Transcript Chapter 1, Heizer/Render, 5th edition

Operations
Management
Supply-Chain Management
Chapter 11
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Outline
 GLOBAL COMPANY PROFILE: VOLKSWAGEN
 THE STRATEGIC IMPORTANCE OF THE
SUPPLY-CHAIN

Global Supply-Chain Issues
 SUPPLY-CHAIN ECONOMICS
Make-or-Buy Decisions
 Outsourcing

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Outline - Continued
 SUPPLY-CHAIN STRATEGIES
Many Suppliers
 Few Suppliers
 Vertical Integration
 Keiretsu Networks
 Virtual Companies

 Managing the Supply Chain
Issues In an Integrated Supply Chain
 Opportunities in an Integrated Supply Chain

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Outline - Continued
 INTERNET PURCHASING
 VENDOR SELECTION
 Vendor Evaluation
 Vendor Development
 Negotiations
 MATERIALS MANAGEMENT
 BENCHMARKING SUPPLY-CHAIN
MANAGEMENT
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Learning Objectives
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
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Learning Objectives
When you complete this chapter, you should be
able to :
Describe or Explain:



Supply-Chain Strategies
Purchasing strategies
Approaches to negotiations
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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
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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

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Supply-Chain Management
 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
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The Supply-Chain
VISA
Material Flow
Supplier
®
Credit Flow
Manufacturing
Supplier
Schedules
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Order
Flow
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Retailer
Consumer
Wholesaler
Retailer
Cash
Flow
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The Supply Chain
Market research data
Scheduling information
Engineering and design data
Order flow and cash flow
Supplier
Inventory
Supplier
Customer
Ideas and design to
satisfy end customer
Material flow
Credit flow
Customer
Manufacturer
Inventory
Supplier
Inventory
Distributor
Customer
Inventory
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Material Costs in
Supply-Chain
Wholesale
8% 9%
Manufacturing
31%
11%
COGS
Payroll
Material
83%
Other
Dir Wages
58%
Retail
Other
13%
16%
71%
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COGS
Payroll
Other
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Supply-Chain Support for Overall
Strategy
Supplier’s
goal
Primary
Selection
Criteria
Low Cost
Response
Supply demand
at lowest
possible cost
Respond
quickly to
changing
requirements
and demand to
minimize
stockouts
Share market
research; jointly
develop
products and
options
Select
primarily for
capacity,
speed, and
flexibility
Select primarily
for product
development
skills
Select
primarily for
cost
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Differentiation
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Supply-Chain Support for Overall
Strategy - continued
Low Cost
Response
Differentiation
Process
Characteristics
Maintain high
average
utilization
Invest in
excess
capacity and
flexible
processes
Modular
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
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Supply-Chain Support for Overall
Strategy - continued
Low Cost
Response
Differentiation
Lead-time
Characteristics
Shorten leadtime as long as it
does not
increase costs
Invest
aggressively to
reduce
production
lead-time
Invest
aggressively to
reduce
development
lead-time
Product-design
Characteristics
Maximize
performance
and minimize
cost
Use product
designs that
lead to low setup time and
rapid production
ramp-up
Use modular
design to
postpone
product
differentiation for
as long as
possible
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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
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Importance of Purchasing
 Major cost center
 Affects quality of final product
 Aids strategy of low cost, response, and
differentiation
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Supply-Chain Costs as a Percent
of Sales
Industry
Percent of Sales
 All industry
 Automobile
 Food
 Lumber
 Paper
 Petroleum
 Transportation
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 52%
 67%
 60%
 61%
 55%
 79%
 62%
11-18
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Dollars of 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
$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
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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
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The Purchasing Focus
Supply Management
-High costs
-Scarcity: national or
international
Materials Management
-High transportation cost
-High inventory costs
Purchasing
Management
-Commodity items
-Standard products
Source Management
-Unique items
-Custom-made items
-High technology items
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Traditional Purchasing Process
Customer
Supplier
Purchase
Order
Receivables
Report
Accounts
Payable
Order
Processing
Mail
Receiving
Dock
Packing
List
Mail
Reconcile
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Invoice
Check
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Mail
Accounts
Receivable
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Purchasing Techniques
 Drop shipping and special packaging
 Blanket orders
 Invoiceless purchasing
 Electronic ordering and funds transfer
 Electronic data interchange (EDI)
 Stockless purchasing
 Standardization
 Outsourcing
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Make/Buy Considerations
Reasons for Making
Reasons for Buying
1. Maintain core competencies
and protect personnel from
layoff
2. Lower production cost
3. Unsuitable suppliers
4. Assure adequate supply
5. Utilize surplus labor and
make a marginal
contribution
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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
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Make/Buy Considerations Continued
Reasons for Making
6. Obtain desired quantity
7. Remove supplier collusion
8. Obtain a unique item that
would entail a prohibitive
commitment from the
supplier
9. Protect proprietary design or
quality
10. Increase or maintain size of
company
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Reasons for Buying
6. 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
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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.
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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.
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Many Suppliers Strategy








Many sources per item
Adversarial relationship
Short-term
Little openness
Negotiated, sporadic PO’s
High prices
Infrequent, large lots
Delivery to receiving dock
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© 1995 Corel Corp.
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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
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© 1995
Corel
Corp.
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Daimler Chrysler’s Supplier Cost
Reduction Effort
Supplier Suggestion
Model Savings
Rockwell
Use passenger car door
locks on trucks
Simplify design/substitute
materials on manual
window system
Dodge
trucks
Various
3M
Change tooling for woodgrain panels to allow three
from one die instead of two
Caravan,
Voyager
Trico
Change wiper-blade
formulation
Various
$140,000
Leslie Metal
Arts
Exterior lighting suggestions
Various
$1,500,000
Rockwell
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$280,000
$300,000
$1,500,000
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Tactics for Close Supplier
Relationships
Tactic
Results
 Reduce total number of
suppliers
 Average 20% reduction in 5 years
 Certify suppliers
 Almost 40% of all companies
surveyed were themselves
currently certified
 About 60% ask for this
 Ask for JIT delivery from key
suppliers
 Involve key suppliers in new
product design
 Develop software linkages to
suppliers
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 About 54% do this
 Almost 80% claim to do this
About 50% claim this
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Vertical Integration Strategy
 Ability to produce goods
previously purchased
Raw Material
(Suppliers)
 Setup operations
 Buy supplier
Backward
Integration
 Make-buy issue
 Major financial
commitment
 Hard to do all things well
Current
Transformation
Forward
Integration
Finished Goods
(Customers)
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Forms of Vertical Integration
Iron Ore
Silicon
Steel
Automobiles
Farming
Raw Material
(Suppliers)
Flour Milling
Backward
Integration
Current
Transformation
Integrated
Circuits
Forward
Integration
Distribution
Circuit Boards
System
Dealers
Computers
Watches
Calculators
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Baked Goods
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Finished Goods
(Customers)
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Vertical Integration Can be
Forward or Backward
Vertical Integration
Raw material (suppliers)
Backward Integration
Examples of Vertical Integration
Iron ore
Silicon
Farming
Flour
Milling
Steel
Current Transformation
Automobiles
Integrated Circuits
Forward Integration
Distribution
System
Circuit boards
Dealers
Computers, watches,
calculators
Finished goods (customers)
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Baked
Goods
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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
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Virtual Companies
 Companies that rely on a variety of supplier
relationships to provide services on demand.
 Also known as hollow corporations, or network
corporations
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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
© 1995 Corel Corp.
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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)
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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
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Successful Supply-Chain
Management Requires:
 A mutual agreement on goals
 Trust
 Compatible organizational cultures
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Issues in an Integrated SupplyChain
 Local optimization
 Incentives
 Large lots
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Opportunities in an Integrated
Supply-Chain
 Generation of accurate “pull” data
 Reduction of lot size
 Single stage control of replenishment
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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”
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Vendor Selection Steps
 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.
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Supplier Selection Criteria
 Company



 Service
Financial stability
Management
Location



 Product

Delivery on time
Condition on arrival
Technical support
Training
Quality
 Price

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Vendor Selection Rating Form
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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

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Logistics Management
Integrates all materials functions
Purchasing
 Inventory management
 Production control
 Inbound traffic
 Warehousing and stores
 Incoming quality control

Objective: Efficient, low cost operations
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Goods Movement Options
 Trucking
 Railways
 Airfreight
 Waterways
 Pipelines
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Supply-Chain Performance
Compared
Benchmark
Typical Firms
Firms
3.3%
0.8%
Administrative costs as
percent of purchases
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%
400
4
Number of shortages per year
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