11-1 Operations Management Supply-Chain Management Chapter 11

11-2 Outline  Strategic Importance of the Supply-Chain.  Supply-Chain Strategies.  Purchasing & Acquisition.  Logistics & Materials Management.

11-3  Management of integrated activities that  procure materials,  transform them into final products, and  deliver them to customers.  Focus on integration and system-wide view.  Involves everyone in the supply-chain.  Example: Your supplier’s supplier. Supply-Chain Management

11-4 Consumer Retailer Manufacturing Material Flow VISA ® Credit Flow Supplier Wholesaler Retailer Cash Flow Order Flow Schedules The Supply-Chain Supplier

11-5 Integration  Integrates operations, logistics, marketing, accounting and finance.  Manage:  Transportation.  Suppliers.  Warehousing and distribution.  Inventory levels.  Information sharing.  $ and credit transfers.  Order fulfillment.

11-6 Supply-Chain Trends  Global sourcing and markets.  Need local expertise to handle duties, trade, freight, customs and political issues.  Flexibility to react to sudden changes in parts availability, distribution, or shipping channels, import duties, and currency rates.  Information technology to manage storage and transportation networks.

11-7 Supply-Chain Strategies  How best to work with upstream suppliers and downstream distributors and customers.  To manage procurement, transportation, inventory, warehousing, distribution, etc.  Outsourcing:  Logistics activities (transportation, delivery, inventory, etc.).  Information systems.  Accounting and payroll.  Vertical integration.  Purchasing & Acquisition.

11-8 Outsourcing  Having outside vendors provide services traditionally done internally.  Payroll, logistics, legal, information systems, etc.  Allows organizations to focus on what they do best.  May not have expertise in-house.  Outsourcing may reduce costs.  Economies of scale.  Key question: What activities should be outsourced?  Consider: costs, loss of control, information sharing, loss of expertise, etc.

11-9 Vertical Integration  Produce a good or service previously purchased.  Forward (towards customers) or backwards (towards supplier.).  Develop the capability independently or buy a firm.  Advantages:  May be less expensive than buying.  Provides more control.  Disadvantages:  Can be expensive.  Hard to do all things well.

11-10 Forms of Vertical Integration Iron Ore Steel Automobiles Distribution System Dealers Silicon Integrated Circuits Circuit Boards Computers Watches Calculators Raw Materials Backward Integration CurrentTransformation Forward Integration Finished Goods

11-11  Acquisition of goods & services.  Activities:  Decide whether to make or buy.  Identify sources of supply.  Select suppliers & negotiate contracts.  Control vendor performance.  Importance:  Major cost center.  Affects quality of final product. Purchasing & Acquisition

11-12 Purchasing Costs as a Percent of Sales  All industry  Automobile  Food  Lumber  Paper  Petroleum  Transportation  52%  61%  60%  61%  55%  74%  63% IndustryPercent of Sales

11-13 Make/Buy Considerations  Lower cost to produce.  Unsuitable suppliers.  Poor quality.  Price too high.  Item not available.  Utilize surplus labor.  Protect proprietary design.  Increase/maintain size of company.  Lower cost to buy.  Preserve supplier commitment.  Obtain technical or management ability.  Inadequate capacity.  Item is protected by patent or trade secret.  Frees management to deal with its primary business. Reasons for Making Reasons for Buying

11-14 Supplier Strategies  Negotiate with many suppliers; play one supplier against another.  Negotiated, sporadic small purchase orders.  Adversarial relationship with little openness.  Work with few suppliers and develop long-term “partnering” arrangements.  Exclusive long-term contracts with large orders (and lower prices).  Long-term, stable relationship.

11-15  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. Vendor Selection Steps

11-16  Company criteria  Financial stability.  Management.  Location.  Product criteria  Quality.  Price.  Service criteria  Delivery on time.  Condition on arrival.  Technical support.  Training. Vendor Selection Criteria

11-17 Vendor Selection Rating Form

11-18 Negotiation Strategies  Cost-based price model.  Supplier opens its books to purchaser.  Price based on fixed cost plus escalation clause for materials and labor.  Market-based price model.  Price based on published price or index.  Competitive bidding.  Potential suppliers bid for contract.

11-19 Logistics  All transportation and storage activities from origin or to consumption.  Integrates:  Purchasing.  Inventory management.  Production control.  Inbound and outbound transportation.  Warehousing and stores.  Incoming quality control.

11-20 Logistics  Very expensive: 10% of GDP in USA.  Transportation:  5 modes: Trucking, Railroads, Waterways, Airfreight, Pipeline.  Consider cost and service tradeoff.  Inventory:  Very large and expensive for most firms.  Implications of global production and markets.  Recent security issues.

11-21 Operations Management E-Commerce and Operations Management Supplement 11

11-22 Outline  Electronic Commerce.  E-commerce Definitions.  B2B  B2C  C2C  C2B  E-Procurement

11-23 E-Commerce The use of computer networks, primarily the internet, to buy and sell products, services, and information. Relies on secure, fast and reliable computer and telecommunications networks.

11-24 E-Commerce Definitions Business-to business (B2B) - Both sides of the transaction are businesses, non-profit organizations, or governments. Business-to-consumer (B2C) - Customers are individual consumers. Consumer-to-consumer (C2C) - Consumers sell directly to each other. Consumer-to-business (C2B) - Individuals sell services or goods to businesses.

11-25 E-Procurement  On-line purchasing – link buyers and sellers electronically.  Catalogs.  Auctions.   Internet trading exchanges:  Covisint: By auto industry (buyer).  Spot purchasing.  Example: Spare freight capacity.

11-26 E-Logistics  Inventory tracking.  Global communication.  Automatic identification.  Bar-codes and RFID.  Real-time vehicle routing.  Avoid traffic congestion.  Provide accurate pickup-delivery times.  Better use of vehicle capacity.  Spot markets for empty space in vehicles.