Supply-Chain Management

Supply-Chain Management

Planning, organizing, directing, & controlling flows of materials

Begins with raw materials Continues through internal operations Ends with distribution of finished goods Example: Your suppliers supplier

Involves everyone in supply-chain

Objective: Maximize value & lower waste

The Supply-Chain
VISA

Material Flow

Credit Flow

Supplier Supplier

Manufacturing

Retailer Wholesaler

Consumer Retailer Cash Flow

Schedules

Order Flow

The Supply Chain

Market research data Scheduling information Engineering and design data Order flow and cash flow Ideas and design to satisfy end customer Material flow Credit flow

Supplier

Customer

Inventory

Supplier

Manufacturer
Inventory

Customer

Supplier

Inventory

Distributor
Inventory

Customer

Material Costs in Supply-Chain

Wholesale Manufacturing
31% Material
Dir Wages

8% 9% 83%

COGS Payroll Other

11%
58%

Other

Retail
13% 16% 71%

COGS Payroll Other

Supply-Chain Strategy Support

Low Cost
Suppliers goal
Supply demand at lowest possible cost

Response
Respond quickly to changing requirements and demand to minimize stockouts Select primarily for capacity, speed, and flexibility

Differentiation
Share market research; jointly develop products and options

Primary Selection Criteria

Select primarily for cost

Select primarily for product development skills

Supply-Chain Strategy Support

Low Cost
Maintain high Process Characteristics average utilization

Response
Invest in excess capacity and flexible processes Develop responsive system, with buffer stocks positioned to ensure supply

Differentiation
Modular processes that lend themselves to mass customization Minimize inventory in the chain to avoid obsolescence

Inventory Characteristics

Minimize inventory throughout the chain to hold down costs

Supply-Chain Strategy Support

Low Cost
Shorten leadLead-time Characteristics time as long as it does not increase costs

Response
Invest aggressively to reduce production lead-time Use product designs that lead to low setup time and rapid production ramp-up

Differentiation
Invest aggressively to reduce development lead-time Use modular design to postpone product differentiation for as long as possible

Product-design Characteristics

Maximize performance and minimize cost

Global 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 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

Importance of Purchasing
Major

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

Supply-Chain Costs as a Percent of Sales

Industry

Percent of Sales

All industry Automobile Food Lumber Paper Petroleum Transportation

52% 67% 60% 61% 55% 79% 62%

Additional Sales Needed to Equal 1$ Saved Through Purchasing

Percent of Sales Spent in the Supply-Chain
Percent Net Profit of Firm

30%

40%

50%

60%

70%

80%

90%

2 4 6 8

$2.78 $3.23 $3.85 $4.76 $6.25 $9.09 $16.67 $2.70 $3.13 $3.70 $4.55 $5.88 $8.33 $14.29 $2.63 $3.03 $3.57 $4.35 $5.56 $7.69 $12.50 $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

Purchasing Function Objectives

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 Focus

Materials Management -High transportation cost -High inventory costs Purchasing Management -Commodity items -Standard products Supply Management -High costs -Scarcity: national or international

Source Management -Unique items -Custom-made items -High technology items

Traditional Purchasing Process

Customer
Purchase Order Receivables Report Accounts Payable Reconcile Mail

Supplier
Order Processing Packing List Invoice Mail Accounts Receivable

Receiving Dock
Mail

Check

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

Make/Buy Considerations
Reasons for Making
1.

2. 3. 4. 5.

Maintain core competencies and protect personnel from layoff Lower production cost Unsuitable suppliers Assure adequate supply Utilize surplus labor and make a marginal contribution

6. 7. 8.

9. 10.

Obtain desired quality Remove supplier collusion Obtain a unique item that would entail a prohibitive commitment from the supplier Protect proprietary design or quality Increase or maintain size of company

Make/Buy Considerations
Reasons for Buying
1.

2. 3. 4.

5.

Frees management to deal with its primary business Lower acquisition cost Preserve supplier commitment Obtain technical or management ability Inadequate capacity

Reduce inventory costs 7. Ensure flexibility and alternate source of supply 8. Inadequate managerial or technical resources 9. Reciprocity 10. Item is protected by patent or trade secret
6.

Supply-Chain Strategies
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.

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 Keiretsu - have your suppliers become part of a company coalition Vertically integrate; buy the actual supplier Create a virtual company that uses suppliers on an as-needed basis.

Many Suppliers Strategy

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

1995 Corel Corp.

Few 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.

Daimler Chryslers Supplier Cost Reduction Effort

Supplier
Rockwell Rockwell

Suggestion
Use passenger car door locks on trucks Simplify design/substitute materials on manual window system Change tooling for woodgrain panels to allow three from one die instead of two Change wiper-blade formulation Exterior lighting suggestions

Model
Dodge trucks Various

Savings
$280,000 $300,000

3M

Caravan, Voyager Various Various

$1,500,000

Trico Leslie Metal Arts

$140,000 $1,500,000

Close Supplier Relationships

Tactic

Results

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

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

Vertical Integration Strategy

Ability to produce goods previously purchased Setup operations Buy supplier Make-buy issue Major financial commitment Hard to do all things well

Raw Material (Suppliers) Backward Integration Current Transformation Forward Integration Finished Goods (Customers)

Forms of Vertical Integration

Iron Ore Silicon Farming Raw Material (Suppliers) Backward Integration Current Transformation Forward Integration Finished Goods (Customers)

Steel Integrated Circuits

Flour Milling

Automobiles

Distribution Circuit Boards System Computers Watches Calculators

Dealers

Baked Goods

Keiretsu Network Strategy

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

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 PCs, 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
1995 Corel Corp.

Managing the Supply-Chain

Options:

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 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 Vendor Managed Inventory (VMI)

Successful Management Requires:

A

mutual agreement on goals Trust Compatible organizational cultures Local optimization Careful use of incentives Large lots vs. small lots

Vendor Selection Steps

Vendor evaluation

Identifying & selecting potential vendors Integrating buyer & supplier

Vendor development

Example: Electronic data exchange

Negotiations
Results in contract Specifies period of agreement, price, delivery terms etc.

Vendor Selection Criteria

Company Financial stability Management Location Product Quality Price

Service Delivery on time Condition on arrival Technical support Training

Vendor Selection Rating Form

Vendor Concerns:
Desire for diversification Poor customer scheduling Engineering changes Quality assurance standards Small lot sizes Proximity

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 Purchasing Inventory management Production control Inbound traffic Warehousing and stores Incoming quality control
Objective:

functions

Efficient, low cost

operations

Goods Movement Options

Trucking

Railways
Airfreight Waterways Pipelines

Supply-Chain Comparison
Benchmark Typical Firms Firms 3.3% 0.8% 15 42 minutes 33% 1.5% 400 8 15 minutes 2% .0001% 4

Administrative costs as percent of purchases Lead time (weeks)

Time spent in placing order

Percentage of late deliveries

Percentage of rejected material Number of shortages per year

E-Commerce

The use of computer networks, primarily the internet, to buy and sell products, services, and information.

E-Business
all about cycle time, speed, globalization, enhanced productivity, reaching new customers and sharing knowledge across institutions for competitive advantage.
Louis Gerstner, Chairman, IBM

E-Commerce Definitions
Business-to business (B2B) Both sides of the transaction are businesses, non-profit organizations, or governments. Business-to-consumer (B2C) E-commerce transactions where 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

Types of Information Offered by B2B Applications

Product - drawings, specifications, video or simulation demonstrations, prices Production Processes - capacities, commitments, product plans Transportation - carriers, lead times, costs Inventory - inventory tracking, levels, costs, and location

Types of Information Offered by B2B Applications

Suppliers - product catalogue, quality history, lead times, terms, and conditions Supply Chain Alliances - key contact, partners roles and responsibilities, and schedules Supply Chain Process and Performance process descriptions, performance measures such as quality and delivery

Types of Information Offered by B2B Applications

Sales

and Marketing - point-of-sale (POS) data entry, promotions, pricing, discounts Customer - sales history and forecasts

E-Commerce Security
This

is a serious issue!

Multiple deprivation of service attacks on ecommerce web sites 2/6 - 2/11, 2000; also, the attack of October 21, 2002, which flooded all 13 of the root servers of the Internet Domain Name System (DNS) (on main internet servers)

Security

of data, proprietary business information Impact on the volume of sales and on the bottom line

Benefits of E-commerce

Improved, lower cost information Lower entry costs Available 24/7, virtually anywhere in the world Availability expands markets for both buyers and sellers Decreases the cost of paper-based information Reduces the cost of communication Provides richer communication than traditional means Fast delivery of digitized products Increased flexibility of location

Limitations of E-commerce

Lack of system security, reliability and standards Lack of privacy Insufficient bandwidth Integrating e-commerce software with existing software is still a challenge Lack of trust in (1) unknowns on the other end of the transaction, (2) integrity of the transaction itself, and(3) electronic money that is only bits and bytes

Impact on Product Design

Shorter

life cycles require faster product development and lead to time-based competition Greater use of shared knowledge and collaboration - decreased development costs More data sharing with suppliers and strategic partners

E-Procurement
Purchasing

or order release communicated over the internet or via approved online vendor catalogues Significant savings (10%) Requires new skills and staffing in procurement area

Online Catalogues
Information

about products made available in electronic form via the Internet.

Provided by vendors Developed by buyers Provided by intermediaries

Often

incorporate voice and video

Internet Trading Exchanges

Health care products: set up by Johnson & Johnson, G.E. Medical Systems, Baxter International, Abbott Laboratories, and Medtronic Inc.; called the Global Health Care Exchange (ghx.com) Defense and aerospace products: created by Boeing, Raytheon, Lockheed-Martin, and Britains BAE Systems; called the Aerospace and Defense Industry Trading Exchange (exostar.com) Food, beverage, consumer products: set up by 49 leading food and beverage firms; called Transora (transora.com) Retail goods: setup by Sears and Frances Carrefour; called Global Net Xchange, for retailers (gnx)

Internet Trading Exchanges

Steel and metal products: such as New View Technologies (exchange.e-steel.com); and Metal-Site (metalsite.com) Construction Industry: set up by Bechtel, Flour, and G.E. Power Systems (citadm.com) is one of 5 construction industry exchanges Hotels: created by Marriott and Hyatt, and later joined by Fairmont, Six Continents, and Club Corp, Called Aventra (aventra.com) buys for 2,800 hotels

Traditional Medical Supply Chain

Manual processes

Supplier

Distributor

Hospital

Group purchasing organization for small, independent hospitals

On-Line Medical Supply Chain

Automated webbased processes
On-line Global Health Care

Supplier

Distributor

Hospital

Group purchasing organization for small, independent hospitals

E-Commerce and Requests for Quotes (RFQs)

Extensive databases of supplier information, and ability to rapidly transfer specifications to vendors reduces time and costs

Online Auctions
Useful

for disposing of excess raw material, and discontinued and excess inventory Online auctions lower entry barriers and increase the potential number of customers

Inventory Tracking
Mass

customization requires knowledge of location of all goods Requires data collection, barcode technology, RF and electronic communications to track inventory in transit, on the shop floor, and in the warehouse Customers can learn what is happening with their order

Warehousing for E-Commerce

E-commerce

warehouse is less a warehouse than a pass through facility.

FedEx and Dell Computer

FedEx

operates warehouses that pick, pack, test, and assemble products, then handle delivery and even customs clearance FedExs Virtual Orderintegrates different companies web catalogues and customer orders for Dell; and then fulfills orders and delivers them through its fleet of trucks and planes.

E-Commerce and JIT

E-commerce

coordinates the suppliers inventory system with the service capabilities of the delivery firm.

Scheduling and Logistics Improvements

Coordinated

pickup and delivery

Fed Ex merges orders in transit

Logistics

cost reduction

Greater capacity utilization