Chapter 17 Supply Chain Management Copyright ©2009 Pearson Education, Inc. Publishing as Prentice Hall 1 Supply Chain Management

Chapter 17 Supply Chain ManagementChapter 17 Supply Chain Management Copyright Copyright ©©2009 Pearson Education, Inc. Publishing as Prentice Hall2009 Pearson Education, Inc. Publishing as Prentice Hall 11

Supply Chain Management


Supply Chain Supply Chain ManagementManagement A key determinant of a A key determinant of a

company’s ability to competecompany’s ability to compete Today, competition is not Today, competition is not

“company vs. company but “company vs. company but supply chain vs. supply chain” supply chain vs. supply chain”

Companies spend nearly $18 Companies spend nearly $18 trillion on goods and services trillion on goods and services each year each year

Source: Visa Commercial Consumption Expenditure Index.

$14.5$15.1

$16.3

$17.4$17.9

$-

$2.0

$4.0

$6.0

$8.0

$10.0

$12.0

$14.0

$16.0

$18.0

Am

ou

nt

Sp

en

t in

Tri

llio

ns

of

Do

llars

2003 2004 2005 2006 2007

Purchases of Goods and Services by U.S. Companies


Supply Chain Supply Chain ManagementManagement Shaving 2% from a company’s Shaving 2% from a company’s

CGS can increase net income by CGS can increase net income by as much as 25%as much as 25%

Aberdeen Group survey: 82% of Aberdeen Group survey: 82% of companies had experienced a companies had experienced a supply disruption or outage within supply disruption or outage within the last two years the last two years

Requires a sound purchasing planRequires a sound purchasing plan

Components of a Components of a purchasing planpurchasing plan

Right Quality

Right Vendor

Right Time

Right Quantity

Right Price

The Purchasing

Plan

Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall


The Purchasing PlanThe Purchasing Plan

QualityQuality Kaizen Kaizen Total Quality ManagementTotal Quality Management

Deming’s 14 PointsDeming’s 14 Points Six SigmaSix Sigma

QuantityQuantity Economic Order Quantity Analysis Economic Order Quantity Analysis

(EOQ)(EOQ) Economic Order Quantity with UsageEconomic Order Quantity with Usage


PricePrice Purchase DiscountsPurchase Discounts

TimeTime Reorder Point AnalysisReorder Point Analysis

VendorVendor Sources of SupplySources of Supply Vendor Rating ScaleVendor Rating Scale

(Continued)(Continued)

The Purchasing PlanThe Purchasing Plan


QualityQuality

““Higher quality is less expensive to Higher quality is less expensive to produce than lower quality.” produce than lower quality.” —— W. W. Edwards DemingEdwards Deming

The endless pursuit of quality produces The endless pursuit of quality produces lower costs, higher productivity, greater lower costs, higher productivity, greater market share, and more satisfied market share, and more satisfied customerscustomers

KaizenKaizen, continuous improvement, is the , continuous improvement, is the most commonly used quality improvement most commonly used quality improvement strategystrategy

Quality


Total Quality Management (TQM) is a Total Quality Management (TQM) is a philosophy that strives for getting philosophy that strives for getting everything a company does for a everything a company does for a customer customer right the first timeright the first time

TQM involves a lifelong process of TQM involves a lifelong process of continuous improvement; a continuous improvement; a successful TQM process requires a successful TQM process requires a company to change company to change everythingeverything it it doesdoes

QualityQualityQuality


Implementing Implementing TQMTQM

1. Use benchmarking to discover the 1. Use benchmarking to discover the best practices that will produce best practices that will produce quality results quality results

2. Shift from a management-driven 2. Shift from a management-driven culture to a participative, team-culture to a participative, team-based onebased one

3. Modify the reward system to 3. Modify the reward system to encourage teamwork and innovation encourage teamwork and innovation

Success requires following 11 principles:Success requires following 11 principles:


4. Train workers constantly to give them 4. Train workers constantly to give them the tools they need to produce quality the tools they need to produce quality and to upgrade the company’s and to upgrade the company’s knowledge base knowledge base

5. Train employees to measure quality 5. Train employees to measure quality with the tools of statistical process with the tools of statistical process control (SPC)control (SPC)

6. Use Pareto’s Law to focus TQM efforts6. Use Pareto’s Law to focus TQM efforts7. Share information with everyone in 7. Share information with everyone in

the organizationthe organization

Implementing Implementing TQMTQMSuccess requires following 11 principles:Success requires following 11 principles:


8. Focus quality improvements on 8. Focus quality improvements on astonishing the customerastonishing the customer

9. Don’t rely on inspection to 9. Don’t rely on inspection to produce quality products and produce quality products and services services

10. Avoid using TQM to place blame 10. Avoid using TQM to place blame on those who make mistakeson those who make mistakes

11. Strive for continuous 11. Strive for continuous improvement in processes as well improvement in processes as well as in products and services as in products and services

Implementing Implementing TQMTQMSuccess requires following 11 principles:Success requires following 11 principles:


Deming’s 14 PointsDeming’s 14 Points

1. Constantly strive to improve 1. Constantly strive to improve products and servicesproducts and services

2. Adopt a total quality philosophy2. Adopt a total quality philosophy

3. Correct defects as they happen 3. Correct defects as they happen rather than rely on mass rather than rely on mass inspection of end productsinspection of end products

4. Don’t award business on price 4. Don’t award business on price alonealone


5. Constantly improve the system 5. Constantly improve the system of production and serviceof production and service

6. Institute training6. Institute training

7. Institute leadership7. Institute leadership

8. Drive out fear8. Drive out fear



9. Break down barriers among staff 9. Break down barriers among staff areasareas

10. Eliminate superficial slogans and 10. Eliminate superficial slogans and goalsgoals

11. Eliminate standard quotas11. Eliminate standard quotas



12. Remove barriers to pride in 12. Remove barriers to pride in workmanshipworkmanship

13. Institute vigorous education and 13. Institute vigorous education and retrainingretraining

14. Take demonstrated 14. Take demonstrated management action to achieve management action to achieve transformationtransformation



Like TQM, Six Sigma uses data-Like TQM, Six Sigma uses data-driven statistical tools to improve driven statistical tools to improve quality quality

Threshold: Just 3.4 defects per 1 Threshold: Just 3.4 defects per 1 million opportunities million opportunities

Built on the Quality DMAIC ProcessBuilt on the Quality DMAIC Process

Six SigmaSix Sigma

Principle Process Improvement Technique

Define Identify the problem.

Define the requirements.

Set the goal for improvement.

Measure Validate the process problem by mapping the process and gathering data about it.

Refine the problem statement and the goal.

Measure current performance by examining the relevant process inputs, steps, and output to establish a baseline.

Analyze Develop a list of potential root causes.

Identify the vital few.

Use data analysis tools to validate the cause and effect connections between root causes and the quality problem.

Improve Develop potential solutions to remove root causes by making changes to the process.

Test potential solutions and develop a plan for implementing those that are successful.

Measure the results of the improved process.

Control Establish standard measures for the new process.

Establish standard procedures for the new process.

Review performance periodically and make adjustments as needed.

Source: Adapted from Andrew Spanyi and Marvin Wurtzel, “Six Sigma for the Rest of Us,” Quality Digest, July 2003, http://www.qualitydigest.com/july03/articles/01_article.shtml.

http://www.qualitydigest.com/july03/articles/01_article.shtml


Four Tenets of Six Four Tenets of Six SigmaSigma

1.1. Delight customers with quality Delight customers with quality and speedand speed

2.2. Constantly improve the processConstantly improve the process

3.3. Use teamwork to improve the Use teamwork to improve the processprocess

4.4. Make changes to the process Make changes to the process based on facts, not guesses based on facts, not guesses


Economic Order Economic Order QuantityQuantity

Cost of units = D x CCost of units = D x C Holding (Carrying) costs = Q/2 x HHolding (Carrying) costs = Q/2 x H Setup (Ordering) costs = D/Q x SSetup (Ordering) costs = D/Q x S

.... seeks to minimize total inventory .. seeks to minimize total inventory costscosts

Three major inventory costs to Three major inventory costs to consider:consider:

EOQ and Carrying Costs

If Q is ...If Q is ... Q/2, Average InventoryQ/2, Average Inventory Q/2 x H, Carrying CostsQ/2 x H, Carrying Costs

500500

1,0001,000

2,0002,000

3,0003,000

4,0004,000

5,0005,000

6,0006,000

7,0007,000

8,0008,000

9,0009,000

10,00010,000

250250

500500

1,0001,000

1,5001,500

2,0002,000

2,5002,500

3,0003,000

3,5003,500

4,0004,000

4,5004,500

5,0005,000

$312.50$312.50

625625

1,2501,250

1,8751,875

2,5002,500

3,1253,125

3,7503,750

4,3754,375

5,0005,000

5,6255,625

6,2506,250


EOQ and Ordering Costs

If Q is ...If Q is ... D/Q, # Orders per YearD/Q, # Orders per Year D/Q x S, Ordering CostD/Q x S, Ordering Cost

500500

1,0001,000

2,0002,000

3,0003,000

4,0004,000

5,0005,000

6,0006,000

7,0007,000

8,0008,000

9,0009,000

10,00010,000

800800

400400

200200

134134

100100

8080

6767

5858

5050

4545

4040

$7,200$7,200

3,6003,600

1,8001,800

1,2061,206

900900

720720

603603

522522

450450

405405

360360


Solving for EOQSolving for EOQ

H

SD2EOQ

where D = Annual demand for productS = Setup (ordering) cost for a single run (order)H = Holding (carrying) cost per unit per year


EOQ and Total EOQ and Total

CostsCostsIf Q is ...If Q is ... Q/2 x HQ/2 x H Total CostsTotal Costs

500500

1,0001,000

2,0002,000

2,4002,400

3,0003,000

4,0004,000

5,0005,000

6,0006,000

7,0007,000

8,0008,000

9,0009,000

10,00010,000

$7,200$7,200

3,6003,600

1,8001,800

1,5001,500

1,2061,206

900900

720720

603603

522522

450450

405405

360360

$620,000$620,000

620,000620,000

620,000620,000

620,000620,000

620,000620,000

620,000620,000

620,000620,000

620,000620,000

620,000620,000

620,000620,000

620,000620,000

620,000620,000

D x CD x C

$313$313

625625

1,2501,250

1,5001,500

1,8751,875

2,5002,500

3,1253,125

3,7503,750

4,3754,375

5,0005,000

5,6255,625

6,2506,250

D/Q x SD/Q x S

$627,513$627,513

624,225624,225

623,050623,050

623,000623,000

623,075623,075

623,400623,400

623,845623,845

624,350624,350

624,889624,889

625,450625,450

626,025626,025

626,610626,610


Calculating Total CostCalculating Total Cost

S

Q

DH

QCD

2Total Cost

Total Cost =

Cost of Units

+ Carrying Cost

+ Ordering Cost


EOQ and Total EOQ and Total CostsCosts


EOQ with UsageEOQ with Usage

PU

-1H

SD2EOQ

where D = Annual demand for productS = Setup (ordering) cost for a single run (order)H = Holding (carrying) cost per unit per yearU = Usage rate P = Production rateCopyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall


PricePrice

Discounts:Discounts: Trade discounts – established on a Trade discounts – established on a

graduated scale and depend on a graduated scale and depend on a company’s position in the channel of company’s position in the channel of distributiondistribution


Trade Discount StructureTrade Discount Structure

Manufacturer sells for $80.Manufacturer sells for $80.

Wholesaler buys at $80;Wholesaler buys at $80;sells at $100.sells at $100.

Retailer buys at $100;Retailer buys at $100;sells at $175.sells at $175.

Customer buys at $175.Customer buys at $175.


Quantity discounts - offer price breaks Quantity discounts - offer price breaks on large-volume purchaseson large-volume purchases

Cash discounts - offered as incentives Cash discounts - offered as incentives to pay early. (e.g. “2/10, net 30”) to pay early. (e.g. “2/10, net 30”)

PricePrice

Discounts:Discounts: Trade discounts - established on a Trade discounts - established on a

graduated scale and depend on a graduated scale and depend on a company’s position in the channel of company’s position in the channel of distributiondistribution

The Cost of Foregoing a Cash The Cost of Foregoing a Cash DiscountDiscount$1,000 invoice 2/10, net 30$1,000 invoice 2/10, net 30

DayDay

AmountAmount

00 1010 3030

$1,000$1,000$980$980

20 days20 days

$20$20

R = R = IIP x TP x T

= $20$20$980 x 20/360$980 x 20/360

= = 36.735%36.735%



Time – When to OrderTime – When to Order

Lead timeLead time – time gap between – time gap between placing an order with a vendor placing an order with a vendor and actually receiving the goods and actually receiving the goods

Safety stockSafety stock – a cushion of extra – a cushion of extra merchandise built into inventory merchandise built into inventory in case demand is greater than in case demand is greater than anticipated anticipated


Simple Reorder Point Simple Reorder Point ModelModel

Reorder Point = (L x U) + SReorder Point = (L x U) + S

L = Lead time for an order (days)L = Lead time for an order (days)

U = Usage rate for the item (units per day)U = Usage rate for the item (units per day)

S = Safety stock (units)S = Safety stock (units)

wherewhere

Simple Reorder Point ModelSimple Reorder Point Model



Reorder Point Model Reorder Point Model (assuming normally distributed (assuming normally distributed demand)demand)

Reorder Point = DReorder Point = DLL + (SLF x SD + (SLF x SDLL))

DDLL = Average demand during lead time for = Average demand during lead time for an order (units)an order (units)

SLF = Service level factor (the appropriate Z SLF = Service level factor (the appropriate Z score)score)

SDSDLL = Standard deviation during lead time = Standard deviation during lead time (units)(units)

wherewhere

Reorder Point without Safety Reorder Point without Safety StockStock


Reorder Point with Safety Reorder Point with Safety StockStock


The Shift from No Safety Stock to Safety The Shift from No Safety Stock to Safety StockStock



Vendor Selection: Vendor Selection: Supply Chain Supply Chain ManagementManagement Goals of Supply Chain ManagementGoals of Supply Chain Management

Reduce inventoryReduce inventory Get products to market fasterGet products to market faster Increase qualityIncrease quality Improve customer satisfactionImprove customer satisfaction

Payoff can be bigPayoff can be big A successful SCM system yields an A successful SCM system yields an

average savings of 15%average savings of 15% Inventory levels decline as much as Inventory levels decline as much as

60%60%


Vendor Selection: Vendor Selection: Managing the Supply Managing the Supply ChainChain Web-based SCM – e-procurementWeb-based SCM – e-procurement

Share production plans, shipment Share production plans, shipment schedules, inventory levels, sales schedules, inventory levels, sales forecasts, and actual sales forecasts, and actual sales real-timereal-time with vendors with vendors

IDC Study: Analytics applied to SCM IDC Study: Analytics applied to SCM produced 277% return over 5 years produced 277% return over 5 years


A Supply Chain Should A Supply Chain Should Be: Be: Agile – fast, flexible, and Agile – fast, flexible, and

responsive to changes in demandresponsive to changes in demand Adaptable – changes as the Adaptable – changes as the

company’s needs change and company’s needs change and accommodates the company’s accommodates the company’s growthgrowth

Aligned – all of the companies that Aligned – all of the companies that make up the supply chain work make up the supply chain work together as a team together as a team


Vendor CertificationVendor Certification

1. Determine important criteria in selecting 1. Determine important criteria in selecting a vendora vendor

2. Assign “weights” to each criterion to 2. Assign “weights” to each criterion to reflect its relative importancereflect its relative importance

3. Develop a grading scale for each criterion3. Develop a grading scale for each criterion

4. Compute a weighted score for each 4. Compute a weighted score for each vendor:vendor:

Weighted Score = Weight x GradeWeighted Score = Weight x Grade

5. Choose the vendor with the highest 5. Choose the vendor with the highest weighted scoreweighted score


Selecting the Right Selecting the Right Vendors Vendors

Factors to consider:Factors to consider: Number of suppliersNumber of suppliers ReliabilityReliability ProximityProximity ServicesServices Collaboration Collaboration PricePrice


Legal Issues in Legal Issues in PurchasingPurchasing

The concept of The concept of titletitle, the right to ownership , the right to ownership of goods, has been replaced by:of goods, has been replaced by:

IdentificationIdentification - goods must be in existence - goods must be in existence and identifiable from all other similar and identifiable from all other similar goodsgoods

Risk of lossRisk of loss - determines which party - determines which party incurs the financial risk if the goods are incurs the financial risk if the goods are damaged, destroyed, or lost before they damaged, destroyed, or lost before they are transferred are transferred


Risk of LossRisk of Loss

Agreement – Risk of loss shifts Agreement – Risk of loss shifts according to the parties’ contractaccording to the parties’ contract

F.O.B. Seller (shipment contract) – Risk F.O.B. Seller (shipment contract) – Risk of loss shifts to buyer as soon as the of loss shifts to buyer as soon as the seller delivers the goods into the care seller delivers the goods into the care of a carrierof a carrier

F.O.B. Buyer (destination contract) – F.O.B. Buyer (destination contract) – Risk of loss shifts to buyer when the Risk of loss shifts to buyer when the seller delivers the goods to a seller delivers the goods to a designated destination designated destination


Legal Issues in Legal Issues in PurchasingPurchasing

The concept of The concept of titletitle, the right to ownership of , the right to ownership of goods, has been replaced by:goods, has been replaced by:

IdentificationIdentification - goods must be in existence - goods must be in existence and identifiable from all other similar goodsand identifiable from all other similar goods

Risk of lossRisk of loss - determines which party incurs - determines which party incurs the financial risk if the goods are damaged, the financial risk if the goods are damaged, destroyed, or lost before they are destroyed, or lost before they are transferred transferred Insurable interestInsurable interest - gives the right to - gives the right to either party to a sales contract to obtain either party to a sales contract to obtain insurance to protect against lost, insurance to protect against lost, damaged, or destroyed merchandise as damaged, or destroyed merchandise as long as he has a “sufficient interest” in long as he has a “sufficient interest” in themthem


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Chapter 17 Supply Chain Management Copyright ©2009 Pearson Education, Inc. Publishing as Prentice Hall 1 Supply Chain Management