Supply Chain Management 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 Retailers C U S Manufacturing Inbound Logistics Operations Outbound Logistics 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 Order Flow Wholesaler Cash Flow Retailer 12
The Supply Chain Supplier Inventory Supplier Supplier 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 Manufacturer Inventory Inventory Customer Customer Inventory Distributor 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 Manufacturing 31% 11% 58% Material Dir Wages Other Wholesale 8% 9% 83% Retail COGS Payroll Other 16% 13% COGS 71% Payroll Other 14
Supply-Chain Support for Overall Strategy Low Cost Response Differentiation Supplier s goal Primary Selection Criteria Supply demand at lowest possible cost Select primarily for cost Respond quickly to changing requirement s and demand to minimize stockouts Select primarily for capacity, speed, and flexibility Share market research; jointly develop products and options Select primarily for product development skills 15
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 Response Differentiation Lead-time Characteristics Shorten leadtime as long as it does not increase costs Invest aggressively to reduce production lead-time Invest aggressively to reduce development lead-time 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 17
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
Acquisition of goods & services Activities Purchasing 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 Percent of Sales 52% 61% 60% 61% 55% 74% 63% 20
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 21
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 Purchasing Management -Commodity items -Standard products Supply Management -High costs -Scarcity: national or international Source Management -Unique items -Custom-made items -High technology items 23
Purchase Order Receivables Report Accounts Payable Traditional Purchasing Customer Receiving Dock Mail Process Mail Packing List Supplier Order Processing Invoice Reconcile Check Mail Accounts Receivable 24
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 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 26 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 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 PO s High prices Infrequent, large lots Delivery to receiving dock 1995 Corel Corp. 29
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 1995 Corel Corp. 30
Chrysler s Supplier Cost Reduction Effort Supplier Suggestion Rockwell Rockwell 3M Trico Leslie Metal Arts Use passenger car door locks on trucks Simplify design/substitute materials on manual window system Change tooling for woodgrain panels to allow three from one die instead of two Change wiper-blade formulation 31 Model Savings Dodge $280,000 trucks Various $300,000 Caravan, Voyager $1,500,000 Various $140,000 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 32 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
Vertical Integration Strategy Ability to produce goods previously purchased Setup operations Buy supplier Make-buy issue Major financial commitment Hard to do all things well 33 Raw Material (Suppliers) Backward Integration Current Transformation Forward Integration Finished Goods (Customers)
Forms of Vertical Integration Iron Ore Silicon Farming Raw Material (Suppliers) Steel Flour Milling Backward Integration Automobiles Integrated Circuits Current Transformation Distribution System Circuit Boards Forward Integration Dealers Computers Watches Calculators Baked Goods Finished Goods (Customers) 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 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 Company Financial stability Management Location Product Quality Price Service Delivery on time Condition on arrival Technical support Training 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 short-term releases to ship Standardization reducing the number of variations in materials and components 40 Electronic Ordering and Funds Transfer
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 Number of suppliers per purchasing agent Purchasing costs as percent of purchases Lead time (weeks) Time spent placing an order Typical Firms 34 3.3% 15 42 minutes Benchmark Firms 5.8% 8 15 minutes 44
Supply-Chain Performance Compared Number of suppliers per purchasing agent Purchasing costs as percent of purchases 34 5 3.3% 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 45