Supply Chain- Exam 1

What is a Supply Chain?
A supply chain consists of the flow of products and services from Raw Materials to End Users and can include the following:
-Raw materials manufacturers
-Component and intermediate manufacturers
-Final product manufacturers
-Wholesalers and distributors and
-Retailers

Connected by transportation and storage activities &
Integrated through information, planning, and technology

Components of a Supply Chain
-Raw material suppliers
-Intermediate component manufacturers
-End-product manufacturers (or focal firm)
-Wholesalers, distributors
-Retailers
-End customers
Institute for Supply Management
The design and management of seamless, value-added processes across organizational boundaries to meet the real needs of the end customer
Logistics and Supply Chain Management Society
The coordinated set of techniques to plan and execute all steps in the global network used to acquire raw materials from vendors, transform them into finished goods, and deliver both goods and services to customers
Council of SCM Professionals
The planning and management of all activities involved in sourcing and procurement, conversion, and all logistics management activities … also includes coordination with channel partners, which can be suppliers, intermediaries, third party service providers, and customers
What is the Goal of Supply Chain Management?
Goal is to have:
-the correct product
-in the needed quantity
-at the right location
-at the right time
-for the lowest total cost.
-Balancing low cost manufacturing with variable customer demand
4 Parts of SCM
-Supply Management: Supplier selection, evaluation, certification, development and strategic partnership. Global sourcing, ethical and sustainable sourcing

-Operations: Demand forecasting, CPFR, inventory management, production & capacity planning, lean, quality systems

-Logistics: Transportation, warehouse, CRM, network design, RFID, location, sustainability, service response logistics

-Integration: Process integration, risk, disruptions, performance measurement

Supply Chain Models
-Efficient: designed to minimize cost
predictable supply, low cost production, highly utilized capacity, high inventory turns, ideal for functional products, stable/predictable demand

-Responsive: designed to respond to market demand;
fast response, min. stock outs, need flexible capacity, min. production lead time, products available when want to buy, ideal for innovative products, short life-cycle & unpredictable demand

Push or Make-to-Stock
Producing stock on the basis of anticipated demand
Pull or Make-to-Order
Producing stock in response to actual demand
History of Supply Chain Management
-In 1956 the world’s first container ship was capable of carrying approx. 58 35ft containers

-Integration w/ suppliers and customers for competitive advantage, sustainability & social responsibility: Increased supply chain capabilities

-Focus on core competency, outsource non core. Enter 3PLs: supply chain relationship formation and extension

-Intense global competition- enter new concepts for quality, inventory, alliance: JIT, TQM, BPR, supplier & customer alliances

-New computer technology lead to development of Materials Requirement PLanning (MRP): inventory management and cost containment

-Mass production techniques as their principal cost reduction and productivity improvement strategies: traditional mass manufacturing

Importance of SCM
Firms have discovered SCM is a competitive advantage:

Reduced operating capital requirements
-Optimized inventory levels
-Improved cash flow

Reduced fixed capital requirements
-Outsource manufacturing & logistics (3PL)

Reduced costs
-Obsolescence / expiration / price erosion
-Lower operating costs
-Lower regulatory costs

Looking at Total Cost of Ownership (TCO)

Purchasing (Sourcing)
Obtaining merchandise, capital equipment; raw materials, services, or maintenance, repair, and operating (MRO) supplies in exchange for money or its equivalent
Contracting
– the term normally used for the acquisition of services
Supply Management
– the term used to encompass all activities in acquiring goods and services
Who is Purchasing?
Merchant Buyers-
Wholesalers, Distributors and retailers who purchase completed product for resale

Industrial Buyers-
Purchase raw materials, services, capital equipment, & maintenance, repair, and operating (MRO) supplies to produce another product or service.

The primary goals of purchasing are to:
1. Ensure uninterrupted flows of products at the lowest total cost
2. Improve quality of the finished goods produced
3. Optimize customer satisfaction.
Purchasing contributes to these objectives by:
-Actively seeking better materials and reliable suppliers,

-Working closely with strategic suppliers to improve quality materials

-Involving suppliers and purchasing personnel in new product design and development efforts.

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 other costs

-Return on Assets (ROA) Effect:
Improving profit for a set of assets or reducing asset requirements to produce the profit both improve ROA
= profit / assets

-Inventory Turnover Effect:
Increased inventory turnovers indicates improved utilization of space and inventory levels and reduced impact of inventory obsolescence
= COGS / Inventory

The Purchasing Process
-Material Requisition:
Identify need to acquire product or service (quantity & price)

-Supplier Determination:
Identify potential suppliers. Issue:
(RFI, RFP, RFQ)
Select supplier
Set up supplier

-Issue Purchase Order:
Determine flow of information & goods. Establish terms of sale.
State item, quantity, price

-Receive, Inspect & Pay:
Receive product / service & invoice. Confirm quantity, quality, performance. Match to invoice & pay.
<3 way match>

People Involved in the process
End user –> buyer –> supplier –> receiver –> end user –> accounts payable

e-Procurement enables process to be automated

Advantages of the e-Procurement System
Time savings
Cost savings
Accuracy
Real time
Mobility
Tracking
Management
Benefits to the suppliers
Small Value Purchase Orders
Need to minimize processing costs for small value purchases:
-Procurement Credit Card
-On line catalogs
-Blanket Purchase Orders
-Accumulating Small Orders to Create a Large Order
Supplier Selection
The process of selecting suppliers, is complex and should be based on multiple criteria:

-Product / process technologies
-Willingness to share technologies & information
-Quality
-Service
-Location
-Reliability
-Order System & cycle time
-Capacity
-Communication capability
-Cost

Supply Base
A 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
Reasons Favoring a Single Supplier
-To establish a good relationship
-Less quality variability
-Lower cost
-Transportation economies
-Proprietary product or process
-Volume too small to split
Reasons Favoring Multiple Suppliers
-Need capacity
-Spread risk of supply interruption
-Create competition
-Information
-Dealing with special kinds of business
Sourcing Decisions
The Make vs. Buy Decision
Reasons for Buying or Outsourcing
1. Cost advantage: Especially for components that are non-vital to the organization’s 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.

2. Lack of expertise: Firm may not have the necessary technology and expertise.

3. Quality: Suppliers have better technology, process, skilled labor, and the advantage of economy of scale.

Reasons for Making
-Protect proprietary technology
-No competent supplier
-Better quality control
-Use existing idle capacity
-Control of lead-time, transportation & warehousing cost
-Cost advantage
The Make-or-Buy Break-Even Analysis
Total Cost to Make = Total Cost to Buy

Algebraically:
Find break-even point by setting the total cost of the two options equal to one another and solving for Q:
Make Buy
25,000 + 5Q = 500 + 7Q
7Q − 5Q = 25,000 − 500
2Q = 24,500
Q = 12,250 units = Break-even point

If requirement is > B-E, make
If requirement is < B-E, buy

Evaluate a Supplier’s Total Cost
More then purchase price

Evaluate all costs to procure
-Transportation
-Payment terms
-Tooling / Set up

Include hidden cost estimates
-quality
-Reliability (supply issues)
-Order processing costs

“Total Cost of Ownership”

Strategic Sourcing Decisions
1.Backward vertical integration :
acquiring sources of supply

2. Forward vertical integration :
acquiring channel partner operations.

3. Outsourcing :
Taking in house activities / operations and deciding to purchase from suppliers instead. Outsourcing has become a key method to reduce costs and increase flexibility.

Outsourcing Programs
Outsourcing allows an organization to:
-Concentrate on core capabilities
-Increase capabilities in the area being outsourced
-Reduce staffing levels (not just labor arbitrage)
-Accelerate reengineering efforts
-Reduce risk and management dilution
-Improve flexibility

Risks associated with outsourcing, include:
-Loss of control / loss of intellectual property
-Increased reliance on suppliers
-Increased need for supplier management
-Public perception issues

Purchasing Organizations: Centralized vs. Decentralized
Purchasing Organization: is dependent on many factors, such as market conditions, types of materials required, company culture

-Centralized Purchasing- purchasing department located at the firm’s corporate office makes all the purchasing decisions.

-Decentralized Purchasing- individual, local purchasing departments, such as plant level, make their own purchasing decisions.

-Hybrid purchasing organization – centralize large national contracts at corporate level and decentralize items specific to business unit at the local level

Advantages of Centralized
-Consolidate orders
-Lower transportation costs
-Leveraging purchase volume
-Avoid duplication
-Specialization
-No competition within units
-Common supply base
Advantages of Decentralized
-Close knowledge of requirements
-Local sourcing
-Relationships
-Less bureaucracy
-Customization

*Hybrid approach can get the best of both worlds

International / Global Sourcing
Opportunity / Challenges:
-Import broker or sales agent
-Import merchant or Trading company
-Tariff
-Non-Tariff barriers to international trade
International Trade Organizations & Agreements
1. World Trade Organization (WTO)
2. North America Free Trade Agreement (NAFTA)
3. Regional Comprehensive Economic Partnership (RCEP)
4. European Union (EU)
Procurement for Government & Non-Profit Agencies
Competitive bidding-
-Sealed Bids
-Performance Bonds
-Federal Acquisition Streamlining Act
-Small Business promotion
-Buy American Act
-Green Purchases
-General Services Administration (GSA)
-State and Local Contracts and buying groups
Strong supplier partnerships
-Important to achieving win-win competitive performance for the buyer and supplier — these require a strategic perspective as opposed to a tactical position

-Involve “a mutual commitment over an extended time to work together to the mutual benefit of both parties, sharing relevant information and the risks and rewards of the relationship”

Keys to Successful Partnerships
1.Build Trust
2. Shared Vision & Objectives
3. Personal Relationships
4. Mutual Benefits & Needs
5. Commitment & Top Management Support
6. Change Management
7. Information Sharing & Lines of Communication
8. Aligned Capabilities
9. Continuous Improvement (Kaizen)
Keys to Successful Partnerships
1. Performance Metrics:
-Supplier Evaluation Process / Scorecards
-TCO, Group costs around the transaction

2. Supplier Certification:
-process for evaluating the quality systems
-Internal / ISO

3.Supplier Development

4. Supplier Recognition

5. Supplier Relationship Management
-Execution improvement
-Sourcing analytics
-Supplier scorecards
-Performance monitoring
-Supplier Development

Supplier Relationship Management (SRM)
Involves developing partnerships with key suppliers
-Reducing total costs
-Innovating new products and services
-Creating value for both companies

Focus on a small set of critical suppliers
-Largest impact on profitability
-Provide most value
-Critical to firm’s success

Manage remaining suppliers based on segmentation
-Segmented based on company’s supply goals
-Manage all suppliers in the segment

Strategic sourcing
managing the firm’s external resources to support a firm’s long term goals.
Drivers of Strategic Sourcing
-Reduce costs & delivery cycle times
-Improve quality & long-term financial performance
-Increase number of global competitors
-Increase customer focus
-Reduce high costs of globalization & materials,
-Deliver more innovative products more frequently & cheaply than competitors
Ethical and Sustainable Sourcing Strategies
-Business Ethics
-Corporate Social Responsibility
-Ethical Sourcing
Business Ethics
is the application of ethical principles to business
-Utilitarianism (greatest good for greatest number of people
-Rights and duties (recognize rights of others and the duties those rights impose on your actions)
Corporate Social Responsibility
the practice of business ethics in a corporation
Ethical Sourcing
that which attempts to take into account the public consequences of organizational buying or bring about positive social change through organizational buying behavior.
-Promote diversity
-Promote good working conditions
-Promote environmental protection
Ethical Policies should include
-Determining where all purchased goods originated & the manner in which they were made
-Knowledge of the suppliers’ workplace principles
-Inclusion of ethics as a performance rating
-Independent verification of vendor compliance
-Report of supplier compliance to stakeholders
-Provision of detailed ethical sourcing expectations to suppliers
Sustainable Sourcing
a process of purchasing goods and services that takes into account the long term impact on people, profits and the planet.
Sustainable Sourcing Strategies
-Green purchasing: is aimed at ensuring products or materials meet environmental objectives

-Sustainability: is the ability to meet current needs of the supply chain without hindering the ability to meet future needs in terms of economic, environmental, and social challenges

-Supports the three P’s – people, planet, and profit
–Environmental stewardship (care for resources)
–Social Responsibility (worker safety, wages, working conditions, human rights)
–While making economic sense (remain a viable company)

Successful Sourcing Strategies
are different for functional products & for innovative products
Supply Chain Strategy Framework
Step 1. Classify purchased items & their suppliers

Step 2: Define supply chain goals for each item

Step 3: Identify capabilities & improvement opportunities

Step 4: Develop work plans linked to goals

Step 5: Execute plans to achieve results

Step 6: Monitor progress & make adjustments

*Strategies of “squeezing” suppliers for a lower price hurts TCO

Supply base rationalization (supply base reduction or supply base optimization)
is often the initial supply chain management effort

Buyer-supplier partnerships are easier with a rationalized supply base & result in –
-Reduced TCO (lower price, lower supply costs, improved quality)
-Fewer supplier management problems
-Closer & more frequent interaction between buyer & supplier
-Greater levels of quality & delivery reliability

Early Supplier Involvement
Early supplier involvement:
1. Key suppliers become more involved in the internal operations of the firm, particularly with respect to new product & process design, concurrent engineering & design for manufacturability techniques.

Vendor managed inventory (VMI)-
1. Key suppliers manage buyer inventories to reduce inventory carrying costs & avoid stock outs for buyer.

Benchmarking
comparing what you do to other businesses that do it best and implementing changes to improve
Normally looking at statistics (TAT, cost, productivity measures)
Best Practices
copying what other businesses do best and implementing in your organization
Watch for culture and organizational fit
Strong supplier partnerships