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Slide1 : Operations Management Supply-Chain Management Chapter 11


Outline : Outline Global Company Profile: Volkswagen The Strategic Importance of the Supply-Chain Global Supply-Chain Issues Purchasing Manufacturing Environments Service Environment Make-or-Buy Decisions


Outline - continued : Outline - continued Supply-Chain Strategies Many Suppliers Few Suppliers Vertical Integration Keiretsu Networks Virtual Companies Vendor Selection Vendor Evaluation Vendor Development Negotiations


Outline - continued : Outline - continued Managing the Supply-Chain Materials Management Distribution Systems Benchmarking Supply-Chain Management


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


Volkswagen : 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


Lead Figure for Chapter 11 : Lead Figure for Chapter 11 Graphic of VW plant, showing areas occupied by supply firms.


Volkswagen : 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


Material Costs in Supply-Chain : Material Costs in Supply-Chain 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)


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 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


Purchasing Costs as a Percent of Sales : Purchasing Costs as a Percent of Sales All industry Automobile Food Lumber Paper Petroleum Transportation 52% 61% 60% 61% 55% 74% 63% Industry Percent of Sales


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


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


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


Make/Buy Considerations : Make/Buy Considerations 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 lower acquisition cost preserve supplier commitment obtain technical or management ability inadequate capacity reduce inventory costs ensure flexibility and alternate source of supply reciprocity Reasons for Making Reasons for Buying


Make/Buy Considerations : Make/Buy Considerations maintain organizational talent protect proprietary design or quality increase/maintain size of company item is protected by patent or trade secret frees management to deal with its primary business Reasons for Making Reasons for Buying


Purchasing 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. Purchasing 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


Purchasers Ties Themselves to Suppliers : Purchasers Ties Themselves to Suppliers Tactic 1. 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; about 15% more than have EDI links to suppliers


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


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 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


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


Vendor Selection Rating Form : Vendor Selection Rating Form


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


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


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


Materials Management : 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 : Goods Movement Options Trucking Railways Airfreight Waterways Pipelines


Supply-Chain Performance Compared : Supply-Chain Performance Compared Typical Firms Benchmark Firms