11

CHAPTER

Supply Chain
Management

DISCUSSION QUESTIONS
1.

A firm might decide to organize its purchasing function as a materials management function when
transportation and inventory costs are substantial and exist on both input and output sides of the
production function.

2.

A Keiretsu is a network of suppliers. Usually the suppliers are partially owned or debtors to the
purchasing organization. This structure is quite common in Japan.

3.

Purchasing receives information from other functional areas with respect to:
n
What is needed, when, and how much or how many
n
What is available, when, and how much or how many
n
Resources that are available for procurement functions
n
The success or failure of its performance
n
Long-range goals and strategies of the organization

4.

The adversarial relationship must be changed dramatically to one of trust and the establishment of
long-term relationships.

5.

The three basic approaches to negotiation are:

n
The cost-based model
n
The market-based model
n
Competitive bidding

6.

An organization moving to JIT deliveries must ensure that the supplier is capable of delivering
quality products on time, provide production schedules for their suppliers, examine its layout to
ensure that deliveries can move quickly to where they are needed, and train and empower
employees to evaluate quality as the product is produced.

7.

To implement long-term relationships, purchasers must move to communicating the broad objective
of the firm and the end customer. This usually requires developing a high level of trust sharing
product information and schedules.

8.

Supplier management implies that the firm is working with (managing/guiding/leading) suppliers,
whereas supply chain management implies that the firm is working to build a supply system that
includes many aspects of supplier relationships at all levels (second- and third-tier suppliers as well
as first-tier suppliers). Purchasing is the procurement function that can be performed with little
concern for long-term relationships with suppliers. Materials management is the integration of all
material acquisition, movement, and storage activities in the firm.

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9.

The Volkswagen approach to production described in the opening Global Company Profile is an
effort to remove Volkswagen from much of the labor union negotiations and leave those
negotiations up to suppliers. Not incidentally, Volkswagen no doubt hopes that the small workforces
working for various suppliers will be less prone to engage in adverse union practices.

10.

There are differences between postponement and channel assembly. Postponement implies that the
final product is not assembled until it is shipped, usually with some modular features such as the
power system for a printer. However, channel assembly actually moves assembly of a PC to the
wholesale level where parts are received and assembly takes place. They are related, but different.

11.

Wal-Mart uses drop shipping to remove itself completely from the distribution process so that
orders from various stores are received from the manufacturer and shipped directly to the store.

12.

Vertical integration implies that a manufacturer moves backward into purchasing raw materials for
components and forward into packaging and distribution. An example would be a coffee blender
moving backwards by buying coffee plantations and moving forward to develop retail coffee shops.

13.

Blanket orders are orders that cover an extended order period, say a year, and against which
releases are issued against that purchase order. Invoiceless purchasing merely implies that some
other information flow has been developed besides a formal invoice. Blanket orders can be
invoiceless and invoiceless purchasing can be part of the blanket order, but they can also be done
separately.

14.

E-procurement is electronic purchasing i.e., the use of the Internet to buy or sell goods.

CRITICAL THINKING EXERCISE

Keiretsu networks are highly dependent upon both culture and laws. The Keiretsu networks found in
Japan are still unique. Neither the U.S. antitrust division nor the EC could be expected to be happy with
such arrangements. Ford Motor Company has established some profit centers that function almost as
stand-alone companies. So we see some indications that the concept is being tested in America. But these
tentative steps are a long way from the true Keiretsu networks of Japan.

END-OF-CHAPTER PROBLEMS
11.1 This problem provides a good way to get students into the library or to the Internet to investigate
vertical integration:
n
Vertically integrated firms include:

Ford Motor Company (although less now than 60 years ago)

Tyson Foods

11.2

192

Firms reducing vertical integration include:

Chrysler Corporation

Jaguar Motor Cars

Moving toward virtual companies:

Per the discussion in the text a number of semiconductor firms are trying it
measuring success may take a few business cycles, perhaps a decade.

Additionally, most publishing companies are virtual companies with copy editors,
artists, layout personnel, typesetters, and printers, all hired as needed.

Size/Capacity

Donna Inc.

Kay Inc.

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2
1
1
2
2
2
2
2
1
2
17 0.63 10.71

3
2
2
2
4
3
3
3
2
2
26 0.63 16.38

3
3
2
1
3
2
1
1
1
17 0.69 11.73

3
3
1
1
3
3
1
1
1
17 0.69 11.73

4
2
2
2
2
12 1.25 15

4
2
2
2
2
12 1.25 15

2
1
2
1
2
1
1
1
2
1
2
1
3
20 0.48 9.6
47.04

1
2
2
2
1
1
2
2
1
3
1
2
3
23 0.48 11.04
54.15

Donna Inc.
2
2
2
2

3
2
2
2

Service

Products

Sales Personnel

Total:

11.3

Size/Capacity

Chapter 11: Supply Chain Management

Kay Inc.

193

2
2
2
2
2
2
20 0.63 12.6

4
3
3
3
2
2
26 0.63 16.38

3
3
2
2
3
2
2
2
2
21 0.69 14.49

3
3
2
2
3
3
2
2
2
22 0.69 1518
.

4
2
2
2
2
12 1.25 15

4
2
2
2
2
12 1.25 15

2
2
2
2
2
2
2
2
2
2
2
2
3
27 0.48 12.96
55.05

2
2
2
2
2
2
2
2
2
3
2
2
3
28 0.48 13.44
60

Service

Products

Sales Personnel

Total:

Kay Inc. maintains a higher rating.

11.4 (a)
(b)

$4.35
$7.14

CASE STUDIES
FACTORY ENTERPRISES, INC.

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1.

Materials management is the integration of all material acquisition, movement, and storage
activities in the firm. Factory Enterprises, Inc. should see a reduction in its costs because of
consolidation of materials management activities. What happens to the company? The organization
structure and reporting relationships change to reflect the new organization. (The following
organization chart reflects some of those changes; the purchasing activities of the sales manager
would also be moved to the new Materials Management function.)
Organizational Changes
President

Materials
Management

Manufacturing

Finance

Order
Processing

Marketing

Order
Processing
Production

Accounting

Sales

Engineering

Treasurer

Promotion

Shipping,
Traffic

Shipping,
Traffic

Market
Research

Purchasing

Purchasing

Purchasing

Production &
Inventory
Control

Production &
Inventory
Control

Warehousing

Warehousing

2.

To install the materials management concept, the president must redefine duties and reporting
relationships, and provide the needed leadership, training, and staffing to ensure a successful
transition.

3.

A good relationship between purchasing and sales should provide improved coordination of
purchasing, warehousing, shipping, and sales. The best way to do this may be to build a formal
materials management concept.

4.

Establishing ISO 9000 is probably a good move for Factory Enterprises, Inc. ISO 9000 compliance
should be an effective marketing tool and also overcome any barriers that EC may establish for
those firms that do not comply.

THOMAS MANUFACTURING COMPANY

This is a great case by which to review purchasing issues, an often neglected area in Operations
Management. In the machinery manufacturing industry 48% of the cost of sales is spent on purchases
(this figure may be higher at Thomas Manufacturing). Therefore, purchasing is a major Operations
Management issue for Thomas Manufacturing.

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This is not meant to be a trick case, but neither Mr. Older or Mr. Younger seem to be focusing on
developing long-term partnering relationships with suppliers. Consequently, some changes certainly
appear warranted. By item:
n

JIT would be a good tact.

Value analysis would seem to be the operative approach here.

Standardization should reduce costs throughout the procurement, inventory, and use cycle.

As the text suggests, blanket purchase orders are usually a good idea.

Vendor evaluation and selection should be an ongoing process.

Increasing the number of bids over Mr. Olders comfortable approach of using existing suppliers
may be a good idea, but moving toward partnership may be a better idea.

Aggressive negotiations does not suggest unreasonableness. It just means both sides getting all of
the issues on the table, from design to delivery and payment schedule.

Taking discounts is basic business. Two percent is equivalent to over 24% per year (2/10 net 30 save
2% for 20 days of money). Most firms can borrow for a lot less than that.

Lowest price is only one criteria and may not be the most important. Local public relations may not
be the best criteria either.

Although reciprocity is sometimes a legitimate criteria for purchases, the payoff from reciprocity in
this case may be very low.

Investing in inventory as a hedge is dangerous. Forecasting purchase prices is chancy as is

forecasting market/sales. Most firms do not allow purchasing personnel to hedge.

CD VIDEO CASE 6

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SUPPLY CHAIN MANAGEMENT AT REGAL MARINE

The video available from Prentice Hall is designed to supplement this case and was filmed specifically for
this text. This case also appears as a video clip on the student CD in the text.
1.

An additional technique that might be used by Regal Marine to improve supply chain management
is to work with personnel agencies as part of the outsourcing, recruiting, and screening process for
employees. Additionally, Regal can begin to incorporate suppliers into its schedule to reduce onhand inventory and related costs.

2.

The typical response by members of the supply chain through partnering is to further the
understanding of end users needs as the suppliers become increasingly integrated through the
purchasers (in this case Regals) customer base. As they learn more about the end user, suppliers
improve the products in accordance with the needs of those end users. Regal can be expected to
develop long-term contracts and integrate suppliers into their strategy, aggregate scheduling, and
detail scheduling so they understand Regal Marines requirements.

3.

Supply chain management is as important to Regal as it is to virtually all manufacturers because a

huge amount of Regal Marines dollars are spent on purchases. Additionally, the quality of those
purchases has significant impact on the quality of Regals end product. Consequently,

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enhancements in terms of quality, delivery, and price have substantial impact on Regal Marines
market and bottom line.
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STUDIES

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INTERNET CASE

AT&T BUYS A PRINTER

1.

Evaluation factors depend on the specific sets of circumstances that are surrounding the purchase.
In this case, the evaluating team considered MICR quality just as important to satisfying the
customer of their process as low cost, because poor MICR lines can result in increased bank fees.

2.

There is only a minor change to the rankings, with the two lowest scores reversing positions. (See
the table below.)
Weighted Rating
Ranking

Siemens
9.61
1

Delphax
5.58
4

Xerox
5.49
5

IBM
6.47
3

NCR
8.37
2

BLUE AND GRAY, INC.

Note: The case makes a point about the standard labor hour rate. The instructor may or may not want to
discuss the problem of having a standard hourly labor rate across all departments. Such a standard can
make a difference in product costing when the actual labor rate varies across departments. In the Blue and
Gray case, the point is made that there is very little difference in actual labor rates between departments.
The solution accepts that premise.
The cost to Blue and Gray of purchasing the units is given by:
C 2,000 units $0.6322 unit $1264.40
1.

The cost to Blue and Gray to produce the units can be viewed in two fashions:
a.
If Blue and Gray has excess production capacity and either does not anticipate uses for this
excess capacity, or is considering this as a short-term, or one-time decision, then only the
variable costs (materials and variable overhead) should be included in the decision. The
argument here is that in the short term, when excess capacity exists, fixed costs will continue
even if this capacity remains unused. If a project is available that will cover variable costs
and contribute additional revenue, the additional revenue will contribute to meeting these
fixed costsand, any positive contribution to fixed costs is better than none.

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197

The cost to produce is then given by:

C 1,000

b.

The decision would be made to produce the part.

If Blue and Gray does not have truly excess capacity; i.e., capacity can be made available
but there are alternate uses, or they are considering this make/buy decision as a long-term
commitment, both fixed and variable costs should be included.
The cost to product is then given by:
C 1,000

n
n
n

198

2,000 units
22 $ hour $1,220
200 units hour

2,000 units
28 $ hour $1,280
200 units hour

The decision would be made to purchase the product from the outside vendor.
Viewing this decision from the short-term/long-term and excess/alternative use perspectives also enables the instructor to raise other issues, such as:
Does Blue and Gray want to give the supplier some work?
Could the shop capacity be used for other jobs or to support other activities such as research
and development?
Does keeping the work of Blue and Gray keep the existing workforce on the payroll?

Instructors Solutions Manual t/a Operations Management