Supply Chain Management

1
Chapter 11

• Supply Chain Management
• And E-Business

2
Overview

• Introduction
• Supply Chain Management
• Purchasing
• Logistics
• Warehousing
• Expediting
• Benchmarking the Performance of Materials
  Managers
• Third-Party Logistics Management Providers
• E-Business and Supply Chain Management
• Wrap-Up What World-Class Companies Do

3
Introduction

• Materials
• Any commodities used directly or indirectly in
  producing a product or service.
• Raw materials, component parts, assemblies,
  finished goods, and supplies
• Supply chain
• Flow of materials through various organizations
  from the raw material supplier to the finished
  goods consumer.

4
Supply Chainfor Steel in an Automobile Door
MINING COMPANY Mines iron ore
STEEL MILL Forms steel ingot
STEEL COMPANY Forms sheet metal
Iron ore
Steel ingots
Sheet metal
AUTOMOTIVE SUPPLIER Makes door
AUTOMOBILE MANUFACTURER Makes automobile
CAR DEALERSHIP Does preparation
Car door
Car
Prepared car
FINAL CONSUMER Drives automobile
5
Supply Chain Management

• Definition
• All management functions related to the flow of
  materials from the companys direct suppliers to
  its direct customers.
• Functions
• Include purchasing, traffic, production control,
  inventory control, warehousing, and shipping.
• Two alternative names
• Materials management
• Logistics management

6
Supply Chain Managementin a Manufacturing Plant
Receiving and Inspection
Raw Materials, Parts, and In-process Ware- Housing

Production
Finished Goods Ware- housing
Inspection, Packaging, And Shipping
Customers
Suppliers
Materials Management
Purchasing
Production Control
Warehousing and Inventory Control
Shipping and Traffic
Physical materials flow Information flow
7
Purchasing

• Factors increasing the importance of purchasing
  today
• Tremendous impact of material costs on profit
• Up to 60-70 of each sales dollar is paid to
  material suppliers
• Popularity of just-in-time manufacturing
• Supply deliveries must be exact in timing,
  quantity, and quality
• Increasing global competition
• Growing competition for scarce resources, and a
  geographically stretched-out supply chain

8
Mission of Purchasing

• Develop purchasing plans for each major product
  or service that are consistent with operations
  strategies
• Low production costs
• Fast and on-time deliveries
• High quality products and services
• Flexibility

9
Purchasing Management

• Maintain data base of available, qualified
  suppliers
• Select suppliers to supply each material
• Negotiate contracts with suppliers
• Act as interface between company and suppliers
• Provide training to suppliers on latest
  technologies

10
Advantages of Centralized Purchasing

• Buying in large quantities
• better prices
• More clout with suppliers
• greater supply continuity
• Larger purchasing department
• buyer specialization
• Combining small orders
• less order cost duplication
• Combining shipments
• lower transportation costs
• Better overall control

11
Purchasing Process
From any department, to purchasing
Material Requisition
From purchasing, to potential suppliers
Request for Quotations
Based on quality, price, lead time, dependability
Select Best Supplier
From purchasing, to selected supplier
Purchase Order
From supplier, to receiving, quality control,
warehouse
Receive and Inspect Goods
12
Buyers Duties

• Know the market for their commodities
• Understand the laws.... tax, contract, patent..
• Process purchase requisitions and quotation
  requests
• Make supplier selections
• Negotiate prices and conditions of sale
• Place and follow-up on purchase orders
• Maintain ethical behavior

13
Make-or-Buy Analysis

• Considerations in make-or-buy decisions
• Lower cost - purchasing or production?
• Better quality - supplier or in-house?
• More-reliable deliveries - supplier or in-house?
• What degree of vertical integration is desirable?
• Should distinctive competencies be outsourced?

14
Example Make-or-Buy

• A firm manufactures a product that contains a
  part requiring heat treatment. An analyst is
  trying to decide whether it is more economical to
  buy the heat treating service or perform the
  treatment in house. Pertinent data is shown on
  the next slide.
• If part quality and delivery performance are
  about the same for the two alternatives, which
  alternative should be selected?

15
Example Make-or-Buy

• Purchase
• Heat-Treat Heat-Treat
• In-House Service
• Number of parts annually 5,000 5,000
• Fixed cost per year 25,000 0
• Variable cost per part 13.20 17.50

16
Example Make-or-Buy

• Compute the total cost for each alternative
• TC FC vQ
• TC1 FC1 v1Q 25,000 13.20(5,000)
  91,000
• TC2 FC2 v2Q 0 17.50(5,000)
  87,500
• The firm should buy the heat-treating service
  (the second alternative).
• continued

17
Example Make-or-Buy

• The analyst has assumed that 5,000 parts per
  year will require heat treatment. By how many
  parts can the firms requirements increase or
  decrease before in-house heat treating is more
  economical? Should the analyst rethink his/her
  decision?

18
Example Make-or-Buy

• Compute the break-even parts quantity
• FC1 v1Q FC2 v2Q
• Q (FC1 - FC2)/(v2- v1)
• Q (25,000 0)/(17.50 13.20)
• Q 5,814
• If the firms annual parts requirement
  increases by 814 (about 16) or more, in-house
  heat treatment would be more economical. The
  analyst should give the decision more thought.

19
Logistics

• Logistics usually refers to management of
• the movement of materials within the factory
• the shipment of incoming materials from suppliers
• the shipment of outgoing products to customers

20
Movement of Materials within Factories
The typical locations from/to which material is
moved
Incoming Vehicles
Receiving Dock
Quality Control
Warehouse
Work Center
Other Work Centers
Packaging
Finished Goods
Shipping
Shipping Dock
Outgoing Vehicles
21
Shipments To and From Factories

• Traffic
• Traffic departments routinely examine shipping
  schedules and select
• shipping methods
• time tables
• ways of expediting deliveries
• Traffic management is a specialized field
  requiring technical training in Department of
  Transportation (DOT) and Interstate Commerce
  Commission (ICC) regulations and rates.

22
Shipments To and From Factories

• Distribution
• Distribution, or physical distribution, is the
  shipment of finished goods through the
  distribution system to customers.
• A distribution system is the network of shipping
  and receiving points starting with the factory
  and ending with the customers.

23
Shipments To and From Factories

• Distribution Requirements Planning
• DRP is the planning for the replenishment of
  regional warehouse inventories.
• DRP uses MRP-type logic to translate regional
  warehouse requirements into central
  distribution-center requirements, which are then
  translated into gross requirements in the MPS at
  the factory.

24
Shipments To and From Factories

• Distribution Requirements Planning
• Scheduled receipts are previously-placed orders
  that are expected to arrive in a given week
• Planned receipt of shipments are orders planned,
  but not yet placed, for the future
• Projected ending inventory is computed as
• Previous weeks projected ending inventory
• Planned receipt of shipments in current week
• Scheduled receipt of shipments in current week
• -- Forecasted demand in current week

25
Shipments To and From Factories

• DRP Time-Phased Order Point Record

Region. Warehouse 1 LT 1 Std. Quantity 50
SS 10
Week
-1
1
2
3
5
4
Forecasted demand (units)
30
40
30
40
40
Scheduled receipts
50
Projected ending inventory
60
80
40
30
20
10
Planned receipt of shipments
50
50
Planned orders for shipments
50
50
26
Example DRP

• Products are shipped from a companys main
  distribution center (adjacent to the factory) to
  two regional warehouses. The DRP records on the
  next two slides show for the two regional
  warehouse the forecasted demand, scheduled
  receipts, and last weeks projected ending
  inventories for a single product.
• The third upcoming slide shows for the main
  distribution center scheduled receipts and last
  weeks projected ending inventory for the same
  product. Complete the DRP records.

27
Example DRP

• DRP Record for Regional Warehouse 1

28
Example DRP

• DRP Record for Regional Warehouse 2

29
Example DRP

• DRP Record for Main Distribution Center

30
Example DRP

• Completed DRP Record for Regional Warehouse 1

Region. Warehouse 1 LT 1 Std. Quantity 100
SS 50
Week
-1
1
2
3
5
4
Forecasted demand (units)
80
100
80
60
100
Scheduled receipts
100
Projected ending inventory
200
220
120
80
80
140
Planned receipt of shipments
100
100
Planned orders for shipments

100
100
31
Example DRP

• Completed DRP Record for Regional Warehouse 2

Region. Warehouse 2 LT 2 Std. Quantity 200
SS 80
Week
-1
1
2
3
5
4
Forecasted demand (units)
100
200
200
240
200
Scheduled receipts
200
Projected ending inventory
220
320
120
80
80
120
Planned receipt of shipments
200
200
200
Planned orders for shipments
200
200
200
32
Example DRP

• DRP Record for Main Distribution Center
• The gross requirement ( in row 1) for any week
  is determined by summing the planned orders for
  shipment for the same week at the two regional
  warehouses
• These gross requirements at the MDC are input to
  the master production schedule in the factory
• In other words, the timing and quantities of
  production in the factory are linked to the
  timing and quantities of demand at the regional
  warehouses

33
Example DRP

• Completed DRP Record for Main Distribution Center

Main Distrib. Center LT 1 Std. Quantity
500 SS 200
Week
-1
1
2
3
5
4
Forecasted demand (units)
200
300
200
100
Scheduled receipts
500
Projected ending inventory
250
550
250
450
450
550
Planned receipt of shipments
500
Planned orders for shipments
500
34
Shipments To and From Factories

• Distribution Resource Planning
• Distribution resource planning extends DRP so
  that the key resources of warehouse space,
  workers, cash, and vehicles are provided in the
  correct quantities at the correct times.

35
Analyzing Shipping Decisions

• The Transportation Problem
• Problem involves shipping a product from several
  sources (ex. factories) with limited supply to
  several destinations (ex. warehouses) with demand
  to be satisfied
• Per-unit cost of shipping from each source to
  each destination is specified
• Optimal solution minimizes total shipping cost
  and specifies the quantity of product to be
  shipped from each source to each destination

36
Example Minimizing Shipping Costs

• Pacer produces computer monitors in its three
  factories and ships them to five regional
  warehouses. The factory-to-warehouse shipping
  costs per monitor are
• Warehouse
• Factory A B C D E
• 1 2.10 4.30 3.60 1.80 2.70
• 2 4.90 2.60 3.50 4.50 3.70
• 3 3.90 3.60 1.50 5.80 3.30
• continued

37
Example Minimizing Shipping Costs

• The factories have the following capacities
  (monitors produced per month) 1 10,000
  2 20,000 and 3 10,000.
• The warehouses need at least these numbers of
  monitors per month A 5,000 B 10,000 C
  10,000 D 5,000 and E 10,000.
• Use the POM Software Library to solve this
  transportation problem.

38
Example Minimizing Shipping Costs

• Solution
• Warehouse
• Factory A B C D E
• 1 5,000 0 0 5,000 0
• 2 0 10,000 0 0 10,000
• 3 0 0 10,000 0 0
• Total monthly shipping cost 97,500
• (Note all warehouse demand is satisfied
• and no factorys capacity is exceeded.)

39
Innovations in Logistics

• New developments affecting logistics include
• All-freight airports
• Inter-modal shipping
• In-transit rates
• Consolidated shipments
• Air-freight and trucking deregulation
• Advanced logistics software

40
Warehousing

• Definition
• Warehousing is the management of materials while
  they are in storage.
• Warehousing activities
• Accounting
• Ordering
• Storing
• Dispersing

41
Warehousing

• Record keeping within warehousing requires a
  stock record for each item that is carried in
  inventories.
• The individual item is called a stock-keeping
  unit (SKU).
• Stock records are running accounts that show
• On-hand balance
• Receipts and expected receipts
• Disbursements, promises, and allocations

42
Inventory Accounting

• In the past, inventory accounting was based on
• periodic inventory accounting systems
• periodic (end-of-day) updating of inventory
  records
• physical inventory counts
• periodic (end-of-year) physical counting of all
  SKUs at one time
• Today, more and more firms are using
• perpetual inventory accounting systems
• real-time updating of records as transactions
  occur
• cycle counting
• ongoing (daily or weekly) physical counting of
  different SKUs

43
Example Cycle Counting

• A company is implementing a cycle-counting
  program. Class A items will be counted monthly,
  Class B items will be counted quarterly, and
  Class C items will be counted semi-annually.
• 5 of the firms inventory items are classified
  as Class A, 20 are Class B, and 75 are Class C.
  If the firm has 16,000 different SKUs (unique
  inventory items), how many will need to be
  counted daily? Assume 200 days per year are
  available for cycle counting.

44
Example Cycle Counting

• Number
• Number of Counts
• Class of Items per Item Total Counts
• of Item per Class per Year per Year
• A 800 12 9,600
• B 3,200 4 12,800
• C 12,000 2 24,000
• Total 16,000 46,400

45
Example Cycle Counting

• Number of Inventory Items Counted Daily
• 46,400/200 232 items per day

46
Example Cycle Counting

• The cycle-counting personnel must count 232
  inventory items per day. If the average
  cycle-counter can count 24 items per day, how
  many counters are needed?
• Number of Cycle-Counting Personnel Required
• 232/24 9.67 or 10 counters

47
Measuring the Performance Materials Managers

• Level and value of in-house inventories
• Percentage of orders delivered on time
• Number of stockouts
• Annual cost of materials
• Annual cost of transportation
• Annual cost of warehouse
• Number of customer complaints
• Other factors

48
Wrap-Up World-Class Practice

• See materials management as key element in
  capturing global market share
• Form partnerships with suppliers
• Use computers extensively to manage logistics

49
End of Chapter 11