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Operations Operations ManagementManagement

Supply-Chain ManagementSupply-Chain ManagementChapter 11Chapter 11

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OutlineOutline

Strategic Importance of the Supply-Chain.

Supply-Chain Strategies.

Purchasing & Acquisition.

Logistics & Materials Management.

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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 ManagementSupply-Chain Management

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Consumer

Retailer

Manufacturing

Material Flow

VISA®

Credit Flow

Supplier

SupplierWholesaler

Retailer

CashFlow

OrderFlow

Schedules

The Supply-ChainThe Supply-Chain

Supplier

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IntegrationIntegration Integrates operations, logistics, marketing,

accounting and finance.

Manage: Transportation. Suppliers. Warehousing and distribution. Inventory levels. Information sharing. $ and credit transfers. Order fulfillment.

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Supply-Chain TrendsSupply-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.

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Supply-Chain StrategiesSupply-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.

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OutsourcingOutsourcing 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.

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Vertical IntegrationVertical 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.

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Forms of Vertical IntegrationForms of Vertical Integration

Iron Ore

Steel

Automobiles

DistributionSystem

Dealers

Silicon

IntegratedCircuits

Circuit Boards

ComputersWatches

Calculators

Raw Materials

Backward Integration

CurrentCurrentTransformationTransformation

ForwardIntegration

Finished GoodsFinished Goods

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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 & AcquisitionPurchasing & Acquisition

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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

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Make/Buy ConsiderationsMake/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

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Supplier StrategiesSupplier 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.

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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

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Company criteria Financial stability.

Management.

Location.

Product criteria Quality.

Price.

Service criteria Delivery on time.

Condition on arrival.

Technical support.

Training.

Vendor Selection CriteriaVendor Selection Criteria

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Vendor Selection Rating FormVendor Selection Rating Form

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Negotiation StrategiesNegotiation 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.

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LogisticsLogistics

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.

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LogisticsLogistics 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.

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Operations Operations ManagementManagement

E-Commerce and Operations E-Commerce and Operations ManagementManagement

Supplement 11Supplement 11

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OutlineOutline Electronic Commerce.

E-commerce Definitions. B2B B2C C2C C2B

E-Procurement

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E-CommerceE-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.

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E-Commerce DefinitionsE-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.

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E-ProcurementE-Procurement On-line purchasing – link buyers and sellers

electronically.

Catalogs.

Auctions. www.freemarkets.com

Internet trading exchanges: Covisint: By auto industry (buyer).

Spot purchasing. Example: Spare freight capacity.

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E-LogisticsE-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.