Supply Chain

Management
MBA 570
Summer 2007

1
 Outline
¨ Global Company Profile: Volkswagon
¨ The Strategic Importance of the Supply-Chain
¨ Global Supply-Chain Issues
¨ Supply Chain Economics
¨ Make-or-Buy Decisions
¨ Outsourcing

2
 Outline - continued
¨ Supply-Chain Strategies
¨ Many Suppliers
¨ Few Suppliers
¨ Vertical Integration
¨ Keiretsu Networks
¨ Virtual Companies
¨ Vendor Selection
¨ Vendor Evaluation
¨ Vendor Development
¨ Negotiations

3
 Outline - continued
¨ Managing the Supply-Chain
¨ Materials Management
¨ Distribution Systems
¨ Benchmarking Supply-Chain Management

4
 Learning Objectives

¨ Explain supply chain management

¨ State the importance of purchasing and
materials management
¨ Compare & contrast purchasing strategies
¨ Summarize vendor relations issues
¨ Describe the purchasing process and
techniques

5
 Volkswagon

¨ Brazilian plant employs 1000 workers

¨ 200 work for VW
¨ 800 work for other contractors:
¨ Rockwell International, Cummins Engines, Delga
Automotiva, MWM, Remon and VDO, etc.
¨ VW responsible for overall quality, marketing,
research and design
¨ VW looks to innovative supply chain to
improve quality and drive down costs
6
 Volkswagon

¨ Unusual elements:
¨ VW is buying not only materials, but also the
labor and related services
¨ Suppliers are integrated tightly into VW’s
own network, right down to assembly work in
the plant

7
 Definition

The process of planning, implementing and controlling

efficient cost effective flow and storage of goods,
services and related information from point of origin
to point of consumption for the purpose of conforming
to customer requirements.

8
 Supply-Chain Management

¨ Planning, organizing, directing, & controlling

flows of materials
¨ Begins with raw materials
¨ Continues through internal operations
¨ Ends with distribution of finished goods
¨ Involves everyone in supply-chain
¨ Example: Your supplier’s supplier
¨ Objective: Maximize value & lower waste

9
 The Supply Chain
Suppliers Suppliers
Tier 2 Tier 1 Distributors Retailers C
U
S
Manufacturing T
Inbound Logistics O
M
Operations
E
Outbound Logistics
R
S
Information
 The time to act is now!

The first firm in an industry to implement

a real time, interactive logistics information system
will have a competitive advantage, the last firm to do
so doesn't need to spend the money.

D. M. Lambert
T. C. Harrington
 The Supply-Chain
VISA
®

Materiall Flow Credit Flow

Supplier Manufacturing Retailer Consumer

Supplier Wholesaler Retailer

Schedules Order Cash

Flow Flow

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 The Supply Chain
Market research data
scheduling information
Engineering and design data
Supplier Order flow and cash flow Customer
Ideas and design to
Inventory satisfy end customer
Material flow
Supplier Credit flow

Manufacturer Customer
Inventory Inventory
Supplier

Distributor Customer
Inventory

13
 Supply Chain Management Components:
Information Management
•Traditional supply chain: Forecasts based on different data.
Contributes to the bullwhip effect, excess inventory, and
stockouts.
 Supply Chain Management Components:
Information Management
Improved approaches enabled by technology to collect,
store and communicate data
Collaborative planning, forecasting, and
replenishment (CPFR) – Approach to demand
planning in which partners negotiate and agree on a
plan for meeting demand
 Material Costs in
Supply-Chain
Wholesale
8% 9%
COGS
Manufacturing
Payroll
31% Material 83%
Other
11% Dir Wages
58% Retail
Other
16% COGS
13%
Payroll
71%
Other

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 Supply-Chain Support for
Overall Strategy
Low Cost Response Differentiation
Supplier’s
goal Supply Respond Share
demand at quickly to market
lowest changing research;
possible cost requirement jointly
s and develop
demand to products and
minimize options
stockouts
Primary Select Select Select
Selection primarily primarily primarily for
Criteria for cost for capacity, product
speed, and development
flexibility skills

15
 Supply-Chain Support for
Overall Strategy - continued
Low Cost Response Differentiation
Process Maintain high Invest in Modular
Characteristics average excess processes to
utilization capacity and lend
flexible themselves to
processes mass
customization

Inventory Minimize Develop Minimize

Characteristics inventory responsive inventory in
throughout system, with the chain to
the chain to buffer stocks avoid
hold down positioned to obsolescence
costs ensure
supply
16
 Supply-Chain Support for
Overall Strategy - continued
Low Cost Response Differentiation
Lead-time Shorten lead- Invest Invest
Characteristics time as long aggressively aggressively to
as it does not to reduce reduce
increase costs production development
lead-time lead-time

Product-design Maximize Use product Use modular

Characteristics performan designs that design to
ce and lead to low postpone
minimize set-up time product
cost and rapid differentiatio
production n for as long
ramp-up as possible
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 Global Supply-Chain Issues
¨ Supply chains in a global environment must be:
¨ flexible enough to react to sudden changes in parts
availability, distribution, or shipping channels, import
duties, and currency rates
¨ able to use the latest computer and transmission
technologies to manage the shipment of parts in and
finished products out
¨ staffed with local specialists to handle duties, trade,
freight, customs and political issues

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 Purchasing
¨ Acquisition of goods & services
¨ Activities
¨ Help decide whether to make or buy
¨ Identify sources of supply
¨ Select suppliers & negotiate contracts
¨ Control vendor performance
¨ Importance
¨ Major cost center
¨ Affects quality of final product

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Purchasing Costs as a Percent of
Sales

Industry Percent of Sales

¨ All industry ¨ 52%
¨ Automobile ¨ 61%
¨ Food ¨ 60%
¨ Lumber ¨ 61%
¨ Paper ¨ 55%
¨ Petroleum ¨ 74%
¨ Transportation ¨ 63%

20
Dollars of Additional Sales Needed to
Equal 1$ Saved Through Purchasing

Percent of Sale
Firm's 30% 40%
Percent
Net
Profit 21
 Motivating Forces: Supply Savings
Example
¨ U.S. businesses spend 20-30% of revenue acquiring goods
from outside suppliers
¨ 60% for manufacturing).
¨ Purchase cost savings have strong impact on bottom line.
¨ e.g., if the business saves just 6% in supply costs
($432,000), profit will increase by 45%.
 Objectives of the Purchasing
Function
¨ Help identify the products and services
that can be best obtained externally;
and
¨ Develop, evaluate, and determine the
best supplier, price, and delivery for
those products and services

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The Purchasing Focus
Materials Management Supply Management
-High transportation cost -High costs
-High inventory costs -Scarcity: national or
international
Purchasing
Management
-Commodity items
-Standard products

Source Management
-Unique items
-Custom-made items
-High technology items
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Traditional Purchasing Process
Customer Supplier
Purchase Mail Order
Order Processing
Receiving
Receivables Dock
Report Packing
List

Accounts Mail Invoice

Payable

Check Mail Accounts

Reconcile
Receivable

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

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 Make/Buy Considerations
Reasons for Making
¨ lower production cost
¨ unsuitable suppliers
¨ assure adequate supply
¨ utilize surplus labor and make a marginal
contribution
¨ obtain desired quantity
¨ remove supplier collusion
¨ obtain a unique item that would entail a
prohibitive commitment from the supplier
¨ maintain organizational talent
¨ protect proprietary design or quality
¨ increase/maintain size of company
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Reasons for Buying
¨ Frees management to deal with
primary business lower acquisition
cost
¨ preserve supplier commitment
¨ obtain technical or management ability
¨ inadequate capacity
¨ reduce inventory costs
¨ ensure flexibility and alternate source
of supply
¨ reciprocity
¨ item is protected by patent or trade
secret
¨ frees management to deal with its
primary business
 Purchasing Strategies

¨ Plans to help achieve company mission

¨ Affect long-term competitive position
¨ Strategic options
¨ Many suppliers
¨ Few suppliers
¨ Keiretsu network
¨ Vertical integration Plan

¨ Virtual company
© 1995 Corel Corp.

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 Supply-Chain Strategies
¨ Negotiate with many suppliers; play one supplier against
another
¨ Develop long-term “partnering” arrangements with a few
suppliers who will work with you to satisfy the end
customer
¨ Vertically integrate; buy the actual supplier
¨ Keiretsu - have your suppliers become part of a company
coalition
¨ Create a virtual company that uses suppliers on an as-
needed basis.

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 Many Suppliers Strategy

¨ Many sources per item

¨ Adversarial relationship
¨ Short-term
¨ Little openness
¨ Negotiated, sporadic PO’s
¨ High prices
¨ Infrequent, large lots © 1995 Corel Corp.

¨ Delivery to receiving dock

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 Few Suppliers Strategy

¨ 1 or few sources per item

¨ Partnership (JIT)
¨ Long-term, stable
¨ On-site audits & visits
¨ Exclusive contracts © 1995
Corel
Corp.
¨ Low prices (large orders)
¨ Frequent, small lots
¨ Delivery to point of use

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 Chrysler’s Supplier Cost
Reduction Effort

SupplierSugge
R ockw ell U se passe
locks on
R ockw ell 31
Sim plify
 Tactics for Close Supplier
Relationships
Tactic Results
¨ Reduce total number of suppliers ¨ Average 20% reduction in 5
¨ Certify suppliers years

¨ Almost 40% of all companies

¨ Ask for JIT delivery from key
suppliers
¨ Involve key suppliers in new
product design
¨ Develop software linkages to
suppliers
surveyed were themselves
currently certified
¨ About 60% ask for this
¨ About 54% do this

¨ Almost 80% claim to do this

About 50% claim this
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 Vertical Integration Strategy
¨ Ability to produce goods Raw Material
previously purchased (Suppliers)
¨ Setup operations
¨ Buy supplier Backward
Integration
¨ Make-buy issue
Current
¨ Major financial
Transformation
commitment
¨ Hard to do all things well Forward
Integration
Finished Goods
(Customers)
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Forms of Vertical Integration

Iron Ore Silicon Farming Raw Material

(Suppliers)

Steel Flour Milling Backward

Integration

Integrated Current
Automobiles
Circuits Transformation

Distribution Forward
Circuit Boards
System Integration

Computers
Finished Goods
Dealers Watches Baked Goods
(Customers)
Calculators

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 Keiretsu Network Strategy
¨ Japanese word for ‘affiliated chain’
¨ System of mutual alliances and
cross-ownership
¨ Company stock is held by allied firms
¨ Lowers need for short-term profits
¨ Links manufacturers, suppliers, distributors,
& lenders
¨ ‘Partnerships’ extend across entire supply chain

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 Virtual Company Strategy

¨ Network of independent companies

¨ Linked by technology
¨ PC’s, faxes, Internet etc.
¨ Each contributes core competencies
¨ Typically provide services
¨ Payroll, editing, designing
¨ May be long or short-term
¨ Usually, only until opportunity is met
© 1995 Corel Corp.

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 Vendor Selection Steps

¨ Vendor evaluation
¨ Identifying & selecting potential vendors
¨ Vendor development
¨ Integrating buyer & supplier
¨ Example: Electronic data exchange
¨ Negotiations
¨ Results in contract
¨ Specifies period of agreement, price, delivery
terms etc.

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 Supplier Selection Criteria

¨ Company ¨ Service
¨ Financial stability ¨ Delivery on time
¨ Management ¨ Condition on arrival
¨ Location ¨ Technical support
¨ Product ¨ Training
¨ Quality
¨ Price

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 Negotiation Strategies
¨ Three types:
¨ cost-based price model - supplier opens its books
to purchaser; price based upon fixed clause plus
escalation clause for materials and labor
¨ market-based price model - published price or
index
¨ competitive bidding - potential suppliers bid for
contract

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 Managing the Supply Chain
¨ Postponement – keeps product generic as long as possible
¨ Channel Assembly – sends to distributor individual components and
modules rather than finished goods
¨ Drop Shipping and Special Packaging – supplier will ship to end
consumer rather than to seller
¨ Blanket Orders – a long-term purchase commitment to a supplier for
items that are to be delivered against short-term releases to ship
¨ Standardization – reducing the number of variations in materials and
components
¨ Electronic Ordering and Funds Transfer – “paperless” ordering and
100% material acceptance, payment by “wire”

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 Managing the Supply-Chain -
Other Options

¨ Establishing lines of credit for suppliers

¨ Reducing bank “float”
¨ Coordinating production and shipping
schedules with suppliers and distributors
¨ Sharing market research
¨ Making optimal use of warehouse space
¨ Vendor managed inventories

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 Logistics Management

¨ Integrates all materials functions

¨ Purchasing
¨ Inventory management
¨ Production control
¨ Inbound traffic
¨ Warehousing and stores
¨ Incoming quality control
¨ Objective: Efficient, low cost operations

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 Goods Movement Options

¨ Trucking
¨ Railways
¨ Airfreight
¨ Waterways
¨ Pipelines

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 Benchmarking Supply-Chain
Management
Typical Benchmark
Firms Firms
Number of suppliers 34 5
per purchasing agent
Purchasing costs as 3.3%
percent of purchases .8%

Lead time (weeks) 15 8

Time spent placing an 42 minutes 15 minutes

order

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 Supply-Chain Performance
Compared
Number of suppliers per 34 5
purchasing agent
Purchasing costs as percent of 3.3% 0.8%
purchases
Lead time (weeks) 15 8
Time spent in placing order 42 minutes 15 minutes
Percentage of late deliveries 33% 2%
Percentage of rejected material 1.5% .0001%
Number of shortages per year 400 4

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