Markets in Transition

• Asian manufacturers dominate the United

States’ consumer market.
• Third-world nations continue to attract U.S.
manufacturers seeking low wages for
laborious tasks.
• Firms have had to change radically in
response to fast technologies
 Supply Chain—A Vital Subject
• The supply chain is simply another way of
saying “the whole process of business.”
 What Starts A Supply Chain
• Whether you are a tea or coffee drinker –
have you ever wondered how your hot
drink makes its way onto your breakfast
table?
What Do You See?
 What Starts A Supply Chain
• Flow of materials.
• Raw materials (tea leaves),
• Work in progress (silo),
• Finished goods (a cup of tea).
 What Starts A Supply Chain
• This goods flow encompasses the
supplier’s supplier through to end
consumer.
• Flow of information, e.g. order
confirmation or dispatch advice.
 Reverse Flow
• Goods, e.g. quality defect products or
obsolete products
• Information, e.g. customer feedback
• Packaging material, e.g. outer cartons
• Transportation equipment, e.g. cages,
pallets or container
 Reverse Flow of Funds
• Money that flows back into the supply
chain.
• Supplier’s supplier wants to be paid for the
delivery of tea leaves!
• The figure depicts two forces in this chain
of goods, information and funds:
1. Product supply
2. Customer demand
Which Of These Two Start A Supply
Chain?
• Imagine a retail outlet is operating from
customer demand.
• You enter as a consumer with the intention
to buy some tea bags.
• You find the tea and coffee shelf empty.
Which Of These Two Start A Supply
Chain?
• Instead of the full assortment of black,
green, fruit and herbal tea, there is a sign
over the counter saying, “Please order
your favorite tea here”.
• Irritated by the absence of product supply
you would probably go and see the store
manager for clarification.
Which Of These Two Start A Supply
Chain?
• They would then explain to you that the
shop is running a customer demand driven
tea supply chain where the end consumer
can place an order directly in the store.
Which Of These Two Start A Supply
Chain?
• The order is then automatically transmitted
to the tea bag supplier in India in order to
grow, pick and process the required
amount of tea leaves that are filled into tea
bags.
• Does that work?
• It probably does not.
 Product Supply
• Commodities, such as tea, coffee, rice,
bread, milk and most other basic
consumer products that you find in
supermarkets are more likely to be
produced on a product supply basis.
• Supply chain starts supplying before you
come into the supermarket to buy some
tea bags.
 Product Supply
• As a consequence, you find supermarket
shelves full of products for everyday use.
• The same for small household equipment,
electronics and general fashion clothes –
mostly these are sourced, produced and
shipped in advance.
 Customer Demand
• High degree of customization.
• Customer order starts the chain of supply,
manufacturing and transport activities of
your desired product.
• Tailor-made clothes, customized tools and
dinner in an up-market fish restaurant.
 Customer Demand
• Here customers see the fish that they are
going to eat later on still swimming in the
fish tank when they enter the restaurant.
• The chain starts moving after you have
expressed your wish or after you have set
your order.
 Definition
• Integration of all activities associated with the
flow and transformation of goods from raw
materials through to end user, as well as
information flows, through improved supply
chain relationships, to achieve a sustainable
competitive advantage.
Handfield and Nichols
The Immediate Supply Chain for an
Individual Firm
Transportation Transportation Customers
Warehousing

Information
flows
Factory

Transportation

Vendors/plants/ports
Warehousing Transportation
 In The Past
• Management of materials and component
parts has been the most neglected
element in the production process.
• Businesses emphasized minimizing the
cost of capital and labor.
 In the Past
• The focus on labor was logical because
the industrial revolution had generated
many labor-intensive manufacturers.
• Producing large standardized batches
represented the norm for some
manufacturers.
 In The Past
• Grappled with the stigma of being labeled
a clerical function.
• However, in the past 30 years, SCM has
made many strides toward shedding this
label and has emerged as a viable
professional career path.
 Setting the Stage for Change
• The reality is that technology is rapidly
displacing labor.
• During the next decade, the supply
management function is likely to contribute to
profits more than any other function in the
company.
 Significance of Supply Chain
Costs are high
• About 10.5% of GDP domestically
• About 12% of GDP internationally
• A range of 4 to 30% of sales for individual
firms, avg. about 10%
• A high as 70-80% of sales if purchasing and
production are included
 Significance of Supply Chain
Customers are more demanding of the supply
chain
• Desire for quick response
• Desire for mass customization
An integral part of company strategy
• Generate revenue
• Improve profit
 Significance of Supply Chain
Supply lines are lengthening
• Local vs. long distance supply
Supply Chains a key to trade and an increased
standard of living
• Law of comparative economic advantage
applies
Supply Chain adds value
• Time and place utilities
 Procurement
• All activities required in order to obtain the
product from the supplier and get it to the
place where it is actually used.
• It encompasses the purchasing function,
store, traffic and transportation, incoming
inspection, and quality control and
assurance.
 Procurement
• Participation in the development of
requirements and their specifications;
• Managing value analysis activities;
• Conducting supply market research;
• Managing supplier negotiations;
• Conducting traditional buying activities;
 Procurement
• Administering purchase contracts;
• Managing supplier quality;
• Buying inbound transportation.
 Purchasing
• A company contracts with third parties to
obtain goods and services required to fulfill
its business objectives in the most timely
and cost-effective manner.
• Used interchangeably with Procurement
 The Difference?
• Purchasing is concerned with establishing
and managing a commercial relationship,
• Procurement is concerned with the more
physical material or service delivery
control aspects after the contract has been
let or the order placed.
 Outsourcing
• Reduce costs by contracting out services
and activities traditionally provided in
house.
SUPPLY CHAIN PLAYERS
 Main Players

• The company, e.g. the producer of tea

bags,
• The supplier, e.g. local companies that
produce raw and packaging materials,
• The customer of that company, e.g.
local supermarkets
Supply Chain Players
 Distributors
• Companies that take inventory in bulk from
manufacturers and deliver an assortment
of related product lines to customers.
• Common in regions where retailing is
fragmented
 Wholesalers
• Often known as cash & carry markets –
buy from distributors or manufacturers
directly.
• Often specialize in certain product ranges
and supply special industries, like hotels,
restaurants and catering, with larger
quantities of products.
 Retailers
• Stock products in smaller quantities and
sell them to the general public.
 Service Providers
• Specialize in certain skills and expertise.
• Provide services more efficiently than
manufacturers, distributors, wholesalers,
retailers or end consumers.
 Service Providers For
• Transportation
• Warehousing
• Finance
• Market research
• New product design
• Information, communication and
technology
PURCHASERS AND BUYERS
 What Do They Really Do?
• Obtain the highest-quality merchandize at
the lowest possible purchase cost
• Purchasers buy goods and services for
use by their business organization.
• Buyers typically buy items for resale.
 What Do They Really Do?
• Determine the best value,
• Choose the appropriate suppliers
• Negotiate the best price,
• Award contracts that ensure that the
correct amount of the product or service is
received at the appropriate time.
 A Step by Step Process
1. Get experts on the services, materials,
and products they purchase.
2. Evaluate suppliers on the basis of price,
quality, service support, availability,
reliability, and selection.
3. Orders are placed and contracts are
awarded to those suppliers who meet the
purchaser’s needs.
 Similarity to Other Functions
• Functional managers within each area
make independent decisions using similar
techniques.
• The objective is to provide high-quality
customer service while minimizing the cost
of producing the service.
 Remember?
• Supply Chain’s purpose is to support the
transformation of raw materials and
component parts into shipped or inventory
goods.
 Factors That Influence
1. Changing economic and political
environments,
2. Emerging technology versus labor,
3. Changing nature of purchasing and
supply chain management as a discipline.
Purchasing Peso Responsibility
• The cost of acquiring, storing, and moving
materials is an increasingly large portion of
the cost of goods sold.
 Ratios Of Materials Related Costs
• The following are ratios of materials-
related costs that are typically cited in
fabrication–assembly industries, for
example, consumer durable goods.
 Measures
• Cost of purchase = 80 percent of sales
• Cost of marketing (sales) = 10 percent of
sales
• Cost of transportation = 10 percent of
sales
 Why?
• These ratios are increasing for various
reasons:
a) Material shortages
b) Increased use of synthetic materials
c) Inflation
d) Complex high-value products.
• Where else is the potential for cost
reduction and competitive advantage
so great?
 Potential For Profit
• Potential for cost reduction and hence
increased profit.
• Many opportunities exist to reduce the
cost of purchases
INTEGRATED SUPPLY MANAGEMENT
(ISM)
 ISM
• One that has full responsibility across the
corporation (including different divisions,
business units and geographies) for the
planning and management of all activities
involved in end--to--end supply chain
processes, including direct sourcing and
procurement, conversion, manufacturing
and all logistics management activities
 ISM
• Achieving integration is a challenge.
• The decisions of a production-inventory
control (PIC) manager may maximize
utilization of production equipment, yet
poorly serve the requirements of the
marketing manager.
 ISM
• The decision of the purchasing manager
affects not only the purchasing function,
but other materials functions.
• It is the objective of ISM to manage the
related considerations.
• Should consider the non-purchasing
consequences of its decisions.
 Example
• Inventory cost is a function of average
inventory.
• Inventory is an asset.
• Working capital is tied up in material rather
than an alternative asset.
• Opportunity costs as well as costs of
storing, insuring, and handling are incurred
when inventory exists.
 Ordering Transportation Costs
• How can the best decision be made?
• One that provides the desired customer
service at minimum cost
• The customers are:
1. Manufacturing,
2. Sales,
3. Distribution
4. Final customer
 Ordering Transportation Costs
• The costs of satisfactory customer service
are only partly identifiable and quantifiable.
• The opportunity costs of poor customer
service is also incomplete.
 Ordering Transportation Costs
• Yet decisions must be made while
recognizing that system wide decision
criteria are
1.Multiple
2.Complex
3.Conflicting
 A Developing Discipline
• An area of management specialization.
• Measures of customer service are
usually expressed in terms of the
availability of material.
1. Did the plant ship on time?
2. Was the product on the shelf when the
customer entered the shop?
3. Availability is only one dimension of
customer service.
 A Developing Discipline.
• As these areas develop, purchasing and
distribution cost accounting will become
part of the accounting-information system.
• Standard costs to create the time and
place utilities will be calculable.
 A Developing Discipline
• Budgeting for materials management
activities will have the detail and reliability
of budgeting in manufacturing.
• When supply management costs become
more visible, their control becomes more
feasible
 Organizing for Purchasing
• Supply coordination involves both:
1. Structure
2. Design of the organization.
 Primary Activities/Processes
a) Setting Customer Service Goals
b) Transportation
c) Inventory Management
d) Location
 Secondary Processes
a) Warehousing
b) Material Handling
c) Acquisition (Purchasing)
d) Protective Packaging
e) Product Scheduling
f) Order Processing
 Organizing for Purchasing
In any purchasing organization, two major
problems must first be considered.
1. Where the purchasing function should be
located in the organization.
 Organizing for Purchasing
2. What level of authority should the
purchasing function have? Given the
evolution of outsourcing, the purchasing
function is expected to gain authority in the
corporate hierarchy
CENTRALIZED VERSUS
DECENTRALIZED
 Advantages of Centralized
Purchasing
• Lower costs because of the availability of
purchase quantity discounts.
• If all material uses are coordinated into
one major purchase, the supplier will work
harder to service the buying firm.
• Large peso purchase quantities equals
buying power.
 Advantages of Centralized
Purchasing
• Promotes the effective use of purchasing
professionals because it allows the
materials manager more authority and
credibility.
• Each buyer can easily become an expert
on associated buys (commodities and
non-commodities)
• Expertise will be developed when there is
a critical mass.
 Advantages of Centralized
Purchasing
• Toyota, Dell, Wal-Mart, and IBM all use
centralized purchasing and have in-house
expertise ranging from engine parts to
rental cars to office equipment to
pharmaceuticals
 Advantages of Centralized
Purchasing
• Enables the buying firm to do a better job
monitoring various changes throughout the
industry.
• Lends itself to periodic (1) reviews of
purchasing activities, (2) evaluation of
suppliers, and (3) the development of
purchasing training programs.
 Disadvantages of Centralized
Purchasing
• High engineering involvement in
procurement decision making
• High need to coordinate purchased parts
with production schedules
• High need to buy from local community.
 The Future Organization
Concept
• Majority of significant peso-valued
purchases will continue to be centralized.
• This trend also will be the result of
increased computer-based management
information systems.
 The Future Organization
Concept
• As firms become lean, centralized
purchasing will become a major focus.
• Long-term agreements will be more
frequently negotiated to stabilize prices.
 Reporting Assignment
• The status of the purchasing professional
in an organization is determined by the
capacity structure.
• In the majority of the Fortune 500 firms,
the purchasing professional reports
directly to the manufacturing vice
president.
 Reporting Assignment
• The purchasing organizational structure
also should be different for service-based
firms.
 Reporting Assignment
• In smaller firms, more than one-third of the
purchasing professionals report to the V.P.
of manufacturing.
• In firms with sales between 5.1 and 10
billion dollars, 61 percent report to either
the president or executive V.P.
 Relationship of SCM to
Marketing and Production
LOGISTICS
Sample
activities: MARKETING
PRODUCTION/ Transport Interface Sample
OPERATIONS  Inventory
Interface activities: activities:
Sample activities:  Order  Customer
 Quality control activities:  Promotion
 Product processing service  Market
 Detailed production
scheduling
scheduling  Materials standards research
 Plant  Pricing  Product
 Equipment maint . handling
location  Packaging
 Capacity planning mix
 Purchasing  Retail  Sales force
 Work measurement
location management
& standards

Production-
logistics Marketing-
interface logistics
interface

Internal Supply Chain

 Relationship of SCM to
Product
Marketing
Promotion
Price

Place-Customer
service levels

Inventory Transport
Logistics

carrying costs costs

Lot quantity Warehousing

costs Order processing costs
and information
costs
 To Summarize
• The supply management concept is a
formal organizational concept that is
involved with the flow of materials through
a manufacturing firm.
 The Functional Areas
1. Purchasing,
2. Inventory control,
3. Traffic,
4. Production control,
5. Stores
 Careers in Purchasing
and Supply Management
• This is the best time for the next
generation of managers to pursue a career
in purchasing supply
• Supply professionals must possess a
comprehensive skill set