Topic X: Sustainable

Supply Chain
Management

PowerPoint presentation to accompany

Heizer, Render, Munson
Operations Management, Twelfth Edition
Principles of Operations Management, Tenth Edition

PowerPoint slides by Jeff Heyl

Copyright © 2017 Pearson Education, Inc. 11 - 1

 Outline
► The Supply Chain’s Strategic Importance
► Sourcing Issues: Make-or-Buy and Outsourcing
► Sourcing Strategies
► Building the Supply Base
► Logistics Management
► Distribution Management
► Measuring Supply Chain Performance
► Corporate Social Responsibility
► Sustainability
► Design and Production for Sustainability
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 Supply-Chain Management

The objective of supply chain

management is to structure the
supply chain to maximize its
competitive advantage and
benefits to the ultimate consumer

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 A Supply Chain for Beer
Figure 11.1

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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
customers

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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
TABLE 11.1
Supply Chain Costs as a Percentage of Sales

Chain INDUSTRY
Automobiles
% PURCHASED
67

Costs Beverages
Chemical
52
62
Food 60
Lumber 61
Metals 65
Paper 55
Petroleum 79
Restaurants 35
Transportation 62

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 Sourcing Issues
▶ Make-or-buy decisions
▶ 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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 Sourcing Strategies
▶ Many suppliers
▶ Few suppliers
▶ Vertical integration
▶ Joint ventures

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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 may be
at risk
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 Vertical Integration
Vertical Integration Examples of Vertical Integration
Raw material
(suppliers) Tree Harvesting

Backward integration Chipmakers Pulpmaking

Current International
transformation Pepsi Apple
Paper

Forward integration Bottling Retail stores End-User Paper

Conversion

Finished goods
(customers) Figure 11.2

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 Vertical Integration
▶ Developing the ability to produce goods or
services previously purchased
▶ Integration may be forward, towards the
customer, or backward, towards suppliers
▶ Can improve cost, quality, delivery, 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
▶ The challenge is to cooperation without
diluting brand or conceding competitive
advantage

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 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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 Shipping Systems
▶ Trucking
▶ Moves the vast majority of manufactured
goods
▶ Chief advantage is flexibility
▶ Railroads
▶ Capable of carrying large loads
▶ Little flexibility though containers and
piggybacking have helped with this

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 Shipping Systems
▶ Airfreight
▶ Fast and flexible for light loads
▶ May be expensive
▶ Waterways
▶ Typically used for bulky, low-value cargo
▶ Used when shipping cost is more important
than speed

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 Shipping Systems
▶ Pipelines
▶ Used for transporting oil, gas, and other
chemical products
▶ Multimodal
▶ Combines shipping methods
▶ Common, especially in international
shipments
▶ Aided by standardized containers

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Cost and Speed of Shipments
▶ Faster shipping is generally more
expensive than slower shipping
▶ Faster methods tend to involve
smaller shipment sizes while slower
methods involve very large shipment
sizes

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 Warehousing
▶ May be expensive, but alternatives may
be more so
▶ Fundamental purpose is to store goods
▶ May provide other functions
▶ Consolidation
▶ Break-bulk
https://transportgeography.org/contents/chapte
▶ Cross-docking r7/logistics-freight-distribution/crossdocking-2/

▶ Value-added services http://www.orientallogistics.com/newo

ll04/html/eng/valueaddedservices.ht
m

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 Third-Party Logistics (3PL)
▶ Outsourcing logistics can reduce
inventory, costs, and improve delivery
reliability and speed
▶ Coordinate supplier inventory with delivery
services
▶ May provide
warehousing,
assembly, testing,
shipping, customs

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 Distribution Management
▶ The outbound flow of products
1) Rapid response
2) Product choice
3) Service
▶ Increasing the number of facilities
generally improves response time and
customer satisfaction

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 Distribution Management
▶ Total logistics costs are important
▶ Inventory costs
▶ Transportation costs
▶ Facility costs
▶ Facilities, packaging, and logistics
▶ Selection and development of dealers or
retailers
▶ Downstream management as important
as upstream management
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 Measuring Supply-Chain
Performance
▶ Assets committed to inventory
Percentage Average inventory investment
invested in = x 100
inventory Total assets

► Home Depot had $11.4b inventory,

total assets of $44.4b
Percentage 11.4
invested in = x 100 = 25.7%
inventory 44.4

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 Measuring Supply-Chain
Performance

TABLE 11.5
Inventory as Percentage of Total Assets
(with examples of exceptional performance)
Manufacturer (Toyota 5%) 15%
Wholesale (Coca-Cola 2.9%) 34%
Restaurants (McDonald’s .05%) 2.9%
Retail (Home Depot 25.7%) 27%

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 Measuring Supply-Chain
Performance
▶ Inventory turnover

Inventory Cost of goods sold

turnover = Average inventory investment

► Inventory investment
► Average of several periods

► (beginning plus ending)/2

► Ending inventory

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 Measuring Supply-Chain
Performance
▶ From PepsiCo, Inc. Annual Report
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 14.2
turnover = 1.69
= 8.4

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 Measuring Supply-Chain
Performance
TABLE 11.6 Examples of Annual Inventory Turnover
FOOD, BEVERAGE, RETAIL
Anheuser Busch 15
Coca-Cola 14
Home Depot 5
McDonald’s 112
MANUFACTURING
Dell Computer 90
Johnson controls 22
Toyota (overall) 13
Nissan (assembly) 150

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 Measuring Supply-Chain
Performance
▶ Weeks of supply
Weeks of Average inventory investment
=
supply Annual cost of goods sold
52 weeks

► For PepsiCo

Inventory investment = $1.69b

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

Weeks of supply = 1.69 / .273 = 6.19 weeks

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 Corporate Social
Responsibility
▶ How products and services affect people
and the environment
▶ Stakeholders have strong opinions about
environmental, social, and ethical issues
▶ Doing what’s right can be beneficial to all
stakeholders
▶ Corporate social responsibility (CSR)

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 Sustainability
▶ Meeting the needs of
the present without
compromising the
ability of future
generations to meet
their needs
▶ More than “going green”
▶ Includes employees, customers,
community, and company reputation
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 Systems View
▶ Looking at a product’s life from design to
disposal, including all the resources
required
▶ The product or service itself is a small
part of much larger social, economic, and
environmental systems
▶ Understanding systems allows more
informed judgments regarding
sustainability
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 Triple Bottom Line
▶ Consider the systems necessary to
support the three Ps: people, planet, and
profit

Figure S5.1

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 Triple Bottom Line
▶ Decisions affect people
▶ Globalization and outsourcing complicate
the task
▶ Supplier selection and performance
criteria are important
▶ Materials must be safe and
environmentally responsible

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 Walmart’s Objectives
1. Improving livelihoods through the creation
of productive, healthy, and safe
workplaces
2. Building strong communities through
access to affordable, high-quality
services
3. Preventing exposure to substances that
are considered harmful or toxic
4. Promoting health and wellness
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 Triple Bottom Line
▶ The planet’s environment
▶ Look for ways to reduce the
environmental impact of operations
▶ Overarching objective is to conserve
scarce resources
▶ Carbon footprint and greenhouse gas
emissions (GHG)

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 Carbon Footprint
Figure S5.2

34.5-gram Bag of
Frito-Lay Chips

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 Triple Bottom Line
▶ Social and environmental sustainability do
not exist without economic sustainability
▶ Staying in business requires making a
profit
▶ Alternate measures of success include risk
profile, intellectual property, employee
morale, and company valuation
▶ Social accounting can supplement financial
accounting to support economic
sustainability
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 Design and Production for
Sustainability
▶ Life cycle assessment valuates the
environmental impact of a product, from raw
material and energy inputs all the way to the
disposal of the product at its end-of-life
▶ The goal is to make decisions that help
reduce the environmental impact of a product
throughout its entire life
▶ The 3Rs— reduce, reuse, and recycle

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 Product Design
▶ Design decisions affect materials, quality,
cost, processes, related packaging and
logistics, and how the product will be
processed when
discarded
▶ Incorporate systems
view to lower
environmental impact
▶ Alternative materials

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 Design for Disassembly
Harmonizer

RESALE RECYCLING PROCESSING DISPOSAL

REVENUE REVENUE COST COST
PART PER UNIT PER UNIT PER UNIT PER UNIT
Printed circuit board $5.93 $1.54 $3.46 $0.00

Laminate back 0.00 0.00 4.53 1.74

Coil 8.56 5.65 6.22 0.00

Processor 9.17 2.65 3.12 0.00

Frame 0.00 0.00 2.02 1.23

Aluminum case 11.83 2.10 2.98 0.00

Total $35.49 $11.94 $22.33 $2.97

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 Design for Disassembly
Rocker

RESALE RECYCLING PROCESSING DISPOSAL

REVENUE REVENUE COST COST
PART PER UNIT PER UNIT PER UNIT PER UNIT
Printed circuit board $7.88 $3.54 $2.12 $0.00

Coil 6.67 4.56 3.32 0.00

Frame 0.00 0.00 4.87 1.97

Processor 8.45 4.65 3.43 0.00

Plastic case 0.00 0.00 4.65 3.98

Total $23.00 $12.75 $18.39 $5.95

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 Design for Disassembly
Total Total Total Total
Revenue
resale + recycling – processing – disposal
retrieval =
revenue revenue cost cost

Revenue
retrieval for = $35.49 + $11.94 – $22.33 – $2.97 = $22.13
Harmonizer

Revenue
retrieval for = $23.00 + $12.75 – $18.39 – $5.95 = $11.41
Rocker

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 Production Process
▶ Reduce the amount of resources in the
production process
▶ Energy
▶ Water
▶ Environmental contamination
▶ Reduce cost and environmental
concerns https://businessofstory.com/frito-lays-sunch
ips-is-a-brilliant-example-of-doable-green-
marketing-and-sustainability/

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 Logistics
▶ Reduce costs by achieving efficient
route and delivery networks
1. Getting shipments to customers
promptly
2. Keeping trucks busy
3. Buying inexpensive
fuel

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 Logistics

▶ Management analytics can help

▶ Evaluate equipment alternatives
▶ Life cycle ownership costs

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 Life Cycle Ownership Costs
OPERATING
COST TO COSTS PER
VEHICLE BUY FUEL EFFICIENCY MILE
Ford TriVan $28,000 Regular Unleaded 24 mpg $.20
Honda $32,000 Regular 37 mpg $.22
CityVan Unleaded/Battery
Annual distance = 22,000 miles Life = 8 years Gas price = $4.25/gallon

Total life Life cycle

Cost of Life cycle
cycle = + + operating
vehicle cost of fuel
cost cost

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 Life Cycle Ownership Costs

a) Ford TriVan

Total life-
cycle
cost

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 Life Cycle Ownership Costs

a) Honda CityVan

Total life-
cycle
cost

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 Life Cycle Ownership Costs
b) Crossover point
Total cost for Ford TriVan = Total cost for Honda CityVan

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 Life Cycle Ownership Costs
c) Crossover point

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 End-of-Life Phase
▶ What happens at the
end-of-life stage?
▶ Closed-loop supply
chains or reverse
logistics
▶ Automaker’s design incorporates
disassembly, recycling, and reuse

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