Supply Chain
Management
11
PowerPoint presentation to accompany
Heizer, Render, Munson
Operations Management, Twelfth Edition
Principles of Operations Management, Tenth Edition
PowerPoint slides by Jeff Heyl
Copyright ยฉ 2017 Pearson Education, Inc.
11 - 1
Outline
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Global Company Profile:
Darden Restaurants
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The Supply Chainโs Strategic
Importance
Sourcing Issues: Make-or-Buy and
Outsourcing
Six Sourcing Strategies
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Outline - Continued
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Supply Chain Risk
Managing the Integrated Supply
Chain
Building the Supply Base
Logistics Management
Distribution Management
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Outline - Continued
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Ethics and Sustainable Supply Chain
Management
Measuring Supply Chain
Performance
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Dardenโs Supply Chain
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One of the largest publicly traded
casual dining company in the world
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Serves over 320 million meals
annually in more than 1,500
restaurants in the North America
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Flagship brand Olive Garden
generates $3.6 billion annual sales
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Operations is the strategy
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Dardenโs Supply Chain
โถ Sources food from five continents
and thousands of suppliers
โถ Four distinct supply chains
โถ Over $2 billion spent annually in
supply chains
โถ Competitive advantage achieved
through superior supply chain
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Learning Objectives
When you complete this chapter you
should be able to:
11.1 Explain the strategic importance of
the supply chain
11.2 Identify six sourcing strategies
11.3 Explain issues and opportunities in
the supply chain
11.4 Describe the steps in supplier
selection
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Learning Objectives
When you complete this chapter you
should be able to:
11.5 Explain major issues in logistics
management
11.6 Compute percentage of assets
committed to inventory and
inventory turnover
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Supply-Chain Management
The objective of supply chain
management is to structure the
supply chain to maximize its
competitive advantage and
benefits to the ultimate consumer
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A Supply Chain for Beer
Figure 11.1
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The Supply Chainโs
Strategic Importance
โถ The coordination of all supply chain
activities, starting with raw materials
and ending with a satisfied customer
โถ Includes suppliers, manufacturers
and/or service providers, distributors,
wholesalers, retailers, and final
customers
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The Supply Chainโs
Strategic Importance
โถ Large portion of sales dollars spent on
purchases
โถ Supplier relationships increasingly
integrated and long term
โถ Improve innovation, speed design,
reduce costs
โถ Managing supplier relationships has
added emphasis
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Supply
Chain
Costs
TABLE 11.1
Supply Chain Costs as a Percentage of Sales
INDUSTRY
% PURCHASED
Automobiles
67
Beverages
52
Chemical
62
Food
60
Lumber
61
Metals
65
Paper
55
Petroleum
79
Restaurants
35
Transportation
62
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Supply Chain vs.
Sales Strategy
Hau Lee Furniture
60% of sales $ in supply chain
Current gross profit = $10,000
Increase profits to $15,000 (50%)
CURRENT
SITUATION
SUPPLY CHAIN
STRATEGY
SALES
STRATEGY
$100,000
$100,000
$125,000
Cost of materials
$60,000 (60%)
$55,000 (55%)
$75,000 (60%)
Production costs
$20,000 (20%)
$20,000 (20%)
$25,000 (20%)
Fixed costs
$10,000 (10%)
$10,000 (10%)
$10,000 (8%)
Profit
$10,000 (10%)
$15,000 (15%)
$15,000 (12%)
Sales
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Supply Chain Management
TABLE 11.2
How Corporate Strategy Impacts Supply Chain Decisions
LOW COST
STRATEGY
RESPONSE
STRATEGY
DIFFERENTIATION
STRATEGY
Primary supplier
selection criteria
โข Cost
โข Capacity
โข Speed
โข Flexibility
โข Product development skills
โข Willing to share information
โข Jointly and rapidly develop
products
Supply chain
inventory
โข Minimize
inventory to hold
down costs
โข Use buffer stocks
to ensure speedy
supply
โข Minimize inventory to avoid
product obsolescence
Distribution
network
โข Inexpensive
transportation
โข Sell through
discount
distributors/
retailers
โข Fast transportation
โข Provide premium
customer service
โข Gather and communicate
market research data
โข Knowledgeable sales staff
Product design
characteristics
โข Maximize
performance
โข Minimize cost
โข Low setup time
โข Rapid production
ramp-up
โข Modular design to aid product
differentiation
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Sourcing Issues
โถ Make-or-buy decisions
โถ Choosing between obtaining products and
services externally as opposed to producing
them internally
โถ Outsourcing
โถ Transfer traditional internal activities and
resources to outside vendors
โถ Efficiency in specialization
โถ Focus on core competencies
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Six Sourcing Strategies
โถ
โถ
โถ
โถ
โถ
โถ
Many suppliers
Few suppliers
Vertical integration
Joint ventures
Keiretsu networks
Virtual companies
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Many Suppliers
โถ Commonly used for commodity
products
โถ Purchasing is typically based on price
โถ Suppliers compete with one another
โถ Supplier is responsible for technology,
expertise, forecasting, cost, quality,
and delivery
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Few Suppliers
โถ Buyer forms longer term relationships with
fewer suppliers
โถ Create value through economies of scale
and learning curve improvements
โถ Suppliers more willing to participate in JIT
programs and contribute design and
technological expertise
โถ Cost of changing suppliers is huge
โถ Trade secrets and other alliances may be
at risk
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Vertical Integration
Vertical Integration
Examples of Vertical Integration
Raw material
(suppliers)
Tree Harvesting
Backward integration
Chipmakers
Pulpmaking
Current
transformation
Pepsi
Apple
International
Paper
Forward integration
Bottling
Retail stores
End-User Paper
Conversion
Finished goods
(customers)
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Figure 11.2
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Vertical Integration
โถ Developing the ability to produce goods or
services previously purchased
โถ Integration may be forward, towards the
customer, or backward, towards suppliers
โถ Can improve cost, quality, delivery, and
inventory but requires capital, managerial
skills, and demand
โถ Risky in industries with rapid technological
change
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Joint Ventures
โถ Formal collaboration
โถ Enhance skills
โถ Secure supply
โถ Reduce costs
โถ The challenge is to cooperation without
diluting brand or conceding competitive
advantage
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Keiretsu Networks
โถ A middle ground between few suppliers and
vertical integration
โถ Supplier becomes part of the company coalition
โถ Often provide financial support for suppliers
through ownership or loans
โถ Members expect long-term relationships and
provide technical expertise and stable deliveries
โถ May extend through several levels of the supply
chain
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Virtual Companies
โถ Rely on a variety of supplier relationships
to provide services on demand
โถ Fluid organizational boundaries that allow
the creation of unique enterprises to meet
changing market demands
โถ Relationships may be short- or long-term
โถ Exceptionally lean performance, low
capital investment, flexibility, and speed
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Supply Chain Risk
โถ More reliance on supply chains means
more risk
โถ Fewer suppliers increase dependence
โถ Compounded by globalization and
logistical complexity
โถ Vendor reliability and
quality risks
โถ Political and
currency risks
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Risk and Mitigation Tactics
โถ
โถ
โถ
โถ
โถ
โถ
Research and assess possible risks
Innovative planning
Reduce potential disruptions
Prepare responses for negative events
Flexible, secure supply chains
Diversified supplier base
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Risk and Mitigation Tactics
TABLE 11.3
Supply Chain Risks and Tactics
RISK
RISK REDUCTION TACTICS EXAMPLE
Supplier
failure to
deliver
Use multiple suppliers;
effective contracts with
penalties; subcontractors on
retainer; pre-planning
McDonald's planned its supply
chain 6 years before its opening
in Russia. Every plantโbakery,
meat, chicken, fish, and
lettuceโis closely monitored to
ensure strong links.
Supplier
quality
failures
Careful supplier selection,
training, certification, and
monitoring
Darden Restaurants has
placed extensive controls,
including third-party audits, on
supplier processes and logistics
to ensure constant monitoring
and reduction of risk.
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Risk and Mitigation Tactics
TABLE 11.3
RISK
Supply Chain Risks and Tactics
RISK REDUCTION
TACTICS
EXAMPLE
Outsourcing
Take over production; provide Tyson took over chicken farm
or perform the service
production in China to mitigate
yourself
product quality and safety
concerns related to using
independent farmers
Logistics
delays or
damage
Multiple/redundant
transportation modes
and warehouses; secure
packaging; effective
contracts with penalties
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Walmart, with its own trucking
fleet and numerous distribution
centers located throughout the
U.S., finds alternative origins
and delivery routes bypassing
problem areas.
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Risk and Mitigation Tactics
TABLE 11.3
RISK
Supply Chain Risks and Tactics
RISK REDUCTION
TACTICS
EXAMPLE
Distribution
Careful selection, monitoring,
and effective contracts with
penalties
Toyota trains its dealers around
the world, invoking principles of
the Toyota Production System to
help dealers improve customer
service, used-car logistics, and
body and paint operations.
Information
loss or
distortion
Redundant databases;
secure IT systems; training of
supply chain partners on the
proper interpretations and
uses of information
Boeing utilizes a state-of-the-art
international communication
system that transmits
engineering, scheduling, and
logistics data to Boeing facilities
and suppliers worldwide.
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Risk and Mitigation Tactics
TABLE 11.3
Supply Chain Risks and Tactics
RISK
RISK REDUCTION TACTICS
EXAMPLE
Political
Political risk insurance; crosscountry diversification;
franchising and licensing
Hard Rock Cafeฬ reduces
political risk by franchising and
licensing, rather than owning,
when the political and cultural
barriers seem significant.
Economic
Hedging to combat exchange
rate risk; purchasing contracts
that address price fluctuations
Honda and Nissan are
moving more manufacturing
out of Japan as the exchange
rate for the yen makes
Japanese-made autos more
expensive.
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Risk and Mitigation Tactics
TABLE 11.3
Supply Chain Risks and Tactics
RISK
RISK REDUCTION TACTICS
EXAMPLE
Natural
catastrophes
Insurance; alternate sourcing;
cross-country diversification
Toyota, after its experience
with fires, earthquakes, and
tsunamis, now attempts to
have at least two suppliers,
each in a different
geographical region, for each
component.
Theft,
Insurance; patent protection;
vandalism,
security measures including
and terrorism RFID and GPS; diversification
Domestic Port Radiation
Initiative: The U.S.
government has set up
radiation portal monitors that
scan nearly all imported
containers for radiation.
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Security and JIT
โถ Shipments get misrouted, stolen,
damaged, or excessively delayed
โถ Technological innovations are improving
security and inventory management
โถ Location, motion sensors, broken seals,
temperature
โถ Tracking can help expedite shipments
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Managing the Integrated
Supply Chain
โถ Issues
โถ Local optimization can magnify
fluctuations
โถ Incentives push merchandise into the
supply chain for sales that have not
occurred
โถ Large lots reduce shipping and production
costs but increase inventory holding and
do not reflect actual sales
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Managing the Integrated
Supply Chain
โถ Issues
โถ Local optimization can magnify
fluctuations
โถ Incentives push merchandise into the
supply chain for sales that have not
occurred
โถ Large lots reduce shipping costs but
increase inventory holding and do not
reflect actual sales
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Managing the Integrated
Supply Chain
โถ Opportunities
โถ Accurate โpullโ data, shared information
โถ Lot size reduction, shipping, discounts,
reduced ordering costs
โถ Single stage control of replenishment
โถ Single supply chain member responsible for
ordering
โถ Vendor managed inventory (VMI)
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Managing the Integrated
Supply Chain
โถ Opportunities
โถ Collaborative planning, forecasting, and
replenishment (CPFR) throughout the
supply chain
โถ Blanket orders against which actual
orders are released
โถ Standardization
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Managing the Integrated
Supply Chain
โถ Opportunities
โถ Postponement withholds modification as
long as possible
โถ Electronic ordering and funds transfer
speed transactions and reduce paperwork
โถ Drop shipping and special packaging
bypasses the seller and reduces costs
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Building the Supply Base
โถ Supplier evaluation
โถ Finding potential suppliers
โถ Determine likelihood of their becoming good
suppliers
โถ Supplier certification
1) Qualification
2) Education
3) Certification
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Building the Supply Base
โถ Supplier development
โถ Integrate the supplier into the system
โถ Quality requirements
โถ Product specifications
โถ Schedules and delivery
โถ Procurement policies
โถ Training
โถ Engineering and production help
โถ Information transfer procedures
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Building the Supply Base
โถ Negotiation
โถ A significant element in purchasing
โถ Highly valued skills
โถ Cost-based price model
โถ Supplier opens books
โถ Market-based price model
โถ Based on published, auction, or indexed prices
โถ Competitive bidding
โถ Common policy for many purchases
โถ Does not generally foster long-term relationships
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Building the Supply Base
โถ Contracting
โถ Share risks, benefits, create incentives
โถ Centralized purchasing
โถ
โถ
โถ
โถ
โถ
โถ
โถ
Leverage volume
Develop specialized staff
Develop supplier relationships
Maintain professional control
Devote resources to selection and negotiation
Reduce duplication of tasks
Promote standardization
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Building the Supply Base
โถ E-Procurement
โถ Speeds purchasing, reduces costs, integrates
supply chain
โถ Online catalogs and exchanges
โถ Standard items or industry-specific web sites
โถ Online auctions
โถ Low barriers to entry
โถ Reverse auctions for buyers
โถ Price not always the most important factor
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Logistics Management
โถ Objective is to obtain efficient operations
through the integration of all material
acquisition, movement, and storage
activities
โถ Is a frequent candidate for outsourcing
โถ Allows competitive advantage to be gained
through reduced costs and improved
customer service
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Shipping Systems
โถ Trucking
โถ Moves the vast majority of manufactured
goods
โถ Chief advantage is flexibility
โถ Railroads
โถ Capable of carrying large loads
โถ Little flexibility though containers and
piggybacking have helped with this
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Shipping Systems
โถ Airfreight
โถ Fast and flexible for light loads
โถ May be expensive
โถ Waterways
โถ Typically used for bulky, low-value cargo
โถ Used when shipping cost is more important
than speed
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Shipping Systems
โถ Pipelines
โถ Used for transporting oil, gas, and other
chemical products
โถ Multimodal
โถ Combines shipping methods
โถ Common, especially in international
shipments
โถ Aided by standardized containers
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Cost and Speed of Shipments
โถ Faster shipping is generally more
expensive than slower shipping
โถ Faster methods tend to involve
smaller shipment sizes while slower
methods involve very large shipment
sizes
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Warehousing
โถ May be expensive, but alternatives may
be more so
โถ Fundamental purpose is to store goods
โถ May provide other functions
โถ Consolidation
โถ Break-bulk
โถ Cross-docking
โถ Postponement
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Warehousing
โถ Channel assembly
โถ Implementation of postponement
โถ Ship components or modules
โถ Distributors become manufacturing partners
โถ Finished goods inventory reduced
โถ Better market response with less investment
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Third-Party Logistics (3PL)
โถ
Outsourcing logistics can reduce
inventory, costs, and improve delivery
reliability and speed
โถ
Coordinate supplier inventory with delivery
services
โถ
May provide
warehousing,
assembly, testing,
shipping, customs
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Distribution Management
โถ The outbound flow of products
1) Rapid response
2) Product choice
3) Service
โถ Increasing the number of facilities
generally improves response time and
customer satisfaction
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Distribution Management
โถ Total costs are important
โถ Inventory costs
โถ Transportation costs
โถ Facility costs
โถ Total logistics costs
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Distribution Management
Figure 11.3
(b) Cost $
(a) Response Time
Response time
Total logistics cost
$
Time
Lowest cost
Facility costs
Inventory costs
Transportation costs
1
2
3
4
5
Number of facilities
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1
2
3
4
5
Number of facilities
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Distribution Management
(c) Cost, Revenue, and Profit
Figure 11.3
Revenue
Total logistics cost
$
Max
profit
1
2
3
4
5
Number of facilities
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Distribution Management
โถ Facilities, packaging, and logistics
โถ Selection and development of dealers or
retailers
โถ Downstream management as important
as upstream management
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Ethics and Sustainable
Supply Chain Management
โถ Personal ethics
โถ Critical to long-term success of an
organization
โถ Supply chains particularly susceptible
โถ Ethics within the supply chain
โถ Ethical behavior regarding the
environment
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Institute for Supply Management
Principles and Standards
โถ Promote and uphold responsibilities to one's
employer; positive supplier and customer
relationships; sustainability and social
responsibility; protection of confidential and
proprietary information; applicable laws,
regulations, and trade agreements; and
development of professional competence
โถ Avoid perceived impropriety; conflicts of interest;
behaviors that negatively influence supply chain
decisions; and improper reciprocal agreements
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ISM Ethical Standards
1. PERCEIVED IMPROPRIETY. Prevent the intent
and appearance of unethical or compromising
conduct in relationships, actions and
communications
2. CONFLICTS OF INTEREST. Ensure that any
personal, business or other activity do not
conflict with the lawful interests of your
employer
3. ISSUES OF INFLUENCE. Avoid behaviors or
actions that may negatively influence, or appear
to influence, supply management decisions
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ISM Ethical Standards
4. RESPONSIBILITIES TO YOUR EMPLOYER.
Uphold fiduciary and other responsibilities using
reasonable care and granted authority to deliver
value to your employer
5. SUPPLIER AND CUSTOMER
RELATIONSHIPS. Promote positive supplier
and customer relationships
6. SUSTAINABILITY AND SOCIAL
RESPONSIBILITY. Champion social
responsibility and sustainability practices in
supply management
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ISM Ethical Standards
7. CONFIDENTIAL AND PROPRIETARY
INFORMATION. Protect confidential and
proprietary information
8. RECIPROCITY. Avoid improper reciprocal
agreements
9. APPLICABLE LAWS, REGULATIONS AND
TRADE AGREEMENTS. Know and obey the
letter and spirit of laws, regulations and trade
agreements applicable to supply management
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ISM Ethical Standards
10. PROFESSIONAL COMPETENCE. Develop
skills, expand knowledge and conduct
business that demonstrates competence and
promotes the supply management profession
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Establishing Sustainability in
Supply Chains
โถ Return or reverse logistics
โถ Sending returned products back up the supply
chain for resale, repair, reuse, remanufacture,
recycling, or disposal
โถ Closed-loop supply chain
โถ Proactive design of a supply chain that tries to
optimize all forward and reverse flows
โถ Prepares for returns prior to product
introduction
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Establishing Sustainability in
Supply Chains
TABLE 11.4
Management Challenges of Reverse Logistics
ISSUE
FORWARD LOGISTICS
REVERSE LOGISTICS
Forecasting
Relatively straightforward
More uncertain
Product quality
Uniform
Not uniform
Product packaging
Uniform
Often damaged
Pricing
Relatively uniform
Dependent on many factors
Speed
Often very important
Often not a priority
Distribution costs
Easily visible
Less directly visible
Inventory management
Consistent
Not consistent
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Measuring Supply-Chain
Performance
โถ Assets committed to inventory
Percentage
Average inventory investment
invested in =
Total assets
inventory
โบ
x 100
Home Depot had $11.4b inventory,
total assets of $44.4b
Percentage
invested in =
inventory
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11.4
44.4
x 100 = 25.7%
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Measuring Supply-Chain
Performance
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 (McDonaldโs .05%)
2.9%
Retail (Home Depot 25.7%)
27%
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Measuring Supply-Chain
Performance
โถ Inventory turnover
Cost of goods sold
Inventory
turnover = Average inventory investment
โบ
Inventory investment
โบ Average of several periods
โบ (beginning plus ending)/2
โบ Ending inventory
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Measuring Supply-Chain
Performance
โถ From PepsiCo, Inc. Annual Report
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
Inventory
turnover =
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$1.69
14.2
1.69
= 8.4
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Measuring Supply-Chain
Performance
TABLE 11.6
Examples of Annual Inventory Turnover
FOOD, BEVERAGE, RETAIL
Anheuser Busch
15
Coca-Cola
14
Home Depot
5
McDonaldโs
112
MANUFACTURING
Dell Computer
90
Johnson controls
22
Toyota (overall)
13
Nissan (assembly)
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150
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Measuring Supply-Chain
Performance
โถ Weeks of supply
Average inventory investment
Weeks of
=
supply
Annual cost of goods sold
52 weeks
โบ
For PepsiCo
Inventory investment = $1.69b
Average weekly cost of goods sold = $14.2b / 52 = $.273b
Weeks of supply = 1.69 / .273 = 6.19 weeks
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Benchmarking the Supply Chain
โถ Comparison with benchmark firms
TABLE 11.7
Supply Chain Metrics in the Consumer Packaged
Goods Industry
Order fill rate
Order fulfillment lead time (days)
Cash-to-cash cycle time (days)
Inventory days of supply
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TYPICAL
FIRMS
BENCHMARK
FIRMS
71%
98%
7
3
100
30
50
20
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The SCOR Model
โถ Processes, metrics, and best practices
Figure 11.4
Plan: Demand/Supply planning and Management
Source: Identify,
select, manage, and
assess sources
Return: Raw material
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The SCOR Model
TABLE 11.8
SCOR Model Metrics to Help Firms Benchmark Performance
Against the Industry
PERFORMANCE
ATTRIBUTE
SAMPLE METRIC
CALCULATION
Supply chain
reliability
Perfect order fulfillment
(Total perfect orders) / (Total number
of orders)
Supply chain
responsiveness
Average order
fulfillment cycle time
(Sum of actual cycle times for all
orders delivered) / (Total number of
orders delivered)
Supply chain agility
Upside supply chain
flexibility
Time required to achieve an
unplanned 20% increase in
delivered quantities
Supply chain costs
Supply chain
management costs
Cost to plan + Cost to source + Cost
to deliver + Cost to return
Supply chain asset
management
Cash-to-cash cycle
time
Inventory days of supply + Days of
receivables outstanding โ Days of
payables outstanding
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Benchmarking the Supply Chain
โถ Benchmarking useful
โถ May not be adequate
โถ Audits may be necessary
โถ Continuing communication, understanding,
trust, performance, corporate strategy
โถ Foster a mutual belief that "we are in
this together"
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