11 &

12

Supply Chain
Management &
Purchasing

McGraw-Hill/Irwin Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved.
 Supply Chain Management

 Supply Chain: the sequence of

organizations - their facilities,
functions, and activities - that are
involved in producing and delivering
a product or service.

Sometimes referred to as value chains

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 Facilities

 Warehouses
 Factories
 Processing centers
 Distribution centers
 Retail outlets
 Offices

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 Functions and Activities
 Forecasting
 Purchasing
 Inventory management
 Information management
 Quality assurance
 Scheduling
 Production and delivery
 Customer service

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 Typical Supply Chains

Production Distribution
Purchasing Receiving Storage Operations Storage

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 Typical Supply Chain for a
Figure 11.1a Manufacturer

Supplier

Supplier

Supplier
}
Storage Mfg. Storage Dist. Retailer Customer

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 Typical Supply Chain for a
Figure 11.1b Service

Supplier

Supplier
} Storage Service Customer

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 Need for Supply Chain
Management
1.Improve operations
2.Increasing levels of outsourcing
3.Increasing transportation costs
4.Competitive pressures
5.Increasing globalization
6.Increasing importance of e-commerce
7.Complexity of supply chains
8.Manage inventories

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 Bullwhip Effect
Figure 16.3
Fluctuations in orders increase as they move up the supply chain
from retailers to wholesalers to manufacturers to suppliers

Demand

Initial
Final Customer
Supplier

Inventory fluctuations become progressively

larger looking backward through the supply chain

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 Benefits of Supply Chain
Management
Organization Benefit

Campbell Soup Doubled inventory turnover rate

Hewlett-Packard Cut supply costs 75%

Sport Obermeyer Doubled profits and increased sales 60%

National Bicycle Increased market share from 5% to 29%

Wal-Mart Largest and most profitable retailer in the

world

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Benefits of Supply Chain Management
 Lower inventories
 Higher productivity
 Greater agility
 Shorter lead times
 Higher profits
 Greater customer loyalty
 Integrates separate organizations into a
organized operating system

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 Global Supply Chains
 Increasing more complex
 Language
 Culture
 Currency fluctuations
 Political
 Transportation costs
 Local capabilities
 Finance and economics
 Environmental

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 Elements of Supply Chain
Table 11.1 Management
Element Typical Issues
Customers Determining what customers want
Forecasting Predicting quantity and timing of demand
Design Incorporating customer wants, mfg., and time
Processing Controlling quality, scheduling work
Inventory Meeting demand while managing inventory costs
Purchasing Evaluating suppliers and supporting operations
Suppliers Monitoring supplier quality, delivery, and relations
Location Determining location of facilities
Logistics Deciding how to best move and store materials

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 Strategic or Operational
 Two types of decisions in supply chain
management
 Strategic – design and policy
 Operational – day-today activities
 Major decisions areas
 Location
 Production
 Inventory
 Distribution

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 Logistics

 Logistics
 Refers to the movement of materials and
information within a facility and to incoming
and outgoing shipments of goods and
materials in a supply chain

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 Logistics
• Movement within the facility
• Incoming and outgoing shipments
• Bar coding
• EDI
• Distribution 0

• JIT Deliveries 214800 232087768

Electronic Data Interchange (EDI) is the electronic interchange of business
information using a standardized format; a process which allows one company to
send information to another company electronically rather than with paper. Business
entities conducting business electronically are called trading partners
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 Materials Movement
Figure 11.4
Work center
Work center Work
center

Work Storage
center

Storage

Storage
RECEIVING

Shipping

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 Distribution Requirements
Planning
 Distribution requirements planning
(DRP) is a system for inventory
management and distribution planning
 Extends the concepts of MRPII

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 Uses of DRP

 Management uses DRP to plan and

coordinate:
 Transportation
 Warehousing
 Workers
 Equipment
 Financial flows

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 E-Business/E-commerce
 E-Business: the use of electronic
technology to facilitate business
transactions
 Applications include
 Internet buying and selling
 E-mail
 Order and shipment tracking
 Electronic data interchange

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 Advantages E-Business
 Companies can:
 Have a global presence
 Improve competitiveness and quality
 Analyze customer interests
 Collect detailed information
 Shorten supply chain response times
 Realize substantial cost savings
 Create virtual companies
 Level the playing field for small companies

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 Disadvantages of E-Business
 Customer expectations
 Order quickly -> fast delivery
 Order fulfillment
 Order rate often exceeds ability to fulfill it
 Inventory holding
 Outsourcing loss of control
 Internal holding costs

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 Reverse Logistics
 Reverse logistics – the backward flow of
goods returned to the supply chain
 Processing returned goods
 Sorting, examining/testing, restocking, repairing
 Reconditioning, recycling, disposing
 Gatekeeping – screening goods to prevent
incorrect acceptance of goods
 Avoidance – finding ways to minimize the
number of items that are returned

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 Effective Supply Chain
 Requires linking the market, distribution
channels processes, and suppliers
 Supply chain should enable members to:
 Share forecasts
 Determine the status of orders in real time
 Access inventory data of partners

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 Successful Supply Chain
 Trust among trading partners
 Effective communications
 Supply chain visibility
 Event-management capability
 The ability to detect and respond to
unplanned events
 Performance metrics

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 Creating an Effective Supply
Chain
1.Develop strategic objectives and tactics
2.Integrate and coordinate activities in the
internal supply chain
3.Coordinate activities with suppliers with
customers
4.Coordinate planning and execution
across the supply chain
5.Form strategic partnerships
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Supply Chain Performance Drivers
1.Quality
2.Cost
3.Flexibility
4.Velocity
5.Customer service

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 Velocity
 Inventory velocity
 The rate at which inventory(material) goes
through the supply chain
 Information velocity
 The rate at which information is
communicated in a supply chain

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 Challenges
 Barriers to integration of organizations
 Getting top management on board
 Dealing with trade-offs
 Small businesses
 Variability and uncertainty
 Long lead times

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 Trade-offs
1. Lot-size-inventory
 Bullwhip effect
2. Inventory-transportation costs
 Cross-docking
3. Lead time-transportation costs
4. Product variety-inventory
 Delayed differentiation
5. Cost-customer service
 Disintermediation - reducing SC partner

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 Trade-offs
 Bullwhip effect
 Inventories are progressively larger moving
backward through the supply chain
 Cross-docking
 Goods arriving at a warehouse from a
supplier are unloaded from the supplier’s
truck and loaded onto outbound trucks
 Avoids warehouse storage

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 Trade-offs
 Delayed differentiation
 Production of standard components and
subassemblies, which are held until late in
the process to add differentiating features
 Disintermediation
 Reducing one or more steps in a supply
chain by cutting out one or more
intermediaries

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 Supply Chain Issues

Strategic Tactical Issues Operating Issues

Issues
Design of the Inventory policies Quality control
supply chain, Purchasing policies Production planning and
partnering Production policies control
Transportation
policies
Quality policies

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 Supply Chain Benefits and
Table 11.5 Drawbacks
Problem Potential Benefits Possible
Improvement Drawbacks
Large Smaller, more Reduced holding Traffic congestion
inventories frequent deliveries costs Increased costs

Long lead Delayed Quick response May not be

times differentiation feasible
Disintermediation May need absorb
functions
Large Modular Fewer parts Less variety
number of Simpler ordering
parts
Cost Outsourcing Reduced cost, Loss of control
Quality higher quality

Variability Shorter lead times, Able to match Less variety

better forecasts supply and
demand
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 Purchasing

 Purchasing is responsible for obtaining

the materials, parts, and supplies and
services needed to produce a product
or provide a service.
 Purchasing cycle: Series of steps that
begin with a request for purchase and
end with notification of shipment
received in satisfactory condition.

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 Goal of Purchasing

 Develop and implement purchasing

plans for products and services that
support operations strategies

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 Duties of Purchasing

 Identifying sources of supply

 Negotiating contracts
 Maintaining a database of suppliers
 Obtaining goods and services
 Managing supplies

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 Purchasing Interfaces
Figure 11.5

Legal

Operations Accounting

Data
Purchasing
processing

Design

Receiving
Suppliers

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 Purchasing Cycle
Legal

1.Requisition received Operations

Accounting

2.Supplier selected
Data
3.Order is placed Purchasing process-
ing

4.Monitor orders
Design
5.Receive orders
Receiving
Suppliers

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 Value Analysis vs. Outsourcing

 Value analysis
 Examination of the function of purchased
parts and materials in an effort to reduce
cost and/or improve performance

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 Centralized vs Decentralized
Purchasing
 Centralized purchasing
 Purchasing is handled by one special
department
 Decentralized purchasing
 Individual departments or separate
locations handle their own purchasing
requirements

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 Suppliers

 Choosing suppliers
 Evaluating sources of supply
 Supplier audits
 Supplier certification
 Supplier relationships
 Supplier partnerships

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 Factors in Choosing a Supplier

 Quality and quality assurance

 Flexibility
 Location
 Price

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 Factors in Choosing a Supplier
(cont’d)
 Product or service changes
 Reputation and financial stability
 Lead times and on-time delivery
 Other accounts

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 Evaluating Sources of Supply

 Vendor analysis: Evaluating the

sources of supply in terms of price,
quality, reputation, and service

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 Evaluating Sources of Supply

 Vendor analysis - evaluating the

sources of supply in terms of
 Price
 Quality
 Services
 Location
 Inventory policy
 Flexibility

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 Supplier as a Partner
Table 11.9
Aspect Adversary(o Partner
pposition)
Number of suppliers Many One or a few
Length of May be brief Long-term
relationship
Low price Major consideration Moderately important
Reliability May not be high High
Openness Low High
Quality May be unreliable; At the source;
buyer inspects vendor certified
Volume of business May be low High
Flexibility Relatively low Relatively high
Location Widely dispersed Nearness is
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 Supplier Partnerships
 Ideas from suppliers could lead to improved
competitiveness
1.Reduce cost of making the purchase
2.Reduce transportation costs
3.Reduce production costs
4.Improve product quality
5.Improve product design
6.Reduce time to market
7.Improve customer satisfaction
8.Reduce inventory costs
9.Introduce new products or services

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 Critical Issues
 Strategic importance
 Cost
 Quality
 Agility
 Customer service
 Competitive advantage
 Technology management
 Benefits
 Risks

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 Critical Issues
 Purchasing function
 Increased outsourcing
 Increased conversion to lean production
 Just-in-time deliveries
 Globalization

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 Ethics in Purchasing
 Ethical behavior is important in all aspects of
business.
 This is certainly true in purchasing, where the
temptations for unethical behavior can be
enormous.
 Buyers often hold great power, and
salespeople are often eager to make a sale.
 Unless both parties act in an ethical manner,
the potential for abuse is very real.

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 Furthermore, with increased globalization,
the challenges are particularly great because
a behavior regarded as customary in one
country might be regarded as unethical in
another country.
 The National Association of Purchasing
Management has established a set of
guidelines for ethical behavior.

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