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Operations Management: Sustainability

and Supply Chain Management Learning Objectives (1 of 2)

Explain the strategic importance of the supply chain

Identify six sourcing strategies
Chapter 4
Explain issues and opportunities in the supply chain
Supply Chain Management
Describe the steps in supplier selection

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Learning Objectives (2 of 2) Supply-Chain Management

Explain major issues in logistics management The objective of supply chain management is to
structure the supply chain to maximize its competitive
Compute percentage of assets committed to inventory and
advantage and benefits to the ultimate consumer
inventory turnover

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Figure 11.1 A Supply Chain for Beer The Supply Chain’s Strategic
Importance (1 of 2)

• The coordination of all supply chain activities, starting

with raw materials and ending with a satisfied customer
• Includes suppliers, manufacturers and/or service
providers, distributors, wholesalers, retailers, and final
customers

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The Supply Chain’s Strategic

Importance (2 of 2) Supply Chain Costs

• Large portion of sales dollars spent on purchases Table 11.1 Supply Chain Costs as a Percentage of Sales
• Supplier relationships increasingly integrated and long Industry % Purchased
term Automobiles 67
Beverages 52
• Improve innovation, speed design, reduce costs Chemical 62

• Managing supplier relationships has added emphasis Food 60

Lumber 61
Metals 65
Paper 55
Petroleum 79
Restaurants 35
Transportation 62

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Supply Chain vs. Sales Strategy Supply Chain Management

• Hau Lee Furniture Table 11.2 How Corporate Strategy Impacts Supply Chain
– 60% of sales $ in supply chain Decisions
Blank Low Cost Strategy Response Strategy Differentiation Strategy
– Current gross profit = $10,000 Primary supplier • Cost • Capacity • Product development skills
– Increase profits to $15,000 (50%) selection criteria • Speed
• Flexibility
• Willing to share information
• Jointly and rapidly develop
products
Blank Current Supply Chain Supply chain • Minimize inventory to • Use buffer stocks • Minimize inventory to avoid
Situation Strategy Sales Strategy inventory hold down costs to ensure speedy product obsolescence
supply
Sales $100,000 $100,000 $125,000
Distribution • Inexpensive • Fast • Gather and communicate
Cost of materials $60,000 (60%) $55,000 (55%) $75,000 (60%) network transportation transportation market research data
• Sell through discount • Provide premium • Knowledgeable sales staff
Production costs $20,000 (20%) $20,000 (20%) $25,000 (20%) distributors/ customer service
retailers
Fixed costs $10,000 (10%) $10,000 (10%) $10,000 (8%)
Product design • Maximize • Low setup time • Modular design to aid
Profit $10,000 (10%) $15,000 (15%) $15,000 (12%) characteristics performance • Rapid production product differentiation
• Minimize cost ramp-up

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Sourcing Issues Six Sourcing Strategies

• Make-or-buy decisions • Many suppliers

– Choosing between obtaining products and services • Few suppliers
externally as opposed to producing them internally
• Vertical integration
• Outsourcing
– Transfer traditional internal activities and resources to • Joint ventures
outside vendors • Keiretsu networks
– Efficiency in specialization
• Virtual companies
– Focus on core competencies

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Many Suppliers Few Suppliers

• Commonly used for commodity products • Buyer forms longer term relationships with fewer
suppliers
• Purchasing is typically based on price
• Create value through economies of scale and learning
• Suppliers compete with one another
curve improvements
• Supplier is responsible for technology, expertise,
• Suppliers more willing to participate in JIT programs and
forecasting, cost, quality, and delivery
contribute design and technological expertise
• Cost of changing suppliers is huge
• Trade secrets and other alliances may be at risk

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Vertical Integration (1 of 2) Vertical Integration (2 of 2)

Figure 11.2 Vertical Integration Can Be Forward or • Developing the ability to produce goods or services
Backward previously purchased
• Integration may be forward, towards the customer, or
backward, towards suppliers
• Can improve cost, quality, delivery, and inventory but
requires capital, managerial skills, and demand
• Risky in industries with rapid technological change

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Joint Ventures Keiretsu Networks

• Formal collaboration • A middle ground between few suppliers and vertical

– Enhance skills integration
– Secure supply • Supplier becomes part of the company coalition
– Reduce costs
• Often provide financial support for suppliers through
• The challenge is to cooperation without diluting brand or ownership or loans
conceding competitive advantage
• Members expect long-term relationships and provide
technical expertise and stable deliveries
• May extend through several levels of the supply chain

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Virtual Companies Supply Chain Risk

• Rely on a variety of supplier relationships to provide • More reliance on supply chains means more risk
services on demand
• Fewer suppliers increase dependence
• Fluid organizational boundaries that allow the creation of
unique enterprises to meet changing market demands • Compounded by
globalization and logistical
• Relationships may be short- or long-term complexity
• Exceptionally lean performance, low capital investment, • Vendor reliability and
flexibility, and speed quality risks
• Political and
currency risks

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Risk and Mitigation Tactics (1 of 6) Risk and Mitigation Tactics (2 of 6)

• Research and assess possible risks Table 11.3 Supply Chain Risks and Tactics
• Innovative planning Risk Risk Reduction Tactics Example
• Reduce potential disruptions Supplier Use multiple suppliers; McDonald's planned its supply
failure to effective contracts with chain 6 years before its opening
• Prepare responses for negative events deliver penalties; subcontractors on in Russia. Every plant—bakery,
retainer; pre-planning meat, chicken, fish, and lettuce—
• Flexible, secure supply chains is closely monitored to ensure
strong links.
• Diversified supplier base Supplier Careful supplier selection, Darden Restaurants has placed
quality training, certification, and extensive controls, including third-
failures monitoring party audits, on supplier
processes and logistics to ensure
constant monitoring and reduction
of risk.

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Risk and Mitigation Tactics (3 of 6) Risk and Mitigation Tactics (4 of 6)

Table 11.3 [continued] Table 11.3 [continued]

Risk Risk Reduction Tactics Example Risk Risk Reduction Tactics Example
Outsourcing Take over production; Tyson took over chicken farm Distribution Careful selection, Toyota trains its dealers around
provide or perform the production in China to mitigate monitoring, and effective the world, invoking principles of
service yourself product quality and safety contracts with penalties the Toyota Production System to
concerns related to using help dealers improve customer
independent farmers service, used-car logistics, and
Logistics Multiple/redundant Walmart, with its own trucking body and paint operations.
delays or transportation modes fleet and numerous distribution Information Redundant databases; Boeing utilizes a state-of-the-art
damage and warehouses; secure centers located throughout the loss or secure IT systems; training international communication
packaging; effective U.S., finds alternative origins and distortion of supply chain partners on system that transmits
contracts with penalties delivery routes bypassing the proper interpretations engineering, scheduling, and
problem areas. and uses of information logistics data to Boeing facilities
and suppliers worldwide.

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Risk and Mitigation Tactics (5 of 6) Risk and Mitigation Tactics (6 of 6)

Table 11.3 [continued] Table 11.3 [continued]

Risk Risk Reduction Tactics Example Risk Risk Reduction Tactics Example
Political Political risk insurance; Hard Rock Café reduces Natural Insurance; alternate Toyota, after its experience with
cross-country political risk by franchising and catastrophes sourcing; cross-country fires, earthquakes, and tsunamis,
diversification; licensing, rather than owning, diversification now attempts to have at least two
franchising and licensing when the political and cultural suppliers, each in a different
barriers seem significant. geographical region, for each
component.
Economic Hedging to combat Honda and Nissan are
exchange rate risk; moving more manufacturing Theft, Insurance; patent protection; Domestic Port Radiation
purchasing contracts that out of Japan as the exchange vandalism, security measures including Initiative: The U.S. government
and RFID and GPS; has set up radiation portal
address price fluctuations rate for the yen makes
terrorism diversification monitors that scan nearly all
Japanese-made autos more imported containers for radiation.
expensive.

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Security and JIT Managing the Integrated Supply Chain (1 of 5)

• Shipments get misrouted, stolen, damaged, or • Issues

excessively delayed – Local optimization can magnify fluctuations
• Technological innovations are improving security and – Incentives push merchandise into the supply chain
inventory management for sales that have not occurred
– Location, motion sensors, broken seals, temperature – Large lots reduce shipping and production costs but
increase inventory holding and do not reflect actual
• Tracking can help expedite shipments sales

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Managing the Integrated Supply Chain (2 of 5) Managing the Integrated Supply Chain (3 of 5)

• Issues • Opportunities
– Large lots reduce shipping costs but increase – Accurate “pull” data, shared information
inventory holding and do not reflect actual sales – Lot size reduction, shipping, discounts, reduced
ordering costs
Bullwhip effect occurs when orders are relayed through the – Single stage control of replenishment
supply chain with fluctuations increasing at each step
▪ Single supply chain member responsible for
ordering
– Vendor managed inventory (VMI)

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Managing the Integrated Supply Chain (4 of 5) Managing the Integrated Supply Chain (5 of 5)

– Collaborative planning, forecasting, and – Postponement withholds modification as long as

replenishment (CPFR) throughout the supply chain possible
– Blanket orders against which actual orders are – Electronic ordering and funds transfer speed
released transactions and reduce paperwork
– Standardization – Drop shipping and special packaging bypasses the
seller and reduces costs

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Building the Supply Base (1 of 5) Building the Supply Base (2 of 5)

• Supplier evaluation • Supplier development

– Finding potential suppliers – Integrate the supplier into the system
– Determine likelihood of their becoming good suppliers ▪ Quality requirements
– Supplier certification ▪ Product specifications
▪ Schedules and delivery
1) Qualification
▪ Procurement policies
2) Education
▪ Training
3) Certification
▪ Engineering and production help
▪ Information transfer procedures

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Building the Supply Base (3 of 5) Building the Supply Base (4 of 5)

• Negotiation • Contracting
– A significant element in purchasing – Share risks, benefits, create incentives
– Highly valued skills
• Centralized purchasing
▪ Cost-based price model
– Leverage volume
– Supplier opens books
– Develop specialized staff
▪ Market-based price model
– Based on published, auction, or indexed prices – Develop supplier relationships
▪ Competitive bidding – Maintain professional control
– Common policy for many purchases – Devote resources to selection and negotiation
– Does not generally foster long-term relationships – Reduce duplication of tasks
– Promote standardization

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Building the Supply Base (5 of 5) Logistics Management

• E-Procurement • Objective is to obtain efficient operations through the

▪ Speeds purchasing, reduces costs, integrates integration of all material acquisition, movement, and
supply chain storage activities
– Online catalogs and exchanges • Is a frequent candidate for outsourcing
▪ Standard items or industry-specific web sites
• Allows competitive advantage to be gained through
– Online auctions reduced costs and improved customer service
▪ Low barriers to entry
▪ Reverse auctions for buyers
▪ Price not always the most important factor

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Shipping Systems (1 of 3) Shipping Systems (2 of 3)

• Trucking • Airfreight
– Moves the vast majority of manufactured goods – Fast and flexible for light loads
– Chief advantage is flexibility – May be expensive
• Railroads • Waterways
– Capable of carrying large loads – Typically used for bulky, low-value cargo
– Little flexibility though containers and piggybacking – Used when shipping cost is more important than
have helped with this speed

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Shipping Systems (3 of 3) Cost and Speed of Shipments

• Pipelines • Faster shipping is generally more expensive than slower

– Used for transporting oil, gas, and other chemical shipping
products • Faster methods tend to involve smaller shipment sizes
• Multimodal while slower methods involve very large shipment sizes
– Combines shipping methods
– Common, especially in international shipments
– Aided by standardized containers

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Warehousing (1 of 2) Warehousing (2 of 2)

• May be expensive, but alternatives may be more so • Channel assembly

• Fundamental purpose is to store goods – Implementation of postponement
– Ship components or modules
• May provide other functions
– Distributors become manufacturing partners
– Consolidation
– Finished goods inventory reduced
– Break-bulk
– Better market response with less investment
– Cross-docking
– Postponement

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Third-Party Logistics (3PL) Distribution Management (1 of 5)

• Outsourcing logistics can reduce inventory, costs, and • The outbound flow of products
improve delivery reliability and speed
1) Rapid response
• Coordinate supplier inventory with delivery services
2) Product choice
• May provide 3) Service
warehousing,
assembly, testing, • Increasing the number of facilities generally improves
shipping, customs response time and customer satisfaction

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Distribution Management (2 of 5) Distribution Management (3 of 5)

• Total costs are important Figure 11.3 Number of Facilities in a Distribution Network
– Inventory costs
– Transportation costs
– Facility costs
• Total logistics costs

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Distribution Management (4 of 5) Distribution Management (5 of 5)

Figure 11.3 [continued] • Facilities, packaging, and logistics

• Selection and development of dealers or retailers
• Downstream management as important as upstream
management

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Ethics and Sustainable Supply Chain Establishing Sustainability in Supply

Management Chains (1 of 2)

• Personal ethics • Return or reverse logistics

– Critical to long-term success of an organization – Sending returned products back up the supply chain
– Supply chains particularly susceptible for resale, repair, reuse, remanufacture, recycling, or
disposal
• Ethics within the supply chain
• Closed-loop supply chain
• Ethical behavior regarding the environment
– Proactive design of a supply chain that tries to
optimize all forward and reverse flows
– Prepares for returns prior to product introduction

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Establishing Sustainability in Supply

Chains (2 of 2) Measuring Supply-Chain Performance (1 of 6)

Table 11.4 Management Challenges of Reverse Logistics • Assets committed to inventory

Issue Forward Logistics Reverse Logistics
 Average inventory investment 
Forecasting Relatively More uncertain Percentage invested in inventory =   100
 Total assets 
straightforward
Product quality Uniform Not uniform
Product packaging Uniform Often damaged
• Home Depot had $11.4b inventory, total assets of 44.4b
Pricing Relatively uniform Dependent on many
 11.4 
factors Percentage invested in inventory =   100 = 25.7%
Speed Often very Often not a priority  44.4 
important
Distribution costs Easily visible Less directly visible
Inventory management Consistent Not consistent
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Measuring Supply-Chain Performance (2 of 6) Measuring Supply-Chain Performance (3 of 6)

Table 11.5 Inventory as Percentage of Total Assets (with • Inventory turnover

examples of exceptional performance)
Inventory  Cost of goods sold 
= 
Manufacturer (Toyota 5%) 15% turnover  Average inventory investment 
Wholesale (Coca-Cola 2.9%) 34%
Restaurants (McDonald’s .05%) 2.9% – Inventory investment
Retail (Home Depot 25.7%) 27% ▪ Average of several periods
▪ (beginning plus ending)/2
▪ Ending inventory

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Measuring Supply-Chain Performance (4 of 6) Measuring Supply-Chain Performance (5 of 6)

• From PepsiCo, Inc. Annual Report Table 11.6 Examples of Annual Inventory Turnover

Net revenue Blank $32.5 Food, Beverage, Retail

Cost of goods sold Blank $14.2 Anheuser Busch 15

Inventory: Blank Blank Coca-Cola 14

Home Depot 5
Raw material inventory $.74 Blank
McDonald’s 112
Work-in-process inventory $.11 Blank
Finished goods inventory $.84 Blank Manufacturing
Total inventory investment Blank $1.69 Dell Computer 90
Johnson controls 22
14.2
Inventory turnover = = 8 .4 Toyota (overall) 13
1.69 Nissan (assembly) 150
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Measuring Supply-Chain Performance (6 of 6) Benchmarking the Supply Chain (1 of 2)

• Weeks of supply • Comparison with benchmark firms

Average inventory investment Table 11.7 Supply Chain Metrics in the Consumer
Weeks of supply =
 Annual cost of goods sold  Packaged Goods Industry
 
 52 weeks 
Blank Typical Benchmark
• For PepsiCo Firms Firms
Inventory investment = $1.69b Order fill rate 71% 98%
Order fulfillment lead time 7 3
Average weekly cost of goods sold = $14.2b 52 = $.273b (days)
Weeks of supply = 1.69 .273 = 6.19 weeks Cash-to-cash cycle time 100 30
(days)
Inventory days of supply 50 20
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The SCOR Model (1 of 2) The SCOR Model (2 of 2)

• Processes, metrics, and best practices Table 11.8 SCOR Model Metrics to Help Firms Benchmark
Performance Against the Industry
Figure 11.4 The Supply Chain Operations Reference
(SCOR) Model Performance Attribute Sample Metric Calculation
Supply chain reliability Perfect order (Total perfect orders) / (Total number of
fulfillment orders)
Supply chain Average order (Sum of actual cycle times for all orders
responsiveness fulfillment cycle time delivered) / (Total number of orders
delivered)
Supply chain agility Upside supply chain Time required to achieve an unplanned 20%
flexibility increase in delivered quantities

Supply chain costs Supply chain Cost to plan + Cost to source + Cost to
management costs deliver + Cost to return

Supply chain asset Cash-to-cash cycle Inventory days of supply + Days of

management time receivables outstanding − Days of payables
outstanding

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Benchmarking the Supply Chain (2 of 2)

• Benchmarking useful
• May not be adequate
• Audits may be necessary
– Continuing communication, understanding, trust,
performance, corporate strategy
• Foster a mutual belief that “we are in this together”

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