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BUS118 Production & Operations Management



Supply Chain Management
Prof. Marvin I. Noroa BUS118 Production & Operations Management
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Thinking Challenge
Current
Situation
Sales
Strategy
Matl
Strategy
Sales $10 $ ? $10
Materials $8 (80%) $ (80%) $ ?
Marketing $1 (10%) $ (10%) $ (10%)
Net Income $1 $2 $2

What would sales & material costs have to
be to double net income? Which is easier?
Percentages are % of sales.
Prof. Marvin I. Noroa
BUS118 Production & Operations Management
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Solution*
Current
Situation
Sales
Strategy
Matl
Strategy
Sales $10 $20 $10
Materials 8 16 7
Mktg (10%) 1 2 1
Net Income 1 2 2

Increase sales 100%
Reduce material costs 12%
Reducing material costs is more feasible.
Prof. Marvin I. Noroa BUS118 Production & Operations Management Prof. Marvin I. Noroa
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What Operations Managers Do?
10 OM Strategy Decisions:
Design of Goods & Services
Managing Quality
Process Strategy
Location Strategies
Layout Strategies
Human Resources
Supply Chain Management
Inventory Management
Scheduling
Maintenance
10 Decision Areas:
service & product design
quality management
process & capacity design
location
layout design
human resources & job design
supply chain management
inventory, MRP, and J-I-T
intermediate, short-term,
and project scheduling
maintenance
BUS118 Production & Operations Management Prof. Marvin I. Noroa
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Supply Chain Management
Management of integrated activities that
procure raw materials
transform those materials into intermediate goods
and final products
deliver the products through a distribution
system
Purchasing
Receiving Storage Operations Storage
Production Distribution
BUS118 Production & Operations Management Prof. Marvin I. Noroa
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FACILITIES
FUNCTIONS and ACTIVITIES
warehouses
factories
processing centers
distribution centers
retail outlets
offices
forecasting
purchasing
inventory management
information management
quality assurance
scheduling
production
distribution
delivery
customer service
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BUS118 Production & Operations Management Prof. Marvin I. Noroa
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SUPPLY CHAIN
Sometimes referred to as Value Chain, a term that
reflects the concept that value is added as goods and
services progress through the chain.
Comprised of separate business organizations, rather
than just a single organization.
Has two (2) components for each organization:
1) a supply component
2) a demand component
BUS118 Production & Operations Management Prof. Marvin I. Noroa
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SUPPLY CHAIN
Customer Retailer Distributor Storage MFG Storage
Supplier
Supplier
Supplier
SUPPLY COMPONENT DEMAND COMPONENT
The supply component starts at the beginning of the chain and ends with the
internal operations of the organization. The demand component of the chain
starts at the point where the organizations output is delivered to its immediate
customer and ends with the final customer in the chain. The demand chain is
the sales and distribution portion of the value chain
The length of each component depends on where a particular organization is in
the chain: the closer the organization is to the final customer, the shorter its
demand component and the longer its supply component.
BUS118 Production & Operations Management Prof. Marvin I. Noroa
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Theory of Supply Chain Management
Companies seek to design business models
that meet customer needs better than
competitors.
Success depends on the ability to
Design, Make, and Deliver
innovative, high quality, low cost products
and services that customers demand.
BUS118 Production & Operations Management Prof. Marvin I. Noroa
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Theory of Supply Chain Management
Supply chain management allows companies
to focus on their unique skill sets.

Supply chain management requires a common
understanding of supply chain objectives and
individual roles, an ability to work together,
and a willingness to adapt in order to create
and delivery the best products and services
possible.
BUS118 Production & Operations Management Prof. Marvin I. Noroa
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Supplier
Supplier
Supplier
S
t
o
r
a
g
e
MFG Distributor
S
t
o
r
a
g
e
S
t
o
r
a
g
e
Retailer CUSTOMER
S
t
o
r
a
g
e
SERVICE CUSTOMER
Supplier
Supplier
Distributor CUSTOMER
Tier 1
Suppliers
PRODUCER
Tier 2
Suppliers
MANUFACTURING SUPPLY CHAIN
SERVICE SUPPLY CHAIN
Supply and Demand Components
BUS118 Production & Operations Management Prof. Marvin I. Noroa
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Supply Chain: Manufacturing Example
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BUS118 Production & Operations Management Prof. Marvin I. Noroa
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Supply Chain: Manufacturing Example
BUS118 Production & Operations Management Prof. Marvin I. Noroa
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The Supply Chain
All organizations, regardless of where they are in the
chain, must deal with supply and demand issues.
The goal of SCM is to link all components of the
supply chain so that market demand is met as
efficiently as possible across the entire chain.
- This requires matching supply and demand at each stage of
the chain.
- Except for the beginning supplier(s) and the final
customer(s), the organizations in a supply chain are both
customers and suppliers.
BUS118 Production & Operations Management Prof. Marvin I. Noroa
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The Supply Chain
Manufacturer
Supplier
Supplier
Supplier
Customer Distributor
Customer
Customer
Inventory
Inventory
Inventory
Inventory
Market research data
Scheduling information
Engineering & design data
Order flow & cash flow
Ideas & design to satisfy
the end customer
Material flow
Credit flow
The supply chain includes all the interactions between suppliers, manufacturers,
distributors, and customers. The chain includes, transportation, scheduling information,
cash & credit transfers, as well as ideas, designs, and material transfers.
BUS118 Production & Operations Management Prof. Marvin I. Noroa
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Supply Chain Management
Includes determining the following:
1) transportation vendors
2) credit & cash transfers
3) suppliers
4) distributors & banks
5) accounts payable & receivable
6) warehousing and inventory levels
7) order fulfillment
8) sharing customer, forecasting & production
information
BUS118 Production & Operations Management Prof. Marvin I. Noroa
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Supply Chain Management
means managing the flow of goods and services
and information through the supply chain in
order to attain the level of synchronization that
will make it more responsive to customer needs
while lowering costs.

has the goal of linking all components of the
supply chain so that market demand is met as
efficiently as possible across the entire chain.
BUS118 Production & Operations Management Prof. Marvin I. Noroa
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Keys to effective SCM
Information
Communication
Cooperation
Trust
Supplier partnering

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BUS118 Production & Operations Management Prof. Marvin I. Noroa
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Supply Chain Management
The idea is to build a chain of suppliers that
focus on both
Reducing waste, and
Maximizing value to the ultimate customer
Activities of Supply Chain managers cut across
the disciplines of
- Accounting
- Finance
- Marketing
- operations
BUS118 Production & Operations Management Prof. Marvin I. Noroa
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Why Supply Chain Management ?
1. Need to improve operations
2. Increasing levels of outsourcing
3. Increasing transportation costs
4. Competitive pressures
5. Increasing globalization
6. Increasing importance of e-commerce
7. Complexity of supply chains
8. Need to manage inventories
BUS118 Production & Operations Management Prof. Marvin I. Noroa
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Supply Chain Management
As firms strive to increase their competitiveness via
STRATEGIES:
Product customization Differentiation
High quality Quality
Cost reductions Low-cost
Speed-to-market Response

added emphasis was placed on the
Supply Chain
BUS118 Production & Operations Management Prof. Marvin I. Noroa
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Supply Chain Management Defined

Supply chain management is the design and
management of seamless, value-added
processes across organizational boundaries to
meet the real needs of the end customer.

- Institute for Supply Management
BUS118 Production & Operations Management Prof. Marvin I. Noroa
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Supply Chain Integration
Internal Process Integration: increase collaboration
among the companys functional groups.
Backward Process Integration: collaboration with
1st-tier and 2nd-tier (leading companies) suppliers.
Forward Process Integration: collaboration with 1st-
tier customers.
Complete Integration: collaboration from the
suppliers supplier to the customers customer.
BUS118 Production & Operations Management Prof. Marvin I. Noroa
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Supply Chain Integration
Common
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BUS118 Production & Operations Management Prof. Marvin I. Noroa
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Internal Value Chain Elements
Executive Management defines company strategy and
allocates resources to achieve it.
Supply Management coordinates the upstream supply
base, finding the right suppliers and building the right
relationships with them.
Operations transforms the inputs acquired from suppliers
into more highly valued products.
Logistics moves and stores materials so they are
available when and where they are needed.
Marketing manages the downstream relationships with
customers, identifying their needs and communicating to
them how the company can meet those needs.
BUS118 Production & Operations Management Prof. Marvin I. Noroa
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Internal Value Chain Elements
Human Resources designs the systems used to hire, train,
and develop the companys employees.
Accounting maintains business records that provide
information needed to control operations.
Finance acquires and controls the capital required to
operate the business.
Information Technology builds and maintains the
systems needed to capture and communicate information
among decision makers.
Research and Development (R&D) is responsible for
new product design.
BUS118 Production & Operations Management Prof. Marvin I. Noroa
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Internal Value Chain: Local Focus
R & D
Operations
Executive
Management
Logistics
Marketing
Human
Resource
Management
Accounting
Finance
Supply
Management
Information
Technology
BUS118 Production & Operations Management Prof. Marvin I. Noroa
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Internal Value Chain: Company Focus
R & D
Operations
Executive
Management
Logistics
Marketing
Human
Resource
Management
Accounting
Finance
Supply
Management
Information
Technology
Upstream
Suppliers
Downstream
Customers
BUS118 Production & Operations Management Prof. Marvin I. Noroa
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Internal Value Chain: Company Focus
R & D
Operations
Executive
Management
Logistics
Marketing
Human
Resource
Management
Accounting
Finance
Supply
Management
Information
Technology
Upstream
Suppliers
Downstream
Customers
BUS118 Production & Operations Management Prof. Marvin I. Noroa
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SCM: Linked Value Chains
R & D
Operations
Executive
Management
Logistics
Marketing
Human
Resource
Management
Accounting
Finance
Supply
Management
Information
Technology
R & D
Operations
Executive
Management
Logistics
Marketing
Human
Resource
Management
Accounting
Finance
Supply
Management
Information
Technology
R & D
Operations
Executive
Management
Logistics
Marketing
Human
Resource
Management
Accounting
Finance
Supply
Management
Information
Technology
R & D
Operations
Executive
Management
Logistics
Marketing
Human
Resource
Management
Accounting
Finance
Supply
Management
Information
Technology
R & D
Operations
Executive
Management
Logistics
Marketing
Human
Resource
Management
Accounting
Finance
Supply
Management
Information
Technology
Focal
Firm
Supplier Suppliers
Supplier
Customer Customers
Customer
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BUS118 Production & Operations Management Prof. Marvin I. Noroa
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Supply Chain Integration
Common
Theoretical Ideal
BUS118 Production & Operations Management Prof. Marvin I. Noroa
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Supply Chain Management Problems
The goal of supply chain management is to
use technology and teamwork to build
efficient and effective processes that create
value for the end customer.

The goal is compromised when processes,
value chain elements, and/or companies work
toward local rather than global optimum.
BUS118 Production & Operations Management Prof. Marvin I. Noroa
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Bullwhip Effect
Tier 2
Suppliers
Tier 1
Suppliers
Producer Distributor Retailer
Final
Customer
Amount of
inventory
=
BUS118 Production & Operations Management Prof. Marvin I. Noroa
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The Bullwhip Effect
Variation in demand is exaggerated as
information moves upstream away from the
point of use.

Variation in demand is exaggerated due to
infrequent demand and/or inventory level
information exchange and order batching.
BUS118 Production & Operations Management Prof. Marvin I. Noroa
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The Bullwhip Effect
BUS118 Production & Operations Management Prof. Marvin I. Noroa
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The Bullwhip Effect
Bullwhip effect costs can be as high as 12 to
25%

Bullwhip can be effectively mitigated by:
Sharing point of sale data
Collaborative forecasting
Collaborative future product promotion planning
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BUS118 Production & Operations Management Prof. Marvin I. Noroa
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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 manage the shipment of parts in and
finished products out
+ Staffed with local specialists to handle duties, trade,
freight, customer, and political issues
BUS118 Production & Operations Management Prof. Marvin I. Noroa
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Elements of Supply Chain Management
Deciding how to best move and store materials Logistics
Determining location of facilities Location
Monitoring supplier quality, delivery, and relations Suppliers
Evaluating suppliers and supporting operations Purchasing
Meeting demand while managing inventory costs Inventory
Controlling quality, scheduling work Processing
Incorporating customer wants, mfg., and time Design
Predicting quantity and timing of demand Forecasting
Determining what customers want Customers
Typical Issues Element
BUS118 Production & Operations Management Prof. Marvin I. Noroa
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PURCHASING
The supply chain receives so much attention because Purchasing is
the most costly activity in most firms
Illustration:
SALES
- VC
Purchases (50%)
Other VC (24%)
- FC
PROFIT

$ 100

(50)
(24)
(24)
$ 2
=====
$ 103.85

(51.93)
(24.92)
(24.00)
$ 3.00
=======
$ 100

(49)
(24)
(24)
$ 3.00
=====
Through a $3.85 of additional sales, profit increased by $1,
from $2 to $3. The same increase in margin could have
been obtained by reducing purchasing costs by $1.
BUS118 Production & Operations Management Prof. Marvin I. Noroa
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PURCHASING
+ is critical to supply chain efficiency because it is the
job of purchasing to
Select suppliers
Establish mutually beneficial relationships with them
+ its goal is to develop and implement purchasing plans
for products and services that support operations
strategies.
+ among its duties are
Identifying sources of supply
Negotiating contracts
Maintaining a database of suppliers
Obtaining goods & services that meet or exceed operations
requirements in a timely and cost-efficient manner
Managing suppliers
BUS118 Production & Operations Management Prof. Marvin I. Noroa
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PURCHASING
O Purchasing is the acquisition of goods & services
O Objectives of Purchasing are:
1. To help identify the products and services that can be
obtained externally
2. To develop, evaluate, and determine the best supplier, price
and delivery for those products and services
O Purchasing takes place in both manufacturing and
service environments
cost & quality of
goods & services
SOLD
cost & quality of
goods & services
PURCHASED


Effective
Purchasing
Strategy
BUS118 Production & Operations Management Prof. Marvin I. Noroa
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Purchasing in Manufacturing Environments
Purchasing function is supported by
1) Product engineering drawings & specs
2) Quality control documents
3) Testing activities that evaluate the purchased items
PURCHASING AGENT
BUYERS EXPEDITERS
- a person with legal authority to
execute purchasing contracts on
behalf of the firm
- perform all the activities of
the purchasing department
EXCEPT contract signing
- assist buyers in
following up on
purchases to ensure
TIMELY DELIVERY
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BUS118 Production & Operations Management Prof. Marvin I. Noroa
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Purchasing in Service Environments
In many service environments, purchasings role is
DIMINISHED because the primary product is an
intangible one (ex. Legal and medical organizations)
In transportation and restaurants, the purchasing
function is CRITICAL
In wholesale and retail segment of services,
purchasing is performed by a BUYER who is a
purchaser RESPONSIBLE for the SALE OF and
PROFIT ON merchandise that will be resold.
BUS118 Production & Operations Management Prof. Marvin I. Noroa
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PURCHASI NG
I NTERFACES
Legal
Accounting
Data
Processing
Design
Receiving
Suppliers
Operations

Purchasing

BUS118 Production & Operations Management Prof. Marvin I. Noroa
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PURCHASI NG CYCLE
Begins with a request from within the organization to
purchase material, equipment, supplies, or other items
from outside the organization
Ends when the purchasing department is notified that a
shipment has been received in satisfactory condition
Main steps are:
1. Purchasing receives the requisition
2. Purchasing selects a supplier
3. Purchasing places the order with a vendor
4. Monitoring orders
5. Receiving orders
BUS118 Production & Operations Management Prof. Marvin I. Noroa
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VALUE ANALYSIS examination of the function of
purchased parts and materials in an effort to reduce cost
and/or improve performance.
MAKE or BUY choosing between producing a
component or a service in-house or advantageously
purchasing it form an outside source
VENDOR SELECTION - a decision regarding who to
buy materials from, considering numerous factors, such
as inventory and transportation costs, availability of
supply, delivery performance, and quality of suppliers
SUPPLIER MANAGEMENT includes vendor
analysis, supplier audits, supplier certification, supplier
relationships and supplier partnerships
ROLES OF PURCHASI NG
BUS118 Production & Operations Management Prof. Marvin I. Noroa
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ROLES OF PURCHASI NG
MAKE or BUY
Role is to evaluate alternative suppliers and provide
current, accurate, complete data relevant to the buy
alternative.
Wholesale/Retail
PURCHASES SALES
Manufacturing, Restaurants, and Assemblers
PURCHASES (components & subassemblies)

PRODUCTION

SALES (final products)
BUS118 Production & Operations Management Prof. Marvin I. Noroa
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Outsourcing
Buying goods or services from outside sources rather
than making or providing them in-house
Reasons:
Ability of outside source to provide materials, parts or
services better, cheaper, or more efficiently
Patents, expertise & knowledge of the supplier
Gives more flexibility to the organization (downsizing)
Risks:
Loss of control
Greater dependency on suppliers
Loss of ability to perform in-house
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BUS118 Production & Operations Management Prof. Marvin I. Noroa
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Deciding Factors in Outsourcing
1. Cost to do it in-house versus cost to buy, including start-up
costs, versus cost to outsource
2. Stability of demand and possible seasonality
3. Quality available from suppliers compared with a firms own
quality capabilities
4. Desire to maintain close control of operations
5. Idle capacity available within the organization
6. Lead times for each alternative
7. Who has patents, expertise, and so on, if these are factors
8. Stability of technology (if technology is changing, it may be
better to use a supplier)
9. Degree to which the necessary operations are consistent with, or
in conflict with current operations
10. Strategy BUS118 Production & Operations Management Prof. Marvin I. Noroa
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Example No.1 : Make or Buy Decision
Choose which alternative is better. Analyze the following data
to determine the total annual cost of making and of buying.
Expected Annual Volume
Variable cost per unit
Annual fixed costs
Make
20,000 units
$ 5.00
$30,000
Buy
20,000 units
$ 6.00
-
Solution: Total Annual Cost = Fixed Cost + VC/unit x annual volume

Make : $ 30,000 + ($5 x 20,000) = $130,000
Buy : 0 + ($6 x 20,000) = $120,000

Buying is the better alternative because it would save $10,000 a year.
BUS118 Production & Operations Management Prof. Marvin I. Noroa
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Example No.2 : Make or Buy Decision
Given the following data, determine the total annual cost of making
and of buying. Estimated demand is 10,000 units a year.
Variable cost per unit
Annual fixed cost
Transportation cost per unit
Make
Process A Process Buy__
$ 50 $ 52 $51
$ 40,000 $ 36,000
$ 2
SOLUTION:
Variable Cost $500,000 $520,000 $510,000
Fixed Cost 40,000 36,000 -
Transportation Cost - - 20,000
Total Annual Cost $540,000 $556,000 $530,000
====== ====== ======
Buying is the best alternative with the lowest total annual cost
BUS118 Production & Operations Management Prof. Marvin I. Noroa
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Outsourcing
REASONS for MAKING
Lower production cost
Unsuitable suppliers
Assure adequate supply (quantity or
delivery)
Utilize surplus labor or facilities and
make a marginal contribution
Obtain desired quality
Remove supplier collusion
Obtain unique item that would entail a
prohibitive commitment for a supplier
Maintain organizational talents and
protect personnel from a layoff
Protect proprietary design or quality
Increase or maintain size of company
(management prerogative)
REASONS for BUYING
Lower acquisition cost
Preserve supplier commitment
Obtain technical or management
ability
Inadequate capacity
Reduce inventory costs
Ensure alternative sources
Inadequate managerial or
technical resources
Reciprocity
Item is protected by a patent or
trade secret
Frees management to deal with its
primary business
BUS118 Production & Operations Management Prof. Marvin I. Noroa
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ROLES OF PURCHASI NG
VALUE ANALYSIS
MAKE or BUY DECISION
VENDOR SELECTION
a decision regarding who to buy materials from
considers numerous factors:
inventory and transportation costs
availability of supply
delivery performance
quality of suppliers
outstanding operations requires excellent vendors
BUS118 Production & Operations Management Prof. Marvin I. Noroa
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3 Stages of Vendor Selection
1. Vendor Evaluation
Involves finding potential vendors and determining
the likelihood of their becoming good suppliers
Requires development of evaluation criteria, such as:
financial strength
quality
management
research
technical ability
potential for a close
long-term relationship
Weights depending
upon the needs of
the organization
10
BUS118 Production & Operations Management Prof. Marvin I. Noroa
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3 Stages of Vendor Selection
2. Vendor Development
Ensures integration of the supplier into a firms system and the
appreciation by the vendor of its
Quality requirements
Engineering changes
Schedules and delivery
Procurement policies
Payment system
May include everything from training, to engineering &
production help, to formats for electronic information transfer
Purchasing policies address issues such as percent of business
done with any one supplier or with minority businesses
BUS118 Production & Operations Management Prof. Marvin I. Noroa
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3 Stages of Vendor Selection
3. Negotiations
Negotiation strategies are approaches taken by
purchasing personnel to develop contractual
relationships with suppliers
They are of 3 classic types:
1) Cost-Based Price Model
2) Market-Based Price Model
3) Competitive Bidding
BUS118 Production & Operations Management Prof. Marvin I. Noroa
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Negotiations / Determining Prices
1) Cost-Based Price Model : requires that the supplier open its
books to the purchaser. The contract price is then based on
time and materials, or on a fixed cost with an escalation clause
to accommodate changes in the vendors labor and materials
cost.
2) Market-Based Price Model : price is based on a published
price or index. Paperboard and nonferrous metals prices, for
instance, are published in weekly industry magazines.
3) Competitive Bidding : is common for large orders of standard
products and services; is a typical policy in many firms for the
majority of their purchases.
- Requires to have several potential suppliers of the product (or its
equivalent)
- Sends requests for bids, asking vendors to quote a price for a specified
quantity and quality of the items
BUS118 Production & Operations Management Prof. Marvin I. Noroa
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Centralized Versus Decentralized
CENTRALIZED PURCHASING
Means that purchasing is handled by one special department
Takes advantage of quantity discounts offered on large orders
Obtains better service and closer attention from suppliers
Enables companies to assign certain categories of items to specialists
DECENTRALIZED PURCHASING
Means that individual departments or separate locations handle their own
purchasing requirements
Has the advantage of awareness of differing local needs and being better
able to respond to those needs.
Offers quicker response than centralized purchasing
Can save on transportation costs by buying locally, where locations are
widely scattered
BUS118 Production & Operations Management Prof. Marvin I. Noroa
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Myths Concerning Purchasing
Negotiation is a win-lose confrontation.
- Purchasing negotiations should not be viewed as a win-lose
game; it can be a win/win game
The main goal is to obtain the lowest possible
price.
- It must be realized that contractors and suppliers need a
reasonable profit to survive.
Each negotiation is an isolated transaction.
- Purchasing must work towards partnering so each
negotiation is a step in developing long-term relationships
and therefore not as an one-off deal.
BUS118 Production & Operations Management Prof. Marvin I. Noroa
60
Ethics in Purchasing
O Principles
Loyalty to employer
Justice to those you deal with
Faith in your profession
O Standards of Purchasing Practice
1. Avoid appearance of unethical or uncompromising practice
2. Follow the lawful instructions of your employer
3. Refrain from private activity that might conflict with the
interest of your employer
4. Refrain from soliciting or accepting gifts, favors, or services
from present or potential suppliers
5. Handle confidential or proprietary employer or supplier
information with due care
11
BUS118 Production & Operations Management Prof. Marvin I. Noroa
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Ethics in Purchasing
O Standards of Purchasing Practice
6. Practice courtesy and impartiality in all aspects of your job
7. Refrain from reciprocal agreements that constrain competition
8. Know and obey the letter and spirit of laws governing
purchasing
9. Demonstrate support for small, disadvantaged, and minority-
owned businesses
10. Discourage involvement in employer-sponsored programs of
non-business, personal packages
11. Enhance the profession by maintaining current knowledge
and the highest ethical standards
12. Conduct international purchasing in accordance with the
laws, customs, and practices of foreign countries, but
consistent with the laws of the your country, your
organizations policies, and these guidelines
BUS118 Production & Operations Management Prof. Marvin I. Noroa
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ROLES OF PURCHASI NG
SUPPLIER MANAGEMENT
Vendor Analysis
Supplier Audits
Supplier Certification
Supplier Relationships
Supplier Partnerships
Strategic Partnerships
BUS118 Production & Operations Management Prof. Marvin I. Noroa
63
SUPPLIER MANAGEMENT
Vendor Analysis
Evaluating the sources of supply in terms of price, quality, the
suppliers reputation, past experience with the supplier and
after-sales service
Other factors that can be used in evaluation are flexibility (in
handling changes in schedules, design and quantity), location,
leadtimes & on-time delivery, and other accounts
Supplier Audits
Are a means of keeping current on suppliers production
capabilities, quality and delivery problems and resolutions,
and performance on other criteria
Are also an important first step in supplier certification
programs
BUS118 Production & Operations Management Prof. Marvin I. Noroa
64
SUPPLIER MANAGEMENT
Supplier Certification
Is a detailed examination of the policies and capabilities of a supplier
Verifies that a supplier meets or exceeds the requirements of the
buyer
Is generally important in supplier relationships, but is particularly
important in seeking to establish long-term relationships with
suppliers
Supplier Relationships
Type of relationship depends on length of a contract
Short-term contracts involve competitive bidding
Medium-term contracts often involve ongoing relationships
Long-term contracts often evolve into partnerships
Keeping good relations with suppliers is increasingly recognized as
an important factor in maintaining a competitive advantage.

BUS118 Production & Operations Management Prof. Marvin I. Noroa
65
Supplier Relationships (cont)
Supplier Partnerships
- More and more business organizations are seeking to establish
partnerships with other organizations in the supply chain
- This implies
a) Fewer suppliers
b) Longer-term relationships
c) Sharing of information (forecasts, sales data, problem alerts)
d) Cooperation in planning
- Benefits are
a) Higher quality
b) Increased delivery speed and reliability
c) Lower inventories
d) Lower costs
e) Higher profits
f) Improved operations
Strategic Partnerships are those that convey strategic benefits to one or
both partners who have the potential for helping them grow their own businesses.
BUS118 Production & Operations Management Prof. Marvin I. Noroa
66
Supplier as a Partner
Aspect Adversary Partner
Number of suppliers Many One or a few
Length of relationship May be brief Long-term
Low price Major consideration Moderately important
Reliability May not be high High
Openness Low High
Quality May be unreliable;
buyer inspects
At the source; vendor
certified
Volume of business May be low High
Flexibility Relatively low Relatively high
Location Widely dispersed Nearness is important
12
BUS118 Production & Operations Management Prof. Marvin I. Noroa
67
Supplier Partnerships
Ideas from suppliers could lead to improved
competitiveness
1.Reduce cost of making the purchase
2.Reduce transportation costs
3.Reduce production costs
4.Improve product quality
5.Improve product design
6.Reduce time to market
7.Improve customer satisfaction
8.Reduce inventory costs
9.Introduce new products or services
BUS118 Production & Operations Management Prof. Marvin I. Noroa
68
Critical I ssues
Strategic importance
Cost
Quality
Agility
Customer service
Competitive advantage
Technology management
Benefits
Risks
BUS118 Production & Operations Management Prof. Marvin I. Noroa
69
Critical I ssues
Purchasing function
Increased outsourcing
Increased conversion to lean production
Just-in-time deliveries
Globalization

BUS118 Production & Operations Management Prof. Marvin I. Noroa
70
LOGISTICS
The movement of materials and information within a
facility and to incoming and outgoing shipments of
goods and materials
Movement within a facility movement of materials must be
coordinated to arrive at the appropriate destination at
appropriate times
Traffic Management overseeing the shipment of incoming
and outgoing goods
Evaluating shipping alternatives need to make a choice
between rapid (but more expensive) shipping alternatives and
slower (but less expensive) alternatives
BUS118 Production & Operations Management Prof. Marvin I. Noroa
71
Materials Movement
R
E
C
E
I
V
I
N
G

Storage
Work
center
Work center
Work center
Storage
Work
center
Storage
Shipping
BUS118 Production & Operations Management Prof. Marvin I. Noroa
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Logistics
Movement within the facility
Incoming and outgoing shipments
Bar coding
EDI
Distribution
JIT Deliveries
0
214800 232087768
13
BUS118 Production & Operations Management Prof. Marvin I. Noroa
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Distribution Requirements Planning
Distribution requirements planning (DRP) is
a system for inventory management and
distribution planning
Extends the concepts of MRPII
BUS118 Production & Operations Management Prof. Marvin I. Noroa
74
Management uses DRP to plan and
coordinate:
Transportation
Warehousing
Workers
Equipment
Financial flows

Uses of DRP
BUS118 Production & Operations Management Prof. Marvin I. Noroa
75
MATERIALS MANAGEMENT
Purchasing may be combined with various warehousing and
inventory activities to form a materials management system
Purpose is to obtain efficiency of operations through the
integration of all material acquisition, movement, and storage
activities
Emphasis is placed on MM when the transportation and inventory
costs are substantial on both the input and output sides of the
production process
Potential for competitive advantage is found via both reduced
costs and improved customer service
Recognizing that distribution of goods to and from the firms
facilities can represent as much as 25% of the cost of the products,
there is a need to evaluate their means of distribution (trucking,
railroads, airfreight, waterways or pipelines)
BUS118 Production & Operations Management Prof. Marvin I. Noroa
76
Materials Management
Integrates all materials functions
Purchasing
Inventory management
Production control
Inbound traffic
Warehousing & stores
Incoming quality control
Objective: Efficient, low cost operations
BUS118 Production & Operations Management Prof. Marvin I. Noroa
77
SUPPLY CHAIN STRATEGIES
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.
BUS118 Production & Operations Management Prof. Marvin I. Noroa
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SUPPLY CHAI N STRATEGY
1. Many Suppliers
Traditional American approach of negotiating with may
suppliers and playing one supplier against another
The supplier responds to the demands and specifications of a
request for quotation (RFQ) with the order usually going to
the low bidder
Suppliers aggressively competing with one another
Places the burden of meeting the buyers demands on the
supplier
Holds the supplier responsible for maintaining the necessary
technology, expertise, and forecasting abilities, as well as cost,
quality, and delivery competence
Not long-term: partnering relationships are NOT the goal
14
BUS118 Production & Operations Management Prof. Marvin I. Noroa
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SUPPLY CHAI N STRATEGY
2. Few Suppliers
Implies that rather than looking for short-term attributes,
such as low cost, a buyer is better off forming a long-term
relationship with a few dedicated suppliers.
Using few suppliers
a) Are more likely to understand the broad objectives of the procuring
firm and the end customer
b) Can create value by allowing customers to have
economies of scale ) that yield both lower transaction costs
learning curve ) and lower production costs
Few suppliers (with large commitment to buyer) may also be
more than willing to
a) Participate in JIT systems
b) Provide innovations & technological expertise
BUS118 Production & Operations Management Prof. Marvin I. Noroa
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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.
BUS118 Production & Operations Management Prof. Marvin I. Noroa
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SUPPLY CHAI N STRATEGY
2. Few Suppliers (cont)
Most important factor : TRUST between suppliers and buying companies
alignment of cultures ) that foster both formal
commitment of resources ) & informal contact
- toward advancing the relationship
- Strengthening the partnership
Buyers Results:
Incorporate suppliers in the supply system ) contracts that extend thru
Choose suppliers even before parts are designed ) the products life cycle
Place added emphasis on quality & reliability ) more efficient
) reduced prices over time
Downsides
Cost of changing parts is huge (so both buyer and supplier run the risk of being
captives of the other)
Risk of poor supplier performance
Concern about trade secrets and suppliers that make other alliances or venture out
on their own (ex. US Schwinn Bicycle Co. taught Taiwans Giant Mfg. Co.)
BUS118 Production & Operations Management
Prof. Marvin I. Noroa 83
SUPPLY CHAI N STRATEGY
3. Vertical Integration
Developing the ability to produce goods or services previously
purchased or actually buying a supplier or distributor.
Can take the form of FORWARD or BACKWARD integration
Vertical Integration
Backward Integration

Raw Material (suppliers)

Current Transformation Automobiles Integrated Flour
Circuits Milling

Forward Integration

Finished goods (customers)
Examples of Vertical Integration
Iron ore
Steel
Distribution
system
Dealers



Silicone
Circuit Boards


Computers
Watches
Calculators
Farming
Baked
goods
BUS118 Production & Operations Management Prof. Marvin I. Noroa
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SUPPLY CHAI N STRATEGY
3. Vertical Integration (cont)
Can offer opportunities or advantages in:
Cost reduction ) work best when the organization
Quality adherence ) has a large market share, or the
Timely delivery ) management talent to operate
Scheduling flexibility ) an acquired vendor successfully
Dangerous for firms in industries undergoing
technological change if management cannot
keep abreast of those changes, or
invest the financial resources necessary for the next wave
of technology
BUS118 Production & Operations Management Prof. Marvin I. Noroa
87
SUPPLY CHAI N STRATEGY
4. Keiretsu Networks
Many large Japanese manufacturers have found a middle
ground between purchasing from few suppliers to vertical
integration
These manufacturers are often the financial supporters of
suppliers through ownership or loans
The supplier then becomes part of a company coalition, known as the
keiretsu
Members of the keiretsu
assured of long-term relationships, and therefore expected to function as
partners
provide technical expertise and stable quality production to the
manufacturer
can also have suppliers down the chain, making second- or even third-
tier suppliers part of the coalition
15
BUS118 Production & Operations Management Prof. Marvin I. Noroa
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SUPPLY CHAI N STRATEGY
5. Virtual Companies
Because vertical integration locks in an organization into
businesses that it may not understand or be able to
manage, another strategy is to find good flexible suppliers
Takes away complications brought about by specialization and
changing technology
Addresses issues of being too bureaucratic having a division
Develops virtual companies that use suppliers on an
as-needed basis
Doing payroll; hiring personnel
Designing products
Manufacturing components
Conducting tests
Distributing products
Providing consulting services
BUS118 Production & Operations Management Prof. Marvin I. Noroa
91
SUPPLY CHAI N STRATEGY
5. Virtual Companies (cont)
companies that rely on a variety of supplier relationships to
provide services on demand
Also known as hollow corporations or network companies
Have fluid, moving organizational boundaries that allow them
to create a unique enterprise to meet changing market demands
Relationships may be ST or LT and may include:
true partners } whatever formal relationship,
collaborators } the result can be
able suppliers } exceptionally
subcontractors } LEAN PERFORMANCE
BUS118 Production & Operations Management Prof. Marvin I. Noroa
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SUPPLY CHAI N STRATEGY
5. Virtual Companies (cont)
Advantages include
+ specialized management expertise
+ low capital investment
+ flexibility
+ speed
Traditional Example : APPAREL BUSINESS
Designer of clothes seldom manufacture their designs
They rather license the manufacture
- rent a loft
- lease sewing machines
- contract labor
Result:
low overhead
flexibility
speed-to-market
BUS118 Production & Operations Management Prof. Marvin I. Noroa
93
SUPPLY CHAI N STRATEGY
5. Virtual Companies (cont)
Contemporary Example : SEMICONDUCTOR INDUSTRY
exemplified by Visioneer (in Palo Alto, CA)
subcontracts almost everything
software written by several partners
hardware manufactured by a silicone subcontractor
PCBs made in Singapore
Plastic cases made in Boston where units are tested and
packed for shipment
In virtual companies, the Purchasing function is demanding
and dynamic
BUS118 Production & Operations Management Prof. Marvin I. Noroa
96
OPTIMIZING the SUPPLY CHAIN
Postponement
Channel Assembly
Drop Shipping and Special Packaging
Blanket Orders
Stockless Purchasing
Standardization
Electronic Ordering and Funds Transfers
Internet Purchasing
RM
sources
Suppliers Prod Whse Distributors Customers
SUPPLIER SELLER DISTRIBUTION CONSUMER
VALUE
CREATION
BUS118 Production & Operations Management Prof. Marvin I. Noroa
97
OPTIMIZING the SUPPLY CHAIN
1. POSTPONEMENT : withholding/delaying any modifications
or customization to the product as long as possible in the
production process
Example: Dell Computers modified its printer by moving out
the power supply into a power cord (generic printers)
- Manufacture and centralized inventories of generic printers for shipment as
demand change
- Unique power system and documentation at the final distribution point
2. CHANNEL ASSEMBLY : a variation of postponement;
postpones final assembly of a product so the distribution channel
can assemble it; sends individual components & modules, rather
than FG, to the distributor, who then assembles, tests, and ships.
Treats distributors more as manufacturing partners than as distributors
Technique is successful in industries where products undergo rapid change such as
PCs
FG inventory is reduced, market response is better, with lower investment (nice
combination in business)
Examples: IBM, HP, Compaq
16
BUS118 Production & Operations Management Prof. Marvin I. Noroa
98
OPTIMIZING the SUPPLY CHAIN
3. DROP SHIPPING & SPECIAL PACKAGING
: means the supplier will ship directly to the end customer, rather
than to the seller saving both time and reshipping costs. Other
cost-saving measures include the use of special packaging, bar
coding & labeling; beneficial to wholesalers & retailers by
reducing shrinkage (lost, damaged or stolen merchandise) and
handling costs.
Dell Computers core competence is not in stocking
peripherals, but in assembling PCs.
4. BLANKET ORDERS : a long-term purchase
commitment to a supplier for items that are to be delivered against
short-term releases to ship
Are unfilled orders with a vendor; not an authorization to ship
anything until the receipt of an agreed-upon document, perhaps
a shipping requisition or shipment release
BUS118 Production & Operations Management Prof. Marvin I. Noroa
99
Rec.
Dock
Traditional Purchasing Process
Customer
Supplier
Purchase
Order
Mail Order
Processing
Packing
List
Processing
BUS118 Production & Operations Management Prof. Marvin I. Noroa
100
Rec.
Dock
Traditional Purchasing Process
Customer
Supplier
Purchase
Order
Order
Processing
Packing
List
Processing
Invoice
Mail
BUS118 Production & Operations Management Prof. Marvin I. Noroa
101
Rec.
Dock
Traditional Purchasing Process
Customer
Supplier
Purchase
Order
Order
Processing
Packing
List
Processing
Rec.
Report
Invoice
Mail
Mail
BUS118 Production & Operations Management Prof. Marvin I. Noroa
102
Rec.
Dock
Traditional Purchasing Process
Customer
Supplier
Purchase
Order
Order
Processing
Packing
List
Processing
Rec.
Report
Invoice
Acct. Pay.
Mail
Mail
BUS118 Production & Operations Management Prof. Marvin I. Noroa
103
Rec.
Dock
Traditional Purchasing Process
Customer
Supplier
Purchase
Order
Order
Processing
Packing
List
Processing
Rec.
Report
Invoice
Acct. Pay.
Reconcile
Mail
Mail
17
BUS118 Production & Operations Management Prof. Marvin I. Noroa
104
Rec.
Dock
Traditional Purchasing Process
Customer
Supplier
Purchase
Order
Order
Processing
Packing
List
Processing
Rec.
Report
Invoice
Mail
Acct. Pay.
Reconcile
Check
Mail
Mail
BUS118 Production & Operations Management Prof. Marvin I. Noroa
105
Traditional Purchasing Process
Rec.
Dock
Purchase
Order
Packing
List
Order
Processing
Invoice
Rec.
Report
Check
Acct. Rec.
Acct. Pay.
Mail
Mail
Reconcile
Mail
Rec.
Dock
Purchase
Order
Packing
List
Order
Processing
Invoice
Rec.
Report
Check
Acct. Rec.
Acct. Pay.
Mail
Mail
Reconcile
Mail
Customer
Supplier
BUS118 Production & Operations Management Prof. Marvin I. Noroa
106
Traditional Purchasing Process
Rec.
Dock
Purchase
Order
Packing
List
Order
Processing
Invoice
Rec.
Report
Check
Acct. Rec.
Acct. Pay.
Mail
Mail
Reconcile
Mail
Rec.
Dock
Purchase
Order
Packing
List
Order
Processing
Invoice
Rec.
Report
Check
Acct. Rec.
Acct. Pay.
Mail
Mail
Reconcile
Mail
Customer
Supplier
Which activities do
NOT add value?
BUS118 Production & Operations Management Prof. Marvin I. Noroa
107
Traditional Purchasing Process
Rec.
Dock
Purchase
Order
Packing
List
Order
Processing
Invoice
Rec.
Report
Check
Acct. Rec.
Acct. Pay.
Mail
Mail
Reconcile
Mail
Rec.
Dock
Purchase
Order
Packing
List
Order
Processing
Invoice
Rec.
Report
Check
Acct. Rec.
Acct. Pay.
Mail
Mail
Reconcile
Mail
Customer
Supplier
Blanket purchase order may be used:
Need is ongoing, but quantities vary;
Typically for class B items (e.g., MRO);
Covers a given time period;
Shipment made upon receipt of
shipping release (mailed).
BUS118 Production & Operations Management Prof. Marvin I. Noroa
108
OPTIMIZING the SUPPLY CHAIN
5. STOCKLESS PURCHASING : means
that a supplier delivers materials directly to the
purchasers using department rather than to a
central stockroom.
6. STANDARDIZATION : reducing the number of
variations in materials and components as aid to cost
reduction
Rather than obtaining a variety of similar components
with labeling, coloring, packaging or slightly different
engineering specifications, the purchasing agent should
try to have the components standardized
BUS118 Production & Operations Management Prof. Marvin I. Noroa
110
OPTIMIZING the SUPPLY CHAIN
7. ELECTRONIC ORDERING & FUNDS
TRANSFER : reduces paper transactions, consisting of purchase
order, purchase release, a receiving document, authorization to pay an
invoice and finally the issuance of a check; Speeds up the traditionally long
procurement cycle

+ Electronic Data Interchange a standardized data
transmittal format for computerized communications
between organizations (order date, due date, quantity,
part #, P.O. #, address, and so forth)
+ Advanced Shipping Notice (ASN) a shipping notice
delivered directly from vendor to purchaser
18
BUS118 Production & Operations Management Prof. Marvin I. Noroa
111
Partnership Purchasing Process
Customer Supplier
Master
Agreement
Master agreement:
Defines partnership;
May specify price, quantities etc.
BUS118 Production & Operations Management Prof. Marvin I. Noroa
112
Partnership Purchasing Process
Customer Supplier
Master
Agreement
Electronic Data
Interchange (EDI)
Electronic data interchange (EDI):
Computer-to-computer messaging system;
Uses modem & telephone lines;
Used for sending orders, schedules etc.
BUS118 Production & Operations Management Prof. Marvin I. Noroa
113
Partnership Purchasing Process
Customer Supplier
Master
Agreement
Electronic Data
Interchange (EDI)
Invoiceless Purchasing:
Used if no electronic data interchange;
No invoice customer automatically sends check
(mail) based on units produced;
If 100 bicycles made, send check for 200 tires.
BUS118 Production & Operations Management Prof. Marvin I. Noroa
114
Partnership Purchasing Process
Point-of-Use
Standard
Containers
Customer Supplier
Master
Agreement
Bar-Coded
Kanban
Electronic Data
Interchange (EDI)
Point-of-Use:
Location where item will be used;
May be office, shop, assembly line etc.
BUS118 Production & Operations Management Prof. Marvin I. Noroa
115
Electronic Data Interchange
EDI the direct transmission of
interorganizational transactions, computer-to-
computer, including purchase orders, shipping
notices, and debit or credit memos.
BUS118 Production & Operations Management Prof. Marvin I. Noroa
116
Electronic Data Interchange
Increased productivity
Reduction of paperwork
Lead time and inventory reduction
Facilitation of just-in-time systems
Electronic transfer of funds
Improved control of operations
Reduction in clerical labor
Increased accuracy
19
BUS118 Production & Operations Management Prof. Marvin I. Noroa
117
Efficient Consumer Response
Efficient consumer response (ECR) is a
supply chain management initiative specific
to the food industry
Reflects companies efforts to achieve quick
response using EDI and bar codes
BUS118 Production & Operations Management Prof. Marvin I. Noroa
118
OPTIMIZING the SUPPLY CHAIN
8. INTERNET PURCHASING
also known as e-procurement
Order releases communicated over the Internet or approved vendor
catalogues available on the Internet for use by employees of the
purchasing firm
Takes 2 forms:
a) First, Internet Purchasing may just imply that the Internet is used to
communicate ORDER RELEASES to the suppliers (items for which a
blanket P.O. exists)
b) Second, for non-standard items, for which there is no blanket P.O.,
CATALOGUES and ORDERING PROCEDURES enhance the
communication features of the Internet
Lends itself to comparison shopping, rapid ordering, and reduction of
inventory
Liked by suppliers because on-line selling means they are getting closer
to their customers
May be a part of an integrated ERP system (order release, not only tells
the supplier to ship, but also updates the appropriate portions of the ERP
system)
BUS118 Production & Operations Management Prof. Marvin I. Noroa
119
CREATING AN EFFECTIVE SUPPLY CHAIN
1. Develop strategic objectives and tactics. These will guide the
process.
2. Integrate and coordinate activities in the internal portion of
the chain. This requires (1) overcoming barriers caused by
functional thinking that lead to attempts to optimize a subset
of a system rather than the system as a whole, and (2)
transferring data and coordinating activities.
3. Coordinate activities with suppliers and with customers. This
involves addressing supply and demand issues.
4. Coordinate planning and execution across the supply chain.
This requires a system for transferring data across the supply
chain and allowing access to data to those engage in
operations to which it will be useful.
5. Consider the possibilities of forming strategic partnerships.
BUS118 Production & Operations Management Prof. Marvin I. Noroa
120
CHALLENGES in SCM
Barriers to Integration of Separate Organizations
Getting CEOs, Board of Directors, Managers, and
Employees Onboard
Dealing with Trade-offs
1. Lot size-inventory trade-off
2. Inventory-transportation cost trade-off
3. Lead time-transportation cost trade-off
4. Product variety-inventory trade-off
5. Cost-customer service trade-off
Small Businesses
Variability and Uncertainty
Long Lead Times
BUS118 Production & Operations Management Prof. Marvin I. Noroa
121
Challenges
Barriers to integration of organizations
Getting top management on board
Dealing with trade-offs
Small businesses
Variability and uncertainty
Long lead times

BUS118 Production & Operations Management Prof. Marvin I. Noroa
122
Trade-offs
1. Lot-size-inventory
Bullwhip effect
2. Inventory-transportation costs
Cross-docking
3. Lead time-transportation costs
Airfreight versus seafreight
4. Product variety-inventory
Delayed differentiation
5. Cost-customer service
Disintermediation
20
BUS118 Production & Operations Management Prof. Marvin I. Noroa
123
Trade-offs
Bullwhip effect
Inventories are progressively larger moving
backward through the supply chain
Cross-docking
Goods arriving at a warehouse from a supplier are
unloaded from the suppliers truck and loaded
onto outbound trucks
Avoids warehouse storage
BUS118 Production & Operations Management Prof. Marvin I. Noroa
124
Trade-offs
Delayed differentiation
Production of standard components and
subassemblies, which are held until late in the
process to add differentiating features
Disintermediation
Reducing one or more steps in a supply chain by
cutting out one or more intermediaries
BUS118 Production & Operations Management Prof. Marvin I. Noroa
125
SUPPLY CHAIN ISSUES
STRATEGIC ISSUES
TACTICAL ISSUES
OPERATING ISSUES
Design of the supply chain
Partnering
Inventory policies
Purchasing policies
Production policies
Transportation policies
Quality policies
Quality Control
Production Planning & Control
BUS118 Production & Operations Management Prof. Marvin I. Noroa
126
Supply Chain Benefits and Drawbacks
Problem Potential
Improvement
Benefits Possible
Drawbacks
Large
inventories
Smaller, more frequent
deliveries
Reduced holding
costs
Traffic congestion
Increased costs
Long lead
times
Delayed differentiation
Disintermediation
Quick response

May not be feasible
May need absorb
functions
Large number
of parts
Modular Fewer parts
Simpler ordering
Less variety

Cost
Quality
Outsourcing Reduced cost,
higher quality
Loss of control
Variability Shorter lead times,
better forecasts
Able to match
supply and demand
Less variety
BUS118 Production & Operations Management Prof. Marvin I. Noroa
127
PERFORMANCE DRIVERS
1. Cost
2. Quality
3. Flexibility
Refers to the ability to adjust to changes in order
quantities but also in product or service requirements
4. Velocity
Inventory velocity the rate at which inventory
(material) goes through the supply chain
Information velocity the rate at which information
(two-way flow) is communicated in a supply chain
5. Customer Service
BUS118 Production & Operations Management Prof. Marvin I. Noroa
128
PERFORMANCE MEASURES
Perspective Metrics
RELIABILITY
On-time delivery
Order fulfillment lead time
Fill rate
Perfect order fulfillment
FLEXIBILITY
Supply chain response time
Upside production flexibility
EXPENSES
Supply chain management cost
Warranty cost as a % of revenue
Value added per employee
ASSETS/UTILIZATION Total inventory days of supply
Cash-to-cash cycle time
Net asset turns
21
BUS118 Production & Operations Management Prof. Marvin I. Noroa
129
SCM Performance Measures
SCOR (Supply Chain Ops Reference) Model
Plan, Source, Make Deliver, Return
SCOR addresses
Product from suppliers
2
to customers
2
SCOR does not address
Sales, Marketing, R&D, Support
BUS118 Production & Operations Management Prof. Marvin I. Noroa
130
Level 1 Performance Metrics
- Reliability delivery performance, fill rate,
perfect fulfillment
- Responsiveness order fill lead time
- Flexibility SC response time, ops flexibility
- Cost warranty cost, productivity, CGS, SCM
cost
- Assets turns, inventory days, cash cycle
BUS118 Production & Operations Management Prof. Marvin I. Noroa
131
SUCCESSFUL SUPPLY CHAIN
Trust among trading partners
Effective communications
Supply chain visibility
Event-management capability
The ability to detect and respond to unplanned
events
Performance metrics

BUS118 Production & Operations Management Prof. Marvin I. Noroa
132
Benefits of Supply Chain Management
Lower inventories
Higher productivity
Greater agility
Shorter lead times
Higher profits
Greater customer loyalty
BUS118 Production & Operations Management Prof. Marvin I. Noroa
133
Benefits of Supply Chain Management
Organization Benefit
Campbell Soup Doubled inventory turnover rate
Hewlett-Packard Cut supply costs 75%
Sport Obermeyer Doubled profits and increased sales 60%
National Bicycle Increased market share from 5% to 29%
Wal-Mart Largest and most profitable retailer in the world
BUS118 Production & Operations Management Prof. Marvin I. Noroa
134
CPFR
Collaborative Planning, Forecasting, and
Replenishment
Focuses on information sharing among
trading partners
Forecasts can be frozen and then converted
into a shipping plan
Eliminates typical order processing
22
BUS118 Production & Operations Management Prof. Marvin I. Noroa
135
CPFR Process
Step 1 Front-end agreement
Step 2 Joint business plan
Steps 3-5 Sales forecast
Steps 6-8 Order forecast collaboration
Step 9 Order generation/delivery execution
BUS118 Production & Operations Management Prof. Marvin I. Noroa
136
CPFR Results
Nabisco and Wegmans
50% increase in category sales
Wal-mart and Sara Lee
14% reduction in store-level inventory
32% increase in sales
Kimberly-Clark and Kmart
Increased category sales that exceeded market
growth
BUS118 Production & Operations Management
SUMMARY
BUS118 Production & Operations Management
138
Supply Chain Management
The process of planning, implementing,
and controlling the efficient, cost effective
flow and storage of raw materials, in-
process inventory, finished goods, and the
related information from the point of origin
to point of consumption for the purpose of
conforming to customer requirements.

Prof. Marvin I. Noroa
BUS118 Production & Operations Management
139
Supply Chain Management
Getting the right product and services to the right
place, at the right time, at the right price, and in the
right condition, while making the greatest
contribution to the firm.
The process of anticipating customer needs and
wants; acquiring the capital, materials, people,
technologies, and information necessary to meet
those needs and wants; optimizing the goods- and
services-producing network to fulfill customer
requests in a timely way.
Prof. Marvin I. Noroa BUS118 Production & Operations Management
140
Supply Chain Management
Planning, organizing, directing, & controlling
flows of materials & information
Begins with raw materials
Continues through internal operations
And distribution of finished goods
Also involves after-sales service
EInvolves everyone in supply chain
Example: Your suppliers supplier
- Objective: Max. value & lower waste
Prof. Marvin I. Noroa
23
BUS118 Production & Operations Management
Supplier Manufacturer
Wholesaler Retailer Consumer
Manufacturer
(Plant) (Sales &Distribution)
The Supply Chain
is a network of manufacturing and logistics sites that
develop, plan, source, convert and deliver products that
meet customer and consumer needs
includes manufacturers, suppliers, transporters,
warehouses, retailers, and customers
Prof. Marvin I. Noroa
141
BUS118 Production & Operations Management
Supply Chain, referred to as the Value Chain
Factory Distribution Center Store Customers
includes movement of products from suppliers to
manufacturers to distributors, but also includes movement
of information, funds, and products in both directions
contains business processes which are a collection of
activities and tasks required to perform the work in order to
maximize overall value created
Prof. Marvin I. Noroa
142
BUS118 Production & Operations Management
The Inbound and Outbound Supply Chain
CONVERSION
FG, RM, IM
STORAGE
SHIPPING
TRANSPORT
CUSTOMERS
DISTRIBUTION
CENTERS
SUPPLIERS
Inbound and Outbound Logistics Management
Prof. Marvin I. Noroa
143
BUS118 Production & Operations Management
S-I-P-O-C Model
Prof. Marvin I. Noroa
144
SUPPLY CHAIN
MANAGEMENT
Materials
Management
Physical
Distribution
Operations Outbound
SUPPLIER INPUT PROCESS OUTPUT CUSTOMER
Production
Goods &
Services
Materials
& Supplies
BUS118 Production & Operations Management
145
Components of Supply Chain Management
Management Actions

Planning Implementation Control
Input
Natural
Resources
(land,
facilities, &
equipment
Human
resources
Financial
resources
Information
resources
Supply Chain Management
Raw In-process Finished
Materialsl Inventory Goods
Marketing
Orientation
(competitive
advantage)
Time & place
utility
Efficient
movement to
customer
Proprietary
asset
Output
Supply Chain Activities
Prof. Marvin I. Noroa BUS118 Production & Operations Management
146
Supply Chain Activities
- Customer Service
- Demand forecasting
- Distribution
communications
- Inventory control
- Material handling
- Order processing
- Parts and service support
- Plant & warehouse site
selection
- Procurement
- Packaging
- Return goods handling
- Salvage & scrap disposal
- Traffic & transportation
- Warehousing & storage

Prof. Marvin I. Noroa
24
BUS118 Production & Operations Management
147
Supply Chain
Consumer
Retailer
Mfg.
Mat'l Flow
VISA

Credit Flow
Supplier
Supplier Wholesaler
Retailer
Cash
Flow
Order
Flow
Schedules
Consumer
Retailer
Mfg.
Mat'l Flow
VISA

Credit Flow
Supplier
Supplier Wholesaler
Retailer
Cash
Flow
Order
Flow
Schedules
Prof. Marvin I. Noroa BUS118 Production & Operations Management
Components of a Supply Chain
Prof. Marvin I. Noroa
148
BUS118 Production & Operations Management 149
Traditional Material Flow and Order Flow
Through the Transformation Process




Inputs
Suppliers Trans-
portation
Conversion R M
Invty
Incoming
Inspection
Receiving F G
Invty
Quality
Control
Trans-
portation
Distribution/
Retail
Customers
Output Transformation
D D D
MRO
Invty
WIP
Invty
Work Orders
Purchasing
Production/Inventory
Control
Order
Entry
Orders from Distributors
Prof. Marvin I. Noroa
BUS118 Production & Operations Management
150
Traditional Logistics Organization
O Independent Cost / Operating Centers
O Lack Of Synergy / Higher End Costs
Prof. Marvin I. Noroa
BUS118 Production & Operations Management
151
Organizational Changes
Prof. Marvin I. Noroa BUS118 Production & Operations Management
152
An Integrated SCM Organization
Prof. Marvin I. Noroa
25
BUS118 Production & Operations Management
153
Business Drivers
Globalization
Customer service and quality focus
Time
Core competency
Technological availability
Electronic commerce
Clean and Green
Lean Production & Cost Minimization
Prof. Marvin I. Noroa BUS118 Production & Operations Management
154
Implications for Supply Chain Managers
EGlobal competition & constant changes
EGreater risk and uncertainty
EA new mindset - global & strategic
EHigh level of organizational flexibility
EManaging risk through improved
information systems
EManagement of supply market in a volatile
environment
Prof. Marvin I. Noroa