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Supply-Chain Management

Importance of supply-chain management (SCM), purchasing strategies and purchasing management

What Is the Supply Chain?

Also referred to as the logistics network Suppliers, manufacturers, warehouses, distribution centers and retail outlets facilities
Suppliers Manufacturers Warehouses & Distribution Centers Customers

and the Raw materials Work-in-process (WIP) inventory Finished products that flow between the facilities

Material Costs

Transportation Costs

Transportation Costs Transportation Manufacturing Costs Inventory Costs Costs

The Supply Chain

Suppliers Manufacturers Warehouses & Distribution Centers Customers

Transportation Costs Material Costs Manufacturing Costs

Transportation Costs Inventory Costs

Transportation Costs

The Supply Chain Another View








Warehouses & Distribution Centers


Material Costs

Transportation Transportation Costs Transportation Costs Manufacturing Costs Inventory Costs Costs 4

What Is Supply Chain Management (SCM)?

Plan Source Make Deliver Buy

A set of approaches used to efficiently integrate

Suppliers Manufacturers Warehouses Distribution centers In the right quantities To the right locations And at the right time For the right customers

So that the product is produced and distributed

System-wide costs are minimized and Service level requirements are satisfied

History of Supply Chain Management

1960s - Inventory Management Focus, Cost Control 1970s Materials requiring planning (MRP) & Bill of materials (BOM) - Operations Planning 1980s - MRPII, JIT - Materials Management, Logistics 1990s - SCM - ERP - Integrated Purchasing, Financials, Manufacturing, Order Entry 2000s - Optimized Value Network with Real-Time Decision Support; Synchronized & Collaborative Extended Network

Why Is SCM Difficult?

Plan Source Make Deliver Buy

Uncertainty is inherent to every supply chain

Travel times Breakdowns of machines and vehicles Weather, natural catastrophe, war Local politics, labor conditions, border issues

The complexity of the problem to globally optimize a supply chain is significant

Minimize internal costs Minimize uncertainty Deal with remaining uncertainty

The Importance of Supply Chain Management

Dealing with uncertain environments matching supply and demand
Boeing announced a $2.6 billion write-off in 1997 due to raw materials shortages, internal and supplier parts shortages and productivity inefficiencies U.S Surgical Corporation announced a $22 million loss in 1993 due to larger than anticipated inventories on the shelves of hospitals IBM sold out its supply of its new Aptiva PC in 1994 costing it millions in potential revenue Hewlett-Packard and Dell found it difficult to obtain important components for its PCs from Taiwanese suppliers in 1999 due to a massive earthquake

The Importance of Supply Chain Management

Shorter product life cycles of high-technology products
Less opportunity to accumulate historical data on customer demand Wide choice of competing products makes it difficult to predict demand

The growth of technologies such as the Internet enable greater collaboration between supply chain trading partners
If you dont do it, your competitor will Major buyers such as Wal-Mart demand a level of supply chain maturity of its suppliers

Availability of SCM technologies on the market

Firms have access to multiple products (e.g., SAP, Baan, Oracle, JD Edwards) with which to integrate internal processes

Supply Chain Management and Uncertainty

Inventory and back-order levels fluctuate considerably across the supply chain even when customer demand doesnt vary The variability worsens as we travel up the supply chain
Multitier Suppliers Manufacturer

Wholesale Distributors









Sales Time

Bullwhip Effect

Factors Contributing to the Bullwhip

Demand forecasting practices
Min-max inventory management (reorder points to bring inventory up to predicted levels) Longer lead times lead to greater variability in estimates of average demand, thus increasing variability and safety stock costs Peaks and valleys in orders Fixed ordering costs Impact of transportation costs (e.g., fuel costs) Sales quotas Promotion and discount policies

Lead time

Batch ordering

Price fluctuations Lack of centralized information


Todays Marketplace Requires:

Personalized content and services for their

Collaborative planning with design partners, distributors, and suppliers

Real-time commitments for design, production, inventory, and transportation capacity

Flexible logistics options to ensure timely fulfillment

Order tracking & reporting across multiple vendors and carriers Shared visibility for
trading partners

Purchasing Strategies & Management

The Receiving Process

The Receiving Clerk In Charge


- Receiving Report

Submit to Purchasing Department, the user & accounting department

Check - Against Purchase Order - Physical check of goods Enclose: - Packing Slip - Bill of Lading - Invoice for Freight

Inspecting the Material

Quality Control Head in Charge

Tests: Characteristics of Incoming materials are compared to the specifications - Blue Prints - Using Gauges - Laboratory Tests - Visual Inspection Inspection report is sent to all relevant departments including the buyer and the seller

Return Policy
If the Material is Rejected
Materials can be returned OR Reworked OR Scrapped off

If buyer reworks or scraps the material supplier will be charged or credited

Materials Rejected Material Returned

Buyer will prepare shipping notice Reverse purchase order

Material Scrapped / Reworks

Quality Problems
If the item fails to meet the buyers specifications, the major problem is usually not ADMINISTRATIVE.
Rejection can disrupt Production Purchasing Manager should work out alternatives

VENDORS are not happy when their shipment are rejected.

The loss to them can be substantial, particularly when the parts cannot be reworked and are a total loss. Vendors can challenge buyers quality procedure

BUYER must investigate to make certain that the supplier has been treated fairly to preserve amicable relations
Go half way & reach a compromise Make honest effort and correct quality discrepancies for future shipments.

Inventory Control
If the material passes inspection

The receiving clerk usually prepares a Move Ticket Material is transferred to the User or to the Storage Area If transferred to stores becomes inventory

Safety Margins
Every minor delay in every minor component would cause a serious shortage. Production rates of components and subassemblies always have to be perfectly synchronized. To avoid defects in scheduling & errors in forecasting.

Cost of Inventories
Inventories solve materials management problems but there are strong incentives for maintaining minimum stocks. Materials should be made available when needed Balance the cost of carrying stock against cost of possible shortages

The Final Stage

The most important job is done when the Material is delivered on schedule to the Manufacturing Organization.

Processing and assembling the Final Product

Packaging, Storage and Shipment of the End Product