1. Chapter 17 Supply Chain Management Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall 17-1 Supply Chain Management

2. Chapter 17 Supply Chain Management Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall 17-2 Supply Chain Management A key determinant of a company’s ability to compete A key determinant of a company’s ability to compete Today, competition is not “company vs. company but supply chain vs. supply chain” Today, competition is not “company vs. company but supply chain vs. supply chain” Globalization has made supply chains longer and more complex Globalization has made supply chains longer and more complex Global purchasing increases risk Global purchasing increases risk

3. Supply Chain Risks Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall 17-3Chapter 17 Supply Chain Management

4. Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall 17-4 Supply Chain Management Companies spend nearly $20 trillion on goods and services each year Companies spend nearly $20 trillion on goods and services each year Shaving 2% from a company’s CGS can increase net income by as much as 25% Shaving 2% from a company’s CGS can increase net income by as much as 25% Aberdeen Group survey: 82% of companies had experienced a supply disruption or outage within the last two years Aberdeen Group survey: 82% of companies had experienced a supply disruption or outage within the last two years Requires a sound purchasing plan Requires a sound purchasing plan

5. Components of a Purchasing Plan Right Quality Right Vendor Right Time Right Quantity Right Price The Purchasing Plan Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall Chapter 17 Supply Chain Management 17-5

6. Chapter 17 Supply Chain Management Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall 17-6 The Purchasing Plan Quality Quality  Kaizen  Total Quality Management Deming’s 14 Points Deming’s 14 Points  Six Sigma Quantity Quantity  Economic Order Quantity Analysis (EOQ)  Economic Order Quantity with Usage

7. Chapter 17 Supply Chain Management Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall 17-7 Price Price  Purchase Discounts Time Time  Reorder Point Analysis Vendor Vendor  Sources of Supply  Vendor Rating Scale (Continued) The Purchasing Plan

8. Chapter 17 Supply Chain Management Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall 17-8 Quality “Higher quality is less expensive to produce than lower quality.” — W. Edwards Deming “Higher quality is less expensive to produce than lower quality.” — W. Edwards Deming The endless pursuit of quality produces lower costs, higher productivity, greater market share, and more satisfied customers The endless pursuit of quality produces lower costs, higher productivity, greater market share, and more satisfied customers Kaizen, continuous improvement, is the most commonly used quality improvement strategy Kaizen, continuous improvement, is the most commonly used quality improvement strategy Quality

9. Chapter 17 Supply Chain Management Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall 17-9 Total Quality Management (TQM) is a philosophy that strives for getting everything a company does for a customer right the first time Total Quality Management (TQM) is a philosophy that strives for getting everything a company does for a customer right the first time TQM involves a lifelong process of continuous improvement; a successful TQM process requires a company to change everything it does TQM involves a lifelong process of continuous improvement; a successful TQM process requires a company to change everything it does Quality Quality

10. Chapter 17 Supply Chain Management Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall 17-10 Implementing TQM 1. Use benchmarking to discover the best practices that will produce quality results 2. Shift from a management-driven culture to a participative, team-based one 3. Modify the reward system to encourage teamwork and innovation Success requires following 11 principles:

11. Chapter 17 Supply Chain Management Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall 17-11 4. Train workers constantly to give them the tools they need to produce quality and to upgrade the company’s knowledge base 5. Train employees to measure quality with the tools of statistical process control (SPC) 6. Use Pareto’s Law to focus TQM efforts 7. Share information with everyone in the organization Implementing TQM Success requires following 11 principles:

12. Chapter 17 Supply Chain Management Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall 17-12 8. Focus quality improvements on astonishing the customer 9. Don’t rely on inspection to produce quality products and services 10. Avoid using TQM to place blame on those who make mistakes 11. Strive for continuous improvement in processes as well as in products and services Implementing TQM Success requires following 11 principles:

13. Chapter 17 Supply Chain Management Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall 17-13 Deming’s 14 Points 1. Constantly strive to improve products and services 2. Adopt a total quality philosophy 3. Correct defects as they happen rather than rely on mass inspection of end products 4. Don’t award business on price alone

14. Chapter 17 Supply Chain Management Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall 17-14 5. Constantly improve the system of production and service 6. Institute training 7. Institute leadership 8. Drive out fear Deming’s 14 Points

15. Chapter 17 Supply Chain Management Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall 17-15 9. Break down barriers among staff areas 10. Eliminate superficial slogans and goals 11. Eliminate standard quotas Deming’s 14 Points

16. Chapter 17 Supply Chain Management Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall 17-16 12. Remove barriers to pride in workmanship 13. Institute vigorous education and retraining 14. Take demonstrated management action to achieve transformation Deming’s 14 Points

17. Chapter 17 Supply Chain Management Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall 17-17 Like TQM, Six Sigma uses data-driven statistical tools to improve quality Like TQM, Six Sigma uses data-driven statistical tools to improve quality Threshold: Just 3.4 defects per 1 million opportunities Threshold: Just 3.4 defects per 1 million opportunities Built on the Quality DMAIC Process Built on the Quality DMAIC Process Six Sigma

18. PrincipleProcess Improvement Technique D efine Identify the problem. Define the requirements. Set the goal for improvement. M easure Validate the process problem by mapping the process and gathering data about it. Refine the problem statement and the goal. Measure current performance by examining the relevant process inputs, steps, and output to establish a baseline. A nalyze Develop a list of potential root causes. Identify the vital few. Use data analysis tools to validate the cause and effect connections between root causes and the quality problem. I mprove Develop potential solutions to remove root causes by making changes to the process. Test potential solutions and develop a plan for implementing those that are successful. Measure the results of the improved process. C ontrol Establish standard measures for the new process. Establish standard procedures for the new process. Review performance periodically and make adjustments as needed. Source: Adapted from Andrew Spanyi and Marvin Wurtzel, “Six Sigma for the Rest of Us,” Quality Digest, July 2003, http://www.qualitydigest.com/july03/articles/01_article.shtml.http://www.qualitydigest.com/july03/articles/01_article.shtml

19. Chapter 17 Supply Chain Management Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall 17-19 Four Tenets of Six Sigma 1. Delight customers with quality and speed 2. Constantly improve the process 3. Use teamwork to improve the process 4. Make changes to the process based on facts, not guesses

20. Chapter 17 Supply Chain Management Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall 17-20 Price Discounts: Trade discounts – established on a graduated scale and depend on a company’s position in the channel of distribution Trade discounts – established on a graduated scale and depend on a company’s position in the channel of distribution

21. Chapter 17 Supply Chain Management Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall 17-21 Trade Discount Structure Manufacturer sells for $80. Wholesaler buys at $80; sells at $100. Retailer buys at $100; sells at $175. Customer buys at $175.

22. Chapter 17 Supply Chain Management Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall 17-22 Quantity discounts - offer price breaks on large-volume purchases Quantity discounts - offer price breaks on large-volume purchases Cash discounts - offered as incentives to pay early. (e.g., “2/10, net 30”) Cash discounts - offered as incentives to pay early. (e.g., “2/10, net 30”) Price Discounts: Trade discounts - established on a graduated scale and depend on a company’s position in the channel of distribution Trade discounts - established on a graduated scale and depend on a company’s position in the channel of distribution

23. Chapter 17 Supply Chain Management Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall 17-23 Selecting the Right Vendors Factors to consider: Number of suppliers Number of suppliers Reliability Reliability Proximity Proximity Speed Speed Services Services Collaboration Collaboration Price Price