ManagementDevelopmentProgramme

OperationsandSupplyChainManagement

FacilitatorKishan SinghApril2019

IntroductionNameCompanyDesignationPreviousExperienceAcademicBackgroundWhyareyouhere?

• BSc(Chemistry/BIochemistry)UKZNSA• PostGraduate- ManagementDUTSA• CityandGuildsQualityManagement- UK• LeanSixSigmaBlackBelt- DrMikelHarrySchoolofSixSigma- USA• ManagingDirector- GlobalIntegratedBusinessSolutions• NationalChairman- IPSAPackagingEducation• GlobalBusinessTrainingAmbassador - WorldPackagingOrganization• CEO– MetPac SA

Contact0828809580Kishan@gibsolutions.co.za

CourseOutline

• Globalisation

• JITandLeanSystems• IntroductiontoSupplyChainManagement

• ProcessManagement• ProductLifeCycle• MichaelPorterValueChain

• Procurement• WarehousingandBusinessFunctionsIntegration

TheGlobalVillage

Globalization

• Tobecomeinternationalorstartoperatingataninternationallevel.

• Theexpansionofbusinessesintotheworldwidemarkets

• Systemofeconomicrelationsintheworldmarkets.• ParityPricing• Lowestcostproducer

GlobalImpact

• Greater opportunities for Business Growth • Global Competition• Access to Global Technology• International Investment• Exports and Imports• Opportunity to Benchmark Internationally• Need for World Class Service

2010 2011 2012 2013 2014 2010 2011 2012 2013 2014 2010 2011 2012 2013 2014USA 3 1 2 1 1 Japan 27 26 27 24 21 Mexico 47 38 37 32 41Switzerland 4 5 3 2 2 Austria 14 18 21 23 22

Philippines 39 41 43 38 42

Singapore 1 3 4 5 3China Mainland 18 19 23 21 23 Portugal 37 40 41 46 43

Hong Kong 2 1 1 3 4 Israel 17 17 19 19 24 India 31 32 35 40 44

Sweden 6 4 5 4 5 Iceland 30 31 26 29 25Slovak Republic 49 48 47 47 45

Germany 16 10 9 9 6 Korea 23 22 22 22 26 Italy 40 42 40 44 46Canada 7 7 6 7 7 France 24 29 29 28 27 Romania 54 50 53 55 47UAE 28 16 8 8 Belgium 25 23 25 26 28 Hungary 42 47 45 50 48Denmark 13 12 13 12 9 Thailand 26 27 30 27 29 Ukraine 57 57 56 49 49Norway 9 13 8 6 10 Estonia 34 33 31 36 30 Peru 41 43 44 43 50Luxembourg 11 11 12 13 11 Chile 28 25 28 30 31 Colombia 45 46 52 48 51

Malaysia 10 16 14 15 12Kazakhstan 33 36 32 34 32

South Africa 44 52 50 53 52

Taiwan 8 6 7 11 13Czech Republic 29 30 33 35 33 Jordan 50 53 49 56 53

Netherlands 12 14 11 14 14 Lithuania 43 45 36 31 34 Brazil 38 44 46 51 54Ireland 21 24 20 17 15 Latvia 41 35 Slovenia 52 51 51 52 55United Kingdom 22 20 18 18 16 Poland 32 34 34 33 36 Bulgaria 53 55 54 57 56Australia 5 9 15 16 17 Indonesia 35 37 42 39 37 Greece 46 56 58 54 57Finland 19 15 17 20 18 Russia 51 49 48 42 38 Argentina 55 54 55 59 58Qatar 15 8 10 10 19 Spain 36 35 39 45 39 Croatia 56 58 57 58 59New Zealand 20 21 24 25 20 Turkey 48 39 38 37 40

Venezuela 58 59 59 60 60

SouthAfricaGlobalCompetitivenessRanking

SouthAfricaCompetitivenessRank 2007-2018

SouthAfricaisthe61mostcompetitivenationintheworldoutof137countriesrankedinthe2017-2018editionoftheGlobalCompetitivenessReportpublishedbytheWorldEconomicForum.CompetitivenessRankinSouthAfricaaveraged49.25from2007until2018,reachinganalltimehighof61in2018andarecordlowof35in2007.

ProfitCalculationoldmethod

profit=sellingprice- costpricenewmethod

sellingprice=profit+costprice

JustInTime(JIT)

Teamwork&Continual

Improvement

LeanManufacturing

SHEQR

KeyElementsofWorldClassPhilosophy(WCP)

EnergisedWorkforce

PrinciplesofWCP

• Purchasetorequirement/Maketoorder• JustInTime• Streamlinedflow• Doingitrightfirsttime• Quickchangeovers• Lean- ValueStreaming• Questforzerodefects• Reducedleadtimes• Totalpreventivemaintenance• Highemployeeinvolvement• StatisticalProcessControl• ContinualImprovement

WasteOfWaiting

WasteOfOver

production

WasteOfUnnecessaryInventory

WasteOfTransportation

WasteOfUnnecessaryProcessing

WasteOfDefects

WasteOfUnnecessaryMotions

Identificationofwasteisthefirststepto

higherefficiency

Anythingthatdoesnotaddvalueiswaste

LeanManufacturing

VideoLean

Manufacturing

• Tosuccessfullydevelopmanufacturingcapabilitiestogainasustainedcompetitiveadvantageintermsofcost,quality,ontimedelivery,flexibilityandinnovation,througheffectiveinventorymanagement

• Benefitsofthereductionofinventoriesare:-• Reducedtheamountoftiedupcapital• Reducedtheriskoflossordamage• Reducedhandlingrequirements• Lessinsurancecost• Reducedtheft• Reducedstoringcost• Preventobsoletestock

JustinTimeManufacturing

• Theshipisthefactory&thewaterisyourinventory

• Loweringtheseaofinventoryexposestherocksandforcesustoaddresstheissuesthatwerehiddenbyinventory.

• Don’tuseinventorytocoverupproblems,findtherootcause&eliminatetheproblem

Line Balancing

Change OverTime

Machine Reliability

UnreliableSuppliersPoor Quality

Transportation

Lead Time

Factory

SeaofInventory

“JustinCasePhilosophy”

• Badsupplier=Ordermorerawmaterial&resaleitemsjustincase

• MachineBreakdowns=Makemoreworkinprogress&finishedgoodsjustincase

• PoorQuality=Makemoreworkinprogress&finishedgoodsjustincase

• Uncertaintyinthemarketplace=holdmorefinishedgoodsjustincase

WhatisSupplyChainManagement?

EvolutionofSupplyChainManagement

1950s 1960s 1970s 1980s 1990s 2000s Beyond

Traditional Mass Manufacturing

Inventory Management/Cost Optimization

JIT, TQM, BPR, Alliances

SCM Formation/Extensions

Further Refinement of SCM Capabilities

WhatisaSupplyChain?

• Flowofproductsandservicesfrom• suppliers• rawmaterialsmanufacturers• intermediategoodsmanufacturers• finishedgoodsmanufacturers• distributorsandwholesalers• retailers• customers

• Connectedthroughtransportation,information,andexchangesoffunds

Manufacturer Distributor Retailer CustomerSupplier

SupplyChain

Supplier1

RawMaterial

RawMaterial

InventoryProcessing

Warehouse/Distribution/Retail

Store Customer2

Transformation

WorkinProgress FinishedProduct

PhysicalProducts

Downstream

Upstream

Supplier2

Information

Customer1

TheSupplyChain

• Anetworkoffacilitiesanddistributionoptionsthatperformsthefunctionsofprocurementofmaterials,transformationofthesematerialsintointermediateandfinishedproducts,andthedistributionofthesefinishedproductstocustomers.

• Includesallfacilities,functions,activities,associatedwiththeflowandtransformationofgoodsandservicesfromrawmaterialstocustomer,aswellastheassociatedinformationflows

• Itinvolvesdesignandestablishmentofroleplayersinthesupplychain

KeyElementsofaSupplyChain

• customer– starts&endswiththecustomersalesorder• planning– productionplancreatedtofulfilcustomerorders• purchasing– purchaserawmaterial&servicesrequiredtofulfilcustomerorder

• inventory- stockofmaterialsusedtosatisfycustomerdemandorsupporttheproductionofgoodsorservices

• production– conversionprocess• WarehousingandDistribution– deliverytovariouspointsinthesupplychain

10-27

PlanDevelopacourseofactionthatwillbalancesupply&demand

SourceProcuregoodsandservicestomeetplannedoractualdemand

MakeTransformproducttoafinishedstatetomeetplannedoractualdemand

DeliverProvideproductstomeetdemand,includingordermanagement,transportationanddistribution

ReturnReturnproducts,post-deliverycustomersupport

Source: Supply Chain Council, 2008

VideoTheStarbucksSupplyChain

WhatIsSupplyChainManagement?

• Itisthemanagementofthesupplychaintoensurethattherightquantities,totherightlocations,andattherighttime,inordertominimizecostswhilesatisfyingservicelevelrequirements.

• SupplyChainManagementisthecoordinationofproduction,inventory,location,andtransportationamongtheparticipantsinasupplychaintoachievethebestmixofresponsivenessandefficiencyforthemarketbeingserved

• “managingsupplyanddemand,sourcingrawmaterialsandparts,manufacturingandassembly,warehousingandinventorytracking,orderentryandordermanagement,distributionacrossallchannels,anddeliverytothecustomer”

SupplyManagementObjectives

• Tocontributetooverallbusinessstrategy• Tomanagesupplybaseensuringadequatecontinuoussupply

• Todevelopariskassessment&strategy• Tofosterinterfunctionrelationships• Integratingsupply,corporate&operationalobjectives• Toensurethatanefficientinformationsystemisinplace

LeanSupplyChainManagement• Themanagementofthesupplychaintoensurethattherightquantities,totherightlocations,andattherighttime,inordertominimizecostswhilesatisfyingservicelevelrequirements.

• Based onorganisationsfocusingonmovinginformationandproductsquicklythroughtheentiresupplychain.

• Valueanalysisandvalueengineeringtoensureeverystepinthesupplyprocessaddsvalue

• Adoptingajustintimephilosophykeepinginventoriestoaminimumlevel

• Distancesanddelaysbetweenprocessstepsarekeptasshortaspossible• Integratedsystemsapproachwithinstantcommunication• High levelsofqualityensuringnodelaysduetodefectivematerials• Teamworkandcontinualimprovementsbasedonbenchmarks

AdvantagesofaLeanSupplyChain• Reducedinventoriesandthusimprovedcashflowandprofit• Shorterleadtimesandthusfasterdeliverytocustomers• Fewerbottlenecks,sobetterutilisationofresourcesandfurtherimprovementstoprofit

• Fewerqualityproblems,solessrework,lowercostsofqualityfailureandhappierconsumers

• Removalofallformsofwaste• Supportsjustintime,totalqualitymanagementandcontinualimprovementthroughteamwork

SupplyChainResponsivenessversusEfficiency

• SupplyChainResponsiveness

• Abilitytorespondtowiderangesofquantitiesdemanded• Meetshortleadtimes• Handlealargevarietyofproducts• Buildhighlyinnovativeproducts• Meetaveryhighservicelevel• Thereisacosttoachievingresponsiveness

• SupplyChainEfficiency• Costofmakinganddeliveringtheproducttothecustomerontimeevery

time

• Increasingresponsivenessresultsinhighercoststhatlowerefficiency

ProcessManagement

AnatomyofaProcess

Resource Inputs (8M’s)

• Money• Man• Materials• Methods• Management• Machines• Maintenance• Mother Nature

Value Added

• An operation• Transportation• Inspection• Delay• Storage

Feedback

Outputs• Finished goods• Services

INPUT OUTPUTACTIVITY

Process

RootCauseAnalysis

ValueAnalysisandValueEngineering

Definitions

• process =input→activity→ output• inputs(resources)• activity(operation,transportation,inspection,delay,storage)• output(product/service)• processflow=movementofinformation&material• processmap=flowchart/diagram• bottleneck =restrictioninflow(inputoractivity)• valueanalyses=evaluatingaprocess• valueengineering=improvingaprocess• procedure describesaprocesse.g.orderplacementprocess• workinstruction definesstepbystephowaprocessmustbecarriedout

e.g.capturingancustomerorderonerp system• logistics - processinvolvedintheflowofgoods/services/information

frompointatob• supplychain – linkingallprocessesinvolvedintheflowofgoods/services

/informationfromorderplacementtoorderfulfillment

PrinciplesofaProcessPerformance

• Principle1– everyprocesshasconstraints.Constrainingactivitythatlimitstheoveralloutputisreferredtoasabottleneck.thesemustbeidentified,monitoredandmaintainmaximumusage

• Principle2– everyprocesscontainsvariancethatconsumescapacity.• Principle3– everyprocessmustbemanagedasasystembecauseitimpactsonanotherprocess

• Principle4– performancemeasuresarecrucialforsuccess• Principle5– everyprocessmustcontinuallyimprove

TheoryofConstraints

• Tocreateanefficientprocessflow,bottleneckstoaprocessmustbeunderstood&managed

• Thethroughputofanysystemisdeterminedbyoneconstraint(bottleneck).”Thustoincreasethethroughput,onemustfocusonidentifyingandimprovingthebottleneckorconstraint.

• Theefficiencyofaprocessisdeterminedbytheslowestresource

• Non-bottleneckresourceswillhaveidletime

Example- TheoryofConstraints

• Instructor hands boxes of candles to Person A

• Identify the constraint If the instructors hand the boxes at a slow pace, Instructor : Time = 30 seconds (Throughput = 2 boxes/minute)Person A: Time = 30 seconds (Throughput = 2 boxes/minute)Person B: Time = 30 seconds (Throughput = 2 boxes/minute)Person C: Time = 30seconds (Throughput = 2 boxes/minute)

• Identify the constraint if the instruct hands the boxes at a faster paceInstructor : Time = 2 seconds (Throughput = 30 boxes/minute)Person A: Time = 2 seconds (Throughput = 30 boxes/minute)Person B: Time = 20 seconds (Throughput = 3 boxes/minute)Person C: Time = 5 seconds (Throughput = 12 boxes/minute)

Inbound and OutboundLogistics Management

Logistics• managementoftheflowofgoods&informationbetweenthepointoforiginandthepointofconsumptioninordertomeettherequirementsofconsumers.

• itinvolvestheintegrationofinformation,transportation,inventory,warehousing,materialandpackaging&occasionallysecurity

InboundLogistics

receiving,storing&distributingincominggoodsandmaterialforstorage

Sourcing OrderPlacement&Expediting Supplier TransportationReceiving&Storage

InboundLogisticsActivities

Ensureavailabilityofmaterials

ReceiveMaterialstospecification

Documentgoods

received&returned

Store&Safeguardgoods

Returnrejectedmaterials

Maintainsafeworkingconditions

OutboundLogistics

movementofmaterialassociatedwithstoring,transporting&distributingaorganisationsgoodsto

customers

OrderProcessing

OrderTransmission

OrderStorage&Transportation

CustomerDelivery

• Balancebetweensupply&demand• Infullontimedelivery

LogisticsCost

Eachofthe6activities

involvescost

Asmuchas25%to30%oftotalbusinesscost

Improvedresponsivenessincreasescost

Tradeoffbetween

efficiencyandresponsiveness

Strategicdecisionmustbebasedon

totalcostofall6activities

Plantlocationshouldbebasedoninbound&outboundlogistics

DemandForecasting

Demand• Whatacustomerorusersactualwant.• Typicallyassociatedwiththeconsumptionofproductsorservicesasopposedtoapredictionofforecast

• Addresses5fundamentalquestions:

• whatproductistobesold?• whenisittobesold?• howmuchistobesold?• whoisbuyingit?• whytheyarebuyingit?

ComponentsofDemand

• stablepattern– consistenthorizontalstreamofdemands.matureconsumerproductse.g.breadormilk

• seasonalityandcycles– regularpatternsofrepeatinghighsandlows.seasonalitymaybedaily,weekly,monthly,orevenlongere.g.christmas cakeseverydecember

• trends – generalslopingtendencyofdemand,eitherupordown,inalinearornonlinearfashione.g.growthordeclineproductphases

ComponentsofDemandContinued

• shiftsorstepchanges– onetimechange,

usuallyduetosomeexternalinfluenceon

demande.g.majorproductpromotional

campaign.

• autocorrelation– describestherelationshipofcurrentandpastdemand.ifvaluesofdemandatanygiventimearehighlycorrelatedwithdemandvaluesfromtherecentpast,thenwesaythatthedemandishighlyautocorrelated.

• forecasterrors– representsthedifferencebetweentheactualdemandandtheforecast.goodforecastingrequiresthatallrelevantcomponentsofdemandisanalysed,whilenotoverreactingtorandomchangesindemand

DemandManagement• Proactiveco-ordinationofanorganisationsservice

/productdemandandsupply• Theproactivecompilationofanorganisations

demandrequirementmatchedwithsupplychaincapabilities

• Thekeytoeffectivedemandmanagementistounderstandtherequirementsoftheenduser

• Balancesupply&demand

ManagingDemand

• Influencethetimingorquantityofdemandthroughpricechanges,promotionsorsalesincentives.increasedemandbyreducingprices,havingpromotionsorsalesincentives.decreasedemandbyincreasingprices

• Managethetimingoforderfulfilment.managesupplyanddemand.

• Substitutebyencouragingcustomerstoshifttheirordersfromoneproducttoanotherorfromoneprovidertoanother

Supply

• Goodsorservicesthatanorganisationprovides• Effectsorganisationsefficiency

• Effectoncompetitiveposition/customersatisfaction

• Effectonorganisationalrisk

• Effectonimage

BalancingSupply&Demand

DemandSupply

Demandexceedsupply• Lowornostock• Cannotmeetcustomerrequirement• Lossofbusiness

DemandSupply

IfSupplyexceedDemand• Meetcustomerrequirement• Highstocklevel• Obsoletestock• Largestoragearearequirement• Highcost

BalancingSupply&Demand

Demand Supply

Abalancedsupply&demand• Meetcustomerrequirement• Minimumstocklevel• SupportsJITmanufacturing• Minimumstoragespace

AchievedviaDemandManagement/Sales&OperationPlanning

Forecasting• Predictionofthefuturedemandofproducts&services• Forecastingisnecessarytomeetdemandandresourceneeds• Experience,judgement&technicalexpertiseoftenplayanimportantroleindevelopingusefullforecasts.

• Demandforecastingresponsibilitylieswithsales&marketing.• Forecastinginventoryrequirements,resourceneeds,timelieswithoperations

• Tendstobeinaccurate(not100%),thereforeallowancesmustbemadeforinaccuracies.

• Forecastaccuracydecreasesoverlongperiodoftime.• Shorttermforecastsareusuallymoreaccurate.• Forecastsdevelopedusingmultipleinformationsourcesareusuallymoreaccuratethanforecastsdevelopedfromasinglesource

• Unplannedeventscanwreakhavocwithforecast

ImportanceofForecasting

• Reducesuncertainty• Necessaryforpreparingforactualdemand• Avoidsstock-outsandmaintainadequateinventorylevels• Providesavailabilityofresourcestomeetfuturedemand• Hiring,trainingandretrenchmentsalldependon

anticipateddemand• Maximisesalesopportunities• Efficientutilisationofresources• Positionsorganisationinagreatercompetitiveposition

ForecastingSteps

Step1Determinepurposeofforecast

Step2Establishatimehorizon

Step3SelectaforecastingtechniqueStep4Obtain,cleanandanalyzedata

Step5Maketheforecast

Step6Monitortheforecast

“Theforecast”

ForecastError• Aforecasterroristhedifferencebetweentheactualorrealandthepredictedorforecastvalue

• Positiveerrorsresultwhentheforecastistoolow,negativeerrorswhentheistoolow

• Accuracyisbasedonthehistoricalerrorperformanceofaforecast• Trackingtheforecasterrorsandanalysingthemcanprovideusefulinsightonwhetherornotforecastareperformingsatisfactorily

ConsequenceofForecastingError

Supplyexceedsdemand• excessivestock• additionalstoragespacerequirements• obsoletestock• holdingstockcost

• Demandexceedssupply• unabletosatisfycustomerrequirements• lossofpotentialbusiness• stockout

SalesandOperationsPlanning(S&OP)

S&OPisaprocesstodeveloptacticalplansbyintegratingcustomer-focusedmarketingplansfornewandexistingproductswiththeoperationalmanagementofthesupplychain

Sales&MarketingFocusoncustomer

demandOperations

FocusonSupply

FinanceFocusonworking

capital&profitability

ExchangeofValueCycle Time Delivery

Cost Price

Defects Quality

Providers -DO

Customers -NEED

This interaction must be carefully managed to maximize value for both parties – as per definition

S&OPBenefits

• Quantifiable• improvedforecastaccuracy• highercustomerservicewithlowerfinishedgoodsinventorylevels• morestablesupplyrates• fasterandmorecontrollednewproductintroduction

• Qualitative• enhancedteamwork• betterdecisions• betteralignmentofoperational,marketingandfinancialplans• greateraccountabilityforresults• awindowintothefuturetoseepotentialproblemssoonenough

GoalsofS&OP• Continuousflowofproduction• Plannedrequirementsofresources• Coordinatedworkschedule• Optimuminventorycontrol• Increasedproductivity• Improvedcustomersatisfaction• Productionandemploymentstabilisation• Improveddeliveryperformance• Maximisesalesopportunities• Reducetheamountofobsoletestock• Fasterresponsetocustomerdemands

S&OPChallenges• Balancingorganisationscapacitywithcustomerdemands• Smallorderquantities• Flexibilitytoadapttochanges• Cashflow• Pushinordersduetoqualitynonconformances• Competition• Customersshortleadtimesexpectations• Supplierreliance• Largeproductranges

TheBullWhipEffect

Product Life Cycle (PLC)

Product Life Cycle PLC• Important marketing concept• Describes the stages a product goes through

from concept to removal from the market• Not all products reach decline stage.• Some continue to grow and some fall• Can be very short period (months) or very long

(years)• Operation managers use the product life cycle

concept to plan the initial design and periodicchanges to the supply chain processes

Product Life Cycle

• A four-stage model in the life of a product basedupon the biological life cycle

• Widely used for describing the sales history of aproduct on a stage basis

• Each stage requires a different marketingstrategy decision

Product Life Cycle

• Important marketing concept• Not all products reach decline stage.• Some continue to grow and some fall• Can be very short period (months) or very long

(years)• Operation Managers use the product life cycle

concept to plan the initial design and periodic changes to the supply chain processes

Product Life Cycle

• Launch (Responsive Supply Chain)

• Resulting from intense product design anddevelopment effort.

• May require supply chain innovation if productcannot make use of existing processtechnologies and capacities

Product Life Cycle• Growth (Responsive and Efficient Supply

Chain)

• As sales grow, customer response providesinformation on how to refine the product

• Modifications continue until standardisedforms of the product begin to emerge

• Operating processes in the supply chain mustbe flexible in order to accommodate a highmix low volume product orders

• Supply chain must be able to rapidly increasecapacity to avoid sales lose

Product Life Cycle• Maturity (Efficient Supply Chain)

• Demand stabilizes and product refinements become less frequent

• Cost become critical because low cost competitors often enter the market

• Process innovation is usually required to increase supply chain efficiencies

• Process innovation is justified because product specifications are stabilized and early profits have generated funding for process investments

Product Life Cycle

• Decline (Efficient Supply Chain)

• As customer needs changes or new technology emerges products enter a decline stage

• As demand declines, challenges emerge to reduce cost and decrease capacity

• Organisations implement product design and development projects to regenerate new or better features or replace with next generation (Responsive Supply Chain)

Product Life Cycle

Product Life Cycle

Introduction Growth Maturity Decline

Sales,cost,and

cashflo

w

Negative cash flow

Costofdevelopmentandproduction

Cashflow

Netrevenue(profit)

Salesrevenue

Loss

2008 Prentice Hall, Inc

Extending the PLC

TIME

SA

LES

a

b

c

Marketing strategies for extending life in a product:

Product modification at point (a). Product range extension at point

(b) Identify new market / market

segments at point (c ) Change of packaging could be [a],

[b] or [c]

Uses of PLC Analysis

• Useful as a guideline only to the life of aproduct / service, as in reality very fewproducts follow such a prescriptive cycle.

• It provides valuable insights about theperformance of a product in a market

• Can assist marketers in reaching a decisionabout what to do with existing products

• Enable a company to exploit opportunitiesavailable at different stages of the PLC

• Vital to accelerate the responsiveness /efficiency of the Supply Chain

GroupDiscussion

DiscussCocaColaasabrandedproductanditslifecycle?

THEVALUECHAIN

MichaelPorters’ValueChain

PrimaryActivities• Inbound logistics include the receiving, warehousing, and inventory

control of input materials. the procurement function should be able to meet the material requirements related to inbound and outbound logistics and often more importantly related to operations. buying for primary activities is referred to as purchasing direct materials, production buying or buying of production items.

• Reduction of all direct material cost will immediately lead to an improvement of the company’s sales margin which will affect return of net assets (RONA) in a positive manner

• Operations are the value-creating activities that transform the inputs into the final product.

• Outbound logistics are the activities required to get the finished product to the customer,

• Including warehousing, order fulfillment, etc.• Marketing & sales are those activities associated with getting buyers

to purchase the product, including channel selection, advertising, pricing, etc.

• Service activities are those that maintain and enhance the product's value including customer support, repair services, etc.

SupportActivities• Procurement activities may also be related to supplying products and

services for other support functions. • Examples - laboratory equipment for research and development, computer

hardware and software for the central computer department, lease cars for the sales force and senior management, office equipment, cleaning equipment for housekeeping, machinery and infrastructure, etc…

• Buying for supporting activities is referred to as non production buying, general expenses or indirect materials. some of the purchases to be made are routine purchases (maintenance, repair & operating supplies – mro) and maybe repetitive and low in value. other purchases may have a “project character: and maybe unique and high value (investment goods, computer systems, capital equipment, building)

• Technology development - includes research and development, process automation, and other technology development used to support the value-chain activities.

• Human resource management - the activities associated with recruiting, development, and compensation of employees.

• Firm infrastructure - includes activities such as finance, legal, quality management, etc.

VideoCokeValueAnalysis

WarehousingAnd

Materials Handling

WarehouseProcessActivities

Receivingandloading

Instoragehandling

OrderPreparation

Staging(makereadyfor

loadingontotransportation

vehicles)

Shipping(verificationofcorrectnessofordersandloading)

WarehouseManagementPrimaryFunctions

• Stockpiling – storageofinventoriestoprotectseasonalsupplyordemand.e.g.ketchupproducedandstoredwhentomatoesareharvested.Createsabilitytoproducedandstockpilewhendemandislowandsupplywhendemandincreases.

• Productionsupport– dedicatedtostoringpartsandcomponentsneededtosupportaplant’soperation.

• Break-bulk – ordersconsolidatedandsenttoawarehouseandthensplitintoindividualcustomerorders

WarehouseManagementPrimaryFunctions

• Warehouseconsolidation – receivesshipmentsfromanumberofsourcesthatarecombinedandshippedtoonelocation

• Cross- docking– largeshipmentsfrommanysourcesarriveattheshippingdockatthesametime.supplierspresortquantitiesandmixedproductsareloadedontodifferenttrucks.

WarehouseManagementPrimaryFunctions

• Reverselogisticssupport– warehouseusedascollectionpointstosendproductsorpackagingmaterialbackfordisassembly,reclamationordisposalsites

• Valueaddedservices– anyworkthatcreatesgreatercustomervalueeg.furnitureassembly

ModernTrendsinStorage

• Justintime(JIT)enableslessinventoryasstockarrivesjustbeforeneeded• E-commerceintegratesthewarehousefunctions,processesandactivitiestoprovideimmediatevisibilityandplacementofinventory

• Barcodescanningandradiofrequencyidentification(RFID)eliminatespaperworkandimprovescommunication

• Outsourcingenablestheuseofcosteffectivethirdpartylogistics• Efficiencyandcustomerservicesfocusesonaquickresponse• Materialhandlingtechnologysuchasrobotsandautomaticstorageandretrievalsystems• Valueaddedservicesincludingpackaging,labelling,assembly

RadioFrequencyIdentification(RFID)-

Video

MaterialsHandling

• Movementofgoodsovershortdistances• Necessaryforcontinuationofprocesses• Trainedpersonnelandimprovedequipmentcancontributeto

anorganisation’sprofit• Greatcostfactorintermsofexpensiveequipment• Poorhandlingcanresultinproductsbeingdamaged• Employeehealth&safetymustbeconsidered• Packagingcanprotectproducts• Environmentalimpactsofpackagingmaterialisaglobal

concern

ObjectivesofMaterialsHandling

• Cost– provideefficientserviceatlowestcost• Optimalutilisationofcapacity• Minimisehandling• IncreasedSafety• Provideservicetomaterialusers• Abilitytoreactoradaptquicklytochangesinproduction

schedule

Purchasing and Supplier Management

Supplier Selection

• Based on a reasonable set of criteria i.e. quality, price,delivery, order placement to order fulfilment time,quantity, flexibility, service, financial status & riskassessment

• Governed by the supplier’s ability to meet these criteriasatisfactorily

• Supplier attributes include performance history, facilities& technical strength, financial status, organisation &management reputation, systems, proceduralcompliance, communications, labour relationscapabilities & location

• Unacceptable supplier performance can create costs farout of proportion to the size of the original purchase,upset internal relationships and strain supplier goodwill& final customer satisfaction

Importance of Supplier Selection

The value purchased goods & services as a %-age ofthe organisation’s turnover

Pressure to lower material cost & remain competitive Outsourcing contributes to the purchasing cost Just in time principles require closer supplier

relationship Supplier e-commerce capabilities e.g. Electronic flight

tickets Supplier contribution to supplier chain efficiency Ability of supplier to create a partnership Selecting incorrect supplier/s can result in stock out,

loss of sales, defective raw materials, product recall,weakening of an organisation’s competitive position

Factors to Consider for Selection Potential Suppliers

Capability to supply the requirements satisfactorily inboth the short & long term

Motivated to supply these requirements in the way thepurchaser expects in the short & long term

Technical or engineering capability, manufacturing ordistribution strength, financial strength & managementcapability. Distribution capability

Financial & management strengths & weaknesses Supply Location

Range of products and services provided Quality of products or services / system

certifications Dependability of supply

Delivery and volume flexibility

Total cost of supply

Potential for innovation

Potential to develop a supplier partnership

Ethical behavior

Factors to Consider for Selection Potential Suppliers

Identifying Potential Suppliers

• Reaching an optimal supply selection decisiondepends in large part on the decision maker’s abilityto generate alternatives ensuring that the truly bestis considered

• Information Sources• The internet• Catalogs• Trade Journals• Trade Directories• Sales Representatives• Supplier & Commodity Databases• Supplier Visits• Colleagues• References

Characteristics of a Good Supplier

• Continual improvement of quality• Implementing cost reduction measures without compromising

quality• Always deliver In Full On Time with little / no damage in transit.• Quick settlement claims for any damages• Advise customer of any unavoidable production or delivery

delays. Allowing time for re-scheduling• Reduces lead time & transport / distribution time• Adheres to the code of ethics• Considers the impact on the environment• Creates a partnership• Promotes innovation & development of new products

Supplier Performance Monitoring & Improvement

• We don’t know what we don’t know. If we don’t measureit, we really don’t know much about it. If we don’t knowmuch about it, we can’t control it. If we can’t control it, weare at the mercy of chance....“If you can’t measure it youcan’t manage it”

• Important to set formal goals for suppliers and to measureperformance on a regular basis.

• Use key performance indicators (KPI’s) in terms of quality,delivery, cost reduction, service or any other attributes

• Provide regular feedback using a supplier scorecard

Criteria for Supplier SelectionSource & Effect Diagram

Supplier managed inventory

StrategicSourcingDefinition

Strategicsourcingisastrategicmanagementprocesswherebycommoditiesandsuppliesareanalysedandrelationshipsareformedandmanagedaccordingtobestpracticesandappropriatestrategiesinsupportoflongtermorganisationalgoals

Traditionapproachtoprocurement

Strategicapproachtoprocurement

• Supplier certification programs verify that potentialsuppliers have the capability to provide the materials orservices the buying firm requires.

• Certification typically involves site visits by a cross-functional team from the buying firm who do an in-depthevaluation of the supplier's capability to meet cost,quality, delivery, and flexibility targets from process andinformation system perspectives.

• The team may consist of members from operations,purchasing, engineering, information systems, andaccounting

Supplier Certification

Supplier PartnershipBroersma (1991) defined it as:‘the building of long-term relationships with a limited number of suppliers

based on mutual trust’

Ellram and Hendrick (1993):A ‘partner’ is defined as a firm with whom your company has an ongoing buyer-seller relationship, involving a commitment over an extended time-period, a mutual sharing of information and a sharing of risks and rewards

resulting from the relationship

Developing a partnership with suppliers takes time. The road is long and difficult. There are no easy ways or short cuts to success

Traditional PartnershipLowest price Total cost of ownershipSpecification driven End customer drivenShort term, reacts to market Long termTrouble avoidance Opportunity maximisationPurchasing’s responsibility Cross functional teams & top

management involvementTactical StrategicLittle information sharing Both supplier & buyer share

short & long term plansShare risk & opportunityStandardisationJoint venturesShare data

Supplier Partnership

Benefits of Supplier Partnerships Parties work together to understand a problem's source, agree on the fix and

decide who is responsible for taking action Improvement of products through contributions to product design, technology, or

ideas for producing new products. Minimizing suppliers can reduce costs and dealing with too many suppliers can

create genuine overhead. A partnership can give suppliers greater visibility into how you operate, enabling

you and your suppliers to collaborate by reducing costs, improving service andquality, and even innovating.

Suppliers can help buyers by pointing out ways in which designs can be improvedor more desirable materials can be used

Suppliers can be sources of suggestions that allow buyers to hold consistenttolerances in production

Can improve the speed to market Supports principles of JIT & Lean manufacturing Savings can be passed on to customers creating a better customer relationship

Short term benefits Long term benefits

• improved product quality• reduction of product cost• reduction of development time• reduction of development cost

• More efficient and effective• collaboration in future new

product development projects• Alignment of future technology• strategies• Better access to technology• resources of the supplier• Contribution of suppliers to

product differentiation

Benefits of Supplier Partnerships

Product Development Early Supplier Involvement Risks

• Sharing crucial product/or process knowledge andskills with an irresponsible supplier

• Becoming locked in into a specific suppliertechnology

• Slowing down the development process byinvolving suppliers early in the process

• Increasing relationship and/or coordination costs• Changing interests and levels of commitment

Transportation and Physical Distribution

TransportationManagement

• Businesstransactiononlycompletedoncecustomerreceivesproductsordered

• Globalisationhascreatedtransportationmanagementchallengesinbothsourcingandsellingproductsacrosstheworld

• Transportationimpactsthecostoftheproductandthereforereceivesconsiderableattention.

Government’sRoleinTransportation

• Economicregulation– governmentcontrolsofentry,ratesandservicesprovidedbytransportationcarriers.

• Safetyregulation– designedtoensurethattransportationcarriersconducttheiractivitiesinasafeandresponsiblemanner

TransportationEconomics

EconomyofScaleThecostperunitofweightdecreasesasthesizeofshipmentincreases

EconomyofDistanceThecostperunitofdistancedecreasesasthedistancemovedincrease

Consolidation• Consolidation – thepracticeofcombiningsmallordersorshipmentsintoonelargershipmenttotakeadvantageofeconomyofscaleordistance

• Marketareaconsolidation– combiningseveralsmallshipmentstoonemarketareaintooneshipment.e.g.kellogg’s haveseveralordersfordifferentcustomerslocatedinalabama,theycombineshipmentsintoasingleloadtobemovedtoadestinationpoint.

• Pooleddeliveryconsolidation– combiningsmallshipmentsfromdifferentshippersthataregoingtothesamemarketarea.pooleddeliveryisgenerallyhandledbyindependenttransportationcompaniese.g.fedexorups.

• Scheduleddeliveryconsolidation– referstoestablishingspecificdeliverytimes.insteadofdailydelivery,ordersareaccumulatedanddeliveredoverscheduledtimes

ModesofTransportMotorcarriersortrucks

• Offerstheadvantageofpoint-to-pointservice,overroad,forproductsvaryingweight&size

• Comparedtoothermodes,serviceisfast&reliable,withlowdamage&lossrates

• PreferredmodefororganisationsoperatingJITsystem

Railcarriers

• Relativelyinflexible&slow&havehigherloss&damagerates,comparedtomotorcarriers

• Haslowervariableoperatingcost,whichmakesitattractiveforhaulinglargetonnageoverlongdistances

ModesofTransport

Aircarriers

• Advantageisspeed• Costly&mustbecombinedwithtrucksfordoortodoorservice• Suitableforhighvalueand/orextremelyperishableproducts• Regardedaspremiumemergencyservice

Pipelines

• Limitedtotransportationofproductsinaliquidorgaseousstate• Onceinitialinvestmentcostisrecovered,variablecostofoperation

islow

ModesofTransportWatercarriers

• Slow&inflexible• Suitableforhaulinglargetonnageoverlongdistances• Frequentlyusedbulkcommoditieseg.coal,grain,sand• Requiressuitablewaterways,ports&handlingequipment• Mustbecombinedwithtrucksfordoortodoorservice

Intermodal

• Involvesthetransportationoffreightinanintermodalcontainerorvehicle,usingmultiplemodesoftransportation(rail,ship,andtruck),withoutanyhandlingofthefreightitselfwhenchangingmodes.

• Reducescargohandling,andsoimprovessecurity,reducesdamagesandlosses,andallowsfreighttobetransportedfaster.

FactorstoconsiderwhenselectingModeofTransport• Transportcost• Requireddeliverytime• Reliability&servicequality• Availableserviceseg.warehousing&inventorymanagement• Typeofitem• Sizeofload• Possibilityofdamage• Costoftransportservice• Carrierfinancialservicesintheeventofanyclaims• Handlingofclaims– prompt&efficientinvestigation&

settlementofclaims• Privatefleet

BusinessEthics

BusinessEthics

• Theethicalcultureofanorganisationisdocumentedbythestandardsofconductinacodeofethics

• Purchasinginvolvestheexchangeofaverylargeamountofmoney,itisthereforevitaltheprocurementprocessiscarriedoutatthehighestethicallevel

• Supplierssometimesgotoconsiderablelengthstosecurebusiness&resorttounethicalpracticessuchasbribesorlargergifts

• Bothsuppliers&purchasersareresponsibleforensuringtheunethicalconductisnottolerated

• Ifabuyersaction’sisperceivedbyotherstobeinappropriate,thenboththebuyer&organisationsreputationmaybeharmed.

• Gifts&gratuitiescanbeusedtoinfluencedecisionscanbedirectedtoanyoneintheorganisationwhocaninfluencethepurchasingdecision

BusinessEthics

• Mostorganisationshavepolicies&proceduresconcerningtherelationsbetweenthesupplyoffice&suppliers’representativestopromoteapositiverelationshipwithsuppliers

• Reciprocity- thepracticeofgivingpreferenceofbuyingfromthosesupplierswhoarecustomersofthebuyingcompanyalthoughtheirpricesmaybehigher&serviceinferiorisunacceptable

• GrowingtrendfororganisationtobecomemoreenvironmentallyresponsibleimplementingtheISO14001:2004Standard.

• SMETA4Pillar– ResponsibleSourcing• SA8000– SocialResponsibility

ReferenceList

Swink,M,Melnyk,SACooper,MBandHartley,JL.2011.Internationaledition.NewYork,(NY),Macraw-Hill

Arjan J.VanWeele,(2005)PurchasingAndSupplyChainManagement,,5th edition.CengageLearning

DavidKruger,RoyRamphal (2009)OperationsManagement, 2ndedition.CapeTown,Oxford

R.DanReid&NadaR.Sanders(2010)OperationsManagement,4thEdition©Wiley

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