Chapter 11

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Chapter 11

  1. 1. BA 339, OM – Chapter 11 <ul><li>Supply Chain Management (SCM) </li></ul><ul><ul><li>Definition & strategic importance </li></ul></ul><ul><ul><li>Organization structure & SCM </li></ul></ul><ul><ul><li>Functional aspects of the supply chain – </li></ul></ul><ul><ul><ul><li>Purchasing – make/buy, orientation toward suppliers, centralized vs. local, </li></ul></ul></ul><ul><ul><ul><li>Inventory – management/measurement, placement </li></ul></ul></ul><ul><ul><ul><li>Distribution/logistics – inbound/outbound </li></ul></ul></ul><ul><ul><li>Supply chain strategies – many/few, vertical integration, E-procurement </li></ul></ul><ul><ul><li>Supplier evaluation/selection </li></ul></ul><ul><ul><li>Supplier risk assessment/management </li></ul></ul><ul><ul><li>Global supply chain issues </li></ul></ul>
  2. 2. BA 339, OM – Chapter 11 <ul><li>SCM Defined </li></ul><ul><ul><li>“ Integration of the activities that procure materials, transform them into intermediate goods and final products, and deliver them to customers” </li></ul></ul><ul><ul><li>“ Managing the flow of materials and services within a firm” </li></ul></ul><ul><ul><li>Includes: Purchasing, supplier management, warehousing, inventory (raw materials, WIP, finished goods), logistics & distribution, accounts payable/receivable, and forecasting </li></ul></ul><ul><ul><li>Involves coordination of these functions with marketing/sales, engineering, finance, IT, and operations </li></ul></ul>
  3. 3. BA 339, OM – Chapter 11 <ul><li>Strategic Importance of SCM </li></ul><ul><ul><li>Material costs in the supply chain </li></ul></ul><ul><ul><ul><li>58% in mfg.; 83% in wholesale; 71% in retail </li></ul></ul></ul><ul><ul><li>Purchasing cost are significant portion of sales and finished goods </li></ul></ul><ul><ul><ul><li>All industries – 52% </li></ul></ul></ul><ul><ul><ul><li>Automobile – 67% </li></ul></ul></ul><ul><ul><ul><li>Petroleum – 79% </li></ul></ul></ul><ul><ul><ul><li>Food – 60% </li></ul></ul></ul><ul><ul><ul><li>Transportation – 62% </li></ul></ul></ul><ul><ul><li>Purchasing savings have substantial impact upon profitability (relative to increasing sales) > see Table 11.3 on page 436 in text </li></ul></ul><ul><ul><li>Provides competitive advantage via cost, quality, responsiveness & differentiation > see Table 11.1 on page 435 in test </li></ul></ul>
  4. 4. BA 339, OM – Chapter 11 <ul><li>Organization Structure & SCM </li></ul><ul><ul><li>Evolution away from functional “stove pipes” to more integrated approaches (generally purchasing, production control, inventory, and distribution/logistics) </li></ul></ul><ul><ul><li>Materials management – often includes purchasing (mat’l & services), inventory, production levels, schedules, distribution, and staffing patterns </li></ul></ul><ul><ul><ul><li>Also referred to as Logistics Management in more service oriented firms </li></ul></ul></ul><ul><ul><ul><li>Segmented structure – traditional, department organizations such as purchasing, production control and distribution reporting to separate managers </li></ul></ul></ul><ul><ul><ul><li>Integrated structure – incorporates functional groups into a single organization that elevates its manager to a higher level in the firm (director, executive, etc.) </li></ul></ul></ul>
  5. 5. BA 339, OM – Chapter 11 <ul><li>Functional Aspects of the Supply Chain </li></ul><ul><ul><li>Purchasing </li></ul></ul><ul><ul><ul><li>Acquisition of materials, supplies, equipment and services </li></ul></ul></ul><ul><ul><ul><li>5 basic steps: </li></ul></ul></ul><ul><ul><ul><ul><li>Recognize a need – technical handoff </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Evaluate/select suppliers </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Issue/place the order or contract </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Track/manage the order or contract </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Receive the order – inventory/logistics handoff </li></ul></ul></ul></ul>
  6. 6. BA 339, OM – Chapter 11 <ul><li>Purchasing </li></ul><ul><ul><li>E-Commerce/E-procurement </li></ul></ul><ul><ul><ul><li>E-Marketplace </li></ul></ul></ul><ul><ul><ul><ul><li>Competitive marketplace located on the internet; generally formed around common industries such as auto, energy, etc. (vertical); horizontal support MRO & commercial items </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Integration ranges from web-browser based transactions > EDI > integration w/E-P > integration w. ERP system </li></ul></ul></ul></ul><ul><ul><ul><li>E-procurement </li></ul></ul></ul><ul><ul><ul><ul><li>Electronic purchase of goods & services </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Hosted – S/W is located on marketplace; functionality differs based on host locations </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Non-hosted – S/W is located & maintained with the buyer </li></ul></ul></ul></ul>
  7. 7. BA 339, OM – Chapter 11 <ul><li>Purchasing </li></ul><ul><ul><li>E-Commerce/E-procurement </li></ul></ul><ul><ul><ul><li>Auctions </li></ul></ul></ul><ul><ul><ul><ul><li>Forward – seller driven; one seller, many buyers, price rises with time; assets and surplus inventory </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Reverse – buyer driven; one buyer, many sellers, price falls with time; materials & services </li></ul></ul></ul></ul><ul><ul><ul><li>Business case usually required because of capital outlays required for S/W & H/W </li></ul></ul></ul><ul><ul><ul><li>Considerations: core business function/competency, scope, volume, etc. </li></ul></ul></ul>
  8. 8. BA 339, OM – Chapter 11 <ul><li>Reasons for Making </li></ul><ul><ul><li>Lower production costs </li></ul></ul><ul><ul><li>Unsuitable suppliers </li></ul></ul><ul><ul><li>Assure adequate supply </li></ul></ul><ul><ul><li>Utilize surplus labor/facilities </li></ul></ul><ul><ul><li>Obtain desired “Q” </li></ul></ul><ul><ul><li>Remove supplier collusion </li></ul></ul><ul><ul><li>Unique item would require prohibitive commitment for a supplier </li></ul></ul><ul><ul><li>Maintain organizational talent; preclude layoff </li></ul></ul><ul><ul><li>Protect proprietary design </li></ul></ul><ul><ul><li>Increase size of firm </li></ul></ul><ul><li>Reason for Buying </li></ul><ul><ul><li>Lower acquisition cost </li></ul></ul><ul><ul><li>Preserve supplier commitment </li></ul></ul><ul><ul><li>Obtain technical or management ability </li></ul></ul><ul><ul><li>Inadequate capacity </li></ul></ul><ul><ul><li>Reduce inventory costs </li></ul></ul><ul><ul><li>Ensure alternative sources </li></ul></ul><ul><ul><li>Inadequate managerial or technical resources </li></ul></ul><ul><ul><li>Reciprocity </li></ul></ul><ul><ul><li>Item protected by patent or trade secret </li></ul></ul><ul><ul><li>Frees management to deal with primary business </li></ul></ul>
  9. 9. BA 339, OM – Chapter 11 <ul><li>Purchasing </li></ul><ul><ul><li>Orientation toward suppliers </li></ul></ul><ul><ul><ul><li>Competitive (Example – U.S. auto industry) </li></ul></ul></ul><ul><ul><ul><ul><li>Negotiation is a zero-sum game – winner & loser </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Short-term advantages valued over long-term commitment </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Buyer pushes price to survival levels </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Seller pushes for higher price for specific levels of quality, customer services & volume flexibility </li></ul></ul></ul></ul><ul><ul><ul><li>Cooperative (Example – VW facility in Brazil) </li></ul></ul></ul><ul><ul><ul><ul><li>Work together toward common goals; more information sharing; partnership </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Favors few suppliers with 1-2 as the optimal numbers </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Suppliers become extension of buyer </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Fewer transactions lower internal cost; reduction in supply chain reduces cost and complexity </li></ul></ul></ul></ul>
  10. 10. BA 339, OM – Chapter 11 <ul><li>Purchasing </li></ul><ul><ul><li>Centralize vs. local (de-centralized) buying </li></ul></ul><ul><ul><ul><li>Centralized </li></ul></ul></ul><ul><ul><ul><ul><li>Increased purchasing clout (volume) > can lead to better service, better availability, improved development of supplier capability </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Favored by companies w/ overseas suppliers because of specialized skills required (language, international commercial/contract law) and use of info. tech. and internet </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Loss of control at local level can negatively affect responsiveness to customers </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Loss of appreciation of cultural impacts due to limited management experience </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Often have longer lead times, more internal bureaucracy and increase logistics cost </li></ul></ul></ul></ul><ul><ul><ul><li>Compromise – IBM’s centralized purchasing based on local needs. </li></ul></ul></ul>
  11. 11. BA 339, OM – Chapter 11 <ul><li>Functional Aspects - Inventory Management </li></ul><ul><ul><li>Key issues: </li></ul></ul><ul><ul><ul><li>Measurement – average aggregate inventory value, weeks of supply, inventory turnaround (“turns”) </li></ul></ul></ul><ul><ul><ul><li>Location and size of warehouse/distribution centers </li></ul></ul></ul><ul><ul><ul><li>Standardization of materials/suppliers and related handling equipment </li></ul></ul></ul><ul><ul><ul><li>Volume </li></ul></ul></ul>
  12. 12. BA 339, OM – Chapter 11 <ul><li>Functional Aspects - Distribution/Logistics </li></ul><ul><ul><li>Inbound & outbound materials flow </li></ul></ul><ul><ul><li>Inbound sometimes considered as part of purchasing or logistics </li></ul></ul><ul><ul><li>Outbound equated with distribution </li></ul></ul><ul><ul><li>Considerations : </li></ul></ul><ul><ul><ul><li>Placement of finished goods inventory – critical for international operations (customer proximity, customs, etc.) > forward (closer to customers) & backward (centralized – evens out regional demand) </li></ul></ul></ul><ul><ul><ul><li>Selection of transportation mode & carriers </li></ul></ul></ul><ul><ul><ul><ul><li>Truck – 40% of U.S. freight </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Rail – 30% of U.S. freight </li></ul></ul></ul></ul><ul><ul><ul><li>Scheduling/routing must align with purchasing and production schedules </li></ul></ul></ul>
  13. 13. BA 339, OM – Chapter 11 <ul><li>Supply Chain Strategies </li></ul><ul><ul><li>Many suppliers </li></ul></ul><ul><ul><ul><li>Many sources per item </li></ul></ul></ul><ul><ul><ul><li>Adversarial relationship </li></ul></ul></ul><ul><ul><ul><li>Short-term emphasis </li></ul></ul></ul><ul><ul><ul><li>Little openness </li></ul></ul></ul><ul><ul><ul><li>Negotiated, sporadic POs </li></ul></ul></ul><ul><ul><ul><li>High prices </li></ul></ul></ul><ul><ul><ul><li>Infrequent, large lots </li></ul></ul></ul><ul><ul><ul><li>Delivery to receiving dock </li></ul></ul></ul>
  14. 14. BA 339, OM – Chapter 11 <ul><li>Supply Chain Strategies </li></ul><ul><ul><li>Few suppliers </li></ul></ul><ul><ul><ul><li>1 or few sources per item </li></ul></ul></ul><ul><ul><ul><li>Partnership (JIT) </li></ul></ul></ul><ul><ul><ul><li>Emphasis on long-term, stability </li></ul></ul></ul><ul><ul><ul><li>On-site audits visits </li></ul></ul></ul><ul><ul><ul><li>Exclusive contract </li></ul></ul></ul><ul><ul><ul><li>Low prices (large orders) </li></ul></ul></ul><ul><ul><ul><li>Frequent, small lots </li></ul></ul></ul><ul><ul><ul><li>Delivery to point of use </li></ul></ul></ul><ul><ul><li>E-commerce/E-procurement </li></ul></ul><ul><ul><ul><li>Vertical/horizontal marketplace, technology driven </li></ul></ul></ul>
  15. 15. BA 339, OM – Chapter 11 <ul><li>Supplier Evaluation/Selection </li></ul><ul><ul><li>Considerations: </li></ul></ul><ul><ul><ul><li>Alignment with business model, competitive strategy (cost, responsiveness, differentiation), product/service lifecycle, risk strategy & purchasing strategy </li></ul></ul></ul><ul><ul><li>Evaluation models </li></ul></ul><ul><ul><ul><li>Company, product, service </li></ul></ul></ul><ul><ul><ul><ul><li>Financial stability, management, location </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Quality, price </li></ul></ul></ul></ul><ul><ul><ul><ul><li>On-time delivery, condition on arrival, technical support, training </li></ul></ul></ul></ul><ul><ul><ul><li>Technical, business, services </li></ul></ul></ul><ul><ul><ul><ul><li>Design, production, quality </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Procurement, financial, logistics, customer satisfaction </li></ul></ul></ul></ul>
  16. 16. BA 339, OM – Chapter 11 <ul><li>Supplier Risk Assessment/Management </li></ul><ul><ul><li>Risk Assessment </li></ul></ul><ul><ul><ul><li>Act of identifying, classifying, quantifying & analyzing risk </li></ul></ul></ul><ul><ul><ul><li>Components </li></ul></ul></ul><ul><ul><ul><ul><li>Probability – likelihood of some event occurring </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Impact – consequence of that event occurring </li></ul></ul></ul></ul><ul><ul><ul><li>Includes internal and external sources of risk </li></ul></ul></ul><ul><ul><ul><li>Includes qualitative (adjectival) and quantitative (numerical) assessments </li></ul></ul></ul><ul><ul><li>Risk Management </li></ul></ul><ul><ul><ul><li>Act of responding to, controlling, mitigating, influencing, avoiding, sharing, accepting, or diversifying risk </li></ul></ul></ul><ul><ul><ul><li>Implies some method of assessment that can be qualitative or quantitative </li></ul></ul></ul>
  17. 17. BA 339, OM – Chapter 11 <ul><li>Source of Risk in the Supply Chain </li></ul><ul><ul><li>Product – complexity, maturity, criticality, technological maturity, delivery schedule criticality, & performance history </li></ul></ul><ul><ul><li>Process – design/engineering, production/manufacturing, quality </li></ul></ul><ul><ul><li>System – multiple, interlocking systems & sub-systems </li></ul></ul><ul><ul><ul><li>Quality management system </li></ul></ul></ul><ul><ul><ul><li>Logistics systems </li></ul></ul></ul>
  18. 18. BA 339, OM – Chapter 11 <ul><li>Sources of Risk (cont.) </li></ul><ul><ul><li>Financial – lack of capital, poor cash flow, product litigation, inefficient use of assets </li></ul></ul><ul><ul><ul><li>Useful ratios </li></ul></ul></ul><ul><ul><ul><ul><li>Current ratio – ratio of assets to liabilities </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Quick ratio – ratio of cash, marketable securities & accounts receivables to current liabilities </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Return on sales ratio – ratio of net income to net sales </li></ul></ul></ul></ul><ul><ul><ul><ul><li>ROI – (Net operating income/sales) x (Sales/avg. operating assets) </li></ul></ul></ul></ul>
  19. 19. BA 339, OM – Chapter 11 <ul><li>Managing Risk </li></ul><ul><ul><li>Understand your suppliers’/service providers’ supply chain, critical processes and capability </li></ul></ul><ul><ul><li>Define critical suppliers, supply chain processes and critical products/services </li></ul></ul><ul><ul><li>Identify sources of risk or variation in the supply chain </li></ul></ul><ul><ul><ul><li>Cost </li></ul></ul></ul><ul><ul><ul><li>Schedule </li></ul></ul></ul><ul><ul><ul><li>Quality </li></ul></ul></ul><ul><ul><ul><li>Requirements </li></ul></ul></ul><ul><ul><ul><li>Technology </li></ul></ul></ul>
  20. 20. BA 339, OM – Chapter 11 <ul><li>Managing Risk </li></ul><ul><ul><li>Asses & measure risk </li></ul></ul><ul><ul><ul><li>Select & develop a risk methodology based on organizational maturity/capability </li></ul></ul></ul><ul><ul><ul><li>Develop measures based on availability and reliability of data </li></ul></ul></ul><ul><ul><ul><ul><li>Assessment measures can be qualitative or quantitative </li></ul></ul></ul></ul><ul><ul><li>Approaches </li></ul></ul><ul><ul><ul><li>ORCA </li></ul></ul></ul><ul><ul><ul><ul><li>Identify business Objectives </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Identify operations and other Risks </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Define Controls </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Assess Process </li></ul></ul></ul></ul>
  21. 21. BA 339, OM – Chapter 11 <ul><li>SC in a global Environment must be: </li></ul><ul><ul><li>Flexible enough to react to sudden changes in parts availability, distribution, or shipping channels, import duties and currency rates </li></ul></ul><ul><ul><li>Able to use the latest computer and transmission technology to schedule and manage shipment of parts in and finished parts out </li></ul></ul><ul><ul><li>Staffed with local specialists to handle duties, trade, freight, customs, and political issues </li></ul></ul>

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