1. GEOP 4355 Supply Networks

2. Outline Definition, importance, and complexity Information sharing
Supplier selection/ management
Design collaboration
Negotiation and contracts
Supplier certification
Information sharing
Vendor managed inventory
Sourcing and Lean
Global sourcing
Outsourcing
Other inbound flow processes

3. Definition, importance and complexity
Sourcing/ Procurement: Processes related to the acquisition of the raw materials required to create the products of the organization
Includes
Supplier (s) selection and design collaboration
Information and operational collaboration between suppliers and the enterprise
Negotiation and contracts
Outsourcing decisions
Supplier certification and assessment
Determining the timing and size of orders (inventory management)

4. Definition, importance and complexity
Can represent 40-60% of the cost of an item
Components and assemblies, packaging
Transportation (where you source from will determine inbound transportation costs)
Internal costs related to transactional processes
Warehousing and inventory management (where you source from will drive safety stocks and other RM inventory costs)
Customs, quotas, and tariff issues
Strategic alignment – strategic advantage
Partnering with “correct suppliers” can lead to a competitive advantage
Allowing to focus on areas of strength (rest is procured)

5. Definition, importance and complexity
Multi-functional decisions. Requires consideration from multiple functions (it affects the performance of …)
Sales / marketing – forecasts/ seasons, product options
Engineering – design specifications
Quality – quality criteria, historical performance
Information Systems – communication / information transfer
Finance and accounting – terms of payment and billing method, insurance risk
Warehousing – receiving processes
Production planning
Transportation – terms, consolidation, alternative routes/ modes
Legal – customs and quotas

6. Definition, importance and complexity
Poor sourcing can result in business failure
Higher costs than competition
Delivery problems (quality, time) propagates into the buyer’s system
Your product’s quality (can’t just blame it on the supplier)
Your product’s on time delivery (can’t …)
Ethical/ Moral Issues
Apple’s case with suppliers in Asia
Differences in culture on accepting “gifts”
Suppliers can tarnish the buyer’s image, for example child labor

7. Supplier selection/ management
Simple: Who to buy from?
The importance of this relates to the particular item you are purchasing
Standard/commodity items
Less critical/ relevant
Intermediaries/ industrial distributors who sell many items
Particular to the product/ designed to company specifications
More important, higher dependencies
Direct relationship with the company that makes it for you

8. Supplier selection/ management
A key component of supplier selection:
supplier vision, mission, and performance must be aligned with the companies priorities
Criteria to select suppliers
Cost / Discounts/ Payment terms
Quality
Lead time and on-time reliability
Capacity and volume flexibility
Technology, innovation, experience
Firm size, financials, …
Ethics, history, …
Systems and Information compatibility
Political stability and risk (of production location and of administration)
For an example

9. Supplier selection/ management
Number of suppliers to use for a single item
Sole versus multiple sourcing
Sole: strong partnership, less variability, but risk of failure
Multiple: competition between suppliers, risk mitigation, but variability and “lack of focus”
There has been a strong push for many years to reduce the supplier base.
Supplier Base Management: Management of relationships with mayor suppliers, minor suppliers, evaluating suppliers and scouting new ones.

10. Supplier selection/ management
Relationship Costs
Ordering Costs
Transportation Costs
Risk
Procurement costs
slow
few
Number of suppliers

11. Supplier selection/ management
Total costs
Relationship Costs
Ordering Costs
Transportation Costs
Contingency/ failure costs
Procurement costs
few
Number of suppliers

12. Supplier selection/ management
Site based supplier selection/ management
Each unit/site selects suppliers based on its needs/local requirements
Uses local know-how
Direct communication between buyer-source
Unified/ company wide supplier selection/ management
Benefit from economies of scale for contract negotiation (prices and terms)
Use of global know-how

13. Supplier selection/ management
Can be part of a strategic process to enter a market
Company X wants to sell product Y in country Z
Country Z will allow it if some components of product Y are made by companies in country Z,
Part of long term relationships
Boeing outsourced significant sections of its latest airplane to Japan. Japan is a major buyer of Boeing aircraft.

14. Supplier selection/ management
ABC Classification of suppliers
“AA” and “A” Suppliers
= strategically important suppliers
Provide the Co critical components
Large purchase volumes in terms of $
Their materials go into the Co’s best selling / highest value products
Few alternatives available / Few qualified sources of supply
Design to company specifications/ very complex specifications requiring complex manufacturing or service process (not easily replaceable)

15. Supplier selection/ management
The “B” suppliers
In between….
The “C” suppliers
Low risk/ Low cost items
Standard specifications
Usually sold in large volumes
Many existing alternatives, Many sources
Small individual transactions (buy a few time in large volumes)

16. Supplier selection/ management
Pareto Principle (80 – 20 rule)
Well known principle, applies to all types of decision processes and analysis

17. Supplier selection/ management
Pareto Principle (80 – 20 rule)
SKU#
Sales
2947F
$34,886
3191A
$7,703
3914R
$803,568
4357A
$4,567
4374A
$5,482
4882R
$34,444
4983F
$29,599
5139A
$6,660
5335F
$31,993
7270R
$479,747
7406F
$17,933
8462F
$132,990
8535F
$20,091
8637A
$15,771
9110A
$5,174

18. Supplier selection/management
For the last years the trend has been to reduce the supplier base (the number of total suppliers to use for all purchased items)
Reduce administrative/management cost
Focus on a few relationships (collaboration, negotiation, better terms)
Consolidate transportation/ purchasing operations
Standardize procured items (part of design process, next slides)
Risk: one supplier that has problems/fails has a higher impact on operations.

19. Supplier Decision Making
Decision Analysis Theory models
Based on the concept of relating multiple alternatives to multiple possible futures.
DA = Decision alternatives
SN = states of nature = possible futures.
Each relation is called a payoff.
Assumptions
All alternatives are considered
All futures are considered

20. Supplier Decision Making
Alternatives:
Supplier Q = high quality but low capacity;
Supplier T = high technology and expensive,
Supplier C = high capacity and moderate costs.
Future
Two elements: Competition focus and market trend
Competition: enhances technology, focuses on quality, focuses on cost
Market trend: up, down

21. Supplier Decision Making
Effect on Market Share
Market
Competition T Up C Q
Down
Supplier Q 5%
12% 1%
-3%
-9%
-4%
Supplier T
11% 4% 8% 6%
-12% 0%
Supplier C
-8% 3%
-5%
-2%

22. Supplier Decision Making
What supplier should be selected?
Optimistic
Conservative
Minimize Error
EV. Need probabilities
Probability of market up = 40%, down = 60%
Competition T = 20%, C = 55%, Q = 25%

23. Supply problem solving
Purchasing manager must determine the amount of the main raw material to buy for a new product.
This is a made to order raw material with a long lead time, thus additional material cannot be procured in this cycle.
They must buy the raw material in lots of 400 and each lot costs $10,000.
Raw material not used is lost due to a fast deterioration.
Cost to produce and deliver the final product is $10/unit and will be based only on the demand.

24. Supply problem solving
Demand for the new product is not known. However the sales department has provided three estimates of how much they will sell and the price customers will be willing to pay for it.
Low demand, low prices: Market for about 1,220 at an average of $45/each. P = 60%
Medium demand/ medium prices: Market for about 1,530 at an average of $55/each. P = 20%
High demand/ high prices: Market for about 2,250 at an average of $60/each. P = 20%
States of Nature: the demand and prices
Decision alternatives: how much raw material to order from the supplier ahead of the production cycle.

25. Design collaboration
As mentioned, 40-60% of spending at a manufacturer is purchasing related
80 percent of the cost of a purchased part is fixed in the design phase
Design collaboration with suppliers can result in reduced cost, improved quality, and decreased time to market
Basis for design collaboration
Strategic similarity
Information technology platforms
Trust/ Contracts
Shared benefits

26. Design collaboration Thinking Life Cycle Design and launch stages:
Supplier integration (Japanese view of design collaboration), standardization, value engineering, joint brainstorming efforts on new products
Design for manufacturing can improve the opportunity to use standard parts and techniques, leverage volumes, and create opportunities for cost savings.
Design for logistics focuses on packaging, transportation, integration with material flows (for example consolidation)

27. Design collaboration Thinking Life Cycle Growth and maturity stages:
Team-based value-engineering efforts, supplier development and kaizen events, cross-enterprise cost reduction projects, supplier suggestion programs, and SC redesign efforts.
These types of efforts require that both parties commit to achieving cost reduction efforts that go beyond simple haggling over prices.
End of life stage:
Purchasing cannot ignore the potential value of environmental initiatives to remanufacture, recycle, or refurbish products that are becoming obsolete

28. Negotiation and contracts
Many shortcomings in supply chain performance occur because the buyer and supplier are separate organizations and each tries to optimize its own profit
Total supply chain profits might therefore be lower than if the supply chain coordinated actions to have a common objective of maximizing total supply chain profits
Company X wants to sell only in CL to reduce its production costs
But this makes the buyer have excess inventory which increases inventory and warehousing costs, obsolescence, …
The supplier must share in some of the buyer’s demand uncertainty (by carrying inventory)

29. Negotiation and contracts
Issues to be considered as part of contracts
Surplus inventory
Changes in requirements (volume and timing)
Sharing of performance improvement savings
Length of contract
Cost changes
Flow into secondary markets

30. Supplier certification
Programs designed to evaluate suppliers
Goal is to track long term performance that allows some suppliers to become “partners”
Partner suppliers (benefits)
Priority for new items being sourced
No need for incoming inspection
Higher level of information sharing
“Kodak’s Supplier Certification Program recognizes suppliers, who meet or exceed Kodak established requirements and are producing excellent levels of cost, quality and delivery performance. To be considered for this recognition, suppliers must show evidence of a sound and effective quality management system, provide Kodak with assurance and flexibility with delivery, lead time, and demonstrate world-class product/service quality levels”

31. Supplier certification
Scorecards: system to evaluate supplier on a consistent basis (list of KPIs)
Defect rate
# of Corrective Actions Last Quarter
Average Response and Resolution time for Corrective actions
# of Rework Hours due to Supplier Components
# of Customer Complaints on Product Quality
Warranty Reserves
Relative ranking of supplier
Performance against benchmark

32. Information sharing Real time connectivity – operational information
Production plans
Inventory levels
Kanban cards/ POs
Long term – operational information
Forecasts
Long term – products
New product collaboration
Life cycle plans
Cost information
Information technology
integration

33. Vendor managed inventory
Supplier controls/manages/owns the inventory at the customer’s location
Therefore the supplier determines the appropriate replenishment policies and safety stock
The buyer provides planned use information and expected service level

34. Sourcing and lean
The importance of suppliers was always stressed in the lean thinking push that gained popularity in the 80’s
In Lean /JIT systems
the supply process is more frequent and must be more reliable
There is more dependency on suppliers for design input, delivery performance, and quality
Operationally
Reduced inventories (safety stock)
Continuous delivery
Small quantities
No incoming inspection
Simplified PO/ Receipt processes

35. Global sourcing – customs brokers
Today’s sourcing is global, this implies importing processes
Customs brokers are the companies/individuals who have the know how and legal authorization to complete importing/ exporting processes.
This function is similar across most countries
Involves the preparation of documents and/or electronic submissions, the calculation and payment of taxes, duties and excises, and facilitating communication between government authorities and importers and exporters.

36. Global sourcing – customs brokers
Customs brokers in the United States prepare and submit documentation to notify or obtain clearance from government agencies such as the U.S. Food and Drug Administration, the U.S. Department of Agriculture, and the Fish and Wildlife Service.
They also arrange the transshipment (i.e., local delivery) of merchandise via trucking companies.
Specialize in certain goods like apparel, perishables, or clearing the crew and manifest of large cargo vessels.

37. Global sourcing – customs brokers
Customs brokers must pass an examination and background check to become licensed by the U.S. Customs and Border Protection. Other countries also require licenses, in EU not the case.
They are not government employees - not be confused with "customs officers" (in other countries, however, the two terms may be interchangeable).
Customs brokers need to be familiar with the tariff schedule, a listing of duty rates for imported items, and the regulations governing imports found in the Code of Federal Regulations Title 19 (19 CFR).
Customs broker functions include: determining tariffs, quota limits, special permits, insurance requirements
Failures result in fines, holds, and seizures.

38. Global sourcing – import processes

39. Global sourcing – import processes

40. Global sourcing – import processes

41. Outsourcing
What is it? The process of moving an activity from internal to external. From in-house to purchased – supplier managed
Old days, Ford produced all parts/ assemblies and even had steel and rubber plants. High level of vertical integration.
Slowly, over time, these internal activities were outsourced, became external to the company.
Today suppliers produce most major assemblies including the engine, electronics, transmission,….
Ford designs (some of it), assembles, sells, finances, …
Outsourcing non-critical functions has become commonplace

42. Outsourcing
Part of supplier management is determining if internal functions should be outsourced (a supplier can do it better, cheaper, faster, …)
When activities/processes are outsourced, is difficult to move back to an in-house operation due to lost know-how, resources, equipment, space, …
Or operations/products provided by suppliers should be performed internally
To reduce risk/ it is critical to operations and the supplier has failed often
However, this is often hard to do given the investments required

43. Other inbound flow processes
In addition to the sourcing processes, some other key processes of inbound flows are:
Receiving: process of accepting shipments. This often includes verification of BoL versus the actual items
Payment processes / authorizing payment
Coordination with Quality Assurance department for inspections/ audits/ samples
Sorting materials
Locating the materials in storage/ move to line

44. Other inbound flow processes
Cross-docking operations
Materials received may be “broken” into smaller shipments and sent immediately to other points in the internal network (no storage at first entry point)
Customers =
(the firm’s other plants, warehouses)