2. Supply Chain Management
Chapter 11
Supply Chain Management
And E-Business

3. Overview Introduction Supply Chain Management Purchasing Logistics
Warehousing
Expediting
Benchmarking the Performance of Materials Managers
Third-Party Logistics Management Providers
E-Business and Supply Chain Management
Wrap-Up: What World-Class Companies Do

4. Introduction
Materials - any commodities used directly or indirectly in producing a product or service.
Raw materials, component parts, assemblies, finished goods, and supplies
Supply chain - the way materials flow through different organizations from the raw material supplier to the finished goods consumer.

5. Supply Chain for Steel in an Automobile Door
MINING
COMPANY
Mines iron ore
STEEL
MILL
Forms steel ingot
STEEL
COMPANY
Forms sheet metal
Iron
ore
Steel
ingots
Sheet
metal
AUTOMOTIVE
SUPPLIER
Makes door
AUTOMOBILE
MANUFACTURER
Makes automobile
CAR
DEALERSHIP
Does preparation
Car
door
Car
Prepared
car
FINAL
CONSUMER
Drives automobile

6. Supply Chain Management
Refers to all the management functions related to the flow of materials from the company’s direct suppliers to its direct customers.
Includes purchasing, traffic, production control, inventory control, warehousing, and shipping.
Two alternative names:
Materials management
Logistics management

7. Supply Chain Management in a Manufacturing Plant
Receiving
and
Inspection
Raw
Materials,
Parts, and
In-process
Ware-
Housing
Production
Finished
Goods
Ware-
housing
Inspection,
Packaging,
And
Shipping
Suppliers
Customers
Materials Management
Purchasing
Production
Control
Warehousing and
Inventory Control
Shipping
and Traffic
Physical materials flow
Information flow

8. Purchasing Factors increasing the importance of purchasing today:
Tremendous impact of material costs on profit (60-70% of each sales dollar is paid to material suppliers)
Popularity of just-in-time manufacturing (supply deliveries must be exact in timing, quantity, and quality)
Increasing global competition (growing competition for scarce resources, and a geographically “stretched-out” supply chain)

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

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

11. Advantages of Centralized Purchasing
Buying in large quantities - better prices
More clout with suppliers - greater supply continuity
Larger purchasing department - buyer specialization
Combining small orders - less order cost duplication
Combining shipments - lower transportation costs
Better overall control

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

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

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

15. Example: Make-or-Buy
A firm manufactures a product that contains a part requiring heat treatment. An analyst is trying to decide whether it is more economical to buy the heat treating service or perform the treatment in house. Pertinent data is shown on the next slide.
If part quality and delivery performance are about the same for the two alternatives, which alternative should be selected?

16. Example: Make-or-Buy Purchase Heat-Treat Heat-Treat In-House Service
Number of parts annually 5,000 5,000
Fixed cost per year $25,000 $0
Variable cost per part $13.20 $17.50

17. Example: Make-or-Buy Compute the total cost for each alternative
TC = FC + vQ
TC1 = FC1 + v1Q = 25, (5,000) = $91,000
TC2 = FC2 + v2Q = (5,000) = $87,500
The firm should buy the heat-treating service (the second alternative).
continued

18. Example: Make-or-Buy
The analyst has assumed that 5,000 parts per year will require heat treatment. By how many parts can the firm’s requirements increase or decrease before in-house heat treating is more economical? Should the analyst rethink his/her decision?

19. Example: Make-or-Buy Compute the break-even parts quantity
FC1 + v1Q = FC2 + v2Q
Q = (FC1 - FC2)/(v2- v1)
Q = (25,000 – 0)/(17.50 – 13.20)
Q = 5,814
If the firm’s annual parts requirement increases by 814 (about 16%) or more, in-house heat treatment would be more economical. The analyst should give the decision more thought.

20. Logistics Logistics usually refers to management of:
the movement of materials within the factory
the shipment of incoming materials from suppliers
the shipment of outgoing products to customers

21. Movement of Materials within Factories
The typical locations from/to which material is moved:
Incoming
Vehicles
Receiving
Dock
Quality
Control
Warehouse
Work
Center
Other Work
Centers
Packaging
Finished
Goods
Shipping
Shipping
Dock
Outgoing
Vehicles

22. Shipments To and From Factories
Traffic
Traffic departments routinely examine shipping schedules and select:
shipping methods
time tables
ways of expediting deliveries
Traffic management is a specialized field requiring technical training in Department of Transportation (DOT) and Interstate Commerce Commission (ICC) regulations and rates.

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

24. Shipments To and From Factories
Distribution Requirements Planning
DRP is the planning for the replenishment of regional warehouse inventories.
DRP uses MRP-type logic to translate regional warehouse requirements into central distribution-center requirements, which are then translated into gross requirements in the MPS at the factory.

25. Shipments To and From Factories
Distribution Requirements Planning
Scheduled receipts are previously-placed orders that are expected to arrive in a given week
Planned receipt of shipments are orders planned, but not yet placed, for the future
Projected ending inventory is computed as:
Previous week’s projected ending inventory
+ Planned receipt of shipments in current week
+ Scheduled receipt of shipments in current week
-- Forecasted demand in current week

26. Shipments To and From Factories
DRP Time-Phased Order Point Record
Region. Warehouse #1 LT = 1
Std. Quantity = SS = 10
Week -1 1 2 3 4 5
Forecasted demand (units) 30 40 30 40 40
Scheduled receipts 50
Projected ending inventory 60 80 40 10 20 30
Planned receipt of shipments 50 50
Planned orders for shipments 50 50

27. Example: DRP
Products are shipped from a company’s main distribution center (adjacent to the factory) to two regional warehouses. The DRP records on the next two slides show – for the two regional warehouse – the forecasted demand, scheduled receipts, and last week’s projected ending inventories for a single product.
The third upcoming slide shows – for the main distribution center – scheduled receipts and last week’s projected ending inventory for the same product. Complete the DRP records.

28. Example: DRP DRP Record for Regional Warehouse #1
Forecasted demand (units)
Scheduled receipts
Projected ending inventory
Planned receipt of shipments
Planned orders for shipments
Region. Warehouse #1 LT = 1
Std. Quantity = SS = 50
200 -1
100 80 1 2 3 60 5 4
Week

29. Example: DRP DRP Record for Regional Warehouse #2
Forecasted demand (units)
Scheduled receipts
Projected ending inventory
Planned receipt of shipments
Planned orders for shipments
Region. Warehouse #2 LT = 2
Std. Quantity = SS = 80
220 -1
200
100 1 2 3
240 5 4
Week

30. Example: DRP DRP Record for Main Distribution Center
Gross Requirements (units)
Scheduled receipts
Projected ending inventory
Planned receipt of shipments
Planned orders for shipments
Main Distrib. Center LT = 1
Std. Quantity = SS = 200
250 -1
500 1 2 3 5 4
Week

31. Example: DRP Completed DRP Record for Regional Warehouse #1
Region. Warehouse #1 LT = 1
Std. Quantity = SS = 50
Week -1 1 2 3 4 5
Forecasted demand (units) 80
100 80 60
100
Scheduled receipts
100
Projected ending inventory
200
220
120
140 80 80
Planned receipt of shipments
100
100
Planned orders for shipments
100
100

32. Example: DRP Completed DRP Record for Regional Warehouse #2
Region. Warehouse #2 LT = 2
Std. Quantity = SS = 80
Week -1 1 2 3 4 5
Forecasted demand (units)
100
200
200
240
200
Scheduled receipts
200
Projected ending inventory
220
320
120
120 80 80
Planned receipt of shipments
200
200
200
Planned orders for shipments
200
200
200

33. Example: DRP DRP Record for Main Distribution Center
The “gross requirement” ( in row 1) for any week is determined by summing the “planned orders for shipment” for the same week at the two regional warehouses
These gross requirements at the MDC are input to the master production schedule in the factory
In other words, the timing and quantities of production in the factory are linked to the timing and quantities of demand at the regional warehouses

34. Example: DRP Completed DRP Record for Main Distribution Center
Main Distrib. Center LT = 1
Std. Quantity = SS = 200
Week -1 1 2 3 4 5
Forecasted demand (units)
200
300
200
100
Scheduled receipts
500
Projected ending inventory
250
550
250
550
450
450
Planned receipt of shipments
500
Planned orders for shipments
500

35. Shipments To and From Factories
Distribution Resource Planning
Distribution resource planning extends DRP so that the key resources of warehouse space, workers, cash, and vehicles are provided in the correct quantities at the correct times.

36. Analyzing Shipping Decisions
The “Transportation Problem”
Problem involves shipping a product from several sources (ex. factories) with limited supply to several destinations (ex. warehouses) with demand to be satisfied
Per-unit cost of shipping from each source to each destination is specified
Optimal solution minimizes total shipping cost and specifies the quantity of product to be shipped from each source to each destination

37. Example: Minimizing Shipping Costs
Pacer produces computer monitors in its three factories and ships them to five regional warehouses. The factory-to-warehouse shipping costs per monitor are:
Warehouse
Factory A B C D E
1 $2.10 $4.30 $3.60 $1.80 $2.70
continued

38. Example: Minimizing Shipping Costs
The factories have the following capacities (monitors produced per month): 1 = 10,000; = 20,000; and 3 = 10,000.
The warehouses need at least these numbers of monitors per month: A = 5,000; B = 10,000; C = 10,000; D = 5,000; and E = 10,000.
Use the POM Software Library to solve this transportation problem.

39. Example: Minimizing Shipping Costs
Solution
Warehouse
Factory A B C D E
1 5, ,000 0
, ,000 ,
Total monthly shipping cost = $97,500
(Note: all warehouse demand is satisfied
and no factory’s capacity is exceeded.)

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

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

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

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

44. Example: Cycle Counting
A company is implementing a cycle-counting program. Class A items will be counted monthly, Class B items will be counted quarterly, and Class C items will be counted semi-annually.
5% of the firm’s inventory items are classified as Class A, 20% are Class B, and 75% are Class C. If the firm has 16,000 different SKUs (unique inventory items), how many will need to be counted daily? Assume 200 days per year are available for cycle counting.

45. Example: Cycle Counting
Number
Number of Counts
Class of Items per Item Total Counts
of Item per Class per Year per Year
A ,600
B 3, ,800
C 12, ,000
Total 16, ,400

46. Example: Cycle Counting
Number of Inventory Items Counted Daily
= 46,400/200 = 232 items per day

47. Example: Cycle Counting
The cycle-counting personnel must count 232 inventory items per day. If the average cycle-counter can count 24 items per day, how many counters are needed?
Number of Cycle-Counting Personnel Required
= 232/24 = or 10 counters

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

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

50. End of Chapter 11