2 Outline Global Company Profile: Volkswagen The Strategic Importance of the Supply-ChainGlobal Supply-Chain IssuesPurchasingManufacturing EnvironmentsService EnvironmentMake-or-Buy Decisions
3 Outline - continued Supply-Chain Strategies Vendor Selection Many SuppliersFew SuppliersVertical IntegrationKeiretsu NetworksVirtual CompaniesVendor SelectionVendor EvaluationVendor DevelopmentNegotiations
4 Outline - continued Managing the Supply-Chain Materials Management Distribution SystemsBenchmarking Supply-Chain Management
5 Learning ObjectivesWhen you complete this chapter, you should be able to :Identify or Define:Supply chain managementPurchasingE-procurementMaterials managementKeiretsuVirtual companiesDescribe or Explain:Purchasing strategiesApproaches to negotiations
6 Volkswagen Brazilian plant employs 1000 workers 200 work for VW800 work for other contractors:Rockwell International, Cummins Engines, Deluge Automotiva, MWM, Remon and VDO, etc.VW responsible for overall quality, marketing, research and designVW looks to innovative supply chain to improve quality and drive down costsIs this the future? Is our increased application of technology forcing both individuals and organizations to become specialists in relatively narrow areas? What problems is this likely to cause?This is probably a good example to discuss in detail. Points which might be raised include:- What differences might one expect between Volkswagen’s employment of 800 of its own workers versus 800 workers from a variety of companies?- What risks does this practice raise for VW?- What changes must VW make to integrate the workers from the other companies into the VW organization?- While this might work in Brazil, would it work equally well in the U.S.?
7 Lead Figure for Chapter 11 Graphic of VW plant, showing areas occupied by supply firms.
8 Volkswagen Unusual elements: VW is buying not only materials, but also the labor and related servicesSuppliers are integrated tightly into VW’s own network, right down to assembly work in the plant
9 Supply-Chain Management Planning, organizing, directing, & controlling flows of materialsBegins with raw materialsContinues through internal operationsEnds with distribution of finished goodsInvolves everyone in supply-chainExample: Your supplier’s supplierObjective: Maximize value & lower wasteProbably the most important point to be made here is the encompassing nature of supply-chain management - from suppliers’ suppliers through internal production through distribution to the customer.
10 The Supply-Chain Material Flow Credit Flow Supplier Manufacturing VISAMaterial FlowCredit FlowSupplierManufacturingRetailerConsumerSupplierWholesalerRetailerOrderCashSchedulesFlowFlow
11 The Supply Chain Customer Supplier Manufacturer Distributor InventoryDistributorManufacturerCustomerMarket research datascheduling informationEngineering and design dataOrder flow and cash flowIdeas and design to satisfy end customerMaterial flowCredit flowThis slide might be used to make the point about the various “flows” - material, information, money.
12 Material Costs in Supply-Chain 11%31%58%MaterialDir WagesOther71%16%13%COGSPayroll83%9%8%ManufacturingWholesaleRetailStudents should be asked to explain the differences illustrated by these graphs.Source: U.S. Department of Commerce, Bureau of Census, 1987 Census of Manufacturers: General Summary of Retail Trade (Washington, D.C.: Government Printing Office, 1991)
13 Supply-Chain Support for Overall Strategy Supply demand at lowest possible costSelect primarily for costLow CostRespond quickly to changing requirements and demand to minimize stockoutsSelect primarily for capacity, speed, and flexibilityResponseShare market research; jointly develop products and optionsSelect primarily for product development skillsDifferentiationSupplier’sgoalPrimary Selection CriteriaThis and the following two slides look at how supply-chain strategy can support overall strategy.
14 Supply-Chain Support for Overall Strategy - continued ProcessCharacteristicsMaintain high average utilizationLow CostInvest in excess capacity and flexible processesResponseModular processes to lend themselves to mass customizationInventory CharacteristicsMinimize inventory throughout the chain to hold down costsDevelop responsive system, with buffer stocks positioned to ensure supplyMinimize inventory in the chain to avoid obsolescenceDifferentiation
15 Supply-Chain Support for Overall Strategy - continued Lead-timeCharacteristicsShorten lead-time as long as it does not increase costsLow CostInvest aggressively to reduce production lead-timeResponseInvest aggressively to reduce development lead-timeDifferentiationProduct-design CharacteristicsMaximize performance and minimize costUse product designs that lead to low set-up time and rapid production ramp-upUse modular design to postpone product differentiation for as long as possible
16 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 ratesable to use the latest computer and transmission technologies to manage the shipment of parts in and finished products outstaffed with local specialists to handle duties, trade, freight, customs and political issues
17 Purchasing Acquisition of goods & services Activities Importance Help decide whether to make or buyIdentify sources of supplySelect suppliers & negotiate contractsControl vendor performanceImportanceMajor cost centerAffects quality of final productStudents might be asked how they believe the role of purchasing is changing given the increased use of information technology and strategies such as JIT.
18 Purchasing Costs as a Percent of Sales IndustryPercent of SalesAll industryAutomobileFoodLumberPaperPetroleumTransportation52%61%60%55%74%63%This slide should further impress upon students the importance of the purchasing function.
19 Dollars of Additional Sales Needed to Equal 1$ Saved Through Purchasing This slide emphasizes the role of efficiency of purchasing.
20 Objectives of the Purchasing Function Help identify the products and services that can be best obtained externally; andDevelop, evaluate, and determine the best supplier, price, and delivery for those products and servicesWhile these are the main functions of purchasing, one would also expect the purchasing department to participate in make-buy decisions.
22 Traditional Purchasing Process ReceivingDockPurchaseOrderPackingListProcessingInvoiceReceivables ReportCheckAccounts ReceivableAccounts PayableMailReconcileCustomerSupplierStudents should be asked to consider how this traditional process might be changed through process reengineering and the effective application of information technology. (paperless purchasing?)How does the nature of this process change in a virtual company?
23 Purchasing Techniques Drop shipping and special packagingBlanket ordersInvoiceless purchasingElectronic ordering and funds transferElectronic data interchange (EDI)Stockless purchasingStandardization
24 Make/Buy Considerations Reasons for Making Reasons for Buyinglower production costunsuitable suppliersassure adequate supplyutilize surplus labor and make a marginal contributionobtain desired quantityremove supplier collusionobtain a unique item that would entail a prohibitive commitment from the supplierlower acquisition costpreserve supplier commitmentobtain technical or management abilityinadequate capacityreduce inventory costsensure flexibility and alternate source of supplyreciprocity
25 Make/Buy Considerations Reasons for Making Reasons for Buyingmaintain organizational talentprotect proprietary design or qualityincrease/maintain size of companyitem is protected by patent or trade secretfrees management to deal with its primary business
27 Supply-Chain Strategies Negotiate with many suppliers; play one supplier against anotherDevelop long-term “partnering” arrangements with a few suppliers who will work with you to satisfy the end customerVertically integrate; buy the actual supplierKeiretsu - have your suppliers become part of a company coalitionCreate a virtual company that uses suppliers on an as-needed basis.Subsequent slides expand upon these strategies.
31 Purchasers Ties Themselves to Suppliers Tactic1. Reduce total number of suppliersCertify suppliersAsk for JIT delivery from key suppliersInvolve key suppliers in new product designDevelop software linkages to suppliersResultsAverage 20% reduction in 5 yearsAlmost 40% of all companies surveyed were themselves currently certifiedAbout 60% ask for thisAbout 54% do thisAlmost 80% claim to do thisAbout 50% claim this; about 15% more than have EDI links to suppliers
32 Vertical Integration Strategy Ability to produce goods previously purchasedSetup operationsBuy supplierMake-buy issueMajor financial commitmentHard to do all things wellRaw Material(Suppliers)BackwardIntegrationCurrentTransformationForwardIntegrationUnder what conditions is vertical integration an appropriate strategy? Would we choose it simply if the item production/purchase cost would be less?Finished Goods(Customers)
33 Forms of Vertical Integration Iron OreSiliconFarmingRaw Material(Suppliers)SteelFlour MillingBackwardIntegrationIntegratedCircuitsCurrentTransformationAutomobilesDistributionSystemForwardIntegrationCircuit BoardsStudents should be asked to consider why, other than on a “cost” basis, a company might want to consider vertical integration.ComputersWatchesCalculatorsFinished Goods(Customers)DealersBaked Goods
34 Keiretsu Network Strategy Japanese word for ‘affiliated chain’System of mutual alliances and cross-ownershipCompany stock is held by allied firmsLowers need for short-term profitsLinks manufacturers, suppliers, distributors, & lenders‘Partnerships’ extend across entire supply chainStudents might be asked to consider what it would take to implement such a system in the U.S.
36 Vendor Selection Steps Vendor evaluationIdentifying & selecting potential vendorsVendor developmentIntegrating buyer & supplierExample: Electronic data exchangeNegotiationsResults in contractSpecifies period of agreement, price, delivery terms etc.Students should be asked to consider the problems which might be encountered at each step in this process.
37 Vendor Selection Rating Form Students might be asked to consider what additional information they might want before approving a vendor selection.
38 Supplier Selection Criteria CompanyFinancial stabilityManagementLocationProductQualityPriceServiceDelivery on timeCondition on arrivalTechnical supportTrainingStudents might be asked if they perceive one or another of these criteria to be especially important. Also, are there other criteria they would prefer to use or think should be added? (One such criteria might be the ability to communicate using EDT)
39 Negotiation Strategies Three types:cost-based price model - supplier opens its books to purchaser; price based upon fixed cost plus escalation clause for materials and labormarket-based price model - published price or indexcompetitive bidding - potential suppliers bid for contractAsk students under what conditions each of these models might be appropriate.
40 Managing the Supply-Chain Options:PostponementChannel assemblyDrop shippingBlanket ordersInvoiceless purchasingElectronic ordering and funds transferStockless purchasingStandardizationInternet purchasing (e-procurement)Ask students to consider the conditions under which each of these options might be appropriate.
41 Managing the Supply-Chain - Other Options Establishing lines of credit for suppliersReducing bank “float”Coordinating production and shipping schedules with suppliers and distributorsSharing market researchMaking optimal use of warehouse space
42 Materials Management Integrates all materials functions PurchasingInventory managementProduction controlInbound trafficWarehousing and storesIncoming quality controlObjective: Efficient, low cost operationsIn addition to framing the materials management function, this slide raises the issue of “how does one begin assigning responsibilities for each of the facets of supply-chain management?”
43 Goods Movement Options TruckingRailwaysAirfreightWaterwaysPipelinesHere you might simply discuss some of the options available under each of the categories listed.
44 Supply-Chain Performance Compared Benchmark FirmsTypical FirmsThis slide summarizes some of the benefits of effective supply-chain management.