1. Transparency Masters to accompany Heizer/Render – Principles of Operations Management, 5e, and Operations Management, 7e © 2004 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458 11-1 Operations Management Supply-Chain Management Chapter 11

2. Transparency Masters to accompany Heizer/Render – Principles of Operations Management, 5e, and Operations Management, 7e © 2004 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458 11-2 Outline  GLOBAL COMPANY PROFILE: VOLKSWAGEN  THE STRATEGIC IMPORTANCE OF THE SUPPLY-CHAIN  Global Supply-Chain Issues  SUPPLY-CHAIN ECONOMICS  Make-or-Buy Decisions  Outsourcing

3. Transparency Masters to accompany Heizer/Render – Principles of Operations Management, 5e, and Operations Management, 7e © 2004 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458 11-3 Outline - Continued  SUPPLY-CHAIN STRATEGIES  Many Suppliers  Few Suppliers  Vertical Integration  Keiretsu Networks  Virtual Companies  Managing the Supply Chain  Issues In an Integrated Supply Chain  Opportunities in an Integrated Supply Chain

4. Transparency Masters to accompany Heizer/Render – Principles of Operations Management, 5e, and Operations Management, 7e © 2004 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458 11-4 Outline - Continued  INTERNET PURCHASING  VENDOR SELECTION  Vendor Evaluation  Vendor Development  Negotiations  MATERIALS MANAGEMENT  BENCHMARKING SUPPLY-CHAIN MANAGEMENT

5. Transparency Masters to accompany Heizer/Render – Principles of Operations Management, 5e, and Operations Management, 7e © 2004 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458 11-5 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

6. Transparency Masters to accompany Heizer/Render – Principles of Operations Management, 5e, and Operations Management, 7e © 2004 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458 11-6 When you complete this chapter, you should be able to : Describe or Explain :  Supply-Chain Strategies  Purchasing strategies  Approaches to negotiations Learning Objectives

7. Transparency Masters to accompany Heizer/Render – Principles of Operations Management, 5e, and Operations Management, 7e © 2004 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458 11-7 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

8. Transparency Masters to accompany Heizer/Render – Principles of Operations Management, 5e, and Operations Management, 7e © 2004 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458 11-8 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

9. Transparency Masters to accompany Heizer/Render – Principles of Operations Management, 5e, and Operations Management, 7e © 2004 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458 11-9  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

10. Transparency Masters to accompany Heizer/Render – Principles of Operations Management, 5e, and Operations Management, 7e © 2004 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458 11-10 Consumer Retailer Manufacturing Material Flow VISA ® Credit Flow Supplier Wholesaler Retailer Cash Flow Order Flow Schedules The Supply-Chain

11. Transparency Masters to accompany Heizer/Render – Principles of Operations Management, 5e, and Operations Management, 7e © 2004 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458 11-11 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

12. Transparency Masters to accompany Heizer/Render – Principles of Operations Management, 5e, and Operations Management, 7e © 2004 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458 11-12 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

13. Transparency Masters to accompany Heizer/Render – Principles of Operations Management, 5e, and Operations Management, 7e © 2004 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458 11-13 Supply-Chain Support for Overall Strategy 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

14. Transparency Masters to accompany Heizer/Render – Principles of Operations Management, 5e, and Operations Management, 7e © 2004 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458 11-14 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 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

15. Transparency Masters to accompany Heizer/Render – Principles of Operations Management, 5e, and Operations Management, 7e © 2004 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458 11-15 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

16. Transparency Masters to accompany Heizer/Render – Principles of Operations Management, 5e, and Operations Management, 7e © 2004 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458 11-16 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 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

17. Transparency Masters to accompany Heizer/Render – Principles of Operations Management, 5e, and Operations Management, 7e © 2004 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458 11-17  Major cost center  Affects quality of final product  Aids strategy of low cost, response, and differentiation Importance of Purchasing

18. Transparency Masters to accompany Heizer/Render – Principles of Operations Management, 5e, and Operations Management, 7e © 2004 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458 11-18 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

19. Transparency Masters to accompany Heizer/Render – Principles of Operations Management, 5e, and Operations Management, 7e © 2004 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458 11-19 Dollars of Additional Sales Needed to Equal 1$ Saved Through Purchasing

20. Transparency Masters to accompany Heizer/Render – Principles of Operations Management, 5e, and Operations Management, 7e © 2004 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458 11-20 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

21. Transparency Masters to accompany Heizer/Render – Principles of Operations Management, 5e, and Operations Management, 7e © 2004 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458 11-21 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

22. Transparency Masters to accompany Heizer/Render – Principles of Operations Management, 5e, and Operations Management, 7e © 2004 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458 11-22 Receiving Dock Purchase Order Packing List Order Processing Invoice Receivables Report Check Accounts Receivable Accounts Payable Mail Reconcile Mail Customer Supplier Traditional Purchasing Process

23. Transparency Masters to accompany Heizer/Render – Principles of Operations Management, 5e, and Operations Management, 7e © 2004 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458 11-23 Purchasing Techniques  Drop shipping and special packaging  Blanket orders  Invoiceless purchasing  Electronic ordering and funds transfer  Electronic data interchange (EDI)  Stockless purchasing  Standardization  Outsourcing

24. Transparency Masters to accompany Heizer/Render – Principles of Operations Management, 5e, and Operations Management, 7e © 2004 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458 11-24 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 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 Reasons for Making Reasons for Buying

25. Transparency Masters to accompany Heizer/Render – Principles of Operations Management, 5e, and Operations Management, 7e © 2004 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458 11-25 Make/Buy Considerations - Continued 6.Obtain desired quantity 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 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 Making Reasons for Buying

26. Transparency Masters to accompany Heizer/Render – Principles of Operations Management, 5e, and Operations Management, 7e © 2004 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458 11-26  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

27. Transparency Masters to accompany Heizer/Render – Principles of Operations Management, 5e, and Operations Management, 7e © 2004 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458 11-27 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.

28. Transparency Masters to accompany Heizer/Render – Principles of Operations Management, 5e, and Operations Management, 7e © 2004 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458 11-28  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

29. Transparency Masters to accompany Heizer/Render – Principles of Operations Management, 5e, and Operations Management, 7e © 2004 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458 11-29  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

30. Transparency Masters to accompany Heizer/Render – Principles of Operations Management, 5e, and Operations Management, 7e © 2004 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458 11-30 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

31. Transparency Masters to accompany Heizer/Render – Principles of Operations Management, 5e, and Operations Management, 7e © 2004 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458 11-31 Tactics for 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 About 50% claim this

32. Transparency Masters to accompany Heizer/Render – Principles of Operations Management, 5e, and Operations Management, 7e © 2004 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458 11-32 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

33. Transparency Masters to accompany Heizer/Render – Principles of Operations Management, 5e, and Operations Management, 7e © 2004 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458 11-33 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

34. Transparency Masters to accompany Heizer/Render – Principles of Operations Management, 5e, and Operations Management, 7e © 2004 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458 11-34 Vertical Integration Can be Forward or Backward Vertical IntegrationExamples of Vertical Integration Raw material (suppliers)Iron oreSiliconFarming Backward IntegrationSteel Current TransformationAutomobilesIntegrated CircuitsFlour Milling Forward IntegrationDistribution System Circuit boards Finished goods (customers)DealersComputers, watches, calculators Baked Goods

35. Transparency Masters to accompany Heizer/Render – Principles of Operations Management, 5e, and Operations Management, 7e © 2004 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458 11-35  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

36. Transparency Masters to accompany Heizer/Render – Principles of Operations Management, 5e, and Operations Management, 7e © 2004 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458 11-36 Virtual Companies  Companies that rely on a variety of supplier relationships to provide services on demand.  Also known as hollow corporations, or network corporations

37. Transparency Masters to accompany Heizer/Render – Principles of Operations Management, 5e, and Operations Management, 7e © 2004 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458 11-37 © 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

38. Transparency Masters to accompany Heizer/Render – Principles of Operations Management, 5e, and Operations Management, 7e © 2004 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458 11-38 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)

39. Transparency Masters to accompany Heizer/Render – Principles of Operations Management, 5e, and Operations Management, 7e © 2004 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458 11-39 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

40. Transparency Masters to accompany Heizer/Render – Principles of Operations Management, 5e, and Operations Management, 7e © 2004 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458 11-40 Successful Supply-Chain Management Requires:  A mutual agreement on goals  Trust  Compatible organizational cultures

41. Transparency Masters to accompany Heizer/Render – Principles of Operations Management, 5e, and Operations Management, 7e © 2004 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458 11-41 Issues in an Integrated Supply- Chain  Local optimization  Incentives  Large lots

42. Transparency Masters to accompany Heizer/Render – Principles of Operations Management, 5e, and Operations Management, 7e © 2004 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458 11-42 Opportunities in an Integrated Supply-Chain  Generation of accurate “pull” data  Reduction of lot size  Single stage control of replenishment

43. Transparency Masters to accompany Heizer/Render – Principles of Operations Management, 5e, and Operations Management, 7e © 2004 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458 11-43 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”

44. Transparency Masters to accompany Heizer/Render – Principles of Operations Management, 5e, and Operations Management, 7e © 2004 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458 11-44  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

45. Transparency Masters to accompany Heizer/Render – Principles of Operations Management, 5e, and Operations Management, 7e © 2004 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458 11-45  Company  Financial stability  Management  Location  Product  Quality  Price  Service  Delivery on time  Condition on arrival  Technical support  Training Supplier Selection Criteria

46. Transparency Masters to accompany Heizer/Render – Principles of Operations Management, 5e, and Operations Management, 7e © 2004 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458 11-46 Vendor Selection Rating Form

47. Transparency Masters to accompany Heizer/Render – Principles of Operations Management, 5e, and Operations Management, 7e © 2004 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458 11-47 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

48. Transparency Masters to accompany Heizer/Render – Principles of Operations Management, 5e, and Operations Management, 7e © 2004 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458 11-48 Logistics Management  Integrates all materials functions  Purchasing  Inventory management  Production control  Inbound traffic  Warehousing and stores  Incoming quality control  Objective: Efficient, low cost operations

49. Transparency Masters to accompany Heizer/Render – Principles of Operations Management, 5e, and Operations Management, 7e © 2004 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458 11-49 Goods Movement Options  Trucking  Railways  Airfreight  Waterways  Pipelines

50. Transparency Masters to accompany Heizer/Render – Principles of Operations Management, 5e, and Operations Management, 7e © 2004 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458 11-50 Supply-Chain Performance Compared 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