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
Involves

everyone in supply-chain

Example:

Objective:

Your suppliers supplier

Maximize value & lower waste

The Supply-Chain
VISA

Material Flow

Supplier

Credit Flow

Manufacturing

Supplier
Schedules

Order
Flow

Retailer

Consumer

Wholesaler

Retailer
Cash
Flow

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
Inventory

Customer

Material Costs in Supply-Chain

Wholesale
8% 9%

Manufacturing
31%
11%

COGS
Payroll

Material

83%

Other

Dir Wages

58%

Other

Retail
13%

16%
71%

COGS
Payroll
Other

Supply-Chain Strategy Support

Suppliers
goal

Primary
Selection
Criteria

Low Cost

Response

Differentiation

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 cost

Select primarily
for capacity,
speed, and
flexibility

Select primarily
for product
development
skills

Supply-Chain Strategy Support

Low Cost
Maintain high
Process
Characteristics average
utilization

Inventory
Characteristics

Minimize
inventory
throughout the
chain to hold
down costs

Response

Differentiation

Invest in
excess
capacity and
flexible
processes

Modular
processes that
lend themselves
to mass
customization

Develop
responsive
system, with
buffer stocks
positioned to
ensure supply

Minimize
inventory in the
chain to avoid
obsolescence

Supply-Chain Strategy Support

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

Product-design
Characteristics

Maximize
performance
and minimize
cost

Response

Differentiation

Invest
aggressively to
reduce
production
lead-time

Invest
aggressively to
reduce
development
lead-time

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

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
All

industry
Automobile
Food
Lumber
Paper
Petroleum
Transportation

Percent of Sales
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%

$2.78 $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

Supply Management
-High costs
-Scarcity: national or
international

Purchasing
Management
-Commodity items
-Standard products
Source Management
-Unique items
-Custom-made items
-High technology items

Traditional Purchasing Process

Customer

Supplier

Purchase
Order
Receivables
Report
Accounts
Payable
Reconcile

Order
Processing

Mail
Receiving
Dock

Packing
List

Mail

Invoice

Check

Mail

Accounts
Receivable

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

Suggestion

Model

Savings

Rockwell

Use passenger car door

locks on trucks

Dodge
trucks

$280,000

Rockwell

Simplify design/substitute
materials on manual
window system

Various

$300,000

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

$1,500,000

Close Supplier Relationships

Results

Tactic

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

Steel

Automobiles

Farming

Raw Material
(Suppliers)

Flour Milling

Backward
Integration
Current
Transformation

Integrated
Circuits

Forward
Integration

Distribution
Circuit Boards
System
Dealers

Computers
Watches
Calculators

Baked Goods

Finished Goods
(Customers)

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

chain

extend across entire supply

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

Vendor

& selecting potential vendors

development

Integrating
Example:

buyer & supplier

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 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 Comparison
Administrative costs as
percent of purchases
Lead time (weeks)

Benchmark
Typical Firms
Firms
3.3%
0.8%
15

Time spent in placing order

42 minutes

15 minutes

Percentage of late deliveries

33%

2%

1.5%

.0001%

400

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
Fed

pickup and delivery

Ex merges orders in transit

Logistics
Greater

cost reduction
capacity utilization