Explain the strategic importance of the supply chain

Supply Chain Management

PowerPoint presentation to accompany

Heizer and Render

Operations Management, Eleventh Edition

Principles of Operations Management, Ninth Edition

PowerPoint slides by Jeff Heyl

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Outline

Global Company Profile:
Darden Restaurants

The Supply Chain’s Strategic Importance
Sourcing Issues: Make-or-Buy vs. Outsourcing
Six Sourcing Strategies

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Outline – Continued

Supply Chain Risk

Managing the Integrated Supply Chain

Building the Supply Base

Logistics Management

Distribution Management

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Outline – Continued

Ethics and Sustainable Supply Chain Management

Measuring Supply Chain Performance

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Learning Objectives

When you complete this chapter you should be able to:

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

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When you complete this chapter you should be able to:

Learning Objectives

Explain major issues in logistics management
Compute percent of assets committed to inventory and inventory turnover

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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

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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

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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

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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

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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

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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%)

CURRENT SITUATION	SUPPLY CHAIN STRATEGY	SALES 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 STRATEGY	RESPONSE STRATEGY	DIFFERENTIATION STRATEGY
Primary supplier selection criteria	Cost	Capacity Speed Flexibility	Product development skills Willing to share information Jointly and rapidly develop products
Supply chain inventory	Minimize inventory to hold down costs	Use buffer stocks to ensure speedy supply	Minimize inventory to avoid product obsolescence
Distribution network	Inexpensive transportation Sell through discount distributors/retailers	Fast transportation Provide premium customer service	Gather and communicate market research data Knowledgeable sales staff
Product design characteristics	Maximize performance Minimize cost	Low setup time Rapid production ramp-up	Modular design to aid product differentiation

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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

Figure 11.2

Raw material (suppliers)	Tree Harvesting
Backward integration	Chipmakers	Pulpmaking
Current transformation	Pepsi	Apple	International Paper
Forward integration	Bottling	Retail stores	End-User Paper Conversion
Finished goods (customers)

Vertical Integration Examples of Vertical Integration

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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

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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

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

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Risk and Mitigation Tactics

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

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Risk and Mitigation Tactics

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

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Risk and Mitigation Tactics

TABLE 11.3	Supply Chain Risks and Tactics
RISK	RISK REDUCTION TACTICS	EXAMPLE
Theft, vandalism, and terrorism	Insurance; patent protection; security measures including RFID and GPS; diversification	Domestic Port Radiation Initiative: The U.S. 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

Bullwhip effect occurs when orders are relayed through the supply chain increasing at each step

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