Supply Chain Management : Background
Production & Operation Management By Prof Srikanth Venkataswamy
Purchasing What is Purchasing ? Purchasing is an “Act” Of Buying an item at a price.
Objective Of Purchasing The Basic objective of Purchasing Is To procure : 5 R’s 1. The right material 2. With the right quality and Along With the right quantity 3. At the right Time 4. For the right Price 5. From the right source
Goals of Purchasing 1. 2. 3. 4. 5. 6. 7. Uninterrupted Flow Of Material Manage Inventory Improve quality Developing and managing suppliers relationship Achieve Lowest Total costs Reduce administrative costs Advance firm’s competitive Position
Importance Of Purchasing 1. 2. 3. 4. 5. Purchase function provides material and flow of materials to the Organization. Provides Effective Buying As purchase Of material Contributes almost 50% to 60% of the organizational spending budget led to efficient buying and cost saving structure. Helps in proper Planning and control of materials. Helps in better forecast , scheduling, capacity planning to the top management.
Centralized & decentralized Purchasing is the matter of discretion and policy. Centralized Purchasing: Is the policy of the Management where all purchases of the entire organistion is made by a single purchase department.
Merits of Centralized Purchasing 1. 2. 3. 4. 5. 6. 7. Uniform purchasing policy/Duplicacy avoided: Better cost (economics of large scale buying)& quality control: Control on Multiple buying: Healthy Supplier buyer relationship: Effective Flow of materials/Supplies: Efficient Departmental line of control Better cash Flow/working capital or Financial management:
Demerits of Centralized Purchasing 1. 2. 3. 4. 5. 6. Efficiency of other related departments depends On the efficiency of the purchase department. No localized Purchase advantages: Delay in supply & Receipt Of materials: Room for Miscommunication/ gaps in line of authority. Unsuitable for small buys or for perishable goods or distance between the purchase & production been very Large : Huge Transitional procedures, systems, Paperwork, approvals & costs
Decentralized Purchasing: Stands for extended line of authority to make independent decision and act up them.
Merits of Decentralized Purchasing 1. 2. 3. 4. 5. 6. 7. Better decision freedom /cut on In Efficiency & short comings of the centralised department: Close Vendor – vendee relationship directly with the user departments: Hands on to tap local Advantage: Effective follow up/Better interdepartmental coordination: Reduce in Transitional procedures, systems, Paperwork, approvals & costs: Reduction of overloading of centralized Purchase Departments Streamlined & better Control on the decentralized units for the top management.
Demerits of Decentralized Purchasing 1. 2. 3. 4. 5. Lack of uniform or standard Practices with the different units of the organistion: Underutilization of services of Experts: Absent of Economics of Large Scale Buying: Sometimes Maintaining Decentralized department may be costlier. May lack centralized coordination between different departments and may lead to conflicts.
Steps Involved In Purchasing 1. 2. 3. 4. Need recognition Description of the need/ Specification of the requirements Suitable source selection Determination of price & availability
Industrial Buying- Decision Process Phases In Buying Decision Process : 1. Recognition Of problem or need 2. Description of the need/ Specification of the requirements/ Determination of the application or Characteristics and Quantity of needed product /Development of specifications or description of Need 3. Search for source and Qualification of Potential suppliers
Industrial Buying- Decision Process Cont… 5. 6. 7. 8. Obtaining and analyzing supplier proposal and selection of suppliers/ Determination of price & availability Selection of an order Routine/Placing purchase orders Performance feedback/Delivery Of material : Post Purchase evaluation: Checking Invoice/approval quality & Quantity/Making payment
Purchasing cycle Recognition Of problem or need Post Purchase evaluation Description Specification of the Need Search for source & Qualification of Potential suppliers Feedback Delivery Of material Routine/ Placing PO selection of suppliers
Phases In Buying Decision Process : Phase-1 Recognition Of problem or need : The Recognition of a problem or need May originate within the Buying firm or may also be recognized By a Smart Marketer.
Phase-2 Determination of the characteristics and Quantity of needed product : Once The problem is recognized within or outside the organization, The next Phase Is How To resolve the problem. Questions : What Type of products or services to be considered ? What quantity of product needed?
Phase – 2 contd…. For technical Products: The technical depts like R&D , industrial engineering, production or Quality control Will suggest general Solutions of The needed Product. For Non-technical Products & services: Either the User dept or the Purchase dept May suggest products & services Based On experience and also the quantity required to solve the problem or by any external source as well.
Phase-3 Development of Specifications Of Needed Product : Phase 2 & 3 are Closely related, once the problem is Recognized and determined, in this Phase development Of a precise statement of specifications and Characteristics are taken up. Outside sources Such as suppliers & Consultants may also be contacted.
Search phase Phase 4 - Search & Qualification Of potential supplier In the Phase the Buying organization Searches for acceptable suppliers or vendors. The search for potential buyer is based on various sources of information like trade journals, sales calls, word- of – Mouth, catalogues, trade shows, industrial directories, associations, approved list from approval agencies, web sites and other media.
Phase-5 Obtaining and Analyzing supplier Proposal Once the qualified suppliers are decided n Float enquiries (RFQ) n Obtain proposal- In form of a formal bid, quotation or written e-mail n
n The proposal should Include 1. Product Specification Details 2. Price 3. Delivery Period 4. Payment terms 5. Taxes & levies 6. Transportation Type & cost 7. Insurance-transit , product etc. 8. Any other Costs , discounts (if any), Delivery schedule, (Quantity ) 9. Other details
Selection of supplier/Source 1. 2. 3. 4. 5. 6. 7. 8. General soundness of the supplier in Consideration. Financial strengths Technical Proficiency/manufacture or supplying abilities Flexibility and cooperative ability Special consideration influencing the choice Size of the supplier/SWOT Analysis Supplier’s client List / List Of clients/ background Delivery adherence : confirmation/Analysis.
Purchasing policy n Tenders n Make or Buy n Vendor analysis and vendor rating n Ancillarisation n Ethics n Purchasing For the benefits Organisation n Gifts
Modes of Tendering n Open tendering n Global tendering n Limited Tendering n Single tender n Spot tender.
Make or Buy Decision Making or Buying an item n Making the item now bought out n Buying the item now made n The Two Factors to be consider in Make Or Buy Decision are: 1. Cost 2. Production Capacity
Factors 1. 2. 3. 4. 5. 6. 7. 8. Less expenses In making the part Secrecy to be maintained Optimum utilization of the plant capacity Suppliers are not up to the expectations Production & Quality are Of Prime importance/need direct supervision Small quantity required Less expensive than manufacturing Govt Policies Favors Ancillarisation. Make Buy
Factors 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. Suppliers cannot quote Different operations Integration Type of the product Company attained Decline stage Industry ageless Suppliers Specialized know-how available Production facilities not much To Maintain constant work force Multiple source policy Monopoly items and buyer no option Temporary Ramp up Make Buy
Inventory Management
The central focus of most manufacturing layouts is to minimize the cost of processing, transporting, and storing materials throughout the production system. Materials used in manufacturing include: Raw material Purchased components Work-in-progress Finished goods Packaging material Maintenance, repair, and operating supplies
What are Inventories ? n n n Inventories are the stocks Of materials Of any Kind stored for future operations. Inventories Includes materials like : Raw materials Semi Finished goods Work-in-process Finished Goods Consumables Maintenance Spare Parts
Objective Of Inventories Objective Of Inventory Management are: 1. To facilitate smooth Operations of the manufacturing process Or Balance Demand to Supply. 2. To run the operations economically 3. To minimize investment on inventory. 4. To reduce material Handling costs and other Costs. 5. To eliminate Uncertainties§ § 6. 7. Uncertainties in demand from customers Uncertainties in Procuring the material. Reasonable utilization of manpower and Other resources. Contribute to the efficient and effective operation of the production system.
Inventory Costs Four types of Inventory costs: 1. Ordering Costs 2. Inventory Carrying Costs 3. Out -Of-stock or stock out Costs 4. Capacity costs
Inventory Costs 1. Ordering Costs 2. Inventory Carrying Costs 3. Out-Of-Stock Costs 4. Capacity Costs
Inventory costs: 1. Ordering costs: Cost Of Placing an order – a) Preparing a purchase order. b) Processing Payments. c) Receiving & inspecting the material.
Inventory costs: A. 2. Inventory carrying costs Costs connected directly with the Materials 1. Obsolescence 2. Deterioration 3. Pilferage B. Costs connected to finance. 1. 2. 3. 4. 5. Taxes Insurance Storage Interest On Capital Interest On inventory
2. Inventory carrying costs contd… Inventory costs: Details Of Carrying costs. Capital Goods: n Interest On Capital Invested In inventory. n Interest On Capital Invested on land & building to hold the inventory. Rent On Building Taxes & insurance on Building /inventory , Depreciation , Cost of maintenance & repairs, Utility Charges, Salaries Of security, maintenance personnel n Interest On Capital Invested In inventory Holding and control equipment.
2. Inventory carrying costs contd… Inventory costs: Handling –Equipment costs: n Cost of Capital on equipment n Taxes & insurances On equipment n Depreciation n Fuel expense n Cost Of maintenance and repairs
Inventory costs: n Back 3. Out-Of-Stock costs ordering n Lost sales
Inventory costs: 4. Capacity costs Overtime payments when capacity is too small 2. Layoffs and idle time when capacity is too large. 1.
Different costs Involved The cost of holding the stock (e. g. , based on the interest rate). n The cost of placing an order (e. g. , for row material stocks) or the set-up cost of production. n The cost of shortage, i. e. , what is lost if the stock is insufficient to meet all demand. The third element is the most difficult to measure and is often handled by establishing a "service level" policy, e. g, certain percentage of demand will be met from stock without delay. n
Costs & EOQ Total costs Cost/Period Carrying costs Order costs Min EOQ
Factors Affecting Inventory Costs Factors Affecting Inventory costs Sales Characteristics Market Characteristics Production Characteristics
Factors Affecting Inventory Costs 1. Sales Characteristics§ § § Size & frequency of the order Uniformity Or Probability of Sales Service Requirements Distribution Pattern Accuracy, Frequency & Details Of sales forecasts
Factors Affecting Inventory Costs 2. Production Characteristics: § Types Of production § No Of Manufacturing Stages § Degree of specification Of the Product at specific Stages § Processing Time At Each Stage § Production Flexibility § Capacity Of production & Warehousing Stages § Kind Of Processing
Factors Affecting Inventory Costs 3. Market Characteristic: – – – – – Procurement Cycle Internal Lead Time Frequency Of Cancellation of the Purchase Orders Terms Of Payments Discounts Speculation Imports Govt/Organisational Polices Shortages/Rising Prices Other Marketing Forces.
Process Of Inventory Management & control Determination of optimum inventory Analysis 2. Determination The Optimize degree of stock control required. 3. Planning and design of the inventory control system 4. Planning Of the inventory control Mission 1.
Why We Want to Hold Inventories n Improve customer service n Reduce certain costs such as – ordering costs – stock out costs – acquisition costs – start-up quality costs n Contribute to the efficient and effective operation of the production system
Why We Want to Hold Inventories Contd… n Finished Goods – Essential in produce-to-stock positioning strategies – Necessary in level aggregate capacity plans – Products can be displayed to customers n Work-in-Process – Necessary in process-focused production – May reduce material-handling & production costs n Raw Material – Suppliers may produce/ship materials in batches – Quantity discounts & freight/handling $$ savings
Why We Do Not Want to Hold Inventories n Certain costs increase such as: – carrying costs – cost of customer responsiveness – cost of coordinating production – cost of diluted return on investment – reduced-capacity costs – large-lot quality cost – cost of production problems
Inventory control Inventory Control Inventory Analysis Stock Control
Inventory Analysis/Techniques ABC Analysis ( Always Better Control) Based On The Annual Usage Value. n VED Analysis : Based On criticality Of items: n Vital, essential, desirable n n n SDE Analysis (Scare, Difficult, Easily Available) Based On Procurement aspects XYZ Analysis: Based On The value Of Inventory Held HML Analysis: ( High, Medium , Low) Based on Unit cost FSN Analysis: (Fast Moving, Slow moving, Non moving ) Based on Consumption rate. AX, BY, CZ Analysis: Combining ABC With XYZ AV, BE, CD Analysis : Combining ABC with VED
n Minimum –Maximum n Two Bin n S-os Analysis n G-O-L-F Analysis G Govt, O Open Market, L Local, F foreign n EOC-Economic ordering Quantity n JIT Just -IN- Time
ABC Analysis The ABC classification process is an analysis of a range of items, such as finished products or customers into three categories: n A - outstandingly important; n B - of average importance; n C - relatively unimportant as a basis for a control scheme. Each category can and sometimes should be handled in a different way, with more attention being devoted to category A, less to B, and less to C.
The ABC Classification n The ABC Classification The ABC classification system is to grouping items according to Annual sales volume, in an attempt to identify the small number of items that will account for most of the sales volume and that are the most important ones to control for effective inventory management.
ABC Analysis (Pareto’s Principle) C I 00 B 95 A % Total Annual Usage value Rs 80 % OF Items
EOQ Economic Order Quantity EOQ Or Best Quantity Technique Or Economic lot Size EOQ Is That Quantity to be bought at a time where the over cost is the least EOQ Is the technique of determining that quantity where the two sets of costs are minimum or equated. TWO Sets Of costs: 1. Inventory procurement costs 2. Inventory carrying costs.
EOQ Ordering Point Reorder Point Quantity Buffer STOCK Reserve STOCK Safety STOCK TIME
EOQ Meanings n Re-Order Point: It Is the point in time when the Next purchase order is to be released to replenish the stock. (This is done when the stock begins to fall below the reorder stock level, which is the sum of the buffer stock, safety stock and reverse stock. ) n Buffer Stock: Is equivalent To the stock required to meet normal consumption during normal lead time n Virtual Stock: Is the sum Of reserve Stock, safety stock and order quantity. n Safety Stock: It Is the stock which provides for delays in the supply of material. It is Equal To The Normal Consumption rate and Max consumption rate multiplied by average lead Time. n Reserve Stock: It Is The stock which provides for abnormal consumption. it Is Equal to the Difference Between Normal & Max Consumption Rate Multiplied by average Lead time
EOQ Formula EOQ = 2 X AC X OC CC % Where: AC = Annual Consumption in Units OC = Ordering Cost Per Order CC% = Inventory carry costs as a percentage of unit cost.
Ordering Costs 1. 2. 3. 4. 5. 6. 7. 8. Costs Incurred in sending enquiries, Receiving quotations, Planning an Order, Finalizing the order, expediting and follow up costs of an order. Transportation & Stationery costs. Rent For the space used By The Purchasing department The Salaries and wages of the office staff of the purchasing department Deprecation of the equipments and furniture Of the Purchase departments Inspection Costs and costs Of the Settlement Of the payment. Purchase Audit costs Other Over Heads.
Inventory Carrying costs 1. 2. 3. Rent For the Storage Space and period. Salaries and wages of store keeping Department Pilferage and deterioration costs Internal Transportation & Stationery costs. 5. Cost Of Obsolescence where the inventories rendered useless. 4. Interest On Capital Blocked in inventories 7. Taxes on inventories. 6.
Standardization, Codification, Simplification Advantages Of Classification & codification: 1. Correct identification of each & every item by systematic grouping of similar items. (items kept in one place and coded with proper numbers). 2. Reduction in sizes and varieties. The usage of long 3. Duplication of stocks & Less confusion. Avoids 4. Standardization of Materials greatly improves and helps to finding substitutes. Simpler Storage methods, Accurate & proper maintaining of records, Easy Inventory & Accounts control Procedures etc. can be achieved 5. description is simplified and possible confusion avoided. duplication of the stocks of the same item being held under different names, Descriptions, Brand names , Part numbers and different stores.
Principles Of Classification Effective Classification & codification systems are based on UCUS: 1. Basis Of Classification to be made uniform (Uniformity) 2. Classification to cover full range of Items (comprehensiveness) 3. Unique one code number to each item (Uniqueness) 4. Ease to adapt by each & every one (simplicity)
Methods Of Classification & Codification n n n Raw Material Stores Work-in-Process Stores Assembly Stores Semi finished Stores Finished Stores Consumable Stores Tools Stores Packing Materials Stores Spare parts stores Small Parts Stores Heavy Parts stores Hardware Stores
Break Even Analysis
Elements of JIT Manufacturing n n n n n Eliminating waste Enforced problem solving and continuous improvement People make JIT work Total Quality Management (TQM) Parallel processing Kanban production control JIT purchasing Reducing inventories Working toward repetitive manufacturing
Benefits of JIT n Inventory reduced: levels are drastically – frees up working capital for other projects – less space is needed – customer responsiveness increases n Total product cycle time drops n Product quality is improved n Scrap and rework costs go down n Forces managers to fix problems and eliminate waste. . or it won’t work!
Supply Chain Management
Introduction & Importance of Supply Chain Management
n Module I: Global Supply Chain – Overview n Introduction & Importance of Supply Chain Management, Developing Supply Chain as a Competitive Tool for Customer Satisfaction and Corporate Profitability, Channel Structure, Supplier Network Development, Outsourcing. , Supply Chain Logistics Operations.
PREAMBLE: SCM Manufacturers world over are frantically trying to improve efficiencies in their operations, the urgency further accelerated by the shrinking global economy. Falling customer demand, tighter credit, rising input prices and the economic uncertainty are forcing companies to re-evaluate their business plans especially with respect to investments in new capacities, markets and products. At the same time, there is a renewed focus on making current assets work harder and maximize the return on the already invested dollar. However, achieving operational efficiencies requires more than reducing costs, high utilization mandates, strict inventory control and rationalizing capacity or manpower.
There is no denying the usefulness of these steps, but the key is to ensure every bit of the supply chain is performing towards meeting a single objective – right product at the right place in the right quantity at the right time. This requires all operational entities within the enterprise to be integrated through business processes and technological enablers.
PREAMBLE: SCM Supply Chain Management exists to an end – satisfied customers at the optimum cost. And as markets and businesses have evolved, supply chains have become more complex, more global and a more critical business function than ever before. At the same time, many leading firms have realized that a well run supply chain can be a source of distinct competitive advantage in the marketplace, and have been in the forefront in adopting practices that deliver superlative efficiencies in their supply chain functions.
PREAMBLE: SCM While many have been successful in optimizing important supply chain functions, a few have managed to make their entire supply chain behave as a single linked entity – from end customer delivery to raw material procurements – to achieve truly synchronized operations.
Supply Chain Process Integrated , coordinated network of value delivering business processes that procure raw materials, transform them into final products, services and delivers the product to the customers § Procurement § Manufacturing/assembly § Inbound logistics § Warehousing § Distribution § Outbound logistics
Supply Chain Management Processes Supply Chain Management is the management of eight key business processes 1. Customer Relationship Management 2. Customer Service Management 3. Demand Management 4. Order Fulfillment 5. Manufacturing Flow Management 6. Procurement 7. Product Development and commercialization 8. Returns Key requirement for successful implementation of supply chain management are executive support, leadership, commitment to change, and empowerment.
• Different aspects of SCM which have received much attention in traditional production and operations management community: – Inventory control, – forecasting, – transportation logistics, – distribution, and – procurement
In the first half of the twentieth century industry replaced agriculture, in the second half of the twentieth century –“service” has replaced “manufacturing” -and right now, the knowledge industry is beginning to replace the others. −−George Kotzmetzk
Introduction *What is Supply Chain Management? * Why is Supply Chain Management important? * The origins of Supply Chain Management * *Important Elements of Supply Chain Management: - Purchasing - Operations - Distribution - Integration * Strategies for Supply Chain Management * Future Trends in Supply Chain Management
What is a Supply Chain? A supply chain consists of the flow of products and services from/to: --Raw materials manufacturers --Intermediate products manufacturers --End product manufacturers --Wholesalers and distributors --Retailers and, --End customers Connected by agents, transportation and storage activities, and Integrated through sharing of information, planning, and processing activities Examples? ? ?
Typical Supply Chains Production Purchasing Distribution Receiving Storage Operations Storage
Typical Supply Chain for a Manufacturer Supplier } Storage Mfg. Storage Dist. Retailer Customer
What is Supply Chain Management? Here are two definitions: The design and management of seamless, value-added process across organizational boundaries to meet the real needs of the end customer -- Institute for Supply Management Managing supply and demand, sourcing raw materials and parts, manufacturing and assembly, warehousing and inventory tracking, order entry and order management, distribution across all channels, and delivery to the customer -- The Supply Chain Council
Supply chain management (SCM) holds promise for not just improving productivity but also competitiveness. SCM has to be leveraged for corporate India’s gain without delay In consumer durables, the entry of MNCs has increased competition and SCM is perceived as the vital factor, which differentiates failure from success.
SCM Offers Opportunities for: n Reduction in costs across functions n Better planning for purchase and production n More efficient use of capital n A $50 billion (13% of our GDP) opportunity for a variety of services – Trucking, warehousing, IT, etc. Most leading companies in India have an SCM drive in place. Source: ETIG-Pw. C SCM Survey 2002
Supply Chains in India n Sony India managed to reduce its inventories by 70% just six months after it began its SCM initiative n Maruti has wired all its suppliers together and 60% of business transactions are now happening online Source: “Pulling Power”, DATAQUEST; 31 October 2001.
Supply Chains in India n Samsung manages a 5, 000 -dealers' online network with just 15 employees n Mahindra & Mahindra's tractor division aims for a reduction of 48% in inventories, 30% in logistics costs and a cutback in production cycle from a month to a week Source: “Pulling Power”, DATAQUEST; 31 October 2001.
Supply Chains in India All these companies have one thing in common. They are among the early adopters of Supply Chain Management systems in the country — They went out all by themselves, setting a path for others to learn from. Source: “Pulling Power”, DATAQUEST; 31 October 2001.
n What is new in SCM? – Two dimensions which differentiate SCM from traditional concepts: § Organizational Integration and § Flow Coordination Stated simply, a supply chain is a network of entities that starts with the suppliers’ suppliers and ends with the customers’ customers for production and delivery of goods and services.
Competitiveness Customer service Integration: Coordination: Choice of partners Use of information and communication technology Network organization and inter-organizational collaboration Process orientation Leadership Advanced planning Foundations: Logistics, marketing, operations research, organizational theory, purchasing and supply… : Fig. House of SCM
Supply Chain Building Blocks Structural Logical IT / ITEC Informational
Structural Building Blocks n n n Suppliers Manufacturing / Assembly Plants Warehouses Distribution Centers Retailers / Customers Logistics Network – Inbound – Outbound n Customers Orders
Example of a Typical Supply Chain: IBM Europe PC Supply Chain Warehouse Port PC Assembly Plant Suppliers (International) 1. 2 Million PC/Yr. Glasgow U. K. Retailers 13 Transshipment Country-wide Points (TPs) in Europe Distribution Centers (DCs)
Logical Building Blocks STRATEGIC TACTICAL OPERATIONAL Procurement Logistics Manufacturing Distribution Logistics
Order/ Product Flow through Supply Chain Functions Products Order Management Channel A Orders Channel B Orders Customer Orders Manufacturing Parts Part Supply Products Product Distribution Production Plans Component Requirement Channel C Products Demand Forecast Supply Planning Demand Planning
Conclusion Efficiency Responsiveness Supply chain structure Inventory Transportation Facilities Information Drivers of Supply Chain Performance Source: Chopra & Meindl/Logistics Strategy
Elements of Supply Chain Management R C a o w Inbound Sourcing Logistics Outbound Manufacturing After Market Logistics Service M a t e r I a l s • Vendor Number, Location, Capacity etc • Product design support • Tooling design and supply • Spot market purchase or partnership • Delivery schedules • Warehouse Number, Location, Size, Function etc • Transportation mode • In-house vs contract carrier • Inventory/safety stock levels • AS/AR systems • Supplier development • Vehicle dispatching • PO tracking • Bar coding • EDI links • Plant Location(s) • DC Location(s) • Capacity Levels • DC functions and size • Number & location of service centers • In-house vs contract carrier • Function and size • Process Technologies • Product & process development • Maintenance programs • WIP targets • Workforce levels • Robotics • CAD/CAM/CAE • Inventory/safety stock levels • Spares inventory level and locations • AS/AR systems • Service fleet size and equipment • Package engineering • Failure analysis • EDI customer links • Work force levels • Shipping schedules • Data mining n s u m e r
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