08 BSCM v3.2 Master

Basics of Supply Chain Management
Purchasing and Physical Distribution

Session 8
APICS Certified in Production and Inventory Management (CPIM)
81 © APICS CONFIDENTIAL AND PROPRIETARY

Basics of Supply Chain Management
1. 2. 3. 4. 5.
Capacity
Introduction to Materials Management
Demand Master
Supply Chain Requirement and Production
Management Planning
Management Planning Activity
Control
Theory of
Aggregate Purchasing Lean/JIT and
Item Inventory Constraints
Inventory and Physical Quality
Management and Review
Management Distribution Systems
Activity
6. 7. 8. 9. 10.

Learning Objectives
Purchasing
– Explain the four types of purchased items
– Identify the four main objectives of purchasing
– Describe the process of selecting and managing suppliers
– Explain the five stages of the purchasing cycle
– Explain the objective of supplier agreements and give five
categories of items to be covered in the agreement
– Explain the difference between consignment and vendor-
managed inventory
– List three key factors for supplier partnering
– Describe four methods of receiving notification to purchase

Learning Objectives (cont.)
Physical Distribution
– Identify two ways physical distribution adds value
– Explain how physical distribution interfaces with marketing,
production, and finance
– Differentiate between pull and push systems for replenishing
distribution centers
– Explain the logic of distribution requirements planning
– Explain how warehousing helps to reduce total transportation
costs
– Identify five basic modes of transportation and relate these to
product shipment characteristics
– Explain four categories of shipping costs and methods to reduce
costs

Session 8
Purchasing

Purchasing for Industry
Purchasing in an industrial/business environment differs

from consumer buying:
The user (production) may not interface with the supplier
Clear product specifications are needed
Long-term purchase contracts may exist
Quality and price controls
Decisions can affect profitability

Types of Purchased Items
Raw materials and components

Capital items
MRO supplies
Services

Purchasing Objectives
Obtain goods and services of the right quality and

quantity needed
Obtain goods and services at the right cost
Ensure the best possible service
Identify qualified suppliers and maintain good relations

Session 8
Purchasing
Activities and
Participants

Purchasing Activities
Establish
Specifications
Select Procurement
Suppliers
Negotiate
Contracts
Manage Manage Contract Purchasing

Purchasing Cycle Buying Execution
Monitor Supplier Measurement

Performance
8  10 © APICS CONFIDENTIAL AND PROPRIETARY

Establish Specifications
What to buy depends on

Quantity
Cost considerations
Function
– Specifications for use
– Quality level needed

Establish Specifications (cont.)
Functional specifications may be described by

Brand
Specifying physical or chemical characteristics, material,
and method of manufacture
Performance requirements
Engineering drawings
Miscellaneous methods, including
– Samples
– ―Give me one just like the last one‖

Select Suppliers
Sourcing
– Sole sourcing
– Multiple sourcing
– Single sourcing

Select Suppliers (cont.)
Factors in selecting suppliers

Technical ability
Manufacturing capability
Reliability
After-sales service
Location
Price
Financial stability
Management attitude

Select Suppliers (cont.)
Supplier Partnering
Key factors:
– Long-term commitment
– Trust
– Shared vision
Managed Inventories
– Consignment
– Vendor-managed inventory (VMI)

Negotiate Contracts
Supplier agreements
Blanket purchase orders
Long-term contracts
Categories covered
– Price
– Terms
– Delivery
– Quality
– Quantity

Purchasing Execution
Notification to purchase
Manage purchasing cycle
Manage contract buying

Notification to Purchase
Purchases may be generated by the following:

Traditional (non-MRP) requisitions
MRP planned order releases
Kanban signals
Buffer replenishment

Manage the Purchasing Cycle
Generate
requisition
Issue
Approve purchase
payment order
Receive
goods Follow up

Purchasing Cycle Steps 1 and 2
Step 1: Generate requisition

– Review requisition (paper or electronic)
– Identifies specification, quantity, and delivery requirements
Step 2: Issue purchase order

– Assign supplier
– Release purchase order

Purchasing Cycle Steps 3-5
Step 3: Follow up
– Track status and expedite as necessary
Step 4: Receive goods

– Use PO to verify order and receipt
– Receive and track partial shipments
Step 5: Approve payment

– Match invoice with PO and packing slip
– Approve payment once goods are received and accepted

Manage Contract Buying
Facilitates time-phased replenishment of materials and

components during manufacturing
Releases against schedules and quantities in blanket
purchase orders or long-term contracts
Can be triggered by MRP or visual signals

Monitor Supplier Performance
Continuous Improvement
Supplier Buyer
Supplies
Product
Supplier
Performance
Feedback
Metrics
(Scorecard)

Session 8
Physical
Distribution

What is Physical Distribution?
Movement of goods and services from a supplier to its

customer in physical distribution channels
The adding of place and time value to products by
locating them where they are available to customers
when they need them

Influence of Marketing: The 4 Ps
Marketing
Marketing Mix
Product Price Place Promotion
The four Ps establish critical factors which need to be addressed by

physical distribution planning & execution:
Physical characteristics Inventory Market geography Product volume
Order winning product carrying cost
Distribution Location of demand
characteristics channels
Demand fluctuations
Order qualifying product Sales channels
characteristics (speed,
cost, quality, etc.)
Variety
Marketing: Chain of Customers
Supplier
Transaction Channels 3
(Chain of Customers)
2
Sequence of customers who Distributor
take title to products during
their flow through the supply
chain
Retailer
Consumer

Interface with Production & Finance
Production
Distribution costs and factory location
High service level of supply necessary
Replenishment of distribution inventory
Finance: Inventory levels

Problem 8.1
Tradeoff between express shipping costs and inventory carrying costs.
A company manufactures component parts for machine tools in North America and ships
them to Southeast Asia for assembly and sale in the local market. The components have
been shipped by sea; transit time averages six weeks, and the shipping cost is $1,000
per shipment. The company is considering moving the parts by air at an estimated cost of
$7,500; shipment will take two days. If inventory in transit for the shipment costs $150 per
day, should the company ship by air?
Water Air
Transportation cost
Inventory carrying cost
Total cost

Problem 8.1 Solution
Tradeoff between express shipping costs and inventory carrying costs.
Should the company ship by air?
Water Air
Transportation cost $1,000 $7,500
Inventory carrying cost $6,300 $ 300
Total cost $7,300 $7,800

Other Influences: Distribution Channels
Central
Supply
Private or common carrier
Distribution Channel
Regional
Companies or individuals that Distribution
participate in the flow of Center
goods and services from the Private or common carrier
supplier to the end user
Distributor
Warehouse
Retailer
Consumer

Physical Distribution Activities
Transportation
Distribution inventory
Warehousing
Inventory control
Materials handling
Order administration
Protective packaging
Reverse logistics

Session 8
Distribution
Inventory

Distribution Inventory
MARKETS & CUSTOMERS
Distribution Distribution
center center
Central
Factory
Supply
Distribution Distribution
center center
MARKETS & CUSTOMERS

Distribution Inventory Objectives
To provide the required level of customer service

To minimize the cost of transportation and handling
To minimize inventory costs
To interact with the factory to minimize scheduling
problems

Distribution Inventory Planning Systems
Alternative distribution inventory planning systems:

Pull system
Push system
Distribution requirements planning (DRP)

Pull System Using Order Point
Demand at distribution
centers may be stable
Distribution centers
order when their
OP
order point is
reached
Demand at central
supply is lumpy
Source: Arnold et al., Introduction to Materials Management, 6th ed.

Reprinted by Permission of Pearson Education

Pull System Characteristics
Each distribution center orders from central supply what it needs when
required without regard for:
Needs of other distribution centers

Available inventory at central supply
Production schedule at the factory
Advantages: Allows each center to operate independently

Demand data may be more accurate
Disadvantages: Lack of coordination, poor customer service,
disrupted factory schedules

Push System Characteristics
All forecasting and order decisions are made centrally.
Advantage: Coordination among factory, central

supply, and the distribution centers
Disadvantage: Not fully responsive to local demand

Distribution Requirements Planning
DC A Week DC B Week
1 2 3 4 5 6 7 8 1 2 3 4 5 6 7 8
Gross Reqmts. 300 Gross Reqmts. 500
Schd. Receipts Schd. Receipts
Proj. Avbl 170 170 170 170 170 170 170 270 270 Proj. Avbl 200 200 200 200 200 200 200 200 200
Net Reqmts 130 Net Reqmts 300
Plnd Ord Rcpts 400 Plnd Ord Rcpts 500
90
Plnd Ord Rlses 400 90
Plnd Ord Rlses 500
Central Week Lot Lead

Supply 1 2 3 4 5 6 7 8 Size Time
Gross Reqmts. 900
DC A 400 1 week
Schd. Receipts
Proj. Avbl 500 500 500 500 500 500 200 200 200 DC B 500 2 weeks
Net Reqmts 400
Plnd Ord Rcpts 600 Central
600 3 weeks
Plnd Ord Rlses 600 Supply
90
Factory
Master 800 N/A
Schedule
Period 1 2 3 4 5 6
Factory Gross Reqmts. 600
Master
PAB 0 0 200 200 200 200
Schedule
MPS 800

Problem 8.2
Week 1 2 3
DC ―A ‖ planned order release 100 100 100
DC ―B ‖ planned order release 200 100
Central supply — Lead time: 2 weeks
Order quantity: 500 units
Week 1 2 3
Gross requirements
Projected available 500
Planned order receipts
Planned order release

Week 1 2 3
DC ―A ‖ planned order release 100 100 100
DC ―B ‖ planned order release 200 100
Central supply — Lead time: 2 weeks
Order quantity: 500 units
Week 1 2 3
Gross requirements 100 300 200
Projected available 500 400 100 400
Planned order receipts 500
Planned order release 500

Session 8
Transportation

Introduction to Transportation
Objectives
Role
Modes
Carriers
Costs
Decisions and Tradeoffs

Objectives of Transportation
Provide high levels of customer service

Keep in-transit time and inventory to a minimum
Minimize transportation costs

Transportation and Warehousing
Customer
Factory LTL Customer
Customer
Customer
Factory TL DC LTL Customer
Customer
TL Full Truckload
LTL Less Than Truckload

Problem 8.3
Compare the transportation costs from factory to customers by direct shipment
or through a local distribution center. Using the data below, perform the
necessary calculations and answer the question in the workbook.
City X City Y
TL
DC
Factory LTL
C C C
LTL
Data
Estimated annual shipped volume = 10,000 cwt
Cost of LTL shipments direct to customers = $80/cwt
Cost of TL shipments to the DC = $40/cwt
Cost of carrying inventory at the DC = $8/cwt
Cost of local delivery = $16/cwt

Compare the transportation costs from factory to customers by direct shipment or
through a local distribution center. Using the data below, perform the necessary
calculations and answer the question in the workbook.
Estimated annual shipment volume = 10,000 cwt

Total annual cost of shipments direct to customers ($80/cwt) = $800,000
Cost of full-truckload shipments to the DC ($40/cwt) = $400,000
Cost of carrying inventory at the DC ($8/cwt) = $80,000
Cost of local delivery ($16/cwt) = $160,000
Total annual distribution costs to customers through the DC = $640,000
Question:
What is the least cost alternative, and what is the major reason for it?
Ship to DCs for local delivery. Line haul cost using TL shipments to DC is much lower than
LTL direct to customers, in this example.

Transportation Modes
Rail
Road
Air
Water
Pipeline
Each mode has its own cost and service characteristics.

Problem 8.4
Product shipment characteristics and mode selection
Product Shipment Mode Selection(s) Comments

Characteristic Recommendations/Other

Rail Transportation
Best able to move large volumes of bulky goods long

distances over land
Less frequency of departure than trucks
Good speed of transit over long distances
Reliable service
Flexibility in types of goods carried
Cheaper than road for large quantities of bulky cargo

Road Transportation
Low capital cost compared with rail

Door-to-door service
Fast, flexible service
Particularly suited to distribution of small volume goods
in a dispersed market

Air Transportation
Fast service over long distances

Passenger as well as freight aircraft
Can go anywhere there is a suitable landing strip
High cost
Suitable for high-value, low-weight cargo and for
emergency items

Water Transportation
Has low operating costs per ton-mile

Is slow and usually not door-to-door
Is most useful for moving low-value, bulky cargo over
long distances where water routes are available

Pipeline Transportation
Low operating costs

Impervious to weather
Move large volumes continuously

Types of Carriers
For hire
– Common
– Contract
Private (in-house)

Shipping Patterns
Full Load Shipments
S T T C
E E O
H N
I R R
S
M M I
P I I
P G
N N N
E Local A Full Load A Local E
R Pickup L Long Distance L Delivery E
Source: Arnold et al., Introduction to Materials Management, 6th ed.

Reprinted by Permission of Pearson Education

Shipping Costs
Line-haul Depend on the distance

moved
Pickup and delivery Depend on the number of
pickups and weight
Terminal handling Depend on the number of
times a shipment is handled, loaded, and unloaded
Billing and collecting Depend on the number of
shipments made

Line-Haul Costs
Include fuel, wages, wear and tear

Depend on the distance moved, not the weight moved

Reducing Transportation Costs
To reduce shipping costs

Increase weight shipped (TL) to reduce line-haul costs
Consolidate shipments to reduce
– Terminal handling costs
– Pickup and delivery costs
– Billing and collecting costs

Carrier Rates
Based on the cost structure, carriers have two types of rate

structures:
Based on full loads

Truckload (TL)
Based on less than full load
Less than truckload (LTL)

Carrier Rates (cont.)
The rate charged by a carrier depends on the commodity

shipped as well as weight and distance. The following
factors must be considered:
Value
Density
Perishability
Packaging

Session 8
Warehousing

Role of Warehousing
Facilitate the throughput of products from inbound to

outbound transportation
Reduce transportation costs
Provide faster and more reliable delivery to nearby
customers
Provide safe, secure, and efficient storage and handling

Warehousing Process and Activities
Order
Management
ERP
Inbound Warehouse System Transportation Outbound
Management Management
Products Products
Cross-Docking Staging &

Receiving Shipping
Flow-Through
Put-away Picking Packaging
Traditional
Post-Mfg
Storage Services

Stock Location Systems
Fixed location systems

Floating (random) location systems

Public vs. Private Warehousing
Major warehousing strategy issue

Similar to make or buy or outsourcing decisions in
manufacturing
Uses of public warehousing
– Adjust warehousing capacity quickly to handle new product
introductions
– Accommodate seasonal demand patterns
– Service regional requirements with private warehouse as the hub
– When volume not great enough to warrant the cost of a private
warehouse

Session 8
Wrap-Up and
Homework

Learning Objectives
Purchasing
– Explain the four types of purchased items
– Identify the four main objectives of purchasing
– Describe the process of selecting and managing suppliers
– Explain the five stages of the purchasing cycle
– Explain the objective of supplier agreements and give five
categories of items to be covered in the agreement
– Explain the difference between consignment and vendor-
managed inventory
– List three key factors for supplier partnering
– Describe four methods of receiving notification to purchase

Learning Objectives (cont.)
Physical Distribution
– Identify two ways physical distribution adds value
– Explain how physical distribution interfaces with marketing,
production, and finance
– Differentiate between pull and push systems for replenishing
distribution centers
– Explain the logic of distribution requirements planning
– Explain how warehousing helps to reduce total transportation
costs
– Identify five basic modes of transportation and relate these to
product shipment characteristics
– Explain four categories of shipping costs and methods to reduce
costs

Vocabulary Check
Objective: Reinforce terminology used in this session.

Complete the activity in class, individually or in pairs, or
as homework.

Vocabulary Check Solution
1. b 7. d
2. c 8. l
3. f 9. g
4. k 10. e
5. i 11. h
6. a 12. j

Problem 8.5
Present line-haul cost per unit =
Proposed line-haul cost per unit =

Present line-haul cost per unit =

500 x $4 = $2.00 per unit
1,000
Proposed line-haul cost per unit =
500 x $4 = $1.11 per unit
1,800

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Basics of Supply Chain Management

Purchasing and Physical Distribution

APICS Certified in Production and Inventory Management (CPIM)

81 © APICS CONFIDENTIAL AND PROPRIETARY

82 © APICS CONFIDENTIAL AND PROPRIETARY

83 © APICS CONFIDENTIAL AND PROPRIETARY

84 © APICS CONFIDENTIAL AND PROPRIETARY

85 © APICS CONFIDENTIAL AND PROPRIETARY

Purchasing in an industrial/business environment differs

86 © APICS CONFIDENTIAL AND PROPRIETARY

Raw materials and components

87 © APICS CONFIDENTIAL AND PROPRIETARY

Obtain goods and services of the right quality and

88 © APICS CONFIDENTIAL AND PROPRIETARY

89 © APICS CONFIDENTIAL AND PROPRIETARY

Manage Manage Contract Purchasing

Monitor Supplier Measurement

8  10 © APICS CONFIDENTIAL AND PROPRIETARY

What to buy depends on

8  11 © APICS CONFIDENTIAL AND PROPRIETARY

Functional specifications may be described by

8  12 © APICS CONFIDENTIAL AND PROPRIETARY

8  13 © APICS CONFIDENTIAL AND PROPRIETARY

Factors in selecting suppliers

8  14 © APICS CONFIDENTIAL AND PROPRIETARY

8  15 © APICS CONFIDENTIAL AND PROPRIETARY

8  16 © APICS CONFIDENTIAL AND PROPRIETARY

8  17 © APICS CONFIDENTIAL AND PROPRIETARY

Purchases may be generated by the following:

8  18 © APICS CONFIDENTIAL AND PROPRIETARY

8  19 © APICS CONFIDENTIAL AND PROPRIETARY

Step 1: Generate requisition

Step 2: Issue purchase order

8  20 © APICS CONFIDENTIAL AND PROPRIETARY

Step 4: Receive goods

Step 5: Approve payment

8  21 © APICS CONFIDENTIAL AND PROPRIETARY

Facilitates time-phased replenishment of materials and

8  22 © APICS CONFIDENTIAL AND PROPRIETARY

8  23 © APICS CONFIDENTIAL AND PROPRIETARY

8  24 © APICS CONFIDENTIAL AND PROPRIETARY

Movement of goods and services from a supplier to its

8  25 © APICS CONFIDENTIAL AND PROPRIETARY

Product Price Place Promotion

The four Ps establish critical factors which need to be addressed by

8  27 © APICS CONFIDENTIAL AND PROPRIETARY

8  28 © APICS CONFIDENTIAL AND PROPRIETARY

Inventory carrying cost

8  29 © APICS CONFIDENTIAL AND PROPRIETARY

Should the company ship by air?

Inventory carrying cost $6,300 $ 300

Total cost $7,300 $7,800

8  30 © APICS CONFIDENTIAL AND PROPRIETARY

8  31 © APICS CONFIDENTIAL AND PROPRIETARY

8  32 © APICS CONFIDENTIAL AND PROPRIETARY

8  33 © APICS CONFIDENTIAL AND PROPRIETARY

MARKETS & CUSTOMERS

8  34 © APICS CONFIDENTIAL AND PROPRIETARY

To provide the required level of customer service

8  35 © APICS CONFIDENTIAL AND PROPRIETARY

Alternative distribution inventory planning systems:

8  36 © APICS CONFIDENTIAL AND PROPRIETARY

Source: Arnold et al., Introduction to Materials Management, 6th ed.

8  37 © APICS CONFIDENTIAL AND PROPRIETARY