Operations

Management
Supply-Chain Management
Chapter 11
11-1

Outline
Strategic Importance of the Supply-Chain.
Supply-Chain Strategies.
Purchasing & Acquisition.

Logistics & Materials Management.

11-2

Supply-Chain Management
Management of integrated activities that

procure materials,

transform them into final products, and

deliver them to customers.

Involves everyone in the supply-chain.

Example: Your suppliers supplier.

11-3

The Supply-Chain
VISA

Credit Flow

Material Flow

Supplier

Supplier

Manufacturing

Supplier

Consumer

Retailer

Wholesaler
Schedules

Order
Flow
11-4

Retailer
Cash
Flow

Integration
Integrates operations, logistics, marketing,
accounting and finance.
Manage:
Transportation.
Suppliers.
Warehousing and distribution.
Inventory levels.
Information sharing.
$ and credit transfers.
Order fulfillment.

11-5

Supply-Chain Trends
Global sourcing and markets.

Need local expertise to handle duties, trade, freight,

customs and political issues.

Flexibility to react to sudden changes in parts

availability, distribution, or shipping channels,
import duties, and currency rates.
Information technology to manage storage and
transportation networks.
11-6

Supply-Chain Strategies
How best to work with upstream suppliers and
downstream distributors and customers.

To manage procurement, transportation, inventory,

warehousing, distribution, etc.

Outsourcing:
Logistics activities (transportation, delivery,
inventory, etc.).
Information systems.
Accounting and payroll.

Vertical integration.
11-7

Vertical Integration
Produce a good or service previously purchased.
Forward (towards customers) or backwards (towards
supplier.).
Develop the capability independently or buy a firm.

Advantages:
May be less expensive than buying.
Provides more control.

Disadvantages:

Can be expensive.

Hard to do all things well.

11-8

Forms of Vertical Integration

Raw Materials
Iron Ore

Silicon

Backward
Integration

Steel

Automobiles

Integrated
Circuits

Distribution
System

Circuit Boards

Dealers

Computers
Watches
Calculators
11-9

Current
Transformation

Forward
Integration
Finished Goods

Purchasing & Acquisition

Acquisition of goods & services.
Activities:

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.

11-10

Purchasing Costs as a Percent of

Sales
Industry

Percent of Sales

All industry
Automobile
Food
Lumber
Paper
Petroleum
Transportation

52%
61%
60%
61%
55%
74%
63%
11-11

Make/Buy Considerations
Reasons for Making
Lower cost to produce.
Unsuitable suppliers.

Poor quality.
Price too high.
Item not available.

Utilize surplus labor.

Protect proprietary design.
Increase/maintain size of
company.

Reasons for Buying

Lower cost to buy.
Preserve supplier commitment.
Obtain technical or
management ability.
Inadequate capacity.
Item is protected by patent or
trade secret.
Frees management to deal with
its primary business.

11-12

Supplier Strategies
Negotiate with many suppliers; play one supplier
against another.
Negotiated, sporadic small purchase orders.
Adversarial relationship with little openness.

Work with few suppliers and develop long-term

partnering arrangements.

Exclusive long-term contracts with large orders (and

lower prices).

Long-term, stable relationship.

11-13

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.

11-14

Vendor Selection Criteria

Company criteria

Service criteria

Financial stability.

Delivery on time.

Management.

Condition on arrival.

Location.

Technical support.

Training.

Product criteria

Quality.

Price.

11-15

Vendor Selection Rating Form

11-16

Negotiation Strategies
Cost-based price model.

Supplier opens its books to purchaser.

Price based on fixed cost plus escalation clause

for materials and labor.

Market-based price model.

Price based on published price or index.

Competitive bidding.

Potential suppliers bid for contract.

11-17

Logistics & Materials Management

All transportation and storage activities for
origin or to consumption.
Integrates:

Purchasing.
Inventory management.
Production control.
Inbound and outbound transportation.
Warehousing and stores.
Incoming quality control.
11-18

Operations
Management
E-Commerce and Operations
Management
Supplement 11
11-19

Outline
Electronic Commerce.
E-commerce Definitions.
B2B
B2C
C2C
C2B

E-Procurement
11-20

E-Commerce
The use of computer networks, primarily the
internet, to buy and sell products, services,
and information.

11-21

E-Business
all about cycle time, speed, globalization,
enhanced productivity, reaching new
customers and sharing knowledge across
institutions for competitive advantage.
Louis Gerstner,

Chairman, IBM

11-22

E-Commerce Definitions
Business-to business (B2B) - Both sides of the
transaction are businesses, non-profit
organizations, or governments.
Business-to-consumer (B2C) - Customers are
individual consumers.
Consumer-to-consumer (C2C) - Consumers sell
directly to each other.
Consumer-to-business (C2B) - Individuals sell
services or goods to businesses.
11-23

E-Procurement
On-line purchasing link buyers and sellers
electronically.

Catalogs.
Auctions.
Internet trading exchanges:

Covisint: By auto industry (buyer).

Spot purchasing.

Example: Spare freight capacity.

11-24