Managing suppliers and

customers

15-1

Outline
• Supply chain management
• Managing suppliers
– Supplier selection, supplier profitability, performance
measures
• Managing inventory
– Economic order quantity (EOQ)
– Just-in-time system (JIT)
• Managing customers
– Customer profitability, performance measures
• Managing time

15-2

1
Supply chain management (SCM)
• SCM is the management of key business
processes that extend across the supply chain,
from the original suppliers to final customers
• The supply chain
– Interlinked customers and suppliers that work together to
convert, distribute and sell goods and services among
themselves, leading to a specific end product
• SCM can involve managing costs, accelerating
time-to-market of new products, creating close
relationships with customers and suppliers

(cont.)

15-3

Supply chain management (SCM)

(cont.)
• Ecommerce—use of electronic transmission
media to engage in the buying and selling of
goods and services
• B2B—ecommerce activities between two
businesses
• Electronic data interchange (EDI) links a firm’s
computer system to suppliers/customers to allow
electronic purchasing and buying
• Enterprise resource planning (ERP) systems
support different functional areas of a business
and enable SCM

15-4

2
Managing suppliers
• Improved supplier relationships can reduce
supplier and inventory-related costs
• Selecting suppliers
– Based on a range of criteria
– Price, quality, delivery, performance history, capacity,
communications systems and geographical location
– Long-term supply controls and preferred suppliers

(cont.)

15-5

Managing suppliers (cont.)

• Analysing supplier costs
– The total cost of ownership is the total cost of dealing
with suppliers, including
 Purchase price
 Costs of purchasing—ordering, receiving and inspection
 Costs of holding inventory
 Costs of poor quality
 Costs of delivery failure
– Activity-based costing can be used to estimate total cost
of ownership
– Hierarchy of supplier activities: unit-level, order-level,
supplier-level

(cont.)

15-6

3
 Managing suppliers (cont.)
• Evaluating supplier performance
– Supplier performance index: the ratio of supplier costs to
total purchase price
– Measures include ability of supplier to supply at the
contract price, material quality, delivery performance,
quality of relationships between employees, union and
management
– A buyer may also assess their own performance in
relation to the management of the supplier

Copyright  2009 McGraw-Hill Australia Pty Ltd

PowerPoint Slides t/a Management Accounting 5e by Langfield-Smith
Prepared by Kim Langfield-Smith 15-7

15-8

4
Managing inventory
• Why hold inventory?
– Cope with uncertainties in customer demand and in
production processes
– Qualify for quantity discounts
– Avoid future price increases in raw materials
– Avoid the costs of placing numerous small orders
• Conventional approaches to inventory management
focus on balancing
– Ordering costs: incremental costs of placing an order
– Carrying costs: the costs of carrying inventory in stock
– Shortage costs (or out-of-stock costs)

15-9

Economic order quantity (EOQ)

• The optimum order size for individual inventory
items, to minimise the total ordering and carrying
costs

2  annual requirement  cost per order

EOQ =
annual carrying cost per unit

15-10

5
Timing of orders under EOQ
• Inventory re-order point (ROP)
– The level of inventory on hand that triggers the
placement of a new order (or setup)
– Lead time- the length of time between placing an order
and receiving the order
• Safety stock
– The extra inventory kept on hand to cover any above-
average usage or demand
– May be costly to maintain extra inventory

15-11

15-12

6
Assumptions underlying EOQ
• Demand is known and constant
• Incremental ordering costs are known and
constant per order
• Acquisition cost per unit is constant
• Entire order is delivered at one time
• Carrying costs are known and constant per unit
• On average, one-half of order is in stock at any
time

15-13

Just-in-time (JIT) systems

• JIT inventory and production system
– A comprehensive system for controlling the flow of
manufacturing in a multi-stage production environment
• The underlying philosophy is the simplifying of the
production process by removing non-value-added
activities
• JIT can cover all aspects of the production
process
– Inventory management is crucial
– Inventory is a major cause of non-value-added activities
and cost

15-14

7
Key features of JIT production
• A pull method of coordinating production
processes
• Simplified production processes
• Purchase of materials, and manufacture of sub-
assemblies and products in small lots
• Quick and inexpensive setups of production
machinery
• High-quality levels for raw materials, components
and finished products
• Effective preventative maintenance of equipment
• Flexible work teams

15-15

JIT purchasing
• Reduces the number of suppliers
• Long-term contracts with suppliers
• Specifies quality standards in supplier contracts
to reduce need for inspection
• Use of e-commerce to place orders, and provide
supplier on-line access to inventory files

15-16

8
Costs and benefits of JIT
• Costs of JIT
– Substantial investment to change production facilities to
minimise non-value-added activities
– An increase in the risk of inventory shortages and the
associated loss of production and sales
• Benefits of JIT
– Savings in inventory-carrying and insurance costs
– Fewer losses due to spoilage, obsolescence and theft
– No opportunity costs of high inventory
– Eliminates non-value-added activities
– Meets customers’ needs more effectively

15-17

Managing customers
• Customer relationship management (CRM)
– Collecting and analysing data to understand individual
customers’ behaviour patterns and needs
– May lead to improved customer service, customer
retention, new customers, more effective and efficient
marketing, increased sales and customer profitability
• E-commerce applications may allow customers to
access interactive web sites and initiate and
complete transactions over the internet

15-18

9
Customer profitability analysis
• Activity-based analysis may be used
• Customer cost analysis
– Analysis of cost of products purchased by customers and
the costs of customer-driven activities
• Customer profitability analysis
– Relative profitability of customers can be determined and
used for a range of strategic decisions
• How do customers differ?
– Customisation of products
– Marketing and selling activities
– Distribution channels
– Customer support activities

15-19

15-20

10
 Why calculate customer
profitability?
• To address a range of questions
• Which customers generate the greatest profits?
And how do we retain them?
• Which customers generate the lowest profits? And
how can we make them more profitable?
• What types of customers should we focus on to
maximise profitability?

15-21

Calculating customer costs

• Three levels of customer-driven activities and
costs
– Order level activities
– Customer level activities
– Market level activities
• Customer performance measures
– Market share
– Customer retention
– Customer acquisition
– Customer satisfaction
– Customer profitability

15-22

11
 15-23

Managing time
• Time dictates the rate at which products are
produced and revenue generated
• Time determines how long resources are tied up
in processes, and unavailable for other uses
• Time delays lead to inventory build-ups
• Time to develop new products and delivering
products to customers may be key to innovation

15-24

12
Time-based management
• Measures for developing new products and
services
– New product development time: time from identification
of initial concept to release of product to the market
– Break-even time (BET): the time from identification of
initial concept to when a product has generated enough
profit to pay back the original investment
– Time taken to fulfil a customer’s order
– Measures of customer response time, order receipt time,
production lead time (cycle time)
– Reliability in meeting scheduled delivery dates

15-25

15-26

13
Summary
• Supply chain management involves managing
costs and creating closer relationships with
suppliers and customers to increase efficiency
and profitability
• Supplier management involves selecting the best
suppliers, analysing supplier profitability and
measuring and managing supplier performance
• Conventional inventory management, such as
EOQ, focuses on optimising orders to minimise
costs, whereas JIT involves working with suppliers
to minimise inventory holdings and increase the
efficiency of production and ordering processes
(cont.)

15-27

Summary (cont.)
• Customer management can involve creating
customer relationship systems, analysing
customer profitability, and measuring and
managing customer performance
• Time can be a driver of customer value and
various time-based performance measures can be
used to increase efficiency, manage cost and to
increase customer satisfaction

15-28

14