Slides prepared
by John Loucks
ã 2002 South-Western/Thomson Learning TM
11
Chapter 11
Supply Chain Management
And E-Business
2
Overview
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Introduction
Supply Chain Management
Purchasing
Logistics
Warehousing
Expediting
Benchmarking the Performance of Materials Managers
Third-Party Logistics Management Providers
E-Business and Supply Chain Management
Wrap-Up: What World-Class Companies Do
3
Introduction
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Materials - any commodities used directly or
indirectly in producing a product or service.
Raw materials, component parts, assemblies,
finished goods, and supplies
Supply chain - the way materials flow through
different organizations from the raw material supplier
to the finished goods consumer.
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4
Supply Chain
for Steel in an Automobile Door
MINING
COMPANY
Mines iron ore
Iron
ore
STEEL
MILL
Forms steel ingot
Steel
ingots
STEEL
COMPANY
Forms sheet metal
Sheet
metal
AUTOMOTIVE
SUPPLIER
Makes door
Car
door
AUTOMOBILE
MANUFACTURER
Car
Makes automobile
CAR
DEALERSHIP
Does preparation
Prepared
car
FINAL
CONSUMER
Drives automobile
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Supply Chain Management
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Refers to all the management functions related to the
flow of materials from the company’s direct suppliers
to its direct customers.
Includes purchasing, traffic, production control,
inventory control, warehousing, and shipping.
Two alternative names:
Materials management
Logistics management
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Receiving
and
Inspection
Raw
Materials,
Parts, and
In-process
WareHousing
Production
Finished
Goods
Warehousing
Inspection,
Packaging,
And
Shipping
Customers
Suppliers
Supply Chain Management
in a Manufacturing Plant
Materials Management
Purchasing
Production
Control
Warehousing and Shipping
Inventory Control and Traffic
Physical materials flow
Information flow
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Purchasing
Factors increasing the importance of purchasing today:
 Tremendous impact of material costs on profit (6070% of each sales dollar is paid to material suppliers)
 Popularity of just-in-time manufacturing (supply
deliveries must be exact in timing, quantity, and
quality)
 Increasing global competition (growing competition
for scarce resources, and a geographically “stretchedout” supply chain)
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Mission of Purchasing
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Develop purchasing plans for each major product or
service that are consistent with operations strategies:
Low production costs
Fast and on-time deliveries
High quality products and services
Flexibility
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Purchasing Management
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Maintain data base of available, qualified suppliers
Select suppliers to supply each material
Negotiate contracts with suppliers
Act as interface between company and suppliers
Provide training to suppliers on latest technologies
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Advantages of Centralized Purchasing
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Buying in large quantities - better prices
More clout with suppliers - greater supply continuity
Larger purchasing department - buyer specialization
Combining small orders - less order cost duplication
Combining shipments - lower transportation costs
Better overall control
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Purchasing Process
Material Requisition
Request for Quotations
Select Best Supplier
Purchase Order
Receive and Inspect Goods
From any department,
to purchasing
From purchasing,
to potential suppliers
Based on quality, price,
lead time, dependability
From purchasing,
to selected supplier
From supplier, to receiving,
quality control, warehouse
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Buyers’ Duties
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Know the market for their commodities
Understand the laws.... tax, contract, patent..…
Process purchase requisitions and quotation requests
Make supplier selections
Negotiate prices and conditions of sale
Place and follow-up on purchase orders
Maintain ethical behavior
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Make-or-Buy Analysis
Considerations in make-or-buy decisions:
 Lower cost - purchasing or production?
 Better quality - supplier or in-house?
 More-reliable deliveries - supplier or in-house?
 What degree of vertical integration is desirable?
 Should distinctive competencies be outsourced?
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Example: Make-or-Buy
A firm manufactures a product that contains a
part requiring heat treatment. An analyst is trying to
decide whether it is more economical to buy the heat
treating service or perform the treatment in house.
Pertinent data is shown on the next slide.
If part quality and delivery performance are about
the same for the two alternatives, which alternative
should be selected?
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Example: Make-or-Buy
Number of parts annually
Fixed cost per year
Variable cost per part
Heat-Treat
In-House
5,000
$25,000
$13.20
Purchase
Heat-Treat
Service
5,000
$0
$17.50
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Example: Make-or-Buy
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Compute the total cost for each alternative
TC = FC + vQ
TC1 = FC1 + v1Q = 25,000 + 13.20(5,000) = $91,000
TC2 = FC2 + v2Q =
0 + 17.50(5,000) = $87,500
The firm should buy the heat-treating service (the
second alternative).
continued
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Example: Make-or-Buy
The analyst has assumed that 5,000 parts per year
will require heat treatment. By how many parts can
the firm’s requirements increase or decrease before
in-house heat treating is more economical? Should
the analyst rethink his/her decision?
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Example: Make-or-Buy
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Compute the break-even parts quantity
FC1 + v1Q = FC2 + v2Q
Q = (FC1 - FC2)/(v2- v1)
Q = (25,000 – 0)/(17.50 – 13.20)
Q = 5,814
If the firm’s annual parts requirement increases
by 814 (about 16%) or more, in-house heat treatment
would be more economical. The analyst should give
the decision more thought.
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Logistics
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Logistics usually refers to management of:
the movement of materials within the factory
the shipment of incoming materials from suppliers
the shipment of outgoing products to customers
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Movement of Materials within Factories
The typical locations from/to which material is moved:
Incoming
Vehicles
Receiving
Dock
Quality
Control
Warehouse
Work
Center
Other Work
Centers
Packaging
Finished
Goods
Shipping
Shipping
Dock
Outgoing
Vehicles
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Shipments To and From Factories
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Traffic
Traffic departments routinely examine shipping
schedules and select:
shipping methods
time tables
ways of expediting deliveries
Traffic management is a specialized field requiring
technical training in Department of Transportation
(DOT) and Interstate Commerce Commission
(ICC) regulations and rates.
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Shipments To and From Factories
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Distribution
Distribution, or physical distribution, is the
shipment of finished goods through the distribution
system to customers.
A distribution system is the network of shipping
and receiving points starting with the factory and
ending with the customers.
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Shipments To and From Factories
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Distribution Requirements Planning
DRP is the planning for the replenishment of
regional warehouse inventories.
DRP uses MRP-type logic to translate regional
warehouse requirements into central distributioncenter requirements, which are then translated into
gross requirements in the MPS at the factory.
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Shipments To and From Factories
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Distribution Requirements Planning
Scheduled receipts are previously-placed orders that
are expected to arrive in a given week
Planned receipt of shipments are orders planned, but
not yet placed, for the future
Projected ending inventory is computed as:
Previous week’s projected ending inventory
+ Planned receipt of shipments in current week
+ Scheduled receipt of shipments in current week
-- Forecasted demand in current week
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Shipments To and From Factories
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DRP Time-Phased Order Point Record
Region. Warehouse #1 LT = 1
Std. Quantity = 50
SS = 10
Forecasted demand (units)
Scheduled receipts
Projected ending inventory
Planned receipt of shipments
Planned orders for shipments
Week
-1
1
2
3
4
5
30
40
30
40
40
40
10
20
30
50
50
50
60
80
50
50
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Example: DRP
Products are shipped from a company’s main
distribution center (adjacent to the factory) to two
regional warehouses. The DRP records on the next
two slides show – for the two regional warehouse –
the forecasted demand, scheduled receipts, and last
week’s projected ending inventories for a single
product.
The third upcoming slide shows – for the main
distribution center – scheduled receipts and last
week’s projected ending inventory for the same
product. Complete the DRP records.
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Example: DRP
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DRP Record for Regional Warehouse #1
Region. Warehouse #1 LT = 1
Std. Quantity = 100
SS = 50
Forecasted demand (units)
Scheduled receipts
Projected ending inventory
Planned receipt of shipments
Planned orders for shipments
Week
-1
1
2
3
4
5
80
100
80
60
100
100
200
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Example: DRP
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DRP Record for Regional Warehouse #2
Region. Warehouse #2 LT = 2
Std. Quantity = 200
SS = 80
Forecasted demand (units)
Scheduled receipts
Projected ending inventory
Planned receipt of shipments
Planned orders for shipments
Week
-1
1
2
3
4
5
100 200 200 240 200
200
220
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Example: DRP
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DRP Record for Main Distribution Center
Main Distrib. Center LT = 1
Std. Quantity = 500
SS = 200
Gross Requirements (units)
Scheduled receipts
Projected ending inventory
Planned receipt of shipments
Planned orders for shipments
Week
-1
1
2
3
4
5
500
250
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Example: DRP
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Completed DRP Record for Regional Warehouse #1
Region. Warehouse #1 LT = 1
Std. Quantity = 100
SS = 50
Forecasted demand (units)
Scheduled receipts
Projected ending inventory
Planned receipt of shipments
Planned orders for shipments
Week
-1
1
2
3
4
5
80
100
80
60
100
200 220 120 140
80
80
100
100
100
100
100
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Example: DRP
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Completed DRP Record for Regional Warehouse #2
Region. Warehouse #2 LT = 2
Std. Quantity = 200
SS = 80
Forecasted demand (units)
Scheduled receipts
Projected ending inventory
Planned receipt of shipments
Planned orders for shipments
Week
-1
1
2
3
4
5
100 200 200 240 200
200
220 320 120 120
80
80
200 200 200
200 200 200
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Example: DRP
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DRP Record for Main Distribution Center
The “gross requirement” ( in row 1) for any week
is determined by summing the “planned orders for
shipment” for the same week at the two regional
warehouses
These gross requirements at the MDC are input to
the master production schedule in the factory
In other words, the timing and quantities of
production in the factory are linked to the timing
and quantities of demand at the regional
warehouses
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Example: DRP
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Completed DRP Record for Main Distribution Center
Main Distrib. Center LT = 1
Std. Quantity = 500
SS = 200
Forecasted demand (units)
Scheduled receipts
Projected ending inventory
Planned receipt of shipments
Planned orders for shipments
Week
-1
1
2
3
4
5
200 300 200 100
500
250 550 250 550 450 450
500
500
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Shipments To and From Factories
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Distribution Resource Planning
Distribution resource planning extends DRP so
that the key resources of warehouse space,
workers, cash, and vehicles are provided in the
correct quantities at the correct times.
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Analyzing Shipping Decisions
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The “Transportation Problem”
Problem involves shipping a product from several
sources (ex. factories) with limited supply to
several destinations (ex. warehouses) with demand
to be satisfied
Per-unit cost of shipping from each source to each
destination is specified
Optimal solution minimizes total shipping cost and
specifies the quantity of product to be shipped
from each source to each destination
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Example: Minimizing Shipping Costs
Pacer produces computer monitors in its three
factories and ships them to five regional warehouses.
The factory-to-warehouse shipping costs per monitor
are:
Factory
1
2
3
Warehouse
A
B
C
D
E
$2.10 $4.30 $3.60 $1.80 $2.70
4.90 2.60 3.50 4.50 3.70
3.90 3.60 1.50 5.80 3.30
continued
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Example: Minimizing Shipping Costs
The factories have the following capacities
(monitors produced per month): 1 = 10,000;
2 = 20,000; and 3 = 10,000.
The warehouses need at least these numbers of
monitors per month: A = 5,000; B = 10,000; C =
10,000; D = 5,000; and E = 10,000.
Use the POM Software Library to solve this
transportation problem.
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Example: Minimizing Shipping Costs
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Solution
Warehouse
Factory A
B
C
D
E
1
5,000 0
0
5,000
0
2
0 10,000
0
0
10,000
3
0
0
10,000 0
0
Total monthly shipping cost = $97,500
(Note: all warehouse demand is satisfied
and no factory’s capacity is exceeded.)
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Innovations in Logistics
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New developments affecting logistics include:
All-freight airports
Inter-modal shipping
In-transit rates
Consolidated shipments
Air-freight and trucking deregulation
Advanced logistics software
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Warehousing
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Warehousing is the management of materials while
they are in storage.
Warehousing activities include:
Storing
Dispersing
Ordering
Accounting
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Warehousing
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Record keeping within warehousing requires a stock
record for each item that is carried in inventories.
The individual item is called a stock-keeping unit
(SKU).
Stock records are running accounts that show:
On-hand balance
Receipts and expected receipts
Disbursements, promises, and allocations
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Inventory Accounting
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In the past, inventory accounting was based on:
periodic inventory accounting systems -- periodic
(end-of-day) updating of inventory records
physical inventory counts -- periodic (end-of-year)
physical counting of all SKUs at one time
Today, more and more firms are using:
perpetual inventory accounting systems -- real-time
updating of records as transactions occur
cycle counting -- ongoing (daily or weekly) physical
counting of different SKUs
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Example: Cycle Counting
A company is implementing a cycle-counting
program. Class A items will be counted monthly,
Class B items will be counted quarterly, and Class C
items will be counted semi-annually.
5% of the firm’s inventory items are classified as
Class A, 20% are Class B, and 75% are Class C. If
the firm has 16,000 different SKUs (unique inventory
items), how many will need to be counted daily?
Assume 200 days per year are available for cycle
counting.
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Example: Cycle Counting
Class
of Item
Number
of Items
per Class
Number
of Counts
per Item
per Year
Total Counts
per Year
A
B
C
800
3,200
12,000
12
4
2
9,600
12,800
24,000
Total
16,000
46,400
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Example: Cycle Counting
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Number of Inventory Items Counted Daily
Total counts per year
=
Number of available days per year
= 46,400/200 = 232 items per day
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Example: Cycle Counting
The cycle-counting personnel must count 232
inventory items per day. If the average cycle-counter
can count 24 items per day, how many counters are
needed?
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Number of Cycle-Counting Personnel Required
Number of items counted per day
=
Number of items per day per counter
= 232/24 = 9.67 or 10 counters
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Measuring the
Performance Materials Managers
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Level and value of in-house inventories
Percentage of orders delivered on time
Number of stockouts
Annual cost of materials
Annual cost of transportation
Annual cost of warehouse
Number of customer complaints
Other factors
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Wrap-Up: World-Class Practice
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See materials management as key element in
capturing global market share
Form partnerships with suppliers
Use computers extensively to manage logistics
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End of Chapter 11
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