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10/16/2010
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1111 Supply-Chain ManagementSupply-Chain Management
11 - 1© 2011 Pearson Education, Inc. publishing as Prentice Hall
PowerPoint presentation to accompany PowerPoint presentation to accompany Heizer and Render Heizer and Render Operations Management, 10e Operations Management, 10e Principles of Operations Management, 8ePrinciples of Operations Management, 8e
PowerPoint slides by Jeff Heyl
OutlineOutlineGlobal Company Profile: Darden RestaurantsThe Supply Chain’s Strategic Importance
11 - 2© 2011 Pearson Education, Inc. publishing as Prentice Hall
Supply Chain RiskEthics and SustainabilitySupply-Chain Economics
Make-or-Buy DecisionsOutsourcing
Outline Outline –– ContinuedContinued
Supply-Chain StrategiesMany SuppliersFew Suppliers
11 - 3© 2011 Pearson Education, Inc. publishing as Prentice Hall
Vertical IntegrationJoint VenturesKeiretsu NetworksVirtual Companies
Outline Outline –– ContinuedContinuedManaging the Supply Chain
Issues in an Integrated Supply ChainOpportunities in an Integrated Supply Chain
11 - 4© 2011 Pearson Education, Inc. publishing as Prentice Hall
E-ProcurementOnline CatalogsAuctionsRFQsRealtime Inventory Tracking
Outline Outline –– ContinuedContinued
Vendor SelectionVendor EvaluationVendor Development
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Negotiations
Outline Outline –– ContinuedContinued
Logistics ManagementDistribution SystemsThird-Party Logistics
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Cost of Shipping AlternativesSecurity and JIT
Measuring Supply-Chain Performance
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Learning ObjectivesLearning ObjectivesWhen you complete this chapter you When you complete this chapter you should be able to:should be able to:
1. Explain the strategic importance of the supply chain
11 - 7© 2011 Pearson Education, Inc. publishing as Prentice Hall
the supply chain2. Identify six supply-chain strategies3. Explain issues and opportunities in
the supply chain4. Describe the steps in vendor
selection
Learning ObjectivesLearning ObjectivesWhen you complete this chapter you When you complete this chapter you should be able to:should be able to:
5. Explain major issues in logistics management
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management6. Compute percent of assets
committed to inventory and inventory turnover
Darden RestaurantsDarden Restaurants
Largest publicly traded casual dining company in the worldServes over 400 million meals
11 - 9© 2011 Pearson Education, Inc. publishing as Prentice Hall
Serves over 400 million meals annually in more than 1,800 restaurants in the US and CanadaAnnual sales of $6.7 billionOperations is the strategy
Darden RestaurantsDarden Restaurants
Sources food from five continents and thousands of suppliersFour distinct supply chains
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pp yOver $1.5 billion spent annually in supply chainsCompetitive advantage achieved through superior supply chain
SupplySupply--Chain ManagementChain Management
The objective is to build a chain of The objective is to build a chain of suppliers that focuses on suppliers that focuses on
maximizing value to the ultimate maximizing value to the ultimate
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ggcustomercustomer
The Supply Chain’s The Supply Chain’s Strategic Importance Strategic Importance
Supply chain management is the integration of the activities that procure materials and services
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procure materials and services, transform them into intermediate
goods and final products, and deliver them through a distribution system
Competition is no longer between Competition is no longer between companies; it is between supply chainscompanies; it is between supply chains
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Supply Chain ManagementSupply Chain Management
1. Transportation vendors2. Credit and cash transfers3. Suppliers
Important activities include determiningImportant activities include determining
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3. Suppliers4. Distributors 5. Accounts payable and receivable6. Warehousing and inventory7. Order fulfillment8. Sharing customer, forecasting, and
production information
A Supply Chain for BeerA Supply Chain for Beer
11 - 14© 2011 Pearson Education, Inc. publishing as Prentice HallFigure 11.1
How Supply Chain How Supply Chain Decisions Impact StrategyDecisions Impact Strategy
Low-Cost Strategy
Response Strategy
Differentiation Strategy
Supplier’s goal
Supply demand at lowest possible cost
Respond quickly to changing requirements
Share market research; jointly develop
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poss b e cost(e.g., Emerson Electric, Taco Bell)
equ e e tsand demand to minimize stockouts (e.g., Dell Computers)
jo t y de e opproducts and options (e.g., Benetton)
Primary selection criteria
Select primarily for cost
Select primarily for capacity, speed, and flexibility
Select primarily for product development skills
Table 11.1
How Supply Chain How Supply Chain Decisions Impact StrategyDecisions Impact Strategy
Low-Cost Strategy
Response Strategy
Differentiation Strategy
Process charact-eristics
Maintain high average utilization
Invest in excess capacity and flexible
Modular processes that lend
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e st cs ut at o e b eprocesses
e dthemselves to mass customization
Inventory charact-eristics
Minimize inventory throughout the chain to hold down cost
Develop responsive system with buffer stocks positioned to ensure supply
Minimize inventory in the chain to avoid obsolescence
Table 11.1
How Supply Chain How Supply Chain Decisions Impact StrategyDecisions Impact Strategy
Low-Cost Strategy
Response Strategy
Differentiation Strategy
Lead-time charact-eristics
Shorten lead time as long as it does not
Invest aggressively to reduce
Invest aggressively to reduce
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e st cs t does otincrease costs
educeproduction lead time
educedevelopment lead time
Product-design charact-eristics
Maximize performance and minimize costs
Use product designs that lead to low setup time and rapid production ramp-up
Use modular design to postpone product differentiation as long as possible
Table 11.1
Supply Chain RiskSupply Chain Risk
More reliance on supply chains means more riskFewer suppliers increase dependence
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Compounded by globalization and logistical complexityVendor reliability and quality risksPolitical and currency risks
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Supply Chain RiskSupply Chain Risk
Mitigate and react to disruptions in1. Processes2. Controls
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3. Environment
Supply Chain RiskSupply Chain RiskReducing risk in supply chains
Process risk at McDonald’sProcess risk at FordC t l t D d R t t
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Controls at Darden RestaurantsControl risk at BoeingEnvironmental risk at Hard Rock CaféEnvironmental risk at Toyota
Ethics and SustainabilityEthics and Sustainability
Personal ethicsInstitute for Supply Management Principles and Standards
Ethi ithi th l h i
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Ethics within the supply chainEthical behavior regarding the environment
Principles and Standards for Principles and Standards for Ethical Supply Management Ethical Supply Management
ConductConduct
LOYALTY TO YOUR ORGANIZATIONLOYALTY TO YOUR ORGANIZATION
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JUSTICE TO THOSE WITH WHOM YOU JUSTICE TO THOSE WITH WHOM YOU DEALDEAL
FAITH IN YOUR PROFESSIONFAITH IN YOUR PROFESSION
Table 11.2
Principles and Standards for Principles and Standards for Ethical Supply Management Ethical Supply Management
ConductConduct1.1. PERCEIVED IMPROPRIETYPERCEIVED IMPROPRIETY Prevent the intent and
appearance of unethical or compromising conduct in relationships, actions and communications
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Table 11.2
communications2.2. CONFLICTS OF INTERESTCONFLICTS OF INTEREST Ensure that any
personal, business or other activity does not conflict with the lawful interests of your employer
3.3. ISSUES OF INFLUENCEISSUES OF INFLUENCE Avoid behaviors or actions that may negatively influence, or appear to influence, supply management decisions
Principles and Standards for Principles and Standards for Ethical Supply Management Ethical Supply Management
ConductConduct4.4. RESPONSIBILITIES TO YOUR EMPLOYERRESPONSIBILITIES TO YOUR EMPLOYER
Uphold fiduciary and other responsibilities using reasonable care and granted authority to deliver value to your employer
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Table 11.2
value to your employer5.5. SUPPLIER AND CUSTOMER RELATIONSHIPS SUPPLIER AND CUSTOMER RELATIONSHIPS
Promote positive supplier and customer relationships
6.6. SUSTAINABILITY AND SOCIAL RESPONSIBILITYSUSTAINABILITY AND SOCIAL RESPONSIBILITYChampion social responsibility and sustainability practices in supply management
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Principles and Standards for Principles and Standards for Ethical Supply Management Ethical Supply Management
ConductConduct7.7. CONFIDENTIAL AND PROPRIETARY CONFIDENTIAL AND PROPRIETARY
INFORMATIONINFORMATION Protect confidential and proprietary information
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Table 11.2
8.8. RECIPROCITYRECIPROCITY Avoid improper reciprocal agreements
9.9. APPLICABLE LAWS, REGULATIONS AND APPLICABLE LAWS, REGULATIONS AND TRADE AGREEMENTSTRADE AGREEMENTS Know and obey the letter and spirit of laws, regulations and trade agreements applicable to supply management
Principles and Standards for Principles and Standards for Ethical Supply Management Ethical Supply Management
ConductConduct10.10.PROFESSIONAL COMPETENCEPROFESSIONAL COMPETENCE Develop skills,
expand knowledge and conduct business that demonstrates competence and promotes the
l t f i
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Table 11.2
supply management profession
Supply Chain EconomicsSupply Chain EconomicsSupply Chain Costs as a Percent of SalesSupply Chain Costs as a Percent of Sales
Industry % PurchasedAll industry 52A t bil 67
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Table 11.3
Automobile 67Food 60Lumber 61Paper 55Petroleum 79Transportation 62
Supply Chain EconomicsSupply Chain EconomicsDollars of additional sales needed to equal $1 Dollars of additional sales needed to equal $1 saved through the supply chainsaved through the supply chain
Percent of Sales Spent in the Supply Chain
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Percent Net Profitof Firm 30% 40% 50% 60% 70% 80% 90%
2 $2.78 $3.23 $3.85 $4.76 $6.25 $9.09 $16.674 $2.70 $3.13 $3.70 $4.55 $5.88 $8.33 $14.296 $2.63 $3.03 $3.57 $4.35 $5.56 $7.69 $12.508 $2.56 $2.94 $3.45 $4.17 $5.26 $7.14 $11.11
10 $2.50 $2.86 $3.33 $4.00 $5.00 $6.67 $10.00
Table 11.4
MakeMake--oror--Buy DecisionsBuy Decisions
Choice between internal production and external sources
11 - 29© 2011 Pearson Education, Inc. publishing as Prentice Hall
OutsourcingOutsourcing
Transfers traditional internal activities and resources of a firm to outside vendorsUtili th ffi i th t
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Utilizes the efficiency that comes with specializationFirms outsource information technology, accounting, legal, logistics, and production
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Supply Chain StrategiesSupply Chain StrategiesNegotiating with many suppliersLong-term partnering with few suppliersV ti l i t ti
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Vertical integrationJoint venturesKeiretsuVirtual companies that use suppliers on an as needed basis
Many SuppliersMany SuppliersCommonly used for commodity productsPurchasing is typically based on price
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priceSuppliers compete with one anotherSupplier is responsible for technology, expertise, forecasting, cost, quality, and delivery
Few SuppliersFew SuppliersBuyer forms longer term relationships with fewer suppliersCreate value through economies of scale and learning curve
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gimprovementsSuppliers more willing to participate in JIT programs and contribute design and technological expertiseCost of changing suppliers is huge
Vertical IntegrationVertical Integration
Raw material (suppliers) Iron ore Silicon Farming
Backward integration Steel
Vertical Integration Examples of Vertical Integration
11 - 34© 2011 Pearson Education, Inc. publishing as Prentice HallFigure 11.2
Current transformation Automobiles Integrated
circuits Flour milling
Forward integration Distribution systems Circuit boards
Finished goods (customers) Dealers
Computers Watches
CalculatorsBaked goods
Vertical IntegrationVertical IntegrationDeveloping the ability to produce goods or service previously purchasedIntegration may be forward, towards the customer, or backward, towards suppliers
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suppliersCan improve cost, quality, and inventory but requires capital, managerial skills, and demandRisky in industries with rapid technological change
Joint VenturesJoint Ventures
Formal collaborationEnhance skillsSecure supply
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Secure supplyReduce costs
Cooperation without diluting brand or conceding competitive advantage
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Keiretsu NetworksKeiretsu NetworksA middle ground between few suppliers and vertical integrationSupplier becomes part of the company coalitionOften provide financial support for
11 - 37© 2011 Pearson Education, Inc. publishing as Prentice Hall
Often provide financial support for suppliers through ownership or loansMembers expect long-term relationships and provide technical expertise and stable deliveriesMay extend through several levels of the supply chain
Virtual CompaniesVirtual Companies
Rely on a variety of supplier relationships to provide services on demandFl id i ti l b d i th t
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Fluid organizational boundaries that allow the creation of unique enterprises to meet changing market demandsExceptionally lean performance, low capital investment, flexibility, and speed
Managing the Supply ChainManaging the Supply Chain
There are significant management issues in controlling a supply chain involving many independent organizations
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Mutual agreement on goalsTrustCompatible organizational cultures
Issues in an Integrated Issues in an Integrated Supply ChainSupply Chain
Local optimizationLocal optimization - focusing on local profit or cost minimization based on limited knowledgeI ti ( l i ti titI ti ( l i ti tit
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Incentives (sales incentives, quantity Incentives (sales incentives, quantity discounts, quotas, and promotions)discounts, quotas, and promotions) -push merchandise prior to saleLarge lotsLarge lots - low unit cost but do not reflect sales
Bullwhip effectBullwhip effect - stable demand becomes lumpy orders through the supply chain
Opportunities in an Opportunities in an Integrated Supply ChainIntegrated Supply Chain
Accurate “pull” dataLot size reduction
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Lot size reductionSingle stage control of replenishmentVendor managed inventory (VMI)
Opportunities in an Opportunities in an Integrated Supply ChainIntegrated Supply Chain
Collaborative planning, forecasting, and
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replenishment (CPFR)Blanket ordersStandardization
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Opportunities in an Opportunities in an Integrated Supply ChainIntegrated Supply Chain
PostponementDrop shipping and special
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Drop shipping and special packagingPass-through facilityChannel assembly
Radio Frequency TagsRadio Frequency TagsRadio Frequency Tags: Keeping the Shelves StockedRadio 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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EE--ProcurementProcurement
Uses the internet to facilitate purchasingEl t i d i d f d
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Electronic ordering and funds transfer
Electronic data interchange (EDI)Advanced shipping notice
EE--ProcurementProcurement
Online catalogs1. Catalogs provided by vendors2 C t l bli h d b
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2. Catalogs published by intermediaries
3. Exchanges provided by buyers
Internet Trading ExchangesInternet Trading ExchangesHealth care products – ghx.comRetail goods – gnx.comDefense and aerospace products –exostar com
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exostar.comFood, beverage, consumer products – transora.comSteel and metal products –metalsite.comHotels – avendra.com
EE--ProcurementProcurementAuctions
Maintained by buyers, sellers, or intermediariesLow barriers
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Low barriers to entryIncrease in the potential number of buyers
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EE--ProcurementProcurement
RFQsCan make requests for quotes (RFQs) less costly
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( ) yImproves supplier selection
Real-time inventory tracking
Vendor SelectionVendor SelectionVendor evaluation
Critical decisionFind potential vendorsDetermine the likelihood of them
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Determine the likelihood of them becoming good suppliers
Vendor DevelopmentTrainingEngineering and production helpEstablish policies and procedures
Vendor EvaluationVendor EvaluationCriteria Weights
Scores (1-5)
Weight x Score
Engineering/research/innovation skills .20 5 1.0Production process capability (flexibility/technical assistance)
.15 4 .6
Distribution/delivery capability .05 4 .2
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Quality systems and performance .10 2 .2Facilities/location .05 2 .1Financial and managerial strength (stability and cost structure)
.15 4 .6
Information systems capability (e-procurement, ERP)
.10 2 .2
Integrity (environmental compliance/ ethics)
.20 5 1.0
Total 1.00 3.9
Vendor SelectionVendor SelectionNegotiations
CostCost--Based Price ModelBased Price Model - supplier opens books to purchaserMarketMarket--Based Price ModelBased Price Model - price
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MarketMarket Based Price ModelBased Price Model price based on published, auction, or indexed priceCompetitive BiddingCompetitive Bidding - used for infrequent purchases but may make establishing long-term relationships difficult
Logistics ManagementLogistics ManagementObjective is to obtain efficient operations through the integration of all material acquisition, movement, and storage activities
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Is a frequent candidate for outsourcingAllows competitive advantage to be gained through reduced costs and improved customer service
Distribution SystemsDistribution SystemsTruckingTrucking
Moves the vast majority of Moves the vast majority of manufactured goodsmanufactured goodsChief advantage is flexibilityChief advantage is flexibility
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Chief advantage is flexibilityChief advantage is flexibilityRailroadsRailroads
Capable of carrying large loadsCapable of carrying large loadsLittle flexibility though Little flexibility though containers and piggybacking containers and piggybacking have helped with thishave helped with this
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Distribution SystemsDistribution SystemsAirfreight
Fast and flexible for light loadsMay be expensive
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Distribution SystemsDistribution Systems
WaterwaysTypically used for bulky, low-value cargo
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Used when shipping cost is more important than speed
Distribution SystemsDistribution Systems
PipelinesUsed for transporting oil, gas, and other chemical products
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ThirdThird--Party LogisticsParty Logistics
Outsourcing logistics can reduce costs and improve delivery reliability and speedCoordinate supplier inventory with
11 - 58© 2011 Pearson Education, Inc. publishing as Prentice Hall
Coordinate supplier inventory with delivery servicesMay provide warehousing, assembly, testing, shipping, customs
Cost of Shipping Cost of Shipping AlternativesAlternatives
Product in transit is a form of inventory and has a carrying cost
11 - 59© 2011 Pearson Education, Inc. publishing as Prentice Hall
Faster shipping is generally more expensive than slower shippingWe can evaluate the two costs to better understand the trade-off
Cost of Shipping Cost of Shipping AlternativesAlternatives
Value of connectors = $1,750.00Holding cost = 40% per yearSecond carrier is 1 day faster and $20 more expensive
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Daily cost of holding product = x /365
Annual holding
costProduct
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
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Security and JITSecurity and JITBorders are becoming more open in the U.S. and around the worldMonitoring and controlling stock moving through supply chains is more important than ever
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than everNew technologies are being developed to allow close monitoring of location, storage conditions, and movement
Measuring SupplyMeasuring Supply--Chain Chain PerformancePerformance
Typical FirmsBenchmark
Firms
Lead time (weeks) 15 8
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Table 11.6
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 SupplyMeasuring Supply--Chain Chain PerformancePerformance
Assets committed to inventory
Percent i d i
Total inventory investment
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invested in inventory
= x 100investmentTotal assets
Investment in inventory = $11.4 billionTotal assets = $44.4 billion
Percent invested in inventory = (11.4/44.4) x 100 = 25.7%
Measuring SupplyMeasuring Supply--Chain Chain PerformancePerformance
Inventory as a % of Total Assets(with exceptional performance)
Manufacturing 15%(Toyota 5%)
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Table 11.7
(Toyota 5%)Wholesale 34%
(Coca-Cola 2.9%)Restaurants 2.9%
(McDonald’s .05%)Retail 27%
(Home Depot 25.7%)
Measuring SupplyMeasuring Supply--Chain Chain PerformancePerformance
Inventory turnover
Cost of goods sold
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Inventory turnover =
Cost of goods soldInventory
investment
Measuring SupplyMeasuring Supply--Chain Chain PerformancePerformance
Examples of Annual Inventory TurnoverFood, Beverage, Retail Manufacturing
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Table 11.8
Anheuser Busch 15 Dell Computer 90Coca-Cola 14 Johnson Controls 22Home Depot 5 Toyota (overall) 13McDonald’s 112 Nissan (assembly) 150
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Measuring SupplyMeasuring Supply--Chain Chain PerformancePerformance
Inventory turnover
Net revenue $32.5Cost of goods sold $14 2
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Cost of goods sold $14.2Inventory:
Raw material inventory $.74Work-in-process inventory $.11Finished goods inventory $.84
Total inventory investment $1.69
Measuring SupplyMeasuring Supply--Chain Chain PerformancePerformance
Inventory turnover
Net revenue $32.5Cost of goods sold $14 2I t t
Cost of goods sold
11 - 68© 2011 Pearson Education, Inc. publishing as Prentice Hall
Cost of goods sold $14.2Inventory:
Raw material inventory $.74Work-in-process inventory $.11Finished goods inventory $.84
Total inventory investment $1.69
Inventory turnover = Inventory investment
= 14.2 / 1.69 = 8.4
Measuring SupplyMeasuring Supply--Chain Chain PerformancePerformance
Inventory turnover
Net revenue $32.5Cost of goods sold $14 2I t t
Cost of goods soldAverage weekly
11 - 69© 2011 Pearson Education, Inc. publishing as Prentice Hall
Cost of goods sold $14.2Inventory:
Raw material inventory $.74Work-in-process inventory $.11Finished goods inventory $.84
Total inventory investment $1.69
Inventory turnover = Inventory investment
= 14.2 / 1.69 = 8.4Weeks of supply =
Inventory investmentAverage weekly cost of
goods sold
= 1.69 / .273 = 6.19 weeks
Average weekly cost of goods sold = $14.2 / 52 = $.273
The SCOR ModelThe SCOR ModelProcesses, metrics and best practices
Plan: Demand/Supply planning and Management
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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
Figure 11.3
11 - 71© 2011 Pearson Education, Inc. publishing as Prentice Hall
All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying,
recording, or otherwise, without the prior written permission of the publisher. Printed in the United States of America.