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Supply Chain
Management
2
Outline
Global Company Profile: Volkswagon
The Strategic Importance of the Supply-
Chain
– Global Supply-Chain Issues
Supply Chain Economics
– Make-or-Buy Decisions
– Outsourcing
3
Outline - continued
Supply-Chain Strategies – Many Suppliers
– Few Suppliers
– Vertical Integration
– Keiretsu Networks
– Virtual Companies
Vendor Selection – Vendor Evaluation
– Vendor Development
– Negotiations
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Outline - continued
Managing the Supply-Chain
Materials Management
– Distribution Systems
Benchmarking Supply-Chain
Management
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Explain supply chain management
State the importance of purchasing and
materials management
Compare & contrast purchasing strategies
Summarize vendor relations issues
Describe the purchasing process and
techniques
Learning Objectives
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Volkswagon
Brazilian plant employs 1000 workers
– 200 work for VW
– 800 work for other contractors: Rockwell International, Cummins Engines, Delga
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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Volkswagon
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
Definition
The process of planning, implementing and controlling
efficient cost effective flow and storage of goods,
services and related information from point of origin
to point of consumption for the purpose of conforming
to customer requirements.
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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
Suppliers
Tier 2
Suppliers
Tier 1
Manufacturing
Inbound Logistics
Operations
Outbound Logistics
Distributors Retailers
The Supply Chain
Information
U
S
T
O
M
E
R
S
C
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The time to act is now!
The first firm in an industry to implement
a real time, interactive logistics information system
will have a competitive advantage, the last firm to do
so doesn't need to spend the money.
D. M. Lambert
T. C. Harrington
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Consumer
Retailer
Manufacturing
Materiall Flow
VISA ®
Credit Flow
Supplier
Supplier Wholesaler
Retailer
Cash Flow
Order Flow
Schedules
The Supply-Chain
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The Supply Chain
Supplier
Supplier
Supplier
Inventory
Inventory
Distributor
Inventory Inventory
Manufacturer
Customer
Customer
Customer
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
Supply Chain Management Components:
Information Management
•Traditional supply chain: Forecasts based on different data.
Contributes to the bullwhip effect, excess inventory, and
stockouts.
Supply Chain Management Components:
Information Management
Improved approaches enabled by technology to collect,
store and communicate data
Collaborative planning, forecasting, and
replenishment (CPFR) – Approach to demand
planning in which partners negotiate and agree on a
plan for meeting demand
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11%
31%
58%
Material
Dir Wages
Other
71%
16% 13% COGS
Payroll
Other
83%
9% 8% COGS
Payroll
Other
Manufacturing
Wholesale
Retail
Material Costs in Supply-Chain
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Supply-Chain Support for Overall Strategy
Supplier’s
goal
Primary Selection Criteria
Supply demand at lowest possible cost
Select primarily for cost
Low Cost
Respond quickly to changing requirements and demand to minimize stockouts
Select primarily for capacity, speed, and flexibility
Response
Share market research; jointly develop products and options
Select primarily for product development skills
Differentiation
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Supply-Chain Support for Overall Strategy - continued
Process
Characteristics
Maintain high average utilization
Low Cost
Invest in excess capacity and flexible processes
Response
Modular processes to 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
Differentiation
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Supply-Chain Support for Overall Strategy - continued
Lead-time
Characteristics
Shorten lead-time as long as it does not increase costs
Low Cost
Invest aggressively to reduce production lead-time
Response
Invest aggressively to reduce development lead-time
Differentiation
Product-design
Characteristics
Maximize
performan
ce and
minimize
cost
Use product
designs that
lead to low
set-up time
and rapid
production
ramp-up
Use modular
design to
postpone
product
differentiation
for 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 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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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
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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
Percent of Sales Spent for Purchases
Firm's
Percent
Net
Profit
30% 40% 50% 60% 70% 80% 90%
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 $10.11
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Motivating Forces: Supply Savings
Example U.S. businesses spend 20-30% of revenue
acquiring goods from outside suppliers
– 60% for manufacturing).
Purchase cost savings have strong impact on
bottom line.
– e.g., if the business saves just 6% in supply costs
($432,000), profit will increase by 45%.
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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
Supply Management
-High costs
-Scarcity: national or
international
Source Management
-Unique items
-Custom-made items
-High technology items
Purchasing
Management
-Commodity items
-Standard products
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Receiving
Dock
Purchase Order
Packing List
Order
Processing
Invoice
Receivables
Report
Check Accounts
Receivable
Accounts
Payable
Mail Reconcile
Customer Supplier
Traditional Purchasing
Process
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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
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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
maintain organizational talent
protect proprietary design or
quality
increase/maintain size of
company
Frees management to deal
with primary business lower
acquisition cost
preserve supplier commitment
obtain technical or
management ability
inadequate capacity
reduce inventory costs
ensure flexibility and alternate
source of supply
reciprocity
item is protected by patent or
trade secret
frees management to deal
with its primary business
Reasons for Making Reasons for Buying
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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
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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 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
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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
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Chrysler‟s Supplier Cost Reduction Effort
Supplier Suggestion Model Savings Rockwell Use passenger car door
locks on trucks
Dodge
trucks
$280,000
Rockwell Simplify design/substitute
materials on manual
window system
Various $300,000
3M Change tooling for wood-
grain panels to allow three
from one die instead of two
Caravan,
Voyager
$1,500,000
Trico Change wiper-blade
formulation
Various $140,000
Leslie Metal
Arts
Exterior lighting suggestions Various $1,500,000
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
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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
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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
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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
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© 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
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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
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Company – Financial stability
– Management
– Location
Product – Quality
– Price
Service – Delivery on time
– Condition on arrival
– Technical support
– Training
Supplier Selection Criteria
39
Negotiation Strategies
Three types:
– cost-based price model - supplier opens its
books to purchaser; price based upon fixed
clause plus escalation clause for materials
and labor
– market-based price model - published price
or index
– competitive bidding - potential suppliers bid
for contract
40
Managing the Supply Chain
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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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
Vendor managed inventories
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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
44
Benchmarking Supply-Chain Management
Number of suppliers
per purchasing agent
Purchasing costs as
percent of purchases
Lead time (weeks)
Time spent placing an
order
34
3.3%
15
42 minutes
5
.8%
8
15 minutes
Typical
Firms Benchmark
Firms
45
Supply-Chain Performance Compared
Number of suppliers per
purchasing agent34 5
Purchasing costs as percent of
purchases3.3% 0.8%
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
