Supply Chain Management

1
 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

2
 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.

3
 Supply Chain
for Steel in an Automobile Door
MINING STEEL STEEL
Iron Steel
COMPANY MILL COMPANY
ore ingots
Mines iron ore Forms steel ingot Forms sheet metal
Sheet
metal
AUTOMOTIVE AUTOMOBILE CAR
Car MANUFACTURER Car
SUPPLIER DEALERSHIP
door
Makes door Makes automobile Does preparation
Prepared
car
FINAL
CONSUMER
Drives automobile

4
 Supply Chain Management


Refers to all the management functions related to the
flow of materials from the company’s direct suppliers
to its direct customers.

Includes purchasing, traffic, production control,
inventory control, warehousing, and shipping.

Two alternative names:

Materials management

Logistics management

5
 Supply Chain Management
in a Manufacturing Plant
Raw
Materials,
Finished Inspection,

Customers
Suppliers

Receiving Parts, and

Goods Packaging,
and In-process Production
Ware- And
Inspection Ware-
housing Shipping
Housing

Materials Management
Production Warehousing and Shipping
Purchasing
Control Inventory Control and Traffic

Physical materials flow

Information flow
6
 Purchasing

Factors increasing the importance of purchasing today:


Tremendous impact of material costs on profit (60-
70% of each sales dollar is paid to material suppliers)

Popularity of just-in-time manufacturing (supply
deliveries must be exact in timing, quantity, and
quality)

Increasing global competition (growing competition
for scarce resources, and a geographically “stretched-
out” supply chain)

7
 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

8
 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

9
 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

10
 Purchasing Process

From any department,

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

11
 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

12
 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?

13
 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?

14
 Example: Make-or-Buy

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

15
 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

16
 Example: Make-or-Buy

The analyst has assumed that 5,000 parts per

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

17
 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 firm’s 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.
18
 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

19
 Movement of Materials within Factories

The typical locations from/to which material is moved:

Incoming Receiving Quality

Warehouse
Vehicles Dock Control

Work Other Work Finished

Packaging
Center Centers Goods

Shipping Outgoing
Shipping
Dock Vehicles

20
 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.

21
 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.

22
 Shipments To and From Factories

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

23
 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 week’s projected ending inventory

+ Planned receipt of shipments in current week

+ Scheduled receipt of shipments in current week

-- Forecasted demand in current week
24
 Shipments To and From Factories


DRP Time-Phased Order Point Record

Region. Warehouse #1 LT = 1 Week

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

25
 Example: DRP

Products are shipped from a company’s 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
week’s projected ending inventories for a single
product.
The third upcoming slide shows – for the main
distribution center – scheduled receipts and last
week’s projected ending inventory for the same
product. Complete the DRP records.
26
 Example: DRP


DRP Record for Regional Warehouse #1

Region. Warehouse #1 LT = 1 Week

Std. Quantity = 100 SS = 50 -1 1 2 3 4 5
Forecasted demand (units) 80 100 80 60 100
Scheduled receipts 100
Projected ending inventory 200
Planned receipt of shipments
Planned orders for shipments

27
 Example: DRP


DRP Record for Regional Warehouse #2

Region. Warehouse #2 LT = 2 Week

Std. Quantity = 200 SS = 80 -1 1 2 3 4 5
Forecasted demand (units) 100 200 200 240 200
Scheduled receipts 200
Projected ending inventory 220
Planned receipt of shipments
Planned orders for shipments

28
 Example: DRP


DRP Record for Main Distribution Center

Main Distrib. Center LT = 1 Week

Std. Quantity = 500 SS = 200 -1 1 2 3 4 5
Gross Requirements (units)
Scheduled receipts 500
Projected ending inventory 250
Planned receipt of shipments
Planned orders for shipments

29
 Example: DRP


Completed DRP Record for Regional Warehouse #1

Region. Warehouse #1 LT = 1 Week

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

30
 Example: DRP


Completed DRP Record for Regional Warehouse #2

Region. Warehouse #2 LT = 2 Week

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

31
 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

32
 Example: DRP


Completed DRP Record for Main Distribution Center

Main Distrib. Center LT = 1 Week

Std. Quantity = 500 SS = 200 -1 1 2 3 4 5
Forecasted demand (units) 200 300 200 100
Scheduled receipts 500
Projected ending inventory 250 550 250 550 450 450
Planned receipt of shipments 500
Planned orders for shipments 500

33
 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.

34
 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

35
 Example: Minimizing Shipping Costs

Pacer produces computer monitors in its three

factories and ships them to five regional warehouses.
The factory-to-warehouse shipping costs per monitor
are:
Warehouse
Factory A B C D E
1 $2.10 $4.30 $3.60 $1.80 $2.70
2 4.90 2.60 3.50 4.50 3.70
3 3.90 3.60 1.50 5.80 3.30
continued
36
 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.

37
 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 factory’s capacity is exceeded.)

38
 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

39
 Warehousing


Warehousing is the management of materials while
they are in storage.

Warehousing activities include:

Storing

Dispersing

Ordering

Accounting

40
 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

41
 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
42
 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 firm’s 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.

43
 Example: Cycle Counting

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

44
 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

45
 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

46
 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

47