemble it.
E-Procurement
Use of internet to facilitate purchasing. Reduces total cycle time, paperwork, integrates SC, enhances organizations competitive advantage.
A SC may contain many of the above techniques within automated purchasing systems.
Internet is used to communicate order releases to suppliers, especially for blanket orders.
For nonblanket orders, catalogs and ordering procedures on internet enhance the communicating features.
11 40
E-Procurement Environments, Components

Traditional Tehniques
Electronic data interchange (EDI) A standardized data transmittal format for computerized communications b/w organizations. Applies to any business application, like purchasing
Provides format for order date, due date, quantity, etc.

Advanced shipping notice (ASN) A shipping notice delivered directly from vendor to purchaser, showing that the vendor is ready to ship.
Modern Techniques
Online catalogs
Auctions RFQs Real time inventory tracking
E-Procurement
Online catalogs
Provide information about products and cost comparisons among suppliers in electronic form
Standard items may be purchased by online catalogs

Catalogs are available in three versions Catalogs provided by vendors
Catalogs published by intermediaries

Ex: www.eksenbilgisayar.com Exchanges provided by buyers Ex: Global healthcare exchange, retail goods, defense and aerospace, food beverage&consumer products
E-Procurement
Auctions
Maintained by buyers, sellers, or intermediaries Use lower barriers for entry
Increase in the potential number of buyers

E-Procurement
RFQ: Request for Quote
When purchasing requirements are nonstandard, RFQ preparation is too time consuming! E-Procurement can make it less costly Improves supplier selection
Ex: GE has extensive database of vendors, deliver, quality, engineering drawings
Real-time inventory tracking

E-procurement supported by bar codes and RFID can provide economical inventory tracking on the shop floor, in warehouses and in logistics
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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
Vendor Evaluation
Criteria Engineering/research/innovation skills Production process capability (flexibility/technical assistance) Weights .20 .15 Scores (1-5) 5 4 Weight x Score 1.0 .6
Distribution/delivery capability
Quality systems and performance Facilities/location
.05
.10 .05
4
2 2
.2
.2 .1
Financial and managerial strength (stability and cost structure)

Information systems capability (eprocurement, ERP) Integrity (environmental compliance/ ethics) Total
.15
.10 .20 1.00
4
2 5
.6
.2 1.0 3.9
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Negotiation Strategies for Vendor Selection

Cost-Based Price Model - supplier opens books to purchaser; price based on time and materials or on fixed cost plus escalation clause for materials and labor changes of the vendor. Market-Based Price Model - price based on published, auction, or indexed price. Ex: paper prices are available on line at official board markets site. Competitive Bidding often appropriate when suppliers dont wish to discuss costs or where near perfect markets do not exist. Used for infrequent purchases but may make establishing long-term relationships difficult
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
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
Airfreight
Fast and flexible for light loads May be expensive
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Waterways
Typically used for bulky, lowvalue cargo Used when shipping cost is more important than speed
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Pipelines
Used for transporting oil, gas, and other chemical products
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Third-Party Logistics
Outsourcing logistics can reduce costs and improve delivery reliability and speed Logistics firm can coordinate supplier inventory with delivery services FedEx provide warehousing, assembly, testing, shipping, customs for Dell Computer
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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
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Cost of Shipping Alternatives:

Connectors to be shipped from San Jose to Singapore
Value of connectors = $1,750 Holding cost = 40% per year Second carrier (airfreight) 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
Logistics, 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
Measuring Supply Chain Performance

Typical Firms Lead time (weeks) Time spent placing an order Percentage of late deliveries 15 42 minutes 33%
Benchmark Firms
8 15 minutes 2%
Percentage of rejected material

Number of shortages per year
1.5%
400
.0001%
4
Table 11.6

Assets committed to inventory
Percent invested in = inventory Total inventory investment
Total assets x 100
Investment in inventory = $11.4 billion Total assets = $44.4 billion Percent invested in inventory = (11.4/44.4) x 100 = 25.7%

Inventory as a % of Total Assets (with exceptional performance)
Manufacturing (Toyota 5%)

Wholesale (Coca-Cola 2.9%)
20%
34%
Restaurants (McDonalds .05%)

Retail (Home Depot 25.7%)
2.9%
27%
Table 11.7
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Inventory turnover
Inventory turnover = Cost of goods sold Inventory investment
Weeks of supply (its reciprocal)
11 60

Examples of Annual Inventory Turnover
Food, Beverage, Retail Anheuser Busch Coca-Cola Home Depot McDonalds 15 14 5 112 Manufacturing Dell Computer Johnson Controls Toyota (overall) Nissan (assembly) 90 22 13 150
Table 11.8
11 61
Measuring Supply Chain Performance PepsiCo Company-2005 annual report

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

Supply Chain Real Time

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Operations Management

Chapter 11 Supply Chain Management

Compute inventory turnover

2008 Prentice Hall, Inc.

The Supply Chains Strategic Importance

Competition is no longer between companies; it is between supply chains

Supply Chain Management

A Supply Chain for Beer

Global Supply-Chain Supply Chain Issues Global Issues

How Supply Chain Decisions Impact Strategy

Primary selection criteria

How Supply Chain Decisions Impact Strategy

Minimize inventory throughout the chain to hold down cost

Develop responsive system with buffer stocks positioned to ensure supply

How Supply Chain Decisions Impact Strategy

Maximize performance and minimize costs

Use modular design to postpone product differentiation as long as possible

2008 Prentice Hall, Inc.

Supply Supply Chain Chain Economics Economics

SC must be managed efficiently!

Supply Chain Economics

Supply Chain Economics

Supply Chain Economics

2008 Prentice Hall, Inc.

Objectives of the Purchasing Function

2008 Prentice Hall, Inc.

Ethics in the Supply Chain

Principles and Standards for Ethical Supply Management Conduct

Principles and Standards for Ethical Supply Management Conduct

Promote positive supplier relationships through courtesy and impartiality

Principles and Standards for Ethical Supply Management Conduct

10. Acquire and maintain professional competence

Supply Chain Strategies

2008 Prentice Hall, Inc.

2008 Prentice Hall, Inc.

Examples of Vertical Integration

Finished goods (customers)

Computers Watches Calculators

Baked goods Figure 11.2

2008 Prentice Hall, Inc.

Requires capital, managerial skills, and demand

2008 Prentice Hall, Inc.

Managing the Supply Chain

Distortions in an Integrated Supply-Chain

2008 Prentice Hall, Inc.

Opportunities for effective management in an Integrated SC

Radio Frequency Tags

2008 Prentice Hall, Inc.

Opportunities for effective management in an Integrated SC

Opportunities for effective management in an Integrated SC

Pass through facility

2008 Prentice Hall, Inc.

E-Procurement Environments, Components

Provides format for order date, due date, quantity, etc.

Standard items may be purchased by online catalogs

Catalogs published by intermediaries

Increase in the potential number of buyers

Real-time inventory tracking

2008 Prentice Hall, Inc.

Engineering and production help

Financial and managerial strength (stability and cost structure)

Negotiation Strategies for Vendor Selection

2008 Prentice Hall, Inc.