08 BSCM v5.0

Basics of Supply Chain Management
Session 8
Purchasing and Physical
Distribution
APICS Certified in Production and Inventory Management (CPIM)
8©• APICS
1 ©Confidential and Proprietary
APICS Confidential and Proprietary
Basics of Supply Chain Management
1. 2. 3. 4. 5.
Capacity
Introduction to Material Management
Demand Master
Supply Chain Requirements and
Management Planning Production
Management Planning
Activity Control
Aggregate Purchasing Lean and

Item Inventory and Physical Theory of
Inventory Quality
Management Distribution Constraints
Management Systems
6. 7. 8. 9. 10.
8•2 © APICS Confidential and Proprietary

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 (VMI).
− 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 (DRP).
− 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 and
Physical Distribution
Purchasing

Purchasing for Industry
 Purchasing in an industrial or 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.
− Controls are needed to ensure sound quality and
pricing.
− 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 and
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, including
• 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
• Color or pattern samples
• The famous phrase “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:

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

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

Purchasing Cycle Steps 1 and 2
 Step 1: Generate requisition

− Review requisition (paper or electronic), which
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
 Supplier agreements facilitate the purchase of

manufacturing materials on a time-phased basis.
 Contract buying enables the release of orders
against schedules and quantities found in blanket
purchase orders or long-term contracts.
 Contract buying can be triggered by MRP or visual
signals.

Monitor Supplier Performance
Continuous improvement
Supplier Buyer
Supplies
product
Supplier
performance
Feedback
metrics
(scorecard)

Session 8
Purchasing and

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

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

Global Distribution
 Global distribution is the movement of goods to and

from locations around the world.
− Results from lower manufacturing costs in other
nations and ability of manufacturers to supply a global
market
− Requires consideration of distance, language, culture,
currency, measurement, lead time, tariffs, and
regulatory compliance
− Requires knowledge of global supply systems and
international business practices
Source: Arnold et al., Introduction to Materials Management, 7th ed. Reprinted by Permission of Pearson Education

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

physical distribution planning and execution:
Physical characteristics Inventory Market geography Product volume
Order winning product carrying cost
Distribution Location of demand
characteristics
channels
Order qualifying product Demand fluctuations
characteristics (speed, cost, Sales channels
quality, and so on)
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 and Finance
 Production
− Distribution costs and factory location
− High service level of supply necessary
− Replenishment of distribution inventory
 Finance: Inventory levels
 Total cost concept

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 $190 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 $7,980 $380
Total cost $8,980 $7,880

Other Influences: Distribution Channels
Central
supply
Private or common carrier
Distribution channel
Regional
Companies or individuals that distribution
center
participate in the flow of
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
Purchasing and
Distribution Inventory

Distribution Inventory
Markets and customers
Distribution Distribution
center center
Central
Factory
supply
Distribution Distribution
center center

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

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
Schd. Receipts
DC A 400 1 week
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
Purchasing and
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.

Reverse Logistics
 Supply chain for the reverse flow of products for

return, repair, remanufacture, or recycling
 Two categories of reverse logistics:
− Asset recovery: return of products
− Green logistics: responsibility of supplier to dispose of
packaging or environmentally sensitive materials
 Growth of reverse supply chain planning and
outsourcing

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

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
 Provides speedy service over long distances

 Uses passenger aircraft as well as freight aircraft
 Can go anywhere there is a suitable landing strip
 Has high cost
 Is suitable for high-value, low-weight cargo and for
emergency items

Water Transportation
 Low operating costs per ton-mile

 Slow and usually not door-to-door
 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
P I
I I G
P N N N
E Local A Full load A Local
E
R pickup L Long distance L delivery E

Shipping Costs
 Line-haul costs depend on the distance moved.

 Pickup and delivery costs depend on the number of
pickups and weight.
 Terminal handling costs depend on the number of
times a shipment is handled, loaded, and unloaded.
 Billing and collecting costs 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
Purchasing and
Warehousing

Role of Warehousing
 Facilitate the throughput of products from inbound to

outbound transportation.
 Reduce transportation costs. Why??
 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 and

Receiving shipping
Flow-through
Put-away Picking Packaging
Conventional
Post-mfg
Storage services

Stock Location Systems
 Fixed location systems

 Floating (random) location systems

Public Versus 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 is not great enough to warrant the cost of
a private warehouse

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 VMI.
− 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 DRP.
− 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 and
Wrap-Up and Homework

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

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

APICS Certified in Production and Inventory Management (CPIM)

Aggregate Purchasing Lean and

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 or business environment

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

Purchasing Activities and

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

8 • 20 © APICS Confidential and Proprietary

8 • 21 © APICS Confidential and Proprietary

 Supplier agreements facilitate the purchase of

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

8 • 25 © APICS Confidential and Proprietary

8 • 26 © APICS Confidential and Proprietary

 Global distribution is the movement of goods to and

8 • 27 © APICS Confidential and Proprietary

Product Price Place Promotion

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

8 • 28 © APICS Confidential and Proprietary

8 • 29 © APICS Confidential and Proprietary

8 • 30 © APICS Confidential and Proprietary

8 • 31 © APICS Confidential and Proprietary

Should the company ship by air?

8 • 32 © APICS Confidential and Proprietary

8 • 33 © APICS Confidential and Proprietary

8 • 34 © APICS Confidential and Proprietary

8 • 35 © APICS Confidential and Proprietary

8 • 36 © APICS Confidential and Proprietary

 To provide the required level of customer service

8 • 37 © APICS Confidential and Proprietary

 Alternative distribution inventory planning systems:

8 • 38 © APICS Confidential and Proprietary

8 • 39 © APICS Confidential and Proprietary

 Each distribution center orders from central supply

8 • 40 © APICS Confidential and Proprietary

 All forecasting and order decisions are made