Session 2

Principles of Supply Chain Management: A Balanced Approach

Course Outline
Session No Definition, Scope, Element of SCM, 1 Introduction to SCM Future Trends in SCM Reading : Text Book, Chapter 1 (pg. 2-20) Role of Purchasing in org, Purchasing process, e-procurement, 2 Topic Description/ Reading(s)

Procurement
Management

Sourcing Decisions Make or Buy,

Supplier Selection Reading : Text Book , Chapter 2 (pg. 32-55)

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Review What is a Supply Chain?

All stages involved, directly or indirectly, in fulfilling a customer request. Includes manufacturers, suppliers, transporters, warehouses, retailers, and customers. Within each company, the supply chain includes all functions involved in fulfilling a customer request service). (product development, marketing,

operations,

distribution,

finance,

customer

Contd

What is a Supply Chain?

Customer is an integral part of the supply chain

Includes movement of products from suppliers to manufacturers to distributors, and information, funds, and products in both directions. May be more accurate to use the term supply network or supply web. Typical supply chain stages: customers, retailers, distributors, manufacturers, suppliers. All stages may not be present in all supply chains (e.g., no retailer or distributor for Dell).

Supply Chain and the Flows therein

Supplier 1

Forecasting and scheduling information Cash flow

Inventory Supplier 3
Inventory

Order flow Product returns/ Empty bins

Customer 1

Manufacturer (The focal firm)

Credit flow

Inventory Inventory

Customer 2

Distributor 1

Supplier 2
Materials flow

Customer 3 Source: Mentzer 2001

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Objectives of Supply Chain

Profitability

Reliability
Flexibility/Agility Responsiveness Turnover Rate Communication and Coordination

The Objective of a Supply Chain

Maximize overall value created Supply chain surplus = Customer value Supply chain cost

Process View of a Supply Chain

Cycle view: processes in a supply chain are divided into a series of cycles, each performed at the interfaces between two successive supply chain stages. Push/Pull view: processes in a supply chain are divided into two categories depending on whether they are executed in response to a customer order (pull) or in anticipation of a customer order (push).

Cycle View of Supply Chain Processes

Cycle View of Supply Chain Processes

Push/Pull View of Supply Chains

Push/Pull View of Supply Chain Processes

Supply chain processes fall into one of two categories depending on the timing of their

execution relative to customer demand.

Pull: Here execution is initiated in response to a customer order (reactive). Push: Here execution is initiated in anticipation of customer orders (speculative). Push/pull boundary separates push processes from pull processes.
Contd

Push/Pull View of Supply Chain

Processes
Useful in considering strategic decisions relating to supply chain design more global view of how supply chain processes relate to customer orders.

Can combine the push/pull and cycle views

Make to Stock LL Bean Build to order - Dell

The relative proportion of push and pull processes

can have an impact on supply chain performance.

Push/Pull ViewL.L. Bean

Push/Pull ViewDell

PURCHASING

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Introduction
PurchasingObtaining merchandise, capital equipment; raw materials, services, or maintenance, repair, and operating (MRO) supplies in exchange for money or its equivalent Merchant BuyersWholesalers and retailers who purchase for resale Industrial BuyersPurchase raw materials for conversion, services, capital equipment, & MRO supplies
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A Brief History of Purchasing Terms

Purchasing - key business function for acquiring materials, services, & equipment Contracting - term often used for the acquisition of services Supply Management - a newer term that encompasses all acquisition activities Institute of Supply management defined supply management as the Identification, acquisition, access, positioning, and management of resources an organization needs or potentially needs in the attainment of its strategic objectives.
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The Role of Purchasing in an Organization

The primary goals of purchasing are:
1. Ensure uninterrupted flows of raw materials at the lowest total cost, 2. Improve quality of the finished goods produced, and 3. Optimize customer satisfaction.

Purchasing contributes to these objectives by:

Actively seeking better materials and reliable suppliers, Work closely with strategic suppliers to improve quality materials, and Involving suppliers and purchasing personnel in new product design and development efforts.
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The Role of Purchasing in an Organization (Cont.)

The Financial Significance of Supply Management Profit-Leverage Effect
A decrease in purchasing expenditures directly increases profits before taxes (assuming no decrease in quality or purchasing total cost)

Return on Assets (ROA) Effect

A high ROA indicates managerial prowess in generating profits with lower spending (caveat- ROA ratios vary from one industry to another)

Inventory Turnover Effect

Increased inventory turnovers indicate optimal utilization of space and inventory levels, increased sales, avoidance of inventory obsolesce
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The Purchasing Process Manual Purchasing (older system)

Step 1- Material Requisition/Purchase Requisition - Stating product, quantity, and
delivery date. May originate as a planned order release from the MRP system. Traveling requisition used for recurring orders.

Step 2- The Request for Quotation (RFQ) - Buyer

identifies suppliers & issues a request for quotation (RFQ) for routine items or a Request for Proposal (RFP) for more demanding products. Supplier Development is used to develop supplier capabilities.

Step 3- The Purchase Order (PO) - Is the buyers

offer & becomes a binding contract when accepted by supplier. When initiated by the supplier on their own terms, the document is a sales order. The Uniform Commercial Code (UCC) governs transactions in the U.S., except Louisiana.
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The Purchasing Process- (Cont.) Manual Purchasing (Fig. 2.1)

Suppliers Purchasing
Materials Requisition MR 1
MR 2

Storage/Warehouse

Users/Requisition
START Materials Requisition MR 1
MR 2 MR 3

Accounting

No

Materials Available?
Yes

Issue PO Materials Requisition MR 1

MR 2 PO 2 PO 3 PO 4

Purchase Order PO 1
PO 2

Purchase Order PO 1

MR File

MR 2

Issue Materials

Materials

Accounting Information for charging the appropriate department

DO 3 DO 2

Delivery Order DO 1

PO File
PO 3 DO 2 MR 2

MR File

Ship Materials
DO 2 PO 2

+
Delivery Order DO 1

MR 2

Materials

Materials

Accounts Payable
PO 2

INV 2

Delivery Order DO 1

Invoice INV 1

Invoice INV 1

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The Purchasing Process e-Procurement

Step 1- Material user inputs a materials requisition - Relevant information such as quantity and date needed. Step 2- Materials requisition submitted to buyer - At purchasing department (hardcopy or electronically). Step 3- Buyer assigns qualified suppliers to bid - Product description, closing date, & conditions are given. Step 4- Buyer reviews closed bids & selects a supplier
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The Purchasing Process- (Cont.) e-Procurement (Fig. 2.4)

Materials User Purchasing Department/Buyer
Extracts and merges Materials Requisition data into Internet based B2B system

Prepares Materials Requisition inputs information into computer system

Buyer reviews Materials Requisition

Materials Requisition is transmitted electronically to a buyer

Collects and reviews bids submitted by suppliers through Internet based B2B system or fax

Assigns suppliers to requisition on B2B system for bidding and specifies closing date and other conditions

Selects a supplier based on quality, cost and delivery performance, then issues a Purchase Order

Purchase Order is transmitted electronically (or faxed) to the supplier

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The Purchasing Process (Cont.) e-Procurement

Advantages of the e-Procurement System Time savings Cost savings Accuracy Real time Mobility Trackability Management Benefits to the suppliers
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Small Value Purchase Orders

Processing costs for small value purchases are minimized through:
Procurement Credit Card/Corporate Purchasing Card Blanket or Open-End Purchase Orders Blank Check Purchase Orders Stockless Buying or System Contracting Petty Cash Standardization & Simplification of Matls & Components Accumulating Small Orders to Create a Large Order Using a Fixed Order Interval
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Sourcing Decisions: The Make-or-Buy Decision

Outsourcing - buying materials and components from suppliers instead of making them in-house. The trend has moved toward outsourcing. Backward vertical integration refers to acquiring sources of supply Forward vertical integration refers to acquiring customers operations. The Make or Buy decision is a strategic decision.
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Sourcing Decisions: The Makeor-Buy Decision (Cont.)

Reasons for Buying or Outsourcing Cost advantage: Especially for components
that are non-vital to the organizations operations, suppliers may have economies of scale.

Insufficient capacity: A firm may be at or

near capacity and subcontracting from a supplier may make better sense. Lack of expertise: Firm may not have the necessary technology and expertise.

Quality: Suppliers have better technology,

process, skilled labor, and the advantage of economy of scale.
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Sourcing Decisions: The Make-or-Buy Decision (Cont.)

Reasons for Making Protect proprietary technology No competent supplier Better quality control Use existing idle capacity Control of lead-time transportation, and warehousing cost Lower cost
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The make or buy ? Example

A company has option to make or buy a part. Annual requirement is 15000 units. A supplier is able to supply the part at $7 per unit. The first estimate that it cost $500 to prepare the contract with the supplier. To make the part, the firm must invest $25000 in equip and it costs $5 per unit to make the part
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 Cost Make Buy FC 25000 500 VC 5 7 Annual Requirement = 15000 Total Cost to make = Total cost to buy 25000+ 5* Q = 500 + 7 Q solving for Q, BEP Q = 12 250 1. Total cost at BEP TC = 25000 + 5* 12250 = 86250
2. 3. Total cost for make = 25000 + 5* 15000 = 87250 Total cost for buy = 500 + 7*15000 = 105500

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Sourcing Decisions: The Make-or-Buy Decision (Cont.)

The Make-or-Buy Break-Even Analysis

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Roles of Supply Base

Supply Base- list of suppliers that a firm uses to
acquire its materials, services, supplies, and equipment Firms emphasize long-term strategic supplier alliances consolidating volume into one or fewer suppliers, resulting in a smaller supply base

Preferred suppliers provide:

Early supplier involvement- Information on the latest trends in materials, processes, or designs Information on the supply market Capacity for meeting unexpected demand Cost efficiency due to economies of scale
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Supplier Selection
The process of selecting suppliers, is complex and should be based on multiple criteria:

Product and process technologies Willingness to share technologies & information [Early supplier involvement (ESI) and concurrent engineering (CE)] Quality

Cost (Total cost of ownership or acquisition) Reliability Order System & cycle time Capacity Communication capability Location Service
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How Many Suppliers to Use

Single-source - a risky proposition. Current trends favor fewer sources. Reasons Favoring a Reasons Favoring Single Supplier Multiple Suppliers

To establish a good Need capacity relationship Spread risk of supply Less quality interruption variability Create competition Lower cost Information Transportation economies Dealing with special Proprietary product kinds of business or process Volume too small to split 2009 South-Western, a division of Cengage Learning 35

Purchasing: Centralized vs. Decentralized

Purchasing Organization is dependent on many factors, such as market conditions & types of materials required. Centralized Purchasingpurchasing department located at the firms corporate office makes all the purchasing decisions.

Decentralized Purchasingindividual, local purchasing departments, such as plant level, make their own purchasing decisions.
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Purchasing: Centralized vs. Decentralized (Cont.)

AdvantagesDecentralization Concentrated volume Closer knowledge Leveraging purchase volume of requirements Avoid duplication Local sourcing Specialization Less bureaucracy Lower transportation costs AdvantagesCentralization
No competition within units Common supply base
A hybrid purchasing organization Decentralized-centralized (large multiunit org)decentralized corporate and centralized at business unit Centralized-decentralized (large org w/centralized control) centralized large national contracts at corporate level and decentralized items specific to business unit
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International Purchasing/Global Sourcing

Reasons for Global Sourcing- Opportunity to improve quality, cost, and delivery performance Potential Challenges- Requires additional skills and knowledge to deal with international suppliers, logistics, communication, political environment, and other issues
Import broker or sales agent- performs service for a fee Import merchant- buys and takes title to the goods Trading company- imports & carries wide variety of goods Tariff and non-tariff barriers- International trade organizations strive to reduce barriers Countertrade- raw materials are traded for goods and services
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