The Supply-Chain

VISA

Material Flow

Supplier

Credit Flow

Manufacturing

Supplier
Schedules

Retailer

Consumer

Wholesaler

Retailer

Order
Flow

Cash
Flow

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 suppliers supplier

Objective: Maximize value & lower waste

The Supply Chain

Market research data
scheduling information
Engineering and design data
Order flow and cash flow

Supplier

Inventory

Supplier

Customer

Ideas and design to

satisfy end customer
Material flow
Credit flow

Customer

Manufacturer
Inventory

Supplier

Inventory

Distributor
Inventory

Customer

Supply Chain Management

SCM 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.

Conflicting Objectives in SC
Purchasing

stable volume requirements

flexible delivery time
little variation in mix
large quantities

Manufacturing

long run production

high quality
high productivity
low production cost

Conflicting Objectives in SC
Warehousing

low inventory
reduced transportation costs
quick replenishment capability

Customers

short order lead time

high in stock
enormous variety in products
low prices

Material Costs in
Supply-Chain
Wholesale
Manufacturing
31%
11%
58%

8% 9%

COGS
Payroll

Material

83%

Other

Dir. Wages

Other

Retail
13%

Source: U.S. Department of Commerce, Bureau of

Census, 1987 Census of Manufacturers: General
Summary of Retail Trade (Washington, D.C.:
Government Printing Office, 1991)

16%

71%

COGS
Payroll
Other

Supply-Chain Support for

Overall Strategy
Low Cost

Response

Differentiation

Suppliers
goal

Supply
demand at
lowest possible
cost

Respond
quickly to
changing
requirements
and demand
to minimize
stockouts

Share market
research;
jointly
develop
products and
options

Primary
Selection
Criteria

Select
primarily for
cost

Select
primarily for
capacity,
speed, and
flexibility

Select
primarily for
product
development
skills

Supply-Chain Support for

Overall Strategy - continued
Low Cost

Response

Differentiation

Process
Characteristics

Maintain high
average
utilization

Invest in
excess
capacity and
flexible
processes

Modular
processes to
lend themselves
to mass
customization

Inventory
Characteristics

Minimize
inventory
throughout
the chain to
hold down
costs

Develop
responsive
system, with
buffer stocks
positioned to
ensure supply

Minimize
inventory in
the chain to
avoid
obsolescence

Supply-Chain Support for

Overall Strategy - continued
Low Cost

Response

Differentiation

Lead-time
Characteristics

Shorten leadtime as long as

it does not
increase costs

Invest
aggressively
to reduce
production
lead-time

Invest
aggressively to
reduce
development
lead-time

Product-design
Characteristics

Maximize
performance
and
minimize
cost

Use product
designs that
lead to low
set-up time
and rapid
production
ramp-up

Use modular
design to
postpone
product
differentiation
for as long as
possible

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

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

Purchasing Costs as a Percent of

Sales
Industry

All industry
Automobile
Food
Lumber
Paper
Petroleum
Transportation

Percent of Sales

52%
61%
60%
61%
55%
74%
63%

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

Purchasing Techniques

Drop shipping and special packaging

Blanket orders
Invoiceless purchasing
Electronic ordering and funds transfer
Electronic data interchange (EDI)
Stockless purchasing
Standardization

Make/Buy Considerations
Reasons for Making

Reasons for Buying

lower production cost

unsuitable suppliers
assure adequate supply
utilize surplus labor and make a
marginal contribution
obtain desired quantity
remove supplier collusion
obtain a unique item that would entail a
prohibitive commitment from the
supplier
maintain organizational talent
protect proprietary design or quality
increase/maintain size of company

lower acquisition cost

preserve supplier commitment
obtain technical or management
ability
inadequate capacity
reduce inventory costs
ensure flexibility and alternate
source of supply
reciprocity
item is protected by patent or trade
secret
frees management to deal with its
primary business

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 asneeded basis.

Many Suppliers Strategy

Many sources per item

Adversarial relationship
Short-term
Little openness
Negotiated, sporadic POs
High prices
Infrequent, large lots
Delivery to receiving dock

1995 Corel Corp.

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

1995
Corel
Corp.

Supplier Selection Criteria

Company

Financial stability
Management
Location

Product

Quality
Price

Service

Delivery on time
Condition on arrival
Technical support
Training

Managing the Supply-Chain

Options:

Postponement
Channel assembly
Drop shipping
Blanket orders
Invoiceless purchasing
Electronic ordering and funds transfer
Stockless purchasing
Standardization

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

Materials Management
Integrates all materials functions

Purchasing
Inventory management
Production control
Inbound traffic
Warehousing and stores
Incoming quality control

Objective: Efficient, low cost operations

Goods Movement Options

Trucking
Railways
Airfreight
Waterways
Pipelines