1. Supply Chain Design- SC Integration Chapter 10-12

2. What is Supply Chain Design?
Designing a firm’s supply chain to meet the competitive priorities of the firm’s operations strategy.

3. What is Supply Chain Integration?
The effective coordination of supply chain processes though the seamless flow of information up and down the supply chain.

4. Supply Chain Network
Manufacturer
Supplier
Raw Material
Vendor
Distribution
Centers
Retail Stores /
Customers
The objective is to build a chain of suppliers that focuses on maximizing value to the ultimate customer

5. Supply Chain Integration
Upstream
Downstream
Tier 3
Tier 2
Tier 1
Tomato suppliers
Tomato paste factories
Tomato grading stations
Retail sales
Consumers
Ketchup factory
Information flows
Cash flows

6. Supply Chain Illustration

7. A Supply Chain for Beer

8. Service Supply Chain Packaging Flowers: Local/International
Arrangement materials
FedEx delivery service
Local delivery service
Internet service
Maintenance services
Flowers-on-Demand florist
Home
customers
Commercial
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9. 11/8/2017
Supply Chain
Facilities, functions, activities for producing & delivering product or service from supplier to customer
Planning, managing, purchasing, producing, warehousing, distribution, delivery.
Strategic importance: creation of value
A firm’s a core activities to help reduce costs and identify sources of competitiveness.

10. Darden Restaurants
Largest publicly traded casual dining company in the world
Serves over 400 million meals annually in more than 1,800 restaurants in the US and Canada
Annual sales of $6.7 billion
Operations is the strategy
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11. Darden Restaurants
Sources food from five continents and thousands of suppliers
Four distinct supply chains
Over $1.5 billion spent annually in supply chains
Competitive advantage achieved through superior supply chain
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12. Supply Chain Economics
Supply Chain Costs as a Percent of Sales
Industry
% Purchased
All industry 52
Automobile 67
Food 60
Lumber 61
Paper 55
Petroleum 79
Transportation 62

13. Supply Chain Strategies
Negotiating with many suppliers
Long-term partnering with few suppliers
Vertical integration
Joint ventures
Virtual companies that use suppliers on an as needed basis
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14. 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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15. 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
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16. 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
Mitigate and react to disruptions in
Processes (McDonalds, Ford)
Controls (Darden, Boeing)
Environment (Hard Rock Café, Toyota)

17. Computers Watches Calculators
Vertical Integration
Vertical Integration Examples of Vertical Integration
Raw material (suppliers)
Iron ore
Silicon
Farming
Backward integration
Steel
Current transformation
Automobiles
Integrated circuits
Flour milling
Forward integration
Distribution systems
Circuit boards
Finished goods (customers)
Dealers
Computers Watches Calculators
Baked goods
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18. 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

19. Joint Ventures Formal collaboration
Enhance skills
Secure supply
Reduce costs
Cooperation without diluting brand or conceding competitive advantage

20. 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
Exceptionally lean performance, low capital investment, flexibility, and speed

21. 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
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22. Issues in an Integrated Supply Chain
Local optimization - focusing on local profit or cost minimization based on limited knowledge
Incentives (sales incentives, quantity discounts, quotas, and promotions) - push merchandise prior to sale
Large lots - low unit cost but do not reflect sales
Bullwhip effect - stable demand becomes lumpy orders through the supply chain
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23. Opportunities in an Integrated Supply Chain
Accurate “pull” data
Lot size reduction
Single stage control of replenishment
Vendor managed inventory (VMI)
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24. Opportunities in an Integrated Supply Chain
Collaborative planning, forecasting, and replenishment (CPFR)
Blanket orders (long term purchase commitment)
Standardization of components

25. Opportunities in an Integrated Supply Chain
Postponement (delaying any modification or customization in the production- HP power supply and power cord example)
Drop shipping and special packaging (shipping directly from the supplier to the end customer)
Pass-through facility (distribution center where a merchandise is held)
Channel assembly (assembly is done at the distribution center)

26. Information Technology: A Supply Chain Enabler
Information links all aspects of supply chain
E-business
replacement of physical business processes with electronic ones
Electronic data interchange (EDI)
a computer-to-computer exchange of business documents
Bar code and point-of-sale
data creates an instantaneous computer record of a sale
Radio frequency identification (RFID)
technology can send product data from an item to a reader via radio waves
Internet
allows companies to communicate with suppliers, customers, shippers and other businesses around the world, instantaneously

27. SCM Software Enterprise Resource Planning (ERP)
software that integrates components of a company by sharing and organizing information and data
SAP was first ERP software
mySAP.com
web enabled modules that allow collaboration between companies along the supply chain

28. Source: Adapted from Garrison Wieland for “Wal-Mart’s Supply Chain,” Harvard Business Review 70(2; March–April 1992), pp. 60–71.
Relationship between Facilities and Functions along the Wal-Mart Supply Chain

29. Linking Supply Chain with SAP
11/8/2017
Linking Supply Chain with SAP

30. Radio Frequency Tags Radio Frequency Tags: Keeping the Shelves Stocked
Supply chains work smoothly when sales are steady, but often break down when confronted by a sudden surge in demand. Radio frequency ID (or RFID) tags can change that by providing real-time information about what’s happening on store shelves. Here’s how the system works for Proctor & Gamble’s Pampers.
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31. RFID Capabilities

32. RFID Capabilities (cont.)

33. Outsourcing versus Offshoring
Outsourcing: Procuring from external sources services and products that are normally part of an organization
Offshoring: Moving a business process to a foreign country but retaining control of it.

34. Measuring Supply-Chain Performance
Typical Firms
Benchmark 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
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35. Measuring Supply-Chain Performance
Assets committed to inventory
Percent invested in inventory
= x 100
Total inventory investment
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%
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36. Measuring Supply-Chain Performance
Inventory as a % of Total Assets (with exceptional performance)
Manufacturing 15% (Toyota 5%)
Wholesale 34% (Coca-Cola 2.9%)
Restaurants 2.9% (McDonald’s .05%)
Retail 27% (Home Depot 25.7%)
Table 11.7
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37. Measuring Supply-Chain Performance
Inventory turnover
Inventory turnover =
Cost of goods sold
Inventory investment
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38. Measuring Supply-Chain Performance
Examples of Annual Inventory Turnover
Food, Beverage, Retail Manufacturing
Anheuser Busch 15 Dell Computer 90
Coca-Cola 14 Johnson Controls 22
Home Depot 5 Toyota (overall) 13
McDonald’s 112 Nissan (assembly) 150
Table 11.8
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39. 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
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40. 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
Inventory turnover =
Cost of goods sold
Inventory investment
= 14.2 / 1.69 = 8.4
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41. 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
Inventory turnover =
Cost of goods sold
Inventory investment
= 14.2 / 1.69 = 8.4
Average weekly cost of goods sold
= $14.2 / 52 = $.273
Weeks of supply =
Inventory investment
Average weekly cost of goods sold
= 1.69 / .273 = 6.19 weeks
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42. Inventory Measures Average aggregate inventory value = +
Value of each unit of item B
Number of units of item B typically on hand
Value of each unit of item A
Number of units of item A typically on hand
Weeks of supply =
Average aggregate inventory value
Weekly sales (at cost)
Inventory turnover =
Annual sales (at cost)
Average aggregate inventory value
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43. Example 10.1
The Eagle Machine Company averaged $2 million in inventory last year, and the cost of goods sold was $10 million.
The breakout of raw materials, work-in-process, and finished goods inventories is on the following slide.
The best inventory turnover in the company’s industry is six turns per year. If the company has 52 business weeks per year, how many weeks of supply were held in inventory? What was the inventory turnover? What should the company do?

44. Example 10.1

45. Example 10.1
The average aggregate inventory value of $2 million translates into 10.4 weeks of supply and 5 turns per year, calculated as follows:
= 10.4 weeks
$2 million
($10 million)/(52 weeks)
Weeks of supply =
= 5 turns/year
$10 million
$2 million
Inventory turns =

46. Average aggregate inventory value
Application 10.1
A recent accounting statement showed total inventories (raw materials + WIP + finished goods) to be $6,821,000. This year’s “cost of goods sold” is $19.2 million. The company operates 52 weeks per year. How many weeks of supply are being held? What is the inventory turnover?
Weeks of supply =
Average aggregate inventory value
Weekly sales (at cost)
= = 18.5 weeks
$6,821,000
($19,200,000)/(52 weeks)
= 2.8 turns
$19,200,000
$6,821,000
Inventory turnover =

47. The SCOR Model Processes, metrics and best practices
Plan: Demand/Supply planning and Management
Source: Identify, select, manage, and assess sources
Make: Manage production execution, testing and packaging
Deliver: Invoice, warehouse, transport and install
Return: Raw material
Return: Finished goods
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48. Vendor Selection Vendor evaluation Vendor Development
Critical decision
Find potential vendors
Determine the likelihood of them becoming good suppliers
Vendor Development
Training
Engineering and production help
Establish policies and procedures
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49. Vendor Evaluation Criteria Weights Scores (1-5) Weight x Score
Engineering/research/innovation skills
.20 5
1.0
Production process capability (flexibility/technical assistance)
.15 4 .6
Distribution/delivery capability
.05 .2
Quality systems and performance
.10 2
Facilities/location .1
Financial and managerial strength (stability and cost structure)
Information systems capability (e-procurement, ERP)
Integrity (environmental compliance/ ethics)
Total
1.00
3.9
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50. 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
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51. 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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