Operations Management CustomerFocused Principles

1
Operations ManagementCustomer-Focused Principles

• Purchasing Management Concepts

2
Overview

• Order Fulfillment (Exhibit 9-1)
• Suppliers as Partners
• Contrast Exhibit 9-2 versus Exhibit S9-1
• Exhibit 9-3
• Exhibit 9-4
• Exhibit 9-5
• Outsourcing as a Strategy
• Exhibit 9-7
• Exhibit 9-8
• Purchasing Policies Procedures
• Exhibit 9-9 and 9-10
• Exhibit 9-11

3
Exhibit 9-1
Order-Fulfillment Sequence
1. Demand / Sale
2. Order Entry
Serve immediately?
NO
3. Order Positioning
YES

4. Order Promise
Materials/ supplies needed?
YES
5. Inventory Planning
NO

6. Purchasing
7. Service / Delivery
9-1
4
Exhibit 9-2
Black-Box View of the Suppliers System
Purchase order
Deliveries
Supplier's System a black box
Inquiries
Replies
Order modificationrequests
?
Responses
9-2
5
Exhibit S 9-1
Fords Supplier Certification Program
Program launch dates
TQE - applied to external suppliers
15
5
8
11
Numbers in each line show certifications earned
Q1 - applied to Ford plants
3
Q1 - applied to internal suppliers
5
15
45
65
71
Q1 - applied to external suppliers
450
590
1,050
2,900
1981
1985
1986
1987
1988
1989
1990
1991
1992
Year
9-13
6
Exhibit 9-3
Supplier Relationships
Adversary
Partnership
1. Tenure
2. Type of agreement
3. Number of sources
4. Prices/costs
9-3
7
Exhibit 9-3
Supplier Relationships
Partnership
Adversary
5. Quality
Uncertain reliance on receiving inspections
Quality at source sup- plier uses
statistical process control and total
quality manage- ment
Make use of suppliers design expertise
6. Design
Customer developed
7. Delivery frequency / order size
Infrequent, large lots
Frequent (sometimes more than one per
day), small lots just-in- time
8. Order conveyance
Mail
Long-term contracts. Short-term kanban,
phone, fax, or elec- tronic data interchange
9-4
8
Exhibit 9-3
Supplier Relationships
Adversary
Partnership
9. Documentation
Packing lists, invoices, and count/ inspec-
tion forms
Sometimes no count, inspection, or list --
just monthly bill
10. Transportation
Late and undepend- able stock missing or
damaged
Dependably quick, on-time, and intact
11. Delivery location
Receiving dock and stockroom
Direct to point of use
12. Openness
Very little black box
On-site audits of sup- plier, concurrent
design, visits by front-line associates
9-5
9
Exhibit 9-4
Order Conveyance and Documentation
A. Traditional approach
CUSTOMER
Mail
SUPPLIER
Purchase order
Packing list
Order processingsequence(see exhibit 9-1)
Receiving dock
Discrepancy of variance lists
Mail
Receiving reports
Shipping invoice
Reconcile statements
Reconcile statements
Accounts payable record
Accounts receivable records
Check (mailed)
R.F.P.
B. Partnership approach
EDI Link
Master agreement
CUSTOMER
SUPPLIER
Standard containers
Pointof use
Bar-coded kanban
Electronic funds transfer request
Bank
9-6
10
Exhibit 9-5
Delivery Dock vs. Point-of-Use
CUSTOMER FACILITY
Activity performed
Location of area
Value added?
Supplier A
No
Receiving dock
Quality hold area
No
No
Stockroom
Office, shop, or line
Yes
Supplier B
Office, shop, or line
Yes
9-7
11
Exhibit 9-7
Candidates for Outsourcing
TRANSFORMATION PROCESSES
Create ormanufac-turecompon-ents
Design products and pro-cesses
Assem-bleoutputs
Serve and deliver
Procure materials
Plan capacity
9-8
12
Exhibit 9-8
Make-or-Buy Break-Even Analysis
Total cost (buy)
Total cost (make)
Annual Costs
Variable cost (make)
Fixed cost (make)
Variable cost (buy)
B
Demand per Year
9-9
13
Exhibit 9-9
Annual-Dollar-Volume
Annual Dollar Volume
Stock Number
Annual Demand
Unit Cost
Percent
407 210 021 388 413 195 330 114 274 359
40,000 1,000 2,000 20,000 4,400 500
40 100 280 600
35.50 700.00 55.00 4.00 10.00
36.00 214.00 43.00 1.00 0.25
1,420,000 700,000 110,000
80,000 44,000 18,000
8,560 4,300 280
150
59.53 29.35 4.61 3.35 1.84 0.76 0.36
0.18 0.01 0.00
Totals
9-10
14
Exhibit 9-10
ABC Classification
100
88.9
90
A items (407 and 210)
80
70
60
50
Dollar-volume (percent)
40
30
B items (021, 388 and 413)
C items (195, 330, 114, 274 and 359)
20
9.8
10
1.3
Items (percent)
9-11
15
Exhibit 9-11
Tangibility of Purchased Goods
Highly tangible
Simple parts (screws, diodes, switches)
Output standards of quality
Commodities (tobacco, iron ore, bananas)
Simple finished goods (books, furniture, fabric)
Complex finished goods (autos, ships, missiles)
Designs of tangible goods (engineering designs,
architecture)
Performance (catering, child care, training)
Input and procedural surrogates for quality
Software (computer programs, technical manuals)
Highly intangible
Ideas (consulting, counseling, advising)
9-12
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What Would Deming Say?

• Point 2 -- Adopt the new philosophy
• Point 3 -- Eliminate the need for mass
  inspection
• Point 4 -- Eliminate the awarding of business
  solely on a price tag basis
• Point 9 -- Break down barriers between
  departments

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OM Principles Illustrated

• 1 -- Get to know the customer
• Partnerships with suppliers
• Account for greater proportion of supplier sales
• 3 -- Achieve team involvement in change
• Value analysis
• Liberalized specifications
• 5 -- Cut the number of suppliers
• Relates to Demings Point 3
• Leads to cooperation (TQM, JIT, etc.)
• Standardization of parts, not products

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OM Principles Illustrated

• 10 -- Simplify providing without error
• Customer teams provide assistance to suppliers
• Cooperation concerning quality
• 11 -- Operate at the customers rate of use
• More frequent deliveries possible
• Pipeline concept reduces cycle time
• 15 -- Cut transactions and reporting
• Inspections become unnecessary
• Supplier certification