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Supply-Chain Management

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Outline

GLOBAL COMPANY PROFILE: VOLKSWAGEN

THE STRATEGIC IMPORTANCE OF THE SUPPLY-CHAIN Global Supply-Chain Issues

SUPPLY-CHAIN ECONOMICS Make-or-Buy Decisions Outsourcing

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Outline - Continued SUPPLY-CHAIN STRATEGIES

Many Suppliers Few Suppliers Vertical Integration Keiretsu Networks Virtual Companies

Managing the Supply Chain Issues In an Integrated Supply Chain Opportunities in an Integrated Supply Chain

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Outline - Continued INTERNET PURCHASING VENDOR SELECTION

Vendor Evaluation Vendor Development Negotiations

MATERIALS MANAGEMENT BENCHMARKING SUPPLY-CHAIN

MANAGEMENT

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When you complete this chapter, you should be able to :

Identify or Define: Supply-chain management Purchasing Outsourcing E-procurement Materials management Keiretsu Virtual companies

Learning Objectives

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When you complete this chapter, you should be able to :

Describe or Explain: Supply-Chain Strategies Purchasing strategies Approaches to negotiations

Learning Objectives

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Volkswagen

Brazilian plant employs 1000 workers 200 work for VW

800 work for other contractors: Rockwell International, Cummins Engines, Deluge 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

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Volkswagen

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

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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

Supply-Chain Management

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Consumer

Retailer

Manufacturing

Material Flow

VISA®

Credit Flow

Supplier

Supplier Wholesaler

Retailer

CashFlow

OrderFlowSchedules

The Supply-Chain

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The Supply Chain

Supplier

Supplier

Supplier

Inventory

Inventory

Distributor

Inventory Inventory

Manufacturer

Customer

Customer

Customer

Market research dataScheduling information

Engineering and design dataOrder flow and cash flow

Ideas and design to satisfy end customer

Material flowCredit flow

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11%

31%

58%

Material

Dir Wages

Other

71%

16%13% COGS

Payroll

Other

83%

9%8%COGS

Payroll

Other

Manufacturing

Wholesale

Retail

Material Costs in Supply-Chain

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Supply-Chain Support for Overall Strategy

Supplier’sgoal

Primary Selection Criteria

Supply demand at lowest possible cost

Select primarily for cost

Low CostRespond quickly to changing requirements and demand to minimize stockouts

Select primarily for capacity, speed, and flexibility

ResponseShare market research; jointly develop products and options

Select primarily for product development skills

Differentiation

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Supply-Chain Support for Overall Strategy - continued

Process Characteristics

Maintain high average utilization

Low CostInvest in excess capacity and flexible processes

ResponseModular processes that 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

Differentiation

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Supply-Chain Support for Overall Strategy - continued

Lead-timeCharacteristics

Shorten lead-time as long as it does not increase costs

Low CostInvest aggressively to reduce production lead-time

ResponseInvest aggressively to reduce development lead-time

Differentiation

Product-design Characteristics

Maximize performance 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

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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 schedule and manage the shipment of parts in and finished products out

Staffed with local specialists to handle duties, trade, freight, customs and political issues

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Major cost center Affects quality of final product Aids strategy of low cost, response, and

differentiation

Importance of Purchasing

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Supply-Chain Costs as a Percent of Sales

All industry Automobile Food Lumber Paper Petroleum Transportation

52% 67% 60% 61% 55% 79% 62%

Industry Percent of Sales

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Dollars of Additional Sales Needed to Equal 1$ Saved Through Purchasing

Percent of Sales Spent in the Supply-Chain

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 $10.00

Percent Net Profit of Firm

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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

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The Purchasing Focus

Materials Management-High transportation cost-High inventory costs

Supply Management-High costs-Scarcity: national or

international

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

PurchasingManagement-Commodity items-Standard products

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ReceivingDock

PurchaseOrder

PackingList

OrderProcessing

Invoice

Receivables Report

Check Accounts Receivable

Accounts Payable

Mail

MailReconcile

Mail

Customer Supplier

Traditional Purchasing Process

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Purchasing Techniques Drop shipping and special packaging Blanket orders Invoiceless purchasing Electronic ordering and funds transfer Electronic data interchange (EDI) Stockless purchasing Standardization Outsourcing

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Make/Buy Considerations1. Maintain core

competencies and protect personnel from layoff

2. Lower production cost3. Unsuitable suppliers4. Assure adequate supply5. Utilize surplus labor and

make a marginal contribution

1. Frees management to deal with its primary business

2. Lower acquisition cost3. Preserve supplier

commitment4. Obtain technical or

management ability5. Inadequate capacity

Reasons for Making Reasons for Buying

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Make/Buy Considerations - Continued

6. Obtain desired quantity7. Remove supplier collusion8. Obtain a unique item that

would entail a prohibitive commitment from the supplier

9. Protect proprietary design or quality

10. Increase or maintain size of company

6. Reduce inventory costs7. Ensure flexibility and

alternate source of supply8. Inadequate managerial or

technical resources9. Reciprocity10. Item is protected by patent

or trade secret

Reasons for Making Reasons for Buying

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Plans to help achieve company mission Affect long-term competitive position Strategic options

Many suppliers Few suppliers Keiretsu network Vertical integration Virtual company

Plan

© 1995 Corel Corp.

Supply-Chain Strategies

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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.

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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.

Many Suppliers Strategy

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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.

Few Suppliers Strategy

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Daimler Chrysler’s Supplier Cost Reduction Effort

Supplier Suggestion Model SavingsRockwell Use passenger car door

locks on trucksDodgetrucks

$280,000

Rockwell Simplify design/substitutematerials on manual

window system

Various $300,000

3M Change tooling for wood-grain panels to allow threefrom one die instead of two

Caravan,Voyager

$1,500,000

Trico Change wiper-bladeformulation

Various $140,000

Leslie MetalArts

Exterior lighting suggestions Various $1,500,000

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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

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 this About 50% claim this

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Raw Material(Suppliers)

BackwardIntegration

CurrentTransformation

ForwardIntegration

Finished Goods(Customers)

Ability to produce goods previously purchased Setup operations Buy supplier

Make-buy issue Major financial

commitment Hard to do all things well

Vertical Integration Strategy

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Forms of Vertical Integration

Iron Ore

Steel

Automobiles

DistributionSystem

Dealers

Silicon

IntegratedCircuits

Circuit Boards

ComputersWatches

Calculators

Farming

Flour Milling

Raw Material(Suppliers)

BackwardIntegration

CurrentTransformation

ForwardIntegration

Finished Goods(Customers)

Baked Goods

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Vertical Integration Can be Forward or Backward

Vertical Integration Examples of Vertical Integration

Raw material (suppliers) Iron ore Silicon Farming

Backward Integration Steel

Current Transformation Automobiles Integrated Circuits Flour Milling

Forward Integration Distribution System

Circuit boards

Finished goods (customers) Dealers Computers, watches, calculators

Baked Goods

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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

Keiretsu Network Strategy

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Virtual Companies

Companies that rely on a variety of supplier relationships to provide services on demand.

Also known as hollow corporations, or network corporations

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© 1995 Corel Corp.

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

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Managing the Supply-Chain Options:

Postponement Channel assembly Drop shipping Blanket orders Invoiceless purchasing Electronic ordering and funds transfer Stockless purchasing Standardization Internet purchasing (e-procurement)

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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

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Successful Supply-Chain Management Requires:

A mutual agreement on goals Trust Compatible organizational cultures

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Issues in an Integrated Supply-Chain

Local optimization Incentives Large lots

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Opportunities in an Integrated Supply-Chain

Generation of accurate “pull” data Reduction of lot size Single stage control of replenishment

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Vendor Managed Inventory (VMI) 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

Electronic Ordering and Funds Transfer – “paperless” ordering and 100% material acceptance, payment by “wire”

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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.

Vendor Selection Steps

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Company Financial stability Management Location

Product Quality Price

Service Delivery on time Condition on arrival Technical support Training

Supplier Selection Criteria

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Vendor Selection Rating Form

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Negotiation Strategies

Three types: cost-based price model - supplier opens its

books to purchaser; price based upon fixed cost plus escalation clause for materials and labor

market-based price model - published price or index

competitive bidding - potential suppliers bid for contract

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Logistics Management Integrates all materials functions

Purchasing Inventory management Production control Inbound traffic Warehousing and stores Incoming quality control

Objective: Efficient, low cost operations

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Goods Movement Options

Trucking Railways Airfreight Waterways Pipelines

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Supply-Chain Performance Compared

Typical FirmsBenchmark

FirmsAdministrative costs as percent of purchases

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