1. 9 – 1 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Supply Chain Design 9 For Operations Management, 9e by Krajewski/Ritzman/Malhotra © 2010 Pearson Education PowerPoint Slides by Jeff Heyl

2. 9 – 2 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Supply Chain Design Total costs Supply chain performance New supply chain efficiency curve with changes in design and execution Inefficient supply chain operations Area of improved operations Figure 9.1 – Supply Chain Efficiency Curve Improve perform- ance Reduce costs

3. 9 – 3 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Supply Chain Design The goal is to reduce costs as well increase performance. Supply chains must be managed to coordinate the inputs with the outputs in a firm to achieve the appropriate competitive priorities of the firms enterprise processes. The Internet offers firms an alternative to traditional methods for managing the supply chain. A supply chain strategy is essential for service as well as manufacturing firms.

4. 9 – 4 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Supply Chains Every firm or organization is a member of some supply chain Services Provide support for the essential elements of various services the firm delivers Manufacturing Control inventory by managing the flow of materials Suppliers identified by position in supply chain – tiers Suppliers and customers

5. 9 – 5 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Home customers Home customers Commercial customers Commercial customers Flowers-on-Demand florist Packaging Flowers: Local/International Arrangement materials FedEx delivery service Local delivery service Internet service Maintenance services Supply Chains Figure 9.2 – Supply Chain for a Florist

6. 9 – 6 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. East CoastWest CoastEast EuropeWest Europe Retail USAIreland Distribution centers Manufacturer Ireland Assembly GermanyMexicoUSA Tier 1 Major subassemblies GermanyMexicoUSAChina Tier 2Components Supply Chains PolandUSACanadaAustraliaMalaysia Tier 3 Raw materials Figure 9.2 – Supply Chain for a Manufacturing Firm

7. 9 – 7 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Inventory and Supply Chains Scrap flow Inventory level Output flow of materials Input flow of materials Figure 9.4 –Creation of Inventory

8. 9 – 8 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Inventory and Supply Chains Balance the advantages and disadvantages Pressures for small inventories Inventory holding cost Cost of capital Storage and handling costs Taxes, insurance, and shrinkage

9. 9 – 9 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Inventory and Supply Chains Pressures for large inventories Customer service Ordering cost Setup cost Labor and equipment utilization Transportation cost Payments to suppliers

10. 9 – 10 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Three aggregate categories Raw materials Work-in-process Finished goods Types of Inventory Classified by how it is created Cycle inventory Safety stock inventory Anticipation inventory Pipeline inventory

11. 9 – 11 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Types of Inventory Figure 9.5 – Inventory at Successive Stocking Points

12. 9 – 12 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Cycle Inventory Lot sizing principles 1.The lot size, Q, varies directly with the elapsed time (or cycle) between orders. 2.The longer the time between orders for a given item, the greater the cycle inventory must be. Average cycle inventory = = Q + 0 2 Q2Q2

13. 9 – 13 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Cycle Inventory Pipeline inventory Average demand during lead time = D L Average demand per period = d Number of periods in the items lead time = L Pipeline inventory = D L = dL

14. 9 – 14 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Estimating Inventory Levels EXAMPLE 9.1 A plant makes monthly shipments of electric drills to a wholesaler in average lot sizes of 280 drills. The wholesalers average demand is 70 drills a week, and the lead time from the plant is 3 weeks. The wholesaler must pay for the inventory from the moment the plant makes a shipment. If the wholesaler is willing to increase its purchase quantity to 350 units, the plant will give priority to the wholesaler and guarantee a lead time of only 2 weeks. What is the effect on the wholesalers cycle and pipeline inventories?

15. 9 – 15 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Estimating Inventory Levels SOLUTION The wholesalers current cycle and pipeline inventories are Pipeline inventory = D L = dL = Cycle inventory = = Q2Q2 140 drills (70 drills/week)(3 weeks) = 210 drills

16. 9 – 16 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Estimating Inventory Levels 1.Enter the average lot size, average demand during a period, and the number of periods of lead time: 2.To compute cycle inventory, simply divide average lot size by 2. To compute pipeline inventory, multiply average demand by lead time Cycle inventory Pipeline inventory Average lot size Average demand Lead time 350 70 2 175 140

17. 9 – 17 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Inventory Reduction Tactics Cycle inventory Reduce the lot size Reduce ordering and setup costs and allow Q to be reduced Increase repeatability to eliminate the need for changeovers Safety stock inventory Place orders closer to the time when they must be received Improve demand forecasts Cut lead times Reduce supply chain uncertainty Rely more on equipment and labor buffers

18. 9 – 18 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Inventory Reduction Tactics Anticipation inventory Match demand rate with production rates Add new products with different demand cycles Provide off-season promotional campaigns Offer seasonal pricing plans Pipeline inventory Reduce lead times Find more responsive suppliers and select new carriers Change Q in those cases where the lead time depends on the lot size

19. 9 – 19 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Inventory Placement Where to locate an inventory of finished goods Use of distribution centers (DCs) Centralized placement Inventory pooling Forward placement

20. 9 – 20 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Inventory measures Measures of Supply Chain Performance Average aggregate inventory value =+ Value of each unit of item B Number of units of item B typically on hand Value of each unit of item A Number of units of item A typically on hand Weeks of supply = Average aggregate inventory value Weekly sales (at cost) Inventory turnover = Annual sales (at cost) Average aggregate inventory value

21. 9 – 21 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Calculating Inventory Measures EXAMPLE 9.2 The Eagle Machine Company averaged $2 million in inventory last year, and the cost of goods sold was $10 million. Figure 9.7 shows the breakout of raw materials, work-in-process, and finished goods inventories. The best inventory turnover in the companys industry is six turns per year. If the company has 52 business weeks per year, how many weeks of supply were held in inventory? What was the inventory turnover? What should the company do?

22. 9 – 22 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Calculating Inventory Measures Figure 9.7 –Calculating Inventory Measures Using Inventory Estimator Solver

23. 9 – 23 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Calculating Inventory Measures SOLUTION The average aggregate inventory value of $2 million translates into 10.4 weeks of supply and 5 turns per year, calculated as follows: Weeks of supply = Inventory turns = = 10.4 weeks $2 million ($10 million)/(52 weeks) = 5 turns/year $10 million $2 million

24. 9 – 24 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Application 9.1 A recent accounting statement showed total inventories (raw materials + WIP + finished goods) to be $6,821,000. This years cost of goods sold is $19.2 million. The company operates 52 weeks per year. How many weeks of supply are being held? What is the inventory turnover? Weeks of supply = Average aggregate inventory value Weekly sales (at cost) = = 18.5 weeks $6,821,000 ($19,200,000)/(52 weeks) Inventory turnover = = 2.8 turns $19,200,000 $6,821,000

25. 9 – 25 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Financial measures Total revenue Cost of goods sold Operating expenses Cash flow Working capital Return on assets Measures of Supply Chain Performance

26. 9 – 26 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Return on assets (ROA) Increase ROA with higher net income and fewer total assets Total assets Achieve the same or better performance with fewer assets Working capital Reduce working capital by reducing inventory investment, lead times, and backlogs Fixed assets Reduce the number of warehouses through improved supply chain design Net income Improve profits with greater revenue and lower costs Measures of Supply Chain Performance Total revenue Increase sales through better customer service Cost of goods sold Reduce costs of transportation and purchased materials Operating expenses Reduce fixed expenses by reducing overhead associated with supply chain operations Net cash flows Improve positive cash flows by reducing lead times and backlogs Inventory Increase inventory turnover Figure 9.8 –How Supply Chain Decisions Can Affect ROA

27. 9 – 27 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Mass Customization Competitive advantages Managing customer relationships Eliminate finished goods inventory Increased perceived value of services or products Supply chain design for mass customization Assemble-to-order strategy Modular design Postponement

28. 9 – 28 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Outsourcing Processes Make-or-buy decision Vertical integration Backward integration Forward integration Outsourcing Offshoring Benefits to outsourcing Pitfalls to outsourcing

29. 9 – 29 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Using Break-Even Analysis EXAMPLE 9.3 Thompson manufacturing produces industrial scales for the electronics industry. Management is considering outsourcing the shipping operation to a logistics provider experienced in the electronics industry. Thompsons annual fixed costs of the shipping operation are $1,500,000, which includes costs of the equipment and infrastructure for the operation. The estimated variable cost of shipping the scales with the in-house operation is $4.50 per ton-mile. If Thompson outsourced the operation to Carter Trucking, the annual fixed costs of the infrastructure and management time needed to manage the contract would be $250,000. Carter would charge $8.50 per ton-mile. What is the break-even quantity?

30. 9 – 30 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Using Break-Even Analysis SOLUTION From Supplement A, Decision Making, the formula for the break-even quantity yields Q = F m – F b c b – c m = 312,500 ton-miles = 1,500,000 – 250,000 8.50 – 4.50

31. 9 – 31 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Efficient supply chains Responsive supply chains Design of efficient and responsive supply chains Strategic Implications

32. 9 – 32 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Strategic Implications TABLE 9.1| ENVIRONMENTS BEST SUITED FOR EFFICIENT AND RESPONSIVE | SUPPLY CHAINS FactorEfficient Supply ChainsResponsive Supply Chains DemandPredictable, low forecast errorsUnpredictable, high forecast errors Competitive prioritiesLow cost, consistent quality, on-time delivery Development speed, fast delivery times, customization, volume flexibility, variety, top quality New-service/product introduction InfrequentFrequent Contribution marginsLowHigh Product varietyLowHigh

33. 9 – 33 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Strategic Implications TABLE 9.2| DESIGN FEATURES FOR EFFICIENT AND RESPONSIVE SUPPLY CHAINS FactorEfficient Supply ChainsResponsive Supply Chains Operation strategyMake-to-stock or standardized services or products; emphasize high volumes Assemble-to-order, make-to- order, or customized service or products; emphasize variety Capacity cushionLowHigh Inventory investmentLow; enable high inventory turns As needed to enable fast delivery time Lead timeShorten, but do not increase costs Shorten aggressively Supplier selectionEmphasize low prices, consistent quality, on-time delivery Emphasize fast delivery time, customization, variety, volume flexibility, top quality

34. 9 – 34 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Solved Problem 1 A distribution center experiences an average weekly demand of 50 units for one of its items. The product is valued at $650 per unit. Average inbound shipments from the factory warehouse average 350 units. Average lead time (including ordering delays and transit time) is 2 weeks. The distribution center operates 52 weeks per year; it carries a 1-week supply of inventory as safety stock and no anticipation inventory. What is the value of the average aggregate inventory being held by the distribution center?

35. 9 – 35 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Solved Problem 1 SOLUTION Type of InventoryCalculation of Average Inventory Cycle Safety stock Anticipation Pipeline 1-week supply None dL = (50 units/week)(2 weeks) Q2Q2 = 350 2 Average aggregate inventory Value of aggregate inventory = 175 units = 50 units = 100 units = 325 units = $650(325) = $211,250

36. 9 – 36 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Solved Problem 2 A firms cost of goods sold last year was $3,410,000, and the firm operates 52 weeks per year. It carries seven items in inventory: three raw materials, two work-in-process items, and two finished goods. The following table contains last years average inventory level for each item, along with its value. a.What is the average aggregate inventory value? b.How many weeks of supply does the firm maintain? c.What was the inventory turnover last year? CategoryPart Number Average Level Unit Value Raw materials115,000$ 3.00 22,5005.00 33,0001.00 Work-in-process45,00014.00 54,00018.00 Finished goods62,00048.00 71,00062.00

37. 9 – 37 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Solved Problem 2 SOLUTION a. Part NumberAverage LevelUnit ValueTotal Value 115,000 $ 3.00= 22,500 5.00= 33,000 1.00= 45,000 14.00= 54,000 18.00= 62,000 48.00= 71,000 62.00= Average aggregate inventory value=

38. 9 – 38 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Solved Problem 2 SOLUTION a. $ 45,000 12,500 3,000 70,000 72,000 96,000 62,000 $360,500 Part NumberAverage LevelUnit ValueTotal Value 115,000 $ 3.00= 22,500 5.00= 33,000 1.00= 45,000 14.00= 54,000 18.00= 62,000 48.00= 71,000 62.00= Average aggregate inventory value=

39. 9 – 39 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Solved Problem 2 b.Average weekly sales at cost = $3,410,000/52 weeks = $65,577/week Weeks of supply = Average aggregate inventory value Weekly sales (at cost) = = 5.5 weeks $360,500 $65,577 c.Inventory turnover = Annual sales (at cost) Average aggregate inventory value = = 9.5 turns $3,410,000 $360,500

40. 9 – 40 Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall.