PRODUCTION AND OPERATIONS MANAGEMENT Ch 12 Supply -Chain

PRODUCTION AND OPERATIONS MANAGEMENT Ch. 12: Supply -Chain Management POM - J. Galván 1

Learning Objectives How do we organize supply mechanisms? • Due time • Right price POM - J. Galván 2

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 POM - J. Galván 3

The Supply-Chain VISA ® Materiall Flow Credit Flow Supplier Manufacturing Retailer Consumer Wholesaler Retailer Order Schedules Flow POM - J. Galván Cash Flow 4

Creation of Inventory Input flow of materials Inventory level Scrap flow Output flow of materials

Inventory at Different Stocking Points

Where Inventories Are Held Manufacturing (36%) Other (8%) Retail trade (25%) Farm (8%) Wholesale trade (23%)

Three Possible Structures of the SCM • Segmented (purchasing, production control, distribution departments) • Hybrid (purchasing+production control, distribution departments) • Integrated (material management or logistics department)

Supply Chain Customer Distribution center Manufacturer Tier 1 Tier 2 Tier 3 Legend Supplier of services Supplier of materials

Integrated Supply-Chain Phase 1: Independent supply-chain entities Suppliers Phase 2: Internal integration Suppliers Purchasing Production control Distribution Production Distribution control Internal supply chain Materials management department Phase 3: Supply-chain integration Suppliers Internal supply chain Customers Integrated supply chain Customers

The Acquisition Process Recognize a need Select suppliers Place the order Track the order Receive the order

Purchasing Acquisition of goods & services Activities • • 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 POM - J. Galván 12

Electronic Purchasing • EDI (electronic data interchanges, since 1970 s) – machine-to-machine, phone or dedicated lines, complex (X 12 form has 150 fields) and expensive software, batch processing (order, invoice, etc) • E-Commerce – flexible (Java applets) for any communication (ftp, http, email, etc), low cost, near real-time , reaches wider community of users.

Purchasing • Vendor/Supplier Selection – price, quality, delivery (on-time, short LT) § The impact of lead time (location) on inventory “The cost of a 30 -day inventory, including the cost of damages from handling, accounts for as much as 23% of the price of the parts to customers” Now, JIT delivery (20 minutes) to GM Leonard Kasle President, Kasle Steel

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 POM - J. Galván 15

Traditional Purchasing Process Customer Supplier Purchase Order Receivables Report Accounts Payable Reconcile Order Processing Mail Receiving Dock Packing List Mail Invoice Check POM - J. Galván Mail Accounts Receivable 16

Delivery: American Hospital “Hospitals today are looking at more than price per case; they’re looking at the total cost of procurement, including logistics and INVENTORY. ” Supply Executive, American Hospital

Purchasing--Supplier Relations • Competitive Orientation: – Zero-sum between seller and buyer – When a buyer has more clout? • Big share of supplier’s sales • Item is standardized • Buyer can integrate BACKFORWARD • Suppliers can’t integrate FORWARD • Switching cost is low

Purchasing--Supplier Relations • Cooperative Orientation: – Seller and buyer are partners – become popular with JIT success – a smaller number of suppliers – sole sourcing: required continuous improvement targets and risk – longer term commitment – early supplier involvement in value analysis – supplier certification

Make/Buy Considerations Reasons for Making Reasons for Buying lower acquisition cost lower production cost preserve supplier commitment unsuitable suppliers obtain technical or assure adequate supply management ability utilize surplus labor and make a inadequate capacity marginal contribution reduce inventory costs obtain desired quantity ensure flexibility and alternate remove supplier collusion source of supply obtain a unique item that would reciprocity entail a prohibitive commitment item is protected by patent or trade secret from the supplier frees management to deal with maintain organizational talent its primary business protect proprietary design or quality increase/maintain size of POM - J. Galván company 20

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 POM - J. Galván Plan © 1995 Corel Corp. 21

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 POM - J. Galván © 1995 Corel Corp. 22

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 POM - J. Galván © 1995 Corel Corp. 23

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 Finished Goods (Customers) POM - J. Galván 24

Forms of Vertical Integration Iron Ore Silicon Automobiles Raw Material (Suppliers) Flour Milling Steel Farming Backward Integration Integrated Circuits Current Transformation Distribution Circuit Boards System Dealers Computers Watches Calculators Forward Integration Baked Goods POM - J. Galván Finished Goods (Customers) 25

Centralized Buying • Pros: – Increased clout (savings of 10% or more) – Buyers develop specialized expertise – Consistent with globalization (global sourcing) • Cons: – Loss of local control • profit center responsibility • Unique items are not possible – Longer lead time – More difficult communication

Work Gloves at GM • Before Centralization – GM was spending $10 million per year on work gloves. Almost half was for one type, which was purchased from 95 different suppliers. One of the suppliers charged a different price in each of 5 divisions. The price ranged from $5. 00 to $5. 88 per dozen. • After Centralization – GM is down to only 6 suppliers and it negotiated a 12% price reduction. The annual savings is more than $1 million -- just for work gloves !

Distribution 1. Outbound flow from plant to customer 2. Forward placement of finished goods inventory – Pros: fast delivery, lower transportation costs – Cons: customized products not possible, loss of pooling effect 3. Transportation mode – Five mode: highway, rail, water, pipeline, air – Carriers: private, contract, common

Inventory Measures • Average Aggregate Inventory Value = total value of all item held in inventory • Weeks of Supply = dividing average aggregate inventory value (at all levels) by weekly sales at cost (I. e. cost of goods sold) of finished goods. • Inventory Turnover (or turns) = dividing annual sales at cost (cost of goods sold) by average aggregate inventory value.

Example: Inventory Measures • A recent accounting statement showed average aggregate inventories (RM + WIP + FG) to be $6, 821, 000. This year’s cost of goods sold is $19. 2 million. The company operates 52 weeks per year. How many weeks of supply are being held? What is the inventory turnover? Solution: Weeks of supply Inventory turnover

Inventory Measures Average inventory = $2 million Cost of goods sold = $10 million 52 business weeks per year Weeks of supply = Inventory turns = $2 million ($10 million)/(52 weeks) $10 million $2 million = 10. 4 weeks = 5 turns/year

Supply-Chain Performance Linking Supply-Chain Performance Measures to Financial Measures Operations Measure Aggregate inventory value Weeks of supply Inventory turns Production and material costs Percentage defects Percentage on-time delivery New product development time Supplier lead times Financial Measure Current assets Working capital Contribution margin Revenue Working capital

Supply-Chain Environments Best Suited for Efficient and Responsive Supply Chains Factor Efficient Supply Chains Responsive Supply Chains Demand Predictable; low forecast errors Low cost; consistent quality; on-time delivery Infrequent Unpredictable; high forecast errors Development speed; fast delivery times; customization; volume flexibility; high-performance design quality Frequent Low High Competitive priorities New-product introduction Contribution margins Product variety

Supply-Chain Design Features for Efficient and Responsive Supply Chains Factor Efficient Supply Chains Responsive Supply Chains Flow strategy Line flows; emphasize high volume, standardized products, or services Low Flexible or intermediate flows; emphasize product or service variety High Low; enable high inventory turns Shorten, but do not increase costs Emphasize low prices; consistent quality; ontime delivery As needed to enable fast delivery time Shorten aggressively Capacity cushion Inventory investment Lead time Supplier selection Emphasize fast delivery time; customization; volume flexibility; highperformance design quality

Supply-Chain Dynamics Customer Firm A Firm B Materials Requirements Customer Firm C Firm A Firm C (a) (b) Time

Supply-Chain Dynamics External Supply-Chain Causes Volume changes Product/service mix changes Late deliveries Underfilled shipments Internal Supply-Chain Causes Internally generated shortages Engineering changes New product/service introductions Product/service promotions Information errors

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 • POM - J. Galván 37

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. POM - J. Galván 38

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 POM - J. Galván 39

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 © 1995 Corel Corp. POM - J. Galván 40

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. • POM - J. Galván 41

Supplier Selection Criteria Company Service Financial stability • Management • Location • Product Delivery on time • Condition on arrival • Technical support • Training • Quality • Price • POM - J. Galván 42

Negotiation Strategies Three types: • cost-based price model - supplier opens its books to purchaser; price based upon fixed clause plus escalation clause for materials and labor • market-based price model - published price or index • competitive bidding - potential suppliers bid for contract POM - J. Galván 43

Materials Management Integrates all materials functions • • • Purchasing Inventory management Production control Inbound traffic Warehousing and stores Incoming quality control Objective: Efficient, low cost operations POM - J. Galván 44

Goods Movement Options Trucking Railways Airfreight Waterways Pipelines POM - J. Galván 45