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Operations Management: Sustainability and Supply Chain Management

Third Canadian Edition

Chapter 11

Supply-Chain Management

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Outline (1 of 2)

Global Company Profile: Darden Restaurants

The Supply Chain’s Strategic Importance

Ethics and Sustainability

Supply-Chain Economics

Supply-Chain Strategies

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Outline (2 of 2)

Managing the Supply Chain

E-Procurement

Vendor Selection

Logistics Management

Measuring Supply-Chain Performance

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Learning Objectives (1 of 2)

When you complete this chapter you should be able to:

Explain the strategic importance of the supply chain

Identify six supply-chain strategies

Explain issues and opportunities in the supply chain

Describe the steps in vendor selection

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Learning Objectives (2 of 2)

When you complete this chapter you should be able to:

Explain major issues in logistics management

Compute percentage of assets committed to inventory and inventory turnover

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Darden Restaurants

Largest publicly traded casual dining company in the world

Serves over 400 million meals annually in more than 1,800 restaurants in the US and Canada

Annual sales of $6.7 billion; $1.5 billion spent on supply chain

Sources food from five continents and thousands of suppliers with four distinct supply chains

Competitive advantage achieved through superior supply chain

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This information on Darden can be supplemented by mentioning the common characteristics of all four supply channels: (1) supplier qualification, (2) product tracking, (3) independent audits of suppliers, and (4) just-in-time delivery.

Supply-Chain Management (1 of 2)

The objective is to build a chain of suppliers that focuses on maximizing value to the ultimate customer

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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 Supply Chain’s Strategic Importance

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The key term in this definition is integration. Effective supply chain management is all about getting all members of the supply chain working together as though they were one vertically integrated company. Mathematically, this suggests a global (across the supply chain) optimization strategy, as opposed to a collection of local (firm-only) optimization strategies.

LO 1: Explain the strategic importance of the supply chain.

Supply Chain Management (2 of 2)

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

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Supply Chain for Beer

Figure 11.2

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How Supply Chain Decisions Impact Strategy (1 of 3)

Table 11.1 How Supply Chain Decisions Affect Strategy*

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

Source:*See related table and discussion in Marshall L. Fisher, “What Is the Right Supply Chain for Your Product?” Harvard Business Review (March–April 1997): 105.

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These slides reproduce Table 11.1 from the text. We see here another example of how important it is to clearly define and disseminate the firm’s strategy to all employees, as the strategy dictates very different supply chain policies that should be followed.

How Supply Chain Decisions Impact Strategy (2 of 3)

Table 11.1 Continued

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

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How Supply Chain Decisions Impact Strategy (3 of 3)

Table 11.1 Continued

Blank	Low-Cost Strategy	Response Strategy	Differentiation Strategy
Lead-time charact-eristics	Shorten lead time as long as it does not increase costs	Invest aggressively to reduce production lead time	Invest aggressively to reduce development lead time
Product-design charact-eristics	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

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Supply Chain Risk (1 of 2)

More reliance on supply chains means more risk

Fewer suppliers increase dependence

Compounded by globalization and logistical complexity

Vendor reliability and quality risks

Political and currency risks

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Along with all of the upsides of creating partnerships with supply chain members come the inherent risks of giving up certain control and depending on others The use of global supply networks compounds the risks by introducing political and currency risk, along with the added complexity that managing global networks entails. The reliability and quality of foreign suppliers may be more difficult to determine up front and monitor over time. Therefore, proper risk management becomes crucial to survival (Slide 14). Management must mitigate and react to disruptions in (1) processes (raw materials and component availability, quality, and logistics), (2) controls (management metrics and reliable secure communication for financial transactions, product designs, and logistics scheduling), and (3) environment (customs duties, tariffs, security screening, natural disaster, currency fluctuations, terrorist attacks, and political issues).

Supply Chain Risk (2 of 2)

Mitigate and react to disruptions in

Processes

Controls

Environment

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Ethics and Sustainability

Personal ethics

Institute for Supply Management-Canada: Principles and Standards

Ethics within the supply chain

Ethical behaviour regarding the environment

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Opportunities for ethical violations abound within supply chain management. On a personal level, temptations of bribery and kickbacks must be resisted. Within the supply chain, more and more companies are being held accountable for unethical actions of their suppliers. Finally, as supply chain management deals with the entire process from raw materials to use and final disposal of products, firms must be aware of their environmental impact and should support the conservation and renewal of resources.

Principles and Standards for Ethical Supply Management Conduct (1 of 4)

LOYALTY TO YOUR ORGANIZATION

JUSTICE TO THOSE WITH WHOM YOU DEAL

FAITH IN YOUR PROFESSION

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Principles and Standards for Ethical Supply Management Conduct (2 of 4)

Table 11.2 Principles and Standards of Ethical Supply Management Conduct

PERCEIVED IMPROPRIETY Prevent the intent and appearance of unethical or compromising conduct in relationships, actions, and communications CONFLICTS OF INTEREST Ensure that any personal, business, or other activity does not conflict with the lawful interests of your employer ISSUES OF INFLUENCE Avoid behaviours or actions that may negatively influence, or appear to influence, supply management decisions

Source: Reprinted with permission from Principles and Standards of Ethical Supply Management Conduct. www.instituteforsupplymanagement.org.

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Principles and Standards for Ethical Supply Management Conduct (3 of 4)

Table 11.2 Continued

RESPONSIBILITIES TO YOUR EMPLOYER Uphold fiduciary and other responsibilities using reasonable care and granted authority to deliver value to your employer SUPPLIER AND CUSTOMER RELATIONSHIPS Promote positive supplier and customer relationships SUSTAINABILITY AND SOCIAL RESPONSIBILITY Champion social responsibility and sustainability practices in supply management

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Principles and Standards for Ethical Supply Management Conduct (4 of 4)

CONFIDENTIAL AND PROPRIETARY INFORMATION Protect confidential and proprietary information RECIPROCITY Avoid improper reciprocal agreements APPLICABLE LAWS, REGULATIONS AND TRADE AGREEMENTS Know and obey the letter and spirit of laws, regulations and trade agreements applicable to supply management PROFESSIONAL COMPETENCE Develop skills, expand knowledge and conduct business that demonstrates competence and promotes the supply management profession

Table 11.2 Continued

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Supply Chain Economics

Table 11.3 Supply Chain Costs as a Percent of Sales

Industry	% Purchased
All industry	52
Automobile	67
Food	60
Lumber	61
Paper	55
Petroleum	79
Transportation	62

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Using selected data from Table 11.3 in the text, this kind of information is often used when first introducing the importance of supply chain management. With such a huge portion of revenue devoted to the supply chain, proper control of supply chain costs can ensure success for an organization, and vice-versa.

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

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There is a slight difference between make-or-buy decisions vs. outsourcing. Firms are outsourcing more and more support (non-production) functions, such as payroll and call centres. Outsourcing is covered in detail in the supplement to Chapter 11.

Supply Chain Strategies

Negotiating with many suppliers

Long-term partnering with few suppliers

Vertical integration

Joint ventures

Keiretsu

Virtual companies that use suppliers on an as needed basis

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This slide identifies very different approaches to managing the supply base, which are detailed in the following set of slides.

LO 2: Identify six supply-chain strategies.

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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The “many suppliers” approach is considered to be the “old” or “unenlightened” method for selecting suppliers, but it may still make sense for certain commodity products or for firms who practice an extreme low-cost strategy. These are called “arms-length” transactions, and firms may switch suppliers frequently.

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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The “few suppliers” approach is considered to be a more “enlightened” method for selecting suppliers, and many top companies have been aggressively working to reduce their respective supply bases. It can be nearly impossible to “work together” in the supply chain integration sense if dealing with many suppliers for the same components. When successfully implemented, the few suppliers approach creates win-win opportunities for all parties.

Vertical Integration (1 of 2)

Figure 11.2

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These slides describe vertical integration. Slide 26 reproduces Figure 11.2 from the text, which provides examples of vertical integration in three industries. Importantly, vertical integration works in both directions, including taking over the distribution network. Clearly, the internet has allowed many manufacturers to open up new direct sales channels to customers. Vertical integration is in many ways the opposite of outsourcing; thus, outsourcing’s recent popularity implies that we’re seeing less vertical integration than we used to. Certainly for some products, such as paper mills, vertical integration makes perfect sense. Some of the giant South Korean companies have a fascinating history of growth through a substantial effort towards both vertical and horizontal integration.

Vertical Integration (2 of 2)

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, and demand

Risky in industries with rapid technological change

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Joint Ventures

Formal collaboration

Enhance skills

Secure supply

Reduce costs

Cooperation without diluting brand or conceding competitive advantage

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Joint ventures can represent a nice way to gain the benefits of partnering while retaining independence and being in a relationship that is easier to dissolve.

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

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Keiretsu networks come from Japan, and may include banks as well. In addition to cross-ownership and loans among members, in many cases officers of some companies serve on the board of directors of other firms within the network.

Virtual Companies

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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In a virtual company, the supply chain is the company. In some sense, a virtual company takes delegation to the limit. Several firms have become very profitable by using this strategy. Some critics argue that an economy that becomes full of “hollowed out” organizations that do not make anything themselves carries significant risk and does not represent a strong, stable economy. This concern could be addressed in a short class discussion.

Managing the Supply Chain

There are significant management issues in controlling a supply chain involving many independent organizations

Mutual agreement on goals

Trust

Compatible organizational cultures

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This slide emphasizes three important characteristics to have for a supply chain to act like an integrated company, ready to compete as one against other supply chains.

Issues 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

Bullwhip effect - stable demand becomes lumpy orders through the supply chain

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All three of the bullets on this slide contribute to the bullwhip effect. All three are related in the sense that such practices fail to take into account their impact on the other supply chain members. “The Beer Game” represents an outstanding way to illustrate how such thinking can generate a bullwhip effect in a short period of time.

LO 3: Explain issues and opportunities in the supply chain.

Opportunities in an Integrated Supply Chain (1 of 3)

Accurate “pull” data

Lot size reduction

Single stage control of replenishment

Vendor managed inventory (VMI)

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Each of these following 11 items represents opportunities for effective management in the supply chain. They can all help to minimize the bullwhip effect. Thus, these slides are among the most important in this chapter. Slide 33: (1) accurate pull data are generated by sharing point-of-sales information and computer-assisted ordering; (2) lot size reduction occurs when the benefits of large orders are diminished (e.g., providing discounts based on annual volume rather than units per order or reducing the cost of placing orders); (3) single-stage control of replenishment implies designating one supply chain member to monitor and manage inventory for the whole system, and (4) VMI has vendors maintaining inventory for the buyers, often physically doing so directly in the buyers’ facilities (an example might be a soft drink company keeping the shelves stocked weekly at a local convenience store).

LO 3: Explain issues and opportunities in the supply chain.

Opportunities in an Integrated Supply Chain (2 of 3)

Collaborative planning, forecasting, and replenishment (CPFR)

Blanket orders

Standardization

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Slide 34: (1) CPFR involves members of the supply chain sharing planning, forecasting, and inventory information; (2) blanket orders are long-term commitments with suppliers to purchase items, which are later delivered upon receipt of a shipping requisition; and (3) standardization means employing the use of common components in different products and across production facilities (firms have saved thousands or even millions of dollars doing this via higher volume discounts and inventory reductions).

Opportunities in an Integrated Supply Chain (3 of 3)

Postponement

Drop shipping and special packaging

Pass-through facility

Channel assembly

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Slide 35: (1) postponement combines a make-to-stock strategy for subassemblies with a make-to-order strategy for final products; thus, this can be a way to move towards mass customization (Benetton provided a famous example of postponement by shipping all white sweaters to its distribution centers and dyeing the sweaters there once fashion tastes for the upcoming season are better known); (2) drop shipping involves having suppliers ship certain components or peripherals directly to the customers, without physically going through the selling firm’s hands; (3) a pass-through facility is also known as a cross dock—instead of storing incoming inventory for some time in a warehouse, such inventory is directly placed into an outgoing truck, and (4) channel assembly is somewhat like extending postponement downstream in the supply chain.

E-Procurement

Uses the internet to facilitate purchasing

Electronic ordering and funds transfer

Catalogues

Auctions

RFQs

Real-time inventory tracking

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This set of slides covers the increasing practice of firms that order items with computers. One example is Online auctions, which have become excellent mechanisms for firms to unload excess material or inventory. eBay is probably the best known consumer-based example of such auctions. At this point, instructors could ask the students about their experiences with eBay or similar auctions. The pros and cons identified there might be relevant for business-to-business auctions as well. The RFQ process has stream-lined e-procurement. Furthermore, the combination of e-procurement, bar codes, and RFID have made tracking of inventory and individual products much more accurate.

Vendor Selection (1 of 2)

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

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Selecting the appropriate vendors can have an enormous impact on quality and production efficiency. A fair amount of research has been and continues to be conducted regarding the supplier selection problem. This is arguably the most important task of a purchasing professional. Vendor development refers to the concept of incorporating selected vendors into the supply chain. Often a large buying firm will essentially provide free consulting services to smaller vendors to help them reach the necessary quality and production levels.

LO 4: Describe the steps in vendor selection.

Vendor Evaluation

Criteria	Weights	Scores (1-5)	Weight × Score
Engineering/research/innovation skills	.20	5	1.0
Production process capability (flexibility/technical assistance)	.15	4	.6
Distribution/delivery capability	.05	4	.2
Quality systems and performance	.10	2	.2
Facilities/location	.05	2	.1
Financial and managerial strength (stability and cost structure)	.15	4	.6
Information systems capability (e-procurement, ERP)	.10	2	.2
Integrity (environmental compliance/ ethics)	.20	5	1.0
Total	1.00	Blank	3.9

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From Example 2 in the text, this slide provides an example of using a weighted-average method to evaluate suppliers. Note the suppliers are often evaluated on far more than simply the price offered.

Vendor Selection (2 of 2)

Negotiations

Cost-Based Price Model - supplier opens books to purchaser

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

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While most consumer transactions involve no negotiations, most business-to-business transactions do. Even when the same prices are offered to all customers, other terms such as delivery and payment are typically open to negotiation between companies. This slide identifies three typical ways that prices are determined in business-to-business transactions.

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

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The distribution component of supply chain management is covered under logistics management. Companies such as Walmart have attained competitive advantage by implementing outstanding logistics systems.

LO 5: Explain major issues in logistics management.

Distribution Systems (1 of 2)

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

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These slides identify the major distribution systems. Trucking is by far the most common, but the others still play a substantial role in some industries. For international shipments, the huge cost savings attained by sending goods by ship instead of plane must be weighed against substantially longer lead times. Instructors might ask if students can think of any “modern” distribution system that is not on the slides—Answer: electronic (downloading music, etc.).

LO 5: Explain major issues in logistics management.

Distribution Systems (2 of 2)

Airfreight

Fast and flexible for light loads

May be expensive

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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LO 5: Explain major issues in logistics management.

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

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This slide describes the concept of third-party logistics, where firms completely outsource their logistics efforts, including, in some cases, their warehousing, assembly, and customs. FedEx, UPS, and DHL have expanded their roles from shipping companies to full-service logistics providers.

Cost of Shipping Alternatives (1 of 2)

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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These slides show how to compute the core trade-off between the higher cost of a faster shipment method with its savings in pipeline inventory costs.

Cost of Shipping Alternatives (2 of 2)

Value of connectors = $1750.00

Holding cost = 40% per year

Second carrier is 1 day faster and $20 more expensive

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

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This slide illustrates Example 3 from the text. If the time savings is longer than one day, the same calculation is made but should be multiplied by the number of days of savings.

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

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Instructors could emphasize the statistic from the text stating that some 5% of international container movements are misrouted, stolen, damaged, or excessively delayed. This quote also applies: “Improvements in security may aid JIT, and improvements in JIT may aid security—both of which can improve supply chain logistics.”

Measuring Supply-Chain Performance (1 of 8)

Table 11.5 Metrics for Supply Chain Performance

Blank	Typical Firms	Benchmark Firms
Lead time (weeks)	15	8
Time spent placing an order	42 minutes	15 minutes
Percentage of late deliveries	33%	2%
Percentage of rejected material	1.5%	.0001%
Number of shortages per year	400	4

Source: Adapted from a McKinsey & Company report.

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From Table 11.5 in the text, this slide describes common supply chain metrics that focus on procurement and vendor performance issues. The “Benchmark Firms” column represents the performance of typical world-class firms. These values can be good targets for which to strive.

LO 6: Compute the percentage of assets committed to inventory and inventory turnover.

Measuring Supply-Chain Performance (2 of 8)

Assets committed to inventory

Investment in inventory = $11.4 billion

Total assets = $44.4 billion

Percent invested in inventory = (11.4/44.4) × 100 = 25.7%

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These slides focus on the supply-chain metric of percentage invested in inventory (in general, the lower the better). This slide presents Example 4 from the text. Typical values for four industries are presented in Slide 49 (Table 11.6), along with examples of exceptional performance.

LO 6: Compute the percentage of assets committed to inventory and inventory turnover.

Measuring Supply-Chain Performance (3 of 8)

Table 11.6 Inventory as Percentage of Total Assets (with examples of exceptional performance)

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

Manufacturing (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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Measuring Supply-Chain Performance (4 of 8)

Inventory turnover

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The formula for inventory turnover is provided in this slide, with company examples provided in Slide 51 (Table 11.7). Note how inventory turnover can vary substantially, depending on industry and company conditions. In general, higher turnover is better.

Measuring Supply-Chain Performance (5 of 8)

Table 11.7 Examples of Annual Inventory Turnover

Food, Beverage, Retail	Blank
Molson Coors	8
Coca-Cola	14
Home Depot	5
McDonald’s	112
Manufacturing	Blank
Dell Computer	90
Magna International	11
Toyota (overall)	13
Nissan (assembly)	150

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Measuring Supply-Chain Performance (6 of 8)

Inventory turnover

Net revenue	Blank	$32.5
Cost of goods sold	Blank	$14.2
Inventory:	Blank	Blank
Raw material inventory	$.74	Blank
Work-in-process inventory	$.11	Blank
Finished goods inventory	$.84	Blank
Total inventory investment	Blank	$1.69

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Slides 52 and 53 present the inventory turnover calculation from Example 5 in the text. Slide 54 continues the example by also determining the weeks of supply (Example 6). In general, a smaller value is better.

Measuring Supply-Chain Performance (7 of 8)

Inventory turnover

Net revenue	Blank	$32.5
Cost of goods sold	Blank	$14.2
Inventory:	Blank	Blank
Raw material inventory	$.74	Blank
Work-in-process inventory	$.11	Blank
Finished goods inventory	$.84	Blank
Total inventory investment	Blank	$1.69

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Measuring Supply-Chain Performance (8 of 8)

Inventory turnover

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The Supply Chain Operations Reference (SCOR) Model

Processes, metrics, and best practices

Figure 11.3

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This slide presents Figure 11.3 from the text, showing the Supply-Chain Operations Reference (SCOR) model developed by the Supply-Chain Council. Membership in the council is currently about 900 members. It provides, among other benefits, access to the process, metric, and best practice data from the SCOR model.

Summary

Competition is no longer between companies, but between supply chains. This is a strategic competitive issue.

Six supply chain strategies have been discussed:

Many suppliers

Few suppliers

Vertical integration

Joint ventures

Keiretsu networks

Virtual companies

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