458 Chapter 11 • Supply Chain Management

• 11.7 Using Table 11.3, determine the sales necessary to Table 11.9 For Problems 11.11 and 11.12
equal a dollar of savings on purchases for a company that has:
a) A net profit of 6% and spends 60% of its revenue on purchases. Arrow Distributing Corp.
b) A net profit of 8% and spends 80% of its revenue on purchases.
Net revenue $16,500
• • 11.8 Your options for shipping $100,000 of machine parts Cost of sales $13,500
from Baltimore to Kuala Lumpur, Malaysia, are (1) use a ship that Inventory $ 1,000
will take 30 days at a cost of $3,800, or (2) truck the parts to Los Total assets $ 8,600
Angeles and then ship at a total cost of $4,800. The second option will
take only 20 days. You are paid via a letter of credit the day the parts Baker Mfg. Inc.
arrive. Your holding cost is estimated at 30% of the value per year.
a) Which option is more economical? Net revenue $27,500
b) What customer issues are not included in the data presented? Cost of sales $21,500
Inventory $ 1,250
Total assets $16,600

• • 11.11 Baker Mfg Inc. (see Table 11.9) wishes to compare its
inventory turnover to those of industry leaders, who have turnover of
about 13 times per year and 8% of their assets invested in inventory.
a) What is Baker's inventory turnover?
b) What is Baker's percent of assets committed to inventory?
c) How does Baker's performance compare to the industry leaders?
• • 11.12 Arrow Distributing Corp. (see Table 11.9) 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?
d) Is Arrow's supply chain performance, as measured by these
inventory metrics, better than that of Baker, in Problem 11.11?
• • 11.9 If you have a third option for the data in Problem 11.8, • 11.13 The grocery industry has an annual inventory turnover
and it costs only $4,000 and also takes 20 days, what is your most of about 14 times. Organic Grocers, Inc., had a cost of goods sold
economical plan? last year of $10.5 million; its average inventory was $1.0 million.
What was Organic Grocers's inventory turnover, and how does that
• • 11.10 Monczka-Trent Shipping is the logistics vendor for
performance compare with that of the industry?
Handfield Manufacturing Co. in Ohio. Handfield has daily ship-
ments of a power-steering pump from its Ohio plant to an auto •• 11.14 Mattress Wholesalers, Inc. is constantly trying to
assembly line in Alabama. The value of the standard shipment is reduce inventory in its supply chain. Last year, cost of goods sold
$250,000. Monczka-Trent has two options: (1) its standard 2-day was $7.5 million and inventory was $1.5 million. This year, costs of
shipment or (2) a subcontractor who will team drive overnight with goods sold is $8.6 million and inventory investment is $1.6 million.
an effective delivery of 1 day. The extra driver costs $175. a) What were the weeks of supply last year?
Handfield's holding cost is 35% annually for this kind of inventory. b) What are the weeks of supply this year?
a) Which option is more economical? c) Is Mattress Wholesalers making progress in its inventory-reduc-
b) What production issues are not included in the data presented? tion effort?

Case Studies
Dell's Value Chain
Dell, the computer manufacturer highlighted in Chapter 7's Global and leverages that research to help itself and suppliers. Dell also
Company Profile, develops close relationships with suppliers. It constructs special Web pages for suppliers, allowing them to view
encourages suppliers to focus on their individual technological orders for components they produce as well as current levels of
capabilities to sustain leadership in their components. Research and inventory at Dell. This allows suppliers to plan based on actual end
development costs are too high and technological changes are too customer demand; as a result, it reduces the bullwhip effect. The
rapid for any one company to sustain leadership in every compo- intent is to work with suppliers to keep the supply chain moving
nent. Suppliers are also pressed to drive down lead times, lot sizes, rapidly, products current, and the customer order queue short. Then,
and inventories. Dell, in turn, keeps its research customer focused with supplier collaboration, Dell can offer the latest options, can
 Video Case 459

build to order, and can achieve rapid throughput. The payoff is a allow low inventory and support mass customization. Dell maximizes
competitive advantage, growing market share, and low capital the benefit of postponement by focusing on new products for which
investment. demand is difficult to forecast. Manufacturers who sell via distribu-
On the distribution side, Dell uses direct sales, primarily via tors and retailers find postponement virtually impossible. Therefore,
the Internet, to increase revenues by offering a virtually unlim- traditional manufacturers are often stuck with product configurations
ited variety of desktops, notebooks, and enterprise products. that are not selling while simultaneously being out of the configura-
Options displayed over the Internet allow Dell to attract cus- tions that are selling. Dell is better able to match supply and demand.
tomers that value choice. Customers select recommended product One of the few negatives for Dell's model is that it results in
configurations or customize them. Dell's customers place orders higher outbound shipping costs than selling through distributors and
at any time of the day from anywhere in the world. And Dell's retailers. Dell sends individual products directly to customers from
price is cheaper; retail stores have additional costs because of its factories. But many of these shipments are small (often one or a
their brick-and-mortar model. Dell has also customized Web few products), while manufacturers selling through distributors and
pages that enable large business customers to track past pur- retailers ship with some economy of scale, using large shipments
chases and place orders consistent with their purchase history via truck to warehouses and retailers, with the end user providing
and current needs. Assembly begins immediately after receipt of the final portion of delivery. As a result, Dell's outbound transporta-
a customer order. Competing firms have previously assembled tion costs are higher, but the relative cost is low (typically 2% to
products filling the distribution channels (including shelves at 3%), and thus the impact on the overall cost is low.
retailers) before a product reaches the customer. Dell, in contrast, What Dell has done is build a collaborative supply chain and an
introduces a new product to customers over the Internet as soon innovative ordering and production system. The result is what Dell
as the first of that model is ready. In an industry where products likes to refer to as its value chain—a chain that brings value from sup-
have life cycles measured in months, Dell enjoys a huge early-to- plier to the customer and provides Dell with a competitive advantage.
market advantage.
Dell's model also has cash flow advantages. Direct sales allow
Dell to eliminate distributor and retailer margins and increase its Discussion Questions
own margin. Dell collects payment in a matter of days after prod- 1. How has Dell used its direct sales and build-to-order model to
ucts are sold. But Dell pays its suppliers according to the more tra- develop an exceptional supply chain?
ditional billing schedules. Given its low levels of inventory, Dell is 2. How has Dell exploited the direct sales model to improve opera-
able to operate its business with negative working capital because it tions performance?
manages to receive payment before it pays its suppliers for compo- 3. What are the main disadvantages of Dell's direct sales model?
nents. These more traditional supply chains often require 60 or 4. How does Dell compete with a retailer who already has a stock?
more days for the cash to flow from customer to supplier—a huge 5. How does Dell's supply chain deal with the bullwhip effect?
demand on working capital.
Dell has designed its order processing, products, and assembly
Sources: Adapted from S. Chopra and P. Meindl, Supply Chain
lines so that customized products can be assembled in a matter of Management, 3rd ed. (Upper Saddle River, NJ: Prentice Hall, 2007); R.
hours. This allows Dell to postpone assembly until after a customer Kapuscinski, et al., "Inventory Decisions in Dell's Supply Chain," Interfaces
order has been placed. In addition, any inventory is often in the form 34, no. 3 (May-June 2004): 191-205; and A. A. Thompson, A. J. Strickland,
of components that are common across a wide variety of finished and J. E. Gamble, "Dell, Inc. in 2006: Can Rivals Beat Its Strategy?"
products. Postponement, component modularity, and tight scheduling Crafting and Executing Strategy, 15th ed. (New York: McGraw-Hill, 2007).

Video
Darden's Global Supply Chains Case
Darden Restaurants (subject of the Global Company Profile at the Second, frozen, dry, and canned food products are handled
beginning of this chapter), owner of popular brands such as Olive economically by Darden's 11 distribution centers in North America,
Garden and Red Lobster, requires unique supply chains to serve which are managed by major U.S. food distributors, such as MBM,
more than 300 million meals annually. Darden's strategy is opera- Maines, and Sygma. This is Darden's second supply line.
tions excellence, and Senior VP Jim Lawrence's task is to ensure Third, the fresh food supply chain (not frozen and not
competitive advantage via Darden's supply chains. For a firm with canned), where life is measured in days, includes dairy products,
purchases exceeding $1.5 billion, managing the supply chains is a produce, and meat. This supply chain is B2B, where restaurant
complex and challenging task. managers directly place orders with a preselected group of inde-
Darden, like other casual dining restaurants, has unique supply pendent suppliers.
chains that reflect its menu options. Darden's supply chains are Fourth, Darden's worldwide seafood supply chain is the final
rather shallow, often having just one tier of suppliers. But it has four link. Here Darden has developed independent suppliers of salmon,
distinct supply chains. shrimp, tilapia, scallops, and other fresh fish that are source inspected
First, "smallware" is a restaurant industry term for items such by Darden's overseas representatives to ensure quality. These fresh
as linens, dishes, tableware and kitchenware, and silverware. These products are flown to the U.S. and shipped to 16 distributors, with 22
are purchased, with Darden taking title as they are received at the locations, for quick delivery to the restaurants. With suppliers hi 35
Darden Direct Distribution (ODD) warehouse in Orlando, Florida. countries, Darden must be on the cutting edge when it comes to collab-
From this single warehouse, smallware items are shipped via com- oration, partnering, communication, and food safety. It does this with
mon carrier (trucking companies) to Olive Garden, Red Lobster, heavy travel schedules for purchasing and quality control personnel,
Bahama Breeze, and Seasons 52 restaurants. native-speaking employees onsite, and aggressive communication.