1. Operations Management Supply-Chain Management Chapter 11

2. Learning Objectives
When you complete this chapter, you should be able to :
Identify or Define:
Supply-chain management
Purchasing
Outsourcing
E-procurement
Materials management
Keiretsu
Virtual companies

3. Learning Objectives
When you complete this chapter, you should be able to :
Describe or Explain:
Supply-Chain Strategies
Purchasing strategies
Approaches to negotiations

4. Volkswagen Brazilian plant employs 1000 workers
200 work for VW
800 work for other contractors:
Rockwell International, Cummins Engines, Deluge Automotiva, MWM, Remon and VDO, etc.
VW responsible for overall quality, marketing, research and design
VW looks to innovative supply-chain to improve quality and drive down costs

5. Volkswagen Unusual elements:
VW is buying not only materials, but also the labor and related services
Suppliers are integrated tightly into VW’s own network, right down to assembly work in the plant

6. Supply-Chain Management
Planning, organizing, directing, & controlling flows of materials
Begins with raw materials
Continues through internal operations
Ends with distribution of finished goods
Involves everyone in supply-chain
Example: Your supplier’s supplier
Objective: Maximize value & lower waste

7. The Supply-Chain Material Flow Credit Flow Supplier Manufacturing
VISA
Material Flow
Credit Flow
Supplier
Manufacturing
Retailer
Consumer
Raw material Supplier
Wholesaler
Retailer
Order
Cash
Schedules
Flow
Flow

8. The Supply Chain Customer Supplier Manufacturer Distributor
Inventory
Distributor
Manufacturer
Customer
Market research data
Scheduling information
Engineering and design data
Order flow and cash flow
Ideas and design to satisfy end customer
Material flow
Credit flow

9. Material Costs in Supply-Chain
11%
31%
58%
Material
Dir Wages
Other
71%
16%
13%
COGS
Payroll
83% 9% 8%
Manufacturing
Wholesale
Retail

10. Supply-Chain Support for Overall Strategy
Supply demand at lowest possible cost
Select primarily for cost
Low Cost
Respond quickly to changing requirements and demand to minimize stockouts
Select primarily for capacity, speed, and flexibility
Response
Share market research; jointly develop products and options
Select primarily for product development skills
Differentiation
Supplier’s
goal
Primary Selection Criteria

11. Supply-Chain Support for Overall Strategy - continued
Process
Characteristics
Maintain high average utilization
Low Cost
Invest in excess capacity and flexible processes
Response
Modular processes that lend themselves to mass customization
Inventory Characteristics
Minimize inventory throughout the chain to hold down costs
Develop responsive system, with buffer stocks positioned to ensure supply
Minimize inventory in the chain to avoid obsolescence
Differentiation

12. Supply-Chain Support for Overall Strategy - continued
Lead-time
Characteristics
Shorten lead-time as long as it does not increase costs
Low Cost
Invest aggressively to reduce production lead-time
Response
Invest aggressively to reduce development lead-time
Differentiation
Product-design Characteristics
Maximize performance and minimize cost
Use product designs that lead to low set-up time and rapid production ramp-up
Use modular design to postpone product differentiation for as long as possible

13. 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 schedule and manage the shipment of parts in and finished products out
Staffed with local specialists to handle duties, trade, freight, customs and political issues

14. Importance of Purchasing
Major cost center
Affects quality of final product
Aids strategy of low cost, response, and differentiation

15. Supply-Chain Costs as a Percent of Sales
Industry
Percent of Sales
All industry
Automobile
Food
Lumber
Paper
Petroleum
Transportation
52%
67%
60%
61%
55%
79%
62%

16. Dollars of Additional Sales Needed to Equal 1$ Saved Through Purchasing
Percent of Sales Spent in the Supply-Chain
30%
40%
50%
60%
70%
80%
90% 2
$2.78
$3.23
$3.85
$4.76
$6.25
$9.09
$16.67 4
$2.70
$3.13
$3.70
$4.55
$5.88
$8.33
$14.29 6
$2.63
$3.03
$3.57
$4.35
$5.56
$7.69
$12.50 8
$2.56
$2.94
$3.45
$4.17
$5.26
$7.14
$11.11 10
$2.50
$2.86
$3.33
$4.00
$5.00
$6.67
$10.00
Percent Net Profit of Firm

17. Objectives of the Purchasing Function
Help identify the products and services that can be best obtained externally;
and
Develop, evaluate, and determine the best supplier, price, and delivery for those products and services

18. The Purchasing Focus Supply Management Materials Management
-High transportation cost
-High inventory costs
Supply Management
-High costs
-Scarcity: national or
international
Source Management
-Unique items
-Custom-made items
-High technology items
Purchasing
Management
-Commodity items
-Standard products

19. Traditional Purchasing Process
Receiving
Dock
Purchase
Order
Packing
List
Processing
Invoice
Receivables Report
Check
Accounts Receivable
Accounts Payable
Mail
Reconcile
Customer
Supplier

20. Purchasing Techniques
Drop shipping and special packaging
Blanket orders
Electronic ordering and funds transfer
Electronic data interchange (EDI)
Standardization
Outsourcing

21. Make/Buy Considerations
Reasons for Making Reasons for Buying
Maintain core competencies and protect personnel from layoff
Lower production cost
Unsuitable suppliers
Assure adequate supply
Utilize surplus labor and make a marginal contribution
Frees management to deal with its primary business
Lower acquisition cost
Preserve supplier commitment
Obtain technical or management ability
Inadequate capacity

22. 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

23. Supply-Chain Strategies
Negotiate with many suppliers; play one supplier against another
Develop long-term “partnering” arrangements with a few suppliers who will work with you to satisfy the end customer
Vertically integrate; buy the actual supplier
Keiretsu - have your suppliers become part of a company coalition
Create a virtual company that uses suppliers on an as-needed basis.

24. Many Suppliers Strategy
Many sources per item
Adversarial relationship
Short-term
Little openness
Negotiated, sporadic PO’s
High prices
Infrequent, large lots
Delivery to receiving dock

25. 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.

26. Daimler Chrysler’s Supplier Cost Reduction Effort
Suggestion
Model
Savings
Rockwell
Use passenger car door
locks on trucks
Dodge
trucks
$280,000
Simplify design/substitute
materials on manual
window system
Various
$300,000 3M
Change tooling for wood-
grain panels to allow three
from one die instead of two
Caravan,
Voyager
$1,500,000
Trico
Change wiper-blade
formulation
$140,000
Leslie Metal
Arts
Exterior lighting suggestions

27. Tactics for Close Supplier Relationships
Reduce total number of suppliers
Certify suppliers
Ask for JIT delivery from key suppliers
Involve key suppliers in new product design
Develop software linkages to suppliers
Results
Average 20% reduction in 5 years
Almost 40% of all companies surveyed were themselves currently certified
About 60% ask for this
About 54% do this
Almost 80% claim to do this
About 50% claim this

28. Vertical Integration Strategy
Raw Material
(Suppliers)
Why Use it?
Ability to produce goods previously purchased
Setup operations
Buy supplier
Make-buy issue
Major financial commitment
Hard to do all things well
Backward
Integration
Current
Transformation
Forward
Integration
Finished Goods
(Customers)

29. Forms of Vertical Integration
Iron Ore
Silicon
Farming
Raw Material
(Suppliers)
Steel
Flour Milling
Backward
Integration
Integrated
Circuits
Current
Transformation
Automobiles
Distribution
System
Forward
Integration
Circuit Boards
Computers
Watches
Calculators
Finished Goods
(Customers)
Dealers
Baked Goods

30. Vertical Integration Can be Forward or Backward
Examples of Vertical Integration
Raw material (suppliers)
Iron ore
Silicon
Farming
Backward Integration
Steel
Current Transformation
Automobiles
Integrated Circuits
Flour Milling
Forward Integration
Distribution System
Circuit boards
Finished goods (customers)
Dealers
Computers, watches, calculators
Baked Goods

31. Keiretsu Network Strategy
Japanese word for ‘affiliated chain’
System of mutual alliances and cross-ownership
Company stock is held by allied firms
Resulting in lowering need for short-term profits
Links manufacturers, suppliers, distributors, & lenders
‘Partnerships’ extend across entire supply chain

32. Virtual Companies
Companies that rely on a variety of supplier relationships to provide services on demand.
Also known as hollow corporations, or network corporations

33. Virtual Company Strategy
Network of independent companies
Linked by technology
PC’s, faxes, Internet etc.
Each contributes core competencies
Typically provide services
Payroll, editing, designing
May be long or short-term
Usually, only until opportunity is met

34. Managing the Supply-Chain
Options:
Postponement
Channel assembly
Drop shipping
Blanket orders
Invoiceless purchasing
Electronic ordering and funds transfer
Stockless purchasing
Standardization
Internet purchasing (e-procurement)

35. Managing the Supply-Chain - Other Options
Establishing lines of credit for suppliers
Reducing bank “float”
Coordinating production and shipping schedules with suppliers and distributors
Sharing market research
Making optimal use of warehouse space

36. Successful Supply-Chain Management Requires:
A mutual agreement on goals
Trust
Compatible organizational cultures

37. Issues in an Integrated Supply-Chain
Local optimization
Incentives
Large lots

38. Opportunities in an Integrated Supply-Chain
Generation of accurate “pull” data
Reduction of lot size
Single stage control of replenishment

39. Vendor Managed Inventory (VMI)
Postponement – keeps product generic as long as possible
Channel Assembly – sends to distributor individual components and modules rather than finished goods
Drop Shipping and Special Packaging – supplier will ship to end consumer rather than to seller
Blanket Orders – a long-term purchase commitment to a supplier for items that are to be delivered against short-term releases to ship
Standardization – reducing the number of variations in materials and components
Electronic Ordering and Funds Transfer – “paperless” ordering and 100% material acceptance, payment by “wire”

40. Vendor Selection Steps
Vendor evaluation
Identifying & selecting potential vendors
Vendor development
Integrating buyer & supplier
Example: Electronic data exchange
Negotiations
Results in contract
Specifies period of agreement, price, delivery terms etc.

41. Vendor Selection Rating Form

42. 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 labor
market-based price model - published price or index
competitive bidding - potential suppliers bid for contract

43. Logistics Management Integrates all materials functions
Purchasing
Inventory management
Production control
Inbound traffic
Warehousing and stores
Incoming quality control
Objective: Efficient, low cost operations

44. Goods Movement Options
Trucking
Railways
Airfreight
Waterways
Pipelines

45. Supply-Chain Performance Compared
Typical Firms
Benchmark Firms
Administrative costs as percent of purchases
3.3%
0.8%
Lead time (weeks) 15 8
Time spent in placing order
42 minutes
15 minutes
Percentage of late deliveries
33% 2%
Percentage of rejected material
1.5%
.0001%
Number of shortages per year
400 4