Operations Management

© 2008 Prentice Hall, Inc. 11 – 1

Operations ManagementOperations ManagementChapter 11 – Chapter 11 – Supply Chain Supply Chain ManagementManagement

PowerPoint presentation to accompany PowerPoint presentation to accompany Heizer/Render Heizer/Render Principles of Operations Management, 7ePrinciples of Operations Management, 7eOperations Management, 9e Operations Management, 9e


OutlineOutline

Global Company Profile: Global Company Profile: Darden RestaurantsDarden Restaurants

The Supply Chain’s Strategic The Supply Chain’s Strategic ImportanceImportance Global Supply Chain IssuesGlobal Supply Chain Issues

Supply Chain EconomicsSupply Chain Economics Make-or-Buy DecisionsMake-or-Buy Decisions

OutsourcingOutsourcing


Outline – ContinuedOutline – Continued

Ethics in the Supply ChainEthics in the Supply Chain

Supply Chain StrategiesSupply Chain Strategies Many SuppliersMany Suppliers

Few SuppliersFew Suppliers

Vertical IntegrationVertical Integration

Keiretsu NetworksKeiretsu Networks

Virtual CompaniesVirtual Companies


Outline – ContinuedOutline – Continued Managing the Supply ChainManaging the Supply Chain

Issues in an Integrated Supply ChainIssues in an Integrated Supply Chain

Opportunities in an Integrated Opportunities in an Integrated Supply ChainSupply Chain

E-ProcurementE-Procurement Online CatalogsOnline Catalogs

AuctionsAuctions

RFQsRFQs

Realtime Inventory TrackingRealtime Inventory Tracking



Vendor SelectionVendor Selection Vendor EvaluationVendor Evaluation

Vendor DevelopmentVendor Development

NegotiationsNegotiations



Logistics ManagementLogistics Management Distribution SystemsDistribution Systems

Third-Party LogisticsThird-Party Logistics

Cost of Shipping AlternativesCost of Shipping Alternatives

Logistics, Security, and JITLogistics, Security, and JIT

Measuring Supply Chain Measuring Supply Chain PerformancePerformance


Learning ObjectivesLearning Objectives

When you complete this chapter you When you complete this chapter you should be able to:should be able to:

1.1. Explain the strategic importance of Explain the strategic importance of the supply chainthe supply chain

2.2. Identify five supply chain strategiesIdentify five supply chain strategies

3.3. Explain issues and opportunities in Explain issues and opportunities in the supply chainthe supply chain

4.4. Describe approaches to supply Describe approaches to supply chain negotiationschain negotiations


Learning ObjectivesLearning Objectives

When you complete this chapter you When you complete this chapter you should be able to:should be able to:

Evaluate supply chain performanceEvaluate supply chain performance

Compute percent of assets Compute percent of assets committed to inventorycommitted to inventory

Compute inventory turnoverCompute inventory turnover


Darden RestaurantsDarden Restaurants

Largest publicly traded casual Largest publicly traded casual dining company in the worlddining company in the world

Serves over 300 million meals Serves over 300 million meals annually in more than 1,400 annually in more than 1,400 restaurants in the US and Canadarestaurants in the US and Canada

Annual sales of $2.4 billionAnnual sales of $2.4 billion

Operations is the strategyOperations is the strategy


Darden RestaurantsDarden Restaurants

Sources food from five continents Sources food from five continents and thousands of suppliersand thousands of suppliers

Four distinct supply chainsFour distinct supply chains

Over $1.5 billion spent annually in Over $1.5 billion spent annually in supply chainssupply chains

Competitive advantage achieved Competitive advantage achieved through superior supply chainthrough superior supply chain


The Supply Chain’s The Supply Chain’s Strategic Importance Strategic Importance

Supply chain management is the Supply chain management is the integration of the activities that integration of the activities that procure materials and services, procure materials and services,

transform them into intermediate transform them into intermediate goods and the final product, and goods and the final product, and

deliver them to customersdeliver them to customers

Competition is no longer between Competition is no longer between companies; it is between supply chainscompanies; it is between supply chains


Supply Chain ManagementSupply Chain Management

1.1. Transportation vendorsTransportation vendors

2.2. Credit and cash transfersCredit and cash transfers

3.3. SuppliersSuppliers

4.4. Distributors Distributors

5.5. Accounts payable and receivableAccounts payable and receivable

6.6. Warehousing and inventoryWarehousing and inventory

7.7. Order fulfillmentOrder fulfillment

8.8. Sharing customer, forecasting, and Sharing customer, forecasting, and production informationproduction information

Important activities include determiningImportant activities include determining


A Supply Chain for BeerA Supply Chain for Beer

Figure 11.1Figure 11.1


Global Supply Chain IssuesGlobal Supply Chain Issues

React to sudden changes in parts React to sudden changes in parts availability, distribution, or shipping availability, distribution, or shipping channels, import duties, and currency rateschannels, import duties, and currency rates

Use the latest computer and transmission Use the latest computer and transmission technologies to schedule and manage the technologies to schedule and manage the shipment of parts in and finished products shipment of parts in and finished products outout

Staff with local specialists who handle Staff with local specialists who handle duties, freight, customs and political issuesduties, freight, customs and political issues

Supply chains in a global environment Supply chains in a global environment must be able tomust be able to


How Supply Chain How Supply Chain Decisions Impact StrategyDecisions Impact Strategy

Low-Cost Low-Cost StrategyStrategy

Response Response StrategyStrategy

Differentiation Differentiation StrategyStrategy

Supplier’s Supplier’s goalgoal

Supply demand Supply demand at lowest at lowest possible cost possible cost (e.g., Emerson (e.g., Emerson Electric, Taco Electric, Taco Bell)Bell)

Respond quickly Respond quickly to changing to changing requirements requirements and demand to and demand to minimize minimize stockouts (e.g., stockouts (e.g., Dell Computers)Dell Computers)

Share market Share market research; research; jointly develop jointly develop products and products and options (e.g., options (e.g., Benetton)Benetton)

Primary Primary selection selection criteriacriteria

Select primarily Select primarily for costfor cost

Select primarily Select primarily for capacity, for capacity, speed, and speed, and flexibilityflexibility

Select primarily Select primarily for product for product development development skillsskills

Table 11.1Table 11.1






Process Process charact-charact-eristicseristics

Maintain high Maintain high average average utilizationutilization

Invest in excess Invest in excess capacity and capacity and flexible flexible processesprocesses

Modular Modular processes that processes that lend lend themselves to themselves to mass mass customizationcustomization

Inventory Inventory charact-charact-eristicseristics

Minimize Minimize inventory inventory throughout the throughout the chain to hold chain to hold down costdown cost

Develop Develop responsive responsive system with system with buffer stocks buffer stocks positioned to positioned to ensure supplyensure supply

Minimize Minimize inventory in the inventory in the chain to avoid chain to avoid obsolescenceobsolescence







Lead-time Lead-time charact-charact-eristicseristics

Shorten lead Shorten lead time as long as time as long as it does not it does not increase costsincrease costs

Invest Invest aggressively to aggressively to reduce reduce production lead production lead timetime

Invest Invest aggressively to aggressively to reduce reduce development development lead timelead time

Product-Product-design design charact-charact-eristicseristics

Maximize Maximize performance performance and minimize and minimize costscosts

Use product Use product designs that designs that lead to low lead to low setup time and setup time and rapid rapid production production ramp-upramp-up

Use modular Use modular design to design to postpone postpone product product differentiation differentiation as long as as long as possiblepossible



Supply Chain EconomicsSupply Chain Economics

Supply Chain Costs as a Percent of SalesSupply Chain Costs as a Percent of Sales


IndustryIndustry % Purchased% Purchased

All industryAll industry 5252

AutomobileAutomobile 6767

FoodFood 6060

LumberLumber 6161

PaperPaper 5555

PetroleumPetroleum 7979

TransportationTransportation 6262


Supply Chain EconomicsSupply Chain Economics

Dollars 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 ChainPercent of Sales Spent in the Supply Chain

Percent Net ProfitPercent Net Profitof Firmof Firm 30%30% 40%40% 50%50% 60%60% 70%70% 80%80% 90%90%

22 $2.78$2.78 $3.23$3.23 $3.85$3.85 $4.76$4.76 $6.25$6.25 $9.09$9.09 $16.67$16.67

44 $2.70$2.70 $3.13$3.13 $3.70$3.70 $4.55$4.55 $5.88$5.88 $8.33$8.33 $14.29$14.29

66 $2.63$2.63 $3.03$3.03 $3.57$3.57 $4.35$4.35 $5.56$5.56 $7.69$7.69 $12.50$12.50

88 $2.56$2.56 $2.94$2.94 $3.45$3.45 $4.17$4.17 $5.26$5.26 $7.14$7.14 $11.11$11.11

1010 $2.50$2.50 $2.86$2.86 $3.33$3.33 $4.00$4.00 $5.00$5.00 $6.67$6.67 $10.00$10.00



Make-or-Buy DecisionsMake-or-Buy Decisions

1.1. Maintain core competenceMaintain core competence

2.2. Lower production costLower production cost

3.3. Unsuitable suppliersUnsuitable suppliers

4.4. Assure adequate supply (quantity or delivery)Assure adequate supply (quantity or delivery)

5.5. Utilize surplus labor or facilitiesUtilize surplus labor or facilities

6.6. Obtain desired qualityObtain desired quality

7.7. Remove supplier collusionRemove supplier collusion

8.8. Obtain unique item that would entail a prohibitive Obtain unique item that would entail a prohibitive commitment for a suppliercommitment for a supplier

9.9. Protect personnel from a layoffProtect personnel from a layoff

10.10. Protect proprietary design or qualityProtect proprietary design or quality

11.11. Increase or maintain size of companyIncrease or maintain size of company

Reasons for MakingReasons for Making



Make-or-Buy DecisionsMake-or-Buy Decisions

1.1. Frees management to deal with its core Frees management to deal with its core competencecompetence

2.2. Lower acquisition costLower acquisition cost

3.3. Preserve supplier commitmentPreserve supplier commitment

4.4. Obtain technical or management abilityObtain technical or management ability

5.5. Inadequate capacityInadequate capacity

6.6. Reduce inventory costsReduce inventory costs

7.7. Ensure alternative sourcesEnsure alternative sources

8.8. Inadequate managerial or technical resourcesInadequate managerial or technical resources

9.9. ReciprocityReciprocity

10.10. Item is protected by a patent or trade secretItem is protected by a patent or trade secret

Reasons for BuyingReasons for Buying



OutsourcingOutsourcing

Transfers traditional internal Transfers traditional internal activities and resources of a firm to activities and resources of a firm to outside vendorsoutside vendors

Utilizes the efficiency that comes Utilizes the efficiency that comes with specializationwith specialization

Firms outsource information Firms outsource information technology, accounting, legal, technology, accounting, legal, logistics, and productionlogistics, and production


Ethics in the Supply ChainEthics in the Supply Chain

Opportunities for unethical behavior Opportunities for unethical behavior are enormous and temptations are highare enormous and temptations are high

Many companies have strict rules and Many companies have strict rules and codes of conduct that define codes of conduct that define acceptable behavioracceptable behavior

Institute for Supply Management has Institute for Supply Management has developed a detailed set of principles developed a detailed set of principles and standards for ethical behaviorand standards for ethical behavior


Principles and Standards for Principles and Standards for Ethical Supply Management Ethical Supply Management

ConductConduct

LOYALTY TO YOUR ORGANIZATIONLOYALTY TO YOUR ORGANIZATION

JUSTICE TO THOSE WITH WHOM JUSTICE TO THOSE WITH WHOM YOU DEALYOU DEAL

FAITH IN YOUR PROFESSIONFAITH IN YOUR PROFESSION




ConductConduct

1.1. Avoid the intent and appearance of unethical or Avoid the intent and appearance of unethical or compromising practice in relationships, actions, and compromising practice in relationships, actions, and communicationscommunications

2.2. Demonstrate loyalty to the employer by diligently Demonstrate loyalty to the employer by diligently following the lawful instructions of the employer, using following the lawful instructions of the employer, using reasonable care and granted authorityreasonable care and granted authority

3.3. Avoid any personal business or professional activity that Avoid any personal business or professional activity that would create a conflict between personal interests and would create a conflict between personal interests and the interests of the employerthe interests of the employer




ConductConduct

4.4. Avoid soliciting or accepting money, loans, credits, or Avoid soliciting or accepting money, loans, credits, or preferential discounts, and the acceptance of gifts, preferential discounts, and the acceptance of gifts, entertainment, favors, or services from present or entertainment, favors, or services from present or potential suppliers that might influence, or appear to potential suppliers that might influence, or appear to influence, supply management decisionsinfluence, supply management decisions

5.5. Handle confidential or proprietary information with due Handle confidential or proprietary information with due care and proper consideration of ethical and legal care and proper consideration of ethical and legal ramifications and government regulationsramifications and government regulations

6.6. Promote positive supplier relationships through courtesy Promote positive supplier relationships through courtesy and impartialityand impartiality

7.7. Avoid improper reciprocal agreementsAvoid improper reciprocal agreementsTable 11.5Table 11.5



ConductConduct

8.8. Know and obey the letter and spirit of laws applicable to Know and obey the letter and spirit of laws applicable to supply managementsupply management

9.9. Encourage support for small, disadvantaged, and Encourage support for small, disadvantaged, and minority-owned businessesminority-owned businesses

10.10. Acquire and maintain professional competenceAcquire and maintain professional competence

11.11. Conduct supply management activities in accordance Conduct supply management activities in accordance with national and international laws, customs, and with national and international laws, customs, and practices, your organization’s policies, and these ethical practices, your organization’s policies, and these ethical principles and standards of conductprinciples and standards of conduct

12.12. Enhance the stature of the supply management Enhance the stature of the supply management professionprofession Table 11.5Table 11.5


Supply Chain StrategiesSupply Chain Strategies

Negotiating with many suppliersNegotiating with many suppliers

Long-term partnering with few Long-term partnering with few supplierssuppliers

Vertical integrationVertical integration

KeiretsuKeiretsu

Virtual companies that use Virtual companies that use suppliers on an as needed basissuppliers on an as needed basis


Many SuppliersMany Suppliers

Commonly used for commodity Commonly used for commodity productsproducts

Purchasing is typically based on Purchasing is typically based on priceprice

Suppliers compete with one Suppliers compete with one anotheranother

Supplier is responsible for Supplier is responsible for technology, expertise, forecasting, technology, expertise, forecasting, cost, quality, and deliverycost, quality, and delivery


Few SuppliersFew Suppliers

Buyer forms longer term Buyer forms longer term relationships with fewer suppliersrelationships with fewer suppliers

Create value through economies of Create value through economies of scale and learning curve scale and learning curve improvementsimprovements

Suppliers more willing to participate Suppliers more willing to participate in JIT programs and contribute in JIT programs and contribute design and technological expertisedesign and technological expertise

Cost of changing suppliers is hugeCost of changing suppliers is huge



Figure 11.2Figure 11.2

Raw material Raw material (suppliers)(suppliers) Iron oreIron ore SiliconSilicon FarmingFarming

Backward integration SteelSteel

Current transformation Automobiles Integrated

circuits Flour milling

Forward integration Distribution Distribution systemssystems Circuit boardsCircuit boards

Finished goods Finished goods (customers)(customers) DealersDealers

Computers Computers Watches Watches

CalculatorsCalculatorsBaked goodsBaked goods

Vertical IntegrationVertical Integration Examples of Vertical IntegrationExamples of Vertical Integration



Developing the ability to produce goods or Developing the ability to produce goods or service previously purchasedservice previously purchased

Integration may be forward, towards the Integration may be forward, towards the customer, or backward, towards supplierscustomer, or backward, towards suppliers

Can improve cost, quality, and inventory Can improve cost, quality, and inventory but requires capital, managerial skills, and but requires capital, managerial skills, and demanddemand

Risky in industries with rapid technological Risky in industries with rapid technological changechange


Keiretsu NetworksKeiretsu Networks A middle ground between few suppliers A middle ground between few suppliers

and vertical integrationand vertical integration

Supplier becomes part of the company Supplier becomes part of the company coalitioncoalition

Often provide financial support for Often provide financial support for suppliers through ownership or loanssuppliers through ownership or loans

Members expect long-term relationships Members expect long-term relationships and provide technical expertise and stable and provide technical expertise and stable deliveriesdeliveries

May extend through several levels of the May extend through several levels of the supply chainsupply chain


Virtual CompaniesVirtual Companies

Rely on a variety of supplier Rely on a variety of supplier relationships to provide services on relationships to provide services on demanddemand

Fluid organizational boundaries that Fluid organizational boundaries that allow the creation of unique enterprises allow the creation of unique enterprises to meet changing market demandsto meet changing market demands

Exceptionally lean performance, low Exceptionally lean performance, low capital investment, flexibility, and speedcapital investment, flexibility, and speed


Managing the Supply ChainManaging the Supply Chain

Mutual agreement on goalsMutual agreement on goals

TrustTrust

Compatible organizational culturesCompatible organizational cultures

There are significant management issues in There are significant management issues in controlling a supply chain involving many controlling a supply chain involving many independent organizationsindependent organizations


Issues in an Integrated Issues in an Integrated Supply ChainSupply Chain

Local optimizationLocal optimization - focusing on local - focusing on local profit or cost minimization based on profit or cost minimization based on limited knowledgelimited knowledge

Incentives (sales incentives, quantity Incentives (sales incentives, quantity discounts, quotas, and promotions)discounts, quotas, and promotions) - - push merchandise prior to salepush merchandise prior to sale

Large lotsLarge lots - low unit cost but do not - low unit cost but do not reflect salesreflect sales Bullwhip effect Bullwhip effect - stable demand becomes - stable demand becomes

lumpy orders through the supply chainlumpy orders through the supply chain


Opportunities in an Opportunities in an Integrated Supply ChainIntegrated Supply Chain

Accurate “pull” dataAccurate “pull” data

Lot size reductionLot size reduction

Single stage control of Single stage control of replenishmentreplenishment

Vendor managed inventoryVendor managed inventory

Blanket ordersBlanket orders


Opportunities in an Opportunities in an Integrated Supply ChainIntegrated Supply Chain

StandardizationStandardization

PostponementPostponement

Drop shipping and special Drop shipping and special packagingpackaging

Pass-through facilityPass-through facility

Channel assemblyChannel 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 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 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.about what’s happening on store shelves. Here’s how the system works for Proctor & Gamble’s Pampers.


E-ProcurementE-Procurement

Uses the internet to facilitate Uses the internet to facilitate purchasingpurchasing

Electronic ordering and funds Electronic ordering and funds transfertransfer Electronic data interchange (EDI)Electronic data interchange (EDI)

Advanced shipping noticeAdvanced shipping notice



Online catalogsOnline catalogs Catalogs provided by vendorsCatalogs provided by vendors

Catalogs published by Catalogs published by intermediariesintermediaries

Exchanges provided by buyersExchanges provided by buyers


Internet Trading ExchangesInternet Trading Exchanges

Health care products – ghx.comHealth care products – ghx.com

Retail goods – gnx.comRetail goods – gnx.com

Defense and aerospace products – Defense and aerospace products – exostar.comexostar.com

Food, beverage, consumer products Food, beverage, consumer products – transora.com– transora.com

Steel and metal products – Steel and metal products – metalsite.commetalsite.com

Hotels – avendra.comHotels – avendra.com



AuctionsAuctions Maintained by buyers, sellers, or Maintained by buyers, sellers, or

intermediariesintermediaries

Low barriers Low barriers to entryto entry

Increase in Increase in the potential the potential number of number of buyersbuyers



RFQsCan make requests for quotes

(RFQs) less costly

Improves supplier selection

Real-time inventory tracking


Vendor SelectionVendor Selection

Vendor evaluationVendor evaluation Critical decisionCritical decision

Find potential vendorsFind potential vendors

Determine the likelihood of them Determine the likelihood of them becoming good suppliersbecoming good suppliers

Vendor DevelopmentVendor Development TrainingTraining

Engineering and production helpEngineering and production help

Establish policies and proceduresEstablish policies and procedures


Vendor SelectionVendor Selection

NegotiationsNegotiations Cost-Based Price Model Cost-Based Price Model - supplier - supplier

opens books to purchaseropens books to purchaser

Market-Based Price ModelMarket-Based Price Model - price - price based on published, auction, or based on published, auction, or indexed priceindexed price

Competitive BiddingCompetitive Bidding - used for - used for infrequent purchases but may make infrequent purchases but may make establishing long-term relationships establishing long-term relationships difficultdifficult


Vendor EvaluationVendor Evaluation

CriteriaCriteria WeightsWeightsScores Scores

(1-5)(1-5)Weight Weight x Scorex Score

Engineering/research/innovation skillsEngineering/research/innovation skills .20.20 55 1.01.0

Production process capability Production process capability (flexibility/technical assistance)(flexibility/technical assistance)

.15.15 44 .6.6

Distribution/delivery capabilityDistribution/delivery capability .05.05 44 .2.2

Quality systems and performanceQuality systems and performance .10.10 22 .2.2

Facilities/locationFacilities/location .05.05 22 .1.1

Financial and managerial strength Financial and managerial strength (stability and cost structure)(stability and cost structure)

.15.15 44 .6.6

Information systems capability (e-Information systems capability (e-procurement, ERP)procurement, ERP)

.10.10 22 .2.2

Integrity (environmental compliance/ Integrity (environmental compliance/ ethics)ethics)

.20.20 55 1.01.0

TotalTotal 1.001.00 3.93.9


Logistics ManagementLogistics Management

Objective is to obtain efficient Objective is to obtain efficient operations through the integration operations through the integration of all material acquisition, of all material acquisition, movement, and storage activitiesmovement, and storage activities

Is a frequent candidate for Is a frequent candidate for outsourcingoutsourcing

Allows competitive advantage to Allows competitive advantage to be gained through reduced costs be gained through reduced costs and improved customer serviceand improved customer service


Distribution SystemsDistribution Systems

TruckingTrucking Moves the vast majority of Moves the vast majority of

manufactured goodsmanufactured goods

Chief advantage is flexibilityChief advantage is flexibility

RailroadsRailroads Capable of carrying large loadsCapable of carrying large loads

Little flexibility though Little flexibility though containers and piggybacking containers and piggybacking have helped with thishave helped with this



AirfreightAirfreight Fast and flexible for light loadsFast and flexible for light loads

May be expensiveMay be expensive



WaterwaysWaterways Typically used for bulky, low-Typically used for bulky, low-

value cargovalue cargo

Used when shipping cost is more Used when shipping cost is more important important than speedthan speed



PipelinesPipelines Used for transporting oil, gas, Used for transporting oil, gas,

and other chemical productsand other chemical products


Third-Party LogisticsThird-Party Logistics

Outsourcing logistics can reduce costs Outsourcing logistics can reduce costs and improve delivery reliability and and improve delivery reliability and speedspeed

Coordinate supplier inventory with Coordinate supplier inventory with delivery servicesdelivery services

May provide May provide warehousing, warehousing, assembly, testing, assembly, testing, shipping, customsshipping, customs


Cost of Shipping Cost of Shipping AlternativesAlternatives

Product in transit is a form of Product in transit is a form of inventory and has a carrying costinventory and has a carrying cost

Faster shipping is generally more Faster shipping is generally more expensive than slower shippingexpensive than slower shipping

We can evaluate the two costs to We can evaluate the two costs to better understand the trade-offbetter understand the trade-off


Cost of Shipping Cost of Shipping AlternativesAlternatives

Value of connectors = Value of connectors = $1,750.00$1,750.00Holding cost Holding cost = 40%= 40% per year per yearSecond carrier is Second carrier is 11 day faster and day faster and $20$20 more more expensiveexpensive

Daily cost of Daily cost of holding productholding product == xx /365/365

Annual Annual holding holding

costcost

Product Product valuevalue

= (.40 x $1,750)/ 365 = $1.92= (.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


Logistics, Security, and JITLogistics, Security, and JIT

Borders are becoming more open in the Borders are becoming more open in the U.S. and around the worldU.S. and around the world

Monitoring and controlling stock moving Monitoring and controlling stock moving through supply chains is more important through supply chains is more important than everthan ever

New technologies are New technologies are being developed to being developed to allow close monitoring allow close monitoring of location, storage of location, storage conditions, and conditions, and movementmovement




Typical FirmsTypical FirmsBenchmark Benchmark

FirmsFirms

Lead time (weeks)Lead time (weeks) 1515 88

Time spent placing an orderTime spent placing an order 42 42 minutesminutes 15 15 minutesminutes

Percentage of late deliveriesPercentage of late deliveries 33%33% 2%2%

Percentage of rejected materialPercentage of rejected material 1.5%1.5% .0001%.0001%

Number of shortages per yearNumber of shortages per year 400400 44



Assets committed to inventoryAssets committed to inventory

Percent Percent invested in invested in inventoryinventory

= x = x 100100Total inventory Total inventory

investmentinvestment

Total assetsTotal assets

Investment in inventory Investment in inventory = $11.4= $11.4 billion billionTotal assets Total assets = $44.4= $44.4 billion billion

Percent invested in inventory Percent invested in inventory = (11.4/44.4) x 100 = 25.7%= (11.4/44.4) x 100 = 25.7%




Inventory as a % of Total AssetsInventory as a % of Total Assets(with exceptional performance)(with exceptional performance)

ManufacturingManufacturing 20%20%(Toyota 5%)(Toyota 5%)

WholesaleWholesale 34%34%(Coca-Cola 2.9%)(Coca-Cola 2.9%)

RestaurantsRestaurants 2.9%2.9%(McDonald’s .05%)(McDonald’s .05%)

RetailRetail 27%27%(Home Depot 25.7%)(Home Depot 25.7%)



Inventory turnoverInventory turnover

Inventory Inventory turnoverturnover ==

Cost of goods soldCost of goods sold

Inventory Inventory investmentinvestment




Examples of Annual Inventory TurnoverExamples of Annual Inventory Turnover

Food, Beverage, RetailFood, Beverage, Retail ManufacturingManufacturing

Anheuser BuschAnheuser Busch 1515 Dell ComputerDell Computer 9090

Coca-ColaCoca-Cola 1414 Johnson ControlsJohnson Controls 2222

Home DepotHome Depot 55 Toyota (overall)Toyota (overall) 1313

McDonald’sMcDonald’s 112112 Nissan (assembly)Nissan (assembly) 150150




Net revenueNet revenue $32.5$32.5Cost of goods soldCost of goods sold $14.2$14.2Inventory:Inventory:

Raw material inventoryRaw material inventory $.74$.74Work-in-process inventoryWork-in-process inventory $.11$.11Finished goods inventoryFinished goods inventory $.84$.84

Total inventory investmentTotal inventory investment $1.69$1.69







Inventory turnover = Cost of goods sold

Inventory investment

= 14.2 / 1.69 = 8.4







Inventory turnover turnover = = Cost of goods sold


= 14.2 / 1.69 = 8.4= 14.2 / 1.69 = 8.4Weeks of supply =


Average weekly cost of goods sold

= 1.69 / .273 = 6.19 weeks

Average weekly cost of goods sold = $14.2 / 52 = $.273

Operations Management

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