Operations

Management
Chapter 5
P R O F. D R . F R A N C E S C O D . S A N D U L L I
UNIVERSITY COMPLUTENSE OF MADRID
 Operations Management
Chapter 5
SUPPLY CHAIN MANAGEMENT

Concept of Supply Chain

Supply Chain Strategies
Vendor Selection
Logistics
Measuring Supply Management Performance
 The Supply Chain’s
Strategic Importance
Supply chain management is the
integration of the activities that
procure materials and services,
transform them into intermediate
goods and the final product, and
deliver them to customers
Competition is no longer between
companies; it is between supply chains
 Supply Chain Management
Important activities include determining

1. Transportation vendors
2. Credit and cash transfers
3. Suppliers Management
4. Distributors Management
5. Accounts payable and receivable
6. Warehousing and inventory
7. Order fulfillment
8. Sharing customer, forecasting, and
production information
A Supply Chain for Beer
Global Supply Chain Issues
Supply chains in a global environment
must be able to
1. React to sudden changes in parts
availability, distribution, or shipping
channels, import duties, and currency rates
2. Use the latest computer and transmission
technologies to schedule and manage the
shipment of parts in and finished products
out
3. Staff with local specialists who handle
duties, freight, customs and political issues
 How Supply Chain
Decisions Impact Strategy
Low-Cost Response Differentiation
Strategy Strategy Strategy
Supplier’s Supply demand Respond quickly Share market
goal at lowest to changing research;
possible cost requirements jointly develop
(e.g., Emerson and demand to products and
Electric, Taco minimize options (e.g.,
Bell) stockouts (e.g., Benetton)
Dell Computers)

Primary Select primarily Select primarily Select primarily

selection for cost for capacity, for product
criteria speed, and development
flexibility skills
 How Supply Chain
Decisions Impact Strategy
Low-Cost Response Differentiation
Strategy Strategy Strategy
Process Maintain high Invest in excess Modular
charact- average capacity and processes that
eristics utilization flexible lend
processes themselves to
mass
customization

Inventory Minimize Develop Minimize

charact- inventory responsive inventory in the
eristics throughout the system with chain to avoid
chain to hold buffer stocks obsolescence
down cost positioned to
ensure supply
 How Supply Chain
Decisions Impact Strategy
Low-Cost Response Differentiation
Strategy Strategy Strategy
Lead-time Shorten lead Invest Invest
charact- time as long as aggressively to aggressively to
eristics it does not reduce reduce
increase costs production lead development
time lead time

Product- Maximize Use product Use modular

design performance designs that design to
charact- and minimize lead to low postpone
eristics costs setup time and product
rapid differentiation
production as long as
ramp-up possible
 Supply Chain Strategies

1. Negotiating with many suppliers

2. Long-term partnering with few
suppliers
3. Vertical integration
4. Keiretsu
5. Virtual supply chains that use
suppliers on an as needed basis
 1.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
 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
 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
 Vertical Integration
Vertical Integration Examples of Vertical Integration
Raw material
(suppliers) Iron ore Silicon Farming

Backward
integration Steel

Current Integrated
transformation Automobiles circuits Flour milling

Distribution
Forward integration systems Circuit boards

Finished goods Computers

(customers) Watches
Dealers Baked goods
Calculators

Figure 11.2
 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
 Virtual Supply Chains

• 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
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
 Managing the Supply Chain
One of the main discussions in managing the Supply Chain is the
local optimization vs chain optimization and how to manage the
bullwhip effect (small fluctuations of the demand at the retail level
create progressively larger fluctuations upstream the supply chain).
 Causes of Bullwhip
Effect
1. Local optimization - focusing on
local profit or cost minimization
based on limited knowledge
2. Incentives (sales incentives,
quantity discounts, quotas, and
promotions) - push merchandise
prior to sale
3. Large lots - low unit cost but do
not reflect sales
 Opportunities in an
Integrated Supply Chain

Accurate “pull” data

Lot size reduction
Single stage control of
replenishment
Vendor managed inventory
Blanket orders
 Opportunities in an
Integrated Supply Chain

Standardization
Postponement
Drop shipping and special
packaging
Pass-through facility
Channel assembly
 Vendor Selection
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
 Vendor Selection
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
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
Distribution 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
Distribution Systems

Airfreight
Fast and flexible for light loads
May be expensive
 Distribution Systems

Waterways
Typically used for bulky, low-
value cargo
Used when shipping cost is more
important
than speed
Distribution Systems

Pipelines
Used for transporting oil, gas,
and other chemical products
 Cost of Shipping
Alternatives

Logistics has two main costs:

1. Holding cost: Product in transit
is a form of inventory and has a
holding/carrying cost.
2. Shipping cost: Faster shipping
is generally more expensive than
slower shipping
We can evaluate the two costs to
better understand the trade-off
 Cost of Shipping
Alternatives
Value of connectors = $1,750.00
Holding cost = 40% per year
Second carrier is 1 day faster and $20 more
expensive per unit
Annual
Daily unit cost of Product
= holding x /365
holding product cost value

= (.40 x $1,750)/ 365 = $1.92

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
 Measuring Supply Chain
Performance
Benchmark
Typical Firms 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

 Measuring Supply Chain
Performance
Assets committed to inventory: lower ratio values will be
associated to higher inventory efficiency

Percent Total inventory

invested in = investment x 100
inventory
Total assets

Investment in inventory = $11.4 billion

Total assets = $44.4 billion

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

 Measuring Supply Chain
Performance
Inventory turnover: A relatively low inventory turnover ratio
may be a sign of weak sales or excess inventory, while a
higher ratio signals strong sales but may also indicate
inadequate inventory stocking.

Cost of goods sold

Inventory
turnover = Inventory
investment
Measuring Supply Chain
Performance
Inventory turnover

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
Measuring Supply Chain
Performance
Inventory turnover
Net revenue $32.5
Cost of goods sold $14.2
Cost of goods sold
InInventory
ventory: turnover =
Raw material Inventory
inventotinvestment
ory
$.74 Work-i-in-p
-process inventory
$.11 Finished go=o14.2
ds i/n1.69
ventot=or8.4
y
$.84
Total inventory investment $1.69

1
© 2008 PRENTICE HALL, INC. 1
 Measuring Supply Chain
Performance
Weeks of supply: Number of weeks you will stay in stock based on your
current inventory levels and historical demand. Ideally, your weeks of
supply will equal or be slightly more than your average order lead time.

Average weekly
cost of goods sold = $14.2 / 52 = $.273

Inventory investment/
Weeks of supply =
Average weekly cost of
goods sold

= 1.69 / .273 = 6.19 weeks