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

2. 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

3. 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

4. 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

5. 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

6. 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

7. 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

8. 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

9. 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

10. 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

11. 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

12. 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

13. 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

14. 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

15. 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

16. 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

17. 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

18. 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

19. 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

20. 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

21. 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

22. 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

23. 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

24. 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

25. 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

26. 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

27. 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

28. 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

29. 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

30. 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

31. 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

32. 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

33. 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

34. 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

35. 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

36. 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

37. 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

38. 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

39. 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

40. 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

41. 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

42. 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

43. 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

44. 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