Operations Management

SupplySupply-Chain Management
Prof. Rushen Chahal

Prof. Rushen Chahal

Outline
jGlobal Company Profile: Volkswagen jThe Strategic Importance of the SupplyChain
j

Global Supply-Chain Issues

jPurchasing
Manufacturing Environments j Service Environment j Make-or-Buy Decisions
j

Prof. Rushen Chahal

Outline - continued
jSupply-Chain Strategies
j j j j j

Many Suppliers Few Suppliers Vertical Integration Keiretsu Networks Virtual Companies

jVendor Selection
Vendor Evaluation j Vendor Development j Negotiations
j
Prof. Rushen Chahal

Outline - continued
jManaging the Supply-Chain jMaterials Management
j

Distribution Systems

jBenchmarking Supply-Chain Management

Prof. Rushen Chahal

Learning Objectives
When you complete this chapter, you should be able to : j Identify or Define:
j j j j j j

Supply chain management Purchasing E-procurement Materials management Keiretsu Virtual companies

j Describe or Explain:
j j

Purchasing strategies Approaches to negotiations

Prof. Rushen Chahal

Volkswagen
jBrazilian plant employs 1000 workers
j j

200 work for VW 800 work for other contractors:

j

Rockwell International, Cummins Engines, Deluge Automotiva, MWM, Remon and VDO, etc.

jVW responsible for overall quality, marketing, research and design jVW looks to innovative supply chain to improve quality and drive down costs
Prof. Rushen Chahal

Lead Figure for Chapter 11

jGraphic of VW plant, showing areas occupied by supply firms.

Prof. Rushen Chahal

Volkswagen
jUnusual elements:
VW is buying not only materials, but also the labor and related services j Suppliers are integrated tightly into VWs own network, right down to assembly work in the plant
j

Prof. Rushen Chahal

SupplySupply-Chain Management
j Planning, organizing, directing, & controlling flows of materials
Begins with raw materials j Continues through internal operations j Ends with distribution of finished goods
j

j Involves everyone in supply-chain

j

Example: Your suppliers supplier

j Objective: Maximize value & lower waste

Prof. Rushen Chahal

The Supply-Chain SupplyVISA

Material Flow

Credit Flow

Supplier

Manufacturing

Retailer

Consumer

Supplier Schedules Order Flow

Wholesaler Cash Flow

Prof. Rushen Chahal

Retailer

The Supply Chain

Market research data scheduling information Engineering and design data Order flow and cash flow Ideas and design to satisfy end customer Material flow Credit flow

Supplier

Customer

Inventory

Supplier

Manufacturer
Inventory Inventory

Customer

Supplier Distributor
Inventory

Customer

Prof. Rushen Chahal

Material Costs in SupplySupply-Chain

Wholesale Manufacturing
31% 11% 58% Material
Dir Wages

8% 9%

COGS Payroll

83%

Other

Other

Retail
13% 16%

COGS Payroll

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)

71%

Other

Prof. Rushen Chahal

SupplySupply-Chain Support for Overall Strategy

Low Cost
Suppliers goal
Supply demand at lowest possible cost

Response
Respond quickly to changing requirements and demand to minimize stockouts Select primarily for capacity, speed, and flexibility
Prof. Rushen Chahal

Differentiation
Share market research; jointly develop products and options

Primary Selection Criteria

Select primarily for cost

Select primarily for product development skills

SupplySupply-Chain Support for Overall Strategy - continued

Low Cost
Process Characteristics
Maintain high average utilization

Response
Invest in excess capacity and flexible processes

Differentiation
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

Prof. Rushen Chahal

Minimize inventory in the chain to avoid obsolescence

SupplySupply-Chain Support for Overall Strategy - continued

Low Cost
Lead-time Characteristics
Shorten leadtime as long as it does not increase costs

Response
Invest aggressively to reduce production lead-time Use product designs that lead to low setup time and rapid production ramp-up
Prof. Rushen Chahal

Differentiation
Invest aggressively to reduce development lead-time Use modular design to postpone product differentiation for as long as possible

Product-design Characteristics

Maximize performance and minimize cost

Global Supply-Chain Issues SupplySupply 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 j able to use the latest computer and transmission technologies to manage the shipment of parts in and finished products out j staffed with local specialists to handle duties, trade, freight, customs and political issues
j

Prof. Rushen Chahal

Purchasing
j Acquisition of goods & services j Activities
Help decide whether to make or buy j Identify sources of supply j Select suppliers & negotiate contracts j Control vendor performance
j

j Importance
Major cost center j Affects quality of final product
j
Prof. Rushen Chahal

Purchasing Costs as a Percent of Sales

Industry
j All industry j Automobile j Food j Lumber j Paper j Petroleum j Transportation

Percent of Sales
j 52% j 61% j 60% j 61% j 55% j 74% j 63%
Prof. Rushen Chahal

Dollars of Additional Sales Needed to Equal 1$ Saved Through Purchasing

Percent of Sales Spent for Purchases Firm's 30% 40% 50% 60% 70% 80% 90% Percent Net Profit 2 $2.78 $3.23 $3.85 $4.76 $6.25 $9.09 $16.67 4 6 8 10 $2.70 $3.13 $3.70 $4.55 $5.88 $8.33 $14.29 $2.63 $3.03 $3.57 $4.35 $5.56 $7.69 $12.50 $2.56 $2.94 $3.45 $4.17 $5.26 $7.14 $11.11 $2.50 $2.86 $3.33 $4.00 $5.00 $6.67 $10.11
Prof. Rushen Chahal

Objectives of the Purchasing Function

j Help identify the products and services that can be best obtained externally; and j Develop, evaluate, and determine the best supplier, price, and delivery for those products and services

Prof. Rushen Chahal

The Purchasing Focus

Materials Management -High transportation cost -High inventory costs Supply Management -High costs -Scarcity: national or international

Purchasing Management -Commodity items -Standard products

Source Management -Unique items -Custom-made items -High technology items

Prof. Rushen Chahal

Traditional Purchasing Process

Customer
Purchase Order Receivables Report Accounts Payable Reconcile Receiving Dock Mail Mail

Supplier
Order Processing

Packing List Invoice

Check

Mail

Accounts Receivable

Prof. Rushen Chahal

Purchasing Techniques
j Drop shipping and special packaging j Blanket orders j Invoiceless purchasing j Electronic ordering and funds transfer j Electronic data interchange (EDI) j Stockless purchasing j Standardization
Prof. Rushen Chahal

Make/Buy Considerations
Reasons for Making
lower production cost unsuitable suppliers assure adequate supply utilize surplus labor and make a marginal contribution j obtain desired quantity j remove supplier collusion j obtain a unique item that would entail a prohibitive commitment from the supplier j j j j

Reasons for Buying

j lower acquisition cost j preserve supplier commitment j obtain technical or management ability j inadequate capacity j reduce inventory costs j ensure flexibility and alternate source of supply j reciprocity

Prof. Rushen Chahal

Make/Buy Considerations
Reasons for Making
j maintain organizational talent j protect proprietary design or quality j increase/maintain size of company

Reasons for Buying

j item is protected by patent or trade secret j frees management to deal with its primary business

Prof. Rushen Chahal

Purchasing Strategies
j Plans to help achieve company mission j Affect long-term competitive position j Strategic options
j j j j j

Many suppliers Few suppliers Keiretsu network Vertical integration Virtual company

Plan

1995 Corel Corp. Prof. Rushen Chahal

SupplySupply-Chain Strategies
jNegotiate with many suppliers; play one supplier against another jDevelop long-term partnering arrangements with a few suppliers who will work with you to satisfy the end customer jVertically integrate; buy the actual supplier jKeiretsu - have your suppliers become part of a company coalition jCreate a virtual company that uses suppliers on an as-needed basis.
Prof. Rushen Chahal

Many Suppliers Strategy

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

1995 Corel Corp.

Prof. Rushen Chahal

Few Suppliers Strategy

j 1 or few sources per item j Partnership (JIT) j Long-term, stable j On-site audits & visits j Exclusive contracts j Low prices (large orders) j Frequent, small lots j Delivery to point of use
Prof. Rushen Chahal

1995 Corel Corp.

Daimler Chryslers Supplier Cost Reduction Effort

Supplier Suggestion
Rockwell Rockwell Use passenger car door locks on trucks Simplify design/substitute materials on manual window system Change tooling for woodgrain panels to allow three from one die instead of two Change wiper-blade formulation

Model Savings
Dodge trucks Various $280,000 $300,000

3M

Caravan, Voyager Various

$1,500,000

Trico Leslie Metal Arts

$140,000 $1,500,000

Exterior lighting suggestions Various

Prof. Rushen Chahal

Purchasers Ties Themselves to Suppliers

Tactic
j 1. Reduce total number of suppliers j Certify suppliers j Ask for JIT delivery from key suppliers j Involve key suppliers in new product design j Develop software linkages to suppliers

Results
j Average 20% reduction in 5 years j Almost 40% of all companies surveyed were themselves currently certified j About 60% ask for this j About 54% do this j Almost 80% claim to do this j About 50% claim this; about 15% more than have EDI links to suppliers
Prof. Rushen Chahal

Vertical Integration Strategy

j Ability to produce goods previously purchased
j Setup operations j Buy supplier

Raw Material (Suppliers) Backward Integration Current Transformation Forward Integration Finished Goods (Customers)
Prof. Rushen Chahal

j Make-buy issue j Major financial commitment j Hard to do all things well

Forms of Vertical Integration

Iron Ore Silicon Farming Raw Material (Suppliers) Backward Integration Current Transformation Forward Integration Baked Goods Finished Goods (Customers)
Prof. Rushen Chahal

Steel Integrated Circuits

Flour Milling

Automobiles

Distribution Circuit Boards System Dealers Computers Watches Calculators

Keiretsu Network Strategy

j Japanese word for affiliated chain j System of mutual alliances and cross-ownership
j

Company stock is held by allied firms

j Lowers need for short-term

profits

j Links manufacturers, suppliers, distributors, & lenders

j

Partnerships extend across entire supply chain

Prof. Rushen Chahal

Virtual Company Strategy

j Network of independent companies
j j

Linked by technology
j

PCs, faxes, Internet etc.

Each contributes core competencies j Typically provide services

j

Payroll, editing, designing

j May be long or short-term

j

Usually, only until opportunity is met

1995 Corel Corp.

Prof. Rushen Chahal

Vendor Selection Steps

j Vendor evaluation
j

Identifying & selecting potential vendors Integrating buyer & supplier

j

j Vendor development
j

Example: Electronic data exchange

j Negotiations
Results in contract j Specifies period of agreement, price, delivery terms etc.
j

Prof. Rushen Chahal

Vendor Selection Rating Form

Prof. Rushen Chahal

Supplier Selection Criteria

j Company
Financial stability j Management j Location
j

j Service
Delivery on time j Condition on arrival j Technical support j Training
j

j Product
Quality j Price
j

Prof. Rushen Chahal

Negotiation Strategies
jThree types:
cost-based price model - supplier opens its books to purchaser; price based upon fixed cost plus escalation clause for materials and labor j market-based price model - published price or index j competitive bidding - potential suppliers bid for contract
j

Prof. Rushen Chahal

Managing the Supply-Chain SupplyjOptions:

j j j j j j j j j

Postponement Channel assembly Drop shipping Blanket orders Invoiceless purchasing Electronic ordering and funds transfer Stockless purchasing Standardization Internet purchasing (e-procurement)
Prof. Rushen Chahal

Managing the Supply-Chain SupplyOther Options

jEstablishing lines of credit for suppliers jReducing bank float jCoordinating production and shipping schedules with suppliers and distributors jSharing market research jMaking optimal use of warehouse space

Prof. Rushen Chahal

Materials Management
j Integrates all materials functions
j j j j j j

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

j Objective: Efficient, low cost operations

Prof. Rushen Chahal

Goods Movement Options

jTrucking jRailways jAirfreight jWaterways jPipelines

Prof. Rushen Chahal

SupplySupply-Chain Performance Compared

Number of suppliers per purchasing agent Purchasing costs as percent of purchases Lead time (weeks) Time spent in placing order Percentage of late deliveries Percentage of rejected material Number of shortages per year

Benchmark Typical Firms Firms 34 5

3.3% 15 42 minutes 33% 1.5% 400
Prof. Rushen Chahal

0.8% 8 15 minutes 2% .0001% 4