LSCM-4400 Supply-Chain Management The Strategic Importance of the Supply Chain Supply-chain management is the integration of the activities that procure materials and services, transform them into intermediate goods and the final product, and deliver them to customers Competition is no longer between companies; it is between supply chains SCM vs Traditional Purchasing • Traditional purchasing focuses on initial cost; SCM focuses on total cost of ownership • Traditional purchasing tries to negotiate the price that is best for the purchaser; SCM focuses on negotiating a price that is best for the entire supply chain. Traditional View: Cost breakdown of a manufactured good • Profit 10% • Supply Chain Cost 20% • Marketing Cost 25% • Manufacturing Cost 45% Profit Supply Chain Cost Marketing Cost Manufacturing Cost Effort spent for supply chain activities are invisible to the customers. What can Supply Chain Management do? • Estimated that the grocery industry could save $30 billion (10% of operating cost) by using effective logistics and supply chain strategies • A typical box of cereal spends 104 days from factory to sale • A typical car spends 15 days from factory to dealership • Faster turnaround of the goods is better? • Laura Ashley (retailer of women and children clothes) turns its inventory 10 times a year five times faster than 3 years ago • inventory is emptied 10 times a year, or an item spends about 12/10 months in the inventory. • To be responsive, it relocated its main warehouse next to FedEx hub in Memphis, TE. • National Semiconductor used air transportation and closed 6 warehouses, 34% increase in sales and 47% decrease in delivery lead time. Magnitude of Supply Chain Management • Compaq estimates it lost $0.5 B to $1 B in sales because laptops were not available when and where needed • P&G (Proctor&Gamble) estimates it saved retail customers $65 M (in 18 months) by collaboration resulting in a better match of supply and demand • When the 1 gig processor was introduced by AMD (Advanced Micro Devices), the price of the 800 meg processor dropped by 30% SCM Generated Value Minimizing supply chain costs while keeping a reasonable service level customer satisfaction/quality/on time delivery, etc. This is how SCM contributes to the bottom line SCM is not strictly a cost reduction paradigm! A picture is better than 1000 words! How many words would be better than 3 pictures? - A supply chain consists of Supplier Manufacturer Distributor Upstream Retailer Customer Downstream - aims to Match Supply and Demand, profitably for products and services SUPPLY SIDE DEMAND SIDE - achieves The right Product + + + + + = The right The right The right The right The right Higher Price Store Quantity Customer Time Profits Supply Chain Flows Material Flow Initial supplier Ultimate customer Information Flow There must be a good inter-organizational information provide the required information flow. Detergent supply chain: P&G or other manufacturer Third party DC Plastic cup Producer Tenneco Packaging Chemical manufacturer (e.g. Oil Company) Paper Manufacturer Albertson’s Supermarket Customer wants detergent Chemical manufacturer (e.g. Oil Company) Timber Industry Flows in a Supply Chain Material Information Supplier Customer Funds The flows resemble a chain reaction. SCM in a Supply Network Supply Chain Management (SCM) is concerned with the management and control of the flows of material, information, and finances in supply chains. Cash Products and Services Information THAILAND INDIA N-Tier Suppliers Suppliers Supply Side MEXICO Logistics TEXAS Distributors OEM US Retailers Demand Side Demand Supply The task of SCM is to design, plan, and execute the activities at the different stages so as to provide the desired levels of service to supply chain customers profitably Importance of Supply Chain Management In 2000, the US companies spent $1 trillion (10% of GNP) on supply-related activities (movement, storage, and control of products across supply chains). Source: State of Logistics Report Frequent Supply shortages Low order fill rates Inefficient logistics Tier 1 Supplier Glitch-Wrong Material, Machine is Down – effect snowballs Manufacturer Distributor High inventories through the chain Retailer Ineffective promotions Customer High stockouts High landed costs to the shelf Eliminating inefficiencies in supply chains can save millions of $. Supply Chain Focus • Traditional purchasing focuses on the flow of goods and information from the immediate supplier and immediate customer; SCM focuses on the flow of goods and information from initial supplier to ultimate customer. SCM Strategy Mission-Strategy-Tactics-Decisions Mission, – Mission statement The reason for existence of an organization Strategy – A plan for achieving organizational goals Tactics – The actions taken to accomplish strategies Operational decisions – Day to day decisions to support tactics utdallas.edu/~metin 17 Life Strategy for Ted Ted is an undergrad. He would like to have a career in business, have a good job, and earn enough income to live comfortably Mission: Goal: Strategy: Tactics: Operations: utdallas.edu/~metin Live a good life Successful career, good income Obtain a master’s degree Select a college and a concentration Register, buy books, take courses, study, graduate, get a job 18 Linking SC and Business Strategy Competitive (Business) Strategy Product Development Strategy Marketing Strategy -Portfolio of products -Frequent discounts -Timing of product introductions Supply Chain Strategy -Coupons New Product Development Marketing And Sales Operations Distribution Service Finance, Accounting, Information Technology, Human Resources utdallas.edu/~metin 19 Strategies: Product Development It relates to Technologies for future operations (via patents) and Set of products/services Be the technology leader IBM workstations Offer many products Dell computers Offer products for locals Tata’s Nano at $2500=100000 rupees Production at Singur, West Bengal, India; l x w x h=3.1 x 1.5 x 1.6 meters; Top speed: 105km/hr; Engine volume 623 cc; Mileage 50 miles/gallon; Annual sales target 200,000. utdallas.edu/~metin 20 Strategies Marketing and sales strategy relates to positioning, pricing and promotion of products/services – e.g. Never offer more than 40% discount – e.g. EDLP = every day low price » At Wal-Mart – e.g. Demand smoothing via coupons » BestBuy Supply chain management strategy relates to procurement, transportation, storage and delivery – e.g. Never use more than 1 supplier for every input – e.g. Never expedite orders just because they are late – e.g. Always use domestic suppliers within the sales season not in advance. utdallas.edu/~metin 21 Fitting the SC to the customer or vice versa? Understand the customer Wishes Understand the Capabilities of your SC Match the Wishes with the Capabilities Challenge: utdallas.edu/~metin How to meet extensive Wishes with limited Capabilities? 22 Achieving Strategic Fit: Consistent SCM and Competitive strategies Fit SC to the customer Understanding – – – – – – – utdallas.edu/~metin the Customer Range of demand, pizza hut stable Production lot size, seasonal products Response time, organ transplantation Service level, product availability Product variety Innovation Accommodating poor quality Implied (Demand) Uncertainty for SC Implied trouble for SC 23 Contributors to Implied Demand Uncertainty Commodities Detergent Long lead time steel Customized products High Fashion Clothing Emergency steel, for maintenance/replacement Price Low Customer Need Implied Demand Uncertainty Responsiveness High Short lead times, product variety, distribution channel variety, high rate of innovation and high customer service levels all increase the Implied Demand Uncertainty utdallas.edu/~metin 24 Understanding the Supply Chain: Cost-Responsiveness Tradeoff Responsiveness (in time, high service level and product variety) High Efficiency frontier Fix responsiveness Inefficient Impossible Inefficiency Region Low High Low Cost in $ Why decreasing slope (concave) for the efficiency frontier? utdallas.edu/~metin 25 Achieving Strategic Fit: Wishes vs. Capabilities Responsive (high cost) supply chain Gourmet dinner <High margin> Responsivenes spectrum Efficient (low cost) supply chain utdallas.edu/~metin Lunch buffet <Low margin> Certain demand Implied uncertainty spectrum Uncertain demand 26 Loosing the strategic fit: Webvan Webvan started a merger with HomeGrocer in Sept 2000 and completed in May 2001. Declared bankruptcy in July 2001. Why? – “Webvan was so behemoth that could deliver anything to anyone anywhere that it lost sight of a more mundane task: pleasing grocery customers day after day”. – Short to midterm cash mismanagement. Venture capital of $1.2 B run out. – Merger costs: duplicated work force, integration of technology, realignment of facilities. Peapod has the same business model but more focused in terms of service and locations. It actually survives with its parent company Royal Ahold’s (Dutch Retailer) cash. – Delivers now at a fee of $6.95 within a day. utdallas.edu/~metin 27 Top 10 Retailers Reported in 2008 – First 4 utdallas.edu/~metin Source www.deloitte.com/dtt/cda/doc/content/dtt_2008globalpowersofretailing.pdf 28 Top 10 Retailers Reported in 2008 – First 5-10 utdallas.edu/~metin 29 Big retailers’ Strategy Wal-Mart: Efficiency Target: More quality and service Carrefour: International, ambiance K-Mart: Confused. – Squeezed between Target and Wal-Mart – Reliance on coupon sales – Do coupons stabilize or destabilize a Supply chain? K-Mart and Sears merged in November 2004. Now called Sears Holdings. » K-Mart gets cash » Sears gets presence outside malls utdallas.edu/~metin 30 Other Factors Multiple products in a SC. Multiple customers for a given product – Separate supply chains or Tailored supply chains » e.g. Barnes and Noble: Retailing and/or e-tailing – Product and/or customer classes » e.g. UTD library loans books for 6 months (2 weeks) to faculty (students) » Customer segmentation by pricing Competitors: more, faster and global » UTD online programs compete globally Product life cycle (shortening) – SCM strategy moves toward efficiency and low implied uncertainty as products age » e.g. Air travel is becoming more efficient e.g. Southwest airlines lead the drive for efficiency e.g. Airbus announced A380 accommodating 555-800 people on Jan 17, 2005. » e.g. Flat screen TV producer of AU Optronics of Taiwan was looking for ways to make its SC more efficient in June 2004. – Replacement sales » Selling to replace broken units. e.g. AC replacement is about 50% of the market. – Macroeconomic factors for visibility » Forecasting Home Depot sales from S&P 500 price index. utdallas.edu/~metin Positive correlation is detected. 31 Achieving Strategic Fit over a Lifecycle Responsive (high cost) supply chain Efficient (low cost) supply chain utdallas.edu/~metin Certain demand Uncertain demand 32 Integration Integration is the central theme in SCM Building synergies by integrating business functions, departments and companies utdallas.edu/~metin 33 Strategic Scope Suppliers Manufacturer Distributor Retailer Customer Competitive Strategy Product Dev. Strategy Supply Chain Strategy Marketing Strategy utdallas.edu/~metin 34 Supply Chain Drivers and Obstacles utdallas.edu/~metin 35 Drivers of Supply Chain Performance How to achieve Efficiency Responsiveness Supply chain structure Inventory Information utdallas.edu/~metin Transportation Sourcing Facilities Pricing Logistical Drivers CrossFunctional Drivers 36 1. Inventory Convenience: Cycle inventory – No customer buys eggs one by one Unstable demand: Seasonal inventory – Bathing suits – Xmas toys and computer sales Randomness: Safety inventory – 20% more syllabi than the class size were available in the first class – Compaq’s loss in 95 Pipeline inventory – Work in process or transit utdallas.edu/~metin 37 Little’s law Long run averages = Expected values I=R.T I=Pipeline inventory; R=output per time=throughput; T=delay time=flow time 10/minute Spend 1 minute Flow time? Thruput? Pipeline (work in process) Inventory? utdallas.edu/~metin 38 2. Transportation Air Truck Rail Ship Pipeline Electronic utdallas.edu/~metin 39 3. Facilities Production – Flexible vs. Dedicated – Flexibility costs » Production: For instance, BMW: “a sports car disguised as a sedan” » Service: Can your instructor teach music as well as SCM? » Sports: A playmaker who shoots well is rare. Inventory-like operations: Receiving, Prepackaging, Storing, Picking, Packaging, Sorting, Accumulating, Shipping – Job Lot Storage: Need more space. Reticle storage in fabs. – Crossdocking: Wal-Mart utdallas.edu/~metin 40 4. Information Role in the supply chain – The connection between the various stages in the supply chain – Crucial to daily operation of each stage in a supply chain » E.g., production scheduling, inventory levels Role in the competitive strategy – Allows supply chain to become more efficient and more responsive at the same time (reduces the need for a trade-off) – Information technology » Andersen Windows utdallas.edu/~metin Wood window manufacturer, whose customers can choose from a library of 50,000 designs or create their own. Customer orders automatically sent to the factory. 41 Characteristics of the Good Information Information Global Scope Strategy Coordinated Decisions Supply Chain Success Analytical Models $$$ Information Accurate? Accessible? Up-to-date? In the Correct form? » If not, database restricted ability. How difficult is it to import data into SAP? utdallas.edu/~metin 42 Quality of Information Information drives the decisions: – Good information means good decisions IT helps: MRP, ERP, SAP, EDI Relevant information? How to use information? utdallas.edu/~metin 43 Information Technology in a Supply Chain: Legacy Systems Strategic Planning Operational Supplier utdallas.edu/~metin Manufacturer Distributor Retailer Customer 44 Information Technology in a Supply Chain: ERP Systems Strategic Planning Potential ERP Operational Supplier utdallas.edu/~metin Potential ERP Manufacturer ERP Distributor Retailer Customer 45 Information Technology in a Supply Chain: Analytical Applications Strategic SCM APS Planning Transport & Inventory Planning Supplier Apps MES Operational Supplier utdallas.edu/~metin Manufacturer Transport execution & WMS Distributor Retailer Dem Plan CRM/SFA Customer 46 ERP Systems Wider focus Push (MRP) versus Pull (demand information transmitted quickly throughout the supply chain) Real-time information Coordination and Information sharing Transactional IT Expensive and difficult to implement – About 25% of ERP installations are cancelled within a year – About 70% of ERP installations go over the budget utdallas.edu/~metin 47 IT Push 500 400 300 200 100 0 1965 1973 1981 1989 1997 IT investment($B) utdallas.edu/~metin 48 5. Sourcing Role in the supply chain – Set of processes required to purchase goods and services in a supply chain – Supplier selection, single vs. multiple suppliers, contract negotiation Role in the competitive strategy – Sourcing is crucial. It affects efficiency and responsiveness in a supply chain – In-house vs. outsource decisions- improving efficiency and responsiveness » TI: More than half of the revenue spent for sourcing. » Cisco sources: Low-end products (e.g. home routers) from China. Components of sourcing decisions – In-house versus outsource decisions – Supplier evaluation and selection – Procurement process: » Every department of a firm buy from suppliers independently, or all together. utdallas.edu/~metin EDS to reduce the number of officers with purchasing authorization. 49 6. Pricing Role in the supply chain – Pricing determines the amount to charge customers in a supply chain – Pricing strategies can be used to match demand and supply » Price elasticity: Do you know yours? Role in the competitive strategy – Use pricing strategies to improve efficiency and responsiveness – Low price and low product availability; vary prices by response times » Amazon: Faster delivery is more expensive Components of pricing decisions – Pricing and economies of scale – Everyday low pricing versus high-low pricing – Fixed price versus menu pricing, depending on the product and services utdallas.edu/~metin » Packaging, delivery location, time, customer pick up » Bundling products; products and services 50 Considerations for Supply Chain Drivers Driver Efficiency Responsiveness Inventory Cost of holding Availability Transportation Consolidation Speed Facilities Sourcing Consolidation / Dedicated Low cost/slow/no duplication Low cost sources Proximity / Flexibility High cost/ streamlined/reliable Responsive sources Pricing Constant price Low-high price Information utdallas.edu/~metin 51 Major Obstacles to Achieving Fit SC – – – – is big: Variety of products/services Spoiled customer Multiple owners (Procurement, Production, Inventory, Marketing) / multiple objectives Globalization Local optimization and lack of global fit utdallas.edu/~metin 52 Major Obstacles to Achieving Fit Dealing with Multiple Owners / Local Optimization – Information Coordination » Information sharing / Shyness / Legal and ethical issues – Contractual Coordination » Mechanisms to align local objectives with global ones – Coordination with (real) options » Rare in the practice – Without coordination, misleading reliance on metrics: » Average safety inventory, Average incoming shipment size, Average purchase price of raw materials, Revenue utdallas.edu/~metin 53 Major obstacles to achieving fit Instability – – – – and Randomness: Increasing product variety Shrinking product life cycles Customer fragmentation: Push for customization, segmentation Fragmentation of Supply Chain ownership: Globalization Increasing implied uncertainty utdallas.edu/~metin 54 Common problems Lack of relevant SCM metrics: How to measure responsiveness? » How to measure efficiency, costs, worker performance, etc? Poor inventory status information » Theft: Major problem for furniture retailers. » Transaction errors: Retailers with inaccurate inventory records for 65% of SKUs » Information delays, dated information, incompatible info. systems » Misplaced inventory: 16% of items cannot be found at a major retailer » Spoilage: active ingredients in the products are losing their properties » Product quality and yield » Lack of visibility in SCs utdallas.edu/~metin Do you know the inventory your distribution centers hold? Do you know the inventory your fellow retailer holds? 55 Common problems Poor delivery status information » Not knowing the order status Poor IT design » Unreliable, duplicate data » Security problems: too much or too little Ignoring uncertainties – “The flight from uncertainty and ambiguity is so motivated that we often create pseudocertainty.” – Nitin Nohra, HBR February 2006 issue, p.40. Internal customer discrimination » Giving lower priority to internal customers than external customers Poor integration Elusive inventory costs » Accounting systems do not capture opportunity costs utdallas.edu/~metin SC-insensitive product design 56 Supply-Chain Economics Supply Chain Costs as a Percent of Sales Industry All industry Automobile Food Lumber Paper Petroleum Transportation % Purchased 52 67 60 61 55 79 62 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 2 4 6 8 10 40% $3.23 $3.13 $3.03 $2.94 $2.86 50% $3.85 $3.70 $3.57 $3.45 $3.33 60% $4.76 $4.55 $4.35 $4.17 $4.00 70% $6.25 $5.88 $5.56 $5.26 $5.00 80% $9.09 $8.33 $7.69 $7.14 $6.67 90% $16.67 $14.29 $12.50 $11.11 $10.00 Ethics in the Supply Chain Opportunities for unethical behavior are enormous and temptations are high Many companies have strict rules and codes of conduct that define acceptable behavior Institute for Supply Management (ISM) has developed a detailed set of principles and standards for ethical behavior Principles and Standards for Ethical Supply Management Conduct 1. Avoid the intent and appearance of unethical or compromising practice in relationships, actions, and communications 2. Demonstrate loyalty to the employer by diligently following the lawful instructions of the employer, using reasonable care and granted authority 3. Avoid any personal business or professional activity that would create a conflict between personal interests and the interests of the employer Principles and Standards for Ethical Supply Management Conduct 4. Avoid soliciting or accepting money, loans, credits, or preferential discounts, and the acceptance of gifts, entertainment, favors, or services from present or potential suppliers that might influence, or appear to influence, supply management decisions 5. Handle confidential or proprietary information with due care and proper consideration of ethical and legal ramifications and government regulations 6. Promote positive supplier relationships through courtesy and impartiality 7. Avoid improper reciprocal agreements Principles and Standards for Ethical Supply Management Conduct 8. Know and obey the letter and spirit of laws applicable to supply management 9. Encourage support for small, disadvantaged, and minorityowned businesses 10. Acquire and maintain professional competence 11. Conduct supply management activities in accordance with national and international laws, customs, and practices, your organization’s policies, and these ethical principles and standards of conduct 12. Enhance the stature of the supply management profession Managing the Supply Chain There are significant management issues in controlling a supply chain involving many independent organizations Mutual agreement on goals Trust Compatible organizational cultures Radio Frequency Tags Vendor Selection Vendor evaluation Critical decision Find potential vendors Determine the likelihood of them becoming good suppliers Vendor Development Training Engineering and production help Establish policies and procedures Vendor Selection Negotiations Cost-Based Price Model - supplier opens books to purchaser Market-Based Price Model - price based on published, auction, or indexed price Competitive Bidding - used for infrequent purchases but may make establishing long-term relationships difficult Vendor Evaluation Weights Scores (1-5) Weight x Score Engineering/research/innovation skills .20 5 1.0 Production process capability (flexibility/technical assistance) .15 4 .6 Distribution/delivery capability .05 4 .2 Quality systems and performance .10 2 .2 Facilities/location .05 2 .1 Financial and managerial strength (stability and cost structure) .15 4 .6 Information systems capability (ecommerce, Internet) .10 2 .2 Integrity (environmental compliance/ ethics) .20 5 1.0 Criteria Total 1.00 3.9 Benchmarking Supply-Chain Management Typical Firms Benchmark Firms 3.3% .8% 15 8 Time spent placing an order 42 minutes 15 minutes Percentage of late deliveries 33% 2% Percentage of rejected material 1.5% .0001% 400 4 Administrative costs as a percent of purchases Lead time (weeks) Number of shortages per year Corporate Social Responsibility Going Green? Social and environmental practices in procurement and purchasing Social and environmental practices in production Social and environmental practices in distribution and transportation Social and environmental practices in packaging Social and environmental practices in warehousing What about? Reverse supply chain management CSR • Corporate Social Responsibility (CSR) can be defined as companies’ voluntary integration of social and environmental concerns in their business processes and in their relationships with other companies and stakeholders. As companies successfully adopt social and environmental practices, they can achieve economic benefits by reducing costs, increasing productivity and profits, and enhancing corporate image and reputation. However, for supply chains to be successful in terms of CSR, companies, including all suppliers and manufacturers in the chain, need to increase their own awareness and act in a socially and environmentally responsible manner. Moreover, they are obliged to comply with environmental laws and regulations, meet national and international standards, and integrate CSR practices into their business processes. • Is there a downside? CSR • Seuring and Muller (2008) proposed four key factors to increase the success of CSR implementation across the supply chains: • (1) Determine pressures and incentives for CSR applications across supply chains • (2) Identify and measure the impact of those applications • (3) Address and manage different issues at the supplier-buyer interface • (4) Manage, implement, and integrate CSR applications into all business processes of all actors, taking into consideration the whole product life cycle Corporate Social Responsibility • Corporate social responsibility (CSR) clearly has increased in importance during the past years. • Since suppliers are an important part of the company's value chain today, supplier relationships have become an important focus area of sustainability programs. • The basic idea behind CSR is to meet the needs of current generations without sacrificing the resources for future generations Business principles and procurement • Global sourcing is broadly developed • Regulation regarding labor and environment is often limited • Consumers do not accept atrocities or incompetence in the production • How can purchasers contribute to sustainability? • Companies draw up principles that form a context for doing business • Respecting international law, fair competition, integrity Sustainability: ‘People, Planet, Profit’ • Sustainability - Corporate Social Responsibility • Finding solutions without harming the needs of future generations • Focus from shareholder to stakeholders: • People: Labor circumstances • Planet: Usage of natural resources • Profit: Financial development • Weigh decisions based on these three criteria Carroll’s Pyramid of corporate social Responsibility Philanthropic responsibilities Be a good corporate citizen Ethical responsibilities Be ethical Legal responsibilities Obey the law Economic responsibilities Be profitable Carroll, 1991 Sustainable Purchasing • Suppliers form an important source of competitive ability • Suppliers also form risks considering sustainability • Companies like Philips are busy considering these issues • • • • Developing a standard Self-assessment and audit Plan of action with corrective measures Suppliers are willing to cooperate • Continuing this approach from first tier to second tier suppliers is still a long way to go Self assessment supplier sustainability Answer options Score on Performance/Implementation yes/no/NA 1: Failures do exist ; Implementation: beginner stage / just started 2: Failures potentially exist; Implementation: work in progress, > 50% completed 3: Failures do not exist; Fully Implemented 9.1 GENERAL 9.1.1 Has the top management of your company laid down and signed-off policies covering at least Environment, Health and Safety, Child Labour, Forced Labour, Discrimination, Compensation and Work Hours and which are in compliance with all applicable local laws and regulations? 9.1.2 Does your company make sure that these policies are communicated to and understood by every employee ? Does your company make sure in a structural way that these rules are known and respected by its own supply base and subcontractors. 9.1.3 9.2 Environment Does your company have an environmental strategy/policy in place? 9.2.1 9.2.3 Is your company ISO 14001 certified? If no, does your company have an Environmental Management System equivalent to ISO 14001? Does your company produce an annual environmental report and is a copy provided to their customers? Does your company currently do business with a Philips Product Division? If yes, does your company fully comply with the environmental banned and relevant substance lists appropriate to the Philips Product Division you supply? Does your company consider reduction of environmental impact during the product creation process ? www.philips.com Self assessment supplier sustainability Answer options Score on Performance/Implementation yes/no/NA 1: Failures do exist ; Implementation: beginner stage / just started 2: Failures potentially exist; Implementation: work in progress, > 50% completed 3: Failures do not exist; Fully Implemented 9.3 HEALTH AND SAFETY 9.3.1. Is there a written safety and health policy available signed-off by Top Management and communicated, in which is laid down how to protect the health and safety of the employees and contract labour and minimize any adverse effect on the environment? 9.3.2 Does your company provide appropriate training to ensure that employees and managers are aware of their own responsibility for the health and safety of themselves and others and that they have adequate competence on occupational health, safety and environmental matters? 9.3.4 Is a fire prevention system in place that is compliant with local applicable regulations and company insurance clauses. Does the system cover the whole company and its annexes, tested and is in perfect working conditions. 9.4 CHILD LABOUR 9.4.1 9.4.2 Are written policies and procedures in place to prevent the use of child labour and to implement programs and procedures to the transition of any child found to be performing child labour? Does the youngest age of workers comply with legal requirements and according to convention 138 of the International Labour organization? 9.5 FORCED LABOUR 9.5.1 Are written policies and procedures in place to prevent forced and compulsory labour and are these in compliance with applicable legal requirements? www.philips.com Self assessment supplier sustainability Answer options Score on Performance/Implementation yes/no/NA 1: Failures do exist ; Implementation: beginner stage / just started 2: Failures potentially exist; Implementation: work in progress, > 50% completed 3: Failures do not exist; Fully Implemented 9.5.3 Is voluntary presence of employees fully respected and not forced in any way and at any moment against their own will ? 9.6 COLLECTIVE BARGAINING AND RIGHT TO ORGANIZE 9.6.1 9.6.2 9.6.3 Does your company respects the right of all personnel to form and join trade unions of their choice and to bargain collectively in accordance with ILO C98? Does your company acknowledge unions in discussions of labour conditions? Does your company, in those situations in which the right to freedom of association and collective bargaining are restricted under law, facilitate the development of parallel means of independent and free association and bargaining for all personnel? 9.7 DISCRIMINATION 9.7.1 9.7.2 Are written policies and procedures in place to ensure equal opportunities or eliminate/ avoid discrimination? (e.g. gender, race, religion, ethnic minority, sexual orientation, disability) Does your company make sure that each employee receives and understands all applicable rules with respect to non-discrimination ? Such as: race, color, sex, age, language, religion, political or other opinion national or social origin, property, birth or other status. www.philips.com Trust, integrity and ethics • As companies become more dependent on each other, trust becomes more important. • In a research project by the Centre of Advanced Purchasing Studies (CAPS) it was found that real partnerships among the over 300 companies that were investigated were less than 1% of the total number of supplier relationships. • Purchasing is sensitive for ethical issues through contacts with suppliers • Code of conduct • Increasing importance because of e-auctions • NEVI’s code of conduct Building trust in supplier relations Leadership Business integrity/ organization behavior Skills and competence/knowledge and management Principles/ethics Creativity Trustworthiness competence Trust Supply chain excellence Types of Capital Fixed capital is used to acquire non-current assets for the firm, whereas working capital is used for short-term finance. Fixed capital includes the assets or investments needed to start and maintain a business, like property or equipment. Working capital is the cash or other liquid assets that a business uses to cover daily operations, like meeting payroll and paying bills Working Capital Managing Operational Working Capital Raw and Direct Materials + Work-in-Process + Finished Goods + Accounts Receivable - Accounts Payable Receive materials from suppliers on a justin-time basis Use efficient layout and work cells in a make-to-order environment to keep WIP to a minimum Bypass storage and ship finished goods directly to customers Receive payment quickly for products before paying suppliers for materials Stretch payment terms with suppliers to 30-90 days = Operational Working Capital J. Ross Publishing WAV™ material 92 By Robert J. Trent, Ph.D. Financial Analysis Using Financial Performance Metrics 97 Supply Chain Financial Management By Robert J. Trent, Ph.D. Financial Performance Metrics • • • • • Also called “Financial Ratios” Provide a relative basis for comparison Thousands of potential metrics exist • Involves one number divided by another number • Must be meaningful Applicable to historical information as well as plan and outlook projections Supports trend analysis by examining multiple years of data 98 Supply Chain Financial Management Financial Ratio Analysis Supplier Financial Analysis Do it when? Why do it? Supply Chain Financial Management • For new suppliers • For purchase requirements involving significant dollars • For critical items • When pursuing longer-term agreements • To manage business risk • To eliminate marginal suppliers early in the evaluation process By Robert J. Trent, Ph.D. 99 Financial Ratio Analysis Sources of Supplier Financial Information Company-published annual reports Company-supplied 10-K and 10-Q reports Dun and Bradstreet reports TRW credit reports Trade and business journals Supplier provided data Supply Chain Financial Management By Robert J. Trent, Ph.D. 100 Financial Ratio Analysis–Categories and Examples Liquidity Ratios • How capable is the supplier in meeting its shortterm cash needs? • Current ratio • Quick ratio Leverage Ratios • Is the supplier capable of paying its debt obligations? • Debt to assets • Times interest earned • Fixed charge coverage Activity Ratios • How effectively is the supplier managing its assets? • Inventory turnover • Average collection period • Return on net assets Supply Chain Financial Management By Robert J. Trent, Ph.D. 101 Financial Ratio Analysis—Categories and Examples Profitability Ratios • What rate of return is the supplier earning? Market Ratios • How well is the supplier doing compared to market indicators? Supply Chain Financial Management • Gross and net profit margin • Return on equity • Return on assets • Price/earnings • Shareholder return By Robert J. Trent, Ph.D. 102 More Examples of Financial Ratios Liquidity Activity Supply Chain Financial Management Ratio Preferred Direction Current ratio: current assets – current Higher liabilities Cash ratio: cash/current liabilities Higher Quick ratio: (current assets – inventories)/current liabilities Asset turnover: sales/total assets Current asset turnover: sales/current assets Inventory turnover: sales/inventory Higher Inventory days outstanding: 365/inventory turnover Lower By Robert J. Trent, Ph.D. Higher Higher Higher 103 More Examples of Financial Ratios Leverage Profitability Supply Chain Financial Management Ratio Debt to equity: total liabilities/equity Current debt to equity: current liabilities/equity Interest coverage: earnings before interest and taxes/interest Net profit margin: net income/sales Gross margin: (sales – cost of goods sold)/sales Operating margin: operating income/sales Return on assets: net income/total assets Return on equity: net income/equity By Robert J. Trent, Ph.D. Preferred Direction Lower Lower Higher Higher Higher Higher Higher Higher 104 Seven Eleven Japan (SEJ) A Case Study Information on Seven Eleven Japan (SEJ) • Largest convenience store in Japan with market value of $95 B. The third largest retail company in the world after Wal-Mart and Home Depot. • Established in 1974. • In 2000, total sales $18,000 M, profit $620 M. • Average inventory turnover time 7-8.5 days. • Stock value increased by 3000 times from 1974 to 2000. • In 1985, there were 2000 stores in Japan, increasing by 400-500 per year. • Return on equity 14% over 2000-2004. • A SEJ store is about the half the size of a US 7-eleven store, that is about 110 m2. • Sales: • Products • 32.9% Processed food: drinks, noodles, bread and snacks • 31.6% Fast food: rice ball, box lunch and hamburgers • 12.0% Fresh food: diary products • 25.3% Non-food: magazines, ladies stockings and batteries. • Services: Utility bill paying, installment payments for credit companies, ATMs, photocopying More on SEJ More factual info: • Average sales about twice of an average US store • SKU’s offered in store: Over 3,000 (change by time of day, day of week, season) • Virtually no storage space • No food cooking at the stores Japanese Images of Seven Eleven: • • • • • Convenient Cheerful and lively stores Many ready-made dinner items I buy Famous for its great boxed lunch and dinner - On weekends, when I was single, I went to buy lunch and dinner SC strategy: Micro matching of supply and demand (by location, time of day, day of week, season) Seven Eleven - Number of Stores 1999: 8,027 2004: 10,356 6000 5000 4000 Number of Stores 3000 2000 1000 0 85 86 87 88 89 90 91 92 93 94 Seven Eleven - Net Sales (B Yen) Sales 1,963 B Yen in 2000 1400 1200 1000 800 Net Sales 600 400 200 0 85 86 87 88 89 90 91 92 93 94 Seven Eleven - Pre tax Profit (B Yen) 100 90 80 70 60 50 40 30 20 10 0 Profit 85 86 87 88 89 90 91 92 93 94 Seven Eleven - Inventory turnover (days) 14 12 10 8 Inventory 6 4 2 0 85 86 87 88 89 90 91 92 93 94 Information Strategy Quick access to up to date information (as opposed to data): • In 1991, SEJ implemented Integrated Service Digital Network to link stores, headquarter, DCs and suppliers • Customer checkout process • Clerk records the customer’s gender, (estimated) age and purchased items. These Point of Sales (POS) data are transmitted to database at the headquarters. • Store hardware: Store computer, POS registers linked to store computer, Graphic Order Terminals, Scanner terminals for receiving • Daily use of the data • Headquarters aggregate the data by region, products and time and pass to suppliers and stores by next morning. Store managers deduce trend information. • Weekly use of the data • Monday morning, the CEO chairs a weekly strategy formulation meeting attended by 100 corporate managers. • Tuesday morning, strategies are communicated to Operation Field Counselors who arrive in Tokyo on Monday night. • Tuesday afternoon, regional elements (e.g. weather, sport events) are factored into the strategy. Tuesday nights, field counselors return back to their regions. Information Analysis of POS Data • Analysis of • • • • Sales for product categories over time SKU (stock keeping unit) Waste or disposal 10 day (or week) sales trend by SKU • Sales trends for new product • In the early 1990s, half-prepared fresh noodle sales were going up, new fresh noodle products were quickly developed • Sales trend by time and day • Different sales patterns for different sizes of milk at different times of the day results in rearrangement of the milks in the fridge. Extreme store micromanagement. • Let us speculate: Flavored milks are put in front of the pure milks in the evening (or the morning?). • List of slow moving items • About half of 3000 SKUs are replaced by new ones every year Facilities Strategy • Limited storage space at stores which have only 125-150 m2 space • Frequent and small deliveries to stores • Deliveries arrive from over 200 plants. • Products are grouped by the cooling needs • • • • Combined delivery system: frozen foods, chilled foods, room temperature and hot foods. Such product groups are cross-docked at distribution centers (DC). Food DCs store no inventory. A single truck brings a group of products and visits several stores within a geographical region Aggregation: No supplier (not even coke!) delivers direct • The number of truck deliveries per day is reduced by a factor of 7 from 1974 to 2000. Still, at least 3 fresh food deliveries per day. Goods are received faster with the use of scanners. • Have many outlets, at convenient locations, close to where customers can walk • Focus on some territories, not all: When they locate in a place they blanket (a.k.a. clustering) the area with stores; stores open in clusters with corresponding DC’s. • 844 stores in the Tokyo region; Seven Eleven had stores in 32 out of 47 prefectures in 2004. No stores in Kobe. • Success rate of franchise application <= 1/100 The Present and the Future • Is food preparation a good idea at 7-eleven locations? • e.g. Compare microwave heating vs. salad preparation. • Why SEJ does not allow direct delivery from suppliers to retailers? • Point out which of the following strategies can also be used in US (or Taiwan) • Information strategy • Facilities strategy • Discuss the differences between the Japanese and US (or Taiwanese) consumers with regard to • Frequency and amount of grocery purchase • Use of credit cards vs. cash for purchase • 7-eleven inventory turnover rate is 50 in Japan and 19 in the USA. • 7-eleven growing rapidly in the US so it aims to be a web depot in both the US and Japan. Does this make sense from a supply chain perspective? • Cost vs. Responsiveness • Business strategy • What is the risk of micro-matching strategy? • No direct deliveries to SEJ, what is the potential risk of this strategy if used in the USA?
