Operations Management

Supply-Chain ManagementChapter 11

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

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

Learning Objectives

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

Describe or Explain:– Supply-Chain Strategies– Purchasing strategies– Approaches to negotiations

Learning Objectives

Volkswagen

• 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

Volkswagen

• 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 Management

Consumer

Retailer

Manufacturing

Material Flow

VISA®

Credit Flow

Supplier

Raw material Supplier Wholesaler

Retailer

CashFlow

OrderFlowSchedules

The Supply-Chain

The 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 in Supply-Chain

Supply-Chain Support for Overall Strategy

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 Strategy - continued

Process Characteristics

Maintain high average utilization

Low CostInvest in excess capacity and flexible processes

ResponseModular processes that 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 Strategy - 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 IssuesSupply 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 schedule and manage the shipment of parts in and finished products out

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

• Major cost center• Affects quality of final product• Aids strategy of low cost, response, and

differentiation

Importance of Purchasing

Supply-Chain Costs as a Percent of Sales

• All industry• Automobile• Food• Lumber• Paper• Petroleum• Transportation

• 52%• 67%• 60%• 61%• 55%• 79%• 62%

Industry Percent of Sales

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

Percent of Sales Spent in the Supply-Chain

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 $10.00

Percent Net Profit of Firm

Objectives of the Purchasing Function

• 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 FocusMaterials 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

Customer Supplier

Traditional Purchasing Process

Purchasing Techniques• Drop shipping and special packaging

• Blanket orders

• Electronic ordering and funds transfer

• Electronic data interchange (EDI)

• Standardization

• Outsourcing

Make/Buy Considerations

1. Maintain core competencies and protect personnel from layoff

2. Lower production cost3. Unsuitable suppliers4. Assure adequate supply5. Utilize surplus labor and

make a marginal contribution

1. Frees management to deal with its primary business

2. Lower acquisition cost

3. Preserve supplier commitment

4. Obtain technical or management ability

5. Inadequate capacity

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

Supply-Chain Strategies

Supply-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

Many 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 Strategy

Daimler Chrysler’s Supplier Cost Reduction 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

Tactics for Close Supplier RelationshipsTacticTactic

• 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

Raw Material(Suppliers)

BackwardBackwardIntegrationIntegration

CurrentTransformation

ForwardForwardIntegrationIntegration

Finished GoodsFinished Goods(Customers)(Customers)

Why Use it?

• Ability to produce goods previously purchased– Setup operations– Buy supplier

• Make-buy issue

• Major financial commitment

• Hard to do all things well

Vertical Integration Strategy

Forms of Vertical IntegrationIron 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

Vertical Integration Can be Forward or Backward

Vertical Integration Examples of Vertical Integration

Raw material (suppliers) Iron ore Silicon Farming

Backward Integration Steel

Current Transformation Automobiles

Integrated Circuits Flour Milling

Forward Integration Distribution System

Circuit boards

Finished goods (customers)

Dealers Computers, watches, calculators

Baked Goods

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

cross-ownership– Company stock is held by allied firms

• Resulting in lowering need for short-term profits

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

Keiretsu Network Strategy

Virtual Companies

• Companies that rely on a variety of supplier relationships to provide services on demand.

• Also known as hollow corporations, or network corporations

Virtual 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

Managing 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 - Other 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

Successful Supply-Chain Management Requires:

• A mutual agreement on goals

• Trust

• Compatible organizational cultures

Issues in an Integrated Supply-Chain

• Local optimization

• Incentives

• Large lots

Opportunities in an Integrated Supply-Chain

• Generation of accurate “pull” data

• Reduction of lot size

• Single stage control of replenishment

Vendor Managed Inventory (VMI)

• Postponement – keeps product generic as long as possible• Channel Assembly – sends to distributor individual components

and modules rather than finished goods• Drop Shipping and Special Packaging – supplier will ship to end

consumer rather than to seller• Blanket Orders – a long-term purchase commitment to a supplier

for items that are to be delivered against short-term releases to ship• Standardization – reducing the number of variations in materials

and components• Electronic Ordering and Funds Transfer – “paperless” ordering and

100% material acceptance, payment by “wire”

1. Vendor evaluation– Identifying & selecting potential vendors

2. Vendor development– Integrating buyer & supplier

• Example: Electronic data exchange

3. Negotiations– Results in contract– Specifies period of agreement, price, delivery

terms etc.

Vendor Selection Steps

Vendor Selection Rating Form

Negotiation 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

Logistics 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 Options

• Trucking

• Railways

• Airfreight

• Waterways

• Pipelines

Supply-Chain Performance Compared

Typical FirmsBenchmark

FirmsAdministrative costs as percent of purchases

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