ch11

PowerPoint presentation to accompany Operations Management, 6E (Heizer & Render)

© 2001 by Prentice Hall, Inc., Upper Saddle River, N.J. 0745811-1

Operations Operations ManagementManagement

Supply-Chain ManagementSupply-Chain ManagementChapter 11Chapter 11



OutlineOutline

Global Company Profile: Volkswagen The Strategic Importance of the Supply-

Chain Global Supply-Chain Issues

Purchasing Manufacturing Environments Service Environment Make-or-Buy Decisions



Outline - continuedOutline - continued

Supply-Chain Strategies Many Suppliers Few Suppliers Vertical Integration Keiretsu Networks Virtual Companies

Vendor Selection Vendor Evaluation Vendor Development Negotiations



Outline - continuedOutline - continued

Managing the Supply-Chain Materials Management

Distribution Systems

Benchmarking Supply-Chain Management



When you complete this chapter, you should be able to :

Identify or Define: Supply chain management Purchasing E-procurement Materials management Keiretsu Virtual companies

Describe or Explain: Purchasing strategies Approaches to negotiations

Learning ObjectivesLearning Objectives



VolkswagenVolkswagen

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



Lead Figure for Chapter 11Lead Figure for Chapter 11

Graphic of VW plant, showing areas occupied by supply firms.



VolkswagenVolkswagen

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



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

Supply-Chain ManagementSupply-Chain Management



Consumer

Retailer

Manufacturing

Material Flow

VISA®

Credit Flow

Supplier

Supplier Wholesaler

Retailer

CashFlow

OrderFlowSchedules

The Supply-ChainThe Supply-Chain



The Supply ChainThe Supply Chain

Supplier

Supplier

Supplier

Inventory

Inventory

Distributor

Inventory Inventory

Manufacturer

Customer

Customer

Customer

Market research datascheduling information

Engineering and design dataOrder flow and cash flow

Ideas and design to satisfy end customer

Material flowCredit flow



11%

31%

58%

Material

Dir Wages

Other

71%

16%13% COGS

Payroll

Other

83%

9%8%COGS

Payroll

Other

ManufacturingManufacturing

WholesaleWholesale

RetailRetail

Material Costs inMaterial Costs in Supply-Chain Supply-Chain

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)



Supply-Chain Support for Overall Supply-Chain Support for Overall StrategyStrategy

Supplier’sgoal

Primary Selection Criteria

Supply demand at lowest possible cost

Select primarily for cost

Low CostRespond quickly to changing requirements and demand to minimize stockouts

Select primarily for capacity, speed, and flexibility

ResponseShare market research; jointly develop products and options

Select primarily for product development skills

Differentiation



Supply-Chain Support for Overall Supply-Chain Support for Overall Strategy - continuedStrategy - continued

Process Characteristics

Maintain high average utilization

Low CostInvest in excess capacity and flexible processes

ResponseModular processes to 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



Supply-Chain Support for Overall Supply-Chain Support for Overall Strategy - continuedStrategy - continued

Lead-timeCharacteristics

Shorten lead-time as long as it does not increase costs

Low CostInvest aggressively to reduce production lead-time

ResponseInvest 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



Global Supply-Chain IssuesGlobal 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 manage the shipment of parts in and finished products out

staffed with local specialists to handle duties, trade, freight, customs and political issues



Acquisition of goods & services Activities

Help 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

PurchasingPurchasing



Purchasing Costs as a Percent of Purchasing Costs as a Percent of SalesSales

All industry Automobile Food Lumber Paper Petroleum Transportation

52% 61% 60% 61% 55% 74% 63%

Industry Percent of Sales



Dollars of Additional Sales Needed to Dollars of Additional Sales Needed to Equal 1$ Saved Through PurchasingEqual 1$ Saved Through Purchasing

Percent of Sales Spent for Purchases

Firm'sPercentNetProfit

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 $10.11



Objectives of the Purchasing Objectives of the Purchasing FunctionFunction

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



The Purchasing FocusThe Purchasing Focus

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

PurchasingManagement-Commodity items-Standard products



ReceivingDock

PurchaseOrder

PackingList

OrderProcessing

Invoice

Receivables Report

Check Accounts Receivable

Accounts Payable

Mail

MailReconcile

Mail

CustomerCustomer SupplierSupplier

Traditional Purchasing ProcessTraditional Purchasing Process



Purchasing TechniquesPurchasing Techniques

Drop shipping and special packaging Blanket orders Invoiceless purchasing Electronic ordering and funds transfer Electronic data interchange (EDI) Stockless purchasing Standardization



Make/Buy ConsiderationsMake/Buy Considerations

lower production cost unsuitable suppliers assure adequate supply utilize surplus labor and make a

marginal contribution obtain desired quantity remove supplier collusion obtain a unique item that would

entail a prohibitive commitment from the supplier

lower acquisition cost preserve supplier

commitment obtain technical or

management ability inadequate capacity reduce inventory costs ensure flexibility and

alternate source of supply reciprocity

Reasons for Making Reasons for Buying



Make/Buy ConsiderationsMake/Buy Considerations

maintain organizational talent protect proprietary design or

quality increase/maintain size of

company

item is protected by patent or trade secret

frees management to deal with its primary business

Reasons for Making Reasons for Buying



Plans to help achieve company mission Affect long-term competitive position Strategic options

Many suppliers Few suppliers Keiretsu network Vertical integration Virtual company Plan

© 1995 Corel Corp.

Purchasing StrategiesPurchasing Strategies



Supply-Chain StrategiesSupply-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.



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

© 1995 Corel Corp.

Many Suppliers StrategyMany 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.

Few Suppliers StrategyFew Suppliers Strategy



Daimler Chrysler’s Supplier Cost Daimler Chrysler’s Supplier Cost Reduction EffortReduction Effort

Supplier Suggestion Model SavingsRockwell Use passenger car door

locks on trucksDodgetrucks

$280,000

Rockwell Simplify design/substitutematerials on manualwindow system

Various $300,000

3M Change tooling for wood-grain panels to allow threefrom one die instead of two

Caravan,Voyager

$1,500,000

Trico Change wiper-bladeformulation

Various $140,000

Leslie MetalArts

Exterior lighting suggestions Various $1,500,000



Purchasers Ties Themselves to Purchasers Ties Themselves to SuppliersSuppliers

TacticTactic 1. 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

ResultsResults 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; about 15%

more than have EDI links to suppliers



Raw Material(Suppliers)

BackwardBackwardIntegrationIntegration

CurrentCurrentTransformationTransformation

ForwardForwardIntegrationIntegration

Finished GoodsFinished Goods(Customers)(Customers)

Ability to produce goods previously purchased Setup operations Buy supplier

Make-buy issue Major financial

commitment Hard to do all things well

Vertical Integration StrategyVertical Integration Strategy



Forms of Vertical IntegrationForms of Vertical Integration

Iron Ore

Steel

Automobiles

DistributionSystem

Dealers

Silicon

IntegratedCircuits

Circuit Boards

ComputersWatches

Calculators

Farming

Flour Milling

Raw Material(Suppliers)

BackwardIntegration

CurrentTransformation

ForwardIntegration

Finished Goods(Customers)

Baked Goods



Japanese word for ‘affiliated chain’ System of mutual alliances and

cross-ownership Company stock is held by allied firms

Lowers need for short-term profits

Links manufacturers, suppliers, distributors, & lenders ‘Partnerships’ extend across entire supply chain

Keiretsu Network StrategyKeiretsu Network Strategy



© 1995 Corel Corp.

Virtual Company StrategyVirtual 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



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 StepsVendor Selection Steps



Vendor Selection Rating FormVendor Selection Rating Form



Company Financial stability Management Location

Product Quality Price

Service Delivery on time Condition on arrival Technical support Training

Supplier Selection CriteriaSupplier Selection Criteria



Negotiation StrategiesNegotiation 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



Managing the Supply-ChainManaging 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)



Managing the Supply-Chain - Managing the Supply-Chain - Other OptionsOther 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



Materials ManagementMaterials Management

Integrates all materials functions Purchasing Inventory management Production control Inbound traffic Warehousing and stores Incoming quality control

Objective: Efficient, low cost operations



Goods Movement OptionsGoods Movement Options

Trucking Railways Airfreight Waterways Pipelines



Supply-Chain Performance Supply-Chain Performance ComparedCompared

Number of suppliers perpurchasing agent

34 5

Purchasing costs as percent ofpurchases

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

Typical FirmsBenchmark

Firms

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