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Supply chain management (SCM) is the management of the flow of goods. It includes the movement and storage of raw materials, work-in-process inventory, and finished goods from point of origin to point of consumption. Interconnected or interlinked networks, channels and node businesses are involved in the provision of products and services required by end customers in a supply chain.[2] Supply chain management has been defined as the "design, planning, execution, control, and monitoring of supply chain activities with the objective of creating net value, building a competitive infrastructure, leveraging worldwide logistics, synchronizing supply with demand and measuring performance globally."[3]SCM draws heavily from the areas of operations management, logistics, procurement, and information technology, and strives for an integrated approach.[4]
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1
BUS118 – Production & Operations Management
Supply Chain Management
Prof. Marvin I. Noroña BUS118 – Production & Operations Management 2
Thinking Challenge
Current
Situation
Sales
Strategy
Mat’l
Strategy
Sales $10 $ ? $10
Materials $8 (80%) $ (80%) $ ?
Marketing $1 (10%) $ (10%) $ (10%)
Net Income $1 $2 $2
What would sales & material costs have to
be to double net income? Which is easier?
Percentages are % of sales.
Prof. Marvin I. Noroña
BUS118 – Production & Operations Management 3
Solution*
Current
Situation
Sales
Strategy
Mat’l
Strategy
Sales $10 $20 $10
Materials 8 16 7
Mktg (10%) 1 2 1
Net Income 1 2 2
Increase sales 100% Reduce material costs 12%
Reducing material costs is more feasible.
Prof. Marvin I. Noroña BUS118 – Production & Operations Management Prof. Marvin I. Noroña 4
What Operations Managers Do?
10 OM Strategy Decisions:
• Design of Goods & Services
• Managing Quality
• Process Strategy
• Location Strategies
• Layout Strategies
• Human Resources
• Supply Chain Management
• Inventory Management
• Scheduling
• Maintenance
10 Decision Areas: • service & product design
• quality management
• process & capacity design
• location
• layout design
• human resources & job design
• supply chain management
• inventory, MRP, and J-I-T
• intermediate, short-term,
and project scheduling
• maintenance
BUS118 – Production & Operations Management Prof. Marvin I. Noroña 5
Supply Chain Management
Management of integrated activities that • procure raw materials
• transform those materials into intermediate goods and final products
• deliver the products through a distribution system
Purchasing
Receiving Storage Operations Storage
Production Distribution
BUS118 – Production & Operations Management Prof. Marvin I. Noroña 6
FACILITIES
FUNCTIONS and ACTIVITIES
warehouses
factories
processing centers
distribution centers
retail outlets
offices
• forecasting
• purchasing
• inventory management
• information management
• quality assurance
• scheduling
• production
• distribution
• delivery
• customer service
2
BUS118 – Production & Operations Management Prof. Marvin I. Noroña 7
SUPPLY CHAIN
Sometimes referred to as Value Chain, a term that
reflects the concept that value is added as goods and
services progress through the chain.
Comprised of separate business organizations, rather
than just a single organization.
Has two (2) components for each organization:
1) a supply component
2) a demand component
BUS118 – Production & Operations Management Prof. Marvin I. Noroña 8
SUPPLY CHAIN
Customer Retailer Distributor Storage MFG Storage
Supplier
Supplier
Supplier
SUPPLY COMPONENT DEMAND COMPONENT
The supply component starts at the beginning of the chain and ends with the
internal operations of the organization. The demand component of the chain
starts at the point where the organization’s output is delivered to its immediate
customer and ends with the final customer in the chain. The demand chain is
the sales and distribution portion of the value chain
The length of each component depends on where a particular organization is in
the chain: the closer the organization is to the final customer, the shorter its
demand component and the longer its supply component.
BUS118 – Production & Operations Management Prof. Marvin I. Noroña 9
Theory of Supply Chain Management
Companies seek to design business models
that meet customer needs better than
competitors.
Success depends on the ability to
Design, Make, and Deliver
innovative, high quality, low cost products
and services that customers demand.
BUS118 – Production & Operations Management Prof. Marvin I. Noroña 10
Theory of Supply Chain Management
Supply chain management allows companies to focus on their unique skill sets.
Supply chain management requires a common understanding of supply chain objectives and individual roles, an ability to work together, and a willingness to adapt in order to create and delivery the best products and services possible.
BUS118 – Production & Operations Management Prof. Marvin I. Noroña 11
Supplier
Supplier
Supplier
S
t
o
r
a
g
e
MFG Distributor
S
t
o
r
a
g
e
S
t
o
r
a
g
e
Retailer CUSTOMER
S
t
o
r
a
g
e
SERVICE CUSTOMER
Supplier
Supplier
Distributor CUSTOMER Tier 1
Suppliers PRODUCER
Tier 2
Suppliers
MANUFACTURING SUPPLY CHAIN
SERVICE SUPPLY CHAIN
Supply and Demand Components
BUS118 – Production & Operations Management Prof. Marvin I. Noroña 12
Supply Chain: Manufacturing Example
3
BUS118 – Production & Operations Management Prof. Marvin I. Noroña 13
Supply Chain: Manufacturing Example
BUS118 – Production & Operations Management Prof. Marvin I. Noroña 14
The Supply Chain
All organizations, regardless of where they are in the
chain, must deal with supply and demand issues.
The goal of SCM is to link all components of the
supply chain so that market demand is met as
efficiently as possible across the entire chain.
This requires matching supply and demand at each stage of
the chain.
Except for the beginning supplier(s) and the final
customer(s), the organizations in a supply chain are both
customers and suppliers.
BUS118 – Production & Operations Management Prof. Marvin I. Noroña 15
The Supply Chain
Manufacturer
Supplier
Supplier
Supplier
Customer Distributor
Customer
Customer
Inventory
Inventory
Inventory
Inventory
Market research data
Scheduling information
Engineering & design data
Order flow & cash flow
Ideas & design to satisfy
the end customer
Material flow
Credit flow
The supply chain includes all the interactions between suppliers, manufacturers, distributors, and customers. The chain includes, transportation, scheduling information, cash & credit transfers, as well as ideas, designs, and material transfers.
BUS118 – Production & Operations Management Prof. Marvin I. Noroña 16
Supply Chain Management
Includes determining the following:
1) transportation vendors
2) credit & cash transfers
3) suppliers
4) distributors & banks
5) accounts payable & receivable
6) warehousing and inventory levels
7) order fulfillment
8) sharing customer, forecasting & production information
BUS118 – Production & Operations Management Prof. Marvin I. Noroña 17
Supply Chain Management
means managing the flow of goods and services
and information through the supply chain in
order to attain the level of synchronization that
will make it more responsive to customer needs
while lowering costs.
has the goal of linking all components of the
supply chain so that market demand is met as
efficiently as possible across the entire chain.
BUS118 – Production & Operations Management Prof. Marvin I. Noroña 18
Keys to effective SCM
Information
Communication
Cooperation
Trust
Supplier partnering
4
BUS118 – Production & Operations Management Prof. Marvin I. Noroña 19
Supply Chain Management
The idea is to build a chain of suppliers that focus on both
Reducing waste, and
Maximizing value to the ultimate customer
Activities of Supply Chain managers cut across the disciplines of
Accounting
Finance
Marketing
operations
BUS118 – Production & Operations Management Prof. Marvin I. Noroña 20
Why Supply Chain Management ?
1. Need to improve operations
2. Increasing levels of outsourcing
3. Increasing transportation costs
4. Competitive pressures
5. Increasing globalization
6. Increasing importance of e-commerce
7. Complexity of supply chains
8. Need to manage inventories
BUS118 – Production & Operations Management Prof. Marvin I. Noroña 21
Supply Chain Management
As firms strive to increase their competitiveness via
STRATEGIES:
• Product customization Differentiation
• High quality Quality
• Cost reductions Low-cost
• Speed-to-market Response
added emphasis was placed on the
• Supply Chain
BUS118 – Production & Operations Management Prof. Marvin I. Noroña 22
Supply Chain Management Defined
Supply chain management is the design and
management of seamless, value-added
processes across organizational boundaries to
meet the real needs of the end customer.
- Institute for Supply Management
BUS118 – Production & Operations Management Prof. Marvin I. Noroña 23
Supply Chain Integration
Internal Process Integration: increase collaboration
among the company’s functional groups.
Backward Process Integration: collaboration with
1st-tier and 2nd-tier (leading companies) suppliers.
Forward Process Integration: collaboration with 1st-
tier customers.
Complete Integration: collaboration from the
“suppliers’ supplier to the customers’ customer.”
BUS118 – Production & Operations Management Prof. Marvin I. Noroña 24
Supply Chain Integration
Common
5
BUS118 – Production & Operations Management Prof. Marvin I. Noroña 25
Internal Value Chain Elements
Executive Management defines company strategy and allocates resources to achieve it.
Supply Management coordinates the upstream supply base, finding the right suppliers and building the right relationships with them.
Operations transforms the inputs acquired from suppliers into more highly valued products.
Logistics moves and stores materials so they are available when and where they are needed.
Marketing manages the downstream relationships with customers, identifying their needs and communicating to them how the company can meet those needs.
BUS118 – Production & Operations Management Prof. Marvin I. Noroña 26
Internal Value Chain Elements
Human Resources designs the systems used to hire, train, and develop the company’s employees.
Accounting maintains business records that provide information needed to control operations.
Finance acquires and controls the capital required to operate the business.
Information Technology builds and maintains the systems needed to capture and communicate information among decision makers.
Research and Development (R&D) is responsible for new product design.
BUS118 – Production & Operations Management Prof. Marvin I. Noroña 27
Internal Value Chain: Local Focus
R & D
Operations
Executive
Management
Logistics
Marketing
Human
Resource Management
Accounting
Finance
Supply
Management
Information
Technology
BUS118 – Production & Operations Management Prof. Marvin I. Noroña 28
Internal Value Chain: Company Focus
R & D
Operations
Executive
Management
Logistics
Marketing
Human
Resource Management
Accounting
Finance
Supply
Management
Information
Technology
Upstream
Suppliers
Downstream
Customers
BUS118 – Production & Operations Management Prof. Marvin I. Noroña 29
Internal Value Chain: Company Focus
R & D
Operations
Executive
Management
Logistics
Marketing
Human
Resource Management
Accounting
Finance
Supply
Management
Information
Technology
Upstream
Suppliers
Downstream
Customers
BUS118 – Production & Operations Management Prof. Marvin I. Noroña 30
SCM: Linked Value Chains
R & D
Operations
Executive
Management
Logistics
Marketing
Human
Resource Management
Accounting
Finance
Supply
Management
Information
Technology
R & D
Operations
Executive
Management
Logistics
Marketing
Human
Resource
Management
Accounting
Finance
Supply
Management
Information
Technology
R & D
Operations
Executive
Management
Logistics
Marketing
Human
Resource
Management
Accounting
Finance
Supply
Management
Information
Technology
R & D
Operations
Executive
Management
Logistics
Marketing
Human
Resource
Management
Accounting
Finance
Supply
Management
Information
Technology
R & D
Operations
Executive
Management
Logistics
Marketing
Human
Resource
Management
Accounting
Finance
Supply
Management
Information
Technology
Focal
Firm
Supplier Supplier’s
Supplier
Customer Customer’s
Customer
6
BUS118 – Production & Operations Management Prof. Marvin I. Noroña 31
Supply Chain Integration
Common
Theoretical Ideal BUS118 – Production & Operations Management Prof. Marvin I. Noroña 32
Supply Chain Management Problems
The goal of supply chain management is to
use technology and teamwork to build
efficient and effective processes that create
value for the end customer.
The goal is compromised when processes,
value chain elements, and/or companies work
toward local rather than global optimum.
BUS118 – Production & Operations Management Prof. Marvin I. Noroña 33
Bullwhip Effect
Tier 2
Suppliers
Tier 1
Suppliers Producer Distributor Retailer
Final
Customer
Amount of
inventory =
BUS118 – Production & Operations Management Prof. Marvin I. Noroña 34
The Bullwhip Effect
Variation in demand is exaggerated as
information moves upstream away from the
point of use.
Variation in demand is exaggerated due to
infrequent demand and/or inventory level
information exchange and order batching.
BUS118 – Production & Operations Management Prof. Marvin I. Noroña 35
The Bullwhip Effect
BUS118 – Production & Operations Management Prof. Marvin I. Noroña 36
The Bullwhip Effect
Bullwhip effect costs can be as high as 12 to
25%
Bullwhip can be effectively mitigated by:
Sharing point of sale data
Collaborative forecasting
Collaborative future product promotion planning
7
BUS118 – Production & Operations Management Prof. Marvin I. Noroña 37
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, customer, and political issues
BUS118 – Production & Operations Management Prof. Marvin I. Noroña 38
Elements of Supply Chain Management
Deciding how to best move and store materials Logistics
Determining location of facilities Location
Monitoring supplier quality, delivery, and relations Suppliers
Evaluating suppliers and supporting operations Purchasing
Meeting demand while managing inventory costs Inventory
Controlling quality, scheduling work Processing
Incorporating customer wants, mfg., and time Design
Predicting quantity and timing of demand Forecasting
Determining what customers want Customers
Typical Issues Element
BUS118 – Production & Operations Management Prof. Marvin I. Noroña 39
PURCHASING The supply chain receives so much attention because Purchasing is
the most costly activity in most firms
Illustration:
SALES
- VC Purchases (50%)
Other VC (24%)
- FC PROFIT
$ 100
(50) (24)
(24) $ 2 =====
$ 103.85
(51.93) (24.92)
(24.00) $ 3.00 =======
$ 100
(49) (24)
(24) $ 3.00 =====
Through a $3.85 of additional sales, profit increased by $1,
from $2 to $3. The same increase in margin could have been obtained by reducing purchasing costs by $1.
BUS118 – Production & Operations Management Prof. Marvin I. Noroña 40
PURCHASING
is critical to supply chain efficiency because it is the job of purchasing to • Select suppliers
• Establish mutually beneficial relationships with them
its goal is to develop and implement purchasing plans for products and services that support operations strategies.
among its duties are • Identifying sources of supply
• Negotiating contracts
• Maintaining a database of suppliers
• Obtaining goods & services that meet or exceed operations requirements in a timely and cost-efficient manner
• Managing suppliers
BUS118 – Production & Operations Management Prof. Marvin I. Noroña 41
PURCHASING
Purchasing is the acquisition of goods & services
Objectives of Purchasing are:
1. To help identify the products and services that can be
obtained externally
2. To develop, evaluate, and determine the best supplier, price
and delivery for those products and services
Purchasing takes place in both manufacturing and
service environments
cost & quality of goods & services
SOLD
cost & quality of goods & services
PURCHASED
Effective
Purchasing
Strategy
BUS118 – Production & Operations Management Prof. Marvin I. Noroña 42
Purchasing in Manufacturing Environments
Purchasing function is supported by
1) Product engineering drawings & specs
2) Quality control documents
3) Testing activities that evaluate the purchased items
PURCHASING AGENT
BUYERS EXPEDITERS
- a person with legal authority to
execute purchasing contracts on
behalf of the firm
- perform all the activities of the purchasing department
EXCEPT contract signing
- assist buyers in following up on
purchases to ensure TIMELY DELIVERY
8
BUS118 – Production & Operations Management Prof. Marvin I. Noroña 43
Purchasing in Service Environments
In many service environments, purchasing’s role is DIMINISHED because the primary product is an intangible one (ex. Legal and medical organizations)
In transportation and restaurants, the purchasing function is CRITICAL
In wholesale and retail segment of services, purchasing is performed by a BUYER who is a purchaser RESPONSIBLE for the SALE OF and PROFIT ON merchandise that will be resold.
BUS118 – Production & Operations Management Prof. Marvin I. Noroña 44
PURCHASING
INTERFACES Legal
Accounting
Data
Processing
Design
Receiving
Suppliers
Operations
Purchasing
BUS118 – Production & Operations Management Prof. Marvin I. Noroña 45
PURCHASING CYCLE
Begins with a request from within the organization to purchase material, equipment, supplies, or other items from outside the organization
Ends when the purchasing department is notified that a shipment has been received in satisfactory condition
Main steps are:
1. Purchasing receives the requisition
2. Purchasing selects a supplier
3. Purchasing places the order with a vendor
4. Monitoring orders
5. Receiving orders
BUS118 – Production & Operations Management Prof. Marvin I. Noroña 46
VALUE ANALYSIS – examination of the function of purchased parts and materials in an effort to reduce cost and/or improve performance.
MAKE or BUY – choosing between producing a component or a service in-house or advantageously purchasing it form an outside source
VENDOR SELECTION - a decision regarding who to buy materials from, considering numerous factors, such as inventory and transportation costs, availability of supply, delivery performance, and quality of suppliers
SUPPLIER MANAGEMENT – includes vendor analysis, supplier audits, supplier certification, supplier relationships and supplier partnerships
ROLES OF PURCHASING
BUS118 – Production & Operations Management Prof. Marvin I. Noroña 47
ROLES OF PURCHASING MAKE or BUY
Role is to evaluate alternative suppliers and provide current, accurate, complete data relevant to the buy alternative.
Wholesale/Retail
PURCHASES SALES
Manufacturing, Restaurants, and Assemblers
PURCHASES (components & subassemblies)
PRODUCTION
SALES (final products)
BUS118 – Production & Operations Management Prof. Marvin I. Noroña 48
Outsourcing
Buying goods or services from outside sources rather
than making or providing them in-house
Reasons:
Ability of outside source to provide materials, parts or
services better, cheaper, or more efficiently
Patents, expertise & knowledge of the supplier
Gives more flexibility to the organization (downsizing)
Risks:
• Loss of control
• Greater dependency on suppliers
• Loss of ability to perform in-house
9
BUS118 – Production & Operations Management Prof. Marvin I. Noroña 49
Deciding Factors in Outsourcing 1. Cost to do it in-house versus cost to buy, including start-up
costs, versus cost to outsource
2. Stability of demand and possible seasonality
3. Quality available from suppliers compared with a firm’s own quality capabilities
4. Desire to maintain close control of operations
5. Idle capacity available within the organization
6. Lead times for each alternative
7. Who has patents, expertise, and so on, if these are factors
8. Stability of technology (if technology is changing, it may be better to use a supplier)
9. Degree to which the necessary operations are consistent with, or in conflict with current operations
10. Strategy BUS118 – Production & Operations Management Prof. Marvin I. Noroña 50
Example No.1 : Make or Buy Decision
Choose which alternative is better. Analyze the following data
to determine the total annual cost of making and of buying.
Expected Annual Volume
Variable cost per unit Annual fixed costs
Make
20,000 units $ 5.00 $30,000
Buy
20,000 units $ 6.00 -
Solution: Total Annual Cost = Fixed Cost + VC/unit x annual volume
Make : $ 30,000 + ($5 x 20,000) = $130,000 Buy : 0 + ($6 x 20,000) = $120,000
Buying is the better alternative because it would save $10,000 a year.
BUS118 – Production & Operations Management Prof. Marvin I. Noroña 51
Example No.2 : Make or Buy Decision Given the following data, determine the total annual cost of making
and of buying. Estimated demand is 10,000 units a year.
Variable cost per unit
Annual fixed cost Transportation cost per unit
Make
Process A Process Buy__
$ 50 $ 52 $51 $ 40,000 $ 36,000 $ 2
SOLUTION:
Variable Cost $500,000 $520,000 $510,000 Fixed Cost 40,000 36,000 - Transportation Cost - - 20,000
Total Annual Cost $540,000 $556,000 $530,000 ====== ====== ======
Buying is the best alternative with the lowest total annual cost BUS118 – Production & Operations Management Prof. Marvin I. Noroña 52
Outsourcing REASONS for MAKING
Lower production cost
Unsuitable suppliers
Assure adequate supply (quantity or delivery)
Utilize surplus labor or facilities and make a marginal contribution
Obtain desired quality
Remove supplier collusion
Obtain unique item that would entail a prohibitive commitment for a supplier
Maintain organizational talents and protect personnel from a layoff
Protect proprietary design or quality
Increase or maintain size of company (management prerogative)
REASONS for BUYING
Lower acquisition cost
Preserve supplier commitment
Obtain technical or management ability
Inadequate capacity
Reduce inventory costs
Ensure alternative sources
Inadequate managerial or technical resources
Reciprocity
Item is protected by a patent or trade secret
Frees management to deal with its primary business
BUS118 – Production & Operations Management Prof. Marvin I. Noroña 53
ROLES OF PURCHASING
VALUE ANALYSIS
MAKE or BUY DECISION
VENDOR SELECTION
a decision regarding who to buy materials from
considers numerous factors:
• inventory and transportation costs
• availability of supply
• delivery performance
• quality of suppliers
outstanding operations requires excellent vendors BUS118 – Production & Operations Management Prof. Marvin I. Noroña 54
3 Stages of Vendor Selection
1. Vendor Evaluation
Involves finding potential vendors and determining the likelihood of their becoming good suppliers
Requires development of evaluation criteria, such as:
• financial strength
• quality
• management
• research
• technical ability
• potential for a close
long-term relationship
Weights depending upon the needs of
the organization
10
BUS118 – Production & Operations Management Prof. Marvin I. Noroña 55
3 Stages of Vendor Selection
2. Vendor Development
Ensures integration of the supplier into a firm’s system and the
appreciation by the vendor of its
• Quality requirements
• Engineering changes
• Schedules and delivery
• Procurement policies
• Payment system
May include everything from training, to engineering &
production help, to formats for electronic information transfer
Purchasing policies address issues such as percent of business
done with any one supplier or with minority businesses
BUS118 – Production & Operations Management Prof. Marvin I. Noroña 56
3 Stages of Vendor Selection
3. Negotiations
Negotiation strategies are approaches taken by
purchasing personnel to develop contractual
relationships with suppliers
They are of 3 classic types:
1) Cost-Based Price Model
2) Market-Based Price Model
3) Competitive Bidding
BUS118 – Production & Operations Management Prof. Marvin I. Noroña 57
Negotiations / Determining Prices 1) Cost-Based Price Model : requires that the supplier open its
books to the purchaser. The contract price is then based on time and materials, or on a fixed cost with an escalation clause to accommodate changes in the vendor’s labor and materials cost.
2) Market-Based Price Model : price is based on a published price or index. Paperboard and nonferrous metals prices, for instance, are published in weekly industry magazines.
3) Competitive Bidding : is common for large orders of standard products and services; is a typical policy in many firms for the majority of their purchases.
Requires to have several potential suppliers of the product (or its equivalent)
Sends requests for bids, asking vendors to quote a price for a specified quantity and quality of the items
BUS118 – Production & Operations Management Prof. Marvin I. Noroña 58
Centralized Versus Decentralized
CENTRALIZED PURCHASING Means that purchasing is handled by one special department
Takes advantage of quantity discounts offered on large orders
Obtains better service and closer attention from suppliers
Enables companies to assign certain categories of items to specialists
DECENTRALIZED PURCHASING Means that individual departments or separate locations handle their own
purchasing requirements
Has the advantage of awareness of differing “local” needs and being better able to respond to those needs.
Offers quicker response than centralized purchasing
Can save on transportation costs by buying locally, where locations are widely scattered
BUS118 – Production & Operations Management Prof. Marvin I. Noroña 59
Myths Concerning Purchasing
“Negotiation is a win-lose confrontation.”
Purchasing negotiations should not be viewed as a win-lose game; it can be a win/win game
“The main goal is to obtain the lowest possible price.”
It must be realized that contractors and suppliers need a reasonable profit to survive.
“Each negotiation is an isolated transaction.”
Purchasing must work towards partnering so each negotiation is a step in developing long-term relationships and therefore not as an one-off deal.
BUS118 – Production & Operations Management Prof. Marvin I. Noroña 60
Ethics in Purchasing Principles
Loyalty to employer
Justice to those you deal with
Faith in your profession
Standards of Purchasing Practice
1. Avoid appearance of unethical or uncompromising practice
2. Follow the lawful instructions of your employer
3. Refrain from private activity that might conflict with the interest of your employer
4. Refrain from soliciting or accepting gifts, favors, or services from present or potential suppliers
5. Handle confidential or proprietary employer or supplier information with due care
11
BUS118 – Production & Operations Management Prof. Marvin I. Noroña 61
Ethics in Purchasing Standards of Purchasing Practice
6. Practice courtesy and impartiality in all aspects of your job
7. Refrain from reciprocal agreements that constrain competition
8. Know and obey the letter and spirit of laws governing purchasing
9. Demonstrate support for small, disadvantaged, and minority-owned businesses
10. Discourage involvement in employer-sponsored programs of non-business, personal packages
11. Enhance the profession by maintaining current knowledge and the highest ethical standards
12. Conduct international purchasing in accordance with the laws, customs, and practices of foreign countries, but consistent with the laws of the your country, your organization’s policies, and these guidelines
BUS118 – Production & Operations Management Prof. Marvin I. Noroña 62
ROLES OF PURCHASING
SUPPLIER MANAGEMENT
Vendor Analysis
Supplier Audits
Supplier Certification
Supplier Relationships
Supplier Partnerships
Strategic Partnerships
BUS118 – Production & Operations Management Prof. Marvin I. Noroña 63
SUPPLIER MANAGEMENT Vendor Analysis
Evaluating the sources of supply in terms of price, quality, the supplier’s reputation, past experience with the supplier and after-sales service
Other factors that can be used in evaluation are flexibility (in handling changes in schedules, design and quantity), location, leadtimes & on-time delivery, and other accounts
Supplier Audits
Are a means of keeping current on suppliers’ production capabilities, quality and delivery problems and resolutions, and performance on other criteria
Are also an important first step in supplier certification programs
BUS118 – Production & Operations Management Prof. Marvin I. Noroña 64
SUPPLIER MANAGEMENT Supplier Certification Is a detailed examination of the policies and capabilities of a supplier
Verifies that a supplier meets or exceeds the requirements of the buyer
Is generally important in supplier relationships, but is particularly important in seeking to establish long-term relationships with suppliers
Supplier Relationships Type of relationship depends on length of a contract
• Short-term contracts involve competitive bidding
• Medium-term contracts often involve ongoing relationships
• Long-term contracts often evolve into partnerships
Keeping good relations with suppliers is increasingly recognized as an important factor in maintaining a competitive advantage.
BUS118 – Production & Operations Management Prof. Marvin I. Noroña 65
Supplier Relationships (con’t)
Supplier Partnerships
More and more business organizations are seeking to establish partnerships with other organizations in the supply chain
This implies
a) Fewer suppliers
b) Longer-term relationships
c) Sharing of information (forecasts, sales data, problem alerts)
d) Cooperation in planning
Benefits are
a) Higher quality
b) Increased delivery speed and reliability
c) Lower inventories
d) Lower costs
e) Higher profits
f) Improved operations
Strategic Partnerships are those that convey strategic benefits to one or
both partners who have the potential for helping them grow their own businesses.
BUS118 – Production & Operations Management Prof. Marvin I. Noroña 66
Supplier as a Partner
Aspect Adversary Partner Number of suppliers Many One or a few
Length of relationship May be brief Long-term
Low price Major consideration Moderately important
Reliability May not be high High
Openness Low High
Quality May be unreliable;
buyer inspects
At the source; vendor
certified
Volume of business May be low High
Flexibility Relatively low Relatively high
Location Widely dispersed Nearness is important
12
BUS118 – Production & Operations Management Prof. Marvin I. Noroña 67
Supplier Partnerships
Ideas from suppliers could lead to improved competitiveness
1.Reduce cost of making the purchase
2.Reduce transportation costs
3.Reduce production costs
4.Improve product quality
5.Improve product design
6.Reduce time to market
7.Improve customer satisfaction
8.Reduce inventory costs
9.Introduce new products or services
BUS118 – Production & Operations Management Prof. Marvin I. Noroña 68
Critical Issues
Strategic importance
Cost
Quality
Agility
Customer service
Competitive advantage
Technology management
Benefits
Risks
BUS118 – Production & Operations Management Prof. Marvin I. Noroña 69
Critical Issues
Purchasing function
Increased outsourcing
Increased conversion to lean production
Just-in-time deliveries
Globalization
BUS118 – Production & Operations Management Prof. Marvin I. Noroña 70
LOGISTICS
The movement of materials and information within a
facility and to incoming and outgoing shipments of
goods and materials
Movement within a facility – movement of materials must be
coordinated to arrive at the appropriate destination at
appropriate times
Traffic Management – overseeing the shipment of incoming
and outgoing goods
Evaluating shipping alternatives – need to make a choice
between rapid (but more expensive) shipping alternatives and
slower (but less expensive) alternatives
BUS118 – Production & Operations Management Prof. Marvin I. Noroña 71
Materials Movement
RE
CE
IVIN
G
Storage
Work
center
Work center Work center
Storage
Work
center
Storage
Shipping
BUS118 – Production & Operations Management Prof. Marvin I. Noroña 72
Logistics
• Movement within the facility
• Incoming and outgoing shipments
• Bar coding
• EDI
• Distribution
• JIT Deliveries
0
214800 232087768
13
BUS118 – Production & Operations Management Prof. Marvin I. Noroña 73
Distribution Requirements Planning
Distribution requirements planning (DRP) is
a system for inventory management and
distribution planning
Extends the concepts of MRPII
BUS118 – Production & Operations Management Prof. Marvin I. Noroña 74
Management uses DRP to plan and
coordinate:
Transportation
Warehousing
Workers
Equipment
Financial flows
Uses of DRP
BUS118 – Production & Operations Management Prof. Marvin I. Noroña 75
MATERIALS MANAGEMENT
Purchasing may be combined with various warehousing and inventory activities to form a materials management system
Purpose is to obtain efficiency of operations through the integration of all material acquisition, movement, and storage activities
Emphasis is placed on MM when the transportation and inventory costs are substantial on both the input and output sides of the production process
Potential for competitive advantage is found via both reduced costs and improved customer service
Recognizing that distribution of goods to and from the firm’s facilities can represent as much as 25% of the cost of the products, there is a need to evaluate their means of distribution (trucking, railroads, airfreight, waterways or pipelines)
BUS118 – Production & Operations Management Prof. Marvin I. Noroña 76
Materials Management
Integrates all materials functions
Purchasing
Inventory management
Production control
Inbound traffic
Warehousing & stores
Incoming quality control
Objective: Efficient, low cost operations
BUS118 – Production & Operations Management Prof. Marvin I. Noroña 77
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.
BUS118 – Production & Operations Management Prof. Marvin I. Noroña 78
SUPPLY CHAIN STRATEGY 1. Many Suppliers Traditional American approach of negotiating with may
suppliers and playing one supplier against another
The supplier responds to the demands and specifications of a “request for quotation” (RFQ) with the order usually going to the low bidder
Suppliers aggressively competing with one another
Places the burden of meeting the buyer’s demands on the supplier
Holds the supplier responsible for maintaining the necessary technology, expertise, and forecasting abilities, as well as cost, quality, and delivery competence
Not long-term: partnering relationships are NOT the goal
14
BUS118 – Production & Operations Management Prof. Marvin I. Noroña 79
SUPPLY CHAIN STRATEGY
2. Few Suppliers Implies that rather than looking for short-term attributes,
such as low cost, a buyer is better off forming a long-term relationship with a few dedicated suppliers.
Using few suppliers
a) Are more likely to understand the broad objectives of the procuring firm and the end customer
b) Can create value by allowing customers to have
economies of scale ) that yield both lower transaction costs
learning curve ) and lower production costs
Few suppliers (with large commitment to buyer) may also be more than willing to
a) Participate in JIT systems
b) Provide innovations & technological expertise
BUS118 – Production & Operations Management Prof. Marvin I. Noroña 81
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.
BUS118 – Production & Operations Management Prof. Marvin I. Noroña 82
SUPPLY CHAIN STRATEGY
2. Few Suppliers (con’t) Most important factor : TRUST between suppliers and buying companies
alignment of cultures ) that foster both formal
commitment of resources ) & informal contact
toward advancing the relationship
Strengthening the partnership
Buyers Results:
Incorporate suppliers in the supply system ) contracts that extend thru
Choose suppliers even before parts are designed ) the product’s life cycle
Place added emphasis on quality & reliability ) more efficient
) reduced prices over time
Downsides
Cost of changing parts is huge (so both buyer and supplier run the risk of being captives of the other)
Risk of poor supplier performance
Concern about trade secrets and suppliers that make other alliances or venture out on their own (ex. US Schwinn Bicycle Co. taught Taiwan’s Giant Mfg. Co.)
BUS118 – Production & Operations Management Prof. Marvin I. Noroña 83
SUPPLY CHAIN STRATEGY 3. Vertical Integration Developing the ability to produce goods or services previously
purchased or actually buying a supplier or distributor.
Can take the form of FORWARD or BACKWARD integration
Vertical Integration
Backward Integration
Raw Material (suppliers)
Current Transformation Automobiles Integrated Flour
Circuits Milling
Forward Integration
Finished goods (customers)
Examples of Vertical Integration
Iron ore
Steel
Distribution
system
Dealers
Silicone
Circuit Boards
Computers
Watches Calculators
Farming
Baked
goods
BUS118 – Production & Operations Management Prof. Marvin I. Noroña 86
SUPPLY CHAIN STRATEGY 3. Vertical Integration (con’t)
Can offer opportunities or advantages in:
Cost reduction ) work best when the organization
Quality adherence ) has a large market share, or the
Timely delivery ) management talent to operate
Scheduling flexibility ) an acquired vendor successfully
Dangerous for firms in industries undergoing
technological change if management cannot
keep abreast of those changes, or
invest the financial resources necessary for the next wave
of technology BUS118 – Production & Operations Management Prof. Marvin I. Noroña 87
SUPPLY CHAIN STRATEGY 4. Keiretsu Networks Many large Japanese manufacturers have found a middle
ground between purchasing from few suppliers to vertical integration
These manufacturers are often the financial supporters of suppliers through ownership or loans
The supplier then becomes part of a company coalition, known as the keiretsu
Members of the keiretsu
assured of long-term relationships, and therefore expected to function as partners
provide technical expertise and stable quality production to the manufacturer
can also have suppliers down the chain, making second- or even third-tier suppliers part of the coalition
15
BUS118 – Production & Operations Management Prof. Marvin I. Noroña 90
SUPPLY CHAIN STRATEGY 5. Virtual Companies Because vertical integration locks in an organization into
businesses that it may not understand or be able to
manage, another strategy is to find good flexible suppliers Takes away complications brought about by specialization and
changing technology
Addresses issues of being too bureaucratic having a division
Develops virtual companies that use suppliers on an
as-needed basis Doing payroll; hiring personnel
Designing products
Manufacturing components
Conducting tests
Distributing products
Providing consulting services BUS118 – Production & Operations Management Prof. Marvin I. Noroña 91
SUPPLY CHAIN STRATEGY 5. Virtual Companies (con’t)
companies that rely on a variety of supplier relationships to
provide services on demand
Also known as hollow corporations or network companies
Have fluid, moving organizational boundaries that allow them
to create a unique enterprise to meet changing market demands
Relationships may be ST or LT and may include:
true partners } whatever formal relationship,
collaborators } the result can be
able suppliers } exceptionally
subcontractors } LEAN PERFORMANCE
BUS118 – Production & Operations Management Prof. Marvin I. Noroña 92
SUPPLY CHAIN STRATEGY 5. Virtual Companies (con’t) Advantages include
specialized management expertise low capital investment flexibility speed
Traditional Example : APPAREL BUSINESS Designer of clothes seldom manufacture their designs They rather license the manufacture
rent a loft lease sewing machines contract labor
Result: low overhead flexibility speed-to-market
BUS118 – Production & Operations Management Prof. Marvin I. Noroña 93
SUPPLY CHAIN STRATEGY 5. Virtual Companies (con’t)
Contemporary Example : SEMICONDUCTOR INDUSTRY
exemplified by Visioneer (in Palo Alto, CA)
subcontracts almost everything
software written by several partners
hardware manufactured by a silicone subcontractor
PCBs made in Singapore
Plastic cases made in Boston where units are tested and
packed for shipment
In virtual companies, the Purchasing function is demanding
and dynamic
BUS118 – Production & Operations Management Prof. Marvin I. Noroña 96
OPTIMIZING the SUPPLY CHAIN
Postponement Channel Assembly Drop Shipping and Special Packaging Blanket Orders Stockless Purchasing Standardization Electronic Ordering and Funds Transfers Internet Purchasing
RM
sources Suppliers Prod Whse Distributors Customers
SUPPLIER SELLER DISTRIBUTION – CONSUMER
VALUE
CREATION
BUS118 – Production & Operations Management Prof. Marvin I. Noroña 97
OPTIMIZING the SUPPLY CHAIN 1. POSTPONEMENT : withholding/delaying any modifications
or customization to the product as long as possible in the production process
Example: Dell Computers modified its printer by moving out the power supply into a power cord (generic printers) Manufacture and centralized inventories of generic printers for shipment as
demand change
Unique power system and documentation at the final distribution point
2. CHANNEL ASSEMBLY : a variation of postponement; postpones final assembly of a product so the distribution channel can assemble it; sends individual components & modules, rather than FG, to the distributor, who then assembles, tests, and ships. Treats distributors more as manufacturing partners than as distributors
Technique is successful in industries where products undergo rapid change such as PCs
FG inventory is reduced, market response is better, with lower investment (nice combination in business)
Examples: IBM, HP, Compaq
16
BUS118 – Production & Operations Management Prof. Marvin I. Noroña 98
OPTIMIZING the SUPPLY CHAIN
3. DROP SHIPPING & SPECIAL PACKAGING : means the supplier will ship directly to the end customer, rather than to the seller saving both time and reshipping costs. Other cost-saving measures include the use of special packaging, bar coding & labeling; beneficial to wholesalers & retailers by reducing shrinkage (lost, damaged or stolen merchandise) and handling costs.
Dell Computer’s core competence is not in stocking peripherals, but in assembling PCs.
4. BLANKET ORDERS : a long-term purchase commitment to a supplier for items that are to be delivered against short-term releases to ship
Are unfilled orders with a vendor; not an authorization to ship anything until the receipt of an agreed-upon document, perhaps a shipping requisition or shipment release
BUS118 – Production & Operations Management Prof. Marvin I. Noroña 99
Rec.
Dock
Traditional Purchasing Process
Customer Supplier
Purchase Order
Mail Order
Processing
Packing List
Processing
BUS118 – Production & Operations Management Prof. Marvin I. Noroña 100
Rec.
Dock
Traditional Purchasing Process
Customer Supplier
Purchase Order
Order
Processing
Packing List
Processing
Invoice
BUS118 – Production & Operations Management Prof. Marvin I. Noroña 101
Rec.
Dock
Traditional Purchasing Process
Customer Supplier
Purchase Order
Order
Processing
Packing List
Processing
Rec. Report
Invoice
BUS118 – Production & Operations Management Prof. Marvin I. Noroña 102
Rec.
Dock
Traditional Purchasing Process
Customer Supplier
Purchase Order
Order
Processing
Packing List
Processing
Rec. Report
Invoice Acct. Pay.
BUS118 – Production & Operations Management Prof. Marvin I. Noroña 103
Rec.
Dock
Traditional Purchasing Process
Customer Supplier
Purchase Order
Order
Processing
Packing List
Processing
Rec. Report
Invoice Acct. Pay.
Reconcile
17
BUS118 – Production & Operations Management Prof. Marvin I. Noroña 104
Rec.
Dock
Traditional Purchasing Process
Customer Supplier
Purchase Order
Order
Processing
Packing List
Processing
Rec. Report
Invoice Mail Acct. Pay.
Reconcile Check Mail
BUS118 – Production & Operations Management Prof. Marvin I. Noroña 105
Traditional Purchasing Process
Rec.
Dock
PurchaseOrder
PackingList
Order
Processing
Invoice
Rec.Report
Check Acct. Rec.
Acct. Pay.
MailReconcile
Rec.
Dock
PurchaseOrder
PackingList
Order
Processing
Invoice
Rec.Report
Check Acct. Rec.
Acct. Pay.
MailReconcile
Customer Supplier
BUS118 – Production & Operations Management Prof. Marvin I. Noroña 106
Traditional Purchasing Process
Rec.
Dock
PurchaseOrder
PackingList
Order
Processing
Invoice
Rec.Report
Check Acct. Rec.
Acct. Pay.
MailReconcile
Rec.
Dock
PurchaseOrder
PackingList
Order
Processing
Invoice
Rec.Report
Check Acct. Rec.
Acct. Pay.
MailReconcile
Customer Supplier Which activities do
NOT add value?
BUS118 – Production & Operations Management Prof. Marvin I. Noroña 107
Traditional Purchasing Process
Rec.
Dock
PurchaseOrder
PackingList
Order
Processing
Invoice
Rec.Report
Check Acct. Rec.
Acct. Pay.
MailReconcile
Rec.
Dock
PurchaseOrder
PackingList
Order
Processing
Invoice
Rec.Report
Check Acct. Rec.
Acct. Pay.
MailReconcile
Customer Supplier
‘Blanket purchase order’ may be used:
• Need is ongoing, but quantities vary;
• Typically for class B items (e.g., MRO);
• Covers a given time period;
• Shipment made upon receipt of
shipping release (mailed).
BUS118 – Production & Operations Management Prof. Marvin I. Noroña 108
OPTIMIZING the SUPPLY CHAIN
5. STOCKLESS PURCHASING : means that a supplier delivers materials directly to the purchaser’s using department rather than to a central stockroom.
6. STANDARDIZATION : reducing the number of variations in materials and components as aid to cost reduction
Rather than obtaining a variety of similar components with labeling, coloring, packaging or slightly different engineering specifications, the purchasing agent should try to have the components standardized
BUS118 – Production & Operations Management Prof. Marvin I. Noroña 110
OPTIMIZING the SUPPLY CHAIN
7. ELECTRONIC ORDERING & FUNDS TRANSFER : reduces paper transactions, consisting of purchase order, purchase release, a receiving document, authorization to pay an invoice and finally the issuance of a check; Speeds up the traditionally long procurement cycle
Electronic Data Interchange – a standardized data transmittal format for computerized communications between organizations (order date, due date, quantity, part #, P.O. #, address, and so forth)
Advanced Shipping Notice (ASN) – a shipping notice delivered directly from vendor to purchaser
18
BUS118 – Production & Operations Management Prof. Marvin I. Noroña 111
Partnership Purchasing Process
Customer Supplier
Master Agreement
Master agreement:
• Defines partnership;
• May specify price, quantities etc.
BUS118 – Production & Operations Management Prof. Marvin I. Noroña 112
Partnership Purchasing Process
Customer Supplier
Master Agreement
Electronic Data Interchange (EDI)
Electronic data interchange (EDI):
• Computer-to-computer messaging system;
• Uses modem & telephone lines;
• Used for sending orders, schedules etc.
BUS118 – Production & Operations Management Prof. Marvin I. Noroña 113
Partnership Purchasing Process
Customer Supplier
Master Agreement
Electronic Data Interchange (EDI)
Invoiceless Purchasing:
• Used if no electronic data interchange;
• No invoice — customer automatically sends check
(mail) based on units produced;
• If 100 bicycles made, send check for 200 tires.
BUS118 – Production & Operations Management Prof. Marvin I. Noroña 114
Partnership Purchasing Process
Point-of-Use
Standard Containers
Customer Supplier
Master Agreement
Bar-Coded Kanban
Electronic Data Interchange (EDI)
Point-of-Use:
• Location where item will be used;
• May be office, shop, assembly line etc.
BUS118 – Production & Operations Management Prof. Marvin I. Noroña 115
Electronic Data Interchange
EDI – the direct transmission of
interorganizational transactions, computer-to-
computer, including purchase orders, shipping
notices, and debit or credit memos.
BUS118 – Production & Operations Management Prof. Marvin I. Noroña 116
Electronic Data Interchange
Increased productivity
Reduction of paperwork
Lead time and inventory reduction
Facilitation of just-in-time systems
Electronic transfer of funds
Improved control of operations
Reduction in clerical labor
Increased accuracy
19
BUS118 – Production & Operations Management Prof. Marvin I. Noroña 117
Efficient Consumer Response
Efficient consumer response (ECR) is a
supply chain management initiative specific
to the food industry
Reflects companies’ efforts to achieve quick
response using EDI and bar codes
BUS118 – Production & Operations Management Prof. Marvin I. Noroña 118
OPTIMIZING the SUPPLY CHAIN
8. INTERNET PURCHASING also known as e-procurement Order releases communicated over the Internet or approved vendor
catalogues available on the Internet for use by employees of the purchasing firm
Takes 2 forms: a) First, Internet Purchasing may just imply that the Internet is used to
communicate ORDER RELEASES to the suppliers (items for which a blanket P.O. exists)
b) Second, for non-standard items, for which there is no blanket P.O., CATALOGUES and ORDERING PROCEDURES enhance the communication features of the Internet
Lends itself to comparison shopping, rapid ordering, and reduction of inventory
Liked by suppliers because on-line selling means they are getting closer to their customers
May be a part of an integrated ERP system (order release, not only tells the supplier to ship, but also updates the appropriate portions of the ERP system)
BUS118 – Production & Operations Management Prof. Marvin I. Noroña 119
CREATING AN EFFECTIVE SUPPLY CHAIN 1. Develop strategic objectives and tactics. These will guide the
process.
2. Integrate and coordinate activities in the internal portion of the chain. This requires (1) overcoming barriers caused by functional thinking that lead to attempts to optimize a subset of a system rather than the system as a whole, and (2) transferring data and coordinating activities.
3. Coordinate activities with suppliers and with customers. This involves addressing supply and demand issues.
4. Coordinate planning and execution across the supply chain. This requires a system for transferring data across the supply chain and allowing access to data to those engage in operations to which it will be useful.
5. Consider the possibilities of forming strategic partnerships. BUS118 – Production & Operations Management Prof. Marvin I. Noroña 120
CHALLENGES in SCM Barriers to Integration of Separate Organizations
Getting CEOs, Board of Directors, Managers, and Employees “Onboard”
Dealing with Trade-offs
1. Lot size-inventory trade-off
2. Inventory-transportation cost trade-off
3. Lead time-transportation cost trade-off
4. Product variety-inventory trade-off
5. Cost-customer service trade-off
Small Businesses
Variability and Uncertainty
Long Lead Times
BUS118 – Production & Operations Management Prof. Marvin I. Noroña 121
Challenges
Barriers to integration of organizations
Getting top management on board
Dealing with trade-offs
Small businesses
Variability and uncertainty
Long lead times
BUS118 – Production & Operations Management Prof. Marvin I. Noroña 122
Trade-offs
1. Lot-size-inventory
Bullwhip effect
2. Inventory-transportation costs
Cross-docking
3. Lead time-transportation costs
Airfreight versus seafreight
4. Product variety-inventory
Delayed differentiation
5. Cost-customer service
Disintermediation
20
BUS118 – Production & Operations Management Prof. Marvin I. Noroña 123
Trade-offs
Bullwhip effect
Inventories are progressively larger moving
backward through the supply chain
Cross-docking
Goods arriving at a warehouse from a supplier are
unloaded from the supplier’s truck and loaded
onto outbound trucks
Avoids warehouse storage
BUS118 – Production & Operations Management Prof. Marvin I. Noroña 124
Trade-offs
Delayed differentiation
Production of standard components and
subassemblies, which are held until late in the
process to add differentiating features
Disintermediation
Reducing one or more steps in a supply chain by
cutting out one or more intermediaries
BUS118 – Production & Operations Management Prof. Marvin I. Noroña 125
SUPPLY CHAIN ISSUES
STRATEGIC ISSUES
TACTICAL ISSUES
OPERATING ISSUES
Design of the supply chain Partnering
Inventory policies Purchasing policies
Production policies Transportation policies Quality policies
Quality Control Production Planning & Control
BUS118 – Production & Operations Management Prof. Marvin I. Noroña 126
Supply Chain Benefits and Drawbacks
Problem Potential
Improvement
Benefits Possible
Drawbacks
Large
inventories
Smaller, more frequent
deliveries
Reduced holding
costs
Traffic congestion
Increased costs
Long lead
times
Delayed differentiation
Disintermediation
Quick response
May not be feasible
May need absorb
functions
Large number
of parts
Modular Fewer parts
Simpler ordering
Less variety
Cost
Quality
Outsourcing Reduced cost,
higher quality
Loss of control
Variability Shorter lead times,
better forecasts
Able to match
supply and demand
Less variety
BUS118 – Production & Operations Management Prof. Marvin I. Noroña 127
PERFORMANCE DRIVERS
1. Cost
2. Quality
3. Flexibility
Refers to the ability to adjust to changes in order quantities but also in product or service requirements
4. Velocity
Inventory velocity – the rate at which inventory (material) goes through the supply chain
Information velocity – the rate at which information (two-way flow) is communicated in a supply chain
5. Customer Service
BUS118 – Production & Operations Management Prof. Marvin I. Noroña 128
PERFORMANCE MEASURES
Perspective Metrics
RELIABILITY On-time delivery
Order fulfillment lead time Fill rate Perfect order fulfillment
FLEXIBILITY Supply chain response time
Upside production flexibility
EXPENSES Supply chain management cost
Warranty cost as a % of revenue Value added per employee
ASSETS/UTILIZATION Total inventory days of supply
Cash-to-cash cycle time Net asset turns
21
BUS118 – Production & Operations Management Prof. Marvin I. Noroña 129
SCM Performance Measures
SCOR (Supply Chain Ops Reference) Model
Plan, Source, Make Deliver, Return
SCOR addresses
Product from supplier’s2 to customer’s2
SCOR does not address
Sales, Marketing, R&D, Support
BUS118 – Production & Operations Management Prof. Marvin I. Noroña 130
Level 1 Performance Metrics
Reliability – delivery performance, fill rate,
perfect fulfillment
Responsiveness – order fill lead time
Flexibility – SC response time, ops flexibility
Cost – warranty cost, productivity, CGS, SCM
cost
Assets – turns, inventory days, cash cycle
BUS118 – Production & Operations Management Prof. Marvin I. Noroña 131
SUCCESSFUL SUPPLY CHAIN
Trust among trading partners
Effective communications
Supply chain visibility
Event-management capability
The ability to detect and respond to unplanned
events
Performance metrics
BUS118 – Production & Operations Management Prof. Marvin I. Noroña 132
Benefits of Supply Chain Management
Lower inventories
Higher productivity
Greater agility
Shorter lead times
Higher profits
Greater customer loyalty
BUS118 – Production & Operations Management Prof. Marvin I. Noroña 133
Benefits of Supply Chain Management
Organization Benefit
Campbell Soup Doubled inventory turnover rate
Hewlett-Packard Cut supply costs 75%
Sport Obermeyer Doubled profits and increased sales 60%
National Bicycle Increased market share from 5% to 29%
Wal-Mart Largest and most profitable retailer in the world
BUS118 – Production & Operations Management Prof. Marvin I. Noroña 134
CPFR
Collaborative Planning, Forecasting, and
Replenishment
Focuses on information sharing among
trading partners
Forecasts can be frozen and then converted
into a shipping plan
Eliminates typical order processing
22
BUS118 – Production & Operations Management Prof. Marvin I. Noroña 135
CPFR Process
Step 1 – Front-end agreement
Step 2 – Joint business plan
Steps 3-5 – Sales forecast
Steps 6-8 – Order forecast collaboration
Step 9 – Order generation/delivery execution
BUS118 – Production & Operations Management Prof. Marvin I. Noroña 136
CPFR Results
Nabisco and Wegmans
50% increase in category sales
Wal-mart and Sara Lee
14% reduction in store-level inventory
32% increase in sales
Kimberly-Clark and Kmart
Increased category sales that exceeded market
growth
BUS118 – Production & Operations Management
SUMMARY
BUS118 – Production & Operations Management 138
Supply Chain Management
The process of planning, implementing,
and controlling the efficient, cost effective
flow and storage of raw materials, in-
process inventory, finished goods, and the
related information from the point of origin
to point of consumption for the purpose of
conforming to customer requirements.
Prof. Marvin I. Noroña
BUS118 – Production & Operations Management 139
Supply Chain Management
Getting the right product and services to the right place, at the right time, at the right price, and in the right condition, while making the greatest contribution to the firm.
The process of anticipating customer needs and wants; acquiring the capital, materials, people, technologies, and information necessary to meet those needs and wants; optimizing the goods- and services-producing network to fulfill customer requests in a timely way.
Prof. Marvin I. Noroña BUS118 – Production & Operations Management 140
Supply Chain Management Planning, organizing, directing, & controlling
flows of materials & information
Begins with raw materials
Continues through internal operations
And distribution of finished goods
Also involves after-sales service
Involves everyone in supply chain
Example: Your supplier’s supplier
Objective: Max. value & lower waste
Prof. Marvin I. Noroña
23
BUS118 – Production & Operations Management
Supplier Manufacturer Wholesaler Retailer Consumer Manufacturer
(Plant) (Sales & Distribution)
The Supply Chain
• is a network of manufacturing and logistics sites that develop, plan, source, convert and deliver products that meet customer and consumer needs
• includes manufacturers, suppliers, transporters, warehouses, retailers, and customers
Prof. Marvin I. Noroña 141 BUS118 – Production & Operations Management
Supply Chain, referred to as the “ Value Chain ”
Factory Distribution Center Store Customers
• includes movement of products from suppliers to manufacturers to distributors, but also includes movement of information, funds, and products in both directions
• contains business processes which are a collection of activities and tasks required to perform the work in order to maximize overall value created
Prof. Marvin I. Noroña 142
BUS118 – Production & Operations Management
The Inbound and Outbound Supply Chain
CONVERSION
FG, RM, IM STORAGE
SHIPPING
TRANSPORT
CUSTOMERS
DISTRIBUTION CENTERS
SUPPLIERS
Inbound and Outbound Logistics Management
Prof. Marvin I. Noroña 143 BUS118 – Production & Operations Management
S-I-P-O-C Model
Prof. Marvin I. Noroña 144
SUPPLY CHAIN
MANAGEMENT
Materials Management
Physical Distribution
Operations Outbound
SUPPLIER INPUT PROCESS OUTPUT CUSTOMER
Production
Goods & Services
Materials & Supplies
BUS118 – Production & Operations Management 145
Components of Supply Chain Management
Management Actions
Planning Implementation Control
Input
Natural Resources
(land, facilities, & equipment
Human resources
Financial resources
Information resources
Supply Chain Management
Raw In-process Finished
Materialsl Inventory Goods
Marketing Orientation
(competitive advantage)
Time & place utility
Efficient movement to
customer
Proprietary asset
Output
Supply Chain Activities Prof. Marvin I. Noroña BUS118 – Production & Operations Management 146
Supply Chain Activities
Customer Service
Demand forecasting
Distribution
communications
Inventory control
Material handling
Order processing
Parts and service support
Plant & warehouse site selection
Procurement
Packaging
Return goods handling
Salvage & scrap disposal
Traffic & transportation
Warehousing & storage
Prof. Marvin I. Noroña
24
BUS118 – Production & Operations Management 147
Supply Chain
Consumer
Retailer
Mfg.
Mat'l Flow
VISA®
Credit Flow
Supplier
Supplier Wholesaler
Retailer
CashFlow
OrderFlow
Schedules
Consumer
Retailer
Mfg.
Mat'l Flow
VISA®
Credit Flow
Supplier
Supplier Wholesaler
Retailer
CashFlow
OrderFlow
Schedules
Prof. Marvin I. Noroña BUS118 – Production & Operations Management
Components of a Supply Chain
Prof. Marvin I. Noroña 148
BUS118 – Production & Operations Management 149
Traditional Material Flow and Order Flow Through the Transformation Process
Inputs
Suppliers Trans-portation
Conversion R M Invty
Incoming Inspection
Receiving F G Invty
Quality Control
Trans-portation
Distribution/Retail
Customers
Output Transformation
D D D
MRO Invty
WIP Invty
Work Orders
Purchasing
Production/Inventory Control
Order Entry
Orders from Distributors
Prof. Marvin I. Noroña BUS118 – Production & Operations Management 150
Traditional Logistics Organization
Independent Cost / Operating Centers
Lack Of Synergy / Higher End Costs
Prof. Marvin I. Noroña
BUS118 – Production & Operations Management 151
Organizational Changes
Prof. Marvin I. Noroña BUS118 – Production & Operations Management 152
An Integrated SCM Organization
Prof. Marvin I. Noroña
25
BUS118 – Production & Operations Management 153
Business Drivers
Globalization
Customer service and quality focus
Time
Core competency
Technological availability
Electronic commerce
Clean and Green
Lean Production & Cost Minimization
Prof. Marvin I. Noroña BUS118 – Production & Operations Management 154
Implications for Supply Chain Managers
Global competition & constant changes
Greater risk and uncertainty
A new mindset - global & strategic
High level of organizational flexibility
Managing risk through improved
information systems
Management of supply market in a volatile
environment
Prof. Marvin I. Noroña
Recommended