1. Chapter 15 Managing suppliers and customers
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2. Outline Supply chain management Managing suppliers Managing inventory
Supplier selection, supplier profitability, performance measures
Managing inventory
Economic order quantity (EOQ)
Just-in-time system (JIT)
Managing customers
Customer profitability, performance measures
Managing time
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3. Supply chain management (SCM)
SCM is the management of key business processes that extend across the supply chain, from the original suppliers to final customers
The supply chain
Interlinked customers and suppliers that work together to convert, distribute and sell goods and services among themselves, leading to a specific end product
SCM can involve managing costs, accelerating time-to-market of new products, creating close relationships with customers and suppliers
(cont.)
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4. Supply chain management (SCM) (cont.)
Ecommerce—use of electronic transmission media to engage in the buying and selling of goods and services
B2B—ecommerce activities between two businesses
Electronic data interchange (EDI) links a firm’s computer system to suppliers/customers to allow electronic purchasing and buying
Enterprise resource planning (ERP) systems support different functional areas of a business and enable SCM
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5. Managing suppliers
Improved supplier relationships can reduce supplier and inventory-related costs
Selecting suppliers
Based on a range of criteria
Price, quality, delivery, performance history, capacity, communications systems and geographical location
Long-term supply controls and preferred suppliers
(cont.)
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6. Managing suppliers (cont.)
Analysing supplier costs
The total cost of ownership is the total cost of dealing with suppliers, including
Purchase price
Costs of purchasing—ordering, receiving and inspection
Costs of holding inventory
Costs of poor quality
Costs of delivery failure
Activity-based costing can be used to estimate total cost of ownership
Hierarchy of supplier activities: unit-level, order-level, supplier-level
(cont.)
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7. Managing suppliers (cont.)
Evaluating supplier performance
Supplier performance index: the ratio of supplier costs to total purchase price
Measures include ability of supplier to supply at the contract price, material quality, delivery performance, quality of relationships between employees, union and management
A buyer may also assess their own performance in relation to the management of the supplier
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8. Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-Smith
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9. Managing inventory Why hold inventory?
Cope with uncertainties in customer demand and in production processes
Qualify for quantity discounts
Avoid future price increases in raw materials
Avoid the costs of placing numerous small orders
Conventional approaches to inventory management focus on balancing
Ordering costs: incremental costs of placing an order
Carrying costs: the costs of carrying inventory in stock
Shortage costs (or out-of-stock costs)
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10. Economic order quantity (EOQ)
The optimum order size for individual inventory items, to minimise the total ordering and carrying costs
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11. Timing of orders under EOQ
Inventory re-order point (ROP)
The level of inventory on hand that triggers the placement of a new order (or setup)
Lead time- the length of time between placing an order and receiving the order
Safety stock
The extra inventory kept on hand to cover any above-average usage or demand
May be costly to maintain extra inventory
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13. Assumptions underlying EOQ
Demand is known and constant
Incremental ordering costs are known and constant per order
Acquisition cost per unit is constant
Entire order is delivered at one time
Carrying costs are known and constant per unit
On average, one-half of order is in stock at any time
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14. Just-in-time (JIT) systems
JIT inventory and production system
A comprehensive system for controlling the flow of manufacturing in a multi-stage production environment
The underlying philosophy is the simplifying of the production process by removing non-value-added activities
JIT can cover all aspects of the production process
Inventory management is crucial
Inventory is a major cause of non-value-added activities and cost
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15. Key features of JIT production
A pull method of coordinating production processes
Simplified production processes
Purchase of materials, and manufacture of sub-assemblies and products in small lots
Quick and inexpensive setups of production machinery
High-quality levels for raw materials, components and finished products
Effective preventative maintenance of equipment
Flexible work teams
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16. JIT purchasing Reduces the number of suppliers
Long-term contracts with suppliers
Specifies quality standards in supplier contracts to reduce need for inspection
Use of e-commerce to place orders, and provide supplier on-line access to inventory files
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17. Costs and benefits of JIT
Costs of JIT
Substantial investment to change production facilities to minimise non-value-added activities
An increase in the risk of inventory shortages and the associated loss of production and sales
Benefits of JIT
Savings in inventory-carrying and insurance costs
Fewer losses due to spoilage, obsolescence and theft
No opportunity costs of high inventory
Eliminates non-value-added activities
Meets customers’ needs more effectively
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18. Managing customers Customer relationship management (CRM)
Collecting and analysing data to understand individual customers’ behaviour patterns and needs
May lead to improved customer service, customer retention, new customers, more effective and efficient marketing, increased sales and customer profitability
E-commerce applications may allow customers to access interactive web sites and initiate and complete transactions over the internet
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19. Customer profitability analysis
Activity-based analysis may be used
Customer cost analysis
Analysis of cost of products purchased by customers and the costs of customer-driven activities
Customer profitability analysis
Relative profitability of customers can be determined and used for a range of strategic decisions
How do customers differ?
Customisation of products
Marketing and selling activities
Distribution channels
Customer support activities
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21. Why calculate customer profitability?
To address a range of questions
Which customers generate the greatest profits? And how do we retain them?
Which customers generate the lowest profits? And how can we make them more profitable?
What types of customers should we focus on to maximise profitability?
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22. Calculating customer costs
Three levels of customer-driven activities and costs
Order level activities
Customer level activities
Market level activities
Customer performance measures
Market share
Customer retention
Customer acquisition
Customer satisfaction
Customer profitability
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24. Managing time
Time dictates the rate at which products are produced and revenue generated
Time determines how long resources are tied up in processes, and unavailable for other uses
Time delays lead to inventory build-ups
Time to develop new products and delivering products to customers may be key to innovation
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25. Time-based management
Measures for developing new products and services
New product development time: time from identification of initial concept to release of product to the market
Break-even time (BET): the time from identification of initial concept to when a product has generated enough profit to pay back the original investment
Time taken to fulfil a customer’s order
Measures of customer response time, order receipt time, production lead time (cycle time)
Reliability in meeting scheduled delivery dates
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27. Summary
Supply chain management involves managing costs and creating closer relationships with suppliers and customers to increase efficiency and profitability
Supplier management involves selecting the best suppliers, analysing supplier profitability and measuring and managing supplier performance
Conventional inventory management, such as EOQ, focuses on optimising orders to minimise costs, whereas JIT involves working with suppliers to minimise inventory holdings and increase the efficiency of production and ordering processes
(cont.)
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28. Summary (cont.)
Customer management can involve creating customer relationship systems, analysing customer profitability, and measuring and managing customer performance
Time can be a driver of customer value and various time-based performance measures can be used to increase efficiency, manage cost and to increase customer satisfaction
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