1. 2 chapter 11 supply chain management and e-business

1 1 2002 South-Western/Thomson Learning 2002 South-Western/Thomson Learning TMTM

Slides preparedSlides preparedby John Loucksby John Loucks

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Chapter 11Chapter 11Chapter 11Chapter 11

Supply Chain ManagementSupply Chain Management

And E-BusinessAnd E-Business

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OverviewOverviewOverviewOverview

IntroductionIntroduction Supply Chain ManagementSupply Chain Management PurchasingPurchasing LogisticsLogistics WarehousingWarehousing ExpeditingExpediting Benchmarking the Performance of Materials ManagersBenchmarking the Performance of Materials Managers Third-Party Logistics Management ProvidersThird-Party Logistics Management Providers E-Business and Supply Chain ManagementE-Business and Supply Chain Management Wrap-Up: What World-Class Companies DoWrap-Up: What World-Class Companies Do

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IntroductionIntroductionIntroductionIntroduction

MaterialsMaterials - any commodities used directly or - any commodities used directly or indirectly in producing a product or service.indirectly in producing a product or service. Raw materials, component parts, assemblies, Raw materials, component parts, assemblies,

finished goods, and suppliesfinished goods, and supplies Supply chainSupply chain - the way materials flow through - the way materials flow through

different organizations from the raw material supplier different organizations from the raw material supplier to the finished goods consumer.to the finished goods consumer.

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Supply ChainSupply Chainfor Steel in an Automobile Doorfor Steel in an Automobile Door

Supply ChainSupply Chainfor Steel in an Automobile Doorfor Steel in an Automobile Door

MININGMININGCOMPANYCOMPANY

Mines iron oreMines iron ore

STEELSTEELMILLMILL

Forms steel ingotForms steel ingot

STEELSTEELCOMPANYCOMPANY

Forms sheet metalForms sheet metal

IronIron

oreore

SteelSteel

ingotsingots

AUTOMOTIVEAUTOMOTIVESUPPLIERSUPPLIER

Makes doorMakes door

AUTOMOBILEAUTOMOBILEMANUFACTURERMANUFACTURER

Makes automobileMakes automobile

CARCARDEALERSHIPDEALERSHIP

Does preparationDoes preparation

CarCar

doordoor

CarCar

FINALFINALCONSUMERCONSUMER

Drives automobileDrives automobile

PreparedPrepared

carcar

SheetSheet

metalmetal

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Supply Chain ManagementSupply Chain ManagementSupply Chain ManagementSupply Chain Management

Refers to all the management functions related to the Refers to all the management functions related to the flow of materials from the company’s direct suppliers flow of materials from the company’s direct suppliers to its direct customers.to its direct customers.

Includes purchasing, traffic, production control, Includes purchasing, traffic, production control, inventory control, warehousing, and shipping.inventory control, warehousing, and shipping.

Two alternative names:Two alternative names: Materials managementMaterials management Logistics managementLogistics management

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Supply Chain ManagementSupply Chain Managementin a Manufacturing Plantin a Manufacturing Plant

Supply Chain ManagementSupply Chain Managementin a Manufacturing Plantin a Manufacturing Plant

ReceivingReceivingandand

InspectionInspection

RawRawMaterials,Materials,Parts, andParts, andIn-processIn-process

Ware-Ware-HousingHousing

ProductionProduction

FinishedFinishedGoodsGoodsWare-Ware-

housinghousing

Inspection,Inspection,Packaging,Packaging,

AndAndShippingShippingS

uppl

iers

Cus

tom

ers

Materials Management

PurchasingPurchasing ProductionProductionControlControl

Warehousing andWarehousing andInventory ControlInventory Control

ShippingShippingand Trafficand Traffic

Physical materials flowPhysical materials flowInformation flowInformation flow

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PurchasingPurchasingPurchasingPurchasing

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

70% of each sales dollar is paid to material suppliers)70% of each sales dollar is paid to material suppliers) Popularity of just-in-time manufacturing (supply Popularity of just-in-time manufacturing (supply

deliveries must be exact in timing, quantity, and deliveries must be exact in timing, quantity, and quality)quality)

Increasing global competition (growing competition Increasing global competition (growing competition for scarce resources, and a geographically “stretched-for scarce resources, and a geographically “stretched-out” supply chain)out” supply chain)

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Mission of PurchasingMission of PurchasingMission of PurchasingMission of Purchasing

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

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Purchasing ManagementPurchasing ManagementPurchasing ManagementPurchasing Management

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

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Advantages of Centralized PurchasingAdvantages of Centralized PurchasingAdvantages of Centralized PurchasingAdvantages of Centralized Purchasing

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

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Purchasing ProcessPurchasing ProcessPurchasing ProcessPurchasing Process

Material RequisitionMaterial Requisition

Request for QuotationsRequest for Quotations

Select Best SupplierSelect Best Supplier

Purchase OrderPurchase Order

Receive and Inspect GoodsReceive and Inspect Goods

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

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Buyers’ DutiesBuyers’ DutiesBuyers’ DutiesBuyers’ Duties

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

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Make-or-Buy AnalysisMake-or-Buy AnalysisMake-or-Buy AnalysisMake-or-Buy Analysis

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

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

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

If part quality and delivery performance are If part quality and delivery performance are about the same for the two alternatives, which about the same for the two alternatives, which alternative should be selected?alternative should be selected?

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PurchasePurchaseHeat-TreatHeat-Treat Heat- Heat-

TreatTreatIn-HouseIn-House ServiceService

Number of parts annuallyNumber of parts annually 5,0005,000 5,0005,000

Fixed cost per yearFixed cost per year $25,000$25,000 $0$0

Variable cost per partVariable cost per part $13.20$13.20 $17.50$17.50

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Compute the total cost for each alternativeCompute the total cost for each alternative

TC = FC + vQTC = FC + vQ

TCTC11 = FC = FC11 + v + v11Q = 25,000 + 13.20(5,000) = $91,000Q = 25,000 + 13.20(5,000) = $91,000

TCTC22 = FC = FC22 + v + v22Q = 0 + 17.50(5,000) = $87,500Q = 0 + 17.50(5,000) = $87,500

The firm should buy the heat-treating service (the The firm should buy the heat-treating service (the second alternative).second alternative).

continuedcontinued

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

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Compute the break-even parts quantityCompute the break-even parts quantity

FCFC11 + v + v11Q = FCQ = FC22 + v + v22Q Q

Q = (FCQ = (FC1 1 - FC- FC22)/(v)/(v22- v- v11))

Q = (25,000 – 0)/(17.50 – 13.20)Q = (25,000 – 0)/(17.50 – 13.20)

Q = 5,814Q = 5,814

If the firm’s annual parts requirement increases If the firm’s annual parts requirement increases by 814 (about 16%) or more, in-house heat treatment by 814 (about 16%) or more, in-house heat treatment would be more economical. The analyst should give would be more economical. The analyst should give the decision more thought.the decision more thought.

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LogisticsLogisticsLogisticsLogistics

LogisticsLogistics usually refers to management of: usually refers to management of: the movement of materials within the factorythe movement of materials within the factory the shipment of incoming materials from suppliersthe shipment of incoming materials from suppliers the shipment of outgoing products to customersthe shipment of outgoing products to customers

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Movement of Materials within FactoriesMovement of Materials within FactoriesMovement of Materials within FactoriesMovement of Materials within Factories

Incoming Incoming VehiclesVehicles

Incoming Incoming VehiclesVehicles

ReceivingReceivingDockDock

ReceivingReceivingDockDock

QualityQualityControlControlQualityQualityControlControl WarehouseWarehouseWarehouseWarehouse

Work Work CenterCenterWork Work CenterCenter

Other Work Other Work CentersCenters

Other Work Other Work CentersCenters PackagingPackagingPackagingPackaging FinishedFinished

GoodsGoodsFinishedFinishedGoodsGoods

ShippingShippingShippingShipping ShippingShippingDockDock

ShippingShippingDockDock

OutgoingOutgoingVehiclesVehiclesOutgoingOutgoingVehiclesVehicles

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

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

TrafficTraffic Traffic departmentsTraffic departments routinely examine shipping routinely examine shipping

schedules and select:schedules and select: shipping methodsshipping methods time tablestime tables ways of expediting deliveriesways of expediting deliveries

Traffic managementTraffic management is a specialized field requiring is a specialized field requiring technical training in Department of Transportation technical training in Department of Transportation (DOT) and Interstate Commerce Commission (DOT) and Interstate Commerce Commission (ICC) regulations and rates.(ICC) regulations and rates.

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DistributionDistribution DistributionDistribution, or physical distribution, is the , or physical distribution, is the

shipment of finished goods through the shipment of finished goods through the distribution system to customers.distribution system to customers.

A A distribution systemdistribution system is the network of shipping is the network of shipping and receiving points starting with the factory and and receiving points starting with the factory and ending with the customers.ending with the customers.

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Distribution Requirements PlanningDistribution Requirements Planning DRP is the planning for the replenishment of DRP is the planning for the replenishment of

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

warehouse requirements into central distribution-warehouse requirements into central distribution-center requirements, which are then translated into center requirements, which are then translated into gross requirements in the MPS at the factory.gross requirements in the MPS at the factory.

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Distribution Requirements PlanningDistribution Requirements Planning Scheduled receiptsScheduled receipts are previously-placed orders that are previously-placed orders that

are expected to arrive in a given weekare expected to arrive in a given week Planned receipt of shipmentsPlanned receipt of shipments are orders planned, but are orders planned, but

not yet placed, for the futurenot yet placed, for the future Projected ending inventoryProjected ending inventory is computed as: is computed as:

Previous week’s projected ending inventoryPrevious week’s projected ending inventory + Planned receipt of shipments in current week+ Planned receipt of shipments in current week + Scheduled receipt of shipments in current week+ Scheduled receipt of shipments in current week -- Forecasted demand in current week-- Forecasted demand in current week

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DRP Time-Phased Order Point RecordDRP 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 = 1 LT = 1Std. Quantity = 50 SS = 10Std. Quantity = 50 SS = 10

6060

-1-1

8080

5050

3030

4040

4040

11 22 33

3030

50505050

50505050

303020201010

4040

5544

4040

WeekWeek

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Example: DRPExample: DRPExample: DRPExample: DRP

Products are shipped from a company’s main Products are shipped from a company’s main distribution center (adjacent to the factory) to two distribution center (adjacent to the factory) to two regional warehouses. The DRP records on the next regional warehouses. The DRP records on the next two slides show – for the two regional warehouse – two slides show – for the two regional warehouse – the forecasted demand, scheduled receipts, and last the forecasted demand, scheduled receipts, and last week’s projected ending inventories for a single week’s projected ending inventories for a single product.product.

The third upcoming slide shows – for the main The third upcoming slide shows – for the main distribution center – scheduled receipts and last distribution center – scheduled receipts and last week’s projected ending inventory for the same week’s projected ending inventory for the same product. Complete the DRP records.product. Complete the DRP records.

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DRP Record for DRP Record for Regional Warehouse #1Regional Warehouse #1







200200

-1-1

100100

8080 100100

11 22 33

8080 6060

5544

100100

WeekWeek

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DRP Record for DRP Record for Regional Warehouse #2Regional Warehouse #2







220220

-1-1

200200

100100 200200

11 22 33

200200 240240

5544

200200

WeekWeek

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DRP Record for DRP Record for Main Distribution CenterMain Distribution Center

Gross Requirements (units)Gross Requirements (units)





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

250250

-1-1

500500

11 22 33 5544

WeekWeek

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Completed DRP Record for Completed DRP Record for Regional Warehouse #1Regional Warehouse #1







200200

-1-1

220220

100100

8080

100100

120120

100100

11 22 33

8080

100100

100100

100100

80808080140140

6060

5544

100100

WeekWeek

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Completed DRP Record for Completed DRP Record for Regional Warehouse #2Regional Warehouse #2







220220

-1-1

200200

320320

200200

100100

200200

120120

200200

11 22 33

200200

200200200200200200

200200

80808080120120

240240

5544

200200

WeekWeek

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DRP Record for Main Distribution CenterDRP Record for Main Distribution Center The “gross requirement” ( in row 1) for any week The “gross requirement” ( in row 1) for any week

is determined by summing the “planned orders for is determined by summing the “planned orders for shipment” for the same week at the two regional shipment” for the same week at the two regional warehouseswarehouses

These gross requirements at the MDC are input to These gross requirements at the MDC are input to the master production schedule in the factorythe master production schedule in the factory

In other words, the timing and quantities of In other words, the timing and quantities of production in the factory are linked to the timing production in the factory are linked to the timing and quantities of demand at the regional and quantities of demand at the regional warehouseswarehouses

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Completed DRP Record for Completed DRP Record for Main Distribution CenterMain Distribution Center






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

250250

-1-1

550550

500500

200200

500500

250250

300300

11 22 33

200200

500500

450450450450550550

100100

5544

WeekWeek

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Distribution Resource PlanningDistribution Resource Planning Distribution resource planningDistribution resource planning extends DRP so extends DRP so

that the key resources of warehouse space, that the key resources of warehouse space, workers, cash, and vehicles are provided in the workers, cash, and vehicles are provided in the correct quantities at the correct times.correct quantities at the correct times.

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Analyzing Shipping DecisionsAnalyzing Shipping DecisionsAnalyzing Shipping DecisionsAnalyzing Shipping Decisions

The “Transportation Problem”The “Transportation Problem” Problem involves shipping a product from several Problem involves shipping a product from several

sources (ex. factories) with limited supply to sources (ex. factories) with limited supply to several destinations (ex. warehouses) with demand several destinations (ex. warehouses) with demand to be satisfiedto be satisfied

Per-unit cost of shipping from each source to each Per-unit cost of shipping from each source to each destination is specifieddestination is specified

Optimal solution minimizes total shipping cost and Optimal solution minimizes total shipping cost and specifies the quantity of product to be shipped specifies the quantity of product to be shipped from each source to each destinationfrom each source to each destination

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Example: Minimizing Shipping CostsExample: Minimizing Shipping CostsExample: Minimizing Shipping CostsExample: Minimizing Shipping Costs

Pacer produces computer monitors in its three Pacer produces computer monitors in its three factories and ships them to five regional warehouses. factories and ships them to five regional warehouses. The factory-to-warehouse shipping costs per monitor The factory-to-warehouse shipping costs per monitor are:are:

WarehouseWarehouse

FactoryFactory AA BB CC DD EE11 $2.10$2.10 $4.30$4.30 $3.60$3.60 $1.80$1.80 $2.70$2.7022 4.90 4.90 2.60 2.60 3.50 3.50 4.50 4.50 3.70 3.7033 3.90 3.90 3.60 3.60 1.50 1.50 5.80 5.80 3.30 3.30

continuedcontinued

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The factories have the following capacities The factories have the following capacities (monitors produced per month): 1 = 10,000; (monitors produced per month): 1 = 10,000; 2 = 20,000; and 3 = 10,000. 2 = 20,000; and 3 = 10,000.

The warehouses need at least these numbers of The warehouses need at least these numbers of monitors per month: A = 5,000; B = 10,000; C = monitors per month: A = 5,000; B = 10,000; C = 10,000; D = 5,000; and E = 10,000.10,000; D = 5,000; and E = 10,000.

Use the POM Software Library to solve this Use the POM Software Library to solve this transportation problem.transportation problem.

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SolutionSolution

WarehouseWarehouse

FactoryFactory AA BB CC DD EE11 5,0005,000 00 00 5,0005,000 0022 00 10,000 10,000 00 00 10,00010,00033 00 00 10,00010,000 00 00

Total monthly shipping cost = $97,500Total monthly shipping cost = $97,500(Note: all warehouse demand is satisfied(Note: all warehouse demand is satisfied and no factory’s capacity is exceeded.)and no factory’s capacity is exceeded.)


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Innovations in LogisticsInnovations in LogisticsInnovations in LogisticsInnovations in Logistics

New developments affecting logistics include:New developments affecting logistics include: All-freight airportsAll-freight airports Inter-modal shippingInter-modal shipping In-transit ratesIn-transit rates Consolidated shipmentsConsolidated shipments Air-freight and trucking deregulationAir-freight and trucking deregulation Advanced logistics softwareAdvanced logistics software

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WarehousingWarehousingWarehousingWarehousing

WarehousingWarehousing is the management of materials while is the management of materials while they are in storage.they are in storage.

Warehousing activities include:Warehousing activities include: StoringStoring DispersingDispersing OrderingOrdering AccountingAccounting

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WarehousingWarehousingWarehousingWarehousing

Record keeping within warehousing requires a Record keeping within warehousing requires a stock stock recordrecord for each item that is carried in inventories. for each item that is carried in inventories.

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

Stock records are running accounts that show:Stock records are running accounts that show: On-hand balanceOn-hand balance Receipts and expected receiptsReceipts and expected receipts Disbursements, promises, and allocationsDisbursements, promises, and allocations

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Inventory AccountingInventory AccountingInventory AccountingInventory Accounting

In the past, inventory accounting was based on:In the past, inventory accounting was based on: periodic inventory accounting systemsperiodic inventory accounting systems -- periodic -- periodic

(end-of-day) updating of inventory records(end-of-day) updating of inventory records physical inventory countsphysical inventory counts -- periodic (end-of-year) -- periodic (end-of-year)

physical counting of all SKUs at one timephysical counting of all SKUs at one time Today, more and more firms are using:Today, more and more firms are using:

perpetual inventory accounting systemsperpetual inventory accounting systems -- real-time -- real-time updating of records as transactions occurupdating of records as transactions occur

cycle countingcycle counting -- ongoing (daily or weekly) physical -- ongoing (daily or weekly) physical counting of different SKUs counting of different SKUs

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Example: Cycle CountingExample: Cycle CountingExample: Cycle CountingExample: Cycle Counting

A company is implementing a cycle-counting A company is implementing a cycle-counting program. Class A items will be counted monthly, program. Class A items will be counted monthly, Class B items will be counted quarterly, and Class C Class B items will be counted quarterly, and Class C items will be counted semi-annually.items will be counted semi-annually.

5% of the firm’s inventory items are classified 5% of the firm’s inventory items are classified as Class A, 20% are Class B, and 75% are Class C. If as Class A, 20% are Class B, and 75% are Class C. If the firm has 16,000 different SKUs (unique inventory the firm has 16,000 different SKUs (unique inventory items), how many will need to be counted daily? items), how many will need to be counted daily? Assume 200 days per year are available for cycle Assume 200 days per year are available for cycle counting.counting.

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NumberNumberNumber Number of Countsof Counts

ClassClass of Itemsof Items per Itemper Item Total CountsTotal Countsof Itemof Item per Classper Class per Yearper Year per Yearper Year

AA 800 800 1212 9,600 9,600BB 3,200 3,200 4 4 12,80012,800CC 12,00012,000 2 2 24,00024,000

TotalTotal 16,00016,000 46,40046,400

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Number of Inventory Items Counted DailyNumber of Inventory Items Counted Daily

= 46,400/200 = 232 items per day= 46,400/200 = 232 items per day

Total counts per year=

Number of available days per year

Total counts per year=

Number of available days per year

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The cycle-counting personnel must count 232 The cycle-counting personnel must count 232 inventory items per day. If the average cycle-counter inventory items per day. If the average cycle-counter can count 24 items per day, how many counters are can count 24 items per day, how many counters are needed?needed?

Number of Cycle-Counting Personnel RequiredNumber of Cycle-Counting Personnel Required

= 232/24 = 9.67 or 10 counters= 232/24 = 9.67 or 10 counters

Number of items counted per day=

Number of items per day per counter

Number of items counted per day=

Number of items per day per counter

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Measuring the Measuring the Performance Materials ManagersPerformance Materials Managers

Measuring the Measuring the Performance Materials ManagersPerformance Materials Managers

Level and value of in-house inventoriesLevel and value of in-house inventories Percentage of orders delivered on timePercentage of orders delivered on time Number of stockoutsNumber of stockouts Annual cost of materialsAnnual cost of materials Annual cost of transportationAnnual cost of transportation Annual cost of warehouseAnnual cost of warehouse Number of customer complaintsNumber of customer complaints Other factorsOther factors

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Wrap-Up: World-Class PracticeWrap-Up: World-Class PracticeWrap-Up: World-Class PracticeWrap-Up: World-Class Practice

See materials management as key element in See materials management as key element in capturing global market sharecapturing global market share

Form partnerships with suppliersForm partnerships with suppliers Use computers extensively to manage logisticsUse computers extensively to manage logistics

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End of Chapter 11End of Chapter 11End of Chapter 11End of Chapter 11

1. 2 chapter 11 supply chain management and e-business

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