Operations Management Supply-Chain Management Chapter 11

Learning Objectives When you complete this chapter, you should be able to : Identify or Define: Supply-chain management Purchasing Outsourcing E-procurement Materials management Keiretsu Virtual companies

Learning Objectives When you complete this chapter, you should be able to : Describe or Explain: Supply-Chain Strategies Purchasing strategies Approaches to negotiations

Volkswagen Brazilian plant employs 1000 workers 200 work for VW 800 work for other contractors: Rockwell International, Cummins Engines, Deluge Automotiva, MWM, Remon and VDO, etc. VW responsible for overall quality, marketing, research and design VW looks to innovative supply-chain to improve quality and drive down costs

Volkswagen Unusual elements: VW is buying not only materials, but also the labor and related services Suppliers are integrated tightly into VW’s own network, right down to assembly work in the plant

Supply-Chain Management Planning, organizing, directing, & controlling flows of materials Begins with raw materials Continues through internal operations Ends with distribution of finished goods Involves everyone in supply-chain Example: Your supplier’s supplier Objective: Maximize value & lower waste

The Supply-Chain Material Flow Credit Flow Supplier Manufacturing VISA ® Material Flow Credit Flow Supplier Manufacturing Retailer Consumer Raw material Supplier Wholesaler Retailer Order Cash Schedules Flow Flow

The Supply Chain Customer Supplier Manufacturer Distributor Inventory Distributor Manufacturer Customer Market research data Scheduling information Engineering and design data Order flow and cash flow Ideas and design to satisfy end customer Material flow Credit flow

Material Costs in Supply-Chain 11% 31% 58% Material Dir Wages Other 71% 16% 13% COGS Payroll 83% 9% 8% Manufacturing Wholesale Retail

Supply-Chain Support for Overall Strategy Supply demand at lowest possible cost Select primarily for cost Low Cost Respond quickly to changing requirements and demand to minimize stockouts Select primarily for capacity, speed, and flexibility Response Share market research; jointly develop products and options Select primarily for product development skills Differentiation Supplier’s goal Primary Selection Criteria

Supply-Chain Support for Overall Strategy - continued Process Characteristics Maintain high average utilization Low Cost Invest in excess capacity and flexible processes Response Modular processes that lend themselves to mass customization Inventory Characteristics Minimize inventory throughout the chain to hold down costs Develop responsive system, with buffer stocks positioned to ensure supply Minimize inventory in the chain to avoid obsolescence Differentiation

Supply-Chain Support for Overall Strategy - continued Lead-time Characteristics Shorten lead-time as long as it does not increase costs Low Cost Invest aggressively to reduce production lead-time Response Invest aggressively to reduce development lead-time Differentiation Product-design Characteristics Maximize performance and minimize cost Use product designs that lead to low set-up time and rapid production ramp-up Use modular design to postpone product differentiation for as long as possible

Global Supply-Chain Issues Supply chains in a global environment must be: Flexible enough to react to sudden changes in parts availability, distribution, or shipping channels, import duties, and currency rates Able to use the latest computer and transmission technologies to schedule and manage the shipment of parts in and finished products out Staffed with local specialists to handle duties, trade, freight, customs and political issues

Importance of Purchasing Major cost center Affects quality of final product Aids strategy of low cost, response, and differentiation

Supply-Chain Costs as a Percent of Sales Industry Percent of Sales All industry Automobile Food Lumber Paper Petroleum Transportation 52% 67% 60% 61% 55% 79% 62%

Dollars of Additional Sales Needed to Equal 1$ Saved Through Purchasing Percent of Sales Spent in the Supply-Chain 30% 40% 50% 60% 70% 80% 90% 2 $2.78 $3.23 $3.85 $4.76 $6.25 $9.09 $16.67 4 $2.70 $3.13 $3.70 $4.55 $5.88 $8.33 $14.29 6 $2.63 $3.03 $3.57 $4.35 $5.56 $7.69 $12.50 8 $2.56 $2.94 $3.45 $4.17 $5.26 $7.14 $11.11 10 $2.50 $2.86 $3.33 $4.00 $5.00 $6.67 $10.00 Percent Net Profit of Firm

Objectives of the Purchasing Function Help identify the products and services that can be best obtained externally; and Develop, evaluate, and determine the best supplier, price, and delivery for those products and services

The Purchasing Focus Supply Management Materials Management -High transportation cost -High inventory costs Supply Management -High costs -Scarcity: national or international Source Management -Unique items -Custom-made items -High technology items Purchasing Management -Commodity items -Standard products

Traditional Purchasing Process Receiving Dock Purchase Order Packing List Processing Invoice Receivables Report Check Accounts Receivable Accounts Payable Mail Reconcile Customer Supplier

Purchasing Techniques Drop shipping and special packaging Blanket orders Electronic ordering and funds transfer Electronic data interchange (EDI) Standardization Outsourcing

Make/Buy Considerations Reasons for Making Reasons for Buying Maintain core competencies and protect personnel from layoff Lower production cost Unsuitable suppliers Assure adequate supply Utilize surplus labor and make a marginal contribution Frees management to deal with its primary business Lower acquisition cost Preserve supplier commitment Obtain technical or management ability Inadequate capacity

Supply-Chain Strategies Plans to help achieve company mission Affect long-term competitive position Strategic options Many suppliers Few suppliers Keiretsu network Vertical integration Virtual company Plan

Supply-Chain Strategies Negotiate with many suppliers; play one supplier against another Develop long-term “partnering” arrangements with a few suppliers who will work with you to satisfy the end customer Vertically integrate; buy the actual supplier Keiretsu - have your suppliers become part of a company coalition Create a virtual company that uses suppliers on an as-needed basis.

Many Suppliers Strategy Many sources per item Adversarial relationship Short-term Little openness Negotiated, sporadic PO’s High prices Infrequent, large lots Delivery to receiving dock

Few Suppliers Strategy 1 or few sources per item Partnership (JIT) Long-term, stable On-site audits & visits Exclusive contracts Low prices (large orders) Frequent, small lots Delivery to point of use © 1995 Corel Corp.

Daimler Chrysler’s Supplier Cost Reduction Effort Suggestion Model Savings Rockwell Use passenger car door locks on trucks Dodge trucks $280,000 Simplify design/substitute materials on manual window system Various $300,000 3M Change tooling for wood- grain panels to allow three from one die instead of two Caravan, Voyager $1,500,000 Trico Change wiper-blade formulation $140,000 Leslie Metal Arts Exterior lighting suggestions

Tactics for Close Supplier Relationships Reduce total number of suppliers Certify suppliers Ask for JIT delivery from key suppliers Involve key suppliers in new product design Develop software linkages to suppliers Results Average 20% reduction in 5 years Almost 40% of all companies surveyed were themselves currently certified About 60% ask for this About 54% do this Almost 80% claim to do this About 50% claim this

Vertical Integration Strategy Raw Material (Suppliers) Why Use it? Ability to produce goods previously purchased Setup operations Buy supplier Make-buy issue Major financial commitment Hard to do all things well Backward Integration Current Transformation Forward Integration Finished Goods (Customers)

Forms of Vertical Integration Iron Ore Silicon Farming Raw Material (Suppliers) Steel Flour Milling Backward Integration Integrated Circuits Current Transformation Automobiles Distribution System Forward Integration Circuit Boards Computers Watches Calculators Finished Goods (Customers) Dealers Baked Goods

Vertical Integration Can be Forward or Backward Examples of Vertical Integration Raw material (suppliers) Iron ore Silicon Farming Backward Integration Steel Current Transformation Automobiles Integrated Circuits Flour Milling Forward Integration Distribution System Circuit boards Finished goods (customers) Dealers Computers, watches, calculators Baked Goods

Keiretsu Network Strategy Japanese word for ‘affiliated chain’ System of mutual alliances and cross-ownership Company stock is held by allied firms Resulting in lowering need for short-term profits Links manufacturers, suppliers, distributors, & lenders ‘Partnerships’ extend across entire supply chain

Virtual Companies Companies that rely on a variety of supplier relationships to provide services on demand. Also known as hollow corporations, or network corporations

Virtual Company Strategy Network of independent companies Linked by technology PC’s, faxes, Internet etc. Each contributes core competencies Typically provide services Payroll, editing, designing May be long or short-term Usually, only until opportunity is met

Managing the Supply-Chain Options: Postponement Channel assembly Drop shipping Blanket orders Invoiceless purchasing Electronic ordering and funds transfer Stockless purchasing Standardization Internet purchasing (e-procurement)

Managing the Supply-Chain - Other Options Establishing lines of credit for suppliers Reducing bank “float” Coordinating production and shipping schedules with suppliers and distributors Sharing market research Making optimal use of warehouse space

Successful Supply-Chain Management Requires: A mutual agreement on goals Trust Compatible organizational cultures

Issues in an Integrated Supply-Chain Local optimization Incentives Large lots

Opportunities in an Integrated Supply-Chain Generation of accurate “pull” data Reduction of lot size Single stage control of replenishment

Vendor Managed Inventory (VMI) Postponement – keeps product generic as long as possible Channel Assembly – sends to distributor individual components and modules rather than finished goods Drop Shipping and Special Packaging – supplier will ship to end consumer rather than to seller Blanket Orders – a long-term purchase commitment to a supplier for items that are to be delivered against short-term releases to ship Standardization – reducing the number of variations in materials and components Electronic Ordering and Funds Transfer – “paperless” ordering and 100% material acceptance, payment by “wire”

Vendor Selection Steps Vendor evaluation Identifying & selecting potential vendors Vendor development Integrating buyer & supplier Example: Electronic data exchange Negotiations Results in contract Specifies period of agreement, price, delivery terms etc.

Vendor Selection Rating Form

Negotiation Strategies Three types: cost-based price model - supplier opens its books to purchaser; price based upon fixed cost plus escalation clause for materials and labor market-based price model - published price or index competitive bidding - potential suppliers bid for contract

Logistics Management Integrates all materials functions Purchasing Inventory management Production control Inbound traffic Warehousing and stores Incoming quality control Objective: Efficient, low cost operations

Goods Movement Options Trucking Railways Airfreight Waterways Pipelines

Supply-Chain Performance Compared Typical Firms Benchmark Firms Administrative costs as percent of purchases 3.3% 0.8% Lead time (weeks) 15 8 Time spent in placing order 42 minutes 15 minutes Percentage of late deliveries 33% 2% Percentage of rejected material 1.5% .0001% Number of shortages per year 400 4