0 Production and Operations Management Norman Gaither Greg Frazier Slides Prepared by John Loucks  1999 South-Western College Publishing

1 Chapter 15 Supply Chain Management

2 OverviewOverview l Introduction l Supply Chain Management l Purchasing l Just-in-Time Purchasing l Logistics l Warehousing l Expediting l Benchmarking the Performance of Materials Managers l Third-Party Logistics Management Providers l Wrap-Up: What World-Class Producers Do

3 IntroductionIntroduction l Materials are any commodities used directly or indirectly in producing a product or service. l Raw materials, component parts, assemblies, and supplies l A supply chain is the way materials flow through different organizations from the raw material supplier to the finished goods consumer.

4 Supply Chain Management l Supply chain management includes all management functions related to the flow of materials from the company’s direct suppliers to its direct customers. l Includes purchasing, traffic, production control, inventory control, warehousing, and shipping. l Materials management and logistics management are two alternative names for supply chain management.

5 PurchasingPurchasing Factors increasing the importance of purchasing today: l Tremendous impact of material costs on profit % of sales dollar paid to material suppliers l Popularity of JIT manufacturing -- supply deliveries must be exact in timing, quantity, and quality l Increasing global competition -- more competition for scarce resources, and geographically stretched-out supply chain

6 Mission of Purchasing l Develop purchasing plans for each major product or service consistent with operations strategies: l Low production costs l Fast and on-time deliveries l High quality products and services l Flexibility

7 Purchasing Management l Maintain data base of available, qualified suppliers l Select suppliers to supply each material l Negotiate contracts with suppliers l Act as interface between company and suppliers l Provide training to suppliers on latest technologies

8 Advantages of Centralized Purchasing l Buy in large quantities --> better prices l More clout with suppliers --> greater supply continuity l Larger purchasing department --> buyer specialization l Combine small orders --> less order cost duplication l Combine shipments --> lower transportation costs l Better overall control

9 Purchasing Process Material Requisition Request for Quotations Select Best Supplier Purchase Order Receive and Inspect Goods From purchasing, to potential suppliers From any department, to purchasing Based on quality, price, lead time, dependability From purchasing, to selected supplier From supplier, to receiving, quality control, warehouse

1010 Buyers’ Duties l Know the market for their commodities l Understand the laws.... tax, contract, patent..… l Process purchase requisitions and quotation requests l Make supplier selections l Negotiate prices and conditions of sale l Place and follow-up on purchase orders l Maintain ethical behavior

1 Make-or-Buy Analysis Considerations in make-or-buy decisions: l Lower cost - purchasing or production? l Better quality - supplier or in-house? l More-reliable deliveries - supplier or in-house? l What degree of vertical integration is desirable? l Should distinctive competencies be outsourced?

1212 JIT Purchasing The key elements of JIT purchasing are: l Cooperative, not adversarial relationships l Longer-term relationships, fewer suppliers l Delivery and quality enters into selecting a supplier l JIT in supplier’s operation l Suppliers nearby l Shipments delivered directly to production line l Deliveries in small, standard-size, returnable containers l Minimum of paperwork

1313 LogisticsLogistics l Logistics usually refers to the management of: l the movement of materials within the factory l the shipment of incoming materials from suppliers l the shipment of outgoing products to customers

1414 Movement of Materials within Factories IncomingVehiclesIncomingVehiclesReceivingDockReceivingDockQualityControlQualityControlWarehouseWarehouse WorkCenterWorkCenter Other Work Centers CentersPackagingPackagingFinishedGoodsFinishedGoods ShippingShippingShippingDockShippingDockOutgoingVehiclesOutgoingVehicles The typical locations from/to which material is moved: The typical locations from/to which material is moved:

1515 Shipments To and From Factories l Traffic departments routinely examine shipping schedules and select: l shipping methods l time tables l ways of expediting deliveries l Traffic management is a specialized field requiring technical training in DOT and ICC regulations and rates.

1616 Shipments To and From Factories l Distribution, or physical distribution, is the shipment of finished goods through the distribution system to customers. l A distribution system is the network of shipping and receiving points starting with the factory and ending with the customers.

1717 Shipments To and From Factories l Distribution requirements planning (DRP) is the planning for the replenishment of regional warehouse inventories. l DRP uses MRP-type logic to translate regional requirements into central-distribution-center requirements, which are then translated into gross requirements in the MPS at the factory. l Distribution resource planning extends DRP so warehouse space, workers, cash, and vehicles are provided in the correct quantities at the correct times.

1818 Innovations in Logistics l New developments affecting logistics include: l All-freight airports l Inter-modal shipping l In-transit rates l Consolidated shipments l Air-freight and trucking deregulation l Advanced logistics software

1919 WarehousingWarehousing l Warehousing is the management of materials while they are in storage. l Warehousing activities include: l Storing l Dispersing l Ordering l Accounting

2020 WarehousingWarehousing l Record keeping within warehousing requires a stock record for each item that is carried in inventories. l The individual item is called a stock-keeping unit (SKU). l Stock records are running accounts that show: l On-hand balance l Receipts and expected receipts l Disbursements, promises, and allocations

2121 Inventory Accounting l In the past, inventory accounting was based on: l periodic inventory accounting systems -- periodic (end-of-day) updating of inventory records l physical inventory counts -- periodic (end-of-year) physical counting of all SKUs at one time l Today, more and more firms are using: l perpetual inventory accounting systems -- real-time updating of records as transactions occur l cycle counting -- ongoing (daily or weekly) physical counting of different SKUs

2 Measuring the Performance Materials Managers l Level and value of in-house inventories l Percentage of orders delivered on time l Number of stockouts l Annual cost of materials l Annual cost of transportation l Annual cost of warehouse l Number of customer complaints l Other factors

2323 Wrap-Up: World-Class Practice l See materials management as key element in capturing global market share l Form partnerships with suppliers l Use computers extensively to manage logistics

2424 End of Chapter 15