ALL SCM PROCESS

8/14/2019 ALL SCM PROCESS

1/104

1

q Definition:

Supply Chain Management is primarily concernedwith the efficient integration of suppliers, factories,

warehouses and stores so that merchandise is produced anddistributed in the right quantities, to the right locations andat the right time, and so as to minimize total system costsubject to satisfying service requirements.

q Notice:

q Who is involvedq Cost and Service Levelq It is all about integration

Supply Chain ManagementSupply Chain Management


2/104

2

Supply Chain ManagementSupply Chain Management

q

Refers to all the management functions related to the flow ofmaterials from the companys direct suppliers to its directcustomers.

q Includes purchasing, traffic, production control, inventorycontrol, warehousing, and shipping.

q Two alternative names:q Materials managementq Logistics management


3/104

3

Supply Chain Management ---A RiverSupply Chain Management ---A River


4/104

4

SCM Improvement PrinciplesSCM Improvement Principles

What Can BeWhat Is

The Seven Principles of Supply Chain Management

Segment customers based upon service needs

Customize the logistics network

Listen to the signals of the marketplace and planaccordingly

Differentiate products closer to the consumer

Source strategically

Develop a supply-chain-wide technology strategy

Adopt channel spanning performance measures


5/104

5

Conflicting Objectives in the SupplyConflicting Objectives in the Supply

ChainChain1. Purchasing Stable volume requirements

Flexible delivery time Little variation in mix Large quantities2. Manufacturing

Long run production High quality High productivity Low production cost


6/104

6

Conflicting Objectives in the SupplyConflicting Objectives in the Supply

ChainChain3. Warehousing Low inventory Reduced transportation costs Quick replenishment capability4. Customers Short order lead time High in stock Enormous variety of products Low prices

q


7/104

7

The Bullwhip EffectThe Bullwhip Effect

The bullwhip Effect is a major cause of higher costs and

inefficiencies in supply chains. It describes how small fluctuationsin demand at the customer level are amplified as orders pass upthe supply chain through distributors, manufacturers, andsuppliers.

As an example, consider disposable diapers. Babies generally

consume diapers at a more or less consistent rate whenaggregated over a large group of customers. Nevertheless,

order fluctuations invariably become considerably larger as

one moves upstream in this chain.

The bullwhip Effect is a major cause of higher costs andinefficiencies in supply chains. It describes how small fluctuationsin demand at the customer level are amplified as orders pass upthe supply chain through distributors, manufacturers, andsuppliers.

As an example, consider disposable diapers. Babies generally

consume diapers at a more or less consistent rate whenaggregated over a large group of customers. Nevertheless,

order fluctuations invariably become considerably larger as

one moves upstream in this chain.

Consequences of the Bullwhip Effect include excess/ fluctuatinginventories, shortages/stockouts, longer lead times, highertransportation and manufacturing costs, and mistrust between

supply chain partners

Consequences of the Bullwhip Effect include excess/ fluctuatinginventories, shortages/stockouts, longer lead times, highertransportation and manufacturing costs, and mistrust between

supply chain partners


8/104

8

The Dynamics of the Supply ChainThe Dynamics of the Supply Chain

Order S

ize

Time

Source: Tom Mc Guffry, Electronic Commerce and Value Chain Management, 1998

CustomerDemand

Retailer OrdersRetailer OrdersDistributor OrdersDistributor Orders

Production PlanProduction Plan


9/104

9

The Dynamics of the Supply ChainThe Dynamics of the Supply Chain

Order S

ize

Time

Source: Tom Mc Guffry, Electronic Commerce and Value Chain Management, 1998

CustomerDemand

Production PlanProduction Plan


10/104

10

Supply Chain upstream ActivitiesSupply Chain upstream Activities

We do it all for you! McDonalds

Have it your way Burger King

We do it all for you! McDonalds

Have it your way Burger King

In most supply chains, the upstream activities respond to forecast, while

somewhere on the downstream side the chain waits for orders to beplaced. Consider these two former fast slogans

In most supply chains, the upstream activities respond to forecast, while

somewhere on the downstream side the chain waits for orders to beplaced. Consider these two former fast slogans

Build to stock VS Build to OrderBuild to stock VS Build to Order


11/104

11

INTEGRATING OPERATIONS MANAGEMENT WITH OTHER FUNCTIONSINTEGRATING OPERATIONS MANAGEMENT WITH OTHER FUNCTIONS

q

Customer choices introduce complexityq product variety, demand uncertainty, variable

capacity requirements

q Mass customization is replacing mass production in

many industriesq There is more opportunity to coordinate activities

because of information systems

q Supply chain management has become a criticalaspect of business success


12/104

12

Classifications of OperationClassifications of Operation

ManagementManagement

q Productive Systemo Process Focused System

o Product Focused System

o Production to stock/order

o

q Service Systemo Stagnant personal services

o Substitutable personal Services

o Progressive serviceso Explosive services

q


13/104

13

SUPPLY CHAIN MANAGEMENT: FROM HENRY FORD TO E-COMMERCESUPPLY CHAIN MANAGEMENT: FROM HENRY FORD TO E-COMMERCE

q

Ford motor company did everything from mining tofinal assembly of its Model T vehicles in the early1900s

q allowed coordination of all sequentially related

activities for large efficiency gainsq very difficult to accommodate product variety

or make model changes


14/104

14

SUPPLY CHAIN MANAGEMENT: FROM HENRY FORD TO E-COMMERCESUPPLY CHAIN MANAGEMENT: FROM HENRY FORD TO E-COMMERCE

q

Other factors leading to division of supply chainsq technology, economies of scale, need for focus

in operations

q Supply chain improvementsq Just in Time (JIT) manufacturingq Lean production

S C A A AG C S O S


15/104

15

SUPPLY CHAIN MANAGEMENT DECISIONS:SUPPLY CHAIN MANAGEMENT DECISIONS:

CONFIGURATION OF THE SUPPLY CHAINCONFIGURATION OF THE SUPPLY CHAIN

q

what the product service bundle will include(manufacturing to stock & manufacturing toorder

q what portion of bundle will be outsourced

q where facilities will be located and capacitiesq what technologies will be usedq how supplier-customer communications will be

handledq the expectations to which suppliers and

customers will be held


16/104

16


COORDINATION OF THE SUPPLY CHAINCOORDINATION OF THE SUPPLY CHAIN

q

determining when to provide products andservices and in what quantitiesq ensuring suppliers are able to provide the value

required of them

q setting appropriate levels for capacity,inventory and lead time

q communicating demand, performanceexpectations and performance results with

suppliers and customers


17/104

17


IMPROVEMENT OF THE SUPPLY CHAINIMPROVEMENT OF THE SUPPLY CHAIN

q

installing Enterprise Resource Planning (ERP)systems or other information technologiesq streamlining the channels of supplyq changing technologies or planning systems to

improve quality, lead time, cost or serviceq redesigning the product service bundle to make

it easier to provide or of greater value to thecustomer


18/104

18

Supply-Chain Costs as a Percent of SalesSupply-Chain Costs as a Percent of Sales

q All industry

q Automobile

q

Foodq Lumber

q Paper

q Petroleum

q

Transportation

q 52%

q 67%

q

60%q 61%

q 55%

q 79%

q

62%

Industry ercent of Sales


19/104

19

%1 %1 %8Material

ir WagesOther

%1%6%3 COGSPayroll

Other

%3

% COGSPayrollOther

Manufacturinanufacturing

Wholesaleholesale

Retailetail

Material Costs inMaterial Costs inSupply-ChainSupply-Chain


20/104

20

Global Supply-Chain IssuesGlobal Supply-Chain Issues

Supply chains in a global environment must be:q Flexible enough to react to sudden changes in

parts availability, distribution, or shipping

channels, import duties, and currency ratesq Able to use the latest computer and

transmission technologies to schedule andmanage the shipment of parts in and finished

products outq Staffed with local specialists to handle duties,

trade, freight, customs and political issues


21/104

21

q Plans to help achieve company missionq Affect long-term competitive position

q Strategic optionsq

Many suppliersq Few suppliersq Keiretsu networkq Vertical integrationq Virtual company

Plan

1995 Corel Corp.

Supply-Chain StrategiesSupply-Chain Strategies


22/104

22

Supply-Chain StrategiesSupply-Chain Strategies

q Negotiate with many suppliers; play one supplier against another

q Develop long-term partnering arrangements with a few supplierswho will work with you to satisfy the end customer

q Vertically integrate; buy the actual supplier

q Keiretsu - have your suppliers become part of a company coalition

q Create a virtual company that uses suppliers on an as-needed basis.


23/104

23

q Many sources per item

q Adversarial relationship

q Short-term

q Little openness

q Negotiated, sporadic POs

q High prices

q Infrequent, large lots

q Delivery to receiving dock

1995 Corel Corp.

Many Suppliers StrategyMany Suppliers Strategy


24/104

24

q 1 or few sources per itemq Partnership (JIT)

q Long-term, stable

q On-site audits & visits

q Exclusive contractsq Low prices (large orders)

q Frequent, small lots

q Delivery to point of use

1995CorelCorp.

Few Suppliers StrategyFew Suppliers Strategy


25/104

25

Tactics for Close Supplier RelationshipsTactics for Close Supplier Relationships

Tacticq Reduce total number of suppliers

q Certify suppliersq

q

q

Ask for JIT delivery from keysuppliers

q Involve key suppliers in newproduct design

q Develop software linkages to

suppliersq

Resultsq Average 20% reduction in 5 yearsq

q Almost 40% of all companiessurveyed were themselvescurrently certified

q About 60% ask for this

q About 54% do this

q Almost 80% claim to do this

About 50% claim this


26/104

26

RawMaterial( )uppliersBackwardackwardIntegrationntegrationCurrenturrentTransformationransformationForwardorward

Integrationntegrationinished Goodsinished Goods( )ustomers)ustomers

q Ability to produce goodspreviously purchased

q Setup operationsq Buy supplier

q Make-buy issueq Major financial commitment

q Hard to do all things well

Vertical Integration StrategyVertical Integration Strategy


27/104

27

Forms of Vertical IntegrationForms of Vertical Integration

Iron Ore

Steel

Automobiles

Distribution

System

Dealers

Silicon

IntegratedCircuits

Circuit Boards

ComputersWatches

Calculators

Farming

Flour Milling

aw Material( )uppliersBackwardIntegrationCurrentTransformation

ForwardIntegration

inished Goods( )ustomersBaked Goods


28/104

28

Vertical Integration Can be Forward or BackwardVertical Integration Can be Forward or Backward

Vertical IntegrationVertical Integration Examples of Vertical IntegrationExamples of Vertical Integration

Raw material (suppliers)Raw material (suppliers) Iron oreIron ore SiliconSilicon FarmingFarming

Backward IntegrationBackward Integration SteelSteel

Current TransformationCurrent Transformation AutomobilesAutomobiles Integrated CircuitsIntegrated Circuits FlourFlourMillingMilling

Forward IntegrationForward Integration DistributionDistributionSystemSystem

Circuit boardsCircuit boards

Finished goods (customers)Finished goods (customers) DealersDealers Computers, watches,Computers, watches,calculatorscalculators

BakedBakedGoodsGoods


29/104

29

q Japanese word for affiliated chain

q System of mutual alliances andcross-ownership

q Company stock is held by allied firmsq Lowers need for short-term profits

q Links manufacturers, suppliers, distributors, &lenders

q Partnerships extend across entire supply chain

Keiretsu Network StrategyKeiretsu Network Strategy


30/104

30

Virtual CompaniesVirtual Companies

q

Companies that rely on a variety of supplierrelationships to provide services on demand.

q Also known as hollow corporations, or networkcorporations


31/104

31

1995 Corel Corp.

Virtual Company StrategyVirtual Company Strategy

q Network of independent companiesq Linked by technology

q PCs, faxes, Internet etc.q Each contributes core competenciesq Typically provide services

q Payroll, editing, designingq May be long or short-term

q

Usually, only until opportunity is met


32/104

32

Managing the Supply-ChainManaging the Supply-Chain

q Options:q Postponementq Channel assemblyq Drop shipping

q Blanket ordersq Invoiceless purchasingq Electronic ordering and funds transferq Stockless purchasingq Standardizationq Internet purchasing (e-procurement)


33/104

33

Managing the Supply-Chain - Other OptionsManaging the Supply-Chain - Other Options

q

Establishing lines of credit for suppliersq Reducing bank float

q Coordinating production and shipping schedules withsuppliers and distributors

q Sharing market researchq Making optimal use of warehouse space


34/104

34

Successful Supply-Chain Management Requires:Successful Supply-Chain Management Requires:

q

A mutual agreement on goalsq Trust

q Compatible organizational cultures


35/104

35

ORGANIZATION STRUCTUREORGANIZATION STRUCTURE

SUPPLY CHAIN MANAGEMENT


36/104

36

1-38 2001 The Gillette Company

GSCM Mission

The Gillette Company will be as highly

recognised and admired by our customers,

shareholders, and employees for SupplyChain performance as we are for our

product development and support of globalbrands. We will become World Class in

Planning & Executing Product Deliveryfrom Source to Customers Shelf.


37/104

37

ORG


38/104

38

Market Distribution Operating ConcernsMarket Distribution Operating Concerns

Market Distribution:

Activities related to providing customer service. Requires performingorder receipt and processing, deploying inventories, storage andhandling, and outbound transportation within a supply chain. Includes

the responsibility to coordinate with marketing planning in such areasas pricing, promotional support, customer service levels, deliverystandards, handling return merchandise, and life-cycle support. Theprimary market distribution objective is to assist in revenue generationby providing strategically desired customer service levels at the lowesttotal cost.


39/104

39

Manufacturing Support Operating ConcernsManufacturing Support Operating Concerns

Manufacturing Support:

Activities related to planning, scheduling, and supportingmanufacturing operations. Requires master schedule planning andperforming work-in-process storage, handling, transportation, and

time phasing of components. Includes the responsibility for storage ofinventory at manufacturing sites and maximum flexibility in thecoordination of geographic and final assemblies postponementbetween manufacturing and market distribution operations.


40/104

40

Procurement Operating ConcernsProcurement Operating Concerns

Procurement:

Activities related to obtaining products and materials from outsidesuppliers. Requires performing resource planning, supply sourcing,negotiation, order placement, inbound transportation, receiving and

inspection, storage and handling, and quality assurance. Includes theresponsibility to coordinate with suppliers in such areas as scheduling,supply continuity, hedging, and speculation, as well as researchleading to new sources or programs. The primary procurementobjective is to support manufacturing or resale organizations byproviding timely purchasing at the lowest total cost.

P h iP h i


41/104

41

PurchasingPurchasing

Factors increasing the importance of purchasing today:q Tremendous impact of material costs on profit (60-

70% of each sales Rupee is paid to materialsuppliers)

q Popularity of just-in-time manufacturing (supplydeliveries must be exact in timing, quantity, andquality)

q Increasing global competition (growing competition

for scarce resources, and a geographicallystretched-out supply chain)

Mission of Purchasing


42/104

42

Mission of Purchasing

The mission of purchasing is to sensethe competitive priorities necessary foreach major product/service (lowproduction costs, fast and on-timedeliveries, high quality /services, andflexibility) and to develop purchasingplans for each major product/service

that are consistent with operationsstrategies

Mi i f P h iMi i f P h i


43/104

43

Mission of PurchasingMission of Purchasing

q

Develop purchasing plans for each major product orservice that are consistent with operationsstrategies:

q Low production costs

q Fast and on-time deliveriesq High quality products and servicesq Flexibility

P h i M tP h i M t


44/104

44

Purchasing ManagementPurchasing Management

q

Maintain data base of available, qualified suppliersq Select suppliers to supply each material

q Negotiate contracts with suppliers

q Act as interface between company and suppliers

q Provide training to suppliers on latest technologies

Purchasing vs. ProcurementPurchasing vs. Procurement


45/104

45

gg

q

Purchasing is normally associated with a functionalactivity

q Procurement/Sourcing should be viewed as a strategicactivity for the business.

Purchasing vs. Sourcing (contd)Purchasing vs. Sourcing (contd)


46/104

46

g g ( )g g ( )

Purchasing Mentality Sourcing Mentality One contract at a time Continual Improvement

Win-lose Win-win

Immediate returns Long-term perspective

Secretive Trusting

Current needs can be met Strategic fit existsLowest purchase price Total cost of ownership

Multiple suppliers Supply-base reduction

Infrequent interaction Frequent interaction

Criticism Constructive evaluations

Buyer-sales relationship Cross-functional relationship

Safety in numbers Safety in knowledgeQuality inspected Quality at source

Inventory as safeguard Information as safeguard

S pplier De elopment Thro gh Proc rementSupplier Development Through Procurement


47/104

47

Supplier Development Through ProcurementSupplier Development Through Procurement

The Procurement Viewpoint

Supplier PurchaserProcurement Initiative

Marketing Response

Supplier PurchaserMarketing Initiative

Purchasing Response

The Marketing Viewpoint

Importance of SourcingImportance of Sourcing


48/104

48

Importance of SourcingImportance of Sourcing

q

In the average manufacturing firm purchased goodsand services account for 55% of every sales Dollar

q Direct labor costs account for only about 10% of thesales dollar

Procurements Potential PayoffProcurements Potential Payoff


49/104

49

Procurement s Potential Payoffocu e e s o e yo

q Beginning Positionq Sales $100,000,000q

Purchases(55%) 55,000,000q Labor (15%) 15,000,000q Other (22%) 22,000,000q Pre-tax profit (8%) 8,000,000

Procurements Potential PayoffProcurements Potential Payoff


50/104

50

Procurement s Potential Payoffy

Reduce

purchase cost

by 10%

Increase

sales by 68%

Reduce labor

cost by 36%

Sales $100,000,000 $168,000,000 $100,000,000

Purchases 49,500,000 92,400,000 55,000,000

Labor 15,000,000 25,200,000 9,600,000

Other 22,000,000 36,960,000 22,000,000

Pre-tax

Profit

13,500,000 13,440,000 13,400,000

Major Categories for the Components of Total Cost of OwnershipMajor Categories for the Components of Total Cost of Ownership


51/104

51

Major Categories for the Components of Total Cost of OwnershipMajor Categories for the Components of Total Cost of Ownership

Pre-transaction Components1. Identifying need2. Investigating sources3. Qualifying sources4. Adding supplier to

internal systems5. Educating :

supplier in firms

operationsfirm in suppliersoperations

Post-transaction Components1. Line fallout2. Defective finished goods

rejected before sale3. Field failures4. Repair/ replacement in field5. Customer goodwill/ reputation

of firm6. Cost of repair parts7. Cost of maintenance and repairs

Transaction Components1. Price2.Order placement/preparation3. Delivery/ transportation4. Tariffs/ duties5. Billing/ payment

6. Inspection7. Return of parts8. Follow-up and correction

Total Cost of Ownership

Major Trends in ProcurementMajor Trends in Procurement


52/104

52

Major Trends in ProcurementMajor Trends in Procurement

q Fewer sources of supply will be usedq Buyers will be more concerned with final customer satisfactionq Buyers will focus on lead supplier relationshipsq Buyers will drive shorter cycle timesq Design engineers and buyers will be part of sourcing teamsq Global sourcing will increaseq e-procurement will have a major impact-not all of it will be

positive for supply chain integrationq buying exchangesq auction sites

E ChemicalsE-Chemicals


53/104

53

E-ChemicalsE-Chemicals

Advantages of Centralized PurchasingAdvantages of Centralized Purchasing


54/104

54

Advantages of Centralized PurchasingAdvantages of Centralized Purchasing

q

Buying in large quantities - better pricesq More clout with suppliers - greater supply continuity

q Larger purchasing department - buyer specialization

q Combining small orders - less order cost duplication

q Combining shipments - lower transportation costs

q Better overall control

Purchasing ProcessPurchasing Process


55/104

55

Purchasing ProcessPurchasing Process

Material RequisitionMaterial Requisition

Request for QuotationsRequest for Quotations

Select Best SupplierSelect Best Supplier

Purchase OrderPurchase Order

Receive and InspectReceive and InspectGoodsGoods

From purchasing,From purchasing,to potential suppliersto potential suppliers

From any department,From any department,to purchasingto purchasing

Based on quality, price,Based on quality, price,lead time, dependabilitylead time, dependability

From purchasing,From purchasing,to selected supplierto selected supplier

From supplier, to receiving,From supplier, to receiving,quality control, warehousequality control, warehouse

Content of Material RequisitionContent of Material Requisition


56/104

56


q Requisition no.q

Requisition dateq Item master codeq Description of material or contentq Used in productq Unit of measureq Specificationq Lead timeq Sourcing data :supplier or producerq Mode of transportq Economic order lot size (packing unit)q Shelf life restrictionq Material handling requirement (control temperature)q Documents to accompany with the material



57/104

57


q Item master codeq Quality control analysis days (quarantine)q Reorder quantityq Maximum inventoryq Standard priceq Duty and sales tax and other border crossing charges

dataq Clearing agent or mode of transportation while

handling locallyq Certificate of originq Labeling specificationq Any special handling restriction etc.

q Required dateq Authorized signature etc.



58/104

58


q

Item master codeq Capital goodsq Equipment, machinery, installation, parts,

subassemblyq

Method of deliveryq Maintenance, pre-post, after sales service,

annual preventive, accidental,q Financial package, (supplier credit,

leasing, consignment sales, wet leasingetc.)q Insuranceq Commissioning, trial,

Content of quotation- invitationContent of quotation- invitation


59/104

59

Content of quotation invitationContent of quotation invitation

q Will be address to the enlisted supplierq

Date of quotationq Deadline for the quotation to be receivedq All the details as mentioned on the companies master dataq Financial and payments procedure

q

Method of paymentq Term of paymentq Negotiable documentsq Companies bankers (L/C, Contract, Usance,)q Bullet delivery, or partial shipment allowedq Penalty clauseq Margin or deposit with the tender or bank guaranteeq Insuranceq Title of good transfer

Content of quotation- invitationContent of quotation- invitation


60/104

60

Content of quotation invitationContent of quotation invitation

q Tentative date of intimation or opening of quotation.q Is it a revolving contract or one time delivery

q Condition for the visit of siteq Specimen samplesq Condition for the approval of sample etc.q Capital goods

q

Turn keyq Installationq Trainingq After sale serviceq Maintenance contractq Free maintenance periodq Pregnancy period before the deliveryq Supplier creditq Leasing facility etc.

Selection of supplier sourcingSelection of supplier sourcing


61/104

61


q Bench mark for spread sheet analysisq Lead timeq

Location of sourcing siteq Localq Importsq In-house configuration,q Outsourcingq Importing in bulk or mix

q Term offeredq Price (rupees, usd, euro, sterling)q Credit (local L/C, contract, letter of aware nessq Loading and unloadingq Transportationq Insuranceq Freight collect, freight prepaidq



62/104

62

Selection of supplier sourcingpp g

q Bench mark for spread sheet analysisq Term offered (more)

q Lot sizeq Negotiation documentation chargesq L/c opening commission on beneficiary

accountsq Accessibility (quick response, emergency,

replenishmentq Past experienceq Credibility financial, data from the contemporaries

q

Maintenance service post deliveryq After sale serviceq Turn key ---projectsq Implementation, installation, trial commissioning , etc.q Configuration, source key, parachute clause, divorce, notice

period etc.

Purchase orderPurchase order


63/104

63

u c ase o de

q Date of orderq

Purchase order numberq Reference (indent number or confirmation)q Maximum detail from item master code.q Financial termsq Delivery dateq Method of shipmentq Lot sizeq Partial shipmentq Maintenance contractq Freight and other chargesq Margin, advance, guarantee, l/c contract, letter of awareness

commitment, other terms and conditions,q Documentation requiredq

Purchase orderPurchase order


64/104

64

q Authorized

q Any special term (pre-shipment samples, qualitycontrol specification, standards,)

q Validation data

q Shelf life

q Guarantee

q Insurance condition

q Any special mode of handling

q Loading unloadingq Freight etc.

Allegations of improper Behaviour by BuyerAllegations of improper Behaviour by Buyer


65/104

65

g p p y yg p p y y

q In exchange for cash and gifts, allowing supplier tostore tools and park vehicles on company propertyand awarding contracts to suppliers without

bidding.

q

Accepting gifts such as expensive perfumery, cloths,dinners, function cards, foreign trips, liquor, giftcoupon during festivals and holidays season.

q Accepting on sharing basis indenting commission

within or outside the countryq Bid rigging, accepting bribes, theft and tax evasion,

and accepting large sums of cash.

Allegations of improper Behaviour by BuyerAllegations of improper Behaviour by Buyer


66/104

66

g p p y yg p p y y

q Payment processing on receipt of kickback

q Approval of product quality on receipt of kickback

q Accepting less quantity of goods in exchange ofbribes

q Accepting lot of bribes in acceptance enlistment ofapproved suppliers or contractors

q Benami Transaction through their own respectivecompanies

q Opening their own respective buying houses oragency and making the purchases from them.

q

Guidelines for Ethical Behaviour in PurchasingGuidelines for Ethical Behaviour in Purchasing


67/104

67

gg

q The National Association for Purchasing Managers(NAPM) has developed a set of three principlesand 12 standards to help guide ethical behaviour in

purchasing. These are the principles:q

Loyalty to your organizationq Justice to those with whom you dealq Faith in your profession

q From these principles are derived the NAPM

standards of purchasing practice (domestic andinternational)



68/104

68

gg

q Avoid the intent and appearance of unethical or compromisingpractice in relationships, actions, and communications

q Demonstrate loyalty to the employer by diligently followingthe lawful instructions of the employer, using reasonablecare and only authority granted.

q Refrain from any private business or professional activity thatwould create a conflict between personal interests and theinterests of the employer

q Refrain from soliciting or accepting money, loans, credits, orprejudicial discounts, and the acceptance of gifts,entertainment favours, or services from present or

potential suppliers that might influence or appear toinfluence purchasing decisions.



69/104

69

g

q Handle confidential or proprietary informationbelonging to employers or suppliers with due careand proper consideration of ethical and legalramifications and governmental regulation

q Promote positive supplier relationships through

courtesy and impartiality in all phases of thepurchasing cycle.

q Refrain from reciprocal agreements that restraincompetition

q Know and obey the letter and spirit of laws governingthe purchasing function and remain alert to thelegal ramifications of purchasing decisions.



70/104

70

g

q Encourage all segments of society to participate bydemonstrating support for small, disadvantaged,and minority-owned businesses.

q Discourage purchasing involvement in employerssponsored programs of personal purchases that

are not business related.q Enhance the proficiency and stature of the purchasing

profession by acquiring and maintaining currenttechnical knowledge and the highest standards of

ethical behaviorq Conduct international purchasing in accordance with

the laws, customs, and practices of foreigncountries

Buyers DutiesBuyers Duties


71/104

71

q Know the market for their commodities

q Understand the laws.... tax, contract, patent..

q Process purchase requisitions and quotation requests

q Make supplier selections

q Negotiate prices and conditions of saleq Place and follow-up on purchase orders

q Maintain ethical behavior

Make-or-Buy AnalysisMake-or-Buy Analysis


72/104

72

Considerations in make-or-buy decisions:

q Lower cost - purchasing or production?

q Better quality - supplier or in-house?

q More-reliable deliveries - supplier or in-house?

q What degree of vertical integration is desirable?q Should distinctive competencies be outsourced?

Make/Buy ConsiderationsMake/Buy Considerations


73/104

73

y

1. Maintain core competenciesand protect personnelfrom layoff

2. Lower production cost

3. Unsuitable suppliers

4. Assure adequate supply

5. Utilize surplus labor andmake a marginalcontribution

1. Frees management to dealwith its primary business

2. Lower acquisition cost

3. Preserve suppliercommitment

4. Obtain technical ormanagement ability

5. Inadequate capacity

Reasons for Making Reasons for Buying

Make/Buy Considerations - ContinuedMake/Buy Considerations - Continued


74/104

74

6. Obtain desired quantity

7. Remove supplier collusion

8. Obtain a unique item thatwould entail a prohibitivecommitment from thesupplier

9. Protect proprietary design or

quality10.Increase or maintain size of

company11.

6. Reduce inventory costs

7. Ensure flexibility andalternate source of supply

8. Inadequate managerial ortechnical resources

9. Reciprocity

10.Item is protected by patent or

trade secret11.

Reasons for Making Reasons for Buying

Example: Make-or-BuyExample: Make-or-Buy


75/104

75

A firm manufactures a product that contains apart requiring heat treatment. An analyst is trying todecide whether it is more economical to buy the heattreating service or perform the treatment in house.Pertinent data is shown on the next slide.

If part quality and delivery performance areabout the same for the two alternatives, whichalternative should be selected?



76/104

76

Purchase Heat-Treat

Heat-Treat

In-HouseService

Number of parts annually 5,000 5,000 Fixed cost per year $25,000 $0 Variable cost per part $13.20 $17.50



77/104

77

q 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 (thesecond alternative). continued



78/104

78

The analyst has assumed that 5,000 parts peryear will require heat treatment. By how many partscan the firms requirements increase or decrease

before in-house heat treating is more economical?Should the analyst rethink his/her decision?



79/104

79

q 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 increasesby 814 (about 16%) or more, in-house heat treatmentwould be more economical. The analyst should givethe decision more thought.

LogisticsLogistics


80/104

80

q Logistics usually refers to management of:q the movement of materials within the factoryq the shipment of incoming materials from

suppliers

q the shipment of outgoing products to customers

Movement of Materials within FactoriesMovement of Materials within Factories


81/104

81

IncomingIncomingVehiclesVehicles

IncomingIncomingVehiclesVehicles

ReceivingReceivingDockDock

ReceivingReceivingDockDock

QualityQualityControlControlQualityQualityControlControl

WarehouseWarehouseWarehouseWarehouse

WorkWorkCenterCenterWorkWorkCenterCenter

Other WorkOther WorkCentersCenters

Other WorkOther WorkCentersCenters Packaging

PackagingPackagingPackagingFinishedFinishedGoodsGoods

FinishedFinishedGoodsGoods

ShippingShippingShippingShippingShippingShipping

DockDockShippingShipping

DockDockOutgoingOutgoingVehiclesVehicles

OutgoingOutgoingVehiclesVehicles

The typical locations from/to which material is moved:The typical locations from/to which material is moved:

Shipments To and From FactoriesShipments To and From Factories


82/104

82

q Trafficq Traffic departments routinely examine shipping

schedules and select:q shipping methodsq

time tablesq ways of expediting deliveriesq Traffic management is a specialized field

requiring technical training in Department of

Transportation (DOT) and InterstateCommerce Commission (ICC) regulationsand rates.



83/104

83

q Distributionq Distribution, or physical distribution, is the

shipment of finished goods through thedistribution system to customers.

q

A distribution system is the network ofshipping and receiving points starting withthe factory and ending with the customers.



84/104

84

q Distribution Requirements Planningq DRP is the planning for the replenishment of

regional warehouse inventories.q DRP uses MRP-type logic to translate regional

warehouse requirements into centraldistribution-center requirements, which arethen translated into gross requirements in theMPS at the factory.



85/104

85

q Distribution Requirements Planningq Scheduled receipts are previously-placed orders

that are expected to arrive in a given weekq Planned receipt of shipments are orders planned,

but not yet placed, for the futureq Projected ending inventory is computed as:

q Previous weeks projected endinginventory

q

+ Planned receipt of shipments in currentweek

q + Scheduled receipt of shipments incurrent week

q

-- Forecasted demand in current week



86/104

86

q DRP Time-Phased Order Point Record

Forecasted demand (units)Forecasted demand (units)Scheduled receiptsScheduled receipts

Projected ending inventoryProjected ending inventory

Planned receipt of shipmentsPlanned receipt of shipments

Planned orders for shipmentsPlanned orders for shipments

Region. Warehouse #1Region. Warehouse #1 LT = 1LT = 1Std. Quantity = 50 SS = 10Std. Quantity = 50 SS = 10

6060

-1-1

8080

50503030

4040

4040

11 22 33

3030

50505050

50505050

303020201010

4040

5544

4040

WeekWeek

Example: DRPExample: DRP


87/104

87

Products are shipped from a companys maindistribution center (adjacent to the factory) to tworegional warehouses. The DRP records on the nexttwo slides show for the two regional warehouse the forecasted demand, scheduled receipts, and lastweeks projected ending inventories for a single

product. The third upcoming slide shows for the main

distribution center scheduled receipts and lastweeks projected ending inventory for the same

product. Complete the DRP records.



88/104

88

q DRP Record for Regional Warehouse #1






200200

-1-1

1001008080 100100

11 22 33

8080 6060

5544

100100

WeekWeek



89/104

89

q DRP Record for Regional Warehouse #2






220220

-1-1

200200100100 200200

11 22 33

200200 240240

5544

200200

WeekWeek



90/104

90

q DRP Record for Main Distribution Center

Gross Requirements (units)Gross Requirements (units)Scheduled receiptsScheduled receipts




Main Distrib. CenterMain Distrib. Center LT = 1LT = 1Std. Quantity = 500 SS = 200Std. Quantity = 500 SS = 200

250250

-1-1

500500

11 22 33 5544

WeekWeek



91/104

91

q Completed DRP Record for Regional Warehouse #1






200200

-1-1

220220

1001008080

100100

120120

100100

11 22 33

8080

100100

100100

100100

80808080140140

6060

5544

100100

WeekWeek



92/104

92

q Completed DRP Record for Regional Warehouse #2






220220

-1-1

200200

320320

200200100100

200200

120120

200200

11 22 33

200200

200200200200200200

200200

80808080120120

240240

5544

200200

WeekWeek



93/104

93

q DRP Record for Main Distribution Centerq The gross requirement ( in row 1) for any

week is determined by summing the plannedorders for shipment for the same week at thetwo regional warehouses

q These gross requirements at the MDC are inputto the master production schedule in thefactory

q In other words, the timing and quantities of

production in the factory are linked to thetiming and quantities of demand at theregional warehouses



94/104

94

q Completed DRP Record for Main Distribution Center





Main Distrib. CenterMain Distrib. Center LT = 1LT = 1Std. Quantity = 500 SS = 200Std. Quantity = 500 SS = 200

250250

-1-1

550550

500500200200

500500

250250

300300

11 22 33

200200

500500

450450450450550550

100100

5544

WeekWeek

Shipments To and From FactoriesShipments To and From FactoriesShipments To and From FactoriesShipments To and From Factories


95/104

95

qDistribution Resource PlanningDistribution Resource PlanningqDistribution resource planningDistribution resource planning extends DRP soextends DRP so

that the key resources of warehouse space,that the key resources of warehouse space,workers, cash, and vehicles are provided in theworkers, cash, and vehicles are provided in the

correct quantities at the correct times.correct quantities at the correct times.

q

Analyzing Shipping DecisionsAnalyzing Shipping Decisions


96/104

96

q The Transportation Problemq Problem involves shipping a product from

several sources (ex. factories) with limitedsupply to several destinations (ex.warehouses) with demand to be satisfied

q Per-unit cost of shipping from each source toeach destination is specified

q Optimal solution minimizes total shipping cost

and specifies the quantity of product to beshipped from each source to each destination

Example: Minimizing Shipping CostsExample: Minimizing Shipping Costs


97/104

97

Pacer produces computer monitors in its threefactories and ships them to five regional warehouses.The factory-to-warehouse shipping costs per monitorare:

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 4.503.70

3 3.90 3.60 1.50 5.803.30



98/104

98

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 ofmonitors 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 thistransportation problem.



99/104

99

q 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 issatisfied

and no factorys capacity is

Innovations in LogisticsInnovations in Logistics


100/104

100

q New developments affecting logistics include:q All-freight airportsq Inter-modal shippingq In-transit rates

q Consolidated shipmentsq Air-freight and trucking deregulationq Advanced logistics software

WarehousingWarehousing


101/104

101

q Warehousing is the management of materials whilethey are in storage.

q Warehousing activities include:q Storing

q Dispersingq Orderingq Accounting

WarehousingWarehousing


102/104

102

q Record keeping within warehousing requires a stockrecord for each item that is carried in inventories.

q The individual item is called a stock-keeping unit(SKU).

q

Stock records are running accounts that show:q On-hand balanceq Receipts and expected receiptsq Disbursements, promises, and allocations

Demand ManagementDemand Management


103/104

103

q Review customer orders and promise shipment oforders as close to request date as possible

q Update MPS at least weekly.... work with Marketingto understand shifts in demand patterns

q

Produce to order..... focus on incoming customerorders

q Produce to stock ..... focus on maintaining finishedgoods levels

q Planning horizon must be as long as the longest leadtime item

EndEnd


104/104