Operations Management: Sustainability and Supply Chain Management PDF

Operations Management: Sustainability and Supply Chain Management Fourteenth Edition Chapter 11 Supply Chain Management Copyright © 2023, 2020, 2017 Pearson Education, Inc....

Operations Management: Sustainability and Supply Chain Management Fourteenth Edition Chapter 11 Supply Chain Management Copyright © 2023, 2020, 2017 Pearson Education, Inc. All Rights Reserved Outline Global Company Profile: Red Lobster The Supply Chain’s Strategic Importance Sourcing Issues: Make-or-Buy and Outsourcing Six Sourcing Strategies Supply Chain Risk Managing the Integrated Supply Chain Copyright © 2023, 2020, 2017 Pearson Education, Inc. All Rights Reserved Outline (continued) Building the Supply Base Logistics Management Distribution Management Ethics and Sustainable Supply Chain Management Measuring Supply Chain Performance Copyright © 2023, 2020, 2017 Pearson Education, Inc. All Rights Reserved Red Lobster’s Supply Chain World’s largest seafood restaurant company Serves 140 million meals annually from over 700 restaurants A winning operations strategy requires a winning supply chain Committed to seafood sustainability Sources food from five continents and thousands of suppliers Supply chains incorporate supplier qualification, product tracking, independent audits, and just-in-time delivery Copyright © 2023, 2020, 2017 Pearson Education, Inc. All Rights Reserved 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 11.5 Explain major issues in logistics management 11.6 Compute percentage of assets committed to inventory and inventory turnover Copyright © 2023, 2020, 2017 Pearson Education, Inc. All Rights Reserved 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 Copyright © 2023, 2020, 2017 Pearson Education, Inc. All Rights Reserved 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 customers Copyright © 2023, 2020, 2017 Pearson Education, Inc. All Rights Reserved The Supply Chain’s Strategic Importance (continued) 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 Copyright © 2023, 2020, 2017 Pearson Education, Inc. All Rights Reserved 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 Copyright © 2023, 2020, 2017 Pearson Education, Inc. All Rights Reserved Supply Chain vs. Sales Strategy Ashley Furniture 60% of sales $ in supply chain Current gross profit = $10,000 Increase profits to $15,000 (50%) SUPPLY CHAIN SALES Blank CURRENT 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%) Copyright © 2023, 2020, 2017 Pearson Education, Inc. All Rights Reserved Supply Chain Management Table 11.2 How Corporate Strategy Impacts Supply Chain Decisions Blank 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 inventory Use buffer stocks Minimize inventory to avoid inventory to hold down costs to ensure speedy product obsolescence supply Distribution network Inexpensive Fast Gather and communicate transportation transportation market research data Sell through discount Provide premium Knowledgeable sales staff distributors/retailers customer service Product design Maximize Low setup time Modular design to aid characteristics performance Rapid production product differentiation Minimize cost ramp-up Copyright © 2023, 2020, 2017 Pearson Education, Inc. All Rights Reserved Sourcing Issues Make-or-buy decisions – 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 Copyright © 2023, 2020, 2017 Pearson Education, Inc. All Rights Reserved Six Sourcing Strategies Many suppliers Few suppliers Vertical integration Joint ventures Keiretsu networks Virtual companies that use suppliers on an as needed basis Copyright © 2023, 2020, 2017 Pearson Education, Inc. All Rights Reserved 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 Copyright © 2023, 2020, 2017 Pearson Education, Inc. All Rights Reserved Few Suppliers Buyer forms long-term relationships with fewer suppliers Create value through economies of scale and learning curve improvements Suppliers more willing to participate in J IT programs and contribute design and technological expertise Cost of changing suppliers is huge Trade secrets and other alliances may be at risk Copyright © 2023, 2020, 2017 Pearson Education, Inc. All Rights Reserved Vertical Integration Developing the ability to produce goods or services 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 Copyright © 2023, 2020, 2017 Pearson Education, Inc. All Rights Reserved Vertical Integration (continued) Figure 11.2 Copyright © 2023, 2020, 2017 Pearson Education, Inc. All Rights Reserved Joint Ventures Formal collaboration – Enhance skills – Secure supply – Reduce costs The challenge is to cooperate without diluting brand or conceding competitive advantage Copyright © 2023, 2020, 2017 Pearson Education, Inc. All Rights Reserved Keiretsu Networks Developed in Japan, these represent 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 Copyright © 2023, 2020, 2017 Pearson Education, Inc. All Rights Reserved 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 Copyright © 2023, 2020, 2017 Pearson Education, Inc. All Rights Reserved 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 Copyright © 2023, 2020, 2017 Pearson Education, Inc. All Rights Reserved Risk and Mitigation Tactics (1 of 6) Research and assess possible risks Innovative planning Reduce potential disruptions Prepare responses to negative events Flexible, secure supply chains Diversified supplier base Copyright © 2023, 2020, 2017 Pearson Education, Inc. All Rights Reserved Risk and Mitigation Tactics (2 of 6) Table 11.3 Supply Chain Risks and Tactics RISK RISK REDUCTION TACTICS EXAMPLE Supplier Use multiple suppliers; McDonald's planned its failure to effective contracts with supply chain 6 years before deliver penalties; subcontractors on its opening in Russia. Every retainer; preplanning plant—bakery, 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, failures monitoring including third-party audits, on supplier processes and logistics to ensure constant monitoring and reduction of risk. Copyright © 2023, 2020, 2017 Pearson Education, Inc. All Rights Reserved Risk and Mitigation Tactics (3 of 6) Table 11.3 Supply Chain Risks and Tactics RISK RISK REDUCTION TACTICS EXAMPLE Outsourcing Take over production; provide Tyson took over chicken farm or perform the service yourself production in China to mitigate product quality and safety concerns related to using independent farmers. Logistics Multiple/redundant Walmart, with its own trucking delays or transportation modes and fleet and numerous damage warehouses; secure distribution centers located packaging; effective contracts throughout the U.S., finds with penalties alternative origins and delivery routes bypassing problem areas. Copyright © 2023, 2020, 2017 Pearson Education, Inc. All Rights Reserved Risk and Mitigation Tactics (4 of 6) Table 11.3 Supply Chain Risks and Tactics RISK RISK REDUCTION TACTICS EXAMPLE 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. 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. Copyright © 2023, 2020, 2017 Pearson Education, Inc. All Rights Reserved Risk and Mitigation Tactics (5 of 6) Table 11.3 Supply Chain Risks and Tactics RISK RISK REDUCTION TACTICS EXAMPLE Political Political risk insurance; cross- Hard Rock Cafe reduces country diversification; political risk by franchising franchising and licensing and licensing, rather than owning, when the political and cultural barriers seem significant. 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. Copyright © 2023, 2020, 2017 Pearson Education, Inc. All Rights Reserved Risk and Mitigation Tactics (6 of 6) Table 11.3 Supply Chain Risks and Tactics RISK RISK REDUCTION TACTICS EXAMPLE 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. 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. Copyright © 2023, 2020, 2017 Pearson Education, Inc. All Rights Reserved 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, radioactivity Tracking can help expedite shipments Copyright © 2023, 2020, 2017 Pearson Education, Inc. All Rights Reserved Managing the Integrated Supply Chain (1 of 5) Issues – Local optimization can magnify fluctuations – Incentives push merchandise into the supply chain for sales that have not occurred – Large lots reduce shipping and production costs but increase inventory holding and do not reflect actual sales Copyright © 2023, 2020, 2017 Pearson Education, Inc. All Rights Reserved Managing the Integrated Supply Chain (2 of 5) Issues – Local optimization can magnify fluctuations – Incentives push merchandise into the supply chain for sales that have not occurred – Large lots reduce shipping and production costs but increase inventory holding and do not reflect actual sales Bullwhip effect occurs when orders are relayed through the supply chain with fluctuations increasing at each step Copyright © 2023, 2020, 2017 Pearson Education, Inc. All Rights Reserved Managing the Integrated Supply Chain (3 of 5) 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 (VM I) Copyright © 2023, 2020, 2017 Pearson Education, Inc. All Rights Reserved Managing the Integrated Supply Chain (4 of 5) Opportunities – Collaborative planning, forecasting, and replenishment (CPFR) throughout the supply chain – Blanket orders against which actual orders are released – Standardization – Postponement withholds modification as long as possible Copyright © 2023, 2020, 2017 Pearson Education, Inc. All Rights Reserved Managing the Integrated Supply Chain (5 of 5) Opportunities – Electronic ordering and funds transfer speed transactions and reduce paperwork – Omnichannel Strategy provide multiple integrated channels of both communication and shipping – Drop shipping and special packaging bypass the seller and reduce costs – Blockchain aids tracking and verification – Digitalization and the Internet-of-Things (I oT) provides improved visibility, enabling managers to make decisions in real time based on accurate current data Copyright © 2023, 2020, 2017 Pearson Education, Inc. All Rights Reserved Tracing Food via Blockchain Figure 11.3 Copyright © 2023, 2020, 2017 Pearson Education, Inc. All Rights Reserved Building the Supply Base (1 of 5) Supplier evaluation – Finding potential suppliers – Determine likelihood of their becoming good suppliers – Supplier certification 1. Qualification 2. Education 3. Certification Copyright © 2023, 2020, 2017 Pearson Education, Inc. All Rights Reserved Building the Supply Base (2 of 5) 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 Copyright © 2023, 2020, 2017 Pearson Education, Inc. All Rights Reserved Building the Supply Base (3 of 5) 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 Copyright © 2023, 2020, 2017 Pearson Education, Inc. All Rights Reserved Building the Supply Base (4 of 5) 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 Copyright © 2023, 2020, 2017 Pearson Education, Inc. All Rights Reserved Building the Supply Base (5 of 5) Electronic-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 Copyright © 2023, 2020, 2017 Pearson Education, Inc. All Rights Reserved 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 Copyright © 2023, 2020, 2017 Pearson Education, Inc. All Rights Reserved Shipping Systems (1 of 3) Trucking – Most vulnerable to accidents – Moves the vast majority of manufactured goods – Chief advantage is flexibility Railroads – Capable of carrying large loads – Containers and piggybacking have helped improve flexibility Four critical points in the logistics process are point of origin, warehousing, transit, and destination Sensors, as part of a digital network, can alert managers to problems Copyright © 2023, 2020, 2017 Pearson Education, Inc. All Rights Reserved Shipping Systems (2 of 3) 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 Copyright © 2023, 2020, 2017 Pearson Education, Inc. All Rights Reserved Shipping Systems (3 of 3) Pipelines Truck Platooning System – Used for transporting oil, gas, and other chemical products Multimodal – Combines shipping methods – Common, especially in international shipments – Aided by standardized containers Copyright © 2023, 2020, 2017 Pearson Education, Inc. All Rights Reserved 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 Copyright © 2023, 2020, 2017 Pearson Education, Inc. All Rights Reserved 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 – Postponement Copyright © 2023, 2020, 2017 Pearson Education, Inc. All Rights Reserved Warehousing (continued) Channel assembly – Implementation of postponement – Ship components or modules – Distributors become manufacturing partners – Finished goods inventory reduced – Better market response with less investment Copyright © 2023, 2020, 2017 Pearson Education, Inc. All Rights Reserved Third-Party Logistics (3P L) 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 Copyright © 2023, 2020, 2017 Pearson Education, Inc. All Rights Reserved Distribution Management (1 of 5) 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 Copyright © 2023, 2020, 2017 Pearson Education, Inc. All Rights Reserved Distribution Management (2 of 5) Total costs are important – Inventory costs – Transportation costs – Facility costs Total logistics costs Copyright © 2023, 2020, 2017 Pearson Education, Inc. All Rights Reserved Distribution Management (3 of 5) Figure 11.4 (a) and (b) Copyright © 2023, 2020, 2017 Pearson Education, Inc. All Rights Reserved Distribution Management (4 of 5) Figure 11.4 (c) Copyright © 2023, 2020, 2017 Pearson Education, Inc. All Rights Reserved Distribution Management (5 of 5) Facilities, packaging, and logistics Selection and development of dealers or retailers Downstream management is as important as upstream management Copyright © 2023, 2020, 2017 Pearson Education, Inc. All Rights Reserved Ethics and Sustainable Supply Chain Management Personal ethics – Critical to long-term success of an organization – Supply chains particularly susceptible Ethics within the supply chain Ethical behavior regarding the environment Copyright © 2023, 2020, 2017 Pearson Education, Inc. All Rights Reserved Institute for Supply Management Principles and Standards 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 Avoid perceived impropriety; conflicts of interest; behaviors that negatively influence supply chain decisions; and improper reciprocal agreements Copyright © 2023, 2020, 2017 Pearson Education, Inc. All Rights Reserved 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 Copyright © 2023, 2020, 2017 Pearson Education, Inc. All Rights Reserved Establishing Sustainability in Supply Chains (continued) 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 Copyright © 2023, 2020, 2017 Pearson Education, Inc. All Rights Reserved Measuring Supply-Chain Performance (1 of 6) Assets committed to inventory Percentage  Average inventory investment  invested in =    100 inventory  Total assets  Home Depot had $12.5b inventory, total assets of $42.9b Percentage  12.5  invested in =    100 = 29.1% inventory  42.9  Copyright © 2023, 2020, 2017 Pearson Education, Inc. All Rights Reserved Measuring Supply-Chain Performance (2 of 6) 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%) 27% Copyright © 2023, 2020, 2017 Pearson Education, Inc. All Rights Reserved Measuring Supply-Chain Performance (3 of 6) Inventory turnover Inventory =  Cost of goods sold  turnover  Average inventory investment  Inventory investment – Average of several periods – (beginning plus ending)/2 – Ending inventory Copyright © 2023, 2020, 2017 Pearson Education, Inc. All Rights Reserved Measuring Supply-Chain Performance (4 of 6) From PepsiCo, Inc. Annual Report Net revenue Blank $63.5 Cost of goods sold Blank $28.7 Inventory: Blank Blank Raw material inventory $1.32 Blank Work-in-process inventory $0.15 Blank Finished goods inventory $1.26 Blank Total inventory investment Blank $2.73 Inventory = 28.7 = 10.5 turnover 2.73 Copyright © 2023, 2020, 2017 Pearson Education, Inc. All Rights Reserved Measuring Supply-Chain Performance (5 of 6) Table 11.6 Examples of Annual Inventory Turnover Copyright © 2023, 2020, 2017 Pearson Education, Inc. All Rights Reserved Measuring Supply-Chain Performance (6 of 6) Weeks of supply Weeks of = Average inventory investment supply  Annual cost of goods sold     52 weeks  For PepsiCo Inventory investment = $2.73b Average weekly cost of goods sold = $28.7b/52 = $.55b Weeks of supply = 2.73/.55 = 4.96 weeks Copyright © 2023, 2020, 2017 Pearson Education, Inc. All Rights Reserved Benchmarking the Supply Chain Comparison with benchmark firms Table 11.7 Supply Chain Metrics in the Consumer Packaged Goods Industry Blank TYPICAL BENCHMARK FIRMS FIRMS Order fill rate 71% 98% Order fulfillment lead time (days) 7 3 Cash-to-cash cycle time (days) 100 30 Inventory days of supply 50 20 Copyright © 2023, 2020, 2017 Pearson Education, Inc. All Rights Reserved The SCOR Model Processes, metrics, and best practices Figure 11.5 Copyright © 2023, 2020, 2017 Pearson Education, Inc. All Rights Reserved The SCOR Model (continued) Table 11.8 SCOR Model Metrics Help Firms Benchmark Performance Against the Industry SUPPLY CHAIN PERFORMANCE ATTRIBUTE SAMPLE METRIC CALCULATION Reliability Perfect order (Total perfect orders) / (Total number of fulfillment orders) Responsiveness Average order (Sum of actual cycle times for all orders fulfillment cycle delivered) / (Total number of orders time delivered) Agility Upside supply Time required to achieve an unplanned 20% chain flexibility increase in delivered quantities Costs Supply chain Cost to plan + Cost to source + Cost to management costs deliver + Cost to return Asset management Cash-to-cash cycle Inventory days of supply + Days of time receivables outstanding − Days of payables mi n us outstanding Copyright © 2023, 2020, 2017 Pearson Education, Inc. All Rights Reserved Benchmarking the Supply Chain (continued) 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” Copyright © 2023, 2020, 2017 Pearson Education, Inc. All Rights Reserved Copyright This work is protected by United States copyright laws and is provided solely for the use of instructors in teaching their courses and assessing student learning. Dissemination or sale of any part of this work (including on the World Wide Web) will destroy the integrity of the work and is not permitted. The work and materials from it should never be made available to students except by instructors using the accompanying text in their classes. All recipients of this work are expected to abide by these restrictions and to honor the intended pedagogical purposes and the needs of other instructors who rely on these materials. Copyright © 2023, 2020, 2017 Pearson Education, Inc. All Rights Reserved