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Chapter 7

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  1. Chapter 7 Supply Chain Management

  2. Introduction

  3. Palm Inc. • During the year 2000, Palm Inc. was selling every PDA (computerized Personal Digital Assistant) that wasn’t nailed down. • In the last few years, Palm has developed a strategic supply chain management function. • They have gone from doing business with hundreds of suppliers to developing deep relationships with only a few suppliers Chapter 7: Supply Chain Management

  4. Palm Inc. continued • The secret to driving the cost so low was working closely with their suppliers to hit tight cost targets for the display, the processor, the memory, the battery, and the mechanicals. • The result of their new strategic emphasis on supply chain management has been a 20-30 percent reduction in materials costs and a 27 percent reduction in overall costs, an increase in inventory turns from 3 to 22, and a 30 percent increase in profit margins. Chapter 7: Supply Chain Management

  5. B2B Networks and Private Exchanges • B2B Online Marketplaces • Private Exchanges • HP • Ace Hardware • IBM Chapter 7: Supply Chain Management

  6. B2B Online Internet Marketplaces • When the Internet revolution began, a number of organizations rushed to establish B2B online marketplaces for entire industries including steel, automobile manufacturing, and electronics. • More recently, however, a number of firms including HP, IBM, and Wal-Mart created their own private exchanges (also called corporate marketplaces). Chapter 7: Supply Chain Management

  7. B2B Online Internet Marketplaces continued • These links allow the parties to collaborate and manage the supply chain in real time. • Ace Hardware provides another example. • Ace's motivation for the development of its system was the desire to manage its inventory more efficiently and be able to collaborate with suppliers in real time. Chapter 7: Supply Chain Management

  8. B2B Online Internet Marketplaces continued • Ace used its supply chain management software to link the computer systems located in its 14 distribution centers with nine suppliers. • IBM's system provides links to over 20,000 of its suppliers. • IBM further estimates that it realized almost $400 million in savings that year due to the increased efficiency of its Web-based procurement system. Chapter 7: Supply Chain Management

  9. Dell Computer • Direct Model • Use of Information Technology • provides suppliers with access to Dell’s inventories • Minimum Inventory Levels Chapter 7: Supply Chain Management

  10. Dell Computer • Classic case in supply chain management. • Established in 1984, Dell experienced supply problems in 1993 and thereupon completely redesigned its supply chain process along the lines of what its founder, Michael Dell, called the “direct” model. • Between 1993 and 1998, Dell's earnings subsequently grew at 65 percent per year. Chapter 7: Supply Chain Management

  11. Dell Computer continued • Dell's supply chain redesign was based on the following elements. • First, Dell sells directly to customers, eliminating the wholesaler and retailer. • Second, Dell also takes advantage of new information technologies in their communications with suppliers who can access Dell's component inventories, production plans, and forecasts in real time and thus keep their production precisely matched to Dell's needs. • Third, Dell deliberately maintains absolute minimum inventory levels at every stage of production, averaging 4 days overall Chapter 7: Supply Chain Management

  12. Supply Chain Management Crusade • Focus is on entire value chain • Includes • lean production • JIT • TQM • purchasing • product/service design Chapter 7: Supply Chain Management

  13. Defining Supply Chain Management • Coordination and integration of all supply chain activities into seamless process. • Enables organizations to plan and collaborate across supply chain. • Goal is to deliver right product to right place at right time in order to maximize profit. Chapter 7: Supply Chain Management

  14. Strategic Advantages of Supply Chain • Supply chain managementincludes the supply, storage, and movement of materials, information, personnel, equipment, and finished goods within the organization and between its environment. • Goal of supply chain management is to integrate the entire process of satisfying the customer’s needs all along the supply chain. Chapter 7: Supply Chain Management

  15. Strategic Advantages of Supply Chain Management continued • Supply chain costs often represent 50% or more of total operating costs • Firms that have implemented supply chain management • Have 45% supply chain cost advantage • 50% lower inventory • 17% faster delivery of final product • Larger market shares and higher customer loyalty Chapter 7: Supply Chain Management

  16. Supply Chain Strategy • Supply chain strategy needs to be tailored to meet the needs of its customers which isn’t always the lowest cost. • In situations where the goods are basic commodities with standard benefits (food, home supplies, standard clothing), then cost reduction will be the focus. • In fashion goods, timeliness should be the focus of the supply chain. Chapter 7: Supply Chain Management

  17. Strategic Need for Supply Chain Management • Total supply chain costs represent better than half, and in some cases three-quarters, of the total operating expenses for most organizations. • The broader concept of the supply chain includes the supply, storage, and movement of materials, information, personnel, equipment, and finished goods within the organization and between it and its environment. Chapter 7: Supply Chain Management

  18. Strategic Need for Supply Chain Management continued • As organizations have continued to adopt more efficient production techniques such as lean manufacturing, total quality management, inventory reduction techniques to reduce costs and improve the quality, functionality, and speed of delivery of their products and services to customers, the costs and delays of procuring the requisite inputs and distributing the resulting goods and services are taking a greater and greater fraction of the total cost and time. Chapter 7: Supply Chain Management

  19. Other Factors Driving Need to Better Manage Supply Chain • Increasing global competition • Outsourcing • E-commerce • Shorter life cycles • Greater supply chain complexity Chapter 7: Supply Chain Management

  20. Measures of Supply Chain Performance • Lower inventories, will be reflected in less need for working capital (WC) and a higher return on asset (ROA) ratio. • Lower cost to carry these inventories will be seen in a reduced cost of goods sold (CGS), and thus a higher contribution margin, return on sales (ROS), and operating income. Chapter 7: Supply Chain Management

  21. Operations-Oriented Measures • Performance measures related to inventory reduction: • First we calculate the aggregate inventory value (at cost) on average for the year (AAIV): AAIV = raw materials + work-in-process + finished goods • % Assets in Inventories = AAIV/total assets • Another inventory measure is the inventory turnover (or “turns,” as it is sometimes called): • Inventory turnover (“turns”) = annual cost of goods sold/AAIV Chapter 7: Supply Chain Management

  22. Supply Chain Design • The supply chain consists of the network of organizations that supply inputs to the business unit, the business unit itself, and the customer network. Chapter 7: Supply Chain Management

  23. The Supply Chain Chapter 7: Supply Chain Management

  24. Logistics

  25. Logistics • Planning and controlling efficient, effective flows of goods, services, and information from one point to another. Chapter 7: Supply Chain Management

  26. The Bullwhip Effect • Each segment further down the whip goes faster than the one above it. • Same effect often observed in supply chains. Chapter 7: Supply Chain Management

  27. Transportation

  28. Modes of Transportation and Routing • Water • Rail • Truck • Air Chapter 7: Supply Chain Management

  29. Cost per unit shipped Ability to fill the transporting vehicle Total shipment cost Safety of contents Shipping time Availability of insurance Perishability Difficulty of arranging shipment Delivery accommodations Seasonal considerations Consolidation possibilities Size of product Factors to Consider in Transportation Decisions Chapter 7: Supply Chain Management

  30. Location • Besides distributing outputs to customers by transporting them, if there is a facilitating good, we can also locate where our customers can easily obtain them. • Advances in information and telecommunications technology have allowed some pure service organizations (i.e., those without a facilitating good) to reach their recipients through phone, cable, the Internet, or microwave links. Chapter 7: Supply Chain Management

  31. Trade-offs Between Transportation and Location • Processing Natural Resources • Large loss in size or weight during processing • High economies of scale exist • Raw material is perishable • Immobile Outputs Chapter 7: Supply Chain Management

  32. Processing Natural Resources • Organizations that process natural or basic resources as raw materials or other essential inputs to obtain their outputs will locate near their resource if one of the following conditions holds: • There is a large loss in size or weight during processing. • High economies of scale exist for the product. • The raw material is perishable. Chapter 7: Supply Chain Management

  33. Immobile Outputs • The outputs of some organizations may be relatively immobile, such as dams, roads, buildings, and bridges. • The organization locates itself at the construction site and transports all required inputs to that location Chapter 7: Supply Chain Management

  34. Distribution Requirements Planning • The distribution process is illustrated on the next slide where retailers order from local warehouses, the warehouses are supplied from regional centers, and the regional centers draw from the central distribution facility, which gets its inventory directly from the factory. Chapter 7: Supply Chain Management

  35. Distribution Requirements Planning (DRP) Chapter 7: Supply Chain Management

  36. Purchasing/Procurement

  37. Purchasing • Activities to reliably obtain materials by the time they are needed in the product supply process. • Important considerations include price, quality, lead times, and reliability. • Manufacturing organizations spend an average of 55 percent of revenue for outside materials and services. • These same organizations spend only 6 percent on labor and 3 percent on overhead. Chapter 7: Supply Chain Management

  38. Purchasing Versus Procurement • Purchasing implies a monetary transaction. • Procurement is simply the responsibility for acquiring the goods and services the organization needs. Chapter 7: Supply Chain Management

  39. Potential for Lowering Cost and Increasing Profits Total sales = $10,000,000 Purchased materials = 7,000,000 Labor and salaries = 2,000,000 Overhead = 500,000 Profit = 500,000 Chapter 7: Supply Chain Management

  40. To Double Profits ... • Increase sales by 100 percent • Increase selling price by 5 percent • Decrease labor and salaries by 25 percent • Decrease overhead by 100 percent • Decrease purchase cost by 7.1 percent Chapter 7: Supply Chain Management

  41. JIT and Purchasing Widespread use of JIT has increased importance of purchasing and procurement since delays in the receipt of materials will stop a JIT program dead in its tracks. Chapter 7: Supply Chain Management

  42. Differences Between Purchasing by Individuals and Organizations • Organizations purchase larger volumes and dollar amounts. • Organization may be larger than its suppliers. • Very few suppliers exist for certain organizational goods, whereas many typically exist for consumer goods. • Certain discounts may be available to organizations. Chapter 7: Supply Chain Management

  43. Value Analysis • A special responsibility of purchasing, or purchasing working jointly with engineering/design and operations (and sometimes even the supplier), is to regularly evaluate the function of purchased items or services, especially those that are expensive or used in high volumes. • The goal is to either reduce the cost of the item or improve its performance. Chapter 7: Supply Chain Management

  44. Key Elements of Effective Purchasing • They leverage their buying power. • They commit to a small number of dependable suppliers. • They work with and help their suppliers reduce total cost. Chapter 7: Supply Chain Management

  45. Supplier Management

  46. Supplier Selection and Vendor Analysis • Characteristics of a good supplier are: • Deliveries are made on time and are of the quality and in the quantity specified. • Prices are fair, and efforts are made to hold or reduce the price. • Able to react to unforeseen changes. • Supplier continually improves products and services. • Supplier is willing to share information and be an important link in the supply chain. Chapter 7: Supply Chain Management

  47. Supplier Relationships • In the past, most customers purchased from the lowest bidders who could meet their quality and delivery needs. • Customers are seeking a closer, more cooperative relationship with their suppliers. Chapter 7: Supply Chain Management

  48. Supplier Certification and Audits • Sole-sourcing arrangements are becoming virtual partnerships with the customer. • This means longer-term relationships. • Suppliers are being certified or qualified so that their shipments do not need to be inspected by the customer—the items go directly to the production line. Chapter 7: Supply Chain Management

  49. Outsourcing and Global Sourcing • Outsourcing is the process of contracting with external suppliers for goods and services that were formally provided internally. • Global sourcing is an important aspect of supply chain outsourcing strategy and we see it occurring more and more. Chapter 7: Supply Chain Management

  50. Primary Reasons Outsourcing Occurring • 1. The fall of communism and the economic insulation it had maintained. • 2. The advent of telecommunications and computer technology that physically allowed work that previously had to be done locally or regionally to now be conducted overseas. • Outsourcing in general is a major strategic element of SCM these days, not just for production materials but for a wide range of services as well. Chapter 7: Supply Chain Management