Supply Chain Real Time

© 2008 Prentice Hall, Inc. 11 – 1

Operations ManagementOperations ManagementChapter 11 – Chapter 11 – Supply Chain Supply Chain ManagementManagement

PowerPoint presentation to accompany PowerPoint presentation to accompany Heizer/Render Heizer/Render Principles of Operations Management, 7ePrinciples of Operations Management, 7eOperations Management, 9e Operations Management, 9e


Learning ObjectivesLearning Objectives

When you complete this chapter you When you complete this chapter you should be able to:should be able to:

1.1. Explain the strategic importance of Explain the strategic importance of the supply chainthe supply chain

2.2. Identify five supply chain strategiesIdentify five supply chain strategies

3.3. Explain issues and opportunities in Explain issues and opportunities in the supply chainthe supply chain

4.4. Describe approaches to supply Describe approaches to supply chain negotiationschain negotiations


Learning ObjectivesLearning Objectives

When you complete this chapter you When you complete this chapter you should be able to:should be able to:

Evaluate supply chain performanceEvaluate supply chain performance

Compute percent of assets Compute percent of assets committed to inventorycommitted to inventory

Compute inventory turnoverCompute inventory turnover


Darden RestaurantsDarden Restaurants

Largest publicly traded casual Largest publicly traded casual dining company in the worlddining company in the world

Serves over 300 million meals Serves over 300 million meals annually in more than 1,400 annually in more than 1,400 restaurants in the US and Canadarestaurants in the US and Canada

Annual sales of $2.4 billionAnnual sales of $2.4 billion

Operations is the strategyOperations is the strategy


Darden RestaurantsDarden Restaurants

Sources food from five continents Sources food from five continents and thousands of suppliersand thousands of suppliers

Four distinct supply chainsFour distinct supply chains: seafood, : seafood, refrigerated foods, baked goods, refrigerated foods, baked goods, restaurant suppliesrestaurant supplies

Over $1.5 billion spent annually in Over $1.5 billion spent annually in supply chainssupply chains

Competitive advantage achieved Competitive advantage achieved through superior supply chainthrough superior supply chain


Darden RestaurantsDarden RestaurantsSupply chains have the same common Supply chains have the same common

characteristics:characteristics:

• Supplier qualificationSupplier qualification

• Product tracking systemProduct tracking system

• Independent auditsIndependent audits

• Employ JIT deliveryEmploy JIT deliveryReceive competitive advantage through rapid, Receive competitive advantage through rapid,

transparent and efficient SCtransparent and efficient SC


The Supply Chain’s The Supply Chain’s Strategic Importance Strategic Importance

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


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 Distributors

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


A Supply Chain for BeerA Supply Chain for Beer

Figure 11.1Figure 11.1

© 2008 Prentice Hall, Inc. 11 – 1011-11-1010

Global Supply-Chain IssuesGlobal Supply-Chain Issues

Supply chains in a global environment Supply chains in a global environment must be:must be:– FlexibleFlexible enough to react to sudden changes in enough to react to sudden changes in

parts availability, distribution, or shipping parts availability, distribution, or shipping channels, import duties, and currency rateschannels, import duties, and currency rates

– Able to use the Able to use the latest computer and transmission latest computer and transmission technologiestechnologies to schedule and manage the shipment to schedule and manage the shipment of parts in and finished products outof parts in and finished products out

– Staffed with Staffed with local specialistslocal specialists to handle duties, to handle duties, trade, freight, customs and political issuestrade, freight, customs and political issues

Global Supply Chain IssuesGlobal Supply Chain Issues


How Supply Chain How Supply Chain Decisions Impact StrategyDecisions Impact Strategy

Low-Cost Low-Cost StrategyStrategy

Response Response StrategyStrategy

Differentiation Differentiation StrategyStrategy

Supplier’s Supplier’s goalgoal

Supply demand Supply demand at lowest at lowest possible cost possible cost (e.g., Emerson (e.g., Emerson Electric, Taco Electric, Taco Bell)Bell)

Respond quickly Respond quickly to changing to changing requirements requirements and demand to and demand to minimize minimize stockouts (e.g., stockouts (e.g., Dell Computers)Dell Computers)

Share market Share market research; research; jointly develop jointly develop products and products and options (e.g., options (e.g., Benetton)Benetton)

Primary Primary selection selection criteriacriteria

Select primarily Select primarily for costfor cost

Select primarily Select primarily for capacity, for capacity, speed, and speed, and flexibilityflexibility

Select primarily Select primarily for product for product development development skillsskills

Table 11.1Table 11.1






Process Process charact-charact-eristicseristics

Maintain high Maintain high average average utilizationutilization

Invest in excess Invest in excess capacity and capacity and flexible flexible processesprocesses

Modular Modular processes that processes that lend lend themselves to themselves to mass mass customizationcustomization

Inventory Inventory charact-charact-eristicseristics

Minimize Minimize inventory inventory throughout the throughout the chain to hold chain to hold down costdown cost

Develop Develop responsive responsive system with system with buffer stocks buffer stocks positioned to positioned to ensure supplyensure supply

Minimize Minimize inventory in the inventory in the chain to avoid chain to avoid obsolescenceobsolescence







Lead-time Lead-time charact-charact-eristicseristics

Shorten lead Shorten lead time as long as time as long as it does not it does not increase costsincrease costs

Invest Invest aggressively to aggressively to reduce reduce production lead production lead timetime

Invest Invest aggressively to aggressively to reduce reduce development development lead timelead time

Product-Product-design design charact-charact-eristicseristics

Maximize Maximize performance performance and minimize and minimize costscosts

Use product Use product designs that designs that lead to low lead to low setup time and setup time and rapid rapid production production ramp-upramp-up

Use modular Use modular design to design to postpone postpone product product differentiation differentiation as long as as long as possiblepossible



• Supply chain is a costly activity, so Supply chain is a costly activity, so savings in SC costs directly savings in SC costs directly increases profit.increases profit.

• Affects quality of final productAffects quality of final product• Aids strategy of low cost, response, Aids strategy of low cost, response,

and differentiationand differentiation

SC must be managed efficiently!SC must be managed efficiently!

Supply Chain EconomicsSupply Chain EconomicsSupply Chain EconomicsSupply Chain Economics


Supply Chain EconomicsSupply Chain Economics

Supply Chain Costs as a Percent of SalesSupply Chain Costs as a Percent of Sales


IndustryIndustry % Purchased% Purchased

All industryAll industry 5252

AutomobileAutomobile 6767

FoodFood 6060

LumberLumber 6161

PaperPaper 5555

PetroleumPetroleum 7979

TransportationTransportation 6262



Dollars of additional sales needed to equal $1 Dollars of additional sales needed to equal $1 saved through the supply chainsaved through the supply chain

Percent of Sales Spent in the Supply ChainPercent of Sales Spent in the Supply Chain

Percent Net ProfitPercent Net Profitof Firmof Firm 30%30% 40%40% 50%50% 60%60% 70%70% 80%80% 90%90%

22 $2.78$2.78 $3.23$3.23 $3.85$3.85 $4.76$4.76 $6.25$6.25 $9.09$9.09 $16.67$16.67

44 $2.70$2.70 $3.13$3.13 $3.70$3.70 $4.55$4.55 $5.88$5.88 $8.33$8.33 $14.29$14.29

66 $2.63$2.63 $3.03$3.03 $3.57$3.57 $4.35$4.35 $5.56$5.56 $7.69$7.69 $12.50$12.50

88 $2.56$2.56 $2.94$2.94 $3.45$3.45 $4.17$4.17 $5.26$5.26 $7.14$7.14 $11.11$11.11

1010 $2.50$2.50 $2.86$2.86 $3.33$3.33 $4.00$4.00 $5.00$5.00 $6.67$6.67 $10.00$10.00



Hau Lee Furniture spends 50% of its sales in Hau Lee Furniture spends 50% of its sales in the SC and has a net profit of 4%. the SC and has a net profit of 4%.

• How much sales should be made to How much sales should be made to receive the same profit when $1 saving is receive the same profit when $1 saving is made in the SC?made in the SC?

• What is the solution, if the profit is What is the solution, if the profit is increased to 6%, thus the system is more increased to 6%, thus the system is more efficient now?efficient now?



Objectives of the Purchasing FunctionObjectives of the Purchasing Function

• Help Help identify the identify the goodsgoods and services and services that can be best obtained that can be best obtained

externally; andexternally; and

• Develop, evaluate, and determine the Develop, evaluate, and determine the best supplier, price, and deliverybest supplier, price, and delivery for for

those products and servicesthose products and services


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



Make-or-Buy DecisionsMake-or-Buy Decisions

1.1. Frees management to deal with its core Frees management to deal with its core competencecompetence

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



OutsourcingOutsourcing

Transfers traditional internal activities and Transfers traditional internal activities and resources of a firm to outside vendorsresources of a firm to outside vendors

Utilizes the efficiency that comes with Utilizes the efficiency that comes with specializationspecialization, , vendor is an expert in that vendor is an expert in that specialty.specialty.

Firms outsource information technology, Firms outsource information technology, accounting, legal, logistics, and productionaccounting, legal, logistics, and production

There is no tangible product or transfer of title, only resources (facilities, people, equipment) are transferred.


Ethics in the Supply ChainEthics in the Supply Chain

Ethical decisions are critical to long term success of SC. Ethical decisions are critical to long term success of SC. Opportunities for unethical behavior are enormous and Opportunities for unethical behavior are enormous and temptations are hightemptations are high..

Ex: Friendship b/w sales people and customers ..bribery?Ex: Friendship b/w sales people and customers ..bribery?

Many companies have strict rules and codes of conduct Many companies have strict rules and codes of conduct that define acceptable behaviorthat define acceptable behavior..

Institute for Supply Management has developed a Institute for Supply Management has developed a detailed set of principles and standards for ethical detailed set of principles and standards for ethical behaviorbehavior..

In In global global SC’s there are additional ethical issues: labor SC’s there are additional ethical issues: labor laws, culture, traditional values:laws, culture, traditional values:

Ex: Gap Inc. reports that 10-15% of Chinese factories are Ex: Gap Inc. reports that 10-15% of Chinese factories are subject to psychological or verbal abuse; 50% factories subject to psychological or verbal abuse; 50% factories in Africa operate w/o proper safety devices.in Africa operate w/o proper safety devices.


Principles and Standards for Ethical Principles and Standards for Ethical Supply Management ConductSupply Management Conduct

LOYALTY TO YOUR ORGANIZATIONLOYALTY TO YOUR ORGANIZATION

JUSTICE TO THOSE WITH WHOM YOU DEALJUSTICE TO THOSE WITH WHOM YOU DEAL

FAITH IN YOUR PROFESSIONFAITH IN YOUR PROFESSION

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




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 agreements




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



Supply Chain StrategiesSupply Chain Strategies

Plans to help achieve company missionPlans to help achieve company mission. They . They aaffect long-term competitive positionffect long-term competitive position

Negotiating with many suppliersNegotiating with many suppliers

Long-term partnering with few suppliersLong-term partnering with few suppliers

Vertical integrationVertical integration

KeiretsuKeiretsu networks networks

Virtual companies that use suppliers on an Virtual companies that use suppliers on an as needed basisas needed basis


Many SuppliersMany Suppliers

Commonly used for commodity productsCommonly used for commodity products

Purchasing is typically based on pricePurchasing is typically based on price. .

Suppliers Suppliers aggresively aggresively compete with one anothercompete with one another; order ; order goes to the low bider.goes to the low bider.

Supplier is responsible for technology, expertise, Supplier is responsible for technology, expertise, forecasting, cost, quality, and deliveryforecasting, cost, quality, and delivery

Almost no information sharingAlmost no information sharing

Infrequent large lotsInfrequent large lots

Delivery to receiving dockDelivery to receiving dock

Disadvantage:Disadvantage:

• Long term relationship is not the goal!Long term relationship is not the goal!


Few SuppliersFew Suppliers Buyer forms longer term relationships with fewer Buyer forms longer term relationships with fewer

supplierssuppliers

Create value through economies of scale and learning Create value through economies of scale and learning curve improvementscurve improvements, in the long run!, in the long run!

Suppliers participate in JIT programsSuppliers participate in JIT programs, , contribute design contribute design and technological expertiseand technological expertise

Frequent, small lots

Delivery to point of use

DisadvantageDisadvantagess: : CCost of changing partner is highost of changing partner is highThere might be problems with pThere might be problems with poor supplier performanceoor supplier performanceSuppliers can make other alliancesSuppliers can make other alliances. . Ex: Schwinn Bicycle Co. & Giant Manufacturing Co.Ex: Schwinn Bicycle Co. & Giant Manufacturing Co.


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


Vertical IntegrationVertical Integration

Developing the ability to produce goods or service Developing the ability to produce goods or service previously purchasedpreviously purchased. Ex. Ford Motor manufactures its own . Ex. Ford Motor manufactures its own radios. Texas Instruments produce integrated circuits as radios. Texas Instruments produce integrated circuits as well as flat screens, calculators.well as flat screens, calculators.

Integration may be forward, towards the customer, or Integration may be forward, towards the customer, or backward, towards suppliersbackward, towards suppliers

Can improve cost, quality, and Can improve cost, quality, and timely delivery, decrease timely delivery, decrease inventoryinventory

Most beneficial when the company has large market share Most beneficial when the company has large market share and components are highly integratedand components are highly integrated

DisadvantagesDisadvantages

RRequires capital, managerial skills, and demandequires capital, managerial skills, and demand

Risky in industries with rapid technological changeRisky in industries with rapid technological change


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


Virtual CompaniesVirtual Companies Vertical integration has many drawbacks, so find good

flexible suppliers and rely on variety of supplier relationships.

Ex: doing payroll, hiring personnel, designing products, providing consulting services, distributing products,

Relationship: short term, long term, include partners, collaborators

Results in specialized management expertise, low capital investment, flexibility and speed..

Ex: Cloth designers give licence to the manufacturer who Ex: Cloth designers give licence to the manufacturer who rents space, lease sewing m/c’s, contract for labor, rents space, lease sewing m/c’s, contract for labor, subcontact other services.subcontact other services.

Disadvantages:Disadvantages: - Selecting the c- Selecting the companies to join the alliompanies to join the allianceance - - Sharing rSharing revenues evenues - - Evaluating performanceEvaluating performance


Managing the Supply ChainManaging the Supply Chain

Mutual agreement on goalsMutual agreement on goals: not on just contact : not on just contact termsterms

TrustTrust: information sharing: information sharing

Compatible organizational culturesCompatible organizational cultures: strengthen : strengthen the relationship with formal and informal the relationship with formal and informal contactscontacts

Substantial efficiencies are possible by Substantial efficiencies are possible by integrationintegration of the SC . However, management of seperate and of the SC . However, management of seperate and independent organizations may result in serious independent organizations may result in serious inefficiencies.inefficiencies.

SSignificant management issues in controlling a ignificant management issues in controlling a SCSC


DistortionsDistortions in an Integrated in an Integrated Supply-ChainSupply-Chain

Local optimizationLocal optimization - focusing on local profit or - focusing on local profit or cost minimization based on limited knowledgecost minimization based on limited knowledge

Incentives (sales incentives, quantity discounts, Incentives (sales incentives, quantity discounts, quotas, and promotions)quotas, and promotions) - push merchandise - push merchandise prior to saleprior to sale

Large lotsLarge lots - low unit cost but do not reflect sales - low unit cost but do not reflect sales

All result in increased bullwhip effect!All result in increased bullwhip effect!


Bullwhip effectBullwhip effect

Increasing fluctuation in orders Increasing fluctuation in orders towards the towards the upper upper supply chain.supply chain.

Results in:Results in:

• Increases cost of inventory, shipping, etcIncreases cost of inventory, shipping, etc

• Decreases customer service and Decreases customer service and profitabilityprofitability

A well running SC is based on accurate A well running SC is based on accurate information about how many products are information about how many products are truly being pulledtruly being pulled through the system. through the system.


Opportunities Opportunities for effective for effective management management in an Integrated Sin an Integrated SCC

• Generation of accurate “pull” dataGeneration of accurate “pull” data.. Ex: share point-of-sales (POS) info and computer Ex: share point-of-sales (POS) info and computer assisted ordering CAOassisted ordering CAO

• Reduction of lot sizeReduction of lot size by aggressive management by aggressive management Ex: develop economical shipments of small size Ex: develop economical shipments of small size

discounts based on annual volumediscounts based on annual volume

reduce cost of orderingreduce cost of ordering

• Single stage control of replenishmentSingle stage control of replenishment

A member is resposible for the inventory A member is resposible for the inventory management of the whole chain like a retailer, management of the whole chain like a retailer, distributor or manufacturer.distributor or manufacturer.


Radio Frequency TagsRadio Frequency TagsRadio Frequency Tags: Keeping the Shelves StockedRadio Frequency Tags: Keeping the Shelves Stocked

Supply chains work smoothly when sales are steady, but often break down when confronted by a sudden Supply chains work smoothly when sales are steady, but often break down when confronted by a sudden surge in demand. Radio frequency ID (or RFID) tags can change that by providing real-time information surge in demand. Radio frequency ID (or RFID) tags can change that by providing real-time information about what’s happening on store shelves. Here’s how the system works for Proctor & Gamble’s Pampers.about what’s happening on store shelves. Here’s how the system works for Proctor & Gamble’s Pampers.


• Vendor managed inventoryVendor managed inventory (VMI) (VMI)

use of a local supplier to maintain inventory for the use of a local supplier to maintain inventory for the manufacturer or retailer. Supplier delivers directly to the manufacturer or retailer. Supplier delivers directly to the purchaser’s using department.purchaser’s using department.

• Blanket ordersBlanket orders

A contract to purchase certain orders from the vendor.A contract to purchase certain orders from the vendor.

• StandardizationStandardization

Use standard components that do not have slight Use standard components that do not have slight variations. variations.

• PostponementPostponement

Delaying any modification or customization to the later Delaying any modification or customization to the later stages of production. Ex: HP Printersstages of production. Ex: HP Printers



• Drop shipping and special packagingDrop shipping and special packagingSupplier will ship directly to the end consumer to be Supplier will ship directly to the end consumer to be

assembled, tested and shipped. Ex: Dell Computers.assembled, tested and shipped. Ex: Dell Computers.

Use of special packaging, labels, optimal placement of Use of special packaging, labels, optimal placement of labels, their bar codes, etc..labels, their bar codes, etc..

• Pass through facilityPass through facilityA distribution center where merchandise is held, but functions A distribution center where merchandise is held, but functions

as a holding area and shipping hub. Often run by logistics as a holding area and shipping hub. Often run by logistics firmsfirms

• Channel assemblyChannel assembly

Postpones final assembly of a product so the distribution Postpones final assembly of a product so the distribution channel can assemble it. channel can assemble it.



E-ProcurementE-Procurement

Use of internet to facilitate purchasing.

Reduces total cycle time, paperwork, integrates SC, enhances organization’s competitive advantage.

A SC may contain many of the above techniques within automated purchasing systems.

Internet is used to communicate order releases to suppliers, especially for blanket orders.

For nonblanket orders, catalogs and ordering procedures on internet enhance the communicating features.


E-Procurement Environments, E-Procurement Environments, ComponentsComponents

Traditional Tehniques Traditional Tehniques Electronic data interchange (EDI)Electronic data interchange (EDI)

A standardized data transmittal format for computerized A standardized data transmittal format for computerized communications b/w organizations.communications b/w organizations.

Applies to any business application, like purchasingApplies to any business application, like purchasing

Provides format for order date, due date, quantity, etc.Provides format for order date, due date, quantity, etc.

Advanced shipping noticeAdvanced shipping notice (ASN) (ASN)

A shipping notice delivered directly from vendor to purchaser, A shipping notice delivered directly from vendor to purchaser, showing that the vendor is ready to ship.showing that the vendor is ready to ship.

Modern TechniquesModern Techniques Online catalogsOnline catalogs

AuctionsAuctions

RFQsRFQs

Real time inventory trackingReal time inventory tracking



Online catalogsOnline catalogs Provide information about products and cost Provide information about products and cost

comparisons among suppliers in electronic formcomparisons among suppliers in electronic form

Standard items may be purchased by online Standard items may be purchased by online catalogscatalogs

Catalogs are available in three versionsCatalogs are available in three versions

Catalogs provided by vendorsCatalogs provided by vendors

Catalogs published by intermediariesCatalogs published by intermediaries

Ex: www.eksenbilgisayar.comEx: www.eksenbilgisayar.com

Exchanges provided by buyersExchanges provided by buyers

Ex: Global healthcare exchange, retail goods, Ex: Global healthcare exchange, retail goods, defense and aerospace, food defense and aerospace, food beverage&consumer productsbeverage&consumer products



AuctionsAuctions Maintained by buyers, sellers, or Maintained by buyers, sellers, or

intermediariesintermediaries

Use lUse lowowerer barriers barriers forfor entry entry

Increase in Increase in the potential the potential number of number of buyersbuyers



RFQRFQ: Request for Quote: Request for Quote When purchasing requirements are

nonstandard, RFQ preparation is too time consuming! E-Procurement can make it less costly

Improves supplier selection

Ex: GE has extensive database of vendors, deliver, quality, engineering drawings

Real-time inventory trackingReal-time inventory tracking E-procurement supported by bar codes and

RFID can provide economical inventory tracking on the shop floor, in warehouses and in logistics


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


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-procurement, ERP)procurement, ERP)

.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


Negotiation Strategies for Negotiation Strategies for Vendor SelectionVendor Selection

Cost-Based Price Model Cost-Based Price Model - supplier opens books - supplier opens books to purchaserto purchaser; ; price based on time and materials or on fixed cost plus escalation clause for materials and labor changes of the vendor.

Market-Based Price ModelMarket-Based Price Model - price based on - price based on published, auction, or indexed pricepublished, auction, or indexed price. Ex: paper . Ex: paper prices are available on line at official board prices are available on line at official board markets site.markets site.

Competitive BiddingCompetitive Bidding – – often appropriate when often appropriate when suppliers don’t wish to discuss costs or where suppliers don’t wish to discuss costs or where near perfect markets do not exist. Unear perfect markets do not exist. Used for sed for infrequent purchases but may make infrequent purchases but may make establishing long-term relationships difficultestablishing long-term relationships difficult


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

Is a frequent candidate for Is a frequent candidate for outsourcingoutsourcing

Allows competitive advantage to Allows competitive advantage to be gained through reduced costs be gained through reduced costs and improved customer serviceand improved customer service


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



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 more Used when shipping cost is more important important than speedthan speed



PipelinesPipelines Used for transporting oil, gas, Used for transporting oil, gas,

and other chemical productsand other chemical products


Third-Party LogisticsThird-Party Logistics

Outsourcing logistics can reduce Outsourcing logistics can reduce costs and improve delivery reliabilitycosts and improve delivery reliabilityand speedand speed

Logistics firm can cLogistics firm can coordinate supplier oordinate supplier inventory with delivery servicesinventory with delivery services

FedEx FedEx provideprovide warehousing, assembly, testing, warehousing, assembly, testing, shipping, customsshipping, customs for Dell Computer for Dell Computer


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


Cost of Shipping AlternativesCost of Shipping Alternatives: : Connectors to be shipped from Connectors to be shipped from

San Jose to SingaporeSan Jose to Singapore

Value of connectors = Value of connectors = $1,750$1,750Holding cost Holding cost = 40%= 40% per year per yearSecond carrier Second carrier (airfreight) (airfreight) is is 11 day faster and day faster and $20$20 more expensive more expensive

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


Logistics, Security, and JITLogistics, Security, and JIT

Borders are becoming more open in the Borders are becoming more open in the U.S. and around the worldU.S. and around the world

Monitoring and controlling stock moving Monitoring and controlling stock moving through supply chains is more important through supply chains is more important than everthan ever

New technologies are New technologies are being developed to being developed to allow close monitoring allow close monitoring of location, storage of location, storage conditions, and conditions, and movementmovement


Measuring Supply Chain Measuring Supply Chain PerformancePerformance


Typical FirmsTypical FirmsBenchmark Benchmark

FirmsFirms

Lead time (weeks)Lead time (weeks) 1515 88

Time spent placing an orderTime spent placing an order 42 42 minutesminutes 15 15 minutesminutes

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



Assets committed to inventoryAssets committed to inventory

Percent Percent invested in invested in inventoryinventory

= x = x 100100Total inventory Total inventory

investmentinvestment

Total assetsTotal assets

Investment in inventory Investment in inventory = $11.4= $11.4 billion billionTotal assets Total assets = $44.4= $44.4 billion billion

Percent invested in inventory Percent invested in inventory = (11.4/44.4) x 100 = 25.7%= (11.4/44.4) x 100 = 25.7%




Inventory as a % of Total AssetsInventory as a % of Total Assets(with exceptional performance)(with exceptional performance)

ManufacturingManufacturing 20%20%(Toyota 5%)(Toyota 5%)

WholesaleWholesale 34%34%(Coca-Cola 2.9%)(Coca-Cola 2.9%)

RestaurantsRestaurants 2.9%2.9%(McDonald’s .05%)(McDonald’s .05%)

RetailRetail 27%27%(Home Depot 25.7%)(Home Depot 25.7%)



Inventory turnoverInventory turnover

Weeks of supply (its reciprocal)Weeks of supply (its reciprocal)

Inventory Inventory turnoverturnover ==

Cost of goods soldCost of goods sold

Inventory Inventory investmentinvestment




Examples of Annual Inventory TurnoverExamples of Annual Inventory Turnover

Food, Beverage, RetailFood, Beverage, Retail ManufacturingManufacturing

Anheuser BuschAnheuser Busch 1515 Dell ComputerDell Computer 9090

Coca-ColaCoca-Cola 1414 Johnson ControlsJohnson Controls 2222

Home DepotHome Depot 55 Toyota (overall)Toyota (overall) 1313

McDonald’sMcDonald’s 112112 Nissan (assembly)Nissan (assembly) 150150


Measuring Supply Chain PerformanceMeasuring Supply Chain PerformancePepsiCo Company-2005 annual reportPepsiCo Company-2005 annual report

Inventory turnoverInventory turnover billionsbillions

Net revenueNet revenue $32.5$32.5Cost of goods soldCost of goods sold $14.2$14.2Inventory:Inventory:

Raw material inventoryRaw material inventory $.74$.74Work-in-process inventoryWork-in-process inventory $.11$.11Finished goods inventoryFinished goods inventory $.84$.84

Total inventory investmentTotal inventory investment $1.69$1.69







Inventory turnover = Cost of goods sold

Inventory investment

= 14.2 / 1.69 = 8.4







Inventory turnover turnover = = Cost of goods sold


= 14.2 / 1.69 = 8.4= 14.2 / 1.69 = 8.4Weeks of supply =


Average weekly cost of goods sold

= 1.69 / .273 = 6.19 weeks

Average weekly cost of goods sold = $14.2 / 52 = $.273

Documents

Supply Chain Real Time