supply chain management powerpoint presentation

1

BUS118 – Production & Operations Management

Supply Chain Management

Prof. Marvin I. Noroña BUS118 – Production & Operations Management 2

Thinking Challenge

Current

Situation

Sales

Strategy

Mat’l

Strategy

Sales $10 $ ? $10

Materials $8 (80%) $ (80%) $ ?

Marketing $1 (10%) $ (10%) $ (10%)

Net Income $1 $2 $2

What would sales & material costs have to

be to double net income? Which is easier?

Percentages are % of sales.

Prof. Marvin I. Noroña

BUS118 – Production & Operations Management 3

Solution*

Current

Situation

Sales

Strategy

Mat’l

Strategy

Sales $10 $20 $10

Materials 8 16 7

Mktg (10%) 1 2 1

Net Income 1 2 2

Increase sales 100% Reduce material costs 12%

Reducing material costs is more feasible.

Prof. Marvin I. Noroña BUS118 – Production & Operations Management Prof. Marvin I. Noroña 4

What Operations Managers Do?

10 OM Strategy Decisions:

• Design of Goods & Services

• Managing Quality

• Process Strategy

• Location Strategies

• Layout Strategies

• Human Resources

• Supply Chain Management

• Inventory Management

• Scheduling

• Maintenance

10 Decision Areas: • service & product design

• quality management

• process & capacity design

• location

• layout design

• human resources & job design

• supply chain management

• inventory, MRP, and J-I-T

• intermediate, short-term,

and project scheduling

• maintenance

BUS118 – Production & Operations Management Prof. Marvin I. Noroña 5


Management of integrated activities that • procure raw materials

• transform those materials into intermediate goods and final products

• deliver the products through a distribution system

Purchasing

Receiving Storage Operations Storage

Production Distribution


FACILITIES

FUNCTIONS and ACTIVITIES

warehouses

factories

processing centers

distribution centers

retail outlets

offices

• forecasting

• purchasing

• inventory management

• information management

• quality assurance

• scheduling

• production

• distribution

• delivery

• customer service

2


SUPPLY CHAIN

Sometimes referred to as Value Chain, a term that

reflects the concept that value is added as goods and

services progress through the chain.

Comprised of separate business organizations, rather

than just a single organization.

Has two (2) components for each organization:

1) a supply component

2) a demand component


SUPPLY CHAIN

Customer Retailer Distributor Storage MFG Storage

Supplier

Supplier

Supplier

SUPPLY COMPONENT DEMAND COMPONENT

The supply component starts at the beginning of the chain and ends with the

internal operations of the organization. The demand component of the chain

starts at the point where the organization’s output is delivered to its immediate

customer and ends with the final customer in the chain. The demand chain is

the sales and distribution portion of the value chain

The length of each component depends on where a particular organization is in

the chain: the closer the organization is to the final customer, the shorter its

demand component and the longer its supply component.


Theory of Supply Chain Management

Companies seek to design business models

that meet customer needs better than

competitors.

Success depends on the ability to

Design, Make, and Deliver

innovative, high quality, low cost products

and services that customers demand.


Theory of Supply Chain Management

Supply chain management allows companies to focus on their unique skill sets.

Supply chain management requires a common understanding of supply chain objectives and individual roles, an ability to work together, and a willingness to adapt in order to create and delivery the best products and services possible.


Supplier

Supplier

Supplier

S

t

o

r

a

g

e

MFG Distributor

S

t

o

r

a

g

e

S

t

o

r

a

g

e

Retailer CUSTOMER

S

t

o

r

a

g

e

SERVICE CUSTOMER

Supplier

Supplier

Distributor CUSTOMER Tier 1

Suppliers PRODUCER

Tier 2

Suppliers

MANUFACTURING SUPPLY CHAIN

SERVICE SUPPLY CHAIN

Supply and Demand Components


Supply Chain: Manufacturing Example

3


Supply Chain: Manufacturing Example


The Supply Chain

All organizations, regardless of where they are in the

chain, must deal with supply and demand issues.

The goal of SCM is to link all components of the

supply chain so that market demand is met as

efficiently as possible across the entire chain.

This requires matching supply and demand at each stage of

the chain.

Except for the beginning supplier(s) and the final

customer(s), the organizations in a supply chain are both

customers and suppliers.


The Supply Chain

Manufacturer

Supplier

Supplier

Supplier

Customer Distributor

Customer

Customer

Inventory

Inventory

Inventory

Inventory

Market research data

Scheduling information

Engineering & design data

Order flow & cash flow

Ideas & design to satisfy

the end customer

Material flow

Credit flow

The supply chain includes all the interactions between suppliers, manufacturers, distributors, and customers. The chain includes, transportation, scheduling information, cash & credit transfers, as well as ideas, designs, and material transfers.



Includes determining the following:

1) transportation vendors

2) credit & cash transfers

3) suppliers

4) distributors & banks

5) accounts payable & receivable

6) warehousing and inventory levels

7) order fulfillment

8) sharing customer, forecasting & production information



means managing the flow of goods and services

and information through the supply chain in

order to attain the level of synchronization that

will make it more responsive to customer needs

while lowering costs.

has the goal of linking all components of the

supply chain so that market demand is met as

efficiently as possible across the entire chain.


Keys to effective SCM

Information

Communication

Cooperation

Trust

Supplier partnering

4



The idea is to build a chain of suppliers that focus on both

Reducing waste, and

Maximizing value to the ultimate customer

Activities of Supply Chain managers cut across the disciplines of

Accounting

Finance

Marketing

operations


Why Supply Chain Management ?

1. Need to improve operations

2. Increasing levels of outsourcing

3. Increasing transportation costs

4. Competitive pressures

5. Increasing globalization

6. Increasing importance of e-commerce

7. Complexity of supply chains

8. Need to manage inventories



As firms strive to increase their competitiveness via

STRATEGIES:

• Product customization Differentiation

• High quality Quality

• Cost reductions Low-cost

• Speed-to-market Response

added emphasis was placed on the

• Supply Chain


Supply Chain Management Defined

Supply chain management is the design and

management of seamless, value-added

processes across organizational boundaries to

meet the real needs of the end customer.

- Institute for Supply Management


Supply Chain Integration

Internal Process Integration: increase collaboration

among the company’s functional groups.

Backward Process Integration: collaboration with

1st-tier and 2nd-tier (leading companies) suppliers.

Forward Process Integration: collaboration with 1st-

tier customers.

Complete Integration: collaboration from the

“suppliers’ supplier to the customers’ customer.”



Common

5


Internal Value Chain Elements

Executive Management defines company strategy and allocates resources to achieve it.

Supply Management coordinates the upstream supply base, finding the right suppliers and building the right relationships with them.

Operations transforms the inputs acquired from suppliers into more highly valued products.

Logistics moves and stores materials so they are available when and where they are needed.

Marketing manages the downstream relationships with customers, identifying their needs and communicating to them how the company can meet those needs.


Internal Value Chain Elements

Human Resources designs the systems used to hire, train, and develop the company’s employees.

Accounting maintains business records that provide information needed to control operations.

Finance acquires and controls the capital required to operate the business.

Information Technology builds and maintains the systems needed to capture and communicate information among decision makers.

Research and Development (R&D) is responsible for new product design.


Internal Value Chain: Local Focus

R & D

Operations

Executive

Management

Logistics

Marketing

Human

Resource Management

Accounting

Finance

Supply

Management

Information

Technology


Internal Value Chain: Company Focus

R & D

Operations

Executive

Management

Logistics

Marketing

Human

Resource Management

Accounting

Finance

Supply

Management

Information

Technology

Upstream

Suppliers

Downstream

Customers


Internal Value Chain: Company Focus

R & D

Operations

Executive

Management

Logistics

Marketing

Human

Resource Management

Accounting

Finance

Supply

Management

Information

Technology

Upstream

Suppliers

Downstream

Customers


SCM: Linked Value Chains

R & D

Operations

Executive

Management

Logistics

Marketing

Human

Resource Management

Accounting

Finance

Supply

Management

Information

Technology

R & D

Operations

Executive

Management

Logistics

Marketing

Human

Resource

Management

Accounting

Finance

Supply

Management

Information

Technology

R & D

Operations

Executive

Management

Logistics

Marketing

Human

Resource

Management

Accounting

Finance

Supply

Management

Information

Technology

R & D

Operations

Executive

Management

Logistics

Marketing

Human

Resource

Management

Accounting

Finance

Supply

Management

Information

Technology

R & D

Operations

Executive

Management

Logistics

Marketing

Human

Resource

Management

Accounting

Finance

Supply

Management

Information

Technology

Focal

Firm

Supplier Supplier’s

Supplier

Customer Customer’s

Customer

6



Common

Theoretical Ideal BUS118 – Production & Operations Management Prof. Marvin I. Noroña 32

Supply Chain Management Problems

The goal of supply chain management is to

use technology and teamwork to build

efficient and effective processes that create

value for the end customer.

The goal is compromised when processes,

value chain elements, and/or companies work

toward local rather than global optimum.


Bullwhip Effect

Tier 2

Suppliers

Tier 1

Suppliers Producer Distributor Retailer

Final

Customer

Amount of

inventory =


The Bullwhip Effect

Variation in demand is exaggerated as

information moves upstream away from the

point of use.

Variation in demand is exaggerated due to

infrequent demand and/or inventory level

information exchange and order batching.


The Bullwhip Effect


The Bullwhip Effect

Bullwhip effect costs can be as high as 12 to

25%

Bullwhip can be effectively mitigated by:

Sharing point of sale data

Collaborative forecasting

Collaborative future product promotion planning

7


GLOBAL SUPPLY CHAIN ISSUES Supply chains in a global environment must be:

Flexible enough to react to sudden changes in parts

availability, distribution or shipping channels, import

duties, and currency rates

Able to use the latest computer and transmission

technologies to manage the shipment of parts in and

finished products out

Staffed with local specialists to handle duties, trade,

freight, customer, and political issues


Elements of Supply Chain Management

Deciding how to best move and store materials Logistics

Determining location of facilities Location

Monitoring supplier quality, delivery, and relations Suppliers

Evaluating suppliers and supporting operations Purchasing

Meeting demand while managing inventory costs Inventory

Controlling quality, scheduling work Processing

Incorporating customer wants, mfg., and time Design

Predicting quantity and timing of demand Forecasting

Determining what customers want Customers

Typical Issues Element


PURCHASING The supply chain receives so much attention because Purchasing is

the most costly activity in most firms

Illustration:

SALES

- VC Purchases (50%)

Other VC (24%)

- FC PROFIT

$ 100

(50) (24)

(24) $ 2 =====

$ 103.85

(51.93) (24.92)

(24.00) $ 3.00 =======

$ 100

(49) (24)

(24) $ 3.00 =====

Through a $3.85 of additional sales, profit increased by $1,

from $2 to $3. The same increase in margin could have been obtained by reducing purchasing costs by $1.


PURCHASING

is critical to supply chain efficiency because it is the job of purchasing to • Select suppliers

• Establish mutually beneficial relationships with them

its goal is to develop and implement purchasing plans for products and services that support operations strategies.

among its duties are • Identifying sources of supply

• Negotiating contracts

• Maintaining a database of suppliers

• Obtaining goods & services that meet or exceed operations requirements in a timely and cost-efficient manner

• Managing suppliers


PURCHASING

Purchasing is the acquisition of goods & services

Objectives of Purchasing are:

1. To help identify the products and services that can be

obtained externally

2. To develop, evaluate, and determine the best supplier, price

and delivery for those products and services

Purchasing takes place in both manufacturing and

service environments

cost & quality of goods & services

SOLD

cost & quality of goods & services

PURCHASED

Effective

Purchasing

Strategy


Purchasing in Manufacturing Environments

Purchasing function is supported by

1) Product engineering drawings & specs

2) Quality control documents

3) Testing activities that evaluate the purchased items

PURCHASING AGENT

BUYERS EXPEDITERS

- a person with legal authority to

execute purchasing contracts on

behalf of the firm

- perform all the activities of the purchasing department

EXCEPT contract signing

- assist buyers in following up on

purchases to ensure TIMELY DELIVERY

8


Purchasing in Service Environments

In many service environments, purchasing’s role is DIMINISHED because the primary product is an intangible one (ex. Legal and medical organizations)

In transportation and restaurants, the purchasing function is CRITICAL

In wholesale and retail segment of services, purchasing is performed by a BUYER who is a purchaser RESPONSIBLE for the SALE OF and PROFIT ON merchandise that will be resold.


PURCHASING

INTERFACES Legal

Accounting

Data

Processing

Design

Receiving

Suppliers

Operations

Purchasing


PURCHASING CYCLE

Begins with a request from within the organization to purchase material, equipment, supplies, or other items from outside the organization

Ends when the purchasing department is notified that a shipment has been received in satisfactory condition

Main steps are:

1. Purchasing receives the requisition

2. Purchasing selects a supplier

3. Purchasing places the order with a vendor

4. Monitoring orders

5. Receiving orders


VALUE ANALYSIS – examination of the function of purchased parts and materials in an effort to reduce cost and/or improve performance.

MAKE or BUY – choosing between producing a component or a service in-house or advantageously purchasing it form an outside source

VENDOR SELECTION - a decision regarding who to buy materials from, considering numerous factors, such as inventory and transportation costs, availability of supply, delivery performance, and quality of suppliers

SUPPLIER MANAGEMENT – includes vendor analysis, supplier audits, supplier certification, supplier relationships and supplier partnerships

ROLES OF PURCHASING


ROLES OF PURCHASING MAKE or BUY

Role is to evaluate alternative suppliers and provide current, accurate, complete data relevant to the buy alternative.

Wholesale/Retail

PURCHASES SALES

Manufacturing, Restaurants, and Assemblers

PURCHASES (components & subassemblies)

PRODUCTION

SALES (final products)


Outsourcing

Buying goods or services from outside sources rather

than making or providing them in-house

Reasons:

Ability of outside source to provide materials, parts or

services better, cheaper, or more efficiently

Patents, expertise & knowledge of the supplier

Gives more flexibility to the organization (downsizing)

Risks:

• Loss of control

• Greater dependency on suppliers

• Loss of ability to perform in-house

9


Deciding Factors in Outsourcing 1. Cost to do it in-house versus cost to buy, including start-up

costs, versus cost to outsource

2. Stability of demand and possible seasonality

3. Quality available from suppliers compared with a firm’s own quality capabilities

4. Desire to maintain close control of operations

5. Idle capacity available within the organization

6. Lead times for each alternative

7. Who has patents, expertise, and so on, if these are factors

8. Stability of technology (if technology is changing, it may be better to use a supplier)

9. Degree to which the necessary operations are consistent with, or in conflict with current operations

10. Strategy BUS118 – Production & Operations Management Prof. Marvin I. Noroña 50

Example No.1 : Make or Buy Decision

Choose which alternative is better. Analyze the following data

to determine the total annual cost of making and of buying.

Expected Annual Volume

Variable cost per unit Annual fixed costs

Make

20,000 units $ 5.00 $30,000

Buy

20,000 units $ 6.00 -

Solution: Total Annual Cost = Fixed Cost + VC/unit x annual volume

Make : $ 30,000 + ($5 x 20,000) = $130,000 Buy : 0 + ($6 x 20,000) = $120,000

Buying is the better alternative because it would save $10,000 a year.


Example No.2 : Make or Buy Decision Given the following data, determine the total annual cost of making

and of buying. Estimated demand is 10,000 units a year.

Variable cost per unit

Annual fixed cost Transportation cost per unit

Make

Process A Process Buy__

$ 50 $ 52 $51 $ 40,000 $ 36,000 $ 2

SOLUTION:

Variable Cost $500,000 $520,000 $510,000 Fixed Cost 40,000 36,000 - Transportation Cost - - 20,000

Total Annual Cost $540,000 $556,000 $530,000 ====== ====== ======

Buying is the best alternative with the lowest total annual cost BUS118 – Production & Operations Management Prof. Marvin I. Noroña 52

Outsourcing REASONS for MAKING

Lower production cost

Unsuitable suppliers

Assure adequate supply (quantity or delivery)

Utilize surplus labor or facilities and make a marginal contribution

Obtain desired quality

Remove supplier collusion

Obtain unique item that would entail a prohibitive commitment for a supplier

Maintain organizational talents and protect personnel from a layoff

Protect proprietary design or quality

Increase or maintain size of company (management prerogative)

REASONS for BUYING

Lower acquisition cost

Preserve supplier commitment

Obtain technical or management ability

Inadequate capacity

Reduce inventory costs

Ensure alternative sources

Inadequate managerial or technical resources

Reciprocity

Item is protected by a patent or trade secret

Frees management to deal with its primary business


ROLES OF PURCHASING

VALUE ANALYSIS

MAKE or BUY DECISION

VENDOR SELECTION

a decision regarding who to buy materials from

considers numerous factors:

• inventory and transportation costs

• availability of supply

• delivery performance

• quality of suppliers

outstanding operations requires excellent vendors BUS118 – Production & Operations Management Prof. Marvin I. Noroña 54

3 Stages of Vendor Selection

1. Vendor Evaluation

Involves finding potential vendors and determining the likelihood of their becoming good suppliers

Requires development of evaluation criteria, such as:

• financial strength

• quality

• management

• research

• technical ability

• potential for a close

long-term relationship

Weights depending upon the needs of

the organization

10



2. Vendor Development

Ensures integration of the supplier into a firm’s system and the

appreciation by the vendor of its

• Quality requirements

• Engineering changes

• Schedules and delivery

• Procurement policies

• Payment system

May include everything from training, to engineering &

production help, to formats for electronic information transfer

Purchasing policies address issues such as percent of business

done with any one supplier or with minority businesses



3. Negotiations

Negotiation strategies are approaches taken by

purchasing personnel to develop contractual

relationships with suppliers

They are of 3 classic types:

1) Cost-Based Price Model

2) Market-Based Price Model

3) Competitive Bidding


Negotiations / Determining Prices 1) Cost-Based Price Model : requires that the supplier open its

books to the purchaser. The contract price is then based on time and materials, or on a fixed cost with an escalation clause to accommodate changes in the vendor’s labor and materials cost.

2) Market-Based Price Model : price is based on a published price or index. Paperboard and nonferrous metals prices, for instance, are published in weekly industry magazines.

3) Competitive Bidding : is common for large orders of standard products and services; is a typical policy in many firms for the majority of their purchases.

Requires to have several potential suppliers of the product (or its equivalent)

Sends requests for bids, asking vendors to quote a price for a specified quantity and quality of the items


Centralized Versus Decentralized

CENTRALIZED PURCHASING Means that purchasing is handled by one special department

Takes advantage of quantity discounts offered on large orders

Obtains better service and closer attention from suppliers

Enables companies to assign certain categories of items to specialists

DECENTRALIZED PURCHASING Means that individual departments or separate locations handle their own

purchasing requirements

Has the advantage of awareness of differing “local” needs and being better able to respond to those needs.

Offers quicker response than centralized purchasing

Can save on transportation costs by buying locally, where locations are widely scattered


Myths Concerning Purchasing

“Negotiation is a win-lose confrontation.”

Purchasing negotiations should not be viewed as a win-lose game; it can be a win/win game

“The main goal is to obtain the lowest possible price.”

It must be realized that contractors and suppliers need a reasonable profit to survive.

“Each negotiation is an isolated transaction.”

Purchasing must work towards partnering so each negotiation is a step in developing long-term relationships and therefore not as an one-off deal.


Ethics in Purchasing Principles

Loyalty to employer

Justice to those you deal with

Faith in your profession

Standards of Purchasing Practice

1. Avoid appearance of unethical or uncompromising practice

2. Follow the lawful instructions of your employer

3. Refrain from private activity that might conflict with the interest of your employer

4. Refrain from soliciting or accepting gifts, favors, or services from present or potential suppliers

5. Handle confidential or proprietary employer or supplier information with due care

11


Ethics in Purchasing Standards of Purchasing Practice

6. Practice courtesy and impartiality in all aspects of your job

7. Refrain from reciprocal agreements that constrain competition

8. Know and obey the letter and spirit of laws governing purchasing

9. Demonstrate support for small, disadvantaged, and minority-owned businesses

10. Discourage involvement in employer-sponsored programs of non-business, personal packages

11. Enhance the profession by maintaining current knowledge and the highest ethical standards

12. Conduct international purchasing in accordance with the laws, customs, and practices of foreign countries, but consistent with the laws of the your country, your organization’s policies, and these guidelines


ROLES OF PURCHASING

SUPPLIER MANAGEMENT

Vendor Analysis

Supplier Audits

Supplier Certification

Supplier Relationships

Supplier Partnerships

Strategic Partnerships


SUPPLIER MANAGEMENT Vendor Analysis

Evaluating the sources of supply in terms of price, quality, the supplier’s reputation, past experience with the supplier and after-sales service

Other factors that can be used in evaluation are flexibility (in handling changes in schedules, design and quantity), location, leadtimes & on-time delivery, and other accounts

Supplier Audits

Are a means of keeping current on suppliers’ production capabilities, quality and delivery problems and resolutions, and performance on other criteria

Are also an important first step in supplier certification programs


SUPPLIER MANAGEMENT Supplier Certification Is a detailed examination of the policies and capabilities of a supplier

Verifies that a supplier meets or exceeds the requirements of the buyer

Is generally important in supplier relationships, but is particularly important in seeking to establish long-term relationships with suppliers

Supplier Relationships Type of relationship depends on length of a contract

• Short-term contracts involve competitive bidding

• Medium-term contracts often involve ongoing relationships

• Long-term contracts often evolve into partnerships

Keeping good relations with suppliers is increasingly recognized as an important factor in maintaining a competitive advantage.


Supplier Relationships (con’t)


More and more business organizations are seeking to establish partnerships with other organizations in the supply chain

This implies

a) Fewer suppliers

b) Longer-term relationships

c) Sharing of information (forecasts, sales data, problem alerts)

d) Cooperation in planning

Benefits are

a) Higher quality

b) Increased delivery speed and reliability

c) Lower inventories

d) Lower costs

e) Higher profits

f) Improved operations

Strategic Partnerships are those that convey strategic benefits to one or

both partners who have the potential for helping them grow their own businesses.


Supplier as a Partner

Aspect Adversary Partner Number of suppliers Many One or a few

Length of relationship May be brief Long-term

Low price Major consideration Moderately important

Reliability May not be high High

Openness Low High

Quality May be unreliable;

buyer inspects

At the source; vendor

certified

Volume of business May be low High

Flexibility Relatively low Relatively high

Location Widely dispersed Nearness is important

12



Ideas from suppliers could lead to improved competitiveness

1.Reduce cost of making the purchase

2.Reduce transportation costs

3.Reduce production costs

4.Improve product quality

5.Improve product design

6.Reduce time to market

7.Improve customer satisfaction

8.Reduce inventory costs

9.Introduce new products or services


Critical Issues

Strategic importance

Cost

Quality

Agility

Customer service

Competitive advantage

Technology management

Benefits

Risks


Critical Issues

Purchasing function

Increased outsourcing

Increased conversion to lean production

Just-in-time deliveries

Globalization


LOGISTICS

The movement of materials and information within a

facility and to incoming and outgoing shipments of

goods and materials

Movement within a facility – movement of materials must be

coordinated to arrive at the appropriate destination at

appropriate times

Traffic Management – overseeing the shipment of incoming

and outgoing goods

Evaluating shipping alternatives – need to make a choice

between rapid (but more expensive) shipping alternatives and

slower (but less expensive) alternatives


Materials Movement

RE

CE

IVIN

G

Storage

Work

center

Work center Work center

Storage

Work

center

Storage

Shipping


Logistics

• Movement within the facility

• Incoming and outgoing shipments

• Bar coding

• EDI

• Distribution

• JIT Deliveries

0

214800 232087768

13


Distribution Requirements Planning

Distribution requirements planning (DRP) is

a system for inventory management and

distribution planning

Extends the concepts of MRPII


Management uses DRP to plan and

coordinate:

Transportation

Warehousing

Workers

Equipment

Financial flows

Uses of DRP


MATERIALS MANAGEMENT

Purchasing may be combined with various warehousing and inventory activities to form a materials management system

Purpose is to obtain efficiency of operations through the integration of all material acquisition, movement, and storage activities

Emphasis is placed on MM when the transportation and inventory costs are substantial on both the input and output sides of the production process

Potential for competitive advantage is found via both reduced costs and improved customer service

Recognizing that distribution of goods to and from the firm’s facilities can represent as much as 25% of the cost of the products, there is a need to evaluate their means of distribution (trucking, railroads, airfreight, waterways or pipelines)


Materials Management

Integrates all materials functions

Purchasing

Inventory management

Production control

Inbound traffic

Warehousing & stores

Incoming quality control

Objective: Efficient, low cost operations


SUPPLY CHAIN STRATEGIES

Plans to help achieve company mission

Affect long-term competitive position

Strategic options

Many suppliers

Few suppliers

Keiretsu network

Vertical integration

Virtual company

Plan

© 1995 Corel Corp.


SUPPLY CHAIN STRATEGY 1. Many Suppliers Traditional American approach of negotiating with may

suppliers and playing one supplier against another

The supplier responds to the demands and specifications of a “request for quotation” (RFQ) with the order usually going to the low bidder

Suppliers aggressively competing with one another

Places the burden of meeting the buyer’s demands on the supplier

Holds the supplier responsible for maintaining the necessary technology, expertise, and forecasting abilities, as well as cost, quality, and delivery competence

Not long-term: partnering relationships are NOT the goal

14


SUPPLY CHAIN STRATEGY

2. Few Suppliers Implies that rather than looking for short-term attributes,

such as low cost, a buyer is better off forming a long-term relationship with a few dedicated suppliers.

Using few suppliers

a) Are more likely to understand the broad objectives of the procuring firm and the end customer

b) Can create value by allowing customers to have

economies of scale ) that yield both lower transaction costs

learning curve ) and lower production costs

Few suppliers (with large commitment to buyer) may also be more than willing to

a) Participate in JIT systems

b) Provide innovations & technological expertise


Few Suppliers Strategy

1 or few sources per item

Partnership (JIT)

Long-term, stable

On-site audits & visits

Exclusive contracts

Low prices (large orders)

Frequent, small lots

Delivery to point of use

© 1995

Corel Corp.


SUPPLY CHAIN STRATEGY

2. Few Suppliers (con’t) Most important factor : TRUST between suppliers and buying companies

alignment of cultures ) that foster both formal

commitment of resources ) & informal contact

toward advancing the relationship

Strengthening the partnership

Buyers Results:

Incorporate suppliers in the supply system ) contracts that extend thru

Choose suppliers even before parts are designed ) the product’s life cycle

Place added emphasis on quality & reliability ) more efficient

) reduced prices over time

Downsides

Cost of changing parts is huge (so both buyer and supplier run the risk of being captives of the other)

Risk of poor supplier performance

Concern about trade secrets and suppliers that make other alliances or venture out on their own (ex. US Schwinn Bicycle Co. taught Taiwan’s Giant Mfg. Co.)


SUPPLY CHAIN STRATEGY 3. Vertical Integration Developing the ability to produce goods or services previously

purchased or actually buying a supplier or distributor.

Can take the form of FORWARD or BACKWARD integration

Vertical Integration

Backward Integration

Raw Material (suppliers)

Current Transformation Automobiles Integrated Flour

Circuits Milling

Forward Integration

Finished goods (customers)

Examples of Vertical Integration

Iron ore

Steel

Distribution

system

Dealers

Silicone

Circuit Boards

Computers

Watches Calculators

Farming

Baked

goods


SUPPLY CHAIN STRATEGY 3. Vertical Integration (con’t)

Can offer opportunities or advantages in:

Cost reduction ) work best when the organization

Quality adherence ) has a large market share, or the

Timely delivery ) management talent to operate

Scheduling flexibility ) an acquired vendor successfully

Dangerous for firms in industries undergoing

technological change if management cannot

keep abreast of those changes, or

invest the financial resources necessary for the next wave

of technology BUS118 – Production & Operations Management Prof. Marvin I. Noroña 87

SUPPLY CHAIN STRATEGY 4. Keiretsu Networks Many large Japanese manufacturers have found a middle

ground between purchasing from few suppliers to vertical integration

These manufacturers are often the financial supporters of suppliers through ownership or loans

The supplier then becomes part of a company coalition, known as the keiretsu

Members of the keiretsu

assured of long-term relationships, and therefore expected to function as partners

provide technical expertise and stable quality production to the manufacturer

can also have suppliers down the chain, making second- or even third-tier suppliers part of the coalition

15


SUPPLY CHAIN STRATEGY 5. Virtual Companies Because vertical integration locks in an organization into

businesses that it may not understand or be able to

manage, another strategy is to find good flexible suppliers Takes away complications brought about by specialization and

changing technology

Addresses issues of being too bureaucratic having a division

Develops virtual companies that use suppliers on an

as-needed basis Doing payroll; hiring personnel

Designing products

Manufacturing components

Conducting tests

Distributing products

Providing consulting services BUS118 – Production & Operations Management Prof. Marvin I. Noroña 91

SUPPLY CHAIN STRATEGY 5. Virtual Companies (con’t)

companies that rely on a variety of supplier relationships to

provide services on demand

Also known as hollow corporations or network companies

Have fluid, moving organizational boundaries that allow them

to create a unique enterprise to meet changing market demands

Relationships may be ST or LT and may include:

true partners } whatever formal relationship,

collaborators } the result can be

able suppliers } exceptionally

subcontractors } LEAN PERFORMANCE


SUPPLY CHAIN STRATEGY 5. Virtual Companies (con’t) Advantages include

specialized management expertise low capital investment flexibility speed

Traditional Example : APPAREL BUSINESS Designer of clothes seldom manufacture their designs They rather license the manufacture

rent a loft lease sewing machines contract labor

Result: low overhead flexibility speed-to-market


SUPPLY CHAIN STRATEGY 5. Virtual Companies (con’t)

Contemporary Example : SEMICONDUCTOR INDUSTRY

exemplified by Visioneer (in Palo Alto, CA)

subcontracts almost everything

software written by several partners

hardware manufactured by a silicone subcontractor

PCBs made in Singapore

Plastic cases made in Boston where units are tested and

packed for shipment

In virtual companies, the Purchasing function is demanding

and dynamic


OPTIMIZING the SUPPLY CHAIN

Postponement Channel Assembly Drop Shipping and Special Packaging Blanket Orders Stockless Purchasing Standardization Electronic Ordering and Funds Transfers Internet Purchasing

RM

sources Suppliers Prod Whse Distributors Customers

SUPPLIER SELLER DISTRIBUTION – CONSUMER

VALUE

CREATION


OPTIMIZING the SUPPLY CHAIN 1. POSTPONEMENT : withholding/delaying any modifications

or customization to the product as long as possible in the production process

Example: Dell Computers modified its printer by moving out the power supply into a power cord (generic printers) Manufacture and centralized inventories of generic printers for shipment as

demand change

Unique power system and documentation at the final distribution point

2. CHANNEL ASSEMBLY : a variation of postponement; postpones final assembly of a product so the distribution channel can assemble it; sends individual components & modules, rather than FG, to the distributor, who then assembles, tests, and ships. Treats distributors more as manufacturing partners than as distributors

Technique is successful in industries where products undergo rapid change such as PCs

FG inventory is reduced, market response is better, with lower investment (nice combination in business)

Examples: IBM, HP, Compaq

16



3. DROP SHIPPING & SPECIAL PACKAGING : means the supplier will ship directly to the end customer, rather than to the seller saving both time and reshipping costs. Other cost-saving measures include the use of special packaging, bar coding & labeling; beneficial to wholesalers & retailers by reducing shrinkage (lost, damaged or stolen merchandise) and handling costs.

Dell Computer’s core competence is not in stocking peripherals, but in assembling PCs.

4. BLANKET ORDERS : a long-term purchase commitment to a supplier for items that are to be delivered against short-term releases to ship

Are unfilled orders with a vendor; not an authorization to ship anything until the receipt of an agreed-upon document, perhaps a shipping requisition or shipment release


Rec.

Dock

Traditional Purchasing Process

Customer Supplier

Purchase Order

Mail Order

Processing

Packing List

Processing


Rec.

Dock


Customer Supplier

Purchase Order

Order

Processing

Packing List

Processing

Invoice

Mail


Rec.

Dock


Customer Supplier

Purchase Order

Order

Processing

Packing List

Processing

Rec. Report

Invoice

Mail

Mail


Rec.

Dock


Customer Supplier

Purchase Order

Order

Processing

Packing List

Processing

Rec. Report

Invoice Acct. Pay.

Mail

Mail


Rec.

Dock


Customer Supplier

Purchase Order

Order

Processing

Packing List

Processing

Rec. Report

Invoice Acct. Pay.

Reconcile

Mail

Mail

17


Rec.

Dock


Customer Supplier

Purchase Order

Order

Processing

Packing List

Processing

Rec. Report

Invoice Mail Acct. Pay.

Reconcile Check Mail

Mail



Rec.

Dock

PurchaseOrder

PackingList

Order

Processing

Invoice

Rec.Report

Check Acct. Rec.

Acct. Pay.

Mail

MailReconcile

Mail

Rec.

Dock

PurchaseOrder

PackingList

Order

Processing

Invoice

Rec.Report

Check Acct. Rec.

Acct. Pay.

Mail

MailReconcile

Mail

Customer Supplier



Rec.

Dock

PurchaseOrder

PackingList

Order

Processing

Invoice

Rec.Report

Check Acct. Rec.

Acct. Pay.

Mail

MailReconcile

Mail

Rec.

Dock

PurchaseOrder

PackingList

Order

Processing

Invoice

Rec.Report

Check Acct. Rec.

Acct. Pay.

Mail

MailReconcile

Mail

Customer Supplier Which activities do

NOT add value?



Rec.

Dock

PurchaseOrder

PackingList

Order

Processing

Invoice

Rec.Report

Check Acct. Rec.

Acct. Pay.

Mail

MailReconcile

Mail

Rec.

Dock

PurchaseOrder

PackingList

Order

Processing

Invoice

Rec.Report

Check Acct. Rec.

Acct. Pay.

Mail

MailReconcile

Mail

Customer Supplier

‘Blanket purchase order’ may be used:

• Need is ongoing, but quantities vary;

• Typically for class B items (e.g., MRO);

• Covers a given time period;

• Shipment made upon receipt of

shipping release (mailed).



5. STOCKLESS PURCHASING : means that a supplier delivers materials directly to the purchaser’s using department rather than to a central stockroom.

6. STANDARDIZATION : reducing the number of variations in materials and components as aid to cost reduction

Rather than obtaining a variety of similar components with labeling, coloring, packaging or slightly different engineering specifications, the purchasing agent should try to have the components standardized



7. ELECTRONIC ORDERING & FUNDS TRANSFER : reduces paper transactions, consisting of purchase order, purchase release, a receiving document, authorization to pay an invoice and finally the issuance of a check; Speeds up the traditionally long procurement cycle

Electronic Data Interchange – a standardized data transmittal format for computerized communications between organizations (order date, due date, quantity, part #, P.O. #, address, and so forth)

Advanced Shipping Notice (ASN) – a shipping notice delivered directly from vendor to purchaser

18


Partnership Purchasing Process

Customer Supplier

Master Agreement

Master agreement:

• Defines partnership;

• May specify price, quantities etc.



Customer Supplier

Master Agreement

Electronic Data Interchange (EDI)

Electronic data interchange (EDI):

• Computer-to-computer messaging system;

• Uses modem & telephone lines;

• Used for sending orders, schedules etc.



Customer Supplier

Master Agreement


Invoiceless Purchasing:

• Used if no electronic data interchange;

• No invoice — customer automatically sends check

(mail) based on units produced;

• If 100 bicycles made, send check for 200 tires.



Point-of-Use

Standard Containers

Customer Supplier

Master Agreement

Bar-Coded Kanban


Point-of-Use:

• Location where item will be used;

• May be office, shop, assembly line etc.


Electronic Data Interchange

EDI – the direct transmission of

interorganizational transactions, computer-to-

computer, including purchase orders, shipping

notices, and debit or credit memos.


Electronic Data Interchange

Increased productivity

Reduction of paperwork

Lead time and inventory reduction

Facilitation of just-in-time systems

Electronic transfer of funds

Improved control of operations

Reduction in clerical labor

Increased accuracy

19


Efficient Consumer Response

Efficient consumer response (ECR) is a

supply chain management initiative specific

to the food industry

Reflects companies’ efforts to achieve quick

response using EDI and bar codes



8. INTERNET PURCHASING also known as e-procurement Order releases communicated over the Internet or approved vendor

catalogues available on the Internet for use by employees of the purchasing firm

Takes 2 forms: a) First, Internet Purchasing may just imply that the Internet is used to

communicate ORDER RELEASES to the suppliers (items for which a blanket P.O. exists)

b) Second, for non-standard items, for which there is no blanket P.O., CATALOGUES and ORDERING PROCEDURES enhance the communication features of the Internet

Lends itself to comparison shopping, rapid ordering, and reduction of inventory

Liked by suppliers because on-line selling means they are getting closer to their customers

May be a part of an integrated ERP system (order release, not only tells the supplier to ship, but also updates the appropriate portions of the ERP system)


CREATING AN EFFECTIVE SUPPLY CHAIN 1. Develop strategic objectives and tactics. These will guide the

process.

2. Integrate and coordinate activities in the internal portion of the chain. This requires (1) overcoming barriers caused by functional thinking that lead to attempts to optimize a subset of a system rather than the system as a whole, and (2) transferring data and coordinating activities.

3. Coordinate activities with suppliers and with customers. This involves addressing supply and demand issues.

4. Coordinate planning and execution across the supply chain. This requires a system for transferring data across the supply chain and allowing access to data to those engage in operations to which it will be useful.

5. Consider the possibilities of forming strategic partnerships. BUS118 – Production & Operations Management Prof. Marvin I. Noroña 120

CHALLENGES in SCM Barriers to Integration of Separate Organizations

Getting CEOs, Board of Directors, Managers, and Employees “Onboard”

Dealing with Trade-offs

1. Lot size-inventory trade-off

2. Inventory-transportation cost trade-off

3. Lead time-transportation cost trade-off

4. Product variety-inventory trade-off

5. Cost-customer service trade-off

Small Businesses

Variability and Uncertainty

Long Lead Times


Challenges

Barriers to integration of organizations

Getting top management on board

Dealing with trade-offs

Small businesses

Variability and uncertainty

Long lead times


Trade-offs

1. Lot-size-inventory

Bullwhip effect

2. Inventory-transportation costs

Cross-docking

3. Lead time-transportation costs

Airfreight versus seafreight

4. Product variety-inventory

Delayed differentiation

5. Cost-customer service

Disintermediation

20


Trade-offs

Bullwhip effect

Inventories are progressively larger moving

backward through the supply chain

Cross-docking

Goods arriving at a warehouse from a supplier are

unloaded from the supplier’s truck and loaded

onto outbound trucks

Avoids warehouse storage


Trade-offs


Production of standard components and

subassemblies, which are held until late in the

process to add differentiating features

Disintermediation

Reducing one or more steps in a supply chain by

cutting out one or more intermediaries


SUPPLY CHAIN ISSUES

STRATEGIC ISSUES

TACTICAL ISSUES

OPERATING ISSUES

Design of the supply chain Partnering

Inventory policies Purchasing policies

Production policies Transportation policies Quality policies

Quality Control Production Planning & Control


Supply Chain Benefits and Drawbacks

Problem Potential

Improvement

Benefits Possible

Drawbacks

Large

inventories

Smaller, more frequent

deliveries

Reduced holding

costs

Traffic congestion

Increased costs

Long lead

times


Disintermediation

Quick response

May not be feasible

May need absorb

functions

Large number

of parts

Modular Fewer parts

Simpler ordering

Less variety

Cost

Quality

Outsourcing Reduced cost,

higher quality

Loss of control

Variability Shorter lead times,

better forecasts

Able to match

supply and demand

Less variety


PERFORMANCE DRIVERS

1. Cost

2. Quality

3. Flexibility

Refers to the ability to adjust to changes in order quantities but also in product or service requirements

4. Velocity

Inventory velocity – the rate at which inventory (material) goes through the supply chain

Information velocity – the rate at which information (two-way flow) is communicated in a supply chain

5. Customer Service


PERFORMANCE MEASURES

Perspective Metrics

RELIABILITY On-time delivery

Order fulfillment lead time Fill rate Perfect order fulfillment

FLEXIBILITY Supply chain response time

Upside production flexibility

EXPENSES Supply chain management cost

Warranty cost as a % of revenue Value added per employee

ASSETS/UTILIZATION Total inventory days of supply

Cash-to-cash cycle time Net asset turns

21


SCM Performance Measures

SCOR (Supply Chain Ops Reference) Model

Plan, Source, Make Deliver, Return

SCOR addresses

Product from supplier’s2 to customer’s2

SCOR does not address

Sales, Marketing, R&D, Support


Level 1 Performance Metrics

Reliability – delivery performance, fill rate,

perfect fulfillment

Responsiveness – order fill lead time

Flexibility – SC response time, ops flexibility

Cost – warranty cost, productivity, CGS, SCM

cost

Assets – turns, inventory days, cash cycle


SUCCESSFUL SUPPLY CHAIN

Trust among trading partners

Effective communications

Supply chain visibility

Event-management capability

The ability to detect and respond to unplanned

events

Performance metrics


Benefits of Supply Chain Management

Lower inventories

Higher productivity

Greater agility

Shorter lead times

Higher profits

Greater customer loyalty


Benefits of Supply Chain Management

Organization Benefit

Campbell Soup Doubled inventory turnover rate

Hewlett-Packard Cut supply costs 75%

Sport Obermeyer Doubled profits and increased sales 60%

National Bicycle Increased market share from 5% to 29%

Wal-Mart Largest and most profitable retailer in the world


CPFR

Collaborative Planning, Forecasting, and

Replenishment

Focuses on information sharing among

trading partners

Forecasts can be frozen and then converted

into a shipping plan

Eliminates typical order processing

22


CPFR Process

Step 1 – Front-end agreement

Step 2 – Joint business plan

Steps 3-5 – Sales forecast

Steps 6-8 – Order forecast collaboration

Step 9 – Order generation/delivery execution


CPFR Results

Nabisco and Wegmans

50% increase in category sales

Wal-mart and Sara Lee

14% reduction in store-level inventory

32% increase in sales

Kimberly-Clark and Kmart

Increased category sales that exceeded market

growth


SUMMARY



The process of planning, implementing,

and controlling the efficient, cost effective

flow and storage of raw materials, in-

process inventory, finished goods, and the

related information from the point of origin

to point of consumption for the purpose of

conforming to customer requirements.




Getting the right product and services to the right place, at the right time, at the right price, and in the right condition, while making the greatest contribution to the firm.

The process of anticipating customer needs and wants; acquiring the capital, materials, people, technologies, and information necessary to meet those needs and wants; optimizing the goods- and services-producing network to fulfill customer requests in a timely way.


Supply Chain Management Planning, organizing, directing, & controlling

flows of materials & information

Begins with raw materials

Continues through internal operations

And distribution of finished goods

Also involves after-sales service

Involves everyone in supply chain

Example: Your supplier’s supplier

Objective: Max. value & lower waste


23


Supplier Manufacturer Wholesaler Retailer Consumer Manufacturer

(Plant) (Sales & Distribution)

The Supply Chain

• is a network of manufacturing and logistics sites that develop, plan, source, convert and deliver products that meet customer and consumer needs

• includes manufacturers, suppliers, transporters, warehouses, retailers, and customers

Prof. Marvin I. Noroña 141 BUS118 – Production & Operations Management

Supply Chain, referred to as the “ Value Chain ”

Factory Distribution Center Store Customers

• includes movement of products from suppliers to manufacturers to distributors, but also includes movement of information, funds, and products in both directions

• contains business processes which are a collection of activities and tasks required to perform the work in order to maximize overall value created

Prof. Marvin I. Noroña 142


The Inbound and Outbound Supply Chain

CONVERSION

FG, RM, IM STORAGE

SHIPPING

TRANSPORT

CUSTOMERS

DISTRIBUTION CENTERS

SUPPLIERS

Inbound and Outbound Logistics Management

Prof. Marvin I. Noroña 143 BUS118 – Production & Operations Management

S-I-P-O-C Model


SUPPLY CHAIN

MANAGEMENT

Materials Management

Physical Distribution

Operations Outbound

SUPPLIER INPUT PROCESS OUTPUT CUSTOMER

Production

Goods & Services

Materials & Supplies


Components of Supply Chain Management

Management Actions

Planning Implementation Control

Input

Natural Resources

(land, facilities, & equipment

Human resources

Financial resources

Information resources


Raw In-process Finished

Materialsl Inventory Goods

Marketing Orientation

(competitive advantage)

Time & place utility

Efficient movement to

customer

Proprietary asset

Output

Supply Chain Activities Prof. Marvin I. Noroña BUS118 – Production & Operations Management 146

Supply Chain Activities

Customer Service

Demand forecasting

Distribution

communications

Inventory control

Material handling

Order processing

Parts and service support

Plant & warehouse site selection

Procurement

Packaging

Return goods handling

Salvage & scrap disposal

Traffic & transportation

Warehousing & storage


24


Supply Chain

Consumer

Retailer

Mfg.

Mat'l Flow

VISA®

Credit Flow

Supplier

Supplier Wholesaler

Retailer

CashFlow

OrderFlow

Schedules

Consumer

Retailer

Mfg.

Mat'l Flow

VISA®

Credit Flow

Supplier

Supplier Wholesaler

Retailer

CashFlow

OrderFlow

Schedules

Prof. Marvin I. Noroña BUS118 – Production & Operations Management

Components of a Supply Chain



Traditional Material Flow and Order Flow Through the Transformation Process

Inputs

Suppliers Trans-portation

Conversion R M Invty

Incoming Inspection

Receiving F G Invty

Quality Control

Trans-portation

Distribution/Retail

Customers

Output Transformation

D D D

MRO Invty

WIP Invty

Work Orders

Purchasing

Production/Inventory Control

Order Entry

Orders from Distributors


Traditional Logistics Organization

Independent Cost / Operating Centers

Lack Of Synergy / Higher End Costs



Organizational Changes


An Integrated SCM Organization


25


Business Drivers

Globalization

Customer service and quality focus

Time

Core competency

Technological availability

Electronic commerce

Clean and Green

Lean Production & Cost Minimization


Implications for Supply Chain Managers

Global competition & constant changes

Greater risk and uncertainty

A new mindset - global & strategic

High level of organizational flexibility

Managing risk through improved

information systems

Management of supply market in a volatile

environment


supply chain management powerpoint presentation

Documents

demand chain

value chain

internal operations

operations managers

sales material costs

increase sales

final customer

design of goods services