Supply-Chain

11 Management

PowerPoint presentation to accompany

Heizer and Render
Operations Management, 10e
Principles of Operations Management, 8e

PowerPoint slides by Jeff Heyl

© 2014 Pearson Education, Inc. © 2011 Pearson Education, Inc. publishing as 12 - 1

Prentice Hall
 Supply Chain Economics
Dollars of additional sales needed to equal $1 saved through the
supply chain

Percent of Sales Spent in the Supply Chain

Percent Net Profit
of Firm 30% 40% 50% 60% 70% 80% 90%
2 $2.78 $3.23 $3.85 $4.76 $6.25 $9.09 $16.67
4 $2.70 $3.13 $3.70 $4.55 $5.88 $8.33 $14.29
6 $2.63 $3.03 $3.57 $4.35 $5.56 $7.69 $12.50
8 $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
© 2014 Pearson Education, Inc. © 2011 Pearson Education, Inc. publishing as 12 - 2
Prentice Hall
 Problem 11.6
Using Table 11.4, determine the sales necessary to
equal a dollar of savings on purchases for a
company that has:

a) A net profit of 4% and spends 40% of its

revenue on purchases.
b) A net profit of 6% and spends 80% of its
revenue on purchases.

© 2014 Pearson Education, Inc. 12 - 3

 Problem 11.6
Using Table 11.4:

(a) Net profit of 4%, spends 40% of its revenue on

purchases. It will take $3.13 in sales to equal $1
saved through purchasing.
(b) Net profit of 6%, spends 80% of its revenue on
purchases. It will take $7.69 in sales to equal $1
saved through purchasing.

© 2014 Pearson Education, Inc. 12 - 4

 Vendor Evaluation
Scores Weight
Criteria Weights (1-5) x Score
Engineering/research/innovation skills .20 5 1.0
Production process capability .15 4 .6
(flexibility/technical assistance)
Distribution/delivery capability .05 4 .2
Quality systems and performance .10 2 .2
Facilities/location .05 2 .1
Financial and managerial strength .15 4 .6
(stability and cost structure)
Information systems capability (e- .10 2 .2
procurement, ERP)
Integrity (environmental compliance/ .20 5 1.0
ethics)
Total 1.00 3.9
© 2014 Pearson Education, Inc. © 2011 Pearson Education, Inc. publishing as 12 - 5
Prentice Hall
 Problem 11.2
As purchasing agent for Woolsey Enterprises in Golden, Colorado, you ask
your buyer to provide you with a ranking of “excellent,” “good,” “fair,” or “poor”
for a variety of characteristics for two potential vendors. You suggest that
“Products” total be weighted 40% and the other three categories’ totals be
weighted 20% each. The buyer has returned the following ranking:

Which of the two vendors would you select?

© 2014 Pearson Education, Inc. 12 - 6
 Problem 11.2

© 2014 Pearson Education, Inc. 12 - 7

 Problem 11.2

© 2014 Pearson Education, Inc. 12 - 8

 Cost of Shipping
Alternatives
Value of connectors = $1,750.00
Holding cost = 40% per year
Second carrier is 1 day faster and $20 more expensive

Annual
Daily cost of holding holding Product
product = x value /365
cost

= (.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

© 2014 Pearson Education, Inc. © 2011 Pearson Education, Inc. publishing as 12 - 9

Prentice Hall
 Problem 11.10
Monczka-Trent Shipping is the logistics vendor for Handfield
Manufacturing Co, in Ohio. Handfield has daily shipments of a power-
steering pump from its Ohio plant to an auto assembly line in Alabama.
The value of the standard shipment is $250,000. Monczka-Trent has
two options: (1) its standard 2-day shipment or (2) a subcontractor who
will team drive overnight with an effective delivery of 1 day. The extra
driver costs $175. Handfields's holding cost is 35% annually for this
kind of inventory.

a) Which option is most economical?

b.) What production issues are not included in the data presented
above?

© 2014 Pearson Education, Inc. 12 - 10

 Problem 11.10
(a) Daily holding cost = (Annual holding cost  Cost)/Days in year
= (.35  $250,000)/365 = $239.73.
Difference in cost per day between shipping options = $175.
Since the daily holding cost ($239.73) is more than
the cost of faster shipping ($175), use the faster
subcontractor.

(b) Implications of added in-transit time to the production process:

potential delay in activity for which the component is destined (new
product development, quality test, the production process, etc.).

© 2014 Pearson Education, Inc. 12 - 11

 Measuring Supply-Chain
Performance
 Assets committed to inventory

Percent Total inventory

invested in = investment x 100
inventory 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%

© 2014 Pearson Education, Inc. © 2011 Pearson Education, Inc. publishing as 12 - 12
Prentice Hall
 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

© 2014 Pearson Education, Inc. © 2011 Pearson Education, Inc. publishing as 12 - 13

Prentice Hall
 Measuring Supply-Chain
Performance
 Inventory turnover
Cost of goods sold
Inventory
turnover = Inventory
investment

© 2014 Pearson Education, Inc. © 2011 Pearson Education, Inc. publishing as 12 - 14

Prentice Hall
 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

© 2014 Pearson Education, Inc. © 2011 Pearson Education, Inc. publishing as 12 - 15

Prentice Hall
 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

© 2014 Pearson Education, Inc. © 2011 Pearson Education, Inc. publishing as 12 - 16

Prentice Hall
 Measuring Supply-Chain
Performance
 Inventory turnover

Net revenue $32.5

Cost of goods sold
Cost of goods
Inventory sold =
turnover $14.2
Inventory: Inventory investment
Raw material inventory $.74
= 14.2 / 1.69$.11
Work-in-process inventory = 8.4
Finished goods inventory $.84
Total inventory investment $1.69

© 2014 Pearson Education, Inc. © 2011 Pearson Education, Inc. publishing as 12 - 17

Prentice Hall
 Measuring Supply-Chain
Performance
 Inventory turnover

Net revenue $32.5

Cost of goods sold
Cost of goods
Average
Inventory sold =
weekly
turnover $14.2
= $14.2 /investment
cost of goods soldInventory 52 = $.273
Inventory:
Raw material inventory $.74
= 14.2 / 1.69$.11
Inventory
Work-in-process inventory = 8.4
investment
Weeks of supply =
Average weekly
Finished goods inventory $.84 cost of
Total inventory investment goods sold $1.69
= 1.69 / .273 = 6.19 weeks

© 2014 Pearson Education, Inc. © 2011 Pearson Education, Inc. publishing as 12 - 18

Prentice Hall
 Problem 11.12
Arrow Distributing Corp. likes to track inventory by using
weeks of supply as well as by inventory turnover.
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?

Arrow Distribution Corp.

Net Revenue 16,500 $
Cost of Sales 13,500 $
Merchandise Inventory 1,000 $
Total Assets 8,600 $
© 2014 Pearson Education, Inc. 12 - 19
 Problem 11.12

© 2014 Pearson Education, Inc. 12 - 20