PRODUCTION AND
OPERATIONS
MANAGEMENT
Ch. 12: Supply -Chain
Management
POM - J. Galván
1
Learning Objectives

How do we organize supply
mechanisms?
• Due time
• Right price
POM - J. Galván
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Supply-Chain Management

Planning, organizing, directing, &
controlling flows of materials
•
•
•
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Involves everyone in supply-chain
•
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Begins with raw materials
Continues through internal operations
Ends with distribution of finished goods
Example: Your supplier’s supplier
Objective: Maximize value & lower
waste
POM - J. Galván
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The Supply-Chain
VISA
®
Materiall Flow Credit Flow
Supplier
Supplier
Manufacturing
Retailer
Consumer
Wholesaler
Retailer
Order
Schedules Flow
POM - J. Galván
Cash
Flow
4
Creation of Inventory
Input flow of materials
Inventory level
Scrap flow
Output flow of materials
Inventory at Different
Stocking Points
Where
Inventories
Are Held
Manufacturing
(36%)
Other
(8%)
Retail trade
(25%)
Farm
(8%)
Wholesale trade
(23%)
Three Possible Structures of
the SCM
• Segmented (purchasing,
production control, distribution
departments)
• Hybrid (purchasing+production
control, distribution departments)
• Integrated (material management
or logistics department)
Supply
Chain
Customer
Customer
Customer
Distribution
center
Customer
Distribution
center
Manufacturer
Tier 1
Tier 2
Tier 3
Legend
Supplier of services
Supplier of materials
Integrated Supply-Chain
Phase 1:
Independent
supply-chain
entities
Suppliers
Phase 2:
Internal
integration
Suppliers
Purchasing
Purchasing
Production
control
Distribution
Production
Distribution
control
Internal supply chain
Materials management department
Phase 3:
Supply-chain
integration
Suppliers
Internal
supply
chain
Customers
Integrated supply chain
Customers
Customers
The Acquisition Process
 Recognize a need
 Select suppliers
 Place the order
 Track the order
 Receive the order
Purchasing


Acquisition of goods & services
Activities
Help 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

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Electronic Purchasing
• EDI (electronic data interchanges, since
1970s)
– machine-to-machine, phone or dedicated
lines, complex (X12 form has 150 fields)
and expensive software, batch processing
(order, invoice, etc)
• E-Commerce
– flexible (Java applets) for any
communication (ftp, http, email, etc), low
cost, near real-time , reaches wider
community of users.
Purchasing
• Vendor/Supplier Selection
– price, quality, delivery (on-time,
short LT)
§ The impact of lead time (location) on
inventory
“The cost of a 30-day inventory, including the cost of damages from
handling, accounts for as much as 23% of the price of the parts to
customers”
Now, JIT delivery (20 minutes) to GM
Leonard Kasle
President, Kasle Steel
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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Traditional Purchasing Process
Customer
Supplier
Purchase
Order
Receivables
Report
Accounts
Payable
Reconcile
Order
Processing
Mail
Receiving
Dock
Packing
List
Mail
Invoice
Check
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Mail
Accounts
Receivable
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Delivery: American Hospital
“Hospitals today are looking at more
than price per case; they’re
looking at the total cost of
procurement, including logistics
and INVENTORY.”
Supply
Executive,
American Hospital
Purchasing--Supplier
Relations
• Competitive Orientation:
– Zero-sum between seller and buyer
– When a buyer has more clout?
• Big share of supplier’s sales
• Item is standardized
• Buyer can integrate BACKFORWARD
• Suppliers can’t integrate FORWARD
• Switching cost is low
Purchasing--Supplier Relations
• Cooperative Orientation:
– Seller and buyer are partners
– become popular with JIT success
– a smaller number of suppliers
– sole sourcing: required continuous
improvement targets and risk
– longer term commitment
– early supplier involvement in value
analysis
– supplier certification
Make/Buy Considerations
Reasons for Making

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Reasons for Buying

lower acquisition cost
lower production cost

preserve supplier commitment
unsuitable suppliers

obtain technical or
assure adequate supply
management ability
utilize surplus labor and make a  inadequate capacity
marginal contribution

reduce inventory costs
obtain desired quantity

ensure flexibility and alternate
source of supply
remove supplier collusion
obtain a unique item that would  reciprocity
entail a prohibitive commitment  item is protected by patent or
trade secret
from the supplier

frees management to deal with
maintain organizational talent
its primary business
protect proprietary design or
quality
increase/maintain size of POM - J. Galván
company
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Purchasing Strategies



Plans to help achieve company
mission
Affect long-term competitive position
Strategic options
•
•
•
•
•
Many suppliers
Few suppliers
Keiretsu network
Vertical integration
Virtual company
POM - J. Galván
Plan
© 1995 Corel Corp.
21
Many Suppliers Strategy
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Many sources per item
Adversarial relationship
Short-term
Little openness
Negotiated, sporadic PO’s
High prices
Infrequent, large lots
Delivery to receiving dock
POM - J. Galván
© 1995 Corel Corp.
22
Few Suppliers Strategy

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
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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
POM - J. Galván
© 1995
Corel
Corp.
23
Vertical Integration Strategy

Ability to produce
goods previously
purchased
• Setup operations
• Buy supplier



Make-buy issue
Raw Material
(Suppliers)
Backward
Integration
Current
Transformation
Major financial
commitment
Forward
Integration
Hard to do all
things well
Finished Goods
(Customers)
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Forms of Vertical
Integration
Iron Ore
Silicon
Steel
Automobiles
Farming
Raw Material
(Suppliers)
Flour Milling
Backward
Integration
Integrated
Circuits
Current
Transformation
Distribution
Circuit Boards
System
Dealers
Computers
Watches
Calculators
Forward
Integration
Baked Goods
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Finished Goods
(Customers)
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Centralized Buying
• Pros:
– Increased clout (savings of 10% or more)
– Buyers develop specialized expertise
– Consistent with globalization (global sourcing)
• Cons:
– Loss of local control
• profit center responsibility
• Unique items are not possible
– Longer lead time
– More difficult communication
Work Gloves at GM
• Before Centralization
– GM was spending $10 million per year on work
gloves. Almost half was for one type, which was
purchased from 95 different suppliers. One of the
suppliers charged a different price in each of 5
divisions. The price ranged from $5.00 to $5.88 per
dozen.
• After Centralization
– GM is down to only 6 suppliers and it negotiated a
12% price reduction. The annual savings is more
than $1 million -- just for work gloves !
Distribution
1. Outbound flow from plant to
customer
2. Forward placement of finished
goods inventory
– Pros: fast delivery, lower transportation
costs
– Cons: customized products not possible,
loss of pooling effect
3. Transportation mode
– Five mode: highway, rail, water, pipeline,
air
– Carriers: private, contract, common
Inventory Measures
• Average Aggregate Inventory Value = total
value of all item held in inventory
• Weeks of Supply = dividing average
aggregate inventory value (at all levels) by
weekly sales at cost (I.e. cost of goods sold)
of finished goods.
• Inventory Turnover (or turns) = dividing
annual sales at cost (cost of goods sold) by
average aggregate inventory value.
Example: Inventory Measures
• A recent accounting statement showed
average aggregate inventories (RM + WIP +
FG) to be $6,821,000. This year’s cost of
goods sold is $19.2 million. The company
operates 52 weeks per year. How many
weeks of supply are being held? What is the
inventory turnover?
Solution:
Weeks of supply
Inventory turnover
Inventory Measures
Average inventory = $2 million
Cost of goods sold = $10 million
52 business weeks per year
Weeks of supply =
Inventory turns =
$2 million
($10 million)/(52 weeks)
$10 million
$2 million
= 10.4 weeks
= 5 turns/year
Supply-Chain Performance
Linking Supply-Chain Performance Measures to Financial
Measures
Operations Measure
Aggregate inventory value
Weeks of supply
Inventory turns
Production and material costs
Percentage defects
Percentage on-time delivery
New product development time
Supplier lead times
Financial Measure
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Current assets
Working capital
Working capital
Contribution margin
Contribution margin
Revenue
Revenue
Working capital
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Supply-Chain Environments
Environments Best Suited for Efficient and Responsive Supply
Chains
Factor
Efficient Supply Chains
Responsive Supply Chains
Demand
Predictable;
low forecast errors
Low cost;
consistent quality;
on-time delivery
Infrequent
Unpredictable;
high forecast errors
Development speed;
fast delivery times;
customization;
volume flexibility;
high-performance
design quality
Frequent
Low
High
Low
High
Competitive
priorities
New-product
introduction
Contribution
margins
Product variety
Supply-Chain Design
Design Features for Efficient and Responsive Supply Chains
Factor
Efficient Supply Chains
Responsive Supply Chains
Flow strategy
Line flows; emphasize high
volume, standardized
products, or services
Low
Flexible or intermediate
flows; emphasize product
or service variety
High
Low; enable high
inventory turns
Shorten, but do not
increase costs
Emphasize low prices;
consistent quality; ontime delivery
As needed to enable fast
delivery time
Shorten aggressively
Capacity
cushion
Inventory
investment
Lead time
Supplier
selection
Emphasize fast delivery
time; customization;
volume flexibility; highperformance design
quality
Supply-Chain Dynamics
Customer
Firm A
Firm B
Materials Requirements
Customer
Firm C
Firm A
Firm C
Time
(a)
(b)
Supply-Chain Dynamics
External Supply-Chain Causes
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Volume changes
Product/service mix changes
Late deliveries
Underfilled shipments
Internal Supply-Chain Causes
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Internally generated shortages
Engineering changes
New product/service introductions
Product/service promotions
Information errors
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 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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Supply-Chain Strategies
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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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Keiretsu Network Strategy
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Japanese word for ‘affiliated chain’
System of mutual alliances and
cross-ownership
•
Company stock is held by allied firms
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Lowers need for short-term profits
Links manufacturers, suppliers,
distributors, & lenders
•
‘Partnerships’ extend across entire supply
chain
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Virtual Company Strategy
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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.
POM - J. Galván
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Vendor Selection Steps
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Vendor evaluation
•

Identifying & selecting potential vendors
Vendor development
•
Integrating buyer & supplier
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Example: Electronic data exchange
Negotiations
•
•
Results in contract
Specifies period of agreement, price,
delivery terms etc.
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Supplier Selection Criteria

Company

Financial stability
• Management
• Location
•

Product
Quality
• Price
•
POM - J. Galván
Service
Delivery on time
• Condition on
arrival
• Technical support
• Training
•
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Negotiation Strategies

Three types:
• cost-based
price model - supplier opens
its books to purchaser; price based upon
fixed clause 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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Materials Management
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Integrates all materials functions
•
•
•
•
•
•
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Purchasing
Inventory management
Production control
Inbound traffic
Warehousing and stores
Incoming quality control
Objective: Efficient, low cost
operations
POM - J. Galván
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Goods Movement Options
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Trucking
Railways
Airfreight
Waterways
Pipelines
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