Supply Chain Management

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Definition: Supply Chain Management is primarily concerned with the efficient integration of suppliers, factories, warehouses and stores so that merchandise is produced and distributed in the right quantities, to the right locations and at the right time, and so as to minimize total system cost subject to satisfying service requirements. Notice: Who is involved Cost and Service Level It is all about integration
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Supply Chain Management Refers to all the management functions related to the flow of materials from the company’s direct suppliers to its direct customers. Includes purchasing, traffic, production control, inventory control, warehousing, and shipping. Two alternative names: Materials management Logistics management
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Supply Chain Management ---A River

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SCM Improvement Principles

The Seven Principles of Supply Chain Management

§Segment customers based upon service needs §Customize the logistics network
“What Is”

§Listen to the signals of the marketplace and plan
accordingly

“What Can Be”

§Differentiate products closer to the consumer §Source strategically §Develop a supply-chain-wide technology strategy §Adopt channel spanning performance measures

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Conflicting Objectives in the Supply Chain
1. Purchasing  • Stable volume requirements  • Flexible delivery time  • Little variation in mix  • Large quantities 2. Manufacturing  • Long run production  • High quality  • High productivity  • Low production cost

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Conflicting Objectives in the Supply Chain
3. Warehousing  • Low inventory  • Reduced transportation costs  • Quick replenishment capability 4. Customers  • Short order lead time  • High in stock  • Enormous variety of products  • Low prices

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The Bullwhip Effect
“The bullwhip Effect is a major cause of higher costs and “The bullwhip Effect is a major cause of higher costs and inefficiencies in supply chains. It describes how small fluctuations inefficiencies in supply chains. It describes how small fluctuations in demand at the customer level are amplified as orders pass up in demand at the customer level are amplified as orders pass up the supply chain through distributors, manufacturers, and the supply chain through distributors, manufacturers, and suppliers.” suppliers.” “As an example, consider disposable diapers. Babies generally “As an example, consider disposable diapers. Babies generally consume diapers at a more or less consistent rate when consume diapers at a more or less consistent rate when aggregated over a large group of customers. Nevertheless, aggregated over a large group of customers. Nevertheless, order fluctuations invariably become considerably larger as order fluctuations invariably become considerably larger as one moves upstream in this chain.” one moves upstream in this chain.” Consequences of the Bullwhip Effect include excess/ fluctuating Consequences of the Bullwhip Effect include excess/ fluctuating inventories, shortages/stockouts, longer lead times, higher inventories, shortages/stockouts, longer lead times, higher transportation and manufacturing costs, and mistrust between transportation and manufacturing costs, and mistrust between supply chain partners supply chain partners

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The Dynamics of the Supply Chain

Order Size

Customer Demand Distributor Orders Distributor Orders Retailer Orders Retailer Orders

Production Plan Production Plan

Time
Source: Tom Mc Guffry, Electronic Commerce and Value Chain Management, 1998 8

The Dynamics of the Supply Chain

Order Size

Customer Demand

Production Plan Production Plan

Time
Source: Tom Mc Guffry, Electronic Commerce and Value Chain Management, 1998 9

Supply Chain upstream Activities
In most supply chains, the upstream activities respond to forecast, while In most supply chains, the upstream activities respond to forecast, while somewhere on the downstream side the chain waits for orders to be somewhere on the downstream side the chain waits for orders to be placed. Consider these two former fast slogans placed. Consider these two former fast slogans

•“We do it all for you! •“We do it all for you! •“Have it your way •“Have it your way Build to stock

McDonald’s McDonald’s Burger King Burger King

VS Build to Order

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INTEGRATING OPERATIONS MANAGEMENT WITH OTHER FUNCTIONS

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Customer choices introduce complexity product variety, demand uncertainty, variable capacity requirements Mass customization is replacing mass production in many industries There is more opportunity to coordinate activities because of information systems Supply chain management has become a critical aspect of business success
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Classifications of Operation Management
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Productive System
o Process Focused System o Product Focused System o Production to stock/order

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o Service System
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Stagnant personal services Substitutable personal Services Progressive services Explosive services

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SUPPLY CHAIN MANAGEMENT: FROM HENRY FORD TO E-COMMERCE

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Ford motor company did everything from mining to final assembly of its Model T vehicles in the early 1900s allowed coordination of all sequentially related activities for large efficiency gains very difficult to accommodate product variety or make model changes
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SUPPLY CHAIN MANAGEMENT: FROM HENRY FORD TO E-COMMERCE

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Other factors leading to division of supply chains technology, economies of scale, need for focus in operations Supply chain improvements Just in Time (JIT) manufacturing Lean production
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SUPPLY CHAIN MANAGEMENT DECISIONS: CONFIGURATION OF THE SUPPLY CHAIN

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what the product service bundle will include (manufacturing to stock & manufacturing to order what portion of bundle will be outsourced where facilities will be located and capacities what technologies will be used how supplier-customer communications will be handled the expectations to which suppliers and customers will be held
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SUPPLY CHAIN MANAGEMENT DECISIONS: COORDINATION OF THE SUPPLY CHAIN

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determining when to provide products and services and in what quantities ensuring suppliers are able to provide the value required of them setting appropriate levels for capacity, inventory and lead time communicating demand, performance expectations and performance results with suppliers and customers

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SUPPLY CHAIN MANAGEMENT DECISIONS: IMPROVEMENT OF THE SUPPLY CHAIN

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installing Enterprise Resource Planning (ERP) systems or other information technologies streamlining the channels of supply changing technologies or planning systems to improve quality, lead time, cost or service redesigning the product service bundle to make it easier to provide or of greater value to the customer

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Supply-Chain Costs as a Percent of Sales

Industry
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Percent of Sales
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All industry Automobile Food Lumber Paper Petroleum Transportation

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

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Material Costs in Supply-Chain

Wholesale Manufacturin g
31 % 11 % 58 %
8% 9% 83 %

COGS Payroll Other

Material
Dir Wages

Other

Retail
13 % 16 %

COGS Payroll Other
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71 %

Global Supply-Chain Issues

Supply chains in a global environment must be:
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Flexible enough to react to sudden changes in parts availability, distribution, or shipping channels, import duties, and currency rates Able to use the latest computer and transmission technologies to schedule and manage the shipment of parts in and finished products out Staffed with local specialists to handle duties, trade, freight, customs and political issues
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Supply-Chain Strategies

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Plans to help achieve company mission Affect long-term competitive position Strategic options Many suppliers Few suppliers Keiretsu network Vertical integration Virtual company
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Plan

© 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

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Many sources per item Adversarial relationship Short-term Little openness Negotiated, sporadic PO’s High prices Infrequent, large lots Delivery to receiving dock
© 1995 Corel Corp.

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Few Suppliers Strategy

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1 or few sources per item Partnership (JIT) Long-term, stable On-site audits & visits Exclusive contracts Low prices (large orders) Frequent, small lots Delivery to point of use

© 1995 Corel Corp.

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Tactics for Close Supplier Relationships Tactic
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Results

Reduce total number of suppliers Certify suppliers Ask for JIT delivery from key suppliers Involve key suppliers in new product design Develop software linkages to suppliers

Average 20% reduction in 5 years Almost 40% of all companies surveyed were themselves currently certified About 60% ask for this About 54% do this Almost 80% claim to do this About 50% claim this

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Vertical Integration Strategy

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

Iron Ore

Silicon

Farming

Raw Material ( Suppliers ) Backward Integration Current Transformation Forward Integration Finished Goods ( Customers )

Steel Integrated Circuits

Flour Milling

Automobiles

Distribution Circuit Boards System Dealers Computers Watches Calculators Baked Goods

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Vertical Integration Can be Forward or Backward

Vertical Integration
Raw material (suppliers) Backward Integration Current Transformation Forward Integration Finished goods (customers)

Examples of Vertical Integration
Iron ore Steel Silicon Farming Flour Milling

Automobiles Integrated Circuits Distribution System Dealers Circuit boards Computers, watches, calculators

Baked Goods

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Keiretsu Network Strategy

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Japanese word for ‘affiliated chain’ System of mutual alliances and cross-ownership
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Company stock is held by allied firms
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Lowers need for short-term profits

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Links manufacturers, suppliers, distributors, & lenders
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‘Partnerships’ extend across entire supply chain

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Virtual Companies

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Companies that rely on a variety of supplier relationships to provide services on demand. Also known as hollow corporations, or network corporations

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Virtual Company Strategy

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Network of independent companies
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Linked by technology
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PC’s, faxes, Internet etc.

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Each contributes core competencies Typically provide services
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Payroll, editing, designing

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May be long or short-term
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Usually, only until opportunity is met
© 1995 Corel Corp.

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Managing the Supply-Chain

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Options:
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Postponement Channel assembly Drop shipping Blanket orders Invoiceless purchasing Electronic ordering and funds transfer Stockless purchasing Standardization Internet purchasing (e-procurement)
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Managing the Supply-Chain - Other Options

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Establishing lines of credit for suppliers Reducing bank “float” Coordinating production and shipping schedules with suppliers and distributors Sharing market research Making optimal use of warehouse space

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Successful Supply-Chain Management Requires:

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A mutual agreement on goals Trust Compatible organizational cultures

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ORGANIZATION STRUCTURE

SUPPLY CHAIN MANAGEMENT

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GSCM Mission The Gillette Company will be as highly recognised and admired by our customers, shareholders, and employees for Supply Chain performance as we are for our product development and support of global brands. We will become World Class in Planning & Executing Product Delivery from Source to Customer’s Shelf.
© 2001 The Gillett e Company

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ORGA
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Market Distribution Operating Concerns

Market Distribution:
Activities related to providing customer service. Requires performing order receipt and processing, deploying inventories, storage and handling, and outbound transportation within a supply chain. Includes the responsibility to coordinate with marketing planning in such areas as pricing, promotional support, customer service levels, delivery standards, handling return merchandise, and life-cycle support. The primary market distribution objective is to assist in revenue generation by providing strategically desired customer service levels at the lowest total cost.

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Manufacturing Support Operating Concerns

Manufacturing Support:
Activities related to planning, scheduling, and supporting manufacturing operations. Requires master schedule planning and performing work-in-process storage, handling, transportation, and time phasing of components. Includes the responsibility for storage of inventory at manufacturing sites and maximum flexibility in the coordination of geographic and final assemblies postponement between manufacturing and market distribution operations.

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Procurement Operating Concerns

Procurement:
Activities related to obtaining products and materials from outside suppliers. Requires performing resource planning, supply sourcing, negotiation, order placement, inbound transportation, receiving and inspection, storage and handling, and quality assurance. Includes the responsibility to coordinate with suppliers in such areas as scheduling, supply continuity, hedging, and speculation, as well as research leading to new sources or programs. The primary procurement objective is to support manufacturing or resale organizations by providing timely purchasing at the lowest total cost.

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Purchasing

Factors increasing the importance of purchasing today: q Tremendous impact of material costs on profit (6070% of each sales Rupee is paid to material suppliers) q Popularity of just-in-time manufacturing (supply deliveries must be exact in timing, quantity, and quality) q Increasing global competition (growing competition for scarce resources, and a geographically “stretched-out” supply chain)

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Mission of Purchasing
“The mission of purchasing is to sense the competitive priorities necessary for each major product/service (low production costs, fast and on-time deliveries, high quality /services, and flexibility) and to develop purchasing plans for each major product/service that are consistent with operations strategies”
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Mission of Purchasing

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Develop purchasing plans for each major product or service that are consistent with operations strategies: Low production costs Fast and on-time deliveries High quality products and services Flexibility
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Purchasing Management

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Maintain data base of available, qualified suppliers Select suppliers to supply each material Negotiate contracts with suppliers Act as interface between company and suppliers Provide training to suppliers on latest technologies

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Purchasing vs. Procurement

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Purchasing is normally associated with a functional activity Procurement/Sourcing should be viewed as a strategic activity for the business.

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Purchasing vs. Sourcing (cont’d)

Purchasing Mentality
One contract at a time Win-lose Immediate returns Secretive Current needs can be met Lowest purchase price Multiple suppliers Infrequent interaction Criticism Buyer-sales relationship Safety in numbers Quality inspected Inventory as safeguard

Sourcing Mentality
Continual Improvement Win-win Long-term perspective Trusting Strategic fit exists Total cost of ownership Supply-base reduction Frequent interaction Constructive evaluations Cross-functional relationship Safety in knowledge Quality at source Information as safeguard

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Supplier Development Through Procurement

The Marketing Viewpoint Supplier
Marketing Initiative Purchasing Response

Purchaser

The Procurement Viewpoint Supplier
Procurement Initiative Marketing Response 47

Purchaser

Importance of Sourcing
In the average manufacturing firm purchased goods and services account for 55% of every sales Dollar Direct labor costs account for only about 10% of the sales dollar

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Procurement’s Potential Payoff

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Beginning Position Sales $100,000,000 Purchases(55%) 55,000,000 Labor (15%) 15,000,000 Other (22%) 22,000,000 Pre-tax profit (8%) 8,000,000
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Procurement’s Potential Payoff

Reduce purchase cost by 10% Sales Purchases Labor Other Pre-tax Profit
$100,000,000 49,500,000 15,000,000 22,000,000 13,500,000

Increase Reduce labor sales by 68% cost by 36%
$168,000,000 92,400,000 25,200,000 36,960,000 13,440,000 $100,000,000 55,000,000 9,600,000 22,000,000 13,400,000

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Major Categories for the Components of Total Cost of Ownership

Total Cost of Ownership

Pre-transaction Components 1. Identifying need 2. Investigating sources 3. Qualifying sources 4. Adding supplier to internal systems 5. Educating : •supplier in firm’s operations •firm in supplier’s operations

Transaction Components 1. Price 2.Order placement/ preparation 3. Delivery/ transportation 4. Tariffs/ duties 5. Billing/ payment 6. Inspection 7. Return of parts 8. Follow-up and correction

Post-transaction Components 1. Line fallout 2. Defective finished goods rejected before sale 3. Field failures 4. Repair/ replacement in field 5. Customer goodwill/ reputation of firm 6. Cost of repair parts 7. Cost of maintenance and repairs

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Major Trends in Procurement

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Fewer sources of supply will be used Buyers will be more concerned with final customer satisfaction Buyers will focus on “lead supplier” relationships Buyers will drive shorter cycle times Design engineers and buyers will be part of sourcing teams Global sourcing will increase e-procurement will have a major impact-not all of it will be positive for supply chain integration
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buying exchanges auction sites

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E-Chemicals

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Advantages of Centralized Purchasing

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Buying in large quantities - better prices More clout with suppliers - greater supply continuity Larger purchasing department - buyer specialization Combining small orders - less order cost duplication Combining shipments - lower transportation costs Better overall control

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Purchasing Process

Material Requisition Request for Quotations Select Best Supplier Purchase Order Receive and Inspect Goods

From any department, to purchasing From purchasing, to potential suppliers Based on quality, price, lead time, dependability From purchasing, to selected supplier From supplier, to receiving, quality control, warehouse
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Content of Material Requisition
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Requisition no. Requisition date Item master code Description of material or content Used in product Unit of measure Specification Lead time Sourcing data :supplier or producer Mode of transport Economic order lot size (packing unit) Shelf life restriction Material handling requirement (control temperature) Documents to accompany with the material
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Content of Material Requisition Item master code Quality control analysis days (quarantine) Reorder quantity Maximum inventory Standard price Duty and sales tax and other border crossing charges data Clearing agent or mode of transportation while handling locally Certificate of origin Labeling specification Any special handling restriction etc. Required date Authorized signature etc. 57
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Content of Material Requisition

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Item master code Capital goods Equipment, machinery, installation, parts, subassembly Method of delivery Maintenance, pre-post, after sales service, annual preventive, accidental, Financial package, (supplier credit, leasing, consignment sales, wet leasing etc.) Insurance Commissioning, trial,
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Content of quotation- invitation
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Will be address to the enlisted supplier Date of quotation Deadline for the quotation to be received All the details as mentioned on the companies master data Financial and payments procedure Method of payment Term of payment Negotiable documents Companies bankers (L/C, Contract, Usance,) Bullet delivery, or partial shipment allowed Penalty clause Margin or deposit with the tender or bank guarantee Insurance Title of good transfer
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Content of quotation- invitation
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Tentative date of intimation or opening of quotation. Is it a revolving contract or one time delivery Condition for the visit of site Specimen samples Condition for the approval of sample etc. Capital goods Turn key Installation Training After sale service Maintenance contract Free maintenance period Pregnancy period before the delivery Supplier credit Leasing facility etc.
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Selection of supplier –sourcing
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Bench mark for spread sheet analysis Lead time Location of sourcing site Local Imports In-house configuration, Outsourcing Importing in bulk or mix Term offered Price (rupees, usd, euro, sterling) Credit (local L/C, contract, letter of aware ness Loading and unloading Transportation Insurance Freight collect, freight prepaid
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Selection of supplier –sourcing
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Bench mark for spread sheet analysis Term offered (more) Lot size Negotiation documentation charges L/c opening commission on beneficiary accounts Accessibility (quick response, emergency, replenishment Past experience Credibility –financial, data from the contemporaries Maintenance service post delivery After sale service Turn key ---projects Implementation, installation, trial commissioning , etc. Configuration, source key, parachute clause, divorce, notice 62 period etc.
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Purchase order
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Date of order Purchase order number Reference (indent number or confirmation) Maximum detail from item master code. Financial terms Delivery date Method of shipment Lot size Partial shipment Maintenance contract Freight and other charges Margin, advance, guarantee, l/c contract, letter of awareness commitment, other terms and conditions, Documentation required

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Purchase order
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Authorized Any special term (pre-shipment samples, quality control specification, standards,) Validation data Shelf life Guarantee Insurance condition Any special mode of handling Loading unloading Freight etc.
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Allegations of improper Behaviour by Buyer

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In exchange for cash and gifts, allowing supplier to store tools and park vehicles on company property and awarding contracts to suppliers without bidding. Accepting gifts such as expensive perfumery, cloths, dinners, function cards, foreign trips, liquor, gift coupon during festivals and holidays season. Accepting on sharing basis indenting commission within or outside the country Bid rigging, accepting bribes, theft and tax evasion, and accepting large sums of cash.
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Allegations of improper Behaviour by Buyer

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Payment processing on receipt of kickback Approval of product quality on receipt of kickback Accepting less quantity of goods in exchange of bribes Accepting lot of bribes in acceptance enlistment of approved suppliers or contractors Benami Transaction through their own respective companies Opening their own respective buying houses or agency and making the purchases from them.
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Guidelines for Ethical Behaviour in Purchasing

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The National Association for Purchasing Managers (NAPM) has developed a set of three principles and 12 standards to help guide ethical behaviour in purchasing. These are the principles: Loyalty to your organization Justice to those with whom you deal Faith in your profession From these principles are derived the NAPM standards of purchasing practice (domestic and international)
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Guidelines for Ethical Behaviour in Purchasing Avoid the intent and appearance of unethical or compromising practice in relationships, actions, and communications Demonstrate loyalty to the employer by diligently following the lawful instructions of the employer, using reasonable care and only authority granted. Refrain from any private business or professional activity that would create a conflict between personal interests and the interests of the employer Refrain from soliciting or accepting money, loans, credits, or prejudicial discounts, and the acceptance of gifts, entertainment favours, or services from present or potential suppliers that might influence or appear to influence purchasing decisions.
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Guidelines for Ethical Behaviour in Purchasing

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Handle confidential or proprietary information belonging to employers or suppliers with due care and proper consideration of ethical and legal ramifications and governmental regulation Promote positive supplier relationships through courtesy and impartiality in all phases of the purchasing cycle. Refrain from reciprocal agreements that restrain competition Know and obey the letter and spirit of laws governing the purchasing function and remain alert to the legal ramifications of purchasing decisions.
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Guidelines for Ethical Behaviour in Purchasing

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Encourage all segments of society to participate by demonstrating support for small, disadvantaged, and minority-owned businesses. Discourage purchasing involvement in employers sponsored programs of personal purchases that are not business related. Enhance the proficiency and stature of the purchasing profession by acquiring and maintaining current technical knowledge and the highest standards of ethical behavior Conduct international purchasing in accordance with the laws, customs, and practices of foreign countries
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Buyers’ Duties

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Know the market for their commodities Understand the laws.... tax, contract, patent..… Process purchase requisitions and quotation requests Make supplier selections Negotiate prices and conditions of sale Place and follow-up on purchase orders Maintain ethical behavior

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Make-or-Buy Analysis

Considerations in make-or-buy decisions: q Lower cost - purchasing or production? q Better quality - supplier or in-house? q More-reliable deliveries - supplier or in-house? q What degree of vertical integration is desirable? q Should distinctive competencies be outsourced?

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Make/Buy Considerations

Reasons for Making
1. Maintain core competencies and protect personnel from layoff 2. Lower production cost 3. Unsuitable suppliers 4. Assure adequate supply 5. Utilize surplus labor and make a marginal contribution

Reasons for Buying
1. Frees management to deal with its primary business 2. Lower acquisition cost 3. Preserve supplier commitment 4. Obtain technical or management ability 5. Inadequate capacity

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Make/Buy Considerations - Continued

Reasons for Making
6. Obtain desired quantity 7. Remove supplier collusion 8. Obtain a unique item that would entail a prohibitive commitment from the supplier 9. Protect proprietary design or quality 10.Increase or maintain size of company
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Reasons for Buying
6. Reduce inventory costs 7. Ensure flexibility and alternate source of supply 8. Inadequate managerial or technical resources 9. Reciprocity 10.Item is protected by patent or trade secret 11.
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Example: Make-or-Buy

A firm manufactures a product that contains a part requiring heat treatment. An analyst is trying to decide whether it is more economical to buy the heat treating service or perform the treatment in house. Pertinent data is shown on the next slide. If part quality and delivery performance are about the same for the two alternatives, which alternative should be selected?

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Example: Make-or-Buy

 

Purchase

Heat-Treat

Heat-Treat In-House 5,000 $0 $17.50

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Number of parts annually Fixed cost per year Variable cost per part

Service 5,000 $25,000 $13.20

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Example: Make-or-Buy

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Compute the total cost for each alternative TC = FC + vQ TC1 = FC1 + v1Q = 25,000 + 13.20(5,000) = $91,000 TC2 = FC2 + v2Q = 0 + 17.50(5,000) = $87,500 The firm should buy the heat-treating service (the second alternative). continued
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Example: Make-or-Buy

The analyst has assumed that 5,000 parts per year will require heat treatment. By how many parts can the firm’s requirements increase or decrease before in-house heat treating is more economical? Should the analyst rethink his/her decision?

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Example: Make-or-Buy

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Compute the break-even parts quantity FC1 + v1Q = FC2 + v2Q Q = (FC1 - FC2)/(v2- v1) Q = (25,000 – 0)/(17.50 – 13.20) Q = 5,814 If the firm’s annual parts requirement increases by 814 (about 16%) or more, in-house heat treatment would be more economical. The analyst should give the decision more thought.
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   

Logistics

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Logistics usually refers to management of: the movement of materials within the factory the shipment of incoming materials from suppliers the shipment of outgoing products to customers
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Movement of Materials within Factories

The typical locations from/to which material is moved:
Incoming Incoming Vehicles Vehicles Receiving Receiving Dock Dock Quality Quality Control Control Warehouse Warehouse

Work Work Center Center

Other Work Other Work Centers Centers

Packaging Packaging

Finished Finished Goods Goods

Shipping Shipping

Shipping Shipping Dock Dock

Outgoing Outgoing Vehicles Vehicles
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Shipments To and From Factories

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Traffic Traffic departments routinely examine shipping schedules and select: shipping methods time tables ways of expediting deliveries Traffic management is a specialized field requiring technical training in Department of Transportation (DOT) and Interstate Commerce Commission (ICC) regulations and rates.
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Shipments To and From Factories

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Distribution Distribution, or physical distribution, is the shipment of finished goods through the distribution system to customers. A distribution system is the network of shipping and receiving points starting with the factory and ending with the customers.
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Shipments To and From Factories

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Distribution Requirements Planning DRP is the planning for the replenishment of regional warehouse inventories. DRP uses MRP-type logic to translate regional warehouse requirements into central distribution-center requirements, which are then translated into gross requirements in the MPS at the factory.
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Shipments To and From Factories

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Distribution Requirements Planning Scheduled receipts are previously-placed orders that are expected to arrive in a given week Planned receipt of shipments are orders planned, but not yet placed, for the future Projected ending inventory is computed as: Previous week’s projected ending inventory + Planned receipt of shipments in current week + Scheduled receipt of shipments in current week 85 -- Forecasted demand in current week
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Shipments To and From Factories

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DRP Time-Phased Order Point Record
Week -1 1
30 50 60 80 40 10 50 20 50 50 30 50

Region. Warehouse #1 LT = 1 Std. Quantity = 50 SS = 10 Forecasted demand (units) Scheduled receipts Projected ending inventory Planned receipt of shipments Planned orders for shipments

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Example: DRP

Products are shipped from a company’s main distribution center (adjacent to the factory) to two regional warehouses. The DRP records on the next two slides show – for the two regional warehouse – the forecasted demand, scheduled receipts, and last week’s projected ending inventories for a single product. The third upcoming slide shows – for the main distribution center – scheduled receipts and last week’s projected ending inventory for the same product. Complete the DRP records.
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Example: DRP

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DRP Record for Regional Warehouse #1
Week -1 1
80 100 200

Region. Warehouse #1 LT = 1 Std. Quantity = 100 SS = 50 Forecasted demand (units) Scheduled receipts Projected ending inventory Planned receipt of shipments Planned orders for shipments

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100

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Example: DRP

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DRP Record for Regional Warehouse #2
Week -1 1
200 220

Region. Warehouse #2 LT = 2 Std. Quantity = 200 SS = 80 Forecasted demand (units) Scheduled receipts Projected ending inventory Planned receipt of shipments Planned orders for shipments

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100 200 200 240 200

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Example: DRP

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DRP Record for Main Distribution Center
Week -1 1
500 250

Main Distrib. Center LT = 1 Std. Quantity = 500 SS = 200 Gross Requirements (units) Scheduled receipts Projected ending inventory Planned receipt of shipments Planned orders for shipments

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Example: DRP

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Completed DRP Record for Regional Warehouse #1
Week -1 1
80 100 200 220 120 140 100 100 100 80 80 100

Region. Warehouse #1 LT = 1 Std. Quantity = 100 SS = 50 Forecasted demand (units) Scheduled receipts Projected ending inventory Planned receipt of shipments Planned orders for shipments

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Example: DRP

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Completed DRP Record for Regional Warehouse #2
Week -1 1
200 220 320 120 120 200 200 200 80 80 200 200 200

Region. Warehouse #2 LT = 2 Std. Quantity = 200 SS = 80 Forecasted demand (units) Scheduled receipts Projected ending inventory Planned receipt of shipments Planned orders for shipments

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100 200 200 240 200

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Example: DRP

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DRP Record for Main Distribution Center The “gross requirement” ( in row 1) for any week is determined by summing the “planned orders for shipment” for the same week at the two regional warehouses These gross requirements at the MDC are input to the master production schedule in the factory In other words, the timing and quantities of production in the factory are linked to the timing and quantities of demand at the regional warehouses
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Example: DRP

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Completed DRP Record for Main Distribution Center
Week -1 1
500 250 550 250 550 450 450 500 500

Main Distrib. Center LT = 1 Std. Quantity = 500 SS = 200 Forecasted demand (units) Scheduled receipts Projected ending inventory Planned receipt of shipments Planned orders for shipments

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Shipments To and From Factories Shipments To and From Factories
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Distribution Resource Planning Distribution resource planning extends DRP so that the key resources of warehouse space, workers, cash, and vehicles are provided in the correct quantities at the correct times.
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Analyzing Shipping Decisions

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The “Transportation Problem” Problem involves shipping a product from several sources (ex. factories) with limited supply to several destinations (ex. warehouses) with demand to be satisfied Per-unit cost of shipping from each source to each destination is specified Optimal solution minimizes total shipping cost and specifies the quantity of product to be shipped from each source to each destination
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96

Example: Minimizing Shipping Costs

Pacer produces computer monitors in its three factories and ships them to five regional warehouses. The factory-to-warehouse shipping costs per monitor are: Warehouse Factory A B C D E 1 $2.10 $4.30 $3.60 $1.80 2 3 4.90 3.90 2.60 3.60 3.50 1.50 4.50 5.80
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$2.70

3.70

3.30

Example: Minimizing Shipping Costs

The factories have the following capacities (monitors produced per month): 1 = 10,000; 2 = 20,000; and 3 = 10,000. The warehouses need at least these numbers of monitors per month: A = 5,000; B = 10,000; C = 10,000; D = 5,000; and E = 10,000. Use the POM Software Library to solve this transportation problem.

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Example: Minimizing Shipping Costs

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Solution Factory A 1 5,000 2 0 3 $97,500 0 Warehouse B C D E 0 0 5,000 0 10,000 0 0 0 10,000 0 0

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10,000

Total monthly shipping cost = satisfied (Note: all warehouse demand is and no factory’s capacity is
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Innovations in Logistics

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New developments affecting logistics include: All-freight airports Inter-modal shipping In-transit rates Consolidated shipments Air-freight and trucking deregulation Advanced logistics software
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Warehousing

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Warehousing is the management of materials while they are in storage. Warehousing activities include: Storing Dispersing Ordering Accounting
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Warehousing

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Record keeping within warehousing requires a stock record for each item that is carried in inventories. The individual item is called a stock-keeping unit (SKU). Stock records are running accounts that show: On-hand balance Receipts and expected receipts Disbursements, promises, and allocations
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Demand Management

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Review customer orders and promise shipment of orders as close to request date as possible Update MPS at least weekly.... work with Marketing to understand shifts in demand patterns Produce to order..... focus on incoming customer orders Produce to stock ..... focus on maintaining finished goods levels Planning horizon must be as long as the longest lead time item
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End

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