17 Supply Chain

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Operations Management Supply-Chain Management


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


Volkswagen Unusual elements: VW is buying not only materials, but also the labor and related services Suppliers are integrated tightly into VW’s 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 supplier’s supplier Objective: Maximize value & lower waste Supply-Chain Management

The Supply-Chain: 

Consumer Retailer Manufacturing Material Flow VISA ® Credit Flow Supplier Supplier Wholesaler Retailer Cash Flow Order Flow Schedules The Supply-Chain

The Supply Chain: 

The Supply Chain

Supply-Chain Support for Overall Strategy: 

Supply-Chain Support for Overall Strategy Supplier’s goal Primary Selection Criteria

Supply-Chain Support for Overall Strategy - continued: 

Supply-Chain Support for Overall Strategy - continued

Supply-Chain Support for Overall Strategy - continued: 

Supply-Chain Support for Overall Strategy - continued

Global Supply-Chain Issues: 

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

Importance of Purchasing: 

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

Supply-Chain Costs as a Percent of Sales: 

Supply-Chain Costs as a Percent of Sales All industry Automobile Food Lumber Paper Petroleum Transportation 52% 67% 60% 61% 55% 79% 62% Industry Percent of Sales

Objectives of the Purchasing Function: 

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

The Purchasing Focus: 

The Purchasing Focus

Traditional Purchasing Process: 

Traditional Purchasing Process

Purchasing Techniques: 

Purchasing Techniques Drop shipping and special packaging Blanket orders Invoiceless purchasing Electronic ordering and funds transfer Electronic data interchange (EDI) Stockless purchasing Standardization Outsourcing

Make/Buy Considerations: 

Make/Buy Considerations Maintain core competencies and protect personnel from layoff Lower production cost Unsuitable suppliers Assure adequate supply Utilize surplus labor and make a marginal contribution Frees management to deal with its primary business Lower acquisition cost Preserve supplier commitment Obtain technical or management ability Inadequate capacity Reasons for Making Reasons for Buying

Make/Buy Considerations - Continued: 

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

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. Supply-Chain Strategies

Supply-Chain Strategies: 

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 as-needed basis.

Many Suppliers Strategy: 

Many sources per item Adversarial relationship Short-term Little openness Negotiated, sporadic PO’s High prices Infrequent, large lots Delivery to receiving dock © 1995 Corel Corp. Many Suppliers Strategy

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. Few Suppliers Strategy

Daimler Chrysler’s Supplier Cost Reduction Effort: 

Daimler Chrysler’s Supplier Cost Reduction Effort

Tactics for Close Supplier Relationships: 

Tactics for Close Supplier Relationships Tactic Reduce total number of suppliers Certify suppliers Ask for JIT delivery from key suppliers Involve key suppliers in new product design Develop software linkages to 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 this About 50% claim this

Vertical Integration Strategy: 

Raw Material (Suppliers) Backward Integration Current Transformation Forward Integration Finished Goods (Customers) Ability to produce goods previously purchased Setup operations Buy supplier Make-buy issue Major financial commitment Hard to do all things well Vertical Integration Strategy

Forms of Vertical Integration: 

Forms of Vertical Integration Iron Ore Steel Automobiles Distribution System Dealers Silicon Integrated Circuits Circuit Boards Computers Watches Calculators Farming Flour Milling Raw Material (Suppliers) Backward Integration Current Transformation Forward Integration Finished Goods (Customers) Baked Goods

Vertical Integration Can be Forward or Backward: 

Vertical Integration Can be Forward or Backward

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 Keiretsu Network Strategy

Virtual Companies: 

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

Virtual Company Strategy: 

© 1995 Corel Corp. Virtual Company Strategy Network of independent companies Linked by technology PC’s, faxes, Internet etc. Each contributes core competencies Typically provide services Payroll, editing, designing May be long or short-term Usually, only until opportunity is met

Managing the Supply-Chain: 

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)

Managing the Supply-Chain - Other Options: 

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

Successful Supply-Chain Management Requires:: 

Successful Supply-Chain Management Requires: A mutual agreement on goals Trust Compatible organizational cultures

Issues in an Integrated Supply-Chain: 

Issues in an Integrated Supply-Chain Local optimization Incentives Large lots

Opportunities in an Integrated Supply-Chain: 

Opportunities in an Integrated Supply-Chain Generation of accurate “pull” data Reduction of lot size Single stage control of replenishment

Vendor Managed Inventory (VMI): 

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 “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. Vendor Selection Steps

Supplier Selection Criteria: 

Company Financial stability Management Location Product Quality Price Service Delivery on time Condition on arrival Technical support Training Supplier Selection Criteria

Vendor Selection Rating Form: 

Vendor Selection Rating Form

Negotiation Strategies: 

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

Logistics Management: 

Logistics 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: 

Goods Movement Options Trucking Railways Airfreight Waterways Pipelines

Supply-Chain Performance Compared: 

Supply-Chain Performance Compared

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