© 2006 prentice hall, inc.11 – 1 operations management chapter 11 – supply-chain management ©...

© 2006 Prentice Hall, Inc. 11 – 1

Operations ManagementOperations ManagementChapter 11 – Supply-Chain ManagementChapter 11 – Supply-Chain Management

© 2006 Prentice Hall, Inc.

PowerPoint presentation to accompanyPowerPoint presentation to accompany Heizer/Render Heizer/Render Principles of Operations Management, 6ePrinciples of Operations Management, 6eOperations Management, 8e Operations Management, 8e


The Strategic Importance The Strategic Importance of the Supply Chainof the Supply Chain

Supply-chain management is the Supply-chain management is the integration of the activities that integration of the activities that procure materials and services, procure materials and services,

transform them into intermediate transform them into intermediate goods and the final product, and goods and the final product, and

deliver them to customersdeliver them to customers

Competition is no longer between Competition is no longer between companies; it is between supply chainscompanies; it is between supply chains


Supply-Chain ManagementSupply-Chain Management

1.1. Transportation vendorsTransportation vendors

2.2. Credit and cash transfersCredit and cash transfers

3.3. SuppliersSuppliers

4.4. Distributors and banksDistributors and banks

5.5. Accounts payable and receivableAccounts payable and receivable

6.6. Warehousing and inventoryWarehousing and inventory

7.7. Order fulfillmentOrder fulfillment

8.8. Sharing customer, forecasting, and Sharing customer, forecasting, and production informationproduction information

Important activities include determiningImportant activities include determining


A Supply ChainA Supply Chain

Figure 11.1Figure 11.1


Global Supply-Chain IssuesGlobal Supply-Chain Issues

Unreliable distribution systemsUnreliable distribution systems

Tariffs and quotasTariffs and quotas

Political riskPolitical risk

Currency riskCurrency risk


Global Supply-Chain IssuesGlobal Supply-Chain Issues

React to sudden changes in parts React to sudden changes in parts availability, distribution, or shipping availability, distribution, or shipping channels, import duties, and currency rateschannels, import duties, and currency rates

Use the latest computer and transmission Use the latest computer and transmission technologies to schedule and manage the technologies to schedule and manage the shipment of parts in and finished products shipment of parts in and finished products outout

Staff with local specialists who handle Staff with local specialists who handle duties, freight, customs and political issuesduties, freight, customs and political issues

Supply chains in a global environment Supply chains in a global environment must be able tomust be able to


Supply-Chain EconomicsSupply-Chain Economics

Supply Chain Costs as a Percent of SalesSupply Chain Costs as a Percent of Sales

Table 11.2Table 11.2

IndustryIndustry % Purchased% Purchased

All industryAll industry 5252

AutomobileAutomobile 6767

FoodFood 6060

LumberLumber 6161

PaperPaper 5555

PetroleumPetroleum 7979

TransportationTransportation 6262


OutsourcingOutsourcing

Transfers traditional internal Transfers traditional internal activities and resources of a firm to activities and resources of a firm to outside vendorsoutside vendors

Utilizes the efficiency that comes Utilizes the efficiency that comes with specializationwith specialization

Firms outsource information Firms outsource information technology, accounting, legal, technology, accounting, legal, logistics, and productionlogistics, and production


Ethics in the Supply ChainEthics in the Supply Chain

Opportunities for unethical behavior Opportunities for unethical behavior are enormous and temptations are highare enormous and temptations are high

Many companies have strict rules and Many companies have strict rules and codes of conduct that define codes of conduct that define acceptable behavioracceptable behavior

Institute for Supply Management has Institute for Supply Management has developed a detailed set of principles developed a detailed set of principles and standards for ethical behaviorand standards for ethical behavior


Principles and Standards for Principles and Standards for Ethical Supply Management Ethical Supply Management

ConductConduct

LOYALTY TO YOUR ORGANIZATIONLOYALTY TO YOUR ORGANIZATION

JUSTICE TO THOSE WITH WHOM JUSTICE TO THOSE WITH WHOM YOU DEALYOU DEAL

FAITH IN YOUR PROFESSIONFAITH IN YOUR PROFESSION




ConductConduct

1.1. Avoid the intent and appearance of unethical or Avoid the intent and appearance of unethical or compromising practice in relationships, actions, and compromising practice in relationships, actions, and communicationscommunications

2.2. Demonstrate loyalty to the employer by diligently Demonstrate loyalty to the employer by diligently following the lawful instructions of the employer, using following the lawful instructions of the employer, using reasonable care and granted authorityreasonable care and granted authority

3.3. Avoid any personal business or professional activity that Avoid any personal business or professional activity that would create a conflict between personal interests and would create a conflict between personal interests and the interests of the employerthe interests of the employer




ConductConduct

4.4. Avoid soliciting or accepting money, loans, credits, or Avoid soliciting or accepting money, loans, credits, or preferential discounts, and the acceptance of gifts, preferential discounts, and the acceptance of gifts, entertainment, favors, or services from present or entertainment, favors, or services from present or potential suppliers that might influence, or appear to potential suppliers that might influence, or appear to influence, supply management decisionsinfluence, supply management decisions

5.5. Handle confidential or proprietary information with due Handle confidential or proprietary information with due care and proper consideration of ethical and legal care and proper consideration of ethical and legal ramifications and government regulationsramifications and government regulations

6.6. Promote positive supplier relationships through courtesy Promote positive supplier relationships through courtesy and impartialityand impartiality

7.7. Avoid improper reciprocal agreementsAvoid improper reciprocal agreementsTable 11.5Table 11.5



ConductConduct

8.8. Know and obey the letter and spirit of laws applicable to Know and obey the letter and spirit of laws applicable to supply managementsupply management

9.9. Encourage support for small, disadvantaged, and Encourage support for small, disadvantaged, and minority-owned businessesminority-owned businesses

10.10. Acquire and maintain professional competenceAcquire and maintain professional competence

11.11. Conduct supply management activities in accordance Conduct supply management activities in accordance with national and international laws, customs, and with national and international laws, customs, and practices, your organization’s policies, and these ethical practices, your organization’s policies, and these ethical principles and standards of conductprinciples and standards of conduct

12.12. Enhance the stature of the supply management Enhance the stature of the supply management professionprofession Table 11.5Table 11.5


Supply-Chain StrategiesSupply-Chain Strategies

Negotiating with many suppliersNegotiating with many suppliers

Long-term partnering with few Long-term partnering with few supplierssuppliers

Vertical integrationVertical integration

KeiretsuKeiretsu

Virtual companies that use Virtual companies that use suppliers on an as needed basissuppliers on an as needed basis


Many SuppliersMany Suppliers

Commonly used for commodity Commonly used for commodity productsproducts

Purchasing is typically based on Purchasing is typically based on priceprice

Suppliers are pitted against one Suppliers are pitted against one anotheranother

Supplier is responsible for Supplier is responsible for technology, expertise, forecasting, technology, expertise, forecasting, cost, quality, and deliverycost, quality, and delivery


Few SuppliersFew Suppliers

Buyer forms longer term Buyer forms longer term relationships with fewer suppliersrelationships with fewer suppliers

Create value through economies of Create value through economies of scale and learning curve scale and learning curve improvementsimprovements

Suppliers more willing to participate Suppliers more willing to participate in JIT programs and contribute in JIT programs and contribute design and technological expertisedesign and technological expertise

Cost of changing suppliers is hugeCost of changing suppliers is huge


Vertical IntegrationVertical Integration

Figure 11.2Figure 11.2

Raw material Raw material (suppliers)(suppliers) Iron oreIron ore SiliconSilicon FarmingFarming

Backward integration SteelSteel

Current transformation Automobiles Integrated

circuits Flour milling

Forward integration Distribution Distribution systemssystems Circuit boardsCircuit boards

Finished goods Finished goods (customers)(customers) DealersDealers

Computers Computers Watches Watches

CalculatorsCalculatorsBaked goodsBaked goods

Vertical IntegrationVertical Integration Examples of Vertical IntegrationExamples of Vertical Integration


Vertical IntegrationVertical Integration

Developing the ability to produce goods or Developing the ability to produce goods or service previously purchasedservice previously purchased

Integration may be forward, towards the Integration may be forward, towards the customer, or backward, towards supplierscustomer, or backward, towards suppliers

Can improve cost, quality, and inventory Can improve cost, quality, and inventory but requires capital, managerial skills, and but requires capital, managerial skills, and demanddemand

Risky in industries with rapid technological Risky in industries with rapid technological changechange


Keiretsu NetworksKeiretsu Networks A middle ground between few suppliers A middle ground between few suppliers

and vertical integrationand vertical integration

Supplier becomes part of the company Supplier becomes part of the company coalitioncoalition

Often provide financial support for Often provide financial support for suppliers through ownership or loanssuppliers through ownership or loans

Members expect long-term relationships Members expect long-term relationships and provide technical expertise and stable and provide technical expertise and stable deliveriesdeliveries

May extend through several levels of the May extend through several levels of the supply chainsupply chain


Virtual CompaniesVirtual Companies

Rely on a variety of supplier Rely on a variety of supplier relationships to provide services on relationships to provide services on demanddemand

Fluid organizational boundaries that Fluid organizational boundaries that allow the creation of unique enterprises allow the creation of unique enterprises to meet changing market demandsto meet changing market demands

Exceptionally lean performance, low Exceptionally lean performance, low capital investment, flexibility, and speedcapital investment, flexibility, and speed


Managing the Supply ChainManaging the Supply Chain

Mutual agreement on goalsMutual agreement on goals

TrustTrust

Compatible organizational culturesCompatible organizational cultures

There are significant management issues in There are significant management issues in controlling a supply chain involving many controlling a supply chain involving many independent organizations. Success independent organizations. Success depends on:depends on:


Issues that complicate Issues that complicate development of an Integrated development of an Integrated

Supply ChainSupply Chain Local optimization - focusing on local Local optimization - focusing on local

profit or cost minimization based on profit or cost minimization based on limited knowledgelimited knowledge

Incentives (sales incentives, quantity Incentives (sales incentives, quantity discounts, quotas, and promotions) - discounts, quotas, and promotions) - push merchandise prior to salepush merchandise prior to sale

Large lots - low unit cost but do not Large lots - low unit cost but do not reflect salesreflect sales


Issues that complicate Issues that complicate development of an Integrated development of an Integrated

Supply ChainSupply Chain

Bullwhip effect – the increasing Bullwhip effect – the increasing fluctuation in orders that occurs as fluctuation in orders that occurs as orders move through the supply chainorders move through the supply chain


Opportunities to Deal with Opportunities to Deal with the Bullwhip Effectthe Bullwhip Effect

Better communication Better communication among supply chain among supply chain partners:partners:

Accurate “pull” data Accurate “pull” data (Point of Sale systems)(Point of Sale systems)

Integrated computer Integrated computer systemssystems

RFID tagsRFID tags


Internet PurchasingInternet Purchasing

Suppliers get closer to their customers Shorter cycle times may improve cash

flow Capital investment is low Buyers enjoy comparison shopping,

rapid ordering, reduced transaction costs, and lower inventory

May be part of an integrated Enterprise Resource Planning (ERP) system


Vendor SelectionVendor Selection

Vendor evaluationVendor evaluation Critical decisionCritical decision

Find potential vendorsFind potential vendors

Determine the likelihood of them Determine the likelihood of them becoming good suppliersbecoming good suppliers

Vendor DevelopmentVendor Development

TrainingTraining

Engineering and production helpEngineering and production help

Establish policies and proceduresEstablish policies and procedures


Vendor SelectionVendor Selection

Negotiations toward a contractual Negotiations toward a contractual relationship with a vendorrelationship with a vendor Cost-Based Price Model - supplier Cost-Based Price Model - supplier

opens books to purchaseropens books to purchaser

Market-Based Price Model - price Market-Based Price Model - price based on published, auction, or based on published, auction, or indexed priceindexed price

Competitive Bidding - used for Competitive Bidding - used for infrequent purchases but may make infrequent purchases but may make establishing long-term relationships establishing long-term relationships difficultdifficult


Logistics ManagementLogistics Management

Objective is to obtain efficient Objective is to obtain efficient operations through the integration operations through the integration of all material acquisition, of all material acquisition, movement, and storage activitiesmovement, and storage activities

A frequent candidate for A frequent candidate for outsourcingoutsourcing

Gain competitive advantage Gain competitive advantage through reduced costs and through reduced costs and improved customer serviceimproved customer service


Distribution SystemsDistribution Systems

Distribution of goods to and from Distribution of goods to and from facilities can represent as much facilities can represent as much as 25% of the cost of a product.as 25% of the cost of a product.

The total distribution cost in the The total distribution cost in the U.S. is over 10% of the gross U.S. is over 10% of the gross national product (GNP).national product (GNP).



TruckingTrucking Moves the vast majority of Moves the vast majority of

manufactured goodsmanufactured goods

Chief advantage is flexibilityChief advantage is flexibility

RailroadsRailroads Capable of carrying large loadsCapable of carrying large loads

Little flexibility though Little flexibility though containers and piggybacking containers and piggybacking have helped with thishave helped with this



AirfreightAirfreight Fast and flexible for light loadsFast and flexible for light loads

May be expensiveMay be expensive

WaterwaysWaterways Typically used for bulky, low-Typically used for bulky, low-

value cargovalue cargo

Used when shipping cost is Used when shipping cost is more important than speedmore important than speed



PipelinesPipelines Used for transporting oil, gas, Used for transporting oil, gas,

and other chemical productsand other chemical products


Cost of Shipping Cost of Shipping AlternativesAlternatives

Product in transit is a form of Product in transit is a form of inventory and has a carrying or inventory and has a carrying or holding costholding cost

Faster shipping is generally more Faster shipping is generally more expensive than slower shippingexpensive than slower shipping

We can evaluate the two costs to We can evaluate the two costs to better understand the trade-offbetter understand the trade-off

(shipping costs vs. holding costs)(shipping costs vs. holding costs)


Example 3 on Page 450Example 3 on Page 450

A shipment of new connectors for A shipment of new connectors for semiconductors needs to go from semiconductors needs to go from San Jose to Singapore for San Jose to Singapore for assembly. The value of the assembly. The value of the connectors is $1,750 and the connectors is $1,750 and the holding cost is 40% per year. One holding cost is 40% per year. One airfreight carrier can ship the airfreight carrier can ship the connectors 1 day faster than its connectors 1 day faster than its competitor, at an extra cost of competitor, at an extra cost of $20.$20.


Cost of Shipping Cost of Shipping AlternativesAlternatives

Value of connectors = Value of connectors = $1,750.00$1,750.00Holding cost Holding cost = 40%= 40% per year per yearSecond carrier is Second carrier is 11 day faster and day faster and $20$20 more more expensiveexpensive

Daily cost of Daily cost of holding productholding product == xx /365/365

annual annual holding holding

costcost

product product valuevalue

= (.40 x $1,750)/ 365 = $1.92= (.40 x $1,750)/ 365 = $1.92

Since it costs less to hold the product one day longer than it does for the faster shipping ($1.92 < $20), we should use the cheaper, slower shipper


Logistics, Security, and JITLogistics, Security, and JIT

Borders have become more open as a Borders have become more open as a result of trade agreements but supply result of trade agreements but supply chains have gotten more complex since chains have gotten more complex since September 11, 2001September 11, 2001

Monitoring and controlling stock moving Monitoring and controlling stock moving through supply chains is more important through supply chains is more important than everthan ever

New technologies are being developed to New technologies are being developed to allow close monitoring of location, allow close monitoring of location, storage conditions, and movementstorage conditions, and movement

© 2006 prentice hall, inc.11 – 1 operations management chapter 11 – supply-chain management ©...

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