Supply-Chain Management

Outline
 GLOBAL COMPANY PROFILE: VOLKSWAGEN  THE STRATEGIC IMPORTANCE OF THE SUPPLY-CHAIN
 Global Supply-Chain Issues

 SUPPLY-CHAIN ECONOMICS
 Make-or-Buy Decisions  Outsourcing
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Outline - Continued
 SUPPLY-CHAIN STRATEGIES
     Many Suppliers Few Suppliers Vertical Integration Keiretsu Networks Virtual Companies

 Managing the Supply Chain

 Issues In an Integrated Supply Chain  Opportunities in an Integrated Supply Chain
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Outline - Continued
 INTERNET PURCHASING  VENDOR SELECTION
 Vendor Evaluation  Vendor Development  Negotiations

 MATERIALS MANAGEMENT  BENCHMARKING SUPPLY-CHAIN MANAGEMENT

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Learning Objectives
When you complete this chapter, you should be able to : Identify or Define:
       Supply-chain management Purchasing Outsourcing E-procurement Materials management Keiretsu Virtual companies
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Learning Objectives
When you complete this chapter, you should be able to : Describe or Explain:
 Supply-Chain Strategies  Purchasing strategies  Approaches to negotiations

Volkswagen
 Brazilian plant employs 1000 workers
  200 work for VW 800 work for other contractors:
 Rockwell International, Cummins Engines, Deluge Automotiva, MWM, Remon and VDO, etc.

 VW responsible for overall quality, marketing, research and design  VW looks to innovative supply-chain to improve quality and drive down costs
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Volkswagen
 Unusual elements:
 VW is buying not only materials, but also the labor and related services  Suppliers are integrated tightly into VWs own network, right down to assembly work in the plant

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

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The Supply-Chain
VISA

Material Flow

Credit Flow

Supplier

Manufacturing

Retailer

Consumer

Supplier Schedules Order Flow

Wholesaler Cash Flow

Retailer

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The Supply Chain

Supplier
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

Customer

Inventory

Supplier

Manufacturer
Inventory Inventory

Customer

Supplier Distributor
Inventory

Customer

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Material Costs in Supply-Chain

Wholesale
8% 9%

Manufacturing
31% 11% 58% Material
Dir Wages

COGS Payroll

83%

Other

Other

Retail
13% 16%

COGS Payroll

71%

Other
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Supply-Chain Support for Overall Strategy

Suppliers goal

Low Cost
Supply demand at lowest possible cost

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

Differentiation
Share market research; jointly develop products and options

Primary Selection Criteria

Select primarily for cost

Select primarily for product development skills

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Supply-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 that 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

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Supply-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

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

Maximize performance and minimize cost

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
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Importance of Purchasing
 Major cost center  Affects quality of final product  Aids strategy of low cost, response, and differentiation

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Supply-Chain Costs as a Percent of Sales

      

Industry All industry Automobile Food Lumber Paper Petroleum Transportation

52%  Percent of Sales  67%  60%  61%  55%  79%  62%

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

Percent of Sales Spent in the Supply-Chain
Percent Net Profit of Firm

30%

40%

50%

60%

70%

80%

90%

2 4 6 8 10

$2.78 $3.23 $3.85 $4.76 $6.25 $9.09 $16.67 $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 $10.00
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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

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The Purchasing Focus

Materials Management -High transportation cost -High inventory costs Purchasing Management -Commodity items -Standard products Source Management -Unique items -Custom-made items -High technology items
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Supply Management -High costs -Scarcity: national or international

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
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Purchasing Techniques
        Drop shipping and special packaging Blanket orders Invoiceless purchasing Electronic ordering and funds transfer Electronic data interchange (EDI) Stockless purchasing Standardization Outsourcing
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Make/Buy Considerations
1. Maintain core Reasons for Making competencies and protect personnel from layoff 2. Lower production cost 3. Unsuitable suppliers 4. Assure adequate supply 5. Utilize surplus labor and make a marginal contribution 1. Frees management to Reasons for Buying deal with its primary business 2. Lower acquisition cost 3. Preserve supplier commitment 4. Obtain technical or management ability 5. Inadequate capacity

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Make/Buy Considerations Continued

6. Obtain desired quantity Reasons for Making 7. Remove supplier collusion 8. Obtain a unique item that would entail a prohibitive commitment from the supplier 9. Protect proprietary design or quality 10.Increase or maintain size of company 6. Reduce inventory costs Reasons for Buying 7. Ensure flexibility and alternate source of supply 8. Inadequate managerial or technical resources 9. Reciprocity 10.Item is protected by patent or trade secret

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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.

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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.
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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.

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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.

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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 Exterior lighting suggestions

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

3M

Caravan, Voyager Various Various

$1,500,000

Trico Leslie Metal Arts

$140,000 $1,500,000

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Tactics for Close Supplier Relationships

Tactic
  Reduce total number of suppliers Certify suppliers 
Results

Average 20% reduction in 5 years Almost 40% of all companies surveyed were themselves currently certified About 60% ask for this About 54% do this Almost 80% claim to do
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    Ask for JIT delivery from key suppliers Involve key suppliers in new product design Develop software linkages to suppliers

  

this

Vertical Integration Strategy

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

Raw Material (Suppliers) Backward Integration Current Transformation Forward Integration Finished Goods (Customers)
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 Make-buy issue  Major financial commitment  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)
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Steel Integrated Circuits

Flour Milling

Automobiles

Distribution Circuit Boards System Dealers Computers Watches Calculators

Vertical Integration Can be Forward or Backward

Vertical Integration
Raw material (suppliers) Backward Integration Current Transformation Forward Integration Finished goods (customers)

Examples of Vertical Integration

Iron ore Steel Automobile Integrated Circuits s Distributio n System Dealers Circuit boards Computers, watches, calculators Baked Goods
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Silicon

Farmin g Flour Milling

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
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Virtual Companies
 Companies that rely on a variety of supplier relationships to provide services on demand.  Also known as hollow corporations, or network corporations

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Virtual Company Strategy

 Network of independent companies
 Linked by technology
 PCs, faxes, Internet etc.

 Each contributes core competencies  Typically provide services

 Payroll, editing, designing

 May be long or shortterm

 Usually, only until

1995 Corel Corp.

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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)
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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

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Successful Supply-Chain Management Requires:

 A mutual agreement on goals  Trust  Compatible organizational cultures

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Issues in an Integrated SupplyChain

 Local optimization  Incentives  Large lots

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Opportunities in an Integrated Supply-Chain

 Generation of accurate pull data  Reduction of lot size  Single stage control of replenishment

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Vendor Managed Inventory (VMI)

    Postponement keeps product generic as long as possible Channel Assembly sends to distributor individual components and modules rather than finished goods Drop Shipping and Special Packaging supplier will ship to end consumer rather than to seller Blanket Orders a long-term purchase commitment to a supplier for items that are to be delivered against short-term releases to ship Standardization reducing the number of variations in materials and components Electronic Ordering and Funds Transfer paperless ordering and 100% material acceptance, payment by 43 wire

 

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.
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Supplier Selection Criteria

 Company
 Financial stability  Management  Location

 Service
    Delivery on time Condition on arrival Technical support Training

 Product
 Quality  Price

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Vendor Selection Rating Form

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Negotiation Strategies
 Three types:
 cost-based price model - supplier opens its books to purchaser; price based upon fixed cost plus escalation clause for materials and labor  market-based price model - published price or index  competitive bidding - potential suppliers bid for contract
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Logistics Management
 Integrates all materials functions
      Purchasing Inventory management Production control Inbound traffic Warehousing and stores Incoming quality control

 Objective: Efficient, low cost operations

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Goods Movement Options

     Trucking Railways Airfreight Waterways Pipelines

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Supply-Chain Performance Compared

Administrative 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 3.3% 0.8% 15 42 minutes 33% 1.5% 400 8 15 minutes 2% .0001% 4

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