SCM 302 OPERATIONS MANAGEMENT. Supply Chain Management

Transcription

1 SCM 302 OPERATIONS MANAGEMENT Supply Chain Management

2 Supply Chain Management Who are my partners? Which organizations are in my network? 2 Supply Chain Management 1. Explain the strategic importance of the supply chain 2. Identify six sourcing strategies 3. Explain issues and opportunities in the supply chain 4. Describe the steps in supplier selection 5. Explain major issues in logistics management 6. Compute percent of assets committed to inventory and inventory turnover Supply Chain Analytics 1. Use a decision tree to determine number of suppliers to manage risk 2. Explain and measure the bullwhip effect 3. Describe the factor weighting approach to supplier evaluation 4. Evaluate cost-of-shipping alternatives

3 3 The Age of the Mega Suppliers of Auto Parts

4 4 Supply-Chain Management Management of activities related to procuring materials and services, transforming them into intermediate goods and final products and delivering them through the distribution system Raw materials to customer Suppliers, manufacturers and/or service providers, distributors, wholesalers, retailers, and final customer Objective: build a chain of suppliers that focuses on maximizing value to the ultimate customer. Competition is no longer between companies, but between supply chains IT S ALL ABOUT RELATIONSHIPS! Managing supplier and customer relationships which are increasingly integrated and long-term

5 5 A Supply Chain for Beer Figure 11.1

6 6 Issue #1: Sourcing. Make vs. Buy Choosing between obtaining products and services externally or to producing them internally Outsourcing Transfer traditional internal activities and resources to outside vendors Efficiency in specialization Focus on core competencies

7 Issue#2. Sourcing. How many suppliers? Six Sourcing Strategies 1. Many suppliers Negotiate with many suppliers. Common for commodities Suppliers compete on price Suppliers responsible for technology, expertise, forecasting, cost, quality, and delivery 2. Few suppliers Long-term partnerships Economies of scale. Learning curve benefits Supplier incentives to participate in JIT, contribute expertise High cost of changing suppliers 3. Vertical integration Ability to produce goods or services previously purchased Acquire a supplier/distributor Forward or Backward Can improve cost, quality, and inventory but requires capital, managerial skills Better in stable market 7 4. Joint ventures Formal collaboration Enhance skills, secure supply, reduce costs, pool resources Risks: dilute brand, concede competitive advantage E.g. Deere-Hitachi 5. Keiretsu networks Financially independent, mutually supportive coalition Financial support for other members, e.g. loans Members expect long-term relationships, provide technical expertise and stable deliveries Extends to several levels E.g. Mitsubishi 6. Virtual companies Rely on telecommunications technologies to work with suppliers, employees, contractors around the world. Fluid boundaries allow for flexibility, responsiveness Lean performance, low capital investment E.g. Amazon

8 8 Vertical Integration Vertical Integration Raw material (suppliers) Examples of Vertical Integration Tree Harvesting Backward integration Chipmakers Pulpmaking Current transformation Pepsi Apple International Paper Forward integration Bottling Retail stores End-User Paper Conversion Finished goods (customers) Figure 11.2

9 9 Issue #3. Managing Supply Chain Risk More reliance on supply chains means more risk Fewer suppliers = putting all of your eggs in one basket Compounded by globalization and logistical complexity Types of risk (see next slide) Vendor reliability and quality risks Political and currency risks Research and assess possible risks Risk Mitigation Tactics Innovative planning Reduce potential disruptions Insurance and contingency plans Information sharing Flexible, secure supply chains Diversified supplier base

10 10 TABLE 11.3 Supply Chain Risks and Tactics RISK RISK REDUCTION TACTICS EXAMPLE Supplier failure to deliver Supplier quality failure Logistics delays or damage Distribution Information loss or distortion Political Economic Natural catastrophes Theft, vandalism, and terrorism Use multiple suppliers; effective contracts with penalties; subcontractors on retainer; pre-planning Careful supplier selection, training, certification, and monitoring Multiple/redundant transportation modes and warehouses; secure packaging; effective contracts with penalties Careful selection, monitoring, and effective contracts with penalties Redundant databases; secure IT systems; training of supply chain partners on the proper interpretations and uses of information Political risk insurance; cross-country diversification; franchising and licensing Hedging to combat exchange rate risk; purchasing contracts that address price fluctuations Insurance; alternate sourcing; cross-country diversification Insurance; patent protection; security measures including RFID and GPS; diversification McDonald s planned its supply chain 6 years before its opening in Russia. Every plant bakery, meat, chicken, fish, and lettuce is closely monitored to ensure strong links. Darden Restaurants has placed extensive controls, including thirdparty audits, on supplier processes and logistics to ensure constant monitoring and reduction of risk. Walmart, with its own trucking fleet and numerous distribution centers located throughout the U.S., finds alternative origins and delivery routes bypassing problem areas. Toyota trains its dealers around the world, invoking principles of the Toyota Production System to help dealers improve customer service, used-car logistics, and body and paint operations. Boeing utilizes a state-of-the-art international communication system that transmits engineering, scheduling, and logistics data to Boeing facilities and suppliers worldwide. Hard Rock Cafe reduces political risk by franchising and licensing, rather than owning, when the political and cultural barriers seem significant. Honda and Nissan are moving more manufacturing out of Japan as the exchange rate for the yen makes Japanese-made autos more expensive. Toyota, after its experience with fires, earthquakes, and tsunamis, now attempts to have at least two suppliers, each in a different geographical region, for each component. Domestic Port Radiation Initiative: The U.S. government has set up radiation portal monitors that scan nearly all imported containers for radiation.

11 11 Issue #4. Supplier selection & Contracting. 4 Stage Process 1. Supplier evaluation Finding potential suppliers Determine likelihood of their becoming good suppliers Supplier certification, qualification, education 2. Supplier development Integrate the supplier into the system: Training; Engineering help; Information transfer; Product specifications; Schedules and delivery; Procurement 3. Negotiations: approach for setting prices 1. Cost-based price model: supplier opens books 2. Market-based price model: published, auction, or indexed prices 3. Competitive bidding 4. Contracting A design to share risks, benefits, create incentives, optimize supply chain Centralized purchasing E-procurement

12 Issue #5. Supply Chain Integration. Flows of Information, Materials, and Cash. Supply chain integration beings with mutual agreement on goals, trust, and compatible organizational cultures 12 Complicating Issues 1. Local optimization magnifies fluctuations (bullwhip effect). 2. Incentives to push merchandise into the supply chain 3. Large lots reduce shipping costs but increase inventory holding and do not reflect actual sales Challenges and Opportunities Pull data: accurate sales data that initiate transactions to pull product through the supply chain Single-stage control of replenishment retailer responsible for monitoring and managing inventory Vendor Managed Inventory: supplier maintains material/inventory for the buyer, direct delivery Collaborative planning, forecasting, and replenishment (CPFR): members of the a supply chain share information, joint effort to reduce supply chain costs. Blanket order: a long-term purchase commitment for items to be delivered against short-term releases to ship. Lot size reduction Standardization: Postponement withholds modification as long as possible Electronic ordering and funds transfer Drop shipping and packaging to bypasses the seller

13 13 Issue #6. Logistics Management Integration of material acquisition, movement, and storage activities Outsourced via third-party logistics: Faster shipping more expensive than slower shipping Faster methods involve smaller shipment sizes while slower methods involve very large shipment sizes, Warehousing: how to store goods Channel assembly: a system that postpones final assembly of a product so that it is assembled within the distribution channel Trucking Railroads Airfreight Waterways Pipelines Multimodal Vast majority of manufactured goods Chief advantage = flexibility Large loads Little flexibility Fast and flexible for light loads Expensive Bulky, low-value cargo Is cost more important than speed? Oil, gas, and other chemical products Combines shipping methods

14 14 Distribution Management Focused on the outbound flow of final products: Total logistics costs: facility costs + inventory costs + transportation costs. rapid response; product choice; service Increasing # facilities improves response and customer satisfaction but increases costs Faster response, better product choice may lead to higher revenues The best distribution network should maximize total profits.

15 15 Operations Strategy as Supply Chain Strategy TABLE 11.2 Primary supplier selection criteria Supply chain inventory Distribution network Product design characteristics How Corporate Strategy Impacts Supply Chain Decisions LOW COST STRATEGY Cost Minimize inventory to hold down costs Inexpensive transportation Sell through discount distributors/reta ilers Maximize performance Minimize cost RESPONSE STRATEGY Capacity Speed Flexibility Use buffer stocks to ensure speedy supply Fast transportation Provide premium customer service Low setup time Rapid production ramp-up DIFFERENTIATION STRATEGY Product development skills Willing to share information Jointly and rapidly develop products Minimize inventory to avoid product obsolescence Gather and communicate market research data Knowledgeable sales staff Modular design to aid product differentiation

16 16 Sustainable Supply Chain Management Return or reverse logistics Sending returned products back up the supply chain for resale, repair, reuse, remanufacture, recycling, or disposal Closed-loop supply chain Proactive design of a supply chain that tries to optimize all forward and reverse flows Prepares for returns prior to product introduction

17 17 Measuring Supply Chain Performance Typical supply chain benchmark metrics include: Lead time, % Late Deliveries, % Rejected Material, Shortages per year. Important financial ratios: Total Inventory Investment % Assets in Inventory = Total Assets Cost of Goods Sold Inventory Turnover = Avg. Inventory Investment Weeks of Supply = Inventory Investment Annual Cost of Goods Sold 52 weeks Supply Chain Operations Reference (SCOR) Model: A set of processes, metrics, and best practices developed by the supply chain council. Plan: Demand/Supply planning and Management Source: Identify, select, manage, and assess sources Make: Manage production execution, testing and packaging Deliver: Invoice, warehouse, transport and install Return: Raw material Return: Finished goods

18 18 Assets committed to inventory %Assets in Inventory = Home Depot had $11.4b inventory, total assets of $44.4b TABLE 11.5 = 11.4b 44.4b Total Inventory Investment Total Assets = 25.7% for Home Depot Inventory as Percentage of Total Assets (with examples of exceptional performance) Manufacturer (Toyota 5%) 15% Wholesale (Coca-Cola 2.9%) 34% Restaurants (McDonald s.05%) 2.9% Retail (Home Depot 25.7%) 28%

19 19 Inventory Turnover & Weeks of Supply Inventory Turnover = Cost of Goods Sold Inventory Investment = 14.2 = 8.4 for Pepsi 1.69 Weeks ofsupply = Inventory Investment (Annual Cost of Goods Sold)/52 = 1.69 = 6.19 weeks for Pepsi 14.2/52 Net revenue $32.5 Cost of goods sold $14.2 Inventory: Raw material inventory $.74 Work-in-process inventory $.11 Finished goods inventory $.84 Total inventory investment $1.69 TABLE 11.6 FOOD, BEVERAGE, RETAIL Examples of Annual Inventory Turnover Anheuser Busch 15 Coca-Cola 15 Home Depot 5 McDonald s 112 MANUFACTURING Dell Computer 90 Johnson controls 22 Toyota (overall) 13 Nissan (assembly) 150

20 20 The SCOR Model SCOR Model Metrics to Help Firms Benchmark Performance Against the Industry PERFORMANCE ATTRIBUTE SAMPLE METRIC CALCULATION Supply chain reliability Supply chain responsiveness Supply chain agility Supply chain costs Supply chain asset management Perfect order fulfillment Average order fulfillment cycle time Upside supply chain flexibility Supply chain management costs Cash-to-cash cycle time (Total perfect orders) / (Total number of orders) (Sum of actual cycle times for all orders delivered) / (Total number of orders delivered) Time required to achieve an unplanned 20% increase in delivered quantities Cost to plan + Cost to source + Cost to deliver + Cost to return Inventory days of supply + Days of receivables outstanding Days of payables outstanding

21 21 Benchmarking the Supply Chain Comparison with benchmark firms Audits may be necessary Continuing communication, Understanding, Trust, Performance, Corporate strategy Foster a mutual belief that we are in this together TABLE 11.7 Supply Chain Metrics in the Consumer Packaged Goods Industry TYPICAL FIRMS BENCHMARK FIRMS Order fill rate 71% 98% Oder fulfillment lead time (days) 7 3 Cash-to-cash cycle time (days) Inventory days of supply 50 20

22 Order Quantity SCM Supply Chain Management 26 The Bullwhip Effect Figure S Suppliers believe sales are huge and respond accordingly Wholesalers order even more to be sure retailers can be adequately supplied Retailers respond by ordering more Suppliers Wholesalers Retailers Consumers 10 0 A short-term increase in consumer demand Day

23 27 The Bullwhip Effect Variability in orders increases as orders are relayed up the supply chain Leads to unstable production schedules, longer lead times, product obsolescence Damage can be minimized with supplier coordination and planning CAUSE Demand forecast errors (cumulative uncertainty in the supply chain) Order batching (large, infrequent orders leading suppliers to order even larger amounts) Price fluctuations (buying in advance of demand to take advantage of low prices, discounts, or sales) Shortage gaming (hoarding supplies for fear of a supply shortage) REMEDY Share demand information throughout the supply chain Channel coordination: Determine lot sizes as though the full supply chain was one company Price stabilization (everyday low prices) Allocate orders based on past demand

24 28 RFID Helps Control Bullwhip

25 29 The Bullwhip Effect Measure Bullwhip = Variance of orders Variance of demand = s 2 orders 2 s demand If measure is: > 1 : Variance amplification is present = 1 : No amplification is present < 1 : Smoothing or dampening is occurring

26 30 Calculating the Bullwhip Effect Transform sheet steel to tabletops Each firm in the supply chain has one supplier and one customer FIRM VARIANCE OF DEMAND VARIANCE OF ORDERS BULLWHIP MEASURE Furniture Mart, Inc /100 = 1.10 Furniture Distributors, Inc /110 = 1.64 Furniture Makers of America /180 = 1.67 Chieh Lee Metals, Inc /300 = 2.50 Metal Suppliers Ltd /750 = 2.67

27 31 Manufacturers Urge Fuel Tax Review Crumbling and congested U.S. roadways are driving up costs for U.S. manufacturers as late deliveries and unreliable transportation undermine hard-fought gains in production efficiency, according to U.S. manufacturing executives. 1. What different product quality variables are affected by transportation suppliers? 2. How can unreliable transportation hurt a focal firm in terms of profit, scheduling, fees, productivity, quality? 3. What incentive does the government have for boosting infrastructure expenditures?

28 32 Supplier Selection Analysis Many factors play a role Choosing lowest bid is becoming rare Factor weighting techniques consider multiple criteria Each factor is assigned a weight and a score Choose the supplier with the best weighted score

29 33 Factor Weighting Approach CRITERION Engineering/inno vation skills Production process capability Distribution capability Quality performance WEIGHT FABER PAINT SCORE (1-5) (5 HIGHEST) WEIGHT x SCORE SCORE (1-5) (5 HIGHEST) SMITH DYE WEIGHT x SCORE Facilities/location Financial strength Information systems Integrity Total