SUPPLY CHAIN MANAGEMENT

What Operations Managers Do?

10 OM Strategy Decisions:
Design of Goods & Services Managing Quality Process Strategy Location Strategies Layout Strategies Human Resources Supply Chain Management Inventory Management Scheduling Maintenance

10 Decision Areas:
service & product design quality management process & capacity design location layout design human resources & job design supply chain management inventory, MRP, and J-I-T intermediate, short-term, and project scheduling maintenance

Supply Chain Management

Management of integrated activities that procure raw materials transform those materials into intermediate goods and final products deliver the products through a distribution system

SUPPLY CHAIN
Information
SUPPLIERS Materials, Parts, Subassemblies, And service Inventory
Products and Services

PRODUCERS Finished goods, end products, and services Inventory

Products and Services

DISTRIBUTORS Package and Delivery Inventory

Products and Services

CUSTOMERS Total satisfaction with quality, price, delivery and service

Cash Supply Chain is the sequence of organizations their facilities, functions, and activities that are involved in producing and delivering a product or service from suppliers (or their suppliers) to customers (and their customers).

FACILITIES
warehouses factories processing centers distribution centers retail outlets offices

FUNCTIONS and ACTIVITIES

forecasting purchasing inventory management information management quality assurance scheduling production distribution delivery customer service

SUPPLY CHAIN

Sometimes referred to as Value Chain, a term that reflects the concept that value is added as goods and services progress through the chain. Comprised of separate business organizations, rather than just a single organization. Has two (2) components for each organization: 1) a supply component 2) a demand component

Supplier

SUPPLY CHAIN
Storage MFG Storage Distributor Retailer Customer

Supplier

Supplier

SUPPLY COMPONENT

DEMAND COMPONENT

The supply component starts at the beginning of the chain and ends with the internal operations of the organization. The demand component of the chain starts at the point where the organizations output is delivered to its immediate customer and ends with the final customer in the chain. The demand chain is the sales and distribution portion of the value chain The length of each component depends on where a particular organization is in the chain: the closer the organization is to the final customer, the shorter its demand component and the longer its supply component.

MANUFACTURING SUPPLY CHAIN

Supplier
S t o r a g e S t o r a g e S t o r a g e

Supplier

MFG

Distributor

Retailer

CUSTOMER

Supplier

SERVICE SUPPLY CHAIN

Supplier
S t o r a g e

SERVICE

CUSTOMER

Supplier

Supply and Demand Components

Tier 2 Suppliers Tier 1 Suppliers PRODUCER Distributor CUSTOMER

The Supply Chain

All organizations, regardless of where they are in

the chain, must deal with supply and demand issues. The goal of SCM is to link all components of the supply chain so that market demand is met as efficiently as possible across the entire chain.
This requires matching supply and demand at each

stage of the chain. Except for the beginning supplier(s) and the final customer(s), the organizations in a supply chain are both customers and suppliers.

The Supply Chain

Supplier Market research data Scheduling information Engineering & design data Order flow & cash flow Supplier Ideas & design to satisfy the end customer Material flow Credit flow Manufacturer Inventory Supplier Inventory Distributor Customer

Customer

Inventory

Customer

Inventory

The supply chain includes all the interactions between suppliers, manufacturers, distributors, and customers. The chain includes, transportation, scheduling information, cash & credit transfers, as well as ideas, designs, and material transfers.

Supply Chain Management

Includes determining the following: 1) transportation vendors 2) credit & cash transfers 3) suppliers 4) distributors & banks 5) accounts payable & receivable 6) warehousing and inventory levels 7) order fulfillment 8) sharing customer, forecasting & production information

SUPPLY CHAIN MANAGEMENT (SCM)

means managing the flow of goods and services and information through the supply chain in order to attain the level of synchronization that will make it more responsive to customer needs while lowering costs. has the goal of linking all components of the supply chain so that market demand is met as efficiently as possible across the entire chain. Keys to effective SCM are: o Information o Communication o Cooperation o Trust o Supplier partnering

Supply Chain Management

The idea is to build a chain of suppliers

that focus on both

Reducing waste, and Maximizing value to the ultimate customer

Activities of Supply Chain managers cut

across the disciplines of

Accounting Finance Marketing operations

Need for Supply Chain Management

1.

2.
3. 4.

5.
6. 7. 8.

Need to improve operations Increasing levels of outsourcing Increasing transportation costs Competitive pressures Increasing globalization Increasing importance of e-commerce Complexity of supply chains Need to manage inventories

Supply Chain Management

As firms strive to increase their competitiveness via STRATEGIES: Product customization High quality Differentiation Cost reductions Low-cost Speed-to-market Response

added emphasis was placed on the

The key to effective supply-chain management is
Supply Chain

to make the suppliers PARTNERS in the firms strategy to satisfy an ever-changing marketplace.

Supply chains in a global environment must be:

Flexible enough to react to sudden changes in

GLOBAL SUPPLY CHAIN ISSUES

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, customer, and political issues

SUPPLY CHAIN ISSUES

STRATEGIC ISSUES Design of the supply chain Partnering
Inventory policies Purchasing policies Production policies Transportation policies Quality policies Quality Control Production Planning & Control

TACTICAL ISSUES

OPERATING ISSUES

PERFORMANCE MEASURES
Perspective
RELIABILITY

Metrics
On-time delivery Order fulfillment lead time Fill rate Perfect order fulfillment

FLEXIBILITY
EXPENSES

Supply chain response time Upside production flexibility

Supply chain management cost Warranty cost as a % of revenue Value added per employee Total inventory days of supply Cash-to-cash cycle time Net asset turns

ASSETS/UTILIZATION

PURCHASING
The supply chain receives so much attention because

Purchasing is the most costly activity in most firms Illustration:

SALES - VC - FC PROFIT
Purchases (50%) Other VC (24%)

$ 100 (50) (24) (24) $ 2 =====

$ 103.85 (51.93) (24.92) (24.00) $ 3.00 =======

$ 100 (49) (24) (24) $ 3.00 =====

Through a $3.85 of additional sales, profit increased by $1, from $2 to $3. The same increase in margin could have been obtained by reducing purchasing costs by $1.

 is critical to supply chain efficiency because it is the

PURCHASING

job of purchasing to

Select suppliers Establish mutually beneficial relationships with them

its goal is to develop and implement purchasing plans

for products and services that support operations strategies. among its duties are

Identifying sources of supply Negotiating contracts Maintaining a database of suppliers Obtaining goods & services that meet or exceed operations requirements in a timely and cost-efficient manner Managing suppliers

PURCHASING
cost & quality of cost & quality of goods & services goods & services SOLD PURCHASED

Effective Purchasing Strategy

Purchasing is the acquisition of goods & services Objectives of Purchasing are:

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
1.

Purchasing takes place in both manufacturing and service environments

Purchasing in Manufacturing Environments

PURCHASING AGENT - a person with legal authority to
execute purchasing contracts on behalf of the firm

BUYERS
- perform all the activities of the purchasing department EXCEPT contract signing

EXPEDITERS
- assist buyers in following up on purchases to ensure TIMELY DELIVERY

Purchasing function is supported by

1) 2)

3)

Product engineering drawings & specs Quality control documents Testing activities that evaluate the purchased items

Purchasing in Service Environments

In many service environments, purchasings

role is DIMINISHED because the primary product is an intangible one (ex. Legal and medical organizations) In transportation and restaurants, the purchasing function is CRITICAL In wholesale and retail segment of services, purchasing is performed by a BUYER who is a purchaser RESPONSIBLE for the SALE OF and PROFIT ON merchandise that will be resold.

PURCHASING INTERFACES
Legal

Operations

Accounting

Purchasing

Data Processing

Suppliers Receiving

Design

Begins with a request from within the organization to purchase material, equipment, supplies, or other items from outside the organization Ends when the purchasing department is notified that a shipment has been received in satisfactory condition Main steps are:
1. 2. 3. 4. 5.

PURCHASING CYCLE

Purchasing receives the requisition Purchasing selects a supplier Purchasing places the order with a vendor Monitoring orders Receiving orders

ROLES OF PURCHASING
VALUE ANALYSIS examination of the function of purchased parts and materials in an effort to reduce cost and/or improve performance. MAKE or BUY choosing between producing a component or a service in-house or advantageously purchasing it form an outside source VENDOR SELECTION - a decision regarding who to buy materials from, considering numerous factors, such as inventory and transportation costs, availability of supply, delivery performance, and quality of suppliers SUPPLIER MANAGEMENT includes vendor analysis, supplier audits, supplier certification, supplier relationships and supplier partnerships

 MAKE or BUY Role is to evaluate alternative suppliers and provide current, accurate, complete data relevant to the buy alternative. Wholesale/Retail PURCHASES SALES Manufacturing, Restaurants, and Assemblers PURCHASES (components & subassemblies)

ROLES OF PURCHASING

PRODUCTION

SALES (final products)

Outsourcing

Buying goods or services from outside sources

rather than making or providing them in-house Reasons:

Ability of outside source to provide materials, parts or services better, cheaper, or more efficiently Patents, expertise & knowledge of the supplier Gives more flexibility to the organization (downsizing)

Risks: Loss of control Greater dependency on suppliers Loss of ability to perform in-house

Deciding Factors in Outsourcing

Cost to do it in-house versus cost to buy, including startup costs, versus cost to outsource 2. Stability of demand and possible seasonality 3. Quality available from suppliers compared with a firms own quality capabilities 4. Desire to maintain close control of operations 5. Idle capacity available within the organization 6. Lead times for each alternative 7. Who has patents, expertise, and so on, if these are factors 8. Stability of technology (if technology is changing, it may be better to use a supplier) 9. Degree to which the necessary operations are consistent with, or in conflict with current operations 10. Strategy
1.

Example No.1 : Make or Buy Decision

Choose which alternative is better. Analyze the following data to determine the total annual cost of making and of buying. Expected Annual Volume Variable cost per unit Annual fixed costs Make 20,000 units $ 5.00 $30,000 Buy 20,000 units $ 6.00 -

Solution: Total Annual Cost = Fixed Cost + VC/unit x annual volume Make : $ 30,000 + ($5 x 20,000) = $130,000 Buy : 0 + ($6 x 20,000) = $120,000 Buying is the better alternative because it would save $10,000 a year.

Example No.2 : Make or Buy Decision

Given the following data, determine the total annual cost of making and of buying. Estimated demand is 10,000 units a year.
Make Process A Process $ 50 $ 52 $ 40,000 $ 36,000 Buy__ $51 $ 2

Variable cost per unit Annual fixed cost Transportation cost per unit SOLUTION:

Variable Cost $500,000 $520,000 $510,000 Fixed Cost 40,000 36,000 Transportation Cost 20,000 Total Annual Cost $540,000 $556,000 $530,000 ====== ====== ====== Buying is the best alternative with the lowest total annual cost

REASONS for MAKING Lower production cost Unsuitable suppliers Assure adequate supply (quantity or delivery) Utilize surplus labor or facilities and make a marginal contribution Obtain desired quality Remove supplier collusion Obtain unique item that would entail a prohibitive commitment for a supplier Maintain organizational talents and protect personnel from a layoff Protect proprietary design or quality Increase or maintain size of company (management prerogative)

Outsourcing

REASONS for BUYING Lower acquisition cost Preserve supplier commitment Obtain technical or management ability Inadequate capacity Reduce inventory costs Ensure alternative sources Inadequate managerial or technical resources Reciprocity Item is protected by a patent or trade secret Frees management to deal with its primary business

ROLES OF PURCHASING
VALUE ANALYSIS
MAKE or BUY DECISION VENDOR SELECTION a decision regarding who to buy materials from considers numerous factors:
inventory and transportation costs

availability of supply
delivery performance quality of suppliers

outstanding operations requires excellent vendors

3 Stages of Vendor Selection

1. Vendor Evaluation Involves finding potential vendors and determining the likelihood of their becoming good suppliers Requires development of evaluation criteria, such as:

financial strength quality management research technical ability potential for a close long-term relationship

Weights depending upon the needs of the organization

3 Stages of Vendor Selection

2. Vendor Development Ensures integration of the supplier into a firms system and the appreciation by the vendor of its

Quality requirements Engineering changes Schedules and delivery Procurement policies Payment system

May include everything from training, to engineering & production help, to formats for electronic information transfer Purchasing policies address issues such as percent of business done with any one supplier or with minority businesses

3 Stages of Vendor Selection

3. Negotiations Negotiation strategies are approaches taken by purchasing personnel to develop contractual relationships with suppliers They are of 3 classic types:
1) Cost-Based Price Model 2) Market-Based Price Model 3) Competitive Bidding

Negotiations / Determining Prices

1)

2)

3)

Cost-Based Price Model : requires that the supplier open its books to the purchaser. The contract price is then based on time and materials, or on a fixed cost with an escalation clause to accommodate changes in the vendors labor and materials cost. Market-Based Price Model : price is based on a published price or index. Paperboard and nonferrous metals prices, for instance, are published in weekly industry magazines. Competitive Bidding : is common for large orders of standard products and services; is a typical policy in many firms for the majority of their purchases.

Requires to have several potential suppliers of the product (or its equivalent) Sends requests for bids, asking vendors to quote a price for a specified quantity and quality of the items

Centralized Versus Decentralized Purchasing

CENTRALIZED PURCHASING
Means that purchasing is handled by one special department Takes advantage of quantity discounts offered on large orders Obtains better service and closer attention from suppliers Enables companies to assign certain categories of items to specialists

DECENTRALIZED PURCHASING
Means that individual departments or separate locations handle their own purchasing requirements Has the advantage of awareness of differing local needs and being better able to respond to those needs. Offers quicker response than centralized purchasing Can save on transportation costs by buying locally, where locations are widely scattered

Myths Concerning Purchasing

Negotiation is a win-lose confrontation.

Purchasing negotiations should not be viewed as a winlose game; it can be a win/win game

The main goal is to obtain the lowest possible price.

It must be realized that contractors and suppliers need

a reasonable profit to survive.

Each negotiation is an isolated transaction.

Purchasing must work towards partnering so each

negotiation is a step in developing long-term relationships and therefore not as an one-off deal.

Principles

Ethics in Purchasing

Loyalty to employer Justice to those you deal with Faith in your profession

Standards of Purchasing Practice

1.

2. 3.
4. 5. 6.

Avoid appearance of unethical or uncompromising practice Follow the lawful instructions of your employer Refrain from private activity that might conflict with the interest of your employer Refrain from soliciting or accepting gifts, favors, or services from present or potential suppliers Handle confidential or proprietary employer or supplier information with due care Practice courtesy and impartiality in all aspects of your job

Ethics in Purchasing

Standards of Purchasing Practice

7. 8. 9. 10. 11. 12.

Refrain from reciprocal agreements that constrain competition Know and obey the letter and spirit of laws governing purchasing Demonstrate support for small, disadvantaged, and minority-owned businesses Discourage involvement in employer-sponsored programs of non-business, personal packages Enhance the profession by maintaining current knowledge and the highest ethical standards Conduct international purchasing in accordance with the laws, customs, and practices of foreign countries, but consistent with the laws of the your country, your organizations policies, and these guidelines

SUPPLIER MANAGEMENT
Vendor Analysis Supplier Audits Supplier Certification Supplier Relationships
Supplier Partnerships

Strategic Partnerships

Vendor Analysis

SUPPLIER MANAGEMENT

Evaluating the sources of supply in terms of price,

quality, the suppliers reputation, past experience with the supplier and after-sales service Other factors that can be used in evaluation are flexibility
(in handling changes in schedules, design and quantity), location, leadtimes & on-time delivery, and other

accounts

Supplier Audits
Are a means of keeping current on suppliers production

capabilities, quality and delivery problems and resolutions, and performance on other criteria Are also an important first step in supplier certification programs

SUPPLIER MANAGEMENT
Supplier Certification
Is a detailed examination of the policies and capabilities of

a supplier Verifies that a supplier meets or exceeds the requirements of the buyer Is generally important in supplier relationships, but is particularly important in seeking to establish long-term relationships with suppliers

Supplier Relationships
Type of relationship depends on length of a contract
Short-term contracts involve competitive bidding Medium-term contracts often involve ongoing relationships Long-term contracts often evolve into partnerships

Keeping good relations with suppliers is increasingly

recognized as an important factor in maintaining a competitive advantage.

Supplier Relationships

SUPPLIER MANAGEMENT
More and more business organizations are seeking to establish partnerships with other organizations in the supply chain This implies
a) b) c) d)

Supplier Partnerships

Fewer suppliers Longer-term relationships Sharing of information (forecasts, sales data, problem alerts) Cooperation in planning Higher quality Increased delivery speed and reliability Lower inventories Lower costs Higher profits Improved operations

Benefits are
a) b) c) d) e) f)

Strategic Partnerships are those that convey strategic benefits to

one or both partners who have the potential for helping them grow their own businesses.

LOGISTICS
The movement of materials and information within a facility and to incoming and outgoing shipments of goods and materials
Movement within a facility movement of materials must be coordinated to arrive at the appropriate destination at appropriate times Traffic Management overseeing the shipment of incoming and outgoing goods Evaluating shipping alternatives need to make a choice between rapid (but more expensive) shipping alternatives and slower (but less expensive) alternatives

Purchasing may be combined with various warehousing and inventory activities to form a materials management system Purpose is to obtain efficiency of operations through the

MATERIALS MANAGEMENT

integration of all material acquisition, movement, and storage activities

Emphasis is placed on MM when the transportation and inventory costs are substantial on both the input and output sides of the production process Potential for competitive advantage is found via both reduced costs and improved customer service Recognizing that distribution of goods to and from the firms facilities can represent as much as 25% of the cost of the products, there is a need to evaluate their means of distribution (trucking, railroads, airfreight, waterways or pipelines)

SUPPLY CHAIN STRATEGIES

1. Many Suppliers 2. Few Suppliers

3. Vertical Integration
4. Keiretsu Networks 5. Virtual Companies

SUPPLY CHAIN STRATEGY

1. Many Suppliers
Traditional American approach of negotiating with many

suppliers and playing one supplier against another

The supplier responds to the demands and specifications of

a request for quotation (RFQ) with the order usually going to the low bidder Suppliers aggressively competing with one another Places the burden of meeting the buyers demands on the supplier Holds the supplier responsible for maintaining the necessary technology, expertise, and forecasting abilities, as well as cost, quality, and delivery competence Not long-term: partnering relationships are NOT the goal

SUPPLY CHAIN STRATEGY

2. Few Suppliers

Implies that rather than looking for short-term attributes, such as low cost, a buyer is better off forming a long-term relationship with a few dedicated

suppliers.

a) b)

Using few suppliers

Are more likely to understand the broad objectives of the procuring firm and the end customer Can create value by allowing customers to have

economies of scale learning curve

) that yield both lower transaction costs ) and lower production costs

Few suppliers (with large commitment to buyer) may also be more than willing to
a) b)

Participate in JIT systems Provide innovations & technological expertise

SUPPLY CHAIN STRATEGY

2. Few Suppliers

Most important factor : TRUST between suppliers and buying companies

alignment of cultures commitment of resources

) )

that foster both formal & informal contact

toward advancing the relationship Strengthening the partnership

Buyers

Results:

Incorporate suppliers in the supply system ) contracts that extend thru Choose suppliers even before parts are designed ) the products life cycle Place added emphasis on quality & reliability ) more efficient ) reduced prices over time

Downsides
Cost of changing parts is huge (so both buyer and supplier run the risk of being captives of the other) Risk of poor supplier performance Concern about trade secrets and suppliers that make other alliances or venture out on their own (ex. US Schwinn Bicycle Co. taught Taiwans Giant Mfg. Co.)

SUPPLY CHAIN STRATEGY

Developing the ability to produce goods or services previously

3. Vertical Integration

purchased or actually buying a supplier or distributor. Can take the form of FORWARD or BACKWARD integration
Vertical Integration Raw Material (suppliers) Backward Integration Current Transformation Iron ore Silicone

Examples of Vertical Integration

Farming

Steel Automobiles

Integrated Circuits Circuit Boards Computers Watches Calculators

Flour Milling

Forward Integration

Finished goods (customers)

Distribution system Dealers

Baked goods

SUPPLY CHAIN STRATEGY

3. Vertical Integration
Can offer opportunities or advantages in: Cost reduction ) work best when the organization Quality adherence ) has a large market share, or the Timely delivery ) management talent to operate Scheduling flexibility ) an acquired vendor successfully Dangerous for firms in industries undergoing

technological change if management cannot

keep abreast of those changes, or invest the financial resources necessary for the next wave of technology

SUPPLY CHAIN STRATEGY

4. Keiretsu Networks
integration
Many large Japanese manufacturers have found a middle

ground between purchasing from few suppliers to vertical

These manufacturers are often the financial supporters of

suppliers through ownership or loans

keiretsu

The supplier then becomes part of a company coalition, known as the

Members of the keiretsu

assured of long-term relationships, and therefore expected to function

as partners provide technical expertise and stable quality production to the manufacturer can also have suppliers down the chain, making second- or even thirdtier suppliers part of the coalition

SUPPLY CHAIN STRATEGY

5. Virtual Companies

Because vertical integration locks in an organization into

businesses that it may not understand or be able to manage, another strategy is to find good flexible suppliers
Takes away complications brought about by specialization and changing technology Addresses issues of being too bureaucratic having a division

Develops virtual companies that use suppliers on an

as-needed basis

Doing payroll; hiring personnel Designing products Manufacturing components Conducting tests Distributing products Providing consulting services

SUPPLY CHAIN STRATEGY

5. Virtual Companies
companies that rely on a variety of supplier

relationships to provide services on demand Also known as hollow corporations or network

companies

Have fluid, moving organizational boundaries that

allow them to create a unique enterprise to meet changing market demands Relationships may be ST or LT and may include:

true partners collaborators able suppliers subcontractors

} } } }

whatever formal relationship, the result can be exceptionally LEAN PERFORMANCE

SUPPLY CHAIN STRATEGY

Advantages include

5. Virtual Companies
specialized management expertise low capital investment flexibility speed

Traditional Example : APPAREL BUSINESS

Designer of clothes seldom manufacture their designs
They rather license the manufacture rent a loft lease sewing machines contract labor Result: low overhead flexibility speed-to-market

SUPPLY CHAIN STRATEGY

Contemporary Example : SEMICONDUCTOR INDUSTRY exemplified by Visioneer (in Palo Alto, CA)

5. Virtual Companies

subcontracts almost everything software written by several partners hardware manufactured by a silicone subcontractor PCBs made in Singapore Plastic cases made in Boston where units are tested and packed for shipment In virtual companies, the Purchasing function is demanding and dynamic

OPTIMIZING the SUPPLY CHAIN

SUPPLIER SELLER DISTRIBUTION CONSUMER RM Suppliers Prod Whse Distributors Customers sources VALUE CREATION

Postponement

Channel Assembly

Drop Shipping and Special Packaging

Blanket Orders Stockless Purchasing Standardization Electronic Ordering and Funds Transfers Internet Purchasing

1.

OPTIMIZING the SUPPLY CHAIN

POSTPONEMENT :
withholding/delaying any modifications or customization to the product as long as possible in the production process

Example: Dell Computers modified its printer by moving out the power supply into a power cord (generic printers)

Manufacture and centralized inventories of generic printers for shipment as demand change Unique power system and documentation at the final distribution point

2.

CHANNEL ASSEMBLY : a variation of postponement;

postpones final assembly of a product so the distribution channel can assemble it; sends individual components & modules, rather than FG, to the distributor, who then assembles, tests, and ships.

Treats distributors more as manufacturing partners than as distributors Technique is successful in industries where products undergo rapid change such as PCs FG inventory is reduced, market response is better, with lower investment (nice combination in business) Examples: IBM, HP, Compaq

OPTIMIZING the SUPPLY CHAIN

3. DROP SHIPPING & SPECIAL PACKAGING :
means the supplier will ship directly to the end customer, rather than to the seller saving both time and reshipping costs. Other costsaving measures include the use of special packaging, bar coding & labeling; beneficial to wholesalers & retailers by reducing shrinkage (lost, damaged or stolen merchandise) and handling costs. Dell Computers core competence is not in stocking peripherals, but in assembling PCs.

4. BLANKET ORDERS : a long-term purchase

commitment to a supplier for items that are to be delivered against short-term releases to ship
Are unfilled orders with a vendor; not an authorization to ship anything until the receipt of an agreed-upon document, perhaps a shipping requisition or shipment release

5. STOCKLESS PURCHASING : means that a

supplier delivers materials directly to the purchasers using department rather than to a central stockroom.

OPTIMIZING the SUPPLY CHAIN

6. STANDARDIZATION : reducing the number of
variations in materials and components as aid to cost reduction Rather than obtaining a variety of similar components with labeling, coloring, packaging or slightly different engineering specifications, the purchasing agent should try to have the components standardized

7. ELECTRONIC ORDERING & FUNDS

TRANSFER : reduces paper transactions, consisting of

purchase order, purchase release, a receiving document, authorization to pay an invoice and finally the issuance of a check

Speeds up the traditionally long procurement cycle

OPTIMIZING the SUPPLY CHAIN

7. ELECTRONIC ORDERING & FUNDS

TRANSFER :

Electronic Data Interchange a standardized data transmittal format for computerized communications between organizations (order date, due date, quantity, part #, P.O. #, address, and so forth) Advanced Shipping Notice (ASN) a shipping notice delivered directly from vendor to purchaser

OPTIMIZING the SUPPLY CHAIN

8. INTERNET PURCHASING

also known as e-procurement Order releases communicated over the Internet or approved vendor catalogues available on the Internet for use by employees of the purchasing firm Takes 2 forms:
a)

b)

First, Internet Purchasing may just imply that the Internet is used to communicate ORDER RELEASES to the suppliers (items for which a blanket P.O. exists) Second, for non-standard items, for which there is no blanket P.O., CATALOGUES and ORDERING PROCEDURES enhance the communication features of the Internet

Lends itself to comparison shopping, rapid ordering, and

reduction of inventory

Liked by suppliers because on-line selling means they are getting closer to their customers May be a part of an integrated ERP system (order release, not only tells the supplier to ship, but also updates the appropriate portions of the ERP system)

1.

2.

3. 4.

5.

Develop strategic objectives and tactics. These will guide the process. Integrate and coordinate activities in the internal portion of the chain. This requires (1) overcoming barriers caused by functional thinking that lead to attempts to optimize a subset of a system rather than the system as a whole, and (2) transferring data and coordinating activities. Coordinate activities with suppliers and with customers. This involves addressing supply and demand issues. Coordinate planning and execution across the supply chain. This requires a system for transferring data across the supply chain and allowing access to data to those engage in operations to which it will be useful. Consider the possibilities of forming strategic partnerships.

CREATING AN EFFECTIVE SUPPLY CHAIN

Barriers to Integration of Separate Organizations Getting CEOs, Board of Directors, Managers, and Employees Onboard Dealing with Trade-offs
1. 2. 3. 4. 5.

CHALLENGES

Lot size-inventory trade-off Inventory-transportation cost trade-off Lead time-transportation cost trade-off Product variety-inventory trade-off Cost-customer service trade-off

Small Businesses Variability and Uncertainty Long Lead Times

PERFORMANCE DRIVERS
1. 2. 3.

Cost Quality Flexibility

Refers to the ability to adjust to changes in order quantities but also in product or service

requirements
4.

Velocity
Inventory velocity the rate at which inventory
(material) goes through the supply chain Information velocity the rate at which information (two-way flow) is communicated in a supply chain

5.

Customer Service