Slides prepared by John Loucks
2002 South-Western/Thomson Learning TM
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Chapter 11
Supply Chain Management And E-Business
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
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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 - the way materials flow through different organizations from the raw material supplier to the finished goods consumer.
Supply Chain for Steel in an Automobile Door
MINING COMPANY
Mines iron ore
Iron ore
Sheet metal
STEEL MILL
Forms steel ingot
Steel ingots
STEEL COMPANY
Forms sheet metal
AUTOMOTIVE SUPPLIER Makes door
Car door
AUTOMOBILE
MANUFACTURER
Car Prepared car
CAR DEALERSHIP Does preparation
Makes automobile
FINAL CONSUMER
Drives automobile
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Supply Chain Management
Refers to all the management functions related to the flow of materials from the companys direct suppliers to its direct customers. Includes purchasing, traffic, production control, inventory control, warehousing, and shipping. Two alternative names: Materials management Logistics management
Supply Chain Management in a Manufacturing Plant
Raw Materials, Parts, and In-process WareHousing
Receiving and Inspection
Production
Finished Goods Warehousing
Inspection, Packaging, And Shipping
Materials Management Purchasing Production Control Warehousing and Shipping Inventory Control and Traffic
Physical materials flow Information flow 7
Customers
Suppliers
Purchasing
Factors increasing the importance of purchasing today: Tremendous impact of material costs on profit (6070% 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 stretchedout supply chain)
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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
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
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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
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Purchasing Process
Material Requisition Request for Quotations
From any department, to purchasing From purchasing, to potential suppliers Based on quality, price, lead time, dependability From purchasing, to selected supplier From supplier, to receiving, quality control, warehouse
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Select Best Supplier
Purchase Order Receive and Inspect Goods
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
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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?
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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?
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Example: Make-or-Buy
Purchase Heat-Treat Service 5,000 $0 $17.50
Number of parts annually Fixed cost per year Variable cost per part
Heat-Treat In-House 5,000 $25,000 $13.20
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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
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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?
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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.
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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
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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
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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.
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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.
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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 distributioncenter requirements, which are then translated into gross requirements in the MPS at the factory.
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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
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Shipments To and From Factories
DRP Time-Phased Order Point Record
Week
Region. Warehouse #1 LT = 1 Std. Quantity = 50 SS = 10
Forecasted demand (units) Scheduled receipts Projected ending inventory Planned receipt of shipments Planned orders for shipments
-1
1
30 50
2
40 40
3
30 10 50
4
40 20 50 50
5
40 30 50
60
80
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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.
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Example: DRP
DRP Record for Regional Warehouse #1
Week
Region. Warehouse #1 LT = 1 Std. Quantity = 100 SS = 50
Forecasted demand (units) Scheduled receipts Projected ending inventory Planned receipt of shipments Planned orders for shipments
-1
1
80 100
2
100
3
80
4
60
5
100
200
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Example: DRP
DRP Record for Regional Warehouse #2
Week
Region. Warehouse #2 LT = 2 Std. Quantity = 200 SS = 80
Forecasted demand (units) Scheduled receipts Projected ending inventory Planned receipt of shipments Planned orders for shipments
-1
1
200
100 200 200 240 200 220
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Example: DRP
DRP Record for Main Distribution Center
Week
Main Distrib. Center LT = 1 Std. Quantity = 500 SS = 200
Gross Requirements (units) Scheduled receipts Projected ending inventory Planned receipt of shipments Planned orders for shipments
-1
1
500
250
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Example: DRP
Completed DRP Record for Regional Warehouse #1
Week
Region. Warehouse #1 LT = 1 Std. Quantity = 100 SS = 50
Forecasted demand (units) Scheduled receipts Projected ending inventory Planned receipt of shipments Planned orders for shipments
-1
1
80 100
2
100
3
80
4
60 80 100
5
100 80 100
200 220 120 140 100 100
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Example: DRP
Completed DRP Record for Regional Warehouse #2
Week
Region. Warehouse #2 LT = 2 Std. Quantity = 200 SS = 80
Forecasted demand (units) Scheduled receipts Projected ending inventory Planned receipt of shipments Planned orders for shipments
-1
1
200
100 200 200 240 200 220 320 120 120 200 200 200 80 80
200 200 200
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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
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Example: DRP
Completed DRP Record for Main Distribution Center
Week
Main Distrib. Center LT = 1 Std. Quantity = 500 SS = 200
Forecasted demand (units) Scheduled receipts Projected ending inventory Planned receipt of shipments Planned orders for shipments
-1
1
500
200 300 200 100 250 550 250 550 450 450 500 500
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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.
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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
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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:
Factory 1 2 3
Warehouse A B C D E $2.10 $4.30 $3.60 $1.80 $2.70 4.90 2.60 3.50 4.50 3.70 3.90 3.60 1.50 5.80 3.30 continued
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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.
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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.)
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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
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Warehousing
Warehousing is the management of materials while they are in storage. Warehousing activities include: Storing Dispersing Ordering Accounting
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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
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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
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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.
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Example: Cycle Counting
Number of Counts per Item per Year 12 4 2
Class of Item
A B C Total
Number of Items per Class 800 3,200 12,000 16,000
Total Counts per Year
9,600 12,800 24,000 46,400
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Example: Cycle Counting
Number of Inventory Items Counted Daily
Total counts per year = Number of available days per year
= 46,400/200 = 232 items per day
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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
Number of items counted per day = Number of items per day per counter
= 232/24 = 9.67 or 10 counters
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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
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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
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End of Chapter 11
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