Operations Management Chapter 2 Supply-Chain Management PowerPoint presentation to accompany Heizer/Render Principles of Operations Management, 7e Operations Management, 9e

Outline Global Company Profile: Volkswagen The Strategic Importance of the Supply-Chain Global Supply-Chain Issues Purchasing Manufacturing Environments Service Environment Make-or-Buy Decisions PowerPoint presentation to accompany Operations Management, 6E (Heizer & Render) © 2001 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458

Outline - continued Supply-Chain Strategies Vendor Selection Many Suppliers Few Suppliers Vertical Integration Keiretsu Networks Virtual Companies Vendor Selection Vendor Evaluation Vendor Development Negotiations PowerPoint presentation to accompany Operations Management, 6E (Heizer & Render) © 2001 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458

Outline - continued Managing the Supply-Chain Materials Management Distribution Systems Benchmarking Supply-Chain Management PowerPoint presentation to accompany Operations Management, 6E (Heizer & Render) © 2001 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458

Learning Objectives When you complete this chapter, you should be able to : Identify or Define: Supply chain management Purchasing E-procurement Materials management Keiretsu Virtual companies Describe or Explain: Purchasing strategies Approaches to negotiations PowerPoint presentation to accompany Operations Management, 6E (Heizer & Render) © 2001 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458

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 Is this the future? Is our increased application of technology forcing both individuals and organizations to become specialists in relatively narrow areas? What problems is this likely to cause? This is probably a good example to discuss in detail. Points which might be raised include: - What differences might one expect between Volkswagen’s employment of 800 of its own workers versus 800 workers from a variety of companies? - What risks does this practice raise for VW? - What changes must VW make to integrate the workers from the other companies into the VW organization? - While this might work in Brazil, would it work equally well in the U.S.? PowerPoint presentation to accompany Operations Management, 6E (Heizer & Render) © 2001 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458

Lead Figure for Chapter 11 Graphic of VW plant, showing areas occupied by supply firms. PowerPoint presentation to accompany Operations Management, 6E (Heizer & Render) © 2001 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458

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 PowerPoint presentation to accompany Operations Management, 6E (Heizer & Render) © 2001 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458

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 Probably the most important point to be made here is the encompassing nature of supply-chain management - from suppliers’ suppliers through internal production through distribution to the customer. PowerPoint presentation to accompany Operations Management, 6E (Heizer & Render) © 2001 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458

The Supply-Chain Material Flow Credit Flow Supplier Manufacturing VISA ® Material Flow Credit Flow Supplier Manufacturing Retailer Consumer Supplier Wholesaler Retailer Order Cash Schedules Flow Flow PowerPoint presentation to accompany Operations Management, 6E (Heizer & Render) © 2001 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458

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 This slide might be used to make the point about the various “flows” - material, information, money. PowerPoint presentation to accompany Operations Management, 6E (Heizer & Render) © 2001 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458

Material Costs in Supply-Chain 11% 31% 58% Material Dir Wages Other 71% 16% 13% COGS Payroll 83% 9% 8% Manufacturing Wholesale Retail Students should be asked to explain the differences illustrated by these graphs. Source: U.S. Department of Commerce, Bureau of Census, 1987 Census of Manufacturers: General Summary of Retail Trade (Washington, D.C.: Government Printing Office, 1991) PowerPoint presentation to accompany Operations Management, 6E (Heizer & Render) © 2001 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458

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 This and the following two slides look at how supply-chain strategy can support overall strategy. PowerPoint presentation to accompany Operations Management, 6E (Heizer & Render) © 2001 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458

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 to 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 PowerPoint presentation to accompany Operations Management, 6E (Heizer & Render) © 2001 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458

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 PowerPoint presentation to accompany Operations Management, 6E (Heizer & Render) © 2001 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458

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 manage the shipment of parts in and finished products out staffed with local specialists to handle duties, trade, freight, customs and political issues PowerPoint presentation to accompany Operations Management, 6E (Heizer & Render) © 2001 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458

Purchasing Acquisition of goods & services Activities Importance Help decide whether to make or buy Identify sources of supply Select suppliers & negotiate contracts Control vendor performance Importance Major cost center Affects quality of final product Students might be asked how they believe the role of purchasing is changing given the increased use of information technology and strategies such as JIT. PowerPoint presentation to accompany Operations Management, 6E (Heizer & Render) © 2001 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458

Purchasing Costs as a Percent of Sales Industry Percent of Sales All industry Automobile Food Lumber Paper Petroleum Transportation 52% 61% 60% 55% 74% 63% This slide should further impress upon students the importance of the purchasing function. PowerPoint presentation to accompany Operations Management, 6E (Heizer & Render) © 2001 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458

Dollars of Additional Sales Needed to Equal 1$ Saved Through Purchasing This slide emphasizes the role of efficiency of purchasing. PowerPoint presentation to accompany Operations Management, 6E (Heizer & Render) © 2001 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458

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 While these are the main functions of purchasing, one would also expect the purchasing department to participate in make-buy decisions. PowerPoint presentation to accompany Operations Management, 6E (Heizer & Render) © 2001 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458

The Purchasing Focus Supply Management Materials Management -High costs -Scarcity: national or international Materials Management -High transportation cost -High inventory costs Purchasing Management -Commodity items -Standard products Source Management -Unique items -Custom-made items -High technology items PowerPoint presentation to accompany Operations Management, 6E (Heizer & Render) © 2001 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458

Traditional Purchasing Process Receiving Dock Purchase Order Packing List Processing Invoice Receivables Report Check Accounts Receivable Accounts Payable Mail Reconcile Customer Supplier Students should be asked to consider how this traditional process might be changed through process reengineering and the effective application of information technology. (paperless purchasing?) How does the nature of this process change in a virtual company? PowerPoint presentation to accompany Operations Management, 6E (Heizer & Render) © 2001 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458

Purchasing Techniques Drop shipping and special packaging Blanket orders Invoiceless purchasing Electronic ordering and funds transfer Electronic data interchange (EDI) Stockless purchasing Standardization PowerPoint presentation to accompany Operations Management, 6E (Heizer & Render) © 2001 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458

Make/Buy Considerations Reasons for Making Reasons for Buying lower production cost unsuitable suppliers assure adequate supply utilize surplus labor and make a marginal contribution obtain desired quantity remove supplier collusion obtain a unique item that would entail a prohibitive commitment from the supplier lower acquisition cost preserve supplier commitment obtain technical or management ability inadequate capacity reduce inventory costs ensure flexibility and alternate source of supply reciprocity PowerPoint presentation to accompany Operations Management, 6E (Heizer & Render) © 2001 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458

Make/Buy Considerations Reasons for Making Reasons for Buying maintain organizational talent protect proprietary design or quality increase/maintain size of company item is protected by patent or trade secret frees management to deal with its primary business PowerPoint presentation to accompany Operations Management, 6E (Heizer & Render) © 2001 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458

Purchasing Strategies Plans to help achieve company mission Affect long-term competitive position Strategic options Many suppliers Few suppliers Keiretsu network Vertical integration Virtual company The strategic options listed are expanded upon in later slides. Plan © 1995 Corel Corp. PowerPoint presentation to accompany Operations Management, 6E (Heizer & Render) © 2001 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458

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. Subsequent slides expand upon these strategies. PowerPoint presentation to accompany Operations Management, 6E (Heizer & Render) © 2001 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458

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 We read in the management literature more and more about “managing relationships.” If you use the “many supplier” strategy, how do you develop useful relationships? © 1995 Corel Corp. PowerPoint presentation to accompany Operations Management, 6E (Heizer & Render) © 2001 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458

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. The risk of having only a single supplier will probably be obvious to most students. What nature of relationship must you have with your supplier to reduce this risk? PowerPoint presentation to accompany Operations Management, 6E (Heizer & Render) © 2001 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458

Daimler Chrysler’s Supplier Cost Reduction Effort PowerPoint presentation to accompany Operations Management, 6E (Heizer & Render) © 2001 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458

Purchasers Ties Themselves to Suppliers Tactic 1. 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; about 15% more than have EDI links to suppliers PowerPoint presentation to accompany Operations Management, 6E (Heizer & Render) © 2001 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458

Vertical Integration Strategy Ability to produce goods previously purchased Setup operations Buy supplier Make-buy issue Major financial commitment Hard to do all things well Raw Material (Suppliers) Backward Integration Current Transformation Forward Integration Under what conditions is vertical integration an appropriate strategy? Would we choose it simply if the item production/purchase cost would be less? Finished Goods (Customers) PowerPoint presentation to accompany Operations Management, 6E (Heizer & Render) © 2001 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458

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 Students should be asked to consider why, other than on a “cost” basis, a company might want to consider vertical integration. Computers Watches Calculators Finished Goods (Customers) Dealers Baked Goods PowerPoint presentation to accompany Operations Management, 6E (Heizer & Render) © 2001 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458

Keiretsu Network Strategy Japanese word for ‘affiliated chain’ System of mutual alliances and cross-ownership Company stock is held by allied firms Lowers need for short-term profits Links manufacturers, suppliers, distributors, & lenders ‘Partnerships’ extend across entire supply chain Students might be asked to consider what it would take to implement such a system in the U.S. PowerPoint presentation to accompany Operations Management, 6E (Heizer & Render) © 2001 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458

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 Students should be asked to consider the problems in establishing a virtual company, such as: - how does one decide which companies to ask to join their alliance? - how is the decision to share revenues made? - how is performance evaluated? - etc. © 1995 Corel Corp. PowerPoint presentation to accompany Operations Management, 6E (Heizer & Render) © 2001 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458

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. Students should be asked to consider the problems which might be encountered at each step in this process. PowerPoint presentation to accompany Operations Management, 6E (Heizer & Render) © 2001 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458

Vendor Selection Rating Form Students might be asked to consider what additional information they might want before approving a vendor selection. PowerPoint presentation to accompany Operations Management, 6E (Heizer & Render) © 2001 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458

Supplier Selection Criteria Company Financial stability Management Location Product Quality Price Service Delivery on time Condition on arrival Technical support Training Students might be asked if they perceive one or another of these criteria to be especially important. Also, are there other criteria they would prefer to use or think should be added? (One such criteria might be the ability to communicate using EDT) PowerPoint presentation to accompany Operations Management, 6E (Heizer & Render) © 2001 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458

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 Ask students under what conditions each of these models might be appropriate. PowerPoint presentation to accompany Operations Management, 6E (Heizer & Render) © 2001 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458

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) Ask students to consider the conditions under which each of these options might be appropriate. PowerPoint presentation to accompany Operations Management, 6E (Heizer & Render) © 2001 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458

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 PowerPoint presentation to accompany Operations Management, 6E (Heizer & Render) © 2001 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458

Materials Management Integrates all materials functions Purchasing Inventory management Production control Inbound traffic Warehousing and stores Incoming quality control Objective: Efficient, low cost operations In addition to framing the materials management function, this slide raises the issue of “how does one begin assigning responsibilities for each of the facets of supply-chain management?” PowerPoint presentation to accompany Operations Management, 6E (Heizer & Render) © 2001 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458

Goods Movement Options Trucking Railways Airfreight Waterways Pipelines Here you might simply discuss some of the options available under each of the categories listed. PowerPoint presentation to accompany Operations Management, 6E (Heizer & Render) © 2001 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458

Supply-Chain Performance Compared Benchmark Firms Typical Firms This slide summarizes some of the benefits of effective supply-chain management. PowerPoint presentation to accompany Operations Management, 6E (Heizer & Render) © 2001 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458