Supply Chain Management

Supply Chain Management MBA 570 Summer 2007 1

Outline ¨ Global Company Profile: Volkswagon ¨ The Strategic Importance of the Supply-Chain ¨

Global Supply-Chain Issues

¨ Supply Chain Economics ¨ ¨

Make-or-Buy Decisions Outsourcing

2

Outline - continued ¨ Supply-Chain Strategies ¨ ¨ ¨ ¨ ¨

Many Suppliers Few Suppliers Vertical Integration Keiretsu Networks Virtual Companies

¨ Vendor Selection ¨ ¨ ¨

Vendor Evaluation Vendor Development Negotiations

3

Outline - continued ¨ Managing the Supply-Chain ¨ Materials Management ¨

Distribution Systems

¨ Benchmarking Supply-Chain Management

4

Learning Objectives ¨ 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 5

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 6

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

7

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.

8

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 9

The Supply Chain Suppliers Tier 2

Suppliers Tier 1

Distributors

Manufacturing Inbound Logistics Operations Outbound Logistics

Retailers

C U S T O M E R S

Information

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

The Supply-Chain VISA

®

Materiall Flow Credit Flow

Supplier

Manufacturing

Supplier Schedules

Retailer

Consumer

Wholesaler

Retailer

Order Flow 12

Cash Flow

The Supply Chain Market research data scheduling information Engineering and design data Order flow and cash flow

Supplier

Inventory

Supplier

Customer

Ideas and design to satisfy end customer Material flow Credit flow

Customer

Manufacturer Inventory

Supplier

Inventory

Distributor Inventory

13

Customer

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

Material Costs in Supply-Chain Wholesale 8% 9%

Manufacturing 31% 11% 58%

COGS Payroll

Material

83%

Other

Dir Wages

Retail

Other

13%

16%

71% 14

COGS Payroll Other

Supply-Chain Support for Overall Strategy Supplier’s goal

Primary Selection Criteria

Low Cost

Response

Supply demand at lowest possible cost

Respond quickly to changing requirement s and demand to minimize stockouts Select primarily for capacity, speed, and flexibility

Select primarily for cost

15

Differentiation Share market research; jointly develop products and options Select primarily for product development skills

Supply-Chain Support for Overall Strategy - continued Low Cost

Response

Differentiation

Process Characteristics

Maintain high average utilization

Invest in excess capacity and flexible processes

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

16

Supply-Chain Support for Overall Strategy - continued Low Cost Lead-time Characteristics

Product-design Characteristics

Response

Differentiation

Shorten leadtime as long as it does not increase costs

Invest aggressively to reduce production lead-time

Invest aggressively to reduce development lead-time

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 differentiatio n 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 18

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 19

Purchasing Costs as a Percent of Sales Industry ¨ ¨ ¨ ¨ ¨ ¨ ¨

Percent of Sales ¨ ¨ ¨ ¨ ¨ ¨ ¨

All industry Automobile Food Lumber Paper Petroleum Transportation 20

52% 61% 60% 61% 55% 74% 63%

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

Percent of Sale Firm's Percent Net Profit

30%

21

40%

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%.

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 Supply Management -High costs -Scarcity: national or international

Materials Management -High transportation cost -High inventory costs

Purchasing Management -Commodity items -Standard products

Source Management -Unique items -Custom-made items -High technology items 23

Traditional Purchasing Process Customer

Supplier

Purchase Order Receivables Report Accounts Payable Reconcile

Order Processing

Mail Receiving Dock

Packing List

Mail

Invoice

Check

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Mail

Accounts Receivable

Purchasing Techniques ¨ ¨ ¨ ¨ ¨ ¨ ¨

Drop shipping and special packaging Blanket orders Invoiceless purchasing Electronic ordering and funds transfer Electronic data interchange (EDI) Stockless purchasing Standardization 25

Make/Buy Considerations Reasons for Making

Reasons for Buying

¨ ¨ ¨ ¨

¨

¨ ¨ ¨ ¨ ¨ ¨

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

¨ ¨ ¨ ¨ ¨ ¨ ¨ ¨

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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

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.

27

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 asneeded basis. 28

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 29

© 1995 Corel Corp.

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 30

© 1995 Corel Corp.

Chrysler’s Supplier Cost Reduction Effort

SupplierSugge R ockw ell R ockw ell

31

U se passe locks on Sim plify

Tactics for Close Supplier Relationships Tactic

Results

¨ Reduce total number of suppliers

¨ Average 20% reduction in 5 years

¨ Certify suppliers

¨ Almost 40% of all companies surveyed were themselves currently certified ¨ About 60% ask for this

¨ Ask for JIT delivery from key suppliers ¨ Involve key suppliers in new product design ¨ Develop software linkages to suppliers

¨ About 54% do this ¨ Almost 80% claim to do this About 50% claim this 32

Vertical Integration Strategy ¨ Ability to produce goods previously purchased

Raw Material (Suppliers)

¨ Setup operations ¨ Buy supplier

Backward Integration

¨ Make-buy issue ¨ Major financial commitment ¨ Hard to do all things well

Current Transformation Forward Integration Finished Goods (Customers) 33

Forms of Vertical Integration Iron Ore

Silicon

Steel

Automobiles

Farming

Raw Material (Suppliers)

Flour Milling

Backward Integration

Integrated Circuits

Current Transformation

Distribution Circuit Boards System Dealers

Computers Watches Calculators

Forward Integration Baked Goods

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Finished Goods (Customers)

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 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.

36

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. 37

Supplier Selection Criteria ¨ Service

¨ Company ¨ ¨ ¨

¨

Financial stability Management Location

¨ ¨ ¨

¨ Product ¨ ¨

Quality Price

38

Delivery on time Condition on arrival Technical support Training

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

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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”

40

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 41

Logistics Management ¨ Integrates all materials functions ¨ ¨ ¨ ¨ ¨ ¨

Purchasing Inventory management Production control Inbound traffic Warehousing and stores Incoming quality control

¨ Objective: Efficient, low cost operations 42

Goods Movement Options ¨ ¨ ¨ ¨ ¨

Trucking Railways Airfreight Waterways Pipelines

43

Benchmarking Supply-Chain Management Typical Firms

Benchmark Firms

Number of suppliers per purchasing agent

34

5

Purchasing costs as percent of purchases

3.3%

.8%

15

8

42 minutes

15 minutes

Lead time (weeks) Time spent placing an order

44

Supply-Chain Performance Compared 34

5

3.3%

0.8%

15

8

Time spent in placing order

42 minutes

15 minutes

Percentage of late deliveries

33%

2%

1.5%

.0001%

400

4

Number of suppliers per purchasing agent Purchasing costs as percent of purchases Lead time (weeks)

Percentage of rejected material Number of shortages per year

45