Operations Management

Supply-Chain Management Chapter 11

11-1

Outline
Strategic Importance of the Supply-Chain.
Supply-Chain Strategies. Purchasing & Acquisition.

Logistics & Materials Management.

11-2

Supply-Chain Management
Management of integrated activities that

procure materials, transform them into final products, and

deliver them to customers.

Involves everyone in the supply-chain.

Example: Your suppliers supplier.

11-3

The Supply-Chain
VISA

Material Flow

Credit Flow

Supplier

Supplier

Manufacturing

Retailer

Consumer

Supplier Order Flow

11-4

Wholesaler Schedules Cash Flow

Retailer

Integration
Integrates operations, logistics, marketing, accounting and finance. Manage:
Transportation. Suppliers. Warehousing and distribution. Inventory levels. Information sharing. $ and credit transfers. Order fulfillment.

11-5

Supply-Chain Trends
Global sourcing and markets.

Need local expertise to handle duties, trade, freight, customs and political issues.

Flexibility to react to sudden changes in parts availability, distribution, or shipping channels, import duties, and currency rates. Information technology to manage storage and transportation networks.
11-6

Supply-Chain Strategies
How best to work with upstream suppliers and downstream distributors and customers.

To manage procurement, transportation, inventory, warehousing, distribution, etc.

Outsourcing:
Logistics activities (transportation, delivery, inventory, etc.). Information systems. Accounting and payroll.

Vertical integration.
11-7

Vertical Integration
Produce a good or service previously purchased.
Forward (towards customers) or backwards (towards supplier.). Develop the capability independently or buy a firm.

Advantages:
May be less expensive than buying. Provides more control.

Disadvantages:

Can be expensive. Hard to do all things well.

11-8

Forms of Vertical Integration

Raw Materials
Iron Ore Silicon

Steel
Integrated Circuits

Backward Integration
Current Transformation

Automobiles

Distribution System

Circuit Boards Computers Watches Calculators 11-9

Forward Integration
Finished Goods

Dealers

Purchasing & Acquisition

Acquisition of goods & services.
Activities:

Decide whether to make or buy.

Identify sources of supply.

Select suppliers & negotiate contracts. Control vendor performance. Major cost center. Affects quality of final product.
11-10

Importance:

Purchasing Costs as a Percent of Sales

Industry
All industry Automobile Food Lumber Paper Petroleum Transportation
11-11

Percent of Sales
52% 61% 60% 61% 55% 74% 63%

Make/Buy Considerations
Reasons for Making
Lower cost to produce. Unsuitable suppliers.

Reasons for Buying

Lower cost to buy. Preserve supplier commitment. Obtain technical or management ability. Inadequate capacity. Item is protected by patent or trade secret. Frees management to deal with its primary business.

Poor quality. Price too high. Item not available.

Utilize surplus labor. Protect proprietary design. Increase/maintain size of company.

11-12

Supplier Strategies
Negotiate with many suppliers; play one supplier against another.
Negotiated, sporadic small purchase orders. Adversarial relationship with little openness.

Work with few suppliers and develop long-term partnering arrangements.

Exclusive long-term contracts with large orders (and lower prices). Long-term, stable relationship.
11-13

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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Vendor Selection Criteria

Company criteria

Service criteria

Financial stability. Management. Location.

Delivery on time. Condition on arrival.

Technical support.
Training.

Product criteria

Quality.
Price.

11-15

Vendor Selection Rating Form

11-16

Negotiation Strategies
Cost-based price model.

Supplier opens its books to purchaser.

Price based on fixed cost plus escalation clause for materials and labor. Price based on published price or index.

Market-based price model.

Competitive bidding.

Potential suppliers bid for contract.

11-17

Logistics & Materials Management

All transportation and storage activities for origin or to consumption. Integrates:

Purchasing. Inventory management. Production control. Inbound and outbound transportation. Warehousing and stores. Incoming quality control.
11-18

Operations Management
E-Commerce and Operations Management Supplement 11
11-19

Outline
Electronic Commerce. E-commerce Definitions.
B2B B2C C2C C2B

E-Procurement
11-20

E-Commerce
The use of computer networks, primarily the internet, to buy and sell products, services, and information.

11-21

E-Business
all about cycle time, speed, globalization, enhanced productivity, reaching new customers and sharing knowledge across institutions for competitive advantage.
Louis Gerstner,

Chairman, IBM

11-22

E-Commerce Definitions
Business-to business (B2B) - Both sides of the transaction are businesses, non-profit organizations, or governments. Business-to-consumer (B2C) - Customers are individual consumers. Consumer-to-consumer (C2C) - Consumers sell directly to each other. Consumer-to-business (C2B) - Individuals sell services or goods to businesses.
11-23

E-Procurement
On-line purchasing link buyers and sellers electronically.

Catalogs. Auctions. Internet trading exchanges:

Covisint: By auto industry (buyer). Example: Spare freight capacity.

11-24

Spot purchasing.