Chap 5 - Supply Chain Management

Managing business operation
Chapter 5: Supply chain management

Learning objectives
• Explain the strategic importance of the supply chain
• Identify six sourcing strategies
• Explain issues and opportunities in the supply chain
• Describe the steps in supplier selection
• Explain major issues in logistics management
• Compute the percentage of assets committed to inventory
and inventory turnover
What is supply chain?
• Supply chain management: describes the coordination
of all supply chain activities, starting with raw materials and
ending with a satisfied customer.
• A supply chain includes suppliers, manufacturers and/or
service providers; and distributors, wholesalers, and/or
retailers who deliver the product and/or service to the final
customer.
• Objective: structure the supply chain to maximize its
competitive advantage and benefits to the ultimate
consumer
• Specialization
A supply chain for beer
The Supply Chain’s Strategic Importance
Sourcing Issues: Make-or-Buy and Outsourcing
• Make-or-buy decision: A choice between producing a component or service
in-house or purchasing it from an outside source
• Outsourcing: Transferring a firm’s activities that have traditionally been
internal to external suppliers.
Rating Outsource Providers
Case: National Architects, Inc., a San Francisco–based designer of high-rise
office buildings, has decided to outsource its information technology (IT) function.
Three outsourcing providers are being actively considered: one in the U.S., one in India, and one in
Israel.
- National’s VP–Operations, Susan Cholette, has made a list of seven criteria she considers critical. After
putting together a committee of four other VPs, she has rated each firm (boldface type, on a 1–5 scale,
with 5 being highest) and has also placed an importance weight on each of the factors, as shown in Table
2.3 .
Six sourcing strategies
1. Many suppliers
2. Few suppliers
3. Vertical integration
4. Joint venture
5. Keiretsu Networks
6. Virtual companies
Six Sourcing Strategies
1. Many Suppliers
- This is a common strategy when products are
commodities
- Suppliers aggressively compete with one another
- The supplier are responsible for maintaining the necessary
technology, expertise, and forecasting abilities, as well as
cost, quality, and delivery competencies
- Long-term “partnering” relationships are not the goal.
2. Few Suppliers
- A buyer focus on a long-term relationship with a few dedicated
suppliers
- Long-term suppliers are more likely to understand the broad
objectives of the procuring firm and the end customer
- Encourages those suppliers to provide design innovations
and technological expertise
- The cost of changing partners is huge, so both buyer and supplier
run the risk of becoming captives of the other
3. Vertical Integration:
- Developing the ability to produce goods or services previously purchased or actually buying a supplier or a
distributor.
- Backward integration suggests a firm purchase its suppliers
- Vertical integration may provide substantial opportunities for cost reduction, higher quality, timely delivery, and
inventory reduction
- Research and development costs are too high and technology changes too rapid for one company to sustain
leadership in every component.
4. Joint Ventures
- A joint venture (JV) is a business arrangement in which
two or more parties agree to pool their resources for the
purpose of accomplishing a specific task. This task can be a
new project or any other business activity
- Firms engage in collaboration to secure supply or reduce
costs
5. Keiretsu Networks
- A Japanese term that describes suppliers who become part of a company
coalition
- Part purchasing from few suppliers, and part vertical integration
- The manufacturers are often financial supporters of suppliers through
ownership or loans
- Members of the keiretsu are assured long-term relationships and are therefore
expected to collaborate as partners, providing technical expertise and stable
quality production to the manufacturer
- Members of the keiretsu can also have second- and even third-tier suppliers
as part of the coalition
6. Virtual Companies
- Companies that rely on a variety of supplier relationships to provide services
on demand. Also known as hollow corporations or network companies.
- Advantages: specialized management expertise, low capital investment,
flexibility, and speed.
Supply Chain Risks and Mitigation Tactics
- Cross-sourcing : Using one supplier
for a component and a second supplier
for another component, where each
supplier acts as a backup for the other
- Create excess capacity that can be
used in response to problems in the
supply chain as contingency plans to
reduce risk
Building the Supply Base
We examine supplier selection as a four-stage process:

(1) supplier evaluation
(2) supplier development
(3) negotiations
(4) contracting
1. Supplier Evaluation
To potential suppliers and determining the likelihood of their
becoming good suppliers
2. Supplier development
The step includes everything from training, to engineering
and production help, to procedures for information transfer
3. Negotiation
- These may include credit and delivery terms, quality standards, and cooperative advertising
agreements
- Three classic types of negotiation strategies:
 The cost-based model: The contract price is based on time and materials or on a fixed cost
with an escalation clause to accommodate changes in the vendor’s labor and materials cost.
 The market based price model: Price is based on a published, auction, or index price
 Competitive bidding: When suppliers are not willing to discuss costs or where near perfect
markets do not exist, competitive bidding is often appropriate. It requires that the purchasing
agent have several potential suppliers and quotations from each. The major disadvantage of
this method is lack of development of long term relations between buyer and seller.
4. Contracting:
- Contracts are designed to share risks, share benefits, and create
incentive structures to encourage supply chain members to adopt
policies that are optimal for the entire chain.
- Some common features of contracts include quantity discounts
(lower prices for larger orders), buybacks (common in the magazine
and book business where there is a buyback of unsold units), and
revenue sharing (where both partners share the risk of uncertainty
by sharing revenue)
Logistic Management
Procurement activities may be combined with various shipping, warehousing,
and inventory activities to form a logistics system
- Shipping Systems: The transportation of goods to and from their facilities
can represent as much as 25% of the cost of products. Six major means of
shipping are trucking, railroads, airfreight, waterways, pipelines, and multimodal
- Warehousing: Warehousing often adds 8–10% to the cost of a product. The
fundamental purpose of a warehouse is to store goods
- Third-Party Logistics (3PL): Third-party logistics tends to bring added
innovation and expertise to the logistics system. Consequently, supply chain
managers outsource logistics to meet three goals: (1) drive down inventory
investment, (2) lower delivery costs, and (3) improve delivery reliability and
speed.
Distribution Management
the outbound flow of products. Designing distribution networks to meet
customer expectations suggests three criteria: (1) rapid response, (2) product
choice, and (3) service.
Measuring Supply Chain Performance
1. Assets committed to inventory
Percentage invested in inventory
= x 100
E.g.: Home Depot’s management wishes to track its investment in

inventory as one of its performance measures. Recently, Home
Depot had $11.4 billion invested in inventory and total assets of
$44.4 billion.
- What is the company's percentage invested in inventory?
Percentage invested in inventory = 11.4/44.4 * 100 = 25.7%
- If Home Depot can drive its investment down to 20% of assets,

how much money will it free up for other uses?
11.4 - (44.4 × 0.2) = $2.52 billion
Assets Committed to Inventory
1. The amount of money invested in inventory
1.b. Inventory turnover

=
1.c. Weeks of supply

x 52 weeks
Example: PepsiCo, Inc., manufacturer
and distributor of drinks, Frito-Lay, and
Quaker Foods, provides the following in
a recent annual report (shown here in $
billions). Determine PepsiCo’s turnover,
and week of supply.
Solution:
Inventory turnover = Cost of goods sold/Average inventory investment
= 14.2/ 1.69 = 8.4
Weekly sales = annual cost of goods sold ($14.2 billion) divided by 52
= $14.2/52 = $0.273 billion
Weeks of supply = 1.69/.273 = 6.19 weeks
PROBLEM:
Jack’s Pottery Outlet has total end-of-year assets of $5 million. The
first-of-the-year inventory was $375,000, with a year-end inventory
of $325,000. The annual cost of goods sold was $7 million. The
owner, Eric Jack, wants to evaluate his supply chain performance by
measuring his percent of assets in inventory, his inventory turnover,
and his weeks of supply.
SOLUTION
First, determine average inventory :
($375,000 + $325,000)/2 = $350,000
Percent invested in inventory = (Average inventory investment/ Total assets) x 100
= (350,000/ 5,000,000) × 100 = 7%
Inventory turnover = Cost of goods sold/ Average inventory investment

= 7,000,000/ 350,000 = 20
Weeks of inventory = Average inventory investment/ Weekly cost of goods sold

= (350,000/7,000,000)*52) = 2.6 weeks
Benchmarking the Supply Chain
- While metric values convey their own meaning and are useful when compared to past
data, another important use compares these values to those of benchmark firms
- World-class benchmarks are the result of well-managed supply chains that drive down
costs, lead times, late deliveries, and shortages while improving service levels.
The SCOR Model
- Firms use SCOR to identify, measure, reorganize,

and improve supply chain processes
- The SCOR model defines over 200 process
elements, 550 measurable metrics, and 500 best
practices. The best practices describe the
techniques used by benchmark firms that have
scored very well on the metrics.
Key terms
• Supply chain management • Logistics management
• Make-or-buy decision • Distribution management
• Outsourcing • Inventory turnover
• Vertical integration
• Keiretsu
• Virtual companies
• Cross-sourcing
• Bullwhip effect
• Pull data

Chap 5 - Supply Chain Management

Uploaded by

Copyright:

Available Formats

Chap 5 - Supply Chain Management

Uploaded by

Document Information

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Chap 5 - Supply Chain Management

Uploaded by

Copyright:

Available Formats

Managing business operation

Chapter 5: Supply chain management

We examine supplier selection as a four-stage process:

E.g.: Home Depot’s management wishes to track its investment in

- If Home Depot can drive its investment down to 20% of assets,

1.b. Inventory turnover

1.c. Weeks of supply

Inventory turnover = Cost of goods sold/ Average inventory investment

Weeks of inventory = Average inventory investment/ Weekly cost of goods sold

- Firms use SCOR to identify, measure, reorganize,

You might also like

Pfad - The Proxy pFad of © 2024 Garber Painting. All rights reserved.