Supply-Chain

Management

9/29/15

Outline
INTRODUCTION
Supply Chain Management

SUPPLY-CHAIN ECONOMICS
Outsourcing
Value Density
Make-or-Buy Decisions

THE STRATEGIC IMPORTANCE

OF THE SUPPLY-CHAIN
Global Supply-Chain Issues
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Outline - Continued
SUPPLY-CHAIN STRATEGIES
Many Suppliers
Few Suppliers
Vertical Integration
Keiretsu Networks
Virtual Companies

Managing the Supply Chain

Issues In an Integrated Supply Chain
Opportunities in an Integrated Supply
Chain
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Outline - Continued
JIT PURCHASING
GLOBAL SOURCING
VENDOR SELECTION
Vendor Evaluation
Vendor Development
Negotiations

ANALYTIC HIERARCHY PROCESS

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What is Supply-Chain
Management?
Supply-chain is a term that
describes how organizations
(suppliers, manufacturers,
distributors, and customers) are
linked together.
Supply-chain management is a
total system approach to managing
the entire flow of information,
materials, and services from rawmaterial suppliers through factories
and warehouses to the end customer.
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Supply-Chain Management
Planning, organizing, directing, &
controlling flows of materials
Begins with raw materials
Continues through internal operations
Ends with distribution of finished goods

Involves everyone in supply-chain

Example: Your suppliers supplier

Objective: Maximize value & lower

waste
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The Supply-Chain
VISA

Material FlowCredit Flow

SupplierManufacturing Retailer
Supplier

Wholesaler

Schedules Order
Flow
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Consumer
Retailer

Cash
Flow

The Supply Chain

Supplier

Market research data

Scheduling information
Engineering and design data
Order flow and cash flow

Inventory

Supplier

Ideas and
design to
satisfy end
customer
Material flow
Credit flow
Manufacturer

Inventory

Supplier

Customer

Customer

Inventory

Distributor
Inventory

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Customer

Formulas for Measuring Supply-Chain

Performance
Inventory Turnover =
Cost of goods sold
.
Average aggregate inventory
value
(52 Weeks)

Weeks of Supply = Average aggregate inventory value

Cost of goods sold

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Example of Measuring SupplyChain Performance

Suppose a companys new annual
report claims their costs of goods
sold for the year is $160 million and
their total average inventory
(production materials + work-inprocess) is worth $35 million. This
company is used to having an
inventory turn ratio of 10.
What is this years Inventory
Turnover ratio? What does it mean?
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Example of Measuring Supply-Chain

Performance (Continued)
Inventory Turnover
= Cost of goods sold/Average aggregate
inventory value

= $160/$35
= 4.57
Since the company is used to an inventory turnover
of 10, a drop to 4.57 means that the inventory is not
turning over as quickly as it had in the past. Without
knowing the industry average of turns for this
company it is not possible to comment on how they
are competitively doing in the industry.
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What is Outsourcing?

Outsourcing is defined as the act of

moving a firms internal activities and
decision responsibility to outside
providers.

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Reasons to Outsource

Organizationally-driven
Improvement-driven
Financially-driven
Revenue-driven
Cost-driven
Employee-driven

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Value Density
Defined

Value density is defined as the value

of an item per pound of weight.
It is used as an important measure
when deciding where items should be
stocked geographically and how they
should be shipped.

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Make/Buy Considerations
Reasons for Making
1. Maintain core
competencies and
protect personnel
from layof
2. Lower production
cost
3. Unsuitable suppliers
4. Assure adequate
supply
5. Utilize surplus labor
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and make a marginal

Reasons for Buying

1. Frees management
to deal with its
primary business
2. Lower acquisition
cost
3. Preserve supplier
commitment
4. Obtain technical or
management ability
5. Inadequate
capacity

Make/Buy Considerations Continued

Reduce inventory
Reasons for Making 6.Reasons
for Buying
6. Obtain desired
quantity
7. Remove supplier
collusion
8. Obtain a unique item
that would entail a
prohibitive
commitment from
the supplier
9. Protect proprietary
design or quality
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10.Increase or maintain

costs
7. Ensure flexibility
and alternate
source of supply
8. Inadequate
managerial or
technical resources
9. Reciprocity
10.Item is protected by
patent or trade
secret

Global Supply-Chain Issues

Supply chains in a global environment
must be:
Flexible enough to react to sudden changes in
parts availability, distribution, or shipping
channels, import duties, and currency rates
Able to use the latest computer and transmission
technologies to schedule and manage the
shipment of parts in and finished products out
Stafed with local specialists to handle duties,
trade, freight, customs and political issues

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Importance of Purchasing
Major cost center
Afects quality of final product
Aids strategy of low cost,
response, and diferentiation

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Objectives of the Purchasing

Function
Help identify the products and
services that can be best obtained
externally; and
Develop, evaluate, and determine
the best supplier, price, and
delivery for those products and
services

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The Purchasing Focus

Materials Management
-High transportation cost
-High inventory costs

Supply Management
-High costs
-Scarcity: national or
international

Purchasing
Management
-Commodity items
-Standard products
Source Management
-Unique items
-Custom-made items
-High technology items
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Traditional Purchasing
Process
Customer

Supplier

Purchase
Order
Receivabl
es Report
Accounts
Payable
Reconcile

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Order
Processing

Mail
Receiving
Dock

Packing
List

Mail

Invoice

Check

Mail

Accounts
Receivabl
e

Purchasing Techniques

Drop shipping and special packaging

Blanket orders
Invoiceless purchasing
Electronic ordering and funds transfer
Electronic data interchange (EDI)
Stockless purchasing
Standardization
Outsourcing

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Supply-Chain Strategies
Plans to help achieve company
mission
Afect long-term competitive position
Strategic options

Many suppliers
Few suppliers
Keiretsu network
Vertical integration
Virtual company

Plan

1995 Corel Corp.

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Supply-Chain Strategies
Negotiate with many suppliers; play one supplier
against another
Develop long-term partnering arrangements
with a few suppliers who will work with you to
satisfy the end customer
Vertically integrate; buy the actual supplier
Keiretsu - have your suppliers become part of a
company coalition
Create a virtual company that uses suppliers on
an as-needed basis.

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Many Suppliers Strategy

Many sources per item

Adversarial relationship
Short-term
Little openness
Negotiated, sporadic POs
High prices
Infrequent, large lots
Delivery to receiving dock

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1995 Corel Corp.

Few Suppliers Strategy

1 or few sources per item

Partnership (JIT)
Long-term, stable
On-site audits & visits
Exclusive contracts
Low prices (large orders)
Frequent, small lots
Delivery to point of use

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1995
Corel
Corp.

Tactics for Close Supplier

Relationships
Tactic

Reduce total number of

suppliers
Certify suppliers

Results

Average 20% reduction in

5 years
Almost 40% of all
companies surveyed
were themselves
currently certified
About 60% ask for this

Ask for JIT delivery from

key suppliers
Involve key suppliers in
new product design
Develop software linkages
About 54% do this
to suppliers

Almost 80% claim to do

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this
About 50% claim this

Vertical Integration
Strategy
Ability to produce
goods previously
purchased
Setup operations
Buy supplier

Make-buy issue
Major financial
commitment
Hard to do all
things well
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Raw Material
(Suppliers)
Backward
Integration
Current
Transformation
Forward
Integration
Finished Goods
(Customers)

Forms of Vertical
Integration
Iron Ore

Silicon

Steel

Automobiles

Farming

Raw Material
(Suppliers)

Flour Milling

Backward
Integration
Current
Transformation

Integrated
Circuits

Forward
Integration

Distribution
Circuit Boards
System
Dealers

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Computers
Watches
Calculators

Baked Goods

Finished Goods
(Customers)

Vertical Integration Can be Forward

or Backward
Vertical Integration
Raw material (suppliers)
Backward Integration

Examples of Vertical Integration

Iron ore

Silicon

Farming
Flour
Milling

Steel

Current Transformation

Automobiles

Integrated Circuits

Forward Integration

Distribution
System

Circuit boards

Dealers

Computers, watches,
calculators

Finished goods (customers)

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Baked
Goods

Keiretsu Network Strategy

Japanese word for affiliated chain
System of mutual alliances and
cross-ownership
Company stock is held by allied firms

Lowers need for short-term profits

Links manufacturers, suppliers,

distributors, & lenders
Partnerships extend across entire supply
chain
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Virtual Companies
Companies that rely on a variety of
supplier relationships to provide
services on demand.
Also known as hollow corporations,
or network corporations

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Virtual Company Strategy

Network of independent companies
Linked by technology
PCs, faxes, Internet etc.

Each contributes core competencies

Typically provide services
Payroll, editing, designing

May be long or short-term

Usually, only until opportunity is met

1995 Corel Corp.

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Successful Supply-Chain
Management Requires:
A mutual agreement on goals
Trust
Compatible organizational cultures

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Issues in an Integrated Supply-Chain

Local optimization
Incentives
Large lots

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Opportunities in an Integrated
Supply-Chain
Generation of accurate pull data
Reduction of lot size
Single stage control of replenishment

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What does Just-In-Time do?

Attacks waste
Anything not adding value to the
product
From the customers perspectives

Exposes problems and bottlenecks

caused by:
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Types of Waste
Product Defects
Waiting
Transportation
Over production

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JIT contribution to
Competitive Advantages
Suppliers
Reduce number of vendors
Quality deliveries on time

Layout
Reduce space for Inventory
Delivery direct to work areas

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JIT Contribution to
Competitive AdvantageContinued

Inventory

Small lot sizes

Low set up time

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Results
Quality improvement, reduce waste
and wins order
Cost reduction increases margin or
reduces selling prices
Reduce waste and reduce orders

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Yielding
Faster response to the customers at
lower cost and higher quality

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Characteristics of JIT
Partnership
Few
Nearby
Repeat business

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JIT Partnership Eliminates

Unnecessary activities
In-plant inventory
In transit inventory
Poor suppliers

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Global Sourcing
Important reasons for sourcing
globally
Lower price available from foreign
sources
Availability of foreign products
Firms worldwide operation and attitudes
Advanced technology available from
foreign sources
Higher quality products available from
foreign sources
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Vendor Selection Steps

Vendor evaluation
Identifying & selecting potential vendors

Vendor development
Integrating buyer & supplier
Example: Electronic data exchange

Negotiations
Results in contract
Specifies period of agreement, price,
delivery terms etc.
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Vendor Selection Rating

Form

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Analytic Hierarchy Process

1.
2.
3.
4.

Sum the elements in each column.

Divide each value by its column sum.
Compute row averages.
Compare the supplier pair-wise for each criterion.
(Follow steps 1-3)
5. Summarized the computations using simple
weighted average technique.
- weights are multiplied by the appropriate criteria
weights and the results are added together to
compute the supplier score.
6. Choose the best supplier. (the one with the
highest score).
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Pair-Wise comparison Matrix and

Computations: Evaluation Criteria
A. Original Matrix

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Quality

Price

Service

Deliver
y

Quality

Price

Service

1/3

Delivery

1/3

1/3

Total

25/12

11/3

17/2

Pair-Wise comparison Matrix and

Computations: Evaluation Criteria
B. Adjusted Matrix

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Quality

Price

Service

Deliver
y

Weights
(Row
Ave.)

Quality

12/25

6/11

8/17

3/9

0.457

Price

6/25

3/11

6/17

3/9

0.300

Service

3/25

1/11

2/17

2/9

0.138

Delivery

4/25

1/11

1/17

1/9

0.105

Total

1.000

Supplier Comparisons
A.

B.

With Respect to Quality

S1

S2

S3

S4

S1

1/3

S2

1/5

1/6

S3

1/6

1/8

S4

Total

131/30

25/2

17

13/8

S1

S2

S3

S4

S1

1/3

S2

S3

1/5

1/7

S4

1/8

1/9

Total

173/40

100/63

27/2

20

With respect to Price

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Supplier Comparisons Adjusted Matrix

A.

B.

With Respect to Quality

S1

S2

S3

S4

Weight
s (Row
Ave)

S1

30/131

2/5

6/17

8/39

0.297

S2

6/131

2/25

2/17

4/39

0.087

S3

5/131

1/25

1/17

1/13

0.053

S4

90/131

12/25

8/17

8/13

0.563

Total

1.000

With respect to Price

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S1

S2

S3

S4

Weight
s (Row
Ave)

S1

40/173

21/100

10/27

2/5

0.303

S2

120/173

63/100

14/27

9/20

0.573

S3

9/173

9/100

2/27

1/10

0.078

S4

5/173

7/100

1/27

1/20

0.046

Total

1.000

Supplier Comparisons
C.

With Respect to Service

S1

S2

S3

S4

S1

S2

1/5

S3

S4

1/8

1/5

Total

63/40

33/4

57/10

18

D. With respect to Delivery

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S1

S2

S3

S4

S1

1/5

S2

1/3

1/8

1/3

S3

S4

1/5

Total

22/3

15

61/40

22/3

Supplier Comparisons Adjusted Matrix

C.

With Respect to Quality

S1

S2

S3

S4

Weight
s (Row
Ave)

S1

40/63

20/33

40/57

4/9

0.597

S2

8/63

4/33

5/57

2/9

0.140

S3

10/63

8/33

10/57

5/18

0.214

S4

5/63

1/33

2/57

1/18

0.050

Total

1.000

D. With respect to Price

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S1

S2

S3

S4

Weight
s (Row
Ave)

S1

3/22

1/5

8/61

3/22

0.151

S2

1/22

1/15

5/61

1/22

0.060

S3

15/22

8/15

40/61

15/22

0.638

S4

3/22

1/5

8/61

3/22

0.151

Total

1.000

Summary:
Quality

Price

Service

Delivery

S1 (0.457)(0.297) + (0.300)(0.303) + (0.138)(0.597) +

(0.105)(0.151) = 0.325
S2

(0.457)(0.087) + (0.300)(0.573) + (0.138)(0.140) +

(0.105)(0.060) = 0.237

S3 (0.457)(0.053) + (0.300)(0.079) + (0.138)(0.214) +

(0.105)(0.638) = 0.144
S4 (0.457)(0.563) + (0.300)(0.046) + (0.138)(0.050) +
(0.105)(0.151) = 0.294
Choose Supplier 1
9/29/15

Thank

you

- Kryzel, Glenn,

Mharlon and Irish

9/29/15