Supply Chain Management

1
Operations Management
Chapter 11 Supply Chain Management
PowerPoint presentation to accompany
Heizer/Render Principles of Operations
Management, 7e Operations Management, 9e
2
Learning Objectives

• When you complete this chapter you should be able
  to

• Explain the strategic importance of the supply
  chain
• Identify five supply chain strategies
• Explain issues and opportunities in the supply
  chain
• Describe approaches to supply chain negotiations

3
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

4
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

5
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

6
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

7
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
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Supply Chain Management
Important activities include determining

• Transportation vendors
• Credit and cash transfers
• Suppliers
• Distributors
• Accounts payable and receivable
• Warehousing and inventory
• Order fulfillment
• Sharing customer, forecasting, and production
  information

9
A Supply Chain for Beer
Figure 11.1
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Global Supply-Chain Issues
Global Supply Chain 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

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How Supply Chain Decisions Impact Strategy
Table 11.1
12
How Supply Chain Decisions Impact Strategy
Table 11.1
13
How Supply Chain Decisions Impact Strategy
Table 11.1
14
Supply Chain Economics
Supply Chain 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!

15
Supply Chain Economics
Supply Chain Costs as a Percent of Sales
Table 11.2
16
Supply Chain Economics
Dollars of additional sales needed to equal 1
saved through the supply chain
Table 11.3
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Supply Chain Economics

• 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

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Make-or-Buy Decisions
Table 11.4
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Make-or-Buy Decisions
Table 11.4
21
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.

22
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.

23
Principles and Standards for Ethical Supply
Management Conduct

• LOYALTY TO YOUR ORGANIZATION
• JUSTICE TO THOSE WITH WHOM YOU DEAL
• FAITH IN YOUR PROFESSION
• 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
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Principles and Standards for Ethical Supply
Management Conduct

• 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
• Promote positive supplier relationships through
  courtesy and impartiality
• Avoid improper reciprocal agreements

Table 11.5
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Principles and Standards for Ethical Supply
Management Conduct

• Know and obey the letter and spirit of laws
  applicable to supply management
• Encourage support for small, disadvantaged, and
  minority-owned businesses
• Acquire and maintain professional competence
• 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
• Enhance the stature of the supply management
  profession

Table 11.5
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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

27
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
• Disadvantage
• Long term relationship is not the goal!

28
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.

29
Vertical Integration
Figure 11.2
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Vertical Integration

• 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

31
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

32
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

33
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

34
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!

35
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.

36
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.

37
Radio Frequency Tags
38
Opportunities for effective management in an
Integrated SC

• 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

39
Opportunities for effective management in an
Integrated SC

• 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.

40
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.

41
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

42
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

43
E-Procurement

• Auctions
• Maintained by buyers, sellers, or intermediaries
• Low barriers to entry
• Increase in the potential number of buyers

44
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

45
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

46
Negotiation Strategies for Vendor Selection

• Cost-Based Price Model - supplier opens books to
  purchaser price based upon fixed cost plus
  escalation clause for materials and labor
• 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

47
Vendor Evaluation
48
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

49
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

50
Distribution Systems

• Airfreight
• Fast and flexible for light loads
• May be expensive

51
Distribution Systems

• Waterways
• Typically used for bulky, low-value cargo
• Used when shipping cost is more important than
  speed

52
Distribution Systems

• Pipelines
• Used for transporting oil, gas, and other
  chemical products

53
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

54
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

55
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
(.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 lt 20), we should use the cheaper, slower
shipper
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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

57
Measuring Supply Chain Performance
Table 11.6
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Measuring Supply Chain Performance

• Assets committed to inventory

Investment in inventory 11.4 billion Total
assets 44.4 billion
Percent invested in inventory (11.4/44.4) x 100
25.7
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Measuring Supply Chain Performance
Table 11.7
60
Measuring Supply Chain Performance

• Inventory turnover

61
Measuring Supply Chain Performance
Table 11.8
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Measuring Supply Chain Performance

• Inventory turnover

63
Measuring Supply Chain Performance
14.2 / 1.69 8.4
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Measuring Supply Chain Performance
1.69 / .273 6.19 weeks