Slides of Quality assurance

1. Supply Chain Management

2. Introduction
• Supply chain management is the integration of the
activities that procure materials and services, transform
them into intermediate goods and final products, and
deliver them through a distribution system
• A supply chain consists of the flow of products and services
from:
• Raw materials manufacturers
• Component and intermediate manufacturers
• Final product manufacturers
• Wholesalers and distributors and
• Retailers
• Connected by transportation and storage activities, and
• Integrated through information, planning, and integration activities

3. The objective is to build a chain of suppliers that
focuses on maximizing value to the ultimate
customer

4. Strategic Importance of SCM
Competition is no longer between companies; it is between supply chains
Effective SCM develops suppliers as partners for better strategy execution
Supports operations strategy: different strategies require different SCM
orientations
Builds competitive advantage for the company
Limits or eliminates Bullwhip Effect
Eliminates the Supply Chain Risks
• Process risks, control risks and environmental risks

5. How Supply Chain Decisions
Impact Strategy
Low-Cost Strategy Response Strategy Differentiation
Strategy
Supplier’s
goal
Supply demand at
lowest possible
cost
Respond quickly to
changing
requirements and
demand to
minimize
stockouts (e.g.,
Dell Computers)
Share market
research; jointly
develop products
and options
Primary
selection
criteria
Select primarily for
cost
Select primarily for
capacity, speed,
and flexibility
Select primarily for
product
development
skills

6. How Supply Chain Decisions
Impact Strategy
Low-Cost Strategy Response
Strategy
Differentiation
Strategy
Process
characteri
-stics
Maintain high
average utilization
Invest in excess
capacity and
flexible
processes
Modular
processes that
lend themselves
to mass
customization
Inventory
charact-
eristics
Minimize inventory
throughout the
chain to hold down
cost
Develop
responsive
system with
buffer stocks
positioned to
ensure supply
Minimize
inventory in the
chain to avoid
obsolescence

7. How Supply Chain Decisions Impact
Strategy
Low-Cost Strategy Response Strategy Differentiation
Strategy
Lead-time
charact-
eristics
Shorten lead time as
long as it does not
increase costs
Invest aggressively to
reduce production
lead time
Invest aggressively to
reduce development
lead time
Product-
design
charact-
eristics
Maximize
performance and
minimize costs
Use product designs
that lead to low setup
time and rapid
production ramp-up
Use modular design to
postpone product
differentiation as
long as possible

8. Bullwhip Effect(Whiplash effect/Forrester effect)
It refers to the increasing swing in inventory in response to shifts in
customer demand as we move further up the supply chain.
If the demand from customers for a product or service increases
slightly, the demand from retailers will increase even more, similarly
the demand from distributors to manufacturers to suppliers.
This Phenomenon of variability magnification as we move from the
customer to the producer in the supply chain is often referred to as the
bullwhip effect.
Bullwhip effect results in accumulation of inventory in various stages.

10. Supply Chain Risk
More reliance on supply chains means more
risk
Fewer suppliers increase dependence
Compounded by globalization and logistical
complexity
Vendor reliability and quality risks
Political and currency risks

11. Effective supply chain help mitigate and
react to disruptions(risks) in
1. Processes(raw material and component
availability, quality and logistics)
2. Controls(reliable and secure communication
for financial transaction, product designs
and logistics control)
3. Environment( tariffs, natural disaster,
political risk)

12.  Reducing risk in supply chains examples
 Process risk: McDonald planned its supply chain 6 years
in advance of its opening in Russia. Creating $60 million
‘food town’. It developed independently owned supply
plants in Moscow.
 Ford’s process risk reduction strategy is to develop a
global network of few but exceptional suppliers who will
provide the lowest cost and highest quality. Reduced 700
number of suppliers to 227.

13. Darden Restaurants reduced control risk by
implementing extensive controls, including third party
audits, on supplier processes and logistics to ensure
constant monitoring and reductions of risk.
Hard Rock Café has reduced the environmental
(political) risk by franchising and licensing rather than
owning.
To reduce environmental risk, Toyota, after its
experience with fire and earthquakes, has moved to
reduce environmental (natural disaster) risk with a policy
of having at least two suppliers for each component)

14. Supply-Chain Strategies
 Negotiating with many suppliers
 Long-term partnering with few
suppliers
 Vertical integration
 Keiretsu
 Virtual companies that use
suppliers on an as needed basis

15. A. Many Suppliers
 Commonly used for commodity
products
 Purchasing is typically based on
price
 Suppliers are pitted against one
another
 Supplier is responsible for
technology, expertise, forecasting,
cost, quality, and delivery

16. B. Few Suppliers
 Buyer forms longer term relationships
with fewer suppliers
 Create value through economies of
scale and learning curve
improvements
 Suppliers more willing to participate in
JIT programs and contribute design
and technological expertise
 Cost of changing suppliers is huge

17. C. Vertical Integration
 Developing the ability to produce goods or
service previously purchased
 Integration may be forward, towards the
customer, or backward, towards suppliers
 Can improve cost, quality, and inventory but
requires capital, managerial skills, and
demand
 Risky in industries with rapid technological
change

18. C. Vertical Integration
Figure 11.2
Raw material
(suppliers)
Iron ore Silicon Farming
Backward
integration
Steel
Current
transformation
Automobiles
Integrated
circuits
Flour milling
Forward integration
Distribution
systems
Circuit boards
Finished goods
(customers) Dealers
Computers
Watches
Calculators
Baked goods
Vertical Integration Examples of Vertical Integration

19. D. Keiretsu Networks
 A middle ground between few suppliers and
vertical integration
 Supplier becomes part of the company
coalition
 Often provide financial support for suppliers
through ownership or loans
 Members expect long-term relationships and
provide technical expertise and stable
deliveries
 May extend through several levels of the
supply chain

20. E. Virtual Companies
 Rely on a variety of supplier relationships to
provide services on demand
 Fluid organizational boundaries that allow
the creation of unique enterprises to meet
changing market demands
 Exceptionally lean performance, low capital
investment, flexibility, and speed

21. Vendor Selection
Vendors are the suppliers of the firm.
Vendors need to be selected for purchases goods and
services from them.
Vendor selection involves consideration of strategic fit,
vendor competence, delivery and quality performance, etc.
Vendor Selection involves three stages.
Negotiations
Vendor
Development
Vendor Evaluation

22. 1. Vendor evaluation
Critical decision
Find potential vendors
Determine the likelihood of them becoming good
suppliers
2. Vendor Development
Training
Engineering and production help
Establish policies and procedures

23. Broad Criteria for Vendor Selection
•The suppliers can be selected using following three broad
criteria
• Price
• Selecting a supplier who can supply the materials at lowest prices.
• Quality
• Selecting those suppliers who can consistently supply the products
as per the specifications of the final product.
• Delivery
• Selecting one who can supply the right items in right quantity in right
time.
• Environmental Impact
• Green purchasing phenomenon. Selecting supplier on the basis of
environmental considerations.

24. Vendor Evaluation Sheet
Criteria Weights
Scores
(1-5)
Weight x
Score
Engineering/research/innovation skills
Production process capability
(flexibility/technical assistance)
Distribution/delivery capability
Quality systems and performance
Facilities/location
Financial and managerial strength
(stability and cost structure)
Information systems capability (e-
procurement, ERP)
Integrity (environmental compliance/
ethics)
Total 1.00

25. 3. Negotiations
 Negotiation should be done to form contractual
relationships with suppliers
 Negotiations often focus on quality, delivery, payment,
and cost.
 Negotiation strategies:
 Cost-Based Price Model - supplier opens books to purchaser
 Market-Based Price Model - price based on published,
auction, or indexed price
 Competitive Bidding - used for infrequent purchases but may
make establishing long-term relationships difficult

26. Logistics Management
 Logistics: it is planning, execution, and control of the
procurement, movement, and stationing of personnel,
material, and other resources to achieve the objectives of
a firm.
 Logistics Management: Part of SCM which involves
application of management principles to logistics
operations for efficient and cost effective movement of
goods and personnel.
 Objective is to obtain efficient operations through the
integration of all material acquisition, movement, and
storage activities

27. Is a frequent candidate for outsourcing
Allows competitive advantage to be gained through
reduced costs and improved customer service

28. Distribution Systems
 A set of activities that ensure the movement of goods
from producer to the consumers.
 Trucking
 Moves the vast majority of manufactured goods
 Chief advantage is flexibility
 Fostered by JIT
 Railroads
 Capable of carrying large loads
 Little flexibility though containers and piggybacking have
helped with this

29.  Airfreight
Speed and reliability
Fast and flexible for light loads
May be expensive

30.  Waterways
Oldest means of goods transportation
Typically used for bulky, low-value cargo
Used when shipping cost is more important
than speed

31. Pipelines
Used for transporting oil, gas, and
other chemical products

32. Third-Party Logistics
• Outsourcing logistics can reduce costs and
improve delivery reliability and speed
• Coordinate supplier inventory with
delivery services
• May provide
warehousing,
assembly, testing,
shipping, customs

33. Cost of Shipping Alternatives
 Product in transit is a form of inventory and
has a carrying cost
 Faster shipping is generally more
expensive than slower shipping
 We can evaluate the two costs to better
understand the trade-off

34. Cost of Shipping Alternatives Example
Value of connectors = $1,750.00
Holding cost = 40% per year
Second carrier is 1 day faster and $20
more expensive
Daily cost of
holding product
= x /365
Annual
holding
cost
Product
value
= (.40 x $1,750)/ 365 = $1.92
Since it costs less to hold the product one day
longer than it does for the faster shipping ($1.92 <
$20), we should use the cheaper, slower shipper

35. Measuring Supply Chain Performance

36. Inventory Measures
1. Assets committed to inventory
Percent
invested in
inventory
= x 100
Total inventory
investment
Total assets
Investment in inventory = $11.4 billion
Total assets = $44.4 billion
Percent invested in inventory = (11.4/44.4) x 100 = 25.7%

37. 2. Inventory turnover
Inventory
turnover =
Cost of goods sold
Inventory
investment

38. 3. Weeks of Supply (weeks of
inventory)
Weeks of supply =
Inventory investment
Cost of goods sold / 52

39. Linking Supply Chain Performance Measures to Financial Measures
Operating Measure Financial Measure
Aggregate inventory value Current Assets
Weeks of Supply Working Capital
Inventory Turns Working Capital
Production and material
costs
Contribution Margin
Percentage Defects Contribution Margin
Percentage on Time
Delivery
Revenue

40. New Product Development
Time
Revenue
Supplier Lead Time Working Capital

41. Outsourcing
• It is the process of providing certain activity of an
organization to be done by any outside party
• In other words, outsourcing is the act of moving some of the
firm’s internal activities and decision responsibility to outside
providers.
• Organization should outsource other activities except core-
competencies
• Outsourcing allows firms to focus on the activities that
represent its core competencies.

42. Reasons to Outsource and Benefits
• Organizationally Driven Reasons
• Enhance effectiveness by focusing on what you do best
• Increase flexibility to meet changing business condition
• Increase product and service value, customer satisfaction, and shareholder
value
• Improvement-Driven Reasons
• Improve operating performance (increase quality and productivity, shorten
cycle times,etc)
• Obtain expertise and sophisticated technologies
• Acquire innovative ideas
• Improve credibility and image
• Financially Driven Reasons
• Reduce investment in assets and free up these resources for other purposes
• Generate cash by transferring assets to the provider

43. • Revenue Driven Reasons
• Gain market access and business opportunities
• Accelerate expansion of business
• Expand sales and production capacity
• Commercially exploit existing skills
• Cost Driven Reasons
• Reduce costs through superior provider performance and low cost
structure
• Turn fixed costs into variable costs
• Employee Driven Reasons
• Give employees a stronger career path
• Increase commitment and energy in non-core areas

44. Examples of important benefits of outsourcing
• Fed-ex: Tracking technology. One can get information easily
through website about the location of the goods being
transported.
• HP: Outsourced inbound raw material warehousing. Saved
up to 10% of warehousing cost.

45. When to Outsource?
• It is easy said than done to distinguish core activities from
non-core activities to identify what to outsource
• Some non-core activities may turn core as per the flip of time
• Thus, its necessary to think beyond the concept that core
competencies should be identified and non-core activities
should be outsourced.
• Make distinction between core and strategic activities.
• Core activities are key to business but do not provide competitive
advantage
• Strategic activities are key source of competitive advantage
• Outsource all the activities except the strategic activities

46. Framework for Structuring Supplier Relationships
Vertical Integration (Do
Not Outsource)
Arm’s Length
Relationship (Outsource)
Coordination Uncertain activities
which are difficult to
coordinate or integrate,
which need frequent
communication
Well understood and
highly standardized
activities.
Strategic Control If degree of losses are
high in case of relation
break down
If degree of losses are
minimum or negligible if
partner were severed
Intellectual Property Weak intellectual
property protection,
imitable IP
Strong intellectual
property protection,
hard to imitate IP

47. Types of Outsourcing
• Purchasing
• Logistics
• R&D
• Operation of facilities
• Management of services
• Human resources
• Finance/accounting
• Customer relations
• Sales/marketing
• Training
• Legal processes

48. Risks in Outsourcing
• Outsourcing is risky if not done with proper analysis and care
• About 50% of outsourcing agreements fail because of
inappropriate planning and analysis
Core-competency can be incorrectly identified as non-core competency
Selection of incompetent firm providing outsourcing service
Setting unrealistic goals and making outsourcing agreements
Selecting the wrong outsource provider
Misinterpretation of the goals by the outsource provider
Being unable to control the product development, schedules and quality
Having non-responsive outsource provider
Fluctuations in exchange rate

49. Advantages of Outsourcing
• Cost Saving
• Gaining outside expertise
• Improving operations and service
• Focusing on core competencies
• Gaining outside technology
• Credibility and image boosting

50. Disadvantages of Outsourcing
• High transportation cost
• Loss of control
• Creating future competition
• Negative impact on employees

51. Ethical Issues in Outsourcing
• Do not harm to indigenous cultures
• (e.g. avoid outsourcing in a way that violate religious
holidays)
• Do not harm the ecological system
• (don’t use outsourcing to push pollution from one country
to other country)
• Support universal labor standards
• Support basic human rights
• Pursue long term involvement
• Share knowledge and technology

52. Offshoring is a supply chain strategy that
involves moving processes to another country.
It is a different phenomenon