Operations Management SupplyChain Management Chapter 11 Power Point

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Operations Management Supply-Chain Management Chapter 11 Power. Point presentation to accompany Operations Management, 6

Operations Management Supply-Chain Management Chapter 11 Power. Point presentation to accompany Operations Management, 6 E (Heizer & Render) 11 -1 © 2001 by Prentice Hall, Inc. , Upper Saddle River, N. J. 07458

Outline ¨ Global Company Profile: Volkswagen ¨ The Strategic Importance of the Supply-Chain ¨

Outline ¨ Global Company Profile: Volkswagen ¨ The Strategic Importance of the Supply-Chain ¨ Global Supply-Chain Issues ¨ Purchasing Manufacturing Environments ¨ Service Environment ¨ Make-or-Buy Decisions ¨ Power. Point presentation to accompany Operations Management, 6 E (Heizer & Render) 11 -2 © 2001 by Prentice Hall, Inc. , Upper Saddle River, N. J. 07458

Outline - continued ¨ Supply-Chain Strategies ¨ ¨ ¨ Many Suppliers Few Suppliers Vertical

Outline - continued ¨ Supply-Chain Strategies ¨ ¨ ¨ Many Suppliers Few Suppliers Vertical Integration Keiretsu Networks Virtual Companies ¨ Vendor Selection Vendor Evaluation ¨ Vendor Development ¨ Negotiations ¨ Power. Point presentation to accompany Operations Management, 6 E (Heizer & Render) 11 -3 © 2001 by Prentice Hall, Inc. , Upper Saddle River, N. J. 07458

Outline - continued ¨ Managing the Supply-Chain ¨ Materials Management ¨ Distribution Systems ¨

Outline - continued ¨ Managing the Supply-Chain ¨ Materials Management ¨ Distribution Systems ¨ Benchmarking Supply-Chain Management Power. Point presentation to accompany Operations Management, 6 E (Heizer & Render) 11 -4 © 2001 by Prentice Hall, Inc. , Upper Saddle River, N. J. 07458

Supply-Chain Management ¨ Planning, organizing, directing, & controlling flows of materials Begins with raw

Supply-Chain Management ¨ Planning, organizing, directing, & controlling flows of materials Begins with raw materials ¨ Continues through internal operations ¨ Ends with distribution of finished goods ¨ ¨ Involves everyone in supply-chain ¨ Example: Your supplier’s supplier ¨ Objective: Maximize value & lower waste Power. Point presentation to accompany Operations Management, 6 E (Heizer & Render) 11 -5 © 2001 by Prentice Hall, Inc. , Upper Saddle River, N. J. 07458

The Supply-Chain VISA ® Material Flow Credit Flow Supplier Manufacturing Supplier Retailer Consumer Wholesaler

The Supply-Chain VISA ® Material Flow Credit Flow Supplier Manufacturing Supplier Retailer Consumer Wholesaler Retailer Schedules Order Flow Power. Point presentation to accompany Operations Management, 6 E (Heizer & Render) 11 -6 Cash Flow © 2001 by Prentice Hall, Inc. , Upper Saddle River, N. J. 07458

The Supply Chain Supplier Market research data scheduling information Engineering and design data Order

The Supply Chain Supplier Market research data scheduling information Engineering and design data Order flow and cash flow Inventory Supplier Customer Ideas and design to satisfy end customer Material flow Credit flow Customer Manufacturer Inventory Supplier Inventory Distributor Customer Inventory Power. Point presentation to accompany Operations Management, 6 E (Heizer & Render) 11 -7 © 2001 by Prentice Hall, Inc. , Upper Saddle River, N. J. 07458

Material Costs in Supply-Chain Wholesale 8% 9% Manufacturing 31% 11% 58% COGS Payroll Material

Material Costs in Supply-Chain Wholesale 8% 9% Manufacturing 31% 11% 58% COGS Payroll Material 83% Other Dir Wages Retail Other 13% Source: U. S. Department of Commerce, Bureau of Census, 1987 Census of Manufacturers: General Summary of Retail Trade (Washington, D. C. : Government Printing Office, 1991) Power. Point presentation to accompany Operations Management, 6 E (Heizer & Render) 11 -8 16% 71% COGS Payroll Other © 2001 by Prentice Hall, Inc. , Upper Saddle River, N. J. 07458

Supply-Chain Support for Overall Strategy Low Cost Response Differentiation Supplier’s goal Supply demand at

Supply-Chain Support for Overall Strategy Low Cost Response Differentiation Supplier’s goal Supply demand at lowest possible cost Primary Selection Criteria Select primarily for cost Respond quickly to changing requiremen ts and demand to minimize stockouts Select primarily for capacity, speed, and flexibility Power. Point presentation to accompany Operations Management, 6 E (Heizer & Render) 11 -9 Share market research; jointly develop products and options Select primarily for product development skills © 2001 by Prentice Hall, Inc. , Upper Saddle River, N. J. 07458

Supply-Chain Support for Overall Strategy - continued Low Cost Response Maintain Process Characteristic high

Supply-Chain Support for Overall Strategy - continued Low Cost Response Maintain Process Characteristic high average utilization s Inventory Characteristic s Minimize inventory throughout the chain to hold down costs Power. Point presentation to accompany Operations Management, 6 E (Heizer & Render) Invest in excess capacity and flexible processes Differentiation Modular processes to lend themselves to mass customizatio n Minimize inventory in the chain to avoid obsolescenc e Develop responsive system, with buffer stocks positioned to ensure 2001 by Prentice Hall, Inc. , Upper Saddle River, N. J. supply © 07458 11 -10

Supply-Chain Support for Overall Strategy - continued Low Cost Response Differentiation Shorten lead Lead-time

Supply-Chain Support for Overall Strategy - continued Low Cost Response Differentiation Shorten lead Lead-time Characteristic -time as long as it does s not increase costs Invest aggressivel y to reduce production lead-time Invest aggressively to reduce development lead-time Product-design Maximize Characteristics performan ce and minimize cost Use product designs that lead to low set-up time and rapid production ramp-up Use modular design to postpone product differentiatio n for as long as possible Power. Point presentation to accompany Operations Management, 6 E (Heizer & Render) 11 -11 © 2001 by Prentice Hall, Inc. , Upper Saddle River, N. J. 07458

Global Supply-Chain Issues Supply chains in a global environment must be: flexible enough to

Global Supply-Chain Issues Supply chains in a global environment must be: flexible enough to react to sudden changes in 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, customs and political issues ¨ Power. Point presentation to accompany Operations Management, 6 E (Heizer & Render) 11 -12 © 2001 by Prentice Hall, Inc. , Upper Saddle River, N. J. 07458

Purchasing ¨ Acquisition of goods & services ¨ Activities Help decide whether to make

Purchasing ¨ Acquisition of goods & services ¨ Activities Help decide whether to make or buy ¨ Identify sources of supply ¨ Select suppliers & negotiate contracts ¨ Control vendor performance ¨ ¨ Importance Major cost center ¨ Affects quality of final product ¨ Power. Point presentation to accompany Operations Management, 6 E (Heizer & Render) 11 -13 © 2001 by Prentice Hall, Inc. , Upper Saddle River, N. J. 07458

Purchasing Costs as a Percent of Sales Industry Percent of Sales ¨ All industry

Purchasing Costs as a Percent of Sales Industry Percent of Sales ¨ All industry ¨ Automobile ¨ Food ¨ Lumber ¨ Paper ¨ Petroleum ¨ Transportation Power. Point presentation to accompany Operations Management, 6 E (Heizer & Render) 11 -14 ¨ 52% ¨ 61% ¨ 60% ¨ 61% ¨ 55% ¨ 74% ¨ 63% © 2001 by Prentice Hall, Inc. , Upper Saddle River, N. J. 07458

Objectives of the Purchasing Function ¨ Help identify the products and services that can

Objectives of the Purchasing Function ¨ Help identify the products and services that can be best obtained externally; and ¨ Develop, evaluate, and determine the best supplier, price, and delivery for those products and services Power. Point presentation to accompany Operations Management, 6 E (Heizer & Render) 11 -15 © 2001 by Prentice Hall, Inc. , Upper Saddle River, N. J. 07458

The Purchasing Focus Materials Management -High transportation cost -High inventory costs Supply Management -High

The Purchasing Focus Materials Management -High transportation cost -High inventory costs Supply Management -High costs -Scarcity: national or international Purchasing Management -Commodity items -Standard products Source Management -Unique items -Custom-made items -High technology items Power. Point presentation to accompany Operations Management, 6 E (Heizer & Render) 11 -16 © 2001 by Prentice Hall, Inc. , Upper Saddle River, N. J. 07458

Traditional Purchasing Process Customer Supplier Purchase Order Receivabl es Report Accounts Payable Order Processing

Traditional Purchasing Process Customer Supplier Purchase Order Receivabl es Report Accounts Payable Order Processing Mail Receiving Dock Packing List Mail Reconcile Power. Point presentation to accompany Operations Management, 6 E (Heizer & Render) Invoice Check 11 -17 Mail Accounts Receivable © 2001 by Prentice Hall, Inc. , Upper Saddle River, N. J. 07458

Purchasing Techniques ¨ Drop shipping and special packaging ¨ Blanket orders ¨ Invoiceless purchasing

Purchasing Techniques ¨ Drop shipping and special packaging ¨ Blanket orders ¨ Invoiceless purchasing ¨ Electronic ordering and funds transfer ¨ Electronic data interchange (EDI) ¨ Stockless purchasing ¨ Standardization Power. Point presentation to accompany Operations Management, 6 E (Heizer & Render) 11 -18 © 2001 by Prentice Hall, Inc. , Upper Saddle River, N. J. 07458

Make/Buy Considerations Reasons for Making Reasons for Buying ¨ ¨ ¨ lower acquisition cost

Make/Buy Considerations Reasons for Making Reasons for Buying ¨ ¨ ¨ lower acquisition cost ¨ preserve supplier commitment ¨ obtain technical or management ability ¨ inadequate capacity ¨ reduce inventory costs ¨ ensure flexibility and alternate source of supply ¨ reciprocity lower production cost unsuitable suppliers assure adequate supply utilize surplus labor and make a marginal contribution ¨ obtain desired quantity ¨ remove supplier collusion ¨ obtain a unique item that would entail a prohibitive commitment from the supplier Power. Point presentation to accompany Operations Management, 6 E (Heizer & Render) 11 -19 © 2001 by Prentice Hall, Inc. , Upper Saddle River, N. J. 07458

Make/Buy Considerations Reasons for Making Reasons for Buying ¨ item is protected by ¨

Make/Buy Considerations Reasons for Making Reasons for Buying ¨ item is protected by ¨ maintain organizational patent or trade secret talent ¨ protect proprietary design ¨ frees management to deal with its primary or quality business ¨ increase/maintain size of company Power. Point presentation to accompany Operations Management, 6 E (Heizer & Render) 11 -20 © 2001 by Prentice Hall, Inc. , Upper Saddle River, N. J. 07458

Purchasing Strategies ¨ Plans to help achieve company mission ¨ Affect long-term competitive position

Purchasing Strategies ¨ Plans to help achieve company mission ¨ Affect long-term competitive position ¨ Strategic options ¨ ¨ ¨ Many suppliers Few suppliers Keiretsu network Vertical integration Virtual company Plan © 1995 Corel Corp. Power. Point presentation to accompany Operations Management, 6 E (Heizer & Render) 11 -21 © 2001 by Prentice Hall, Inc. , Upper Saddle River, N. J. 07458

Supply-Chain Strategies ¨ Negotiate with many suppliers; play one supplier against another ¨ Develop

Supply-Chain Strategies ¨ Negotiate with many suppliers; play one supplier against another ¨ Develop long-term “partnering” arrangements with a few suppliers who will work with you to satisfy the end customer ¨ Vertically integrate; buy the actual supplier ¨ Keiretsu - have your suppliers become part of a company coalition ¨ Create a virtual company that uses 11 -22 suppliers on an as-needed basis. Power. Point presentation to accompany Operations Management, 6 E (Heizer & Render) © 2001 by Prentice Hall, Inc. , Upper Saddle River, N. J. 07458

Many Suppliers Strategy ¨ Many sources per item ¨ Adversarial relationship ¨ Short-term ¨

Many Suppliers Strategy ¨ Many sources per item ¨ Adversarial relationship ¨ Short-term ¨ Little openness ¨ Negotiated, sporadic PO’s ¨ High prices ¨ Infrequent, large lots ¨ Delivery to receiving dock Power. Point presentation to accompany Operations Management, 6 E (Heizer & Render) 11 -23 © 1995 Corel Corp. © 2001 by Prentice Hall, Inc. , Upper Saddle River, N. J. 07458

Few Suppliers Strategy ¨ 1 or few sources per item ¨ Partnership (JIT) ¨

Few Suppliers Strategy ¨ 1 or few sources per item ¨ Partnership (JIT) ¨ Long-term, stable ¨ On-site audits & visits ¨ Exclusive contracts ¨ Low prices (large orders) ¨ Frequent, small lots ¨ Delivery to point of use Power. Point presentation to accompany Operations Management, 6 E (Heizer & Render) 11 -24 © 1995 Corel Corp. © 2001 by Prentice Hall, Inc. , Upper Saddle River, N. J. 07458

Purchasers Ties Themselves to Suppliers Tactic ¨ 1. Reduce total number of suppliers ¨

Purchasers Ties Themselves to Suppliers Tactic ¨ 1. Reduce total number of suppliers ¨ Certify suppliers ¨ Ask for JIT delivery from key suppliers ¨ Involve key suppliers in new product design ¨ Develop software linkages to suppliers Power. Point presentation to accompany Operations Management, 6 E (Heizer & Render) Results ¨ Average 20% reduction in 5 years ¨ Almost 40% of all companies surveyed were themselves currently certified ¨ About 60% ask for this ¨ About 54% do this ¨ Almost 80% claim to do this ¨ About 50% claim this; 11 -25 about 15% more than have EDI links to © 2001 by Prentice Hall, Inc. , Upper Saddle River, N. J. 07458

Vertical Integration Strategy ¨ Ability to produce goods previously purchased Raw Material (Suppliers) Backward

Vertical Integration Strategy ¨ Ability to produce goods previously purchased Raw Material (Suppliers) Backward Integration Setup operations ¨ Buy supplier ¨ Current Transformation ¨ Make-buy issue ¨ Major financial commitment ¨ Hard to do all things well Power. Point presentation to accompany Operations Management, 6 E (Heizer & Render) Forward Integration Finished Goods (Customers) 11 -26 © 2001 by Prentice Hall, Inc. , Upper Saddle River, N. J. 07458

Forms of Vertical Integration Iron Ore Silicon Steel Automobiles Farming Raw Material (Suppliers) Flour

Forms of Vertical Integration Iron Ore Silicon Steel Automobiles Farming Raw Material (Suppliers) Flour Milling Backward Integration Integrated Circuits Current Transformation Distribution Circuit Boards System Dealers Computers Watches Calculators Power. Point presentation to accompany Operations Management, 6 E (Heizer & Render) Forward Integration Baked Goods 11 -27 Finished Goods (Customers) © 2001 by Prentice Hall, Inc. , Upper Saddle River, N. J. 07458

Keiretsu Network Strategy ¨ Japanese word for ‘affiliated chain’ ¨ System of mutual alliances

Keiretsu Network Strategy ¨ Japanese word for ‘affiliated chain’ ¨ System of mutual alliances and cross-ownership ¨ Company stock is held by allied firms ¨ Lowers need for short-term profits ¨ Links manufacturers, suppliers, distributors, & lenders ¨ ‘Partnerships’ extend across entire supply chain Power. Point presentation to accompany Operations Management, 6 E (Heizer & Render) 11 -28 © 2001 by Prentice Hall, Inc. , Upper Saddle River, N. J. 07458

Virtual Company Strategy ¨ Network of independent companies ¨ Linked by technology ¨ PC’s,

Virtual Company Strategy ¨ Network of independent companies ¨ Linked by technology ¨ PC’s, faxes, Internet etc. Each contributes core competencies ¨ Typically provide services ¨ ¨ Payroll, editing, designing ¨ May be long or short-term ¨ Usually, only until opportunity is met © 1995 Corel Corp. Power. Point presentation to accompany Operations Management, 6 E (Heizer & Render) 11 -29 © 2001 by Prentice Hall, Inc. , Upper Saddle River, N. J. 07458

Vendor Selection Steps ¨ Vendor evaluation ¨ Identifying & selecting potential vendors ¨ Vendor

Vendor Selection Steps ¨ Vendor evaluation ¨ Identifying & selecting potential vendors ¨ Vendor development ¨ Integrating buyer & supplier ¨ Example: Electronic data exchange ¨ Negotiations Results in contract ¨ Specifies period of agreement, price, delivery terms etc. ¨ Power. Point presentation to accompany Operations Management, 6 E (Heizer & Render) 11 -30 © 2001 by Prentice Hall, Inc. , Upper Saddle River, N. J. 07458

Vendor Selection Rating Form Power. Point presentation to accompany Operations Management, 6 E (Heizer

Vendor Selection Rating Form Power. Point presentation to accompany Operations Management, 6 E (Heizer & Render) 11 -31 © 2001 by Prentice Hall, Inc. , Upper Saddle River, N. J. 07458

Supplier Selection Criteria ¨ Company ¨ Service Delivery on time ¨ Condition on arrival

Supplier Selection Criteria ¨ Company ¨ Service Delivery on time ¨ Condition on arrival ¨ Technical support ¨ Training Financial stability ¨ Management ¨ Location ¨ ¨ ¨ Product Quality ¨ Price ¨ Power. Point presentation to accompany Operations Management, 6 E (Heizer & Render) 11 -32 © 2001 by Prentice Hall, Inc. , Upper Saddle River, N. J. 07458

Negotiation Strategies ¨ Three types: cost-based price model - supplier opens its books to

Negotiation Strategies ¨ Three types: cost-based price model - supplier opens its books to purchaser; price based upon fixed cost plus escalation clause for materials and labor ¨ market-based price model - published price or index ¨ competitive bidding - potential suppliers bid for contract ¨ Power. Point presentation to accompany Operations Management, 6 E (Heizer & Render) 11 -33 © 2001 by Prentice Hall, Inc. , Upper Saddle River, N. J. 07458

Managing the Supply-Chain ¨ Options: ¨ ¨ ¨ ¨ ¨ Postponement Channel assembly Drop

Managing the Supply-Chain ¨ Options: ¨ ¨ ¨ ¨ ¨ Postponement Channel assembly Drop shipping Blanket orders Invoiceless purchasing Electronic ordering and funds transfer Stockless purchasing Standardization Internet purchasing (e-procurement) Power. Point presentation to accompany Operations Management, 6 E (Heizer & Render) 11 -34 © 2001 by Prentice Hall, Inc. , Upper Saddle River, N. J. 07458

Managing the Supply-Chain - Other Options ¨ Establishing lines of credit for suppliers ¨

Managing the Supply-Chain - Other Options ¨ Establishing lines of credit for suppliers ¨ Reducing bank “float” ¨ Coordinating production and shipping schedules with suppliers and distributors ¨ Sharing market research ¨ Making optimal use of warehouse 11 -35 space Power. Point presentation to accompany Operations Management, 6 E (Heizer & Render) © 2001 by Prentice Hall, Inc. , Upper Saddle River, N. J. 07458

Materials Management ¨ Integrates all materials functions ¨ ¨ ¨ Purchasing Inventory management Production

Materials Management ¨ Integrates all materials functions ¨ ¨ ¨ Purchasing Inventory management Production control Inbound traffic Warehousing and stores Incoming quality control ¨ Objective: Efficient, low cost operations Power. Point presentation to accompany Operations Management, 6 E (Heizer & Render) 11 -36 © 2001 by Prentice Hall, Inc. , Upper Saddle River, N. J. 07458

Goods Movement Options ¨ Trucking ¨ Railways ¨ Airfreight ¨ Waterways ¨ Pipelines Power.

Goods Movement Options ¨ Trucking ¨ Railways ¨ Airfreight ¨ Waterways ¨ Pipelines Power. Point presentation to accompany Operations Management, 6 E (Heizer & Render) 11 -37 © 2001 by Prentice Hall, Inc. , Upper Saddle River, N. J. 07458