458 Chapter 11 • Supply Chain Management

• 11.7 Using Table 11.3, determine the sales necessary toequal a dollar of savings on purchases for a company that has:a) A net profit of 6% and spends 60% of its revenue on purchases.b) A net profit of 8% and spends 80% of its revenue on purchases.

• • 11.8 Your options for shipping $100,000 of machine partsfrom Baltimore to Kuala Lumpur, Malaysia, are (1) use a ship thatwill take 30 days at a cost of $3,800, or (2) truck the parts to LosAngeles and then ship at a total cost of $4,800. The second option willtake only 20 days. You are paid via a letter of credit the day the partsarrive. Your holding cost is estimated at 30% of the value per year.a) Which option is more economical?b) What customer issues are not included in the data presented?

• • 11.9 If you have a third option for the data in Problem 11.8,and it costs only $4,000 and also takes 20 days, what is your mosteconomical plan?

•• 11.10 Monczka-Trent Shipping is the logistics vendor forHandfield Manufacturing Co. in Ohio. Handfield has daily ship-ments of a power-steering pump from its Ohio plant to an autoassembly line in Alabama. The value of the standard shipment is$250,000. Monczka-Trent has two options: (1) its standard 2-dayshipment or (2) a subcontractor who will team drive overnight withan effective delivery of 1 day. The extra driver costs $175.Handfield's holding cost is 35% annually for this kind of inventory.a) Which option is more economical?b) What production issues are not included in the data presented?

Table 11.9 For Problems 11.11 and 11.12

Arrow Distributing Corp.

Net revenueCost of salesInventoryTotal assets

$16,500$13,500$ 1,000$ 8,600

Baker Mfg. Inc.

Net revenueCost of salesInventoryTotal assets

$27,500$21,500$ 1,250$16,600

• • 11.11 Baker Mfg Inc. (see Table 11.9) wishes to compare itsinventory turnover to those of industry leaders, who have turnover ofabout 13 times per year and 8% of their assets invested in inventory.a) What is Baker's inventory turnover?b) What is Baker's percent of assets committed to inventory?c) How does Baker's performance compare to the industry leaders?

• • 11.12 Arrow Distributing Corp. (see Table 11.9) likes to trackinventory by using weeks of supply as well as by inventoryturnover.a) What is its weeks of supply?b) What percent of Arrow's assets are committed to inventory?c) What is Arrow's inventory turnover?d) Is Arrow's supply chain performance, as measured by these

inventory metrics, better than that of Baker, in Problem 11.11?

• 11.13 The grocery industry has an annual inventory turnoverof about 14 times. Organic Grocers, Inc., had a cost of goods soldlast year of $10.5 million; its average inventory was $1.0 million.What was Organic Grocers's inventory turnover, and how does thatperformance compare with that of the industry?

•• 11.14 Mattress Wholesalers, Inc. is constantly trying toreduce inventory in its supply chain. Last year, cost of goods soldwas $7.5 million and inventory was $1.5 million. This year, costs ofgoods sold is $8.6 million and inventory investment is $1.6 million.a) What were the weeks of supply last year?b) What are the weeks of supply this year?c) Is Mattress Wholesalers making progress in its inventory-reduc-

tion effort?

Case StudiesDell's Value Chain

Dell, the computer manufacturer highlighted in Chapter 7's GlobalCompany Profile, develops close relationships with suppliers. Itencourages suppliers to focus on their individual technologicalcapabilities to sustain leadership in their components. Research anddevelopment costs are too high and technological changes are toorapid for any one company to sustain leadership in every compo-nent. Suppliers are also pressed to drive down lead times, lot sizes,and inventories. Dell, in turn, keeps its research customer focused

and leverages that research to help itself and suppliers. Dell alsoconstructs special Web pages for suppliers, allowing them to vieworders for components they produce as well as current levels ofinventory at Dell. This allows suppliers to plan based on actual endcustomer demand; as a result, it reduces the bullwhip effect. Theintent is to work with suppliers to keep the supply chain movingrapidly, products current, and the customer order queue short. Then,with supplier collaboration, Dell can offer the latest options, can

Video Case 459

build to order, and can achieve rapid throughput. The payoff is acompetitive advantage, growing market share, and low capitalinvestment.

On the distribution side, Dell uses direct sales, primarily viathe Internet, to increase revenues by offering a virtually unlim-ited variety of desktops, notebooks, and enterprise products.Options displayed over the Internet allow Dell to attract cus-tomers that value choice. Customers select recommended productconfigurations or customize them. Dell's customers place ordersat any time of the day from anywhere in the world. And Dell'sprice is cheaper; retail stores have additional costs because oftheir brick-and-mortar model. Dell has also customized Webpages that enable large business customers to track past pur-chases and place orders consistent with their purchase historyand current needs. Assembly begins immediately after receipt ofa customer order. Competing firms have previously assembledproducts filling the distribution channels (including shelves atretailers) before a product reaches the customer. Dell, in contrast,introduces a new product to customers over the Internet as soonas the first of that model is ready. In an industry where productshave life cycles measured in months, Dell enjoys a huge early-to-market advantage.

Dell's model also has cash flow advantages. Direct sales allowDell to eliminate distributor and retailer margins and increase itsown margin. Dell collects payment in a matter of days after prod-ucts are sold. But Dell pays its suppliers according to the more tra-ditional billing schedules. Given its low levels of inventory, Dell isable to operate its business with negative working capital because itmanages to receive payment before it pays its suppliers for compo-nents. These more traditional supply chains often require 60 ormore days for the cash to flow from customer to supplier—a hugedemand on working capital.

Dell has designed its order processing, products, and assemblylines so that customized products can be assembled in a matter ofhours. This allows Dell to postpone assembly until after a customerorder has been placed. In addition, any inventory is often in the formof components that are common across a wide variety of finishedproducts. Postponement, component modularity, and tight scheduling

allow low inventory and support mass customization. Dell maximizesthe benefit of postponement by focusing on new products for whichdemand is difficult to forecast. Manufacturers who sell via distribu-tors and retailers find postponement virtually impossible. Therefore,traditional manufacturers are often stuck with product configurationsthat are not selling while simultaneously being out of the configura-tions that are selling. Dell is better able to match supply and demand.

One of the few negatives for Dell's model is that it results inhigher outbound shipping costs than selling through distributors andretailers. Dell sends individual products directly to customers fromits factories. But many of these shipments are small (often one or afew products), while manufacturers selling through distributors andretailers ship with some economy of scale, using large shipmentsvia truck to warehouses and retailers, with the end user providingthe final portion of delivery. As a result, Dell's outbound transporta-tion costs are higher, but the relative cost is low (typically 2% to3%), and thus the impact on the overall cost is low.

What Dell has done is build a collaborative supply chain and aninnovative ordering and production system. The result is what Delllikes to refer to as its value chain—a chain that brings value from sup-plier to the customer and provides Dell with a competitive advantage.

Discussion Questions

1. How has Dell used its direct sales and build-to-order model todevelop an exceptional supply chain?

2. How has Dell exploited the direct sales model to improve opera-tions performance?

3. What are the main disadvantages of Dell's direct sales model?4. How does Dell compete with a retailer who already has a stock?5. How does Dell's supply chain deal with the bullwhip effect?

Sources: Adapted from S. Chopra and P. Meindl, Supply ChainManagement, 3rd ed. (Upper Saddle River, NJ: Prentice Hall, 2007); R.Kapuscinski, et al., "Inventory Decisions in Dell's Supply Chain," Interfaces34, no. 3 (May-June 2004): 191-205; and A. A. Thompson, A. J. Strickland,and J. E. Gamble, "Dell, Inc. in 2006: Can Rivals Beat Its Strategy?"Crafting and Executing Strategy, 15th ed. (New York: McGraw-Hill, 2007).

Darden's Global Supply Chains VideoCase

Darden Restaurants (subject of the Global Company Profile at thebeginning of this chapter), owner of popular brands such as OliveGarden and Red Lobster, requires unique supply chains to servemore than 300 million meals annually. Darden's strategy is opera-tions excellence, and Senior VP Jim Lawrence's task is to ensurecompetitive advantage via Darden's supply chains. For a firm withpurchases exceeding $1.5 billion, managing the supply chains is acomplex and challenging task.

Darden, like other casual dining restaurants, has unique supplychains that reflect its menu options. Darden's supply chains arerather shallow, often having just one tier of suppliers. But it has fourdistinct supply chains.

First, "smallware" is a restaurant industry term for items suchas linens, dishes, tableware and kitchenware, and silverware. Theseare purchased, with Darden taking title as they are received at theDarden Direct Distribution (ODD) warehouse in Orlando, Florida.From this single warehouse, smallware items are shipped via com-mon carrier (trucking companies) to Olive Garden, Red Lobster,Bahama Breeze, and Seasons 52 restaurants.

Second, frozen, dry, and canned food products are handledeconomically by Darden's 11 distribution centers in North America,which are managed by major U.S. food distributors, such as MBM,Maines, and Sygma. This is Darden's second supply line.

Third, the fresh food supply chain (not frozen and notcanned), where life is measured in days, includes dairy products,produce, and meat. This supply chain is B2B, where restaurantmanagers directly place orders with a preselected group of inde-pendent suppliers.

Fourth, Darden's worldwide seafood supply chain is the finallink. Here Darden has developed independent suppliers of salmon,shrimp, tilapia, scallops, and other fresh fish that are source inspectedby Darden's overseas representatives to ensure quality. These freshproducts are flown to the U.S. and shipped to 16 distributors, with 22locations, for quick delivery to the restaurants. With suppliers hi 35countries, Darden must be on the cutting edge when it comes to collab-oration, partnering, communication, and food safety. It does this withheavy travel schedules for purchasing and quality control personnel,native-speaking employees onsite, and aggressive communication.