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 Supply-Chain Management

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

The Supply Chain Supplier Inventory Distributor Inventory 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

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

Supply-Chain Strategy Support Supplier’s goal Primary Selection Criteria 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

Supply-Chain Strategy Support 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 Strategy Support 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

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

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

Additional Sales Needed to Equal 1$ Saved Through Purchasing

Purchasing Function Objectives 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 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

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

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

Make/Buy Considerations 1. Maintain core competencies and protect personnel from layoff 2. Lower production cost 3. Unsuitable suppliers 4. Assure adequate supply 5. Utilize surplus labor and make a marginal contribution 6. Obtain desired quality 7. Remove supplier collusion 8. Obtain a unique item that would entail a prohibitive commitment from the supplier 9. Protect proprietary design or quality 10. Increase or maintain size of company Reasons for Making

Make/Buy Considerations 1. Frees management to deal with its primary business 2. Lower acquisition cost 3. Preserve supplier commitment 4. Obtain technical or management ability 5. Inadequate capacity 6. Reduce inventory costs 7. Ensure flexibility and alternate source of supply 8. Inadequate managerial or technical resources 9. Reciprocity 10. Item is protected by patent or trade secret Reasons for Buying

Plans to help achieve company mission Affect long-term competitive position Strategic options Many suppliers Few suppliers Keiretsu network Vertical integration Virtual company Plan © 1995 Corel Corp. 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 Keiretsu - have your suppliers become part of a company coalition Vertically integrate; buy the actual supplier Create a virtual company that uses suppliers on an as-needed basis.

Many sources per item Adversarial relationship Short-term Little openness Negotiated, sporadic PO’s High prices Infrequent, large lots Delivery to receiving dock © 1995 Corel Corp. Many 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. Few Suppliers Strategy

Daimler Chrysler’s Supplier Cost Reduction Effort SupplierSuggestionModelSavings RockwellUse passenger car door locks on trucks Dodge trucks $280,000 RockwellSimplify design/substitute materials on manual window system Various$300,000 3MChange tooling for wood- grain panels to allow three from one die instead of two Caravan, Voyager $1,500,000 TricoChange wiper-blade formulation Various$140,000 Leslie Metal Arts Exterior lighting suggestionsVarious$1,500,000

Close Supplier Relationships Tactic 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

Raw Material (Suppliers) BackwardIntegration CurrentTransformation ForwardIntegration Finished Goods (Customers) Ability to produce goods previously purchased Setup operations Buy supplier Make-buy issue Major financial commitment Hard to do all things well Vertical Integration Strategy

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

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 Keiretsu Network Strategy

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

© 1995 Corel Corp. 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 – 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” 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 Vendor Managed Inventory (VMI)

Successful Management Requires: A mutual agreement on goals Trust Compatible organizational cultures Local optimization Careful use of incentives Large lots vs. small lots

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 Steps

Company Financial stability Management Location Product Quality Price Service Delivery on time Condition on arrival Technical support Training Vendor Selection Criteria

Vendor Selection Rating Form

Vendor Concerns: Desire for diversification Poor customer scheduling Engineering changes Quality assurance standards Small lot sizes Proximity

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 Comparison Typical Firms Benchmark Firms Administrative costs as percent of purchases 3.3%0.8% Lead time (weeks) 158 Time spent in placing order 42 minutes15 minutes Percentage of late deliveries 33%2% Percentage of rejected material 1.5%.0001% Number of shortages per year 4004

E-Commerce The use of computer networks, primarily the internet, to buy and sell products, services, and information.

E-Business “… all about cycle time, speed, globalization, enhanced productivity, reaching new customers and sharing knowledge across institutions for competitive advantage.” Louis Gerstner, Chairman, IBM

E-Commerce Definitions Business-to business (B2B) Both sides of the transaction are businesses, non-profit organizations, or governments. Business-to-consumer (B2C) E-commerce transactions where customers are individual consumers Consumer-to-consumer (C2C) Consumers sell directly to each other. Consumer-to-business (C2B) Individuals sell services or goods to businesses

Types of Information Offered by B2B Applications Product - drawings, specifications, video or simulation demonstrations, prices Production Processes - capacities, commitments, product plans Transportation - carriers, lead times, costs Inventory - inventory tracking, levels, costs, and location

Types of Information Offered by B2B Applications Suppliers - product catalogue, quality history, lead times, terms, and conditions Supply Chain Alliances - key contact, partners’ roles and responsibilities, and schedules Supply Chain Process and Performance - process descriptions, performance measures such as quality and delivery

Types of Information Offered by B2B Applications Sales and Marketing - point-of-sale (POS) data entry, promotions, pricing, discounts Customer - sales history and forecasts

E-Commerce Security This is a serious issue! Multiple deprivation of service attacks on e- commerce web sites 2/6 - 2/11, 2000; also, the attack of October 21, 2002, which flooded all 13 of the root servers of the Internet Domain Name System (DNS) (on main internet servers) Security of data, proprietary business information Impact on the volume of sales and on the bottom line

Benefits of E-commerce Improved, lower cost information Lower entry costs Available 24/7, virtually anywhere in the world Availability expands markets for both buyers and sellers Decreases the cost of paper-based information Reduces the cost of communication Provides richer communication than traditional means Fast delivery of digitized products Increased flexibility of location

Limitations of E-commerce Lack of system security, reliability and standards Lack of privacy Insufficient bandwidth Integrating e-commerce software with existing software is still a challenge Lack of trust in (1) unknowns on the other end of the transaction, (2) integrity of the transaction itself, and(3) electronic money that is only bits and bytes

Impact on Product Design Shorter life cycles require faster product development and lead to time-based competition Greater use of shared knowledge and collaboration - decreased development costs More data sharing with suppliers and strategic partners

E-Procurement Purchasing or order release communicated over the internet or via approved online vendor catalogues Significant savings (10%) Requires new skills and staffing in procurement area

Online Catalogues Information about products made available in electronic form via the Internet. Provided by vendors Developed by buyers Provided by intermediaries Often incorporate voice and video

Internet Trading Exchanges Health care products: set up by Johnson & Johnson, G.E. Medical Systems, Baxter International, Abbott Laboratories, and Medtronic Inc.; called the Global Health Care Exchange (ghx.com) Defense and aerospace products: created by Boeing, Raytheon, Lockheed-Martin, and Britain’s BAE Systems; called the Aerospace and Defense Industry Trading Exchange (exostar.com) Food, beverage, consumer products: set up by 49 leading food and beverage firms; called Transora (transora.com) Retail goods: setup by Sears and France’s Carrefour; called Global Net Xchange, for retailers (gnx)

Internet Trading Exchanges Steel and metal products: such as New View Technologies (exchange.e-steel.com); and Metal-Site (metalsite.com) Construction Industry: set up by Bechtel, Flour, and G.E. Power Systems (citadm.com) is one of 5 construction industry exchanges Hotels: created by Marriott and Hyatt, and later joined by Fairmont, Six Continents, and Club Corp, Called Aventra (aventra.com) – buys for 2,800 hotels

Traditional Medical Supply Chain Manual processes Hospital Group purchasing organization for small, independent hospitals DistributorSupplier

On-Line Medical Supply Chain On-line Global Health Care Automated web- based processes Hospital Group purchasing organization for small, independent hospitals DistributorSupplier

E-Commerce and Requests for Quotes (RFQs) Extensive databases of supplier information, and ability to rapidly transfer specifications to vendors reduces time and costs

Online Auctions Useful for disposing of excess raw material, and discontinued and excess inventory Online auctions lower entry barriers and increase the potential number of customers

Inventory Tracking Mass customization requires knowledge of location of all goods Requires data collection, barcode technology, RF and electronic communications to track inventory in transit, on the shop floor, and in the warehouse Customers can learn what is happening with their order

Warehousing for E-Commerce E-commerce warehouse is less a warehouse than a “pass through facility.”

FedEx and Dell Computer FedEx operates warehouses that pick, pack, test, and assemble products, then handle delivery and even customs clearance FedEx’s “Virtual Order”integrates different companies web catalogues and customer orders for Dell; and then fulfills orders and delivers them through its fleet of trucks and planes.

E-Commerce and JIT E-commerce coordinates the supplier’s inventory system with the service capabilities of the delivery firm.

Scheduling and Logistics Improvements Coordinated pickup and delivery Fed Ex merges orders in transit Logistics cost reduction Greater capacity utilization