Operations
Management
Supply Chain Management &
E–Commerce
Supplement 11
11-1
© 2004 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458
Supply Chain Management
Planning, organizing, directing, and controlling
flows of materials
Raw materials through internal operations through
distribution of finished goods to customers
 Associated information flows
 Associated cash flows
 Involves everyone in the supply chain
– e.g. your supplier’s supplier
 Objective: maximize value & lower waste
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Most firms spend over 50% of their sales on purchases
11-2
© 2004 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458
Supply Chain Performance
Typical Firms
Administrative costs as percent
of purchases
Benchmark
Firms
3.3%
0.8%
Lead time (weeks)
15 weeks
8 weeks
Time spent in placing order
42 minutes
15 minutes
Percentage of late deliveries
33%
2%
Percentage of rejected material
1.5%
.0001%
Number of shortages per year
400
11-3
4
© 2004 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458
The Supply Chain
Material
Flow
Supplier
Credit
Flow
VISA
®
Manufacturing
Supplier
Schedules
Retailer
Consumer
Wholesaler
Retailer
Order
Flow
11-4
Schedules
Cash
Flow
$
© 2004 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458
Managing the Customer Interface
 Order placement process
Activities required to register the need
for a product or service and to confirm
the acceptance of the order
 Order fulfillment process
Activities required to deliver
a product or service to a customer
11-5
© 2004 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458
Managing the Supplier Interface
 Supplier selection and certification
 Supplier relations
 E–commerce
11-6
© 2004 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458
Make vs. Buy
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Reasons for Making
Maintain core competencies
Protect proprietary design or process
Obtain a unique / not-readily available item
Assure adequate supply
Obtain desired quantity
Lower production cost
Unsuitable suppliers
Remove supplier collusion
Increase or maintain size of company / utilize surplus
labor / avoid layoffs
11-7
© 2004 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458
Make vs. Buy
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Reasons for Buying
Frees management to deal with its primary business
Inadequate managerial or technical resources
Item is protected by patent or trade secret
Inadequate capacity
Lower acquisition cost
Reduce inventory costs
Ensure flexibility and alternate source of supply
Preserve supplier commitment
Reciprocity
11-8
© 2004 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458
Vendor Evaluation
11-9
© 2004 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458
Supplier Strategies
Multiple Source
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Single Source
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Many sources per item
Arm’s-length relationship
Short-term
Little openness
Negotiated, sporadic PO’s
Infrequent, large lots
Delivery to receiving dock
Cost – business to low
bidder
11-10
One / few sources per item
Partnership (JIT)
Long-term, stable
Audits, visits, shared work
Exclusive contracts
Frequent, small lots
Delivery to point of use
Cost – create value with
large orders, learning curve
© 2004 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458
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
Change tooling for woodgrain panels to allow three
from one die instead of two
Dodge
trucks
Various
$280,000
Trico
Change wiper-blade
formulation
Various
$140,000
Leslie Metal
Arts
Exterior lighting suggestions
Various
$1,500,000
Rockwell
3M
11-11
Caravan,
Voyager
$300,000
$1,500,000
© 2004 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458
Supply Chain Process Measures
Order Placement
Order Fulfillment
 Percent orders taken
 Percent of incomplete
accurately
 Time to complete the
order-placement
process
 Customer satisfaction
with the orderplacement process
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Purchasing
 Percent of suppliers’
orders shipped
Percent of orders
shipped on time
Time to fulfill the order
Percent of returned
items or botched
services
Cost to produce the item
or service
Customer satisfaction
with the order-fulfillment
process
11-12
deliveries on time
 Suppliers’ lead times
 Percent defects in
purchased materials
and services
 Cost of purchased
materials and services
© 2004 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458
Supply-Chain Environments
Low Cost
 Competitive priorities:
low cost, consistent
quality and on-time
delivery
 Predictable demand;
low forecast errors
Response
Differentiation
 Competitive priorities:
 Competitive priorities:
fast delivery times,
volume flexibility,
customization
high-performance
design quality, high
development speed,
customization
 Unpredictable demand;
high forecast errors
 Unpredictable demand;
high forecast errors
 Low product variety
 High product variety
 Infrequent new product

introductions
 Low contribution
Frequent new product
introductions
 High contribution
margins
margins
11-13
© 2004 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458
Supply Chain Design
Low Cost
 Select suppliers for low
cost
 Maintain high capacity
utilization
 Minimize inventory
Response
Differentiation
 Select suppliers for
 Select suppliers for
capacity, speed and
flexibility
 Invest in excess capacity
and flexible processes
 Responsive systems with
throughout the chain to
buffer stocks to ensure
reduce cost
supply
 Shorten lead-time as
 Invest aggressively to
long as it does not
reduce lead-time
increase costs
 Product designs that
 Product designs that lead
maximize performance
to low set-up time and
and minimize cost
rapid production ramp-up
11-14
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product development
skills
Modular processes that
lend themselves to
mass customization
Minimize inventory in
the chain to avoid
obsolescence
Invest aggressively to
reduce development
lead-time
High-performance
design, modular design
to postpone
differentiation
© 2004 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458
E–Commerce
The use of computer networks,
primarily the internet, to buy and sell
products, services, and information
“… all about cycle time, speed, globalization,
enhanced productivity, reaching new customers
and sharing knowledge across institutions for
competitive advantage.”
Louis Gerstner, Chairman, IBM
11-15
© 2004 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458
E–Commerce Transactions
Business
Consumer
Business
Consumer
B2B
B2C
Covisint Exchange,
FreeMarket.com
Amazon, Dell,
Netgrocer.com
C2B
C2C
Priceline, Travelocity
eBay
11-16
© 2004 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458
B2B Applications
 Product – drawings, specifications, video demonstrations,
prices
 Processes – capacities, commitments, plans
 Transportation – carriers, lead times, costs
 Inventory – levels, costs, and location, tracking
 Supply Chain – process descriptions, performance
measures, partners’ roles and responsibilities, and schedules
 Suppliers – product catalogue, quality history, lead times,
terms, and conditions
 Sales / Marketing – point of sale data, promotions, pricing,
discounts
 Customer – sales history and forecasts
11-17
© 2004 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458
B2B Applications
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Improve development time and cost
Support JIT systems
Improve scheduling and logistics
Reduce physical inventories
Allow internet outsourcing
Dramatically reduce cost
Enable new
business models
11-18
© 2004 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458
Benefits of E–Commerce
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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
11-19
© 2004 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458
Limitations of E–Commerce
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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
11-20
© 2004 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458
Summary
 Multiple organizations are needed to create value
Purchasing – Other companies
Operations / Production
Distribution
 Reengineering our order placement process and our order
fulfillment process can lead to faster, better and cheaper
 Cooperative supplier relations can lead to faster, better and
cheaper
 E–commerce is revolutionizing the way operations managers
achieve greater efficiencies, leading to faster, better and
cheaper
11-21
© 2004 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458