Operations Management Supply-Chain Management 供應鏈管理 Chapter 11

Outline GLOBAL COMPANY PROFILE (全球性公司的槪述): VOLKSWAGEN THE STRATEGIC IMPORTANCE OF THE SUPPLY-CHAIN(供應鏈的策略性重點) Global Supply-Chain Issues SUPPLY-CHAIN CONOMICS(供應鏈的經濟性) Make-or-Buy Decisions(自製與外購決策) Ref: Outsourcing (外包)

Outline - Continued SUPPLY-CHAIN STRATEGIES (供應鏈的策略) Many Suppliers Few Suppliers Vertical Integration Keiretsu Networks Virtual Companies Managing the Supply Chain(管理供應鏈) Issues In an Integrated Supply Chain Opportunities in an Integrated Supply Chain

Outline - Continued INTERNET PURCHASING(綱路採購) VENDOR SELECTION(供應商的選擇) Ref: Vendor Evaluation Vendor Development Negotiations MATERIALS MANAGEMENT(配送選擇的成本) BENCHMARKING SUPPLY-CHAIN MANAGEMENT (供應鏈管理的標竿)

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 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.?

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 Ask students what are the benefits and pitfalls of such tight integration.

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.

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

The Supply Chain Customer Manufacturer Market research data Supplier 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.

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.

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.

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 Ask students how these requirements differ from those in a national or domestic environment.

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

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% This slide should further impress upon students the importance of the purchasing function.

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 This slide emphasizes the role of efficiency of purchasing.

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.

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 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?

Purchasing Techniques Drop shipping and special packaging Blanket orders Invoiceless purchasing Electronic ordering and funds transfer Electronic data interchange (EDI) Stockless purchasing Standardization Outsourcing You might provide examples of the use of each of these techniques.

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 Ask students to consider the product characteristics which might cause a company to choose one or the other of the make/buy options.

Make/Buy Considerations - Continued Reasons for Making Reasons for Buying Obtain desired quantity Remove supplier collusion Obtain a unique item that would entail a prohibitive commitment from the supplier Protect proprietary design or quality Increase or maintain size of company Reduce inventory costs Ensure flexibility and alternate source of supply Inadequate managerial or technical resources Reciprocity Item is protected by patent or trade secret Ask students to consider the product characteristics which might cause a company to choose one or the other of the make/buy options.

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 The strategic options listed are expanded upon in later slides. 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 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.

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.

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?

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 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)

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

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 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.

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 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.

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.

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. Students should be asked to consider the problems which might be encountered at each step in this process.

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)

Vendor Selection Rating Form Students might be asked to consider what additional information they might want before approving a vendor selection.

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.

Logistics 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?”

Goods Movement Options Trucking Railways Airfreight Waterways Pipelines Here you might simply discuss some of the options available under each of the categories listed.

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 This slide summarizes some of the benefits of effective supply-chain management.