Supply Chain Management

MBA 570 Summer 2007

1

Outline
Global Company Profile: Volkswagon The Strategic Importance of the SupplyChain

Global Supply-Chain Issues

Make-or-Buy Decisions Outsourcing

Supply Chain Economics

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

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 VWs 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.

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 suppliers supplier

Objective: Maximize value & lower waste

9

The Supply Chain

Suppliers Tier 2 Suppliers Tier 1 Distributors Retailers

Manufacturing
Inbound Logistics Operations Outbound Logistics

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

Retailer

Consumer

Supplier Schedules

Wholesaler Order Flow

12

Retailer Cash Flow

The Supply Chain

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

Supplier

Customer

Inventory

Supplier

Manufacturer
Inventory Inventory

Customer

Supplier
Distributor
Inventory

Customer

13

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 Manufacturing
31% 11% 58% Material
Dir Wages

8% 9%

COGS
Payroll

83%

Other

Other

Retail
13% 16%

COGS Payroll

71%

Other
14

Supply-Chain Support for Overall Strategy

Low Cost
Suppliers goal

Response
Respond quickly to changing requirement s and demand to minimize stockouts Select primarily for capacity, speed, and flexibility
15

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

Supply demand at lowest possible cost

Primary Selection Criteria

Select primarily for cost

Supply-Chain Support for Overall Strategy - continued

Low Cost
Process Characteristics

Response
Invest in excess capacity and flexible processes

Differentiation
Modular processes to lend themselves to mass customization
Minimize inventory in the chain to avoid obsolescence

Maintain high average utilization

Inventory Characteristics

Minimize inventory throughout the chain to hold down costs

16

Develop responsive system, with buffer stocks positioned to ensure supply

Supply-Chain Support for Overall Strategy - continued

Low Cost
Lead-time Characteristics

Response
Invest aggressively to reduce production lead-time
Use product designs that lead to low set-up time and rapid production ramp-up
17

Differentiation
Invest aggressively to reduce development lead-time
Use modular design to postpone product differentiation for as long as possible

Shorten leadtime as long as it does not increase costs

Product-design Characteristics

Maximize performan ce and minimize cost

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
All industry Automobile Food Lumber Paper Petroleum Transportation
20

Percent of Sales
52% 61% 60% 61% 55% 74% 63%

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

22

The Purchasing Focus

Materials Management -High transportation cost -High inventory costs Supply Management -High costs -Scarcity: national or international

Purchasing Management -Commodity items -Standard products

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

23

Traditional Purchasing Process

Customer
Purchase Order
Receivables Report Accounts Payable Reconcile Mail Receiving Dock Mail

Supplier
Order Processing

Packing List Invoice

Check

Mail

Accounts Receivable

24

Purchasing Techniques
Drop shippingDrop shipping ( a supply chain management technique in which the retailer does not keep goods in stock, but instead transfers customer orders and shipment details to wholesalers, who then ship the goods directly to the customer. The retailers make their profit on the difference between the wholesale and retail price.) Blanket orders Invoiceless purchasing Electronic ordering and funds transfer Electronic data interchange (EDI) Stockless purchasing Standardization
25

Make/Buy Considerations
Reasons for Making
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

Reasons for Buying

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

26

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
27

Plan

1995 Corel Corp.

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.
28

Many Suppliers Strategy

Many sources per item Adversarial relationship Short-term Little openness Negotiated, sporadic POs 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.

Chryslers Supplier Cost Reduction Effort

Supplier Suggestion
Rockwell Use passenger car door locks on trucks Rockwell Simplify design/substitute materials on manual window system 3M Change tooling for woodgrain panels to allow three from one die instead of two Trico Change wiper-blade formulation Leslie Metal Exterior lighting suggestions Arts 31

Model Savings
Dodge trucks Various $280,000 $300,000

Caravan, Voyager Various Various

$1,500,000

$140,000 $1,500,000

Tactics for Close Supplier Relationships

Tactic
Reduce total number of suppliers Certify suppliers 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
Results

Average 20% reduction in 5 years

Ask for JIT delivery from key suppliers Involve key suppliers in new product design Develop software linkages to suppliers
32

Vertical Integration Strategy

Ability to produce goods previously purchased
Setup operations Buy supplier
Raw Material (Suppliers) Backward Integration Current Transformation Forward Integration Finished Goods (Customers)
33

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

Forms of Vertical Integration

Iron Ore Silicon Farming Raw Material (Suppliers)
Backward Integration Current Transformation Forward Integration Baked Goods Finished Goods (Customers)

Steel Integrated Circuits

Flour Milling

Automobiles

Distribution Circuit Boards System Computers Watches Calculators

Dealers

34

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

35

Virtual Company Strategy

Network of independent companies Linked by technology

PCs, 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

Company

Service
Delivery on time Condition on arrival Technical support Training

Financial stability Management Location

Product

Quality Price

38

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

39

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 shortterm 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 40 wire

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