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© 2006 Prentice Hall, Inc. 11 – 1
Operations ManagementOperations ManagementChapter 11 – Supply-Chain ManagementChapter 11 – Supply-Chain Management
© 2006 Prentice Hall, Inc.
PowerPoint presentation to accompanyPowerPoint presentation to accompany Heizer/Render Heizer/Render Principles of Operations Management, 6ePrinciples of Operations Management, 6eOperations Management, 8e Operations Management, 8e
© 2006 Prentice Hall, Inc. 11 – 2
The Strategic Importance The Strategic Importance of the Supply Chainof the Supply Chain
Supply-chain management is the Supply-chain management is the integration of the activities that integration of the activities that procure materials and services, procure materials and services,
transform them into intermediate transform them into intermediate goods and the final product, and goods and the final product, and
deliver them to customersdeliver them to customers
Competition is no longer between Competition is no longer between companies; it is between supply chainscompanies; it is between supply chains
© 2006 Prentice Hall, Inc. 11 – 3
Supply-Chain ManagementSupply-Chain Management
1.1. Transportation vendorsTransportation vendors
2.2. Credit and cash transfersCredit and cash transfers
3.3. SuppliersSuppliers
4.4. Distributors and banksDistributors and banks
5.5. Accounts payable and receivableAccounts payable and receivable
6.6. Warehousing and inventoryWarehousing and inventory
7.7. Order fulfillmentOrder fulfillment
8.8. Sharing customer, forecasting, and Sharing customer, forecasting, and production informationproduction information
Important activities include determiningImportant activities include determining
© 2006 Prentice Hall, Inc. 11 – 4
A Supply ChainA Supply Chain
Figure 11.1Figure 11.1
© 2006 Prentice Hall, Inc. 11 – 5
Global Supply-Chain IssuesGlobal Supply-Chain Issues
React to sudden changes in parts React to sudden changes in parts availability, distribution, or shipping availability, distribution, or shipping channels, import duties, and currency rateschannels, import duties, and currency rates
Use the latest computer and transmission Use the latest computer and transmission technologies to schedule and manage the technologies to schedule and manage the shipment of parts in and finished products shipment of parts in and finished products outout
Staff with local specialists who handle Staff with local specialists who handle duties, freight, customs and political issuesduties, freight, customs and political issues
Supply chains in a global environment Supply chains in a global environment must be able tomust be able to
© 2006 Prentice Hall, Inc. 11 – 6
Supply-Chain EconomicsSupply-Chain Economics
Supply Chain Costs as a Percent of SalesSupply Chain Costs as a Percent of Sales
Table 11.2Table 11.2
IndustryIndustry % Purchased% Purchased
All industryAll industry 5252
AutomobileAutomobile 6767
FoodFood 6060
LumberLumber 6161
PaperPaper 5555
PetroleumPetroleum 7979
TransportationTransportation 6262
© 2006 Prentice Hall, Inc. 11 – 7
Make-or-Buy DecisionsMake-or-Buy Decisions
1.1. Maintain core competenceMaintain core competence
2.2. Lower production costLower production cost
3.3. Unsuitable suppliersUnsuitable suppliers
4.4. Assure adequate supply (quantity or delivery)Assure adequate supply (quantity or delivery)
5.5. Utilize surplus labor or facilitiesUtilize surplus labor or facilities
6.6. Obtain desired qualityObtain desired quality
7.7. Remove supplier collusionRemove supplier collusion
8.8. Obtain unique item that would entail a prohibitive Obtain unique item that would entail a prohibitive commitment for a suppliercommitment for a supplier
9.9. Protect personnel from a layoffProtect personnel from a layoff
10.10. Protect proprietary design or qualityProtect proprietary design or quality
11.11. Increase or maintain size of companyIncrease or maintain size of company
Reasons for MakingReasons for Making
Table 11.4Table 11.4
© 2006 Prentice Hall, Inc. 11 – 8
Make-or-Buy DecisionsMake-or-Buy Decisions
1.1. Frees management to deal with its primary Frees management to deal with its primary businessbusiness
2.2. Lower acquisition costLower acquisition cost
3.3. Preserve supplier commitmentPreserve supplier commitment
4.4. Obtain technical or management abilityObtain technical or management ability
5.5. Inadequate capacityInadequate capacity
6.6. Reduce inventory costsReduce inventory costs
7.7. Ensure alternative sourcesEnsure alternative sources
8.8. Inadequate managerial or technical resourcesInadequate managerial or technical resources
9.9. ReciprocityReciprocity
10.10. Item is protected by a patent or trade secretItem is protected by a patent or trade secret
Reasons for BuyingReasons for Buying
Table 11.4Table 11.4
© 2006 Prentice Hall, Inc. 11 – 9
OutsourcingOutsourcing
Transfers traditional internal Transfers traditional internal activities and resources of a firm to activities and resources of a firm to outside vendorsoutside vendors
Utilizes the efficiency that comes Utilizes the efficiency that comes with specializationwith specialization
Firms outsource information Firms outsource information technology, accounting, legal, technology, accounting, legal, logistics, and productionlogistics, and production
© 2006 Prentice Hall, Inc. 11 – 10
Ethics in the Supply ChainEthics in the Supply Chain
Opportunities for unethical behavior Opportunities for unethical behavior are enormous and temptations are highare enormous and temptations are high
Many companies have strict rules and Many companies have strict rules and codes of conduct that define codes of conduct that define acceptable behavioracceptable behavior
Institute for Supply Management has Institute for Supply Management has developed a detailed set of principles developed a detailed set of principles and standards for ethical behaviorand standards for ethical behavior
© 2006 Prentice Hall, Inc. 11 – 11
Principles and Standards for Principles and Standards for Ethical Supply Management Ethical Supply Management
ConductConduct
1.1. Avoid the intent and appearance of unethical or Avoid the intent and appearance of unethical or compromising practice in relationships, actions, and compromising practice in relationships, actions, and communicationscommunications
2.2. Demonstrate loyalty to the employer by diligently Demonstrate loyalty to the employer by diligently following the lawful instructions of the employer, using following the lawful instructions of the employer, using reasonable care and granted authorityreasonable care and granted authority
3.3. Avoid any personal business or professional activity that Avoid any personal business or professional activity that would create a conflict between personal interests and would create a conflict between personal interests and the interests of the employerthe interests of the employer
Table 11.5Table 11.5
© 2006 Prentice Hall, Inc. 11 – 12
Principles and Standards for Principles and Standards for Ethical Supply Management Ethical Supply Management
ConductConduct
4.4. Avoid soliciting or accepting money, loans, credits, or Avoid soliciting or accepting money, loans, credits, or preferential discounts, and the acceptance of gifts, preferential discounts, and the acceptance of gifts, entertainment, favors, or services from present or entertainment, favors, or services from present or potential suppliers that might influence, or appear to potential suppliers that might influence, or appear to influence, supply management decisionsinfluence, supply management decisions
5.5. Handle confidential or proprietary information with due Handle confidential or proprietary information with due care and proper consideration of ethical and legal care and proper consideration of ethical and legal ramifications and government regulationsramifications and government regulations
6.6. Promote positive supplier relationships through courtesy Promote positive supplier relationships through courtesy and impartialityand impartiality
7.7. Avoid improper reciprocal agreementsAvoid improper reciprocal agreementsTable 11.5Table 11.5
© 2006 Prentice Hall, Inc. 11 – 13
Principles and Standards for Principles and Standards for Ethical Supply Management Ethical Supply Management
ConductConduct
8.8. Know and obey the letter and spirit of laws applicable to Know and obey the letter and spirit of laws applicable to supply managementsupply management
9.9. Encourage support for small, disadvantaged, and Encourage support for small, disadvantaged, and minority-owned businessesminority-owned businesses
10.10. Acquire and maintain professional competenceAcquire and maintain professional competence
11.11. Conduct supply management activities in accordance Conduct supply management activities in accordance with national and international laws, customs, and with national and international laws, customs, and practices, your organization’s policies, and these ethical practices, your organization’s policies, and these ethical principles and standards of conductprinciples and standards of conduct
12.12. Enhance the stature of the supply management Enhance the stature of the supply management professionprofession Table 11.5Table 11.5
© 2006 Prentice Hall, Inc. 11 – 14
Supply-Chain StrategiesSupply-Chain Strategies
Negotiating with many suppliersNegotiating with many suppliers
Long-term partnering with few Long-term partnering with few supplierssuppliers
Vertical integrationVertical integration
KeiretsuKeiretsu
Virtual companies that use Virtual companies that use suppliers on an as needed basissuppliers on an as needed basis
© 2006 Prentice Hall, Inc. 11 – 15
Many SuppliersMany Suppliers
Commonly used for commodity Commonly used for commodity productsproducts
Purchasing is typically based on Purchasing is typically based on priceprice
Suppliers are pitted against one Suppliers are pitted against one anotheranother
Supplier is responsible for Supplier is responsible for technology, expertise, forecasting, technology, expertise, forecasting, cost, quality, and deliverycost, quality, and delivery
© 2006 Prentice Hall, Inc. 11 – 16
Few SuppliersFew Suppliers
Buyer forms longer term Buyer forms longer term relationships with fewer suppliersrelationships with fewer suppliers
Create value through economies of Create value through economies of scale and learning curve scale and learning curve improvementsimprovements
Suppliers more willing to participate Suppliers more willing to participate in JIT programs and contribute in JIT programs and contribute design and technological expertisedesign and technological expertise
Cost of changing suppliers is hugeCost of changing suppliers is huge
© 2006 Prentice Hall, Inc. 11 – 17
Vertical IntegrationVertical Integration
Figure 11.2Figure 11.2
Raw material Raw material (suppliers)(suppliers) Iron oreIron ore SiliconSilicon FarmingFarming
Backward integration SteelSteel
Current transformation Automobiles Integrated
circuits Flour milling
Forward integration Distribution Distribution systemssystems Circuit boardsCircuit boards
Finished goods Finished goods (customers)(customers) DealersDealers
Computers Computers Watches Watches
CalculatorsCalculatorsBaked goodsBaked goods
Vertical IntegrationVertical Integration Examples of Vertical IntegrationExamples of Vertical Integration
© 2006 Prentice Hall, Inc. 11 – 18
Vertical IntegrationVertical Integration
Developing the ability to produce goods or Developing the ability to produce goods or service previously purchasedservice previously purchased
Integration may be forward, towards the Integration may be forward, towards the customer, or backward, towards supplierscustomer, or backward, towards suppliers
Can improve cost, quality, and inventory Can improve cost, quality, and inventory but requires capital, managerial skills, and but requires capital, managerial skills, and demanddemand
Risky in industries with rapid technological Risky in industries with rapid technological changechange
© 2006 Prentice Hall, Inc. 11 – 19
Keiretsu NetworksKeiretsu Networks A middle ground between few suppliers A middle ground between few suppliers
and vertical integrationand vertical integration
Supplier becomes part of the company Supplier becomes part of the company coalitioncoalition
Often provide financial support for Often provide financial support for suppliers through ownership or loanssuppliers through ownership or loans
Members expect long-term relationships Members expect long-term relationships and provide technical expertise and stable and provide technical expertise and stable deliveriesdeliveries
May extend through several levels of the May extend through several levels of the supply chainsupply chain
© 2006 Prentice Hall, Inc. 11 – 20
Virtual CompaniesVirtual Companies
Rely on a variety of supplier Rely on a variety of supplier relationships to provide services on relationships to provide services on demanddemand
Fluid organizational boundaries that Fluid organizational boundaries that allow the creation of unique enterprises allow the creation of unique enterprises to meet changing market demandsto meet changing market demands
Exceptionally lean performance, low Exceptionally lean performance, low capital investment, flexibility, and speedcapital investment, flexibility, and speed
© 2006 Prentice Hall, Inc. 11 – 21
Managing the Supply ChainManaging the Supply Chain
Mutual agreement on goalsMutual agreement on goals
TrustTrust
Compatible organizational culturesCompatible organizational cultures
There are significant management issues in There are significant management issues in controlling a supply chain involving many controlling a supply chain involving many independent organizationsindependent organizations
© 2006 Prentice Hall, Inc. 11 – 22
Issues in an Integrated Issues in an Integrated Supply ChainSupply Chain
Local optimization - focusing on local Local optimization - focusing on local profit or cost minimization based on profit or cost minimization based on limited knowledgelimited knowledge
Incentives (sales incentives, quantity Incentives (sales incentives, quantity discounts, quotas, and promotions) - discounts, quotas, and promotions) - push merchandise prior to salepush merchandise prior to sale
Large lots - low unit cost but do not Large lots - low unit cost but do not reflect salesreflect sales
Bullwhip effect - stable demand becomes Bullwhip effect - stable demand becomes lumpy orders through the supply chainlumpy orders through the supply chain
© 2006 Prentice Hall, Inc. 11 – 23
Opportunities in an Opportunities in an Integrated Supply ChainIntegrated Supply Chain
Accurate “pull” dataAccurate “pull” data
Lot size reductionLot size reduction
Single stage control of Single stage control of replenishmentreplenishment
Vendor managed inventoryVendor managed inventory
PostponementPostponement
© 2006 Prentice Hall, Inc. 11 – 24
Opportunities in an Opportunities in an Integrated Supply ChainIntegrated Supply Chain
Channel assemblyChannel assembly
Drop shipping and special Drop shipping and special packagingpackaging
Blanket ordersBlanket orders
StandardizationStandardization
Electronic ordering and Electronic ordering and funds transferfunds transfer
© 2006 Prentice Hall, Inc. 11 – 25
Radio Frequency TagsRadio Frequency Tags
© 2006 Prentice Hall, Inc. 11 – 26
Ships good;receives
electronicpayment
Receiveselectronic
purchase order
Selects a supplierbased on quality,
cost, deliveryperformance;
issues purchaseorder
Collects/reviewsbids submittedelectronically
Assigns suppliersto bid; givesclosing dates
and conditions
Enters data intoInternet system
Buyer reviewsrequisition
Inputs request intocomputer systemand transmits to
purchasingdepartment
Internet PurchasingInternet Purchasing
Figure 11.3Figure 11.3
Individual initiatesIndividual initiatesrequisitionrequisition
PurchasingPurchasingdepartment/buyerdepartment/buyer SupplierSupplier
Prepares requisition
© 2006 Prentice Hall, Inc. 11 – 27
Vendor SelectionVendor Selection
Vendor evaluationVendor evaluation Critical decisionCritical decision
Find potential vendorsFind potential vendors
Determine the likelihood of them Determine the likelihood of them becoming good suppliersbecoming good suppliers
Vendor DevelopmentVendor Development
TrainingTraining
Engineering and production helpEngineering and production help
Establish policies and proceduresEstablish policies and procedures
© 2006 Prentice Hall, Inc. 11 – 28
Vendor SelectionVendor Selection
NegotiationsNegotiations Cost-Based Price Model - supplier Cost-Based Price Model - supplier
opens books to purchaseropens books to purchaser
Market-Based Price Model - price Market-Based Price Model - price based on published, auction, or based on published, auction, or indexed priceindexed price
Competitive Bidding - used for Competitive Bidding - used for infrequent purchases but may make infrequent purchases but may make establishing long-term relationships establishing long-term relationships difficultdifficult
© 2006 Prentice Hall, Inc. 11 – 29
Vendor EvaluationVendor Evaluation
CriteriaCriteria WeightsWeightsScores Scores
(1-5)(1-5)Weight Weight x Scorex Score
Engineering/research/innovation skillsEngineering/research/innovation skills .20.20 55 1.01.0
Production process capability Production process capability (flexibility/technical assistance)(flexibility/technical assistance)
.15.15 44 .6.6
Distribution/delivery capabilityDistribution/delivery capability .05.05 44 .2.2
Quality systems and performanceQuality systems and performance .10.10 22 .2.2
Facilities/locationFacilities/location .05.05 22 .1.1
Financial and managerial strength Financial and managerial strength (stability and cost structure)(stability and cost structure)
.15.15 44 .6.6
Information systems capability (e-Information systems capability (e-commerce, Internet)commerce, Internet)
.10.10 22 .2.2
Integrity (environmental compliance/ Integrity (environmental compliance/ ethics)ethics)
.20.20 55 1.01.0
TotalTotal 1.001.00 3.93.9
© 2006 Prentice Hall, Inc. 11 – 30
Logistics ManagementLogistics Management
Objective is to obtain efficient Objective is to obtain efficient operations through the integration operations through the integration of all material acquisition, of all material acquisition, movement, and storage activitiesmovement, and storage activities
A frequent candidate for A frequent candidate for outsourcingoutsourcing
Gain competitive advantage Gain competitive advantage through reduced costs and through reduced costs and improved customer serviceimproved customer service
© 2006 Prentice Hall, Inc. 11 – 31
Distribution SystemsDistribution Systems
TruckingTrucking Moves the vast majority of Moves the vast majority of
manufactured goodsmanufactured goods
Chief advantage is flexibilityChief advantage is flexibility
RailroadsRailroads Capable of carrying large loadsCapable of carrying large loads
Little flexibility though Little flexibility though containers and piggybacking containers and piggybacking have helped with thishave helped with this
© 2006 Prentice Hall, Inc. 11 – 32
Distribution SystemsDistribution Systems
AirfreightAirfreight Fast and flexible for light loadsFast and flexible for light loads
May be expensiveMay be expensive
WaterwaysWaterways Typically used for bulky, low-Typically used for bulky, low-
value cargovalue cargo
Used when shipping cost is Used when shipping cost is more important than speedmore important than speed
© 2006 Prentice Hall, Inc. 11 – 33
Distribution SystemsDistribution Systems
PipelinesPipelines Used for transporting oil, gas, Used for transporting oil, gas,
and other chemical productsand other chemical products
© 2006 Prentice Hall, Inc. 11 – 34
Cost of Shipping Cost of Shipping AlternativesAlternatives
Product in transit is a form of Product in transit is a form of inventory and has a carrying costinventory and has a carrying cost
Faster shipping is generally more Faster shipping is generally more expensive than slower shippingexpensive than slower shipping
We can evaluate the two costs to We can evaluate the two costs to better understand the trade-offbetter understand the trade-off
© 2006 Prentice Hall, Inc. 11 – 35
Cost of Shipping Cost of Shipping AlternativesAlternatives
Value of connectors = Value of connectors = $1,750.00$1,750.00Holding cost Holding cost = 40%= 40% per year per yearSecond carrier is Second carrier is 11 day faster and day faster and $20$20 more more expensiveexpensive
Daily cost of Daily cost of holding productholding product == xx /365/365
annual annual holding holding
costcost
product product valuevalue
= (.40 x $1,750)/ 365 = $1.92= (.40 x $1,750)/ 365 = $1.92
Since it costs less to hold the product one day longer than it does for the faster shipping ($1.92 < $20), we should use the cheaper, slower shipper
© 2006 Prentice Hall, Inc. 11 – 36
Logistics, Security, and JITLogistics, Security, and JIT
Borders are becoming more open in Borders are becoming more open in the U.S. and around the worldthe U.S. and around the world
Monitoring and controlling stock Monitoring and controlling stock moving through supply chains is moving through supply chains is more important than evermore important than ever
New technologies are being New technologies are being developed to allow close monitoring developed to allow close monitoring of location, storage conditions, and of location, storage conditions, and movementmovement
© 2006 Prentice Hall, Inc. 11 – 37
Benchmarking Supply-Benchmarking Supply-Chain ManagementChain Management
Table 11.6Table 11.6
Typical FirmsTypical FirmsBenchmark Benchmark
FirmsFirms
Administrative costs as a percent of Administrative costs as a percent of purchasespurchases 3.3%3.3% .8%.8%
Lead time (weeks)Lead time (weeks) 1515 88
Time spent placing an orderTime spent placing an order 42 minutes42 minutes 15 minutes15 minutes
Percentage of late deliveriesPercentage of late deliveries 33%33% 2%2%
Percentage of rejected materialPercentage of rejected material 1.5%1.5% .0001%.0001%
Number of shortages per yearNumber of shortages per year 400400 44