All SCM Process

Supply Chain Management
● Definition:
 Supply Chain Management is primarily concerned
with the efficient integration of suppliers, factories,
warehouses and stores so that merchandise is produced and
distributed in the right quantities, to the right locations and
at the right time, and so as to minimize total system cost
subject to satisfying service requirements.
● Notice:
●
Who is involved
●
Cost and Service Level
● It is all about integration
1
Supply Chain Management
● Refers to all the management functions related to the flow of

materials from the company’s direct suppliers to its direct
customers.
● Includes purchasing, traffic, production control, inventory
control, warehousing, and shipping.
● Two alternative names:
●
Materials management
●
Logistics management

2
Supply Chain Management ---A River
3
SCM Improvement Principles
The Seven Principles of Supply Chain Management
§Segment customers based upon service needs

§Customize the logistics network
§Listen to the signals of the marketplace and plan
“What Is” accordingly “What Can Be”
§Differentiate products closer to the consumer
§Source strategically
§Develop a supply-chain-wide technology strategy
§Adopt channel spanning performance measures
4
Conflicting Objectives in the Supply
Chain
 1. Purchasing
 • Stable volume requirements
 • Flexible delivery time
 • Little variation in mix
 • Large quantities
2. Manufacturing
 • Long run production

 • High quality
 • High productivity
 • Low production cost
5
Conflicting Objectives in the Supply
Chain
3. Warehousing
 • Low inventory
 • Reduced transportation costs
 • Quick replenishment capability
4. Customers
 • Short order lead time

 • High in stock
 • Enormous variety of products
 • Low prices
●
6
The Bullwhip Effect
“The
“Thebullwhip
bullwhipEffect
Effectisisaamajor
majorcause
causeofofhigher
highercosts
costsand
and
inefficiencies
inefficienciesininsupply
supplychains.
chains.ItItdescribes
describeshow
howsmall
smallfluctuations
fluctuations
inindemand
demandat atthe
thecustomer
customerlevel
levelare
areamplified
amplifiedas
asorders
orderspass
passupup
the
thesupply
supplychain
chainthrough
throughdistributors,
distributors,manufacturers,
manufacturers,and
and
suppliers.”
suppliers.”
“Asan
“As anexample,
example,consider
considerdisposable
disposablediapers.
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Babiesgenerally
generally
consume
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diapersat
ataamore
moreororless
lessconsistent
consistentrate
ratewhen
when
aggregated
aggregatedover
overaalarge
largegroup
groupofofcustomers.
customers.Nevertheless,
Nevertheless,
order
orderfluctuations
fluctuationsinvariably
invariablybecome
becomeconsiderably
considerablylarger
largeras
as
one
onemoves
movesupstream
upstreamin inthis
thischain.”
chain.”
Consequencesof
Consequences ofthe
theBullwhip
BullwhipEffect
Effectinclude
includeexcess/
excess/fluctuating
fluctuating
inventories,shortages/stockouts,
inventories, shortages/stockouts,longer
longerlead
leadtimes,
times,higher
higher
transportationand
transportation andmanufacturing
manufacturingcosts,
costs,and
andmistrust
mistrustbetween
between
supplychain
supply chainpartners
partners
7
Order Size
The Dynamics of the Supply Chain
Customer
Demand
Retailer
Retailer Orders
Orders
Distributor
Distributor Orders
Orders
Production
ProductionPlan
Plan
Time
8
Source: Tom Mc Guffry, Electronic Commerce and Value Chain Management, 1998
Order Size
The Dynamics of the Supply Chain
Customer
Demand
Production
ProductionPlan
Plan
Time
9
Source: Tom Mc Guffry, Electronic Commerce and Value Chain Management, 1998
Supply Chain upstream Activities
In
Inmost
mostsupply
supplychains,
chains,the
theupstream
upstreamactivities
activitiesrespond
respondto toforecast,
forecast,while
while
somewhere
somewhereon onthe
thedownstream
downstreamside
sidethe
thechain
chainwaits
waitsfor
fororders
ordersto
tobe
be
placed.
placed.Consider
Considerthese
thesetwo
twoformer
formerfast
fastslogans
slogans
•“We do
•“We do itit all
all for
for you!
you! McDonald’s
McDonald’s
•“Have itit your

•“Have your way
way Burger King
Burger King
Build to stock VS Build to Order
10
INTEGRATING OPERATIONS MANAGEMENT WITH OTHER FUNCTIONS
● Customer choices introduce complexity

●
product variety, demand uncertainty, variable
capacity requirements
● Mass customization is replacing mass production in
many industries
● There is more opportunity to coordinate activities
because of information systems
● Supply chain management has become a critical
aspect of business success
11
Classifications of Operation
Management
● Productive System
o Process Focused System
o Product Focused System
o Production to stock/order
o
● Service System
o Stagnant personal services
o Substitutable personal Services
o Progressive services
o Explosive services
●

12
SUPPLY CHAIN MANAGEMENT: FROM HENRY FORD TO E-COMMERCE
● Ford motor company did everything from mining to

final assembly of its Model T vehicles in the early
1900s
●
allowed coordination of all sequentially related
activities for large efficiency gains
●
very difficult to accommodate product variety
or make model changes
13
SUPPLY CHAIN MANAGEMENT: FROM HENRY FORD TO E-COMMERCE
● Other factors leading to division of supply chains

●
technology, economies of scale, need for focus
in operations
● Supply chain improvements
●
Just in Time (JIT) manufacturing
●
Lean production
14
SUPPLY CHAIN MANAGEMENT DECISIONS:
CONFIGURATION OF THE SUPPLY CHAIN
● what the product service bundle will include

(manufacturing to stock & manufacturing to
order
●
what portion of bundle will be outsourced
●
where facilities will be located and capacities
●
what technologies will be used
●
how supplier-customer communications will be
handled
●
the expectations to which suppliers and
customers will be held
15
COORDINATION OF THE SUPPLY CHAIN
● determining when to provide products and

services and in what quantities
●
ensuring suppliers are able to provide the value
required of them
●
setting appropriate levels for capacity,
inventory and lead time
●
communicating demand, performance
expectations and performance results with
suppliers and customers
16
IMPROVEMENT OF THE SUPPLY CHAIN
● installing Enterprise Resource Planning (ERP)

systems or other information technologies
●
streamlining the channels of supply
●
changing technologies or planning systems to
improve quality, lead time, cost or service
●
redesigning the product service bundle to make
it easier to provide or of greater value to the
customer
17
Supply-Chain Costs as a Percent of Sales
Industry Percent of Sales

● All industry ● 52%
● Automobile ● 67%
● Food ● 60%
● Lumber ● 61%
● Paper ● 55%
● Petroleum ● 79%
● Transportation ● 62%
18
Material Costs in
Supply-Chain
Wholesale
8% 9%
COGS
Manufacturin
g Payroll
31 % Material 83 %
Other
11 % Dir Wages
58 %
Other Retail
16 % COGS
13 %
Payroll
71 %
Other
19
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
20
Supply-Chain Strategies
● 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.
21
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.
22
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
© 1995 Corel Corp.
23
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 © 1995
Corel
● Delivery to point of use Corp.
24
Tactics for Close Supplier Relationships
 Tactic  Results
● Reduce total number of suppliers ● Average 20% reduction in 5 years
●
● Certify suppliers
●
● Almost 40% of all companies
●
surveyed were themselves
currently certified
● Ask for JIT delivery from key ● About 60% ask for this
suppliers
● Involve key suppliers in new ● About 54% do this
product design
● Develop software linkages to ● Almost 80% claim to do this
suppliers  About 50% claim this
●
25
Vertical Integration Strategy
● Ability to produce goods Raw Material

previously purchased ( Suppliers )
●
Setup operations
●
Buy supplier Backward
Integration
● Make-buy issue
● Major financial commitment Current
Transformation
● Hard to do all things well
Forward
Integration
Finished Goods
( Customers )
26
Forms of Vertical Integration
Iron Ore Silicon Farming Raw Material

( Suppliers )
Steel Flour Milling Backward

Integration
Integrated Current
Automobiles Circuits Transformation
Distribution Forward
System Circuit Boards Integration
Computers
Finished Goods
Dealers Watches Baked Goods ( Customers )
Calculators
27
Vertical Integration Can be Forward or Backward
Vertical Integration Examples of Vertical Integration

Raw material (suppliers) Iron ore Silicon Farming
Backward Integration Steel
Current Transformation Automobiles Integrated Circuits Flour
Milling
Forward Integration Distribution Circuit boards
System
Finished goods (customers) Dealers Computers, watches, Baked
calculators Goods
28
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
29
Virtual Companies
● Companies that rely on a variety of supplier

relationships to provide services on demand.
● Also known as hollow corporations, or network
corporations
30
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.
31
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)
32
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
33
Successful Supply-Chain Management Requires:
● A mutual agreement on goals

● Trust
● Compatible organizational cultures
34
ORGANIZATION STRUCTURE
SUPPLY CHAIN MANAGEMENT
35
GSCM Mission
The Gillette Company will be as highly

recognised and admired by our customers,
shareholders, and employees for Supply
Chain performance as we are for our
product development and support of global
brands. We will become World Class in
Planning & Executing Product Delivery
from Source to Customer’s Shelf.
1-38
© 2001 The Gillett e Company
36
ORGA
37
Market Distribution Operating Concerns
Market Distribution:
Activities related to providing customer service. Requires performing
order receipt and processing, deploying inventories, storage and
handling, and outbound transportation within a supply chain. Includes
the responsibility to coordinate with marketing planning in such areas
as pricing, promotional support, customer service levels, delivery
standards, handling return merchandise, and life-cycle support. The
primary market distribution objective is to assist in revenue generation
by providing strategically desired customer service levels at the lowest
total cost.
38
Manufacturing Support Operating Concerns
Manufacturing Support:
Activities related to planning, scheduling, and supporting
manufacturing operations. Requires master schedule planning and
performing work-in-process storage, handling, transportation, and
time phasing of components. Includes the responsibility for storage of
inventory at manufacturing sites and maximum flexibility in the
coordination of geographic and final assemblies postponement
between manufacturing and market distribution operations.
39
Procurement Operating Concerns
Procurement:
Activities related to obtaining products and materials from outside
suppliers. Requires performing resource planning, supply sourcing,
negotiation, order placement, inbound transportation, receiving and
inspection, storage and handling, and quality assurance. Includes the
responsibility to coordinate with suppliers in such areas as scheduling,
supply continuity, hedging, and speculation, as well as research
leading to new sources or programs. The primary procurement
objective is to support manufacturing or resale organizations by
providing timely purchasing at the lowest total cost.
40
Purchasing
Factors increasing the importance of purchasing today:


● Tremendous impact of material costs on profit (60-
70% of each sales Rupee is paid to material

suppliers)
● Popularity of just-in-time manufacturing (supply
deliveries must be exact in timing, quantity, and

quality)
● Increasing global competition (growing competition
for scarce resources, and a geographically

“stretched-out” supply chain)
41
Mission of Purchasing
“The mission of purchasing is to sense
the competitive priorities necessary for
each major product/service (low
production costs, fast and on-time
deliveries, high quality /services, and
flexibility) and to develop purchasing
plans for each major product/service
that are consistent with operations
strategies”
42
Mission of Purchasing
● Develop purchasing plans for each major product or

service that are consistent with operations
strategies:
●
Low production costs
●
Fast and on-time deliveries
●
High quality products and services
●
Flexibility
43
Purchasing Management
● Maintain data base of available, qualified suppliers

● Select suppliers to supply each material
● Negotiate contracts with suppliers
● Act as interface between company and suppliers
● Provide training to suppliers on latest technologies
44
Purchasing vs. Procurement
● Purchasing is normally associated with a functional

activity
● Procurement/Sourcing should be viewed as a strategic
activity for the business.
45
Purchasing vs. Sourcing (cont’d)
Purchasing Mentality Sourcing Mentality

One contract at a time Continual Improvement
Win-lose Win-win
Immediate returns Long-term perspective
Secretive Trusting
Current needs can be met Strategic fit exists
Lowest purchase price Total cost of ownership
Multiple suppliers Supply-base reduction
Infrequent interaction Frequent interaction
Criticism Constructive evaluations
Buyer-sales relationship Cross-functional relationship
Safety in numbers Safety in knowledge
Quality inspected Quality at source
Inventory as safeguard Information as safeguard
46
Supplier Development Through Procurement
The Marketing Viewpoint
Marketing Initiative
Supplier Purchaser
Purchasing Response
The Procurement Viewpoint

Procurement Initiative
Supplier Purchaser
Marketing Response
47
Importance of Sourcing
● In the average manufacturing firm purchased goods

and services account for 55% of every sales Dollar
● Direct labor costs account for only about 10% of the
sales dollar
48
Procurement’s Potential Payoff
● Beginning Position
●
Sales $100,000,000
●
Purchases(55%) 55,000,000
●
Labor (15%) 15,000,000
●
Other (22%) 22,000,000
●
Pre-tax profit (8%) 8,000,000
49
Procurement’s Potential Payoff
Reduce Increase Reduce labor

purchase cost sales by 68% cost by 36%
by 10%
Sales $100,000,000 $168,000,000 $100,000,000
Purchases 49,500,000 92,400,000 55,000,000
Labor 15,000,000 25,200,000 9,600,000
Other 22,000,000 36,960,000 22,000,000
Pre-tax 13,500,000 13,440,000 13,400,000

Profit
50
Major Categories for the Components of Total Cost of Ownership
Total Cost of Ownership
Pre-transaction Components
Transaction Components Post-transaction Components
1. Identifying need
1. Price 1. Line fallout
2. Investigating sources
2.Order placement/ 2. Defective finished goods
3. Qualifying sources
preparation rejected before sale
4. Adding supplier to
3. Delivery/ transportation 3. Field failures
internal systems
4. Tariffs/ duties 4. Repair/ replacement in field
5. Educating :
5. Billing/ payment 5. Customer goodwill/ reputation
•supplier in firm’s
6. Inspection of firm
operations
7. Return of parts 6. Cost of repair parts
•firm in supplier’s
8. Follow-up and correction 7. Cost of maintenance and repairs
operations
51
Major Trends in Procurement
● Fewer sources of supply will be used

● Buyers will be more concerned with final customer satisfaction
● Buyers will focus on “lead supplier” relationships
● Buyers will drive shorter cycle times
● Design engineers and buyers will be part of sourcing teams
● Global sourcing will increase
● e-procurement will have a major impact-not all of it will be
positive for supply chain integration
● buying exchanges
●
auction sites
52
E-Chemicals
53
Advantages of Centralized Purchasing
● Buying in large quantities - better prices

● More clout with suppliers - greater supply continuity
● Larger purchasing department - buyer specialization
● Combining small orders - less order cost duplication
● Combining shipments - lower transportation costs
● Better overall control
54
Purchasing Process
From any department,

Material Requisition to purchasing
From purchasing,
Request for Quotations to potential suppliers
Based on quality, price,
Select Best Supplier lead time, dependability
From purchasing,
Purchase Order to selected supplier
Receive and Inspect From supplier, to receiving,
Goods quality control, warehouse
55
Content of Material Requisition
● Requisition no.
● Requisition date
● Item master code
●
Description of material or content
● Used in product
●
Unit of measure
●
Specification
●
Lead time
● Sourcing data :supplier or producer
●
Mode of transport
●
Economic order lot size (packing unit)
●
Shelf life restriction
● Material handling requirement (control temperature)
●
Documents to accompany with the material
56

● Quality control analysis days (quarantine)
●
Reorder quantity
●
Maximum inventory
●
Standard price
● Duty and sales tax and other border crossing charges
data
● Clearing agent or mode of transportation while
handling locally
● Certificate of origin
●
Labeling specification
●
Any special handling restriction etc.
● Required date
● Authorized signature etc. 57

●
Capital goods
●
Equipment, machinery, installation, parts,
subassembly
●
Method of delivery
●
Maintenance, pre-post, after sales service,
annual preventive, accidental,
●
Financial package, (supplier credit,
leasing, consignment sales, wet leasing
etc.)
●
Insurance
●
Commissioning, trial,
58
Content of quotation- invitation
● Will be address to the enlisted supplier

● Date of quotation
● Deadline for the quotation to be received
● All the details as mentioned on the companies master data
● Financial and payments procedure
●
Method of payment
●
Term of payment
●
Negotiable documents
● Companies bankers (L/C, Contract, Usance,)
●
Bullet delivery, or partial shipment allowed
●
Penalty clause
●
Margin or deposit with the tender or bank guarantee
● Insurance
●
Title of good transfer
59
Content of quotation- invitation
● Tentative date of intimation or opening of quotation.
● Is it a revolving contract or one time delivery
● Condition for the visit of site
● Specimen samples
● Condition for the approval of sample etc.
● Capital goods
●
Turn key
●
Installation
●
Training
●
After sale service
●
Maintenance contract
●
Free maintenance period
●
Pregnancy period before the delivery
●
Supplier credit
●
Leasing facility etc. 60
Selection of supplier –sourcing
● Bench mark for spread sheet analysis
●
Lead time
●
Location of sourcing site
●
Local
●
Imports
●
In-house configuration,
●
Outsourcing
●
Importing in bulk or mix
●
Term offered
●
Price (rupees, usd, euro, sterling)
●
Credit (local L/C, contract, letter of aware ness
●
Loading and unloading
●
Transportation
●
Insurance
●
Freight collect, freight prepaid
●
61
Selection of supplier –sourcing
● Bench mark for spread sheet analysis

●
Term offered (more)
●
Lot size
●
Negotiation documentation charges
●
L/c opening commission on beneficiary
accounts
●
Accessibility (quick response, emergency,
replenishment
●
Past experience
●
Credibility –financial, data from the contemporaries
● Maintenance service post delivery
● After sale service
● Turn key ---projects
● Implementation, installation, trial commissioning , etc.
● Configuration, source key, parachute clause, divorce, notice
62
period etc.
Purchase order
● Date of order
● Purchase order number
● Reference (indent number or confirmation)
● Maximum detail from item master code.
● Financial terms
● Delivery date
● Method of shipment
● Lot size
● Partial shipment
● Maintenance contract
● Freight and other charges
● Margin, advance, guarantee, l/c contract, letter of awareness
commitment, other terms and conditions,
● Documentation required
● 63
Purchase order
● Authorized
● Any special term (pre-shipment samples, quality
control specification, standards,)
● Validation data
● Shelf life
● Guarantee
● Insurance condition
● Any special mode of handling
● Loading unloading
● Freight etc.
64
Allegations of improper Behaviour by Buyer
● In exchange for cash and gifts, allowing supplier to

store tools and park vehicles on company property
and awarding contracts to suppliers without
bidding.
● Accepting gifts such as expensive perfumery, cloths,
dinners, function cards, foreign trips, liquor, gift
coupon during festivals and holidays season.
● Accepting on sharing basis indenting commission
within or outside the country
● Bid rigging, accepting bribes, theft and tax evasion,
and accepting large sums of cash.
65
Allegations of improper Behaviour by Buyer
● Payment processing on receipt of kickback

● Approval of product quality on receipt of kickback
● Accepting less quantity of goods in exchange of
bribes
● Accepting lot of bribes in acceptance enlistment of
approved suppliers or contractors
● Benami Transaction through their own respective
companies
● Opening their own respective buying houses or
agency and making the purchases from them.
●
66
Guidelines for Ethical Behaviour in Purchasing
● The National Association for Purchasing Managers

(NAPM) has developed a set of three principles
and 12 standards to help guide ethical behaviour in
purchasing. These are the principles:
●
Loyalty to your organization
●
Justice to those with whom you deal
●
Faith in your profession
● From these principles are derived the NAPM
standards of purchasing practice (domestic and
international)
67
● Avoid the intent and appearance of unethical or compromising

practice in relationships, actions, and communications
● Demonstrate loyalty to the employer by diligently following
the lawful instructions of the employer, using reasonable
care and only authority granted.
● Refrain from any private business or professional activity that
would create a conflict between personal interests and the
interests of the employer
● Refrain from soliciting or accepting money, loans, credits, or
prejudicial discounts, and the acceptance of gifts,
entertainment favours, or services from present or
potential suppliers that might influence or appear to
influence purchasing decisions.
68
● Handle confidential or proprietary information

belonging to employers or suppliers with due care
and proper consideration of ethical and legal
ramifications and governmental regulation
● Promote positive supplier relationships through
courtesy and impartiality in all phases of the
purchasing cycle.
● Refrain from reciprocal agreements that restrain
competition
● Know and obey the letter and spirit of laws governing
the purchasing function and remain alert to the
legal ramifications of purchasing decisions.
69
● Encourage all segments of society to participate by

demonstrating support for small, disadvantaged,
and minority-owned businesses.
● Discourage purchasing involvement in employers
sponsored programs of personal purchases that
are not business related.
● Enhance the proficiency and stature of the purchasing
profession by acquiring and maintaining current
technical knowledge and the highest standards of
ethical behavior
● Conduct international purchasing in accordance with
the laws, customs, and practices of foreign
countries
70
Buyers’ Duties
● Know the market for their commodities

● Understand the laws.... tax, contract, patent..…
● Process purchase requisitions and quotation requests
● Make supplier selections
● Negotiate prices and conditions of sale
● Place and follow-up on purchase orders
● Maintain ethical behavior
71
Make-or-Buy Analysis
Considerations in make-or-buy decisions:


● Lower cost - purchasing or production?
● Better quality - supplier or in-house?
● More-reliable deliveries - supplier or in-house?
● What degree of vertical integration is desirable?
● Should distinctive competencies be outsourced?
72
Make/Buy Considerations
Reasons for Making Reasons for Buying

1. Maintain core competencies 1. Frees management to deal
and protect personnel with its primary business
from layoff 2. Lower acquisition cost
2. Lower production cost 3. Preserve supplier
3. Unsuitable suppliers commitment
4. Assure adequate supply 4. Obtain technical or
management ability
5. Utilize surplus labor and
make a marginal 5. Inadequate capacity
contribution
73
Make/Buy Considerations - Continued
Reasons for Making Reasons for Buying

6. Obtain desired quantity 6. Reduce inventory costs
7. Remove supplier collusion 7. Ensure flexibility and
8. Obtain a unique item that alternate source of supply
would entail a prohibitive 8. Inadequate managerial or
commitment from the technical resources
supplier 9. Reciprocity
9. Protect proprietary design or 10.Item is protected by patent or
quality trade secret
10.Increase or maintain size of 11.
company
11.
74
Example: Make-or-Buy
 A firm manufactures a product that contains a

part requiring heat treatment. An analyst is trying to
decide whether it is more economical to buy the heat
treating service or perform the treatment in house.
Pertinent data is shown on the next slide.
 If part quality and delivery performance are
about the same for the two alternatives, which
alternative should be selected?
75
Purchase
 Heat-Treat
Heat-Treat
 In-House
Service
 Number of parts annually 5,000 5,000
 Fixed cost per year $25,000 $0
 Variable cost per part $13.20 $17.50
76
●

Compute the total cost for each alternative


TC = FC + vQ
 TC1 = FC1 + v1Q = 25,000 + 13.20(5,000) =
$91,000
 TC2 = FC2 + v2Q = 0 + 17.50(5,000) =

$87,500
 The firm should buy the heat-treating service (the
second alternative).
 continued
77
 The analyst has assumed that 5,000 parts per

year will require heat treatment. By how many parts
can the firm’s requirements increase or decrease
before in-house heat treating is more economical?
Should the analyst rethink his/her decision?
78
●

Compute the break-even parts quantity
 FC1 + v1Q = FC2 + v2Q
 Q = (FC1 - FC2)/(v2- v1)
 Q = (25,000 – 0)/(17.50 – 13.20)


Q = 5,814
 If the firm’s annual parts requirement increases
by 814 (about 16%) or more, in-house heat treatment
would be more economical. The analyst should give
the decision more thought.
79
Logistics
● Logistics usually refers to management of:

●
the movement of materials within the factory
●
the shipment of incoming materials from
suppliers
●
the shipment of outgoing products to customers
80
Movement of Materials within Factories
The typical locations from/to which material is moved:
Incoming
Incoming Receiving
Receiving Quality
Quality Warehouse
Warehouse
Vehicles
Vehicles Dock
Dock Control
Control
Work
Work Other
Other Work
Work Finished
Finished
Packaging
Packaging
Center
Center Centers
Centers Goods
Goods
Shipping
Shipping Outgoing
Outgoing
Shipping
Shipping Dock
Dock Vehicles
Vehicles
81
Shipments To and From Factories
● Traffic
●
Traffic departments routinely examine shipping
schedules and select:
●
shipping methods
●
time tables
●
ways of expediting deliveries
●
Traffic management is a specialized field
requiring technical training in Department of
Transportation (DOT) and Interstate
Commerce Commission (ICC) regulations
and rates.
82
● Distribution
●
Distribution, or physical distribution, is the
shipment of finished goods through the
distribution system to customers.
●
A distribution system is the network of
shipping and receiving points starting with
the factory and ending with the customers.
83
● Distribution Requirements Planning

●
DRP is the planning for the replenishment of
regional warehouse inventories.
●
DRP uses MRP-type logic to translate regional
warehouse requirements into central
distribution-center requirements, which are
then translated into gross requirements in the
MPS at the factory.
84
● Distribution Requirements Planning

●
Scheduled receipts are previously-placed orders
that are expected to arrive in a given week
●
Planned receipt of shipments are orders planned,
but not yet placed, for the future
●
Projected ending inventory is computed as:
●
Previous week’s projected ending
inventory
●
+ Planned receipt of shipments in current
week
●
+ Scheduled receipt of shipments in
current week
85
●
-- Forecasted demand in current week
● DRP Time-Phased Order Point Record
Region. Warehouse #1 LT = 1 Week

Std. Quantity = 50 SS = 10 -1 1 2 3 4 5
Forecasted demand (units) 30 40 30 40 40
Scheduled receipts 50
Projected ending inventory 60 80 40 10 20 30
Planned receipt of shipments 50 50
Planned orders for shipments 50 50
86
Example: DRP
 Products are shipped from a company’s main

distribution center (adjacent to the factory) to two
regional warehouses. The DRP records on the next
two slides show – for the two regional warehouse –
the forecasted demand, scheduled receipts, and last
week’s projected ending inventories for a single
product.
 The third upcoming slide shows – for the main
distribution center – scheduled receipts and last
week’s projected ending inventory for the same
product. Complete the DRP records.
87
Example: DRP
● DRP Record for Regional Warehouse #1

Std. Quantity = 100 SS = 50 -1 1 2 3 4 5
Projected ending inventory 200
Planned receipt of shipments
Planned orders for shipments
88
Example: DRP
● DRP Record for Regional Warehouse #2

Std. Quantity = 200 SS = 80 -1 1 2 3 4 5
89
Example: DRP
● DRP Record for Main Distribution Center
Main Distrib. Center LT = 1 Week

Std. Quantity = 500 SS = 200 -1 1 2 3 4 5
Gross Requirements (units)
90
Example: DRP
● Completed DRP Record for Regional Warehouse #1



Std. Quantity = 100 SS = 50 -1 1 2 3 4 5
Planned receipt of shipments 100 100
Planned orders for shipments 100 100
91
Example: DRP
● Completed DRP Record for Regional Warehouse #2

Std. Quantity = 200 SS = 80 -1 1 2 3 4 5
Planned receipt of shipments 200 200 200
Planned orders for shipments 200 200 200
92
Example: DRP
● DRP Record for Main Distribution Center

●
The “gross requirement” ( in row 1) for any
week is determined by summing the “planned
orders for shipment” for the same week at the
two regional warehouses
●
These gross requirements at the MDC are input
to the master production schedule in the
factory
●
In other words, the timing and quantities of
production in the factory are linked to the
timing and quantities of demand at the
regional warehouses
93
Example: DRP
● Completed DRP Record for Main Distribution Center
Main Distrib. Center LT = 1 Week

Std. Quantity = 500 SS = 200 -1 1 2 3 4 5
Forecasted demand (units) 200 300 200 100
Planned receipt of shipments 500
Planned orders for shipments 500
94
Shipments
Shipments To
To and
and From
From Factories
Factories
● Distribution Resource Planning

●
Distribution resource planning extends DRP so
that the key resources of warehouse space,
workers, cash, and vehicles are provided in the
correct quantities at the correct times.
●
95
Analyzing Shipping Decisions
● The “Transportation Problem”

●
Problem involves shipping a product from
several sources (ex. factories) with limited
supply to several destinations (ex.
warehouses) with demand to be satisfied
●
Per-unit cost of shipping from each source to
each destination is specified
●
Optimal solution minimizes total shipping cost
and specifies the quantity of product to be
shipped from each source to each destination
96
Example: Minimizing Shipping Costs
 Pacer produces computer monitors in its three

factories and ships them to five regional warehouses.
The factory-to-warehouse shipping costs per monitor

are:
 Warehouse
 Factory A B C D E
 1 $2.10 $4.30 $3.60 $1.80
$2.70
 2 4.90 2.60 3.50 4.50
3.70
 3 3.90 3.60 1.50 5.80

3.30 97

 The factories have the following capacities

(monitors produced per month): 1 = 10,000; 2
= 20,000; and 3 = 10,000.
 The warehouses need at least these numbers of
monitors per month: A = 5,000; B = 10,000; C =
10,000; D = 5,000; and E = 10,000.
 Use the POM Software Library to solve this
transportation problem.
98
●

Solution
 Warehouse
 Factory A B C D E
 1 5,000 0 0 5,000 0
 2 0 10,000 0 0
10,000
 3 0 0 10,000 0 0

 Total monthly shipping cost =

$97,500
 (Note: all warehouse demand is
satisfied
 and no factory’s capacity is 99
Innovations in Logistics
● New developments affecting logistics include:

●
All-freight airports
●
Inter-modal shipping
●
In-transit rates
● Consolidated shipments
● Air-freight and trucking deregulation
●
Advanced logistics software
100
Warehousing
● Warehousing is the management of materials while

they are in storage.
● Warehousing activities include:
●
Storing
●
Dispersing
●
Ordering
●
Accounting
101
Warehousing
● Record keeping within warehousing requires a stock

record for each item that is carried in inventories.
● The individual item is called a stock-keeping unit
(SKU).
● Stock records are running accounts that show:
●
On-hand balance
●
Receipts and expected receipts
●
Disbursements, promises, and allocations
102
Demand Management
● Review customer orders and promise shipment of

orders as close to request date as possible
● Update MPS at least weekly.... work with Marketing
to understand shifts in demand patterns
● Produce to order..... focus on incoming customer
orders
● Produce to stock ..... focus on maintaining finished
goods levels
● Planning horizon must be as long as the longest lead
time item
103
End
104

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Supply Chain Management

● Refers to all the management functions related to the flow of

The Seven Principles of Supply Chain Management

§Segment customers based upon service needs

 • Long run production

 • Short order lead time

•“Have itit your

Build to stock VS Build to Order

● Customer choices introduce complexity

● Ford motor company did everything from mining to

● Other factors leading to division of supply chains

● what the product service bundle will include

● determining when to provide products and

● installing Enterprise Resource Planning (ERP)

Industry Percent of Sales

 Supply chains in a global environment must be:

● Plans to help achieve company mission

© 1995 Corel Corp.

● Negotiate with many suppliers; play one supplier against another

● Many sources per item

● 1 or few sources per item

● Ability to produce goods Raw Material

Iron Ore Silicon Farming Raw Material

Steel Flour Milling Backward

Vertical Integration Examples of Vertical Integration

● Japanese word for ‘affiliated chain’

● Companies that rely on a variety of supplier

● Network of independent companies

© 1995 Corel Corp.

● Establishing lines of credit for suppliers

● A mutual agreement on goals

SUPPLY CHAIN MANAGEMENT

The Gillette Company will be as highly

Factors increasing the importance of purchasing today:

● Tremendous impact of material costs on profit (60-

70% of each sales Rupee is paid to material

deliveries must be exact in timing, quantity, and

for scarce resources, and a geographically

● Develop purchasing plans for each major product or

● Maintain data base of available, qualified suppliers

● Purchasing is normally associated with a functional

Purchasing Mentality Sourcing Mentality

The Marketing Viewpoint

The Procurement Viewpoint

● In the average manufacturing firm purchased goods

Reduce Increase Reduce labor

Purchases 49,500,000 92,400,000 55,000,000

Labor 15,000,000 25,200,000 9,600,000

Other 22,000,000 36,960,000 22,000,000

Pre-tax 13,500,000 13,440,000 13,400,000

Total Cost of Ownership

● Fewer sources of supply will be used

● Buying in large quantities - better prices

From any department,

● Item master code

● Item master code

● Will be address to the enlisted supplier

● Bench mark for spread sheet analysis

● In exchange for cash and gifts, allowing supplier to

● Payment processing on receipt of kickback

● The National Association for Purchasing Managers

● Avoid the intent and appearance of unethical or compromising

● Handle confidential or proprietary information