GEOP 4355 Supply Networks

Outline Definition, importance, and complexity Information sharing Supplier selection/ management Design collaboration Negotiation and contracts Supplier certification Information sharing Vendor managed inventory Sourcing and Lean Global sourcing Outsourcing Other inbound flow processes

Definition, importance and complexity Sourcing/ Procurement: Processes related to the acquisition of the raw materials required to create the products of the organization Includes Supplier (s) selection and design collaboration Information and operational collaboration between suppliers and the enterprise Negotiation and contracts Outsourcing decisions Supplier certification and assessment Determining the timing and size of orders (inventory management)

Definition, importance and complexity Can represent 40-60% of the cost of an item Components and assemblies, packaging Transportation (where you source from will determine inbound transportation costs) Internal costs related to transactional processes Warehousing and inventory management (where you source from will drive safety stocks and other RM inventory costs) Customs, quotas, and tariff issues Strategic alignment – strategic advantage Partnering with “correct suppliers” can lead to a competitive advantage Allowing to focus on areas of strength (rest is procured)

Definition, importance and complexity Multi-functional decisions. Requires consideration from multiple functions (it affects the performance of …) Sales / marketing – forecasts/ seasons, product options Engineering – design specifications Quality – quality criteria, historical performance Information Systems – communication / information transfer Finance and accounting – terms of payment and billing method, insurance risk Warehousing – receiving processes Production planning Transportation – terms, consolidation, alternative routes/ modes Legal – customs and quotas

Definition, importance and complexity Poor sourcing can result in business failure Higher costs than competition Delivery problems (quality, time) propagates into the buyer’s system Your product’s quality (can’t just blame it on the supplier) Your product’s on time delivery (can’t …) Ethical/ Moral Issues Apple’s case with suppliers in Asia http://www.huffingtonpost.com/2012/03/07/apple-foxconn-scandal_n_1325930.html Differences in culture on accepting “gifts” Suppliers can tarnish the buyer’s image, for example child labor http://alt1040.com/2010/03/apple-reconoce-explotacion-infantil-en-sus-fabricas-en-asia

Supplier selection/ management Simple: Who to buy from? The importance of this relates to the particular item you are purchasing Standard/commodity items Less critical/ relevant Intermediaries/ industrial distributors who sell many items Particular to the product/ designed to company specifications More important, higher dependencies Direct relationship with the company that makes it for you

Supplier selection/ management A key component of supplier selection: supplier vision, mission, and performance must be aligned with the companies priorities Criteria to select suppliers Cost / Discounts/ Payment terms Quality Lead time and on-time reliability Capacity and volume flexibility Technology, innovation, experience Firm size, financials, … Ethics, history, … Systems and Information compatibility Political stability and risk (of production location and of administration) For an example

Supplier selection/ management Number of suppliers to use for a single item Sole versus multiple sourcing Sole: strong partnership, less variability, but risk of failure Multiple: competition between suppliers, risk mitigation, but variability and “lack of focus” There has been a strong push for many years to reduce the supplier base. Supplier Base Management: Management of relationships with mayor suppliers, minor suppliers, evaluating suppliers and scouting new ones.

Supplier selection/ management Relationship Costs Ordering Costs Transportation Costs Risk Procurement costs slow few Number of suppliers

Supplier selection/ management Total costs Relationship Costs Ordering Costs Transportation Costs Contingency/ failure costs Procurement costs few Number of suppliers

Supplier selection/ management Site based supplier selection/ management Each unit/site selects suppliers based on its needs/local requirements Uses local know-how Direct communication between buyer-source Unified/ company wide supplier selection/ management Benefit from economies of scale for contract negotiation (prices and terms) Use of global know-how

Supplier selection/ management Can be part of a strategic process to enter a market Company X wants to sell product Y in country Z Country Z will allow it if some components of product Y are made by companies in country Z, Part of long term relationships Boeing outsourced significant sections of its latest airplane to Japan. Japan is a major buyer of Boeing aircraft.

Supplier selection/ management ABC Classification of suppliers “AA” and “A” Suppliers = strategically important suppliers Provide the Co critical components Large purchase volumes in terms of $ Their materials go into the Co’s best selling / highest value products Few alternatives available / Few qualified sources of supply Design to company specifications/ very complex specifications requiring complex manufacturing or service process (not easily replaceable)

Supplier selection/ management The “B” suppliers In between…. The “C” suppliers Low risk/ Low cost items Standard specifications Usually sold in large volumes Many existing alternatives, Many sources Small individual transactions (buy a few time in large volumes)

Supplier selection/ management Pareto Principle (80 – 20 rule) Well known principle, applies to all types of decision processes and analysis

Supplier selection/ management Pareto Principle (80 – 20 rule) SKU# Sales 2947F $34,886 3191A $7,703 3914R $803,568 4357A $4,567 4374A $5,482 4882R $34,444 4983F $29,599 5139A $6,660 5335F $31,993 7270R $479,747 7406F $17,933 8462F $132,990 8535F $20,091 8637A $15,771 9110A $5,174

Supplier selection/management For the last 10-20 years the trend has been to reduce the supplier base (the number of total suppliers to use for all purchased items) Reduce administrative/management cost Focus on a few relationships (collaboration, negotiation, better terms) Consolidate transportation/ purchasing operations Standardize procured items (part of design process, next slides) Risk: one supplier that has problems/fails has a higher impact on operations.

Supplier Decision Making Decision Analysis Theory models Based on the concept of relating multiple alternatives to multiple possible futures. DA = Decision alternatives SN = states of nature = possible futures. Each relation is called a payoff. Assumptions All alternatives are considered All futures are considered

Supplier Decision Making Alternatives: Supplier Q = high quality but low capacity; Supplier T = high technology and expensive, Supplier C = high capacity and moderate costs. Future Two elements: Competition focus and market trend Competition: enhances technology, focuses on quality, focuses on cost Market trend: up, down

Supplier Decision Making Effect on Market Share Market Competition T Up C Q Down Supplier Q 5% 12% 1% -3% -9% -4% Supplier T 11% 4% 8% 6% -12% 0% Supplier C -8% 3% -5% -2%

Supplier Decision Making What supplier should be selected? Optimistic Conservative Minimize Error EV. Need probabilities Probability of market up = 40%, down = 60% Competition T = 20%, C = 55%, Q = 25%

Supply problem solving Purchasing manager must determine the amount of the main raw material to buy for a new product. This is a made to order raw material with a long lead time, thus additional material cannot be procured in this cycle. They must buy the raw material in lots of 400 and each lot costs $10,000. Raw material not used is lost due to a fast deterioration. Cost to produce and deliver the final product is $10/unit and will be based only on the demand.

Supply problem solving Demand for the new product is not known. However the sales department has provided three estimates of how much they will sell and the price customers will be willing to pay for it. Low demand, low prices: Market for about 1,220 at an average of $45/each. P = 60% Medium demand/ medium prices: Market for about 1,530 at an average of $55/each. P = 20% High demand/ high prices: Market for about 2,250 at an average of $60/each. P = 20% States of Nature: the demand and prices Decision alternatives: how much raw material to order from the supplier ahead of the production cycle.

Design collaboration As mentioned, 40-60% of spending at a manufacturer is purchasing related 80 percent of the cost of a purchased part is fixed in the design phase Design collaboration with suppliers can result in reduced cost, improved quality, and decreased time to market Basis for design collaboration Strategic similarity Information technology platforms Trust/ Contracts Shared benefits

Design collaboration Thinking Life Cycle Design and launch stages: Supplier integration (Japanese view of design collaboration), standardization, value engineering, joint brainstorming efforts on new products Design for manufacturing can improve the opportunity to use standard parts and techniques, leverage volumes, and create opportunities for cost savings. Design for logistics focuses on packaging, transportation, integration with material flows (for example consolidation)

Design collaboration Thinking Life Cycle Growth and maturity stages: Team-based value-engineering efforts, supplier development and kaizen events, cross-enterprise cost reduction projects, supplier suggestion programs, and SC redesign efforts. These types of efforts require that both parties commit to achieving cost reduction efforts that go beyond simple haggling over prices. End of life stage: Purchasing cannot ignore the potential value of environmental initiatives to remanufacture, recycle, or refurbish products that are becoming obsolete

Negotiation and contracts Many shortcomings in supply chain performance occur because the buyer and supplier are separate organizations and each tries to optimize its own profit Total supply chain profits might therefore be lower than if the supply chain coordinated actions to have a common objective of maximizing total supply chain profits Company X wants to sell only in CL to reduce its production costs But this makes the buyer have excess inventory which increases inventory and warehousing costs, obsolescence, … The supplier must share in some of the buyer’s demand uncertainty (by carrying inventory)

Negotiation and contracts Issues to be considered as part of contracts Surplus inventory Changes in requirements (volume and timing) Sharing of performance improvement savings Length of contract Cost changes Flow into secondary markets

Supplier certification Programs designed to evaluate suppliers Goal is to track long term performance that allows some suppliers to become “partners” Partner suppliers (benefits) Priority for new items being sourced No need for incoming inspection Higher level of information sharing “Kodak’s Supplier Certification Program recognizes suppliers, who meet or exceed Kodak established requirements and are producing excellent levels of cost, quality and delivery performance. To be considered for this recognition, suppliers must show evidence of a sound and effective quality management system, provide Kodak with assurance and flexibility with delivery, lead time, and demonstrate world-class product/service quality levels”

Supplier certification Scorecards: system to evaluate supplier on a consistent basis (list of KPIs) Defect rate # of Corrective Actions Last Quarter Average Response and Resolution time for Corrective actions # of Rework Hours due to Supplier Components # of Customer Complaints on Product Quality Warranty Reserves Relative ranking of supplier Performance against benchmark

Information sharing Real time connectivity – operational information Production plans Inventory levels Kanban cards/ POs Long term – operational information Forecasts Long term – products New product collaboration Life cycle plans Cost information Information technology integration

Vendor managed inventory Supplier controls/manages/owns the inventory at the customer’s location Therefore the supplier determines the appropriate replenishment policies and safety stock The buyer provides planned use information and expected service level http://en.wikipedia.org/wiki/Vendor-managed_inventory

Sourcing and lean The importance of suppliers was always stressed in the lean thinking push that gained popularity in the 80’s In Lean /JIT systems the supply process is more frequent and must be more reliable There is more dependency on suppliers for design input, delivery performance, and quality Operationally Reduced inventories (safety stock) Continuous delivery Small quantities No incoming inspection Simplified PO/ Receipt processes

Global sourcing – customs brokers Today’s sourcing is global, this implies importing processes Customs brokers are the companies/individuals who have the know how and legal authorization to complete importing/ exporting processes. This function is similar across most countries Involves the preparation of documents and/or electronic submissions, the calculation and payment of taxes, duties and excises, and facilitating communication between government authorities and importers and exporters. http://en.wikipedia.org/wiki/Customs_broking

Global sourcing – customs brokers Customs brokers in the United States prepare and submit documentation to notify or obtain clearance from government agencies such as the U.S. Food and Drug Administration, the U.S. Department of Agriculture, and the Fish and Wildlife Service. They also arrange the transshipment (i.e., local delivery) of merchandise via trucking companies. Specialize in certain goods like apparel, perishables, or clearing the crew and manifest of large cargo vessels.

Global sourcing – customs brokers Customs brokers must pass an examination and background check to become licensed by the U.S. Customs and Border Protection. Other countries also require licenses, in EU not the case. They are not government employees - not be confused with "customs officers" (in other countries, however, the two terms may be interchangeable). Customs brokers need to be familiar with the tariff schedule, a listing of duty rates for imported items, and the regulations governing imports found in the Code of Federal Regulations Title 19 (19 CFR). Customs broker functions include: determining tariffs, quota limits, special permits, insurance requirements Failures result in fines, holds, and seizures.

Global sourcing – import processes http://www.itradevan.com/Custom.jsp

Global sourcing – import processes

Global sourcing – import processes http://www.hh-express.com/jp/en/solution/ship/flow.html

Outsourcing What is it? The process of moving an activity from internal to external. From in-house to purchased – supplier managed Old days, Ford produced all parts/ assemblies and even had steel and rubber plants. High level of vertical integration. Slowly, over time, these internal activities were outsourced, became external to the company. Today suppliers produce most major assemblies including the engine, electronics, transmission,…. Ford designs (some of it), assembles, sells, finances, … Outsourcing non-critical functions has become commonplace http://www.youtube.com/watch?v=rYaZ57Bn4pQ

Outsourcing Part of supplier management is determining if internal functions should be outsourced (a supplier can do it better, cheaper, faster, …) When activities/processes are outsourced, is difficult to move back to an in-house operation due to lost know-how, resources, equipment, space, … Or operations/products provided by suppliers should be performed internally To reduce risk/ it is critical to operations and the supplier has failed often However, this is often hard to do given the investments required

Other inbound flow processes In addition to the sourcing processes, some other key processes of inbound flows are: Receiving: process of accepting shipments. This often includes verification of BoL versus the actual items Payment processes / authorizing payment Coordination with Quality Assurance department for inspections/ audits/ samples Sorting materials Locating the materials in storage/ move to line

Other inbound flow processes Cross-docking operations Materials received may be “broken” into smaller shipments and sent immediately to other points in the internal network (no storage at first entry point) Customers = (the firm’s other plants, warehouses)