CL 11 Supply Chain Part 1 CH 11 S 20

IENG 343
PRODUCTION/INVENTORY
CONTROL
SUPPLY CHAIN MANAGEMENT

PART 1 CLASS 11
Spring Term 2020
Mr. Kenton Colvin
WEST VIRGINIA UNIVERSITY

INDUSTRIAL AND MANAGEMENT SYSTEMS ENGINEERING
TENTATIVE EXAM & PROJECT SCHEDULE
• Project 1 Due – Tuesday, February 4
• Project 2 Due – Tuesday, February 18
• Mid-Term Exam – Thursday, February 27
• Project 3 Due – Thursday, March 5
• Project 4 Due – Thursday, April 2
• Exam 2 – Thursday, April 16
• Project 5 Due – Thursday, April 23
• Final Exam – Thursday, May 7 (8-10 AM)

PROJECT 1 – TOP 7 COMPANIES S - 20
AVERAGE = 77% RANGE = 48-96%
1) 95% - Oregon Wood Products
2) 90% - ART LLC
3) 89% - Morgantown Magnolia

3) 89% - Riverhog Woodworking
4) 85% - Working Supply Co.
5) 84% - Rec-Rooms-R-US
6) 82% - Custom Finish Works

6) 82% - Weapons of Mass Construction
7) 81% - Homepile

STRATEGIC IMPORTANCE
OF THE SUPPLY CHAIN
• Supply-chain management is the integration
of the activities that procure (purchase)
materials and services, transform them into
intermediate goods and the final product,
and deliver them to customers
• Our focus will be on the procurement

(purchasing side) of Chapter 11.

SUPPLY-CHAIN MANAGEMENT
Important activities include determining

1. Transportation vendors
2. Credit and cash transfers
3. Suppliers
4. Distributors and banks
5. Accounts payable and receivable
6. Warehousing and inventory
7. Order fulfillment
8. Sharing customer, forecasting, and production
information

A SUPPLY CHAIN
Figure 11.1
Supply Logistic and
distribution
management management
• Quality, price, • Transportation modes
delivery timing • Warehouse
• Relationship Operations management management
management • Demand management • Inventory positioning
• Evaluation • Inventory control • Customer relationship
• Certification • Lean systems management
• Development • Quality systems • Distribution network
• Risk • Production technology
management • Warehouse management
• Purchasing
Integration & Coordination
Performance Measurement

ILLUSTRATIVE EXAMPLE OF A NEW
REALITY
Source: McKinsey analysis

Source: adapted from McKinsey, 2012

Global sourcing
Firms compete against global rivals and their supply chains .
But to compete globally

companies need to source …
Hence, global sourcing

systems.
Important: this applies to

service, manufacturing and
business processes alike.
Technology has been the great

catalyst for efforts such efforts.
Source: Bernardes and Fensterseifer, 2004

GLOBAL SUPPLY-CHAIN ISSUES
 Unreliable distribution systems

 Tariffs and quotas
 Political risk
 Currency risk

GLOBAL SUPPLY-CHAIN ISSUES
Supply chains in a global environment
must be able to:
 React to sudden changes in parts availability,
distribution, or shipping channels, import duties,
and currency rates
 Use the latest computer and transmission
technologies to schedule and manage the
shipment of parts in and finished products out
 Staff with local specialists who handle duties,
freight, customs and political issues
SUPPLY-CHAIN ECONOMICS
Supply Chain Costs as a Percent of Sales
Industry % Purchased
All industry ?
Automobile
Food
Lumber
Paper
Petroleum
Transportation
Table 11.2
SUPPLY-CHAIN ECONOMICS
Purchased Parts Costs as a Percent of Sales
Industry % Purchased
All industry 52
Automobile 67
Food 60
Lumber 61
Paper 55
Petroleum 79
Transportation 62
Table 11.2
Product Structure Cherry Wood Lamp - Part Number KRC10
L
0 KRC10
(1) M

1 TOPCAP POST1 WAX10 LPSH1 LPKIT KRC20 GLUE1 BRAD1 BRACE
(1) M (1) M (4 oz)P (1) P (1) P (1) M 2.5 oz P (8) P (4) M

2 WOOD10 POST2 GLUE1 MIDPT TPBS1 BTBS1 FELT10 GLUE1 SCREW8 WOOD40
(3.25) (2) M (4 oz) P (4) M (1) M (1) M (4) M 1.5 oz (4) P (1 in) P
in P P

3 SIDE1 GLUE1 WOOD20 WOOD30 WOOD30 FELT20
(4) M (5 oz) P (2.25 in) P (10 in) P (10 in) P (4 sq.in.)
P

4 WOOD20
Each POST2
(5 in) P Requires 4
SIDE1
Kenton Colvin Replacement Part is Part Number KRC20
From Class 2 lecture WEST VIRGINIA UNIVERSITY

Bill of Material - indented (UC=M+L+OH) Labor = $18hr
Part No. Description QTY UOM M/P M L OH UC LT C-LT MIN Lab/min
KRC10 Finished Lamp 1 ea M $99.06 $9.00 $4.32 $112.38 2 8 30 $0.30
LPSH1 Lamp Shade 1 ea P $7.96 $7.96 4 0
LPKIT Lamp Kit 10" 1 ea P $7.53 $7.53 4 0
TOPCAP Top Cap Finished 1 ea M $0.65 $3.00 $1.44 $5.09 2 10 $0.30
WOOD10 Wood 3/4" X 3.25" 3.25 in P $0.20 $0.20 2 0
P0ST1 Wood Post Finished 1 ea M $41.78 $3.00 $1.44 $46.22 1 10 $0.30
POST2 Wood Post 2" x 2" 2 ea M $13.60 $2.40 $1.15 $17.15 1 8 $0.30
GLUE1 Wood Glue 6 oz P $0.08 $0.08 2 0
SIDE1 Post Side 2" x 5" 4 ea M $1.50 $1.20 $0.58 $3.28 1 4 $0.30
WOOD20 Wood 1" x 2" 5 in P $0.30 $0.30 1 0
MIDPT Side Connector 1"x2"x3" 4 ea M $0.90 $0.60 $0.29 $1.79 1 2 $0.30
WOOD20 Wood 1" x 2" 3 in P $0.30 $0.30 1 0
GLUE1 Wood Glue 4 oz P $0.08 $0.08 2 0
KRC20 Base Assembly Fin 1 ea M $14.40 $4.20 $2.02 $20.62 2 6 14 $0.30
TPBS1 Top Base Part Wood 1 ea M $1.70 $3.00 $1.44 $6.14 1 10 $0.30
WOOD10 Wood 1" x 3" 10 in P $0.17 $0.17 1 0
BTBS1 Bottom Base Part Wood 1 ea M $1.70 $3.00 $1.44 $6.14 1 10 $0.30
WOOD30 Wood 1" x 3" 10 in P $0.17 $0.17 2 0
FELT10 Felt Cut 2" x 2" 4 ea M $0.04 $0.30 $0.14 $0.48 1 1 $0.30
FELT20 Felt 1/4" x 36" x 60 ft 4 sq. in. P $0.01 $0.01 3 0
GLUE1 Wood Glue 1.5 oz P $0.08 $0.08 2 0
SCREW8 Wood Screw #8 x 1 in 4 ea P $0.02 $0.02 1 0
BRACE Base Support 4 ea M $0.25 $1.50 $0.72 $2.47 1 5 $0.30
WOOD40 Wood 3/4" x 2 1/2" 1 in P $0.25 $0.25 2 0
WAX10 Wax 4 oz P $0.35 $0.35 3 0
GLUE1 Wood Glue 2.5 oz P $0.08 $0.08 1 0
BRAD1 Brad 1" nails 8 ea P $0.02 $0.02 1 0
OH% = 48% CHERRY WOOD LAMP WEST VIRGINIA UNIVERSITY

WOOD20 PURCHASED PART QUANTITY
• 5 WOOD20 per SIDE1
• 4 SIDE1 per POST2
• 2 POST2 per POST1
• 1 POST1 per KRC10
• Therefore: total for one KRC10 through this leg = 5 * 4 * 2 * 1 = 40
• 2.25 inches WOOD20 per MIDPT

• 4 MIDPT per POST1
• 1 POST1 per KRC10
• Therefore: total for one KRC10 through this leg = 2.25 * 4 * 1 = 9
• Total inches WOOD20 required to make KRC10 = 40 + 9 = 49 inches
• Total cost WOOD20 for 1 KRC10 = 49 in. * $0.30/in. = $14.70

PROJECT 3 TOTAL PURCHASED PARTS EX: KRC10
P Parts Quantity Used UC Total Calculate
LPSH1 1 $7.96 $7.96
LPKIT 1 $7.53 $7.53
WOOD10 3.25 $0.20 $0.65
WOOD20 49 $0.30 $14.70 5*4*2*1 + 2.25*4*1
WOOD30 20 $0.17 $3.40 10+10
WOOD40 4 $0.25 $1.00 1*4
FELT20 16 $0.01 $0.16 4*4
SCREW8 4 $0.02 $0.08
WAX10 4 $0.35 $1.40
BRAD1 8 $0.02 $0.16
GLUE1 18 $0.08 $1.44 5*2 + 2.5 + 4 +1.5
Total P Costs $38.48

PURCHASED COSTS % KRC10
PROJECT 3
• Purchased Total Costs = $38.48
• UC = $112.38
• Total Purchased Parts as a % of UC =
$38.48/$112.38 = .463 = 34.2%
• SP = $136.56
• Total Purchased Parts as a % of SP =
$38.48/$136.56 = .282 = 28.2%

TO GET $1 MORE PROFIT ON $100 YOU
NEED TO SELL $3.85 MORE @ 2% MARGIN
Sell 100 Change to 1%
dollars with more
% UC = 74% 1,000,000
Total Sales sales Units
Sales 100.00 3.85 103.85
Material
Suppliers 50.00 1.93 51.93 0.5 $3.85 $38,461.54
VC (L & OH) 24.00 0.92 24.92 0.24
Profit 2.00 1.00 3.00
Fixed 24.00 0.00 24.00
Total 100.00 103.85 .74
Profit margin
= .02 3.85

Sell 100 dollars Change to 1%
with more
% UC = 74%
0.06 Total Sales sales 1,000,000
Sales 100.00 3.57 103.57
Material
Suppliers 50.00 1.79 51.79 0.5 $3.57 $35,714.29
VC (L & OH) 22.00 0.79 22.79 0.22
Profit 6.00 1.00 7.00
Fixed 22.00 0.00 22.00
Total 100.00 103.57 .72
Profit margin = .
06 3.57
Sell 100 dollars Change to 1%
with more
% UC = 74%
0.10 Total Sales sales 1,000,000
Sales 100.00 3.33 103.33
Material
Suppliers 50.00 1.67 51.67 0.5 $3.33 $33,333.33
VC (L & OH) 20.00 0.73 20.73 0.2
Profit 10.00 1.00 11.00
Fixed 20.00 0.00 20.00
Total 100.00 103.40 .70
Profit margin
= .10 3.33
DOLLARS OF ADDITIONAL SALES NEEDED
TO EQUAL 1$ SAVED THROUGH
PURCHASING
Percent of Sales Spent for Purchases
Firm's 30% 40% 50% 60% 70% 80% 90%
Percent
Net
Profit
2 $2.78 $3.23 $3.85 $4.76 $6.25 $9.09 $16.67
4 $2.70 $3.13 $3.70 $4.55 $5.88 $8.33 $14.29
6 $2.63 $3.03 $3.57 $4.35 $5.56 $7.69 $12.50
8 $2.56 $2.94 $3.45 $4.17 $5.26 $7.14 $11.11
10 $2.50 $2.86 $3.33 $4.00 $5.00 $6.67 $10.11

PURCHASING
Purchasing Activity – or what is purchasing:

The acquisition of goods and services.

The objective of the purchasing activity is:
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.
Why buy something in the first place?

MAKE/BUY CONSIDERATIONS
Reasons for Buying
• 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
• Cannot make the part

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

PURCHASING TERMS
 Postponement: Delaying any modification to a
product as long as possible in the production
process.
 Channel Assembly: postponing final assembly
of a product so the distribution channel can
assemble it. Ex: Bike – assembled at
distribution center or a selling store.
 Drop shipping: (different than book) an
exception to normal shipping to a seller or
distributer in that the manufacturing company
will ship directly to the customer. This is done
usually at the request of the seller.

PURCHASING TERMS
 RFQ: When purchasing requirements are
nonstandard, time spent preparing requests
for quotes (RFQ) can the bid package can be
substantial.
 Vendor managed inventory: A system in
which a supplier maintains material for the
buyer, often delivering to the buyer’s using
department. Also, known as Consignment
Inventory. Note: in this case the vendor
actually owns the material until it is delivered
to the purchaser.

PURCHASING
Purchasing agent: a person with legal authority to

(sign) and execute purchasing contracts on behalf of
the firm.

The Purchasing Agent is used mostly in a
manufacturing environment. The Purchasing Agent
would have Buyers (who represent the purchasing
department in all capacities but do not sign legal
contracts other than purchase orders) and Expeditors
(who assist buyers in following up on suppliers to
ensure timely delivery.
MEASURING SUPPLY CHAIN
MANAGEMENT– BENCHMARKING
• See Table 11.5 438 It is very important to
understand that you are measuring something in
your company that you can control and compare
your measurement to typical companies and more
importantly to your competitors.
• The supply chain includes all the activities from

procurement of raw materials, inventory,
manufacturing, and shipping of products to
customers.

MEASURING SUPPLY CHAIN
MANAGEMENT BENCHMARKING
Typical firms and competitors (GTE Baseline study
handout GTEMPS) – Example measurements:
1. Inventory Accuracy
2. Time spent placing orders
3. BOM accuracy
4. LT
5. % late deliveries
6. % rejected material
7. Number of shortages per given time frame
Next Step: setup a company strategy to improve your
measurement.

BENCHMARK - PROJECT 3
• Benchmark your company against your major competitor that you
setup in SWOT homework and compare against that competitor.
• Pick 2 measures (2 partners) and 3 measures (3 partners).
• Measurements are in numbers such % of on-time shipments, etc.
• Compare your measurements to those measurements of your major
competitor (not similar firms).
• Pick one of your measurements (making sure that your company is
not as good as your competitor).
• Explain how your company uses benchmarking to identify the
problem.
• Give your company strategy (critical success factor that you plan
to do to make improvements to this particular measurement up to or
to exceed your competitor).

MANAGING THE SUPPLY CHAIN
There are significant management issues in

controlling a supply chain involving many
independent organizations. Success depends on:
 Mutual agreement on goals

 Trust
 Compatible organizational cultures

MANAGING THE SUPPLY CHAIN
Utilizing the “Blanket Order” requires:

 Long-Term Commitment (usually a
year or more).
 Signed Agreement or Contract is
necessary
 Scheduled Order Releases

BLANKET ORDER EXAMPLE
PROJECT 3
The Piedmont Co. issues a “Blanket Order” for a two-
year agreement to purchase Part ABC1 from the Hass
Corporation. Unit Cost = $14 and annual usage is
steady at 48,000 parts/year.
 Monthly usage is 48,000/12 = 4,000 parts
 Order Release = 3 month supply
 Each order release quantity = 3 * 4,000 parts =
12,000 parts.
 The Hass Corporation after shipping the release
of 12,000 parts would give an invoice to the
Peidmont Co. for $14 * 4,000 * 3 = $168,000
 What is SP for the Hass Corporation =

BLANKET ORDER EXAMPLE
PROJECT 3
The Piedmont Co. issues a “Blanket Order” for a two-
year agreement to purchase Part ABC1 from the Hass
Corporation. Unit Cost = $14 and annual usage is
steady at 48,000 parts/year.
 Monthly usage is 48,000/12 = 4,000 parts
 Order Release = 3 month supply
 Each order release quantity = 3 * 4,000 parts =
12,000 parts.
 The Hass Corporation after shipping the release
of 12,000 parts would give an invoice to the
Peidmont Co. for $14 * 4,000 * 3 = $168,000
 What is SP for the Hass Corporation = $14


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IENG 343

SUPPLY CHAIN MANAGEMENT

Spring Term 2020

Mr. Kenton Colvin

WEST VIRGINIA UNIVERSITY

• Project 2 Due – Tuesday, February 18

• Mid-Term Exam – Thursday, February 27

• Project 3 Due – Thursday, March 5

• Project 4 Due – Thursday, April 2

• Exam 2 – Thursday, April 16

• Project 5 Due – Thursday, April 23

• Final Exam – Thursday, May 7 (8-10 AM)

2) 90% - ART LLC

3) 89% - Morgantown Magnolia

4) 85% - Working Supply Co.

6) 82% - Custom Finish Works

WEST VIRGINIA UNIVERSITY

• Our focus will be on the procurement

WEST VIRGINIA UNIVERSITY

Important activities include determining

WEST VIRGINIA UNIVERSITY

WEST VIRGINIA UNIVERSITY

Source: McKinsey analysis

WEST VIRGINIA UNIVERSITY

WEST VIRGINIA UNIVERSITY

But to compete globally

Hence, global sourcing

Important: this applies to

Technology has been the great

Source: Bernardes and Fensterseifer, 2004

WEST VIRGINIA UNIVERSITY

 Unreliable distribution systems

WEST VIRGINIA UNIVERSITY

Kenton Colvin Replacement Part is Part Number KRC20

From Class 2 lecture WEST VIRGINIA UNIVERSITY

OH% = 48% CHERRY WOOD LAMP WEST VIRGINIA UNIVERSITY

• 2.25 inches WOOD20 per MIDPT

• Total inches WOOD20 required to make KRC10 = 40 + 9 = 49 inches

• Total cost WOOD20 for 1 KRC10 = 49 in. * $0.30/in. = $14.70

WEST VIRGINIA UNIVERSITY

WEST VIRGINIA UNIVERSITY

WEST VIRGINIA UNIVERSITY

WEST VIRGINIA UNIVERSITY

10 $2.50 $2.86 $3.33 $4.00 $5.00 $6.67 $10.11

WEST VIRGINIA UNIVERSITY

Purchasing Activity – or what is purchasing:

Why buy something in the first place?

WEST VIRGINIA UNIVERSITY

WEST VIRGINIA UNIVERSITY

WEST VIRGINIA UNIVERSITY

WEST VIRGINIA UNIVERSITY

WEST VIRGINIA UNIVERSITY

Purchasing agent: a person with legal authority to

• The supply chain includes all the activities from

WEST VIRGINIA UNIVERSITY

WEST VIRGINIA UNIVERSITY

WEST VIRGINIA UNIVERSITY

There are significant management issues in

 Mutual agreement on goals

WEST VIRGINIA UNIVERSITY

Utilizing the “Blanket Order” requires:

WEST VIRGINIA UNIVERSITY

 What is SP for the Hass Corporation =