Operations Management: Sustainability

and Supply Chain Management

Thirteenth Edition, Global Edition

Chapter 11
Supply Chain
Management

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Outline (1 of 3)
• Global Company Profile: Red Lobster
• The Supply Chain’s Strategic Importance
• Sourcing Issues: Make-or-Buy and Outsourcing
• Six Sourcing Strategies

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Outline (2 of 3)
• Supply Chain Risk
• Managing the Integrated Supply Chain
• Building the Supply Base
• Logistics Management
• Distribution Management

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Outline (3 of 3)
• Ethics and Sustainable Supply Chain Management
• Measuring Supply Chain Performance

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Red Lobster's Supply Chain (1 of 2)
• 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

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Red Lobster's Supply Chain (2 of 2)
• Sources food from five continents and thousands of
suppliers
• Supply chains incorporate supplier qualification, product
tracking, independent audits, and just-in-time delivery

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Learning Objectives (1 of 2)
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

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Learning Objectives (2 of 2)
When you complete this chapter you should be able to:
11.5 Explain major issues in logistics management
11.6 Compute percentage of assets committed to inventory
and inventory turnover

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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

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A Supply Chain for Beer
Figure 11.1

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The Supply Chain’s Strategic
Importance (1 of 2)
• 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

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The Supply Chain’s Strategic
Importance (2 of 2)
• 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

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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

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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%)

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%)

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Supply Chain Management
Table 11.2 How Corporate Strategy Impacts Supply
Chain Decisions
LOW-COST RESPONSE DIFFERENTIATION
Blank
STRATEGY STRATEGY STRATEGY

Primary supplier • Cost • Capacity • Product development

selection criteria • Speed skills
• Flexibility • Willing to share
information
• Jointly and rapidly
develop products
Supply chain • Minimize inventory to • Use buffer stocks to • Minimize inventory to
inventory hold down costs ensure speedy supply avoid product
obsolescence

Distribution network • Inexpensive • Fast transportation • Gather and

transportation • Provide premium communicate market
• Sell through discount customer service research data
distributors/retailers • Knowledgeable sales
staff
Product design • Maximize • Low setup time • Modular design to aid
characteristics performance • Rapid production ramp-up product differentiation
• Minimize cost

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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

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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 long-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 may be at risk

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Vertical Integration (1 of 2)
Figure 11.2

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Vertical Integration (2 of 2)
• 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

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Joint Ventures
• Formal collaboration
– Enhance skills
– Secure supply
– Reduce costs
• The challenge is to cooperate 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

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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 (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

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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.
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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.

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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
and effective contracts with around the world, invoking
penalties principles of 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-
loss or IT systems; training of supply art international
distortion chain partners on the proper communication system that
interpretations and uses of transmits engineering,
information scheduling, and logistics data
to Boeing facilities and
suppliers worldwide.

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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 Café 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.

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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.

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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,
radioactivity
• Tracking can help expedite shipments

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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

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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

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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 (VMI)

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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

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Managing the Integrated Supply
Chain (5 of 5)
• Opportunities
– Postponement withholds modification as long as
possible
– Electronic ordering and funds transfer speed
transactions and reduce paperwork
– Drop shipping and special packaging bypass the
seller and reduce costs
– Blockchain aids tracking and verification

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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

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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

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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

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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

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Building the Supply Base (5 of 5)
• 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 (1 of 3)
• Trucking
– Moves the vast majority of manufactured goods
– Chief advantage is flexibility
• Railroads
– Capable of carrying large loads
– Containers and piggybacking have helped improve
flexibility

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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

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Shipping Systems (3 of 3)
• 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 (1 of 2)
• 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

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Warehousing (2 of 2)
• Channel assembly
– Implementation of postponement
– Ship components or modules
– Distributors become manufacturing partners
– Finished goods inventory reduced
– Better market response with less investment

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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 (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

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Distribution Management (2 of 5)
• Total costs are important
– Inventory costs
– Transportation costs
– Facility costs
• Total logistics costs

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Distribution Management (3 of 5)
Figure 11.3

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Distribution Management (4 of 5)
Figure 11.3

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Distribution Management (5 of 5)
• Facilities, packaging, and logistics
• Selection and development of dealers or retailers
• Downstream management is as important as upstream
management

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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

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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

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ISM Ethical Standards (1 of 4)
1. PERCEIVED IMPROPRIETY. Prevent the intent and
appearance of unethical or compromising conduct in
relationships, actions, and communications
2. CONFLICTS OF INTEREST. Ensure that any personal,
business or other activity does not conflict with the lawful
interests of your employer
3. ISSUES OF INFLUENCE. Avoid behaviors or actions
that may negatively influence, or appear to influence,
supply management decisions

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ISM Ethical Standards (2 of 4)
4. RESPONSIBILITIES TO YOUR EMPLOYER. Uphold
fiduciary and other responsibilities using reasonable care
and granted authority to deliver value to your employer
5. SUPPLIER AND CUSTOMER RELATIONSHIPS.
Promote positive supplier and customer relationships
6. SUSTAINABILITY AND SOCIAL RESPONSIBILITY.
Champion social responsibility and sustainability
practices in supply management

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ISM Ethical Standards (3 of 4)
7. CONFIDENTIAL AND PROPRIETARY INFORMATION.
Protect confidential and proprietary information
8. RECIPROCITY. Avoid improper reciprocal agreements
9. APPLICABLE LAWS, REGULATIONS, AND TRADE
AGREEMENTS. Know and obey the letter and spirit of
laws, regulations, and trade agreements applicable to
supply management

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ISM Ethical Standards (4 of 4)
10. PROFESSIONAL COMPETENCE. Develop skills,
expand knowledge, and conduct business that
demonstrate competence and promote the supply
management profession

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Establishing Sustainability in Supply
Chains (1 of 2)
• 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 (2 of 2)
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 (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 

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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%

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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

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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 $.15 Blank
Finished goods inventory $1.26 Blank
Total inventory investment Blank $2.73

Inventory 28.7
= = 1 0.5
turnover 2.73
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Measuring Supply-Chain
Performance (5 of 6)
Table 11.6 Examples of Annual Inventory Turnover

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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

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Benchmarking the Supply Chain (1 of 2)
• Comparison with benchmark firms
Table 11.7 Supply Chain Metrics in the Consumer
Packaged Goods Industry
TYPICAL BENCHMARK
Blank
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

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The SCOR Model (1 of 2)
• Processes, metrics, and best practices
Figure 11.4

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The SCOR Model (2 of 2)
Table 11.8 SCOR Model Metrics to Help Firms
Benchmark Performance Against the Industry

PERFORMANCE
ATTRIBUTE SAMPLE METRIC CALCULATION
Supply chain Perfect order (Total perfect orders) / (Total number of
reliability fulfillment orders)
Supply chain Average order (Sum of actual cycle times for all orders
responsiveness fulfillment cycle delivered) / (Total number of orders
time delivered)
Supply chain agility Upside supply Time required to achieve an unplanned 20%
chain flexibility increase in delivered quantities
Supply chain costs Supply chain Cost to plan + Cost to source + Cost to
management costs 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 (2 of 2)
• 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"

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