Supply Chain

Management

© 2014 Pearson Education, Inc. 11 - 2

 Darden’s Supply Chain

► Largest publicly traded casual dining

company in the world
► Serves over 400 million meals
annually in more than 1,900
restaurants in the US and Canada
► Annual sales of flagship brands
totals $6 billion
► Operations is the strategy
© 2014
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Pearson
Pearson
Education,
Education,
Inc.Inc. 11 - 8
 Darden’s Supply Chain

▶ Sources food from five continents

and thousands of suppliers
▶ Four distinct supply chains
▶ Over $2 billion spent annually in
supply chains
▶ Competitive advantage achieved
through superior supply chain

© 2014
© 2014
Pearson
Pearson
Education,
Education,
Inc.Inc. 11 - 9
 Supply-Chain Management

The objective of supply chain

management is to coordinate
activities within the supply chain
to maximize the supply chain’s
competitive advantage and
benefits to the ultimate consumer

© 2014 Pearson Education, Inc. 11 - 10

 The Supply Chain’s Strategic
Importance
▶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
customer

© 2014 Pearson Education, Inc. 11 - 11

 The Supply Chain’s Strategic
Importance
▶Large portion of sales dollars spent on
purchases
▶Supplier relationships increasingly
integrated and long term
▶Improve innovation, speed design, reduce
costs
▶Managing supplier relationships has
added emphasis
© 2014 Pearson Education, Inc. 11 - 12
Supply TABLE 11.1
Supply Chain Costs as a Percentage of Sales

Chain INDUSTRY
Automobiles
% PURCHASED
67

Costs Beverages
Chemical
52
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 SUPPLY CHAIN SALES

SITUATION STRATEGY STRATEGY
Sales $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%)

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 A Supply Chain for Beer
Figure 11.1

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 Supply Chain Management
TABLE 11.2 How Corporate Strategy Impacts Supply Chain Decisions
LOW COST RESPONSE DIFFERENTIATION
STRATEGY STRATEGY STRATEGY
Primary supplier • Cost • Capacity • Product development skills
selection criteria • Speed • Willing to share information
• Flexibility • Jointly and rapidly develop
products
Supply chain • Minimize • Use buffer stocks • Minimize inventory to avoid
inventory inventory to hold to ensure speedy product obsolescence
down costs supply
Distribution network • Inexpensive • Fast transportation • Gather and communicate
transportation • Provide premium market research data
• Sell through customer service • Knowledgeable sales staff
discount
distributors/retail
ers
Product design • Maximize • Low setup time • Modular design to aid product
characteristics performance • Rapid production differentiation
• Minimize cost ramp-up

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 Sourcing Issues
▶Make-or-buy vs. outsourcing
▶Choosing between obtaining products and
services externally as opposed to producing
them internally
▶Outsourcing
▶Transfer traditional internal activities and
resources to outside vendors
▶Efficiency in specialization
▶Focus on core competencies

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 Six Sourcing Strategies
▶Many suppliers
▶Few suppliers
▶Vertical integration
▶Joint ventures
▶Keiretsu networks
▶Virtual companies

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 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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 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
▶Trade secrets and other alliances
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 Vertical Integration
Vertical Integration Examples of Vertical Integration
Raw material
Tree Harvesting
(suppliers)

Backward integration Chipmakers Pulpmaking

Current International
Pepsi Apple
transformation Paper

End-User Paper
Forward integration Bottling Retail stores
Conversion

Finished goods
(customers)
Figure 11.2

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 Vertical Integration
▶ 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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 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

© 2014 Pearson Education, Inc. 11 - 24

 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
▶Relationships may be short- or long-term
▶Exceptionally lean performance, low
capital investment, flexibility, and speed

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 Supply Chain Risk
▶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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 Risk and Mitigation Tactics
▶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 Use multiple suppliers; McDonald’s planned its supply
failure to effective contracts with chain 6 years before its opening
deliver penalties; subcontractors on in Russia. Every plant—bakery,
retainer; pre-planning meat, chicken, fish, and
lettuce—is closely monitored to
ensure strong links.
Supplier Careful supplier selection, Darden Restaurants has
quality training, certification, and placed extensive controls,
failure monitoring 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 Supply Chain Risks and Tactics
RISK RISK REDUCTION TACTICS EXAMPLE
Logistics Multiple/redundant Walmart, with its own trucking
delays or transportation modes fleet and numerous distribution
damage and warehouses; secure centers located throughout the
packaging; effective contracts U.S., finds alternative origins
with penalties and delivery routes bypassing
problem areas.
Distribution Careful selection, monitoring, Toyota trains its dealers around
and effective contracts with the world, invoking principles of
penalties the Toyota Production System to
help dealers improve customer
service, used-car logistics, and
body and paint operations.

© 2014 Pearson Education, Inc. 11 - 29

 Risk and Mitigation Tactics
TABLE 11.3 Supply Chain Risks and Tactics
RISK RISK REDUCTION TACTICS EXAMPLE
Information Redundant databases; secure Boeing utilizes a state-of-the-art
loss or IT systems; training of supply international communication
distortion chain partners on the proper system that transmits
interpretations and uses of engineering, scheduling, and
information logistics data to Boeing facilities
and suppliers worldwide.
Political Political risk insurance; cross- Hard Rock Café reduces
country diversification; political risk by franchising and
franchising and licensing licensing, rather than owning,
when the political and cultural
barriers seem significant.

© 2014 Pearson Education, Inc. 11 - 30

 Risk and Mitigation Tactics
TABLE 11.3 Supply Chain Risks and Tactics
RISK RISK REDUCTION TACTICS EXAMPLE
Economic Hedging to combat exchange Honda and Nissan are
rate risk; purchasing contracts moving more manufacturing
that address price fluctuations out of Japan as the exchange
rate for the yen makes
Japanese-made autos more
expensive.
Natural Insurance; alternate sourcing; Toyota, after its experience
catastrophes cross-country diversification with fires, earthquakes, and
tsunamis, now attempts to
have at least two suppliers,
each in a different
geographical region, for each
component.

© 2014 Pearson Education, Inc. 11 - 31

 Risk and Mitigation Tactics
TABLE 11.3 Supply Chain Risks and Tactics
RISK RISK REDUCTION TACTICS EXAMPLE
Theft, Insurance; patent protection; Domestic Port Radiation
vandalism, security measures including Initiative: The U.S.
and terrorism RFID and GPS; diversification government has set up
radiation portal monitors that
scan nearly all imported
containers for radiation.

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 Security and JIT
▶Shipments get misrouted, stolen,
damaged, or excessively delayed
▶Technological innovations are improving
security and inventory management
▶Location, motion sensors, broken seals,
temperature
▶Tracking can help expedite shipments

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 Managing the Integrated
Supply Chain
▶Issues
▶Local optimization can magnify
fluctuations
▶Incentives push merchandise into the
supply chain for sales that have not
occurred
▶Large lots reduce shipping costs but
increase inventory holding and do not
reflect actual sales

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 Managing the Integrated
Supply Chain
▶Opportunities
▶Accurate “pull” data, shared information
▶Lot size reduction, shipping, discounts,
reduced ordering costs
▶Single stage control of replenishment
▶Single supply chain member responsible for
ordering
▶Vendor managed inventory (VMI)

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 Managing the Integrated
Supply Chain
▶Opportunities
▶Collaborative planning, forecasting, and
replenishment (CPFR) through the supply
chain
▶Blanket orders against which actual
orders are released
▶Standardization

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 Managing the Integrated
Supply Chain
Opportunities
Postponement withholds modification as
long as possible
Electronic ordering and funds transfer
speed transactions and reduce paperwork
Drop shipping and special packaging
bypasses the seller and reduces costs

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 Building the Supply Base
▶Supplier evaluation
▶Finding potential suppliers
▶Determine likelihood of their becoming good
suppliers
▶Supplier certification
1. Qualification
2. Education
3. Certification

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 Building the Supply Base
▶Supplier development
▶Integrate the supplier into the system
▶Quality requirements
▶Product specifications
▶Schedules and delivery
▶Procurement policies
▶Training
▶Engineering and production help
▶Information transfer procedures

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 Building the Supply Base
Negotiation
A significant element in purchasing
Highly valued skills
Cost-based price model
Supplier opens books
Market-based price model
Based on published, auction, or indexed prices
Competitive bidding
Common policy for many purchases
Does not generally foster long-term relationships

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 Building the Supply Base
▶Contracting
▶Share risks, benefits, create incentives
▶Centralized purchasing
▶Leverage volume
▶Develop specialized staff
▶Develop supplier relationships
▶Maintain professional control
▶Devote resources to selection and negotiation
▶Reduce duplication of tasks
▶Promote standardization
© 2014 Pearson Education, Inc. 11 - 41
 Building the Supply Base
▶E-Procurement
▶Speeds purchasing, reduces costs, integrates
supply chain
▶Online catalogs and exchanges
▶Standard items or industry-specific web sites
▶Online auctions
▶Low barriers to entry
▶Reverse auctions for buyers
▶Price not always the most important factor

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 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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 Shipping 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

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 Shipping Systems
▶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

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 Shipping Systems
Pipelines
Used for transporting oil, gas, and other
chemical products
Multimodal
Combines shipping methods
Common, especially in international
shipments
Aided by standardized containers

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Cost and Speed of Shipments
▶Faster shipping is generally more
expensive than slower shipping
▶Faster methods tend to involve
smaller shipment sizes while slower
methods involve very large shipment
sizes

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 Warehousing
▶May be expensive, but alternatives may
be more so
▶Fundamental purpose is to store goods
▶May provide other functions
▶Consolidation
▶Break-bulk
▶Cross-docking
▶Channel assembly

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 Third-Party Logistics (3PL)
Outsourcing logistics can reduce
inventory, costs, and improve delivery
reliability and speed
Coordinate supplier inventory with delivery
services
May provide
warehousing,
assembly, testing,
shipping, customs

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 Distribution Management
▶The outbound flow of products
1. Rapid response
2. Product choice
3. Service
▶Increasing the number of facilities
generally improves response time and
customer satisfaction
▶Total costs are important

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 Distribution Management
Figure 11.3
(a) Response Time (b) Cost $

Response time

Lowest cost Total logistics cost

Time

$ Facility costs

Inventory costs
Transportation costs

1 2 3 4 5 1 2 3 4 5
Number of facilities Number of facilities

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 Distribution Management
(c) Cost, Revenue, and Profit Figure 11.3

Revenue

Max
Total logistics cost
profit
$

1 2 3 4 5
Number of facilities

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 Distribution Management
▶Facilities, packaging, and logistics
▶Selection and development of dealers or
retailers
▶Downstream management as important
as upstream management

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 Establishing Sustainability in
Supply Chains
▶Return or reverse logistics
▶Sending returned products back up the supply
chain for resale, repair, reuse, remanufacture,
recycling, or disposal
▶Closed-loop supply chain
▶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
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
▶ Assets committed to inventory
Percentage Total inventory investment
invested in = x 100
inventory Total assets

► Home Depot had $11.4b inventory,

total assets of $44.4b
Percentage 11.4
invested in = x 100 = 25.7%
inventory 44.4

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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 (McDonald’s .05%) 2.9%
Retail (Home Depot 25.7%) 28%

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 Measuring Supply-Chain
Performance
▶ Inventory turnover

Inventory Cost of goods sold

turnover = Inventory investment

► Inventory investment
► Average of several periods

► (beginning plus ending)/2

► Ending inventory

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 Measuring Supply-Chain
Performance
▶ 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 $1.69

Inventory 14.2
turnover = 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 15
Home Depot 5
McDonald’s 112
MANUFACTURING
Dell Computer 90
Johnson controls 22
Toyota (overall) 13
Nissan (assembly) 150

© 2014 Pearson Education, Inc. 11 - 66

 Measuring Supply-Chain
Performance
▶ Weeks of supply
Weeks of Inventory investment
=
supply Annual cost of goods sold
52 weeks

► 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
▶Comparison with benchmark firms

Supply Chain Metrics in the Consumer Packaged

TABLE 11.7
Goods Industry
TYPICAL BENCHMARK
FIRMS FIRMS
Order fill rate 71% 98%
Oder fulfillment lead time (days) 7 3
Cash-to-cash cycle time (days) 100 30
Inventory days of supply 50 20

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 The SCOR Model
▶ Processes, metrics and best practices

Figure 11.4

Plan: Demand/Supply planning and Management

Source: Identify, Make: Manage Deliver: Invoice,

select, manage, and production execution, warehouse, transport
assess sources testing and packaging and install

Return: Raw material Return: Finished goods

© 2014 Pearson Education, Inc. 11 - 69

 The SCOR Model
SCOR Model Metrics to Help Firms Benchmark Performance
TABLE 11.8
Against the Industry
PERFORMANCE
ATTRIBUTE SAMPLE METRIC CALCULATION
Supply chain Perfect order fulfillment (Total perfect orders) / (Total number
reliability of orders)
Supply chain Average order (Sum of actual cycle times for all
responsiveness fulfillment cycle time orders delivered) / (Total number of
orders delivered)
Supply chain agility Upside supply chain Time required to achieve an
flexibility unplanned 20% increase in
delivered quantities
Supply chain costs Supply chain Cost to plan + Cost to source + Cost
management costs to 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
▶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”

© 2014 Pearson Education, Inc. 11 - 71