Supply Chain Management Chapter 11 Supply Chain Management And E-Business

Overview Introduction Supply Chain Management Purchasing Logistics Warehousing Expediting Benchmarking the Performance of Materials Managers Third-Party Logistics Management Providers E-Business and Supply Chain Management Wrap-Up: What World-Class Companies Do

Introduction Materials - any commodities used directly or indirectly in producing a product or service. Raw materials, component parts, assemblies, finished goods, and supplies Supply chain - the way materials flow through different organizations from the raw material supplier to the finished goods consumer.

Supply Chain for Steel in an Automobile Door MINING COMPANY Mines iron ore STEEL MILL Forms steel ingot STEEL COMPANY Forms sheet metal Iron ore Steel ingots Sheet metal AUTOMOTIVE SUPPLIER Makes door AUTOMOBILE MANUFACTURER Makes automobile CAR DEALERSHIP Does preparation Car door Car Prepared car FINAL CONSUMER Drives automobile

Supply Chain Management Refers to all the management functions related to the flow of materials from the company’s direct suppliers to its direct customers. Includes purchasing, traffic, production control, inventory control, warehousing, and shipping. Two alternative names: Materials management Logistics management

Supply Chain Management in a Manufacturing Plant Receiving and Inspection Raw Materials, Parts, and In-process Ware- Housing Production Finished Goods Ware- housing Inspection, Packaging, And Shipping Suppliers Customers Materials Management Purchasing Production Control Warehousing and Inventory Control Shipping and Traffic Physical materials flow Information flow

Purchasing Factors increasing the importance of purchasing today: Tremendous impact of material costs on profit (60-70% of each sales dollar is paid to material suppliers) Popularity of just-in-time manufacturing (supply deliveries must be exact in timing, quantity, and quality) Increasing global competition (growing competition for scarce resources, and a geographically “stretched-out” supply chain)

Mission of Purchasing Develop purchasing plans for each major product or service that are consistent with operations strategies: Low production costs Fast and on-time deliveries High quality products and services Flexibility

Purchasing Management Maintain data base of available, qualified suppliers Select suppliers to supply each material Negotiate contracts with suppliers Act as interface between company and suppliers Provide training to suppliers on latest technologies

Advantages of Centralized Purchasing Buying in large quantities - better prices More clout with suppliers - greater supply continuity Larger purchasing department - buyer specialization Combining small orders - less order cost duplication Combining shipments - lower transportation costs Better overall control

Purchasing Process Material Requisition Request for Quotations From any department, to purchasing Material Requisition From purchasing, to potential suppliers Request for Quotations Based on quality, price, lead time, dependability Select Best Supplier From purchasing, to selected supplier Purchase Order From supplier, to receiving, quality control, warehouse Receive and Inspect Goods

Buyers’ Duties Know the market for their commodities Understand the laws.... tax, contract, patent..… Process purchase requisitions and quotation requests Make supplier selections Negotiate prices and conditions of sale Place and follow-up on purchase orders Maintain ethical behavior

Make-or-Buy Analysis Considerations in make-or-buy decisions: Lower cost - purchasing or production? Better quality - supplier or in-house? More-reliable deliveries - supplier or in-house? What degree of vertical integration is desirable? Should distinctive competencies be outsourced?

Example: Make-or-Buy A firm manufactures a product that contains a part requiring heat treatment. An analyst is trying to decide whether it is more economical to buy the heat treating service or perform the treatment in house. Pertinent data is shown on the next slide. If part quality and delivery performance are about the same for the two alternatives, which alternative should be selected?

Example: Make-or-Buy Purchase Heat-Treat Heat-Treat In-House Service Number of parts annually 5,000 5,000 Fixed cost per year $25,000 $0 Variable cost per part $13.20 $17.50

Example: Make-or-Buy Compute the total cost for each alternative TC = FC + vQ TC1 = FC1 + v1Q = 25,000 + 13.20(5,000) = $91,000 TC2 = FC2 + v2Q = 0 + 17.50(5,000) = $87,500 The firm should buy the heat-treating service (the second alternative). continued

Example: Make-or-Buy The analyst has assumed that 5,000 parts per year will require heat treatment. By how many parts can the firm’s requirements increase or decrease before in-house heat treating is more economical? Should the analyst rethink his/her decision?

Example: Make-or-Buy Compute the break-even parts quantity FC1 + v1Q = FC2 + v2Q Q = (FC1 - FC2)/(v2- v1) Q = (25,000 – 0)/(17.50 – 13.20) Q = 5,814 If the firm’s annual parts requirement increases by 814 (about 16%) or more, in-house heat treatment would be more economical. The analyst should give the decision more thought.

Logistics Logistics usually refers to management of: the movement of materials within the factory the shipment of incoming materials from suppliers the shipment of outgoing products to customers

Movement of Materials within Factories The typical locations from/to which material is moved: Incoming Vehicles Receiving Dock Quality Control Warehouse Work Center Other Work Centers Packaging Finished Goods Shipping Shipping Dock Outgoing Vehicles

Shipments To and From Factories Traffic Traffic departments routinely examine shipping schedules and select: shipping methods time tables ways of expediting deliveries Traffic management is a specialized field requiring technical training in Department of Transportation (DOT) and Interstate Commerce Commission (ICC) regulations and rates.

Shipments To and From Factories Distribution Distribution, or physical distribution, is the shipment of finished goods through the distribution system to customers. A distribution system is the network of shipping and receiving points starting with the factory and ending with the customers.

Shipments To and From Factories Distribution Requirements Planning DRP is the planning for the replenishment of regional warehouse inventories. DRP uses MRP-type logic to translate regional warehouse requirements into central distribution-center requirements, which are then translated into gross requirements in the MPS at the factory.

Shipments To and From Factories Distribution Requirements Planning Scheduled receipts are previously-placed orders that are expected to arrive in a given week Planned receipt of shipments are orders planned, but not yet placed, for the future Projected ending inventory is computed as: Previous week’s projected ending inventory + Planned receipt of shipments in current week + Scheduled receipt of shipments in current week -- Forecasted demand in current week

Shipments To and From Factories DRP Time-Phased Order Point Record Region. Warehouse #1 LT = 1 Std. Quantity = 50 SS = 10 Week -1 1 2 3 4 5 Forecasted demand (units) 30 40 30 40 40 Scheduled receipts 50 Projected ending inventory 60 80 40 10 20 30 Planned receipt of shipments 50 50 Planned orders for shipments 50 50

Example: DRP Products are shipped from a company’s main distribution center (adjacent to the factory) to two regional warehouses. The DRP records on the next two slides show – for the two regional warehouse – the forecasted demand, scheduled receipts, and last week’s projected ending inventories for a single product. The third upcoming slide shows – for the main distribution center – scheduled receipts and last week’s projected ending inventory for the same product. Complete the DRP records.

Example: DRP DRP Record for Regional Warehouse #1 Forecasted demand (units) Scheduled receipts Projected ending inventory Planned receipt of shipments Planned orders for shipments Region. Warehouse #1 LT = 1 Std. Quantity = 100 SS = 50 200 -1 100 80 1 2 3 60 5 4 Week

Example: DRP DRP Record for Regional Warehouse #2 Forecasted demand (units) Scheduled receipts Projected ending inventory Planned receipt of shipments Planned orders for shipments Region. Warehouse #2 LT = 2 Std. Quantity = 200 SS = 80 220 -1 200 100 1 2 3 240 5 4 Week

Example: DRP DRP Record for Main Distribution Center Gross Requirements (units) Scheduled receipts Projected ending inventory Planned receipt of shipments Planned orders for shipments Main Distrib. Center LT = 1 Std. Quantity = 500 SS = 200 250 -1 500 1 2 3 5 4 Week

Example: DRP Completed DRP Record for Regional Warehouse #1 Region. Warehouse #1 LT = 1 Std. Quantity = 100 SS = 50 Week -1 1 2 3 4 5 Forecasted demand (units) 80 100 80 60 100 Scheduled receipts 100 Projected ending inventory 200 220 120 140 80 80 Planned receipt of shipments 100 100 Planned orders for shipments 100 100

Example: DRP Completed DRP Record for Regional Warehouse #2 Region. Warehouse #2 LT = 2 Std. Quantity = 200 SS = 80 Week -1 1 2 3 4 5 Forecasted demand (units) 100 200 200 240 200 Scheduled receipts 200 Projected ending inventory 220 320 120 120 80 80 Planned receipt of shipments 200 200 200 Planned orders for shipments 200 200 200

Example: DRP DRP Record for Main Distribution Center The “gross requirement” ( in row 1) for any week is determined by summing the “planned orders for shipment” for the same week at the two regional warehouses These gross requirements at the MDC are input to the master production schedule in the factory In other words, the timing and quantities of production in the factory are linked to the timing and quantities of demand at the regional warehouses

Example: DRP Completed DRP Record for Main Distribution Center Main Distrib. Center LT = 1 Std. Quantity = 500 SS = 200 Week -1 1 2 3 4 5 Forecasted demand (units) 200 300 200 100 Scheduled receipts 500 Projected ending inventory 250 550 250 550 450 450 Planned receipt of shipments 500 Planned orders for shipments 500

Shipments To and From Factories Distribution Resource Planning Distribution resource planning extends DRP so that the key resources of warehouse space, workers, cash, and vehicles are provided in the correct quantities at the correct times.

Analyzing Shipping Decisions The “Transportation Problem” Problem involves shipping a product from several sources (ex. factories) with limited supply to several destinations (ex. warehouses) with demand to be satisfied Per-unit cost of shipping from each source to each destination is specified Optimal solution minimizes total shipping cost and specifies the quantity of product to be shipped from each source to each destination

Example: Minimizing Shipping Costs Pacer produces computer monitors in its three factories and ships them to five regional warehouses. The factory-to-warehouse shipping costs per monitor are: Warehouse Factory A B C D E 1 $2.10 $4.30 $3.60 $1.80 $2.70 2 4.90 2.60 3.50 4.50 3.70 3 3.90 3.60 1.50 5.80 3.30 continued

Example: Minimizing Shipping Costs The factories have the following capacities (monitors produced per month): 1 = 10,000; 2 = 20,000; and 3 = 10,000. The warehouses need at least these numbers of monitors per month: A = 5,000; B = 10,000; C = 10,000; D = 5,000; and E = 10,000. Use the POM Software Library to solve this transportation problem.

Example: Minimizing Shipping Costs Solution Warehouse Factory A B C D E 1 5,000 0 0 5,000 0 2 0 10,000 0 0 10,000 3 0 0 10,000 0 0 Total monthly shipping cost = $97,500 (Note: all warehouse demand is satisfied and no factory’s capacity is exceeded.)

Innovations in Logistics New developments affecting logistics include: All-freight airports Inter-modal shipping In-transit rates Consolidated shipments Air-freight and trucking deregulation Advanced logistics software

Warehousing Warehousing is the management of materials while they are in storage. Warehousing activities include: Storing Dispersing Ordering Accounting

Warehousing Record keeping within warehousing requires a stock record for each item that is carried in inventories. The individual item is called a stock-keeping unit (SKU). Stock records are running accounts that show: On-hand balance Receipts and expected receipts Disbursements, promises, and allocations

Inventory Accounting In the past, inventory accounting was based on: periodic inventory accounting systems -- periodic (end-of-day) updating of inventory records physical inventory counts -- periodic (end-of-year) physical counting of all SKUs at one time Today, more and more firms are using: perpetual inventory accounting systems -- real-time updating of records as transactions occur cycle counting -- ongoing (daily or weekly) physical counting of different SKUs

Example: Cycle Counting A company is implementing a cycle-counting program. Class A items will be counted monthly, Class B items will be counted quarterly, and Class C items will be counted semi-annually. 5% of the firm’s inventory items are classified as Class A, 20% are Class B, and 75% are Class C. If the firm has 16,000 different SKUs (unique inventory items), how many will need to be counted daily? Assume 200 days per year are available for cycle counting.

Example: Cycle Counting Number Number of Counts Class of Items per Item Total Counts of Item per Class per Year per Year A 800 12 9,600 B 3,200 4 12,800 C 12,000 2 24,000 Total 16,000 46,400

Example: Cycle Counting Number of Inventory Items Counted Daily = 46,400/200 = 232 items per day

Example: Cycle Counting The cycle-counting personnel must count 232 inventory items per day. If the average cycle-counter can count 24 items per day, how many counters are needed? Number of Cycle-Counting Personnel Required = 232/24 = 9.67 or 10 counters

Measuring the Performance Materials Managers Level and value of in-house inventories Percentage of orders delivered on time Number of stockouts Annual cost of materials Annual cost of transportation Annual cost of warehouse Number of customer complaints Other factors

Wrap-Up: World-Class Practice See materials management as key element in capturing global market share Form partnerships with suppliers Use computers extensively to manage logistics

End of Chapter 11