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Operations

Management
Supply-Chain Management
Chapter 11

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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

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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 VW’s own network,
right down to assembly work in the plant

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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

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The Supply-Chain
VISA
®

Material Flow Credit Flow

Supplier Manufacturing Retailer Consumer

Supplier Wholesaler Retailer

Schedules Order Cash


Flow Flow
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The Supply Chain
Market research data
Scheduling information
Engineering and design data
Supplier Order flow and cash flow Customer
Ideas and design to
Inventory satisfy end customer
Material flow
Supplier Credit flow

Manufacturer Customer
Inventory Inventory
Supplier

Distributor Customer
Inventory

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Material Costs in
Supply-Chain
Wholesale
8% 9%
COGS
Manufacturing
Payroll
31% Material 83%
Other
11% Dir Wages
58% Retail
Other
16% COGS
13%
Payroll
71%
Other
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Supply-Chain Support for Overall
Strategy
Low Cost Response Differentiation
Supplier’s Supply demand Respond Share market
goal at lowest quickly to research; jointly
possible cost changing develop
requirements products and
and demand to options
minimize
stockouts

Primary Select Select Select primarily


Selection primarily for primarily for for product
Criteria cost capacity, development
speed, and skills
flexibility

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Supply-Chain Support for Overall
Strategy - continued
Low Cost Response Differentiation
Process Maintain high Invest in Modular
Characteristics average excess processes that
utilization capacity and lend themselves
flexible to mass
processes customization

Inventory Minimize Develop Minimize


Characteristics inventory responsive inventory in the
throughout the system, with chain to avoid
chain to hold buffer stocks obsolescence
down costs positioned to
ensure supply

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Supply-Chain Support for Overall
Strategy - continued
Low Cost Response Differentiation
Lead-time Shorten lead- Invest Invest
Characteristics time as long as it aggressively to aggressively to
does not reduce reduce
increase costs production development
lead-time lead-time

Product-design Maximize Use product Use modular


Characteristics performance designs that design to
and minimize lead to low set- postpone
cost up time and product
rapid production differentiation for
ramp-up as long as
possible
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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 Percent of Sales
 All industry  52%
 Automobile  67%
 Food  60%
 Lumber  61%
 Paper  55%
 Petroleum  79%
 Transportation  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 30% 40% 50% 60% 70% 80% 90%
Net
Profit of
Firm
2 $2.78 $3.23 $3.85 $4.76 $6.25 $9.09 $16.67
4 $2.70 $3.13 $3.70 $4.55 $5.88 $8.33 $14.29
6 $2.63 $3.03 $3.57 $4.35 $5.56 $7.69 $12.50
8 $2.56 $2.94 $3.45 $4.17 $5.26 $7.14 $11.11
10 $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 Supply Management
-High transportation cost -High costs
-High inventory costs -Scarcity: national or
international
Purchasing
Management
-Commodity items
-Standard products

Source Management
-Unique items
-Custom-made items
-High technology items
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Traditional Purchasing Process
Customer Supplier
Purchase Mail Order
Order Processing
Receiving
Receivables Dock
Report Packing
List

Accounts Mail Invoice


Payable

Check Mail Accounts


Reconcile
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
Reasons for Making Reasons for Buying
1. Maintain core competencies 1. Frees management to deal
and protect personnel from with its primary business
layoff 2. Lower acquisition cost
2. Lower production cost 3. Preserve supplier
3. Unsuitable suppliers commitment
4. Assure adequate supply 4. Obtain technical or
5. Utilize surplus labor and management ability
make a marginal 5. Inadequate capacity
contribution
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Make/Buy Considerations -
Continued
Reasons for Making Reasons for Buying
6. Obtain desired quantity 6. Reduce inventory costs
7. Remove supplier collusion 7. Ensure flexibility and
8. Obtain a unique item that alternate source of supply
would entail a prohibitive 8. Inadequate managerial or
commitment from the
supplier technical resources
9. Protect proprietary design or 9. Reciprocity
quality 10. Item is protected by patent
10. Increase or maintain size of or trade secret
company
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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 as-needed
basis.

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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.

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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) © 1995
Corel

 Frequent, small lots


Corp.

 Delivery to point of use

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Daimler Chrysler’s Supplier Cost
Reduction Effort
Supplier Suggestion Model Savings
Rockwell Use passenger car door Dodge $280,000
locks on trucks trucks
Rockwell Simplify design/substitute Various $300,000
materials on manual
window system
3M Change tooling for wood- Caravan, $1,500,000
grain panels to allow three Voyager
from one die instead of two
Trico Change wiper-blade Various $140,000
formulation
Leslie Metal Exterior lighting suggestions Various $1,500,000
Arts

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Tactics for Close Supplier
Relationships
Tactic Results
 Reduce total number of  Average 20% reduction in 5 years
suppliers
 Certify suppliers  Almost 40% of all companies
surveyed were themselves
currently certified
 Ask for JIT delivery from key  About 60% ask for this
suppliers
 Involve key suppliers in new  About 54% do this
product design
 Develop software linkages to  Almost 80% claim to do this
suppliers About 50% claim this

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

Iron Ore Silicon Farming Raw Material


(Suppliers)

Steel Flour Milling Backward


Integration

Integrated Current
Automobiles
Circuits Transformation

Distribution Forward
Circuit Boards
System Integration

Computers
Finished Goods
Dealers Watches Baked Goods
(Customers)
Calculators

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Vertical Integration Can be
Forward or Backward
Vertical Integration Examples of Vertical Integration
Raw material (suppliers) Iron ore Silicon Farming
Backward Integration Steel
Current Transformation Automobiles Integrated Circuits Flour
Milling
Forward Integration Distribution Circuit boards
System
Finished goods (customers) Dealers Computers, watches, Baked
calculators Goods

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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
 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

© 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 Supply-
Chain

 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 “wire”
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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  Service
 Financial stability  Delivery on time
 Management  Condition on arrival
 Location  Technical support
 Product  Training
 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
Benchmark
Typical Firms Firms
Administrative costs as 3.3% 0.8%
percent of purchases
Lead time (weeks) 15 8
Time spent in placing order 42 minutes 15 minutes
Percentage of late deliveries 33% 2%
Percentage of rejected material 1.5% .0001%
Number of shortages per year 400 4

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