Operations and Supply Chain Management The Core

444 OPERATIONS AND SUPPLY CHAIN MANAGEMENT
MEASURING SOURCING PERFORMANCE
LO13–3
Evaluate sourcing
performance.
Inventory turnover
A measure of supply
chain efficiency.
Cost of goods sold
The annual cost
for a company to
produce the goods
or services provided
to customers.
Average aggregate
inventory value
The average total
value of all items
held in inventory for
the firm, valued at
cost.
One view of sourcing is centered on the inventories that are positioned in the system.
Exhibit 13.9 shows how hamburger meat and potatoes are stored in various locations in a
typical fast-food restaurant chain. Here we see the steps that the beef and potatoes move
through on their way to the local retail store and then to the customer. Inventory is carried
at each step, and this inventory has a particular cost to the company. Inventory serves as a
buffer, thus allowing each stage to operate independently of the others. For example, the
distribution center inventory allows the system that supplies the retail stores to operate
independently of the meat and potato packing operations. Because the inventory at each
stage ties up money, it is important that the operations at each stage are synchronized to
minimize the size of these buffer inventories. The efficiency of the supply chain can be
measured based on the size of the inventory investment in the supply chain. The inventory
investment is measured relative to the total cost of the goods provided through the
supply chain.
Two common measures to evaluate supply chain efficiency are inventory turnover and
weeks-of-supply. Inventory turnover is calculated as follows:
Cost of goods sold
​Inventory turnover = ​ _____________________________ ​ [13.1]
Average aggregate inventory value
The cost of goods sold is the annual cost for a company to produce the goods or
services provided to customers; it is sometimes referred to as the cost of revenue. This
does not include the selling and administactive expenses of the company. The average
aggregate inventory value is the average total value of all items held in inventory for
exhibit 13.9
Inventory in the Supply Chain—Fast-Food Restaurant
Potatoes—
25 /lb.
Potatoes—
30 /lb.
Bags of frozen
French fries—
35 /lb.
Beef patties—$1.00/lb.
Frozen French
fries—40 /lb.
Potato
farm
Potato processing and packing
Distribution
center
Retail
store
Customer
Cattle
farm
Slaughter
house
Meat
packing
Cows—
50 /lb.
Beef
carcasses—
55 /lb.
Beef loins—
60 /lb.
Frozen beef
patties—
65 /lb.
Hamburgers—
$8.00/lb.
French fries—
$3.75/lb.