BA 339, OM

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BA 339, OM Chapter 11

• Supply Chain Management (SCM)
• Definition strategic importance
• Organization structure SCM
• Functional aspects of the supply chain
• Purchasing make/buy, orientation toward
  suppliers, centralized vs. local,
• Inventory management/measurement, placement
• Distribution/logistics inbound/outbound
• Supply chain strategies many/few, vertical
  integration, E-procurement
• Supplier evaluation/selection
• Supplier risk assessment/management
• Global supply chain issues

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BA 339, OM Chapter 11

• SCM Defined
• Integration of the activities that procure
  materials, transform them into intermediate goods
  and final products, and deliver them to
  customers
• Managing the flow of materials and services
  within a firm
• Includes Purchasing, supplier management,
  warehousing, inventory (raw materials, WIP,
  finished goods), logistics distribution,
  accounts payable/receivable, and forecasting
• Involves coordination of these functions with
  marketing/sales, engineering, finance, IT, and
  operations

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• Strategic Importance of SCM
• Material costs in the supply chain
• 58 in mfg. 83 in wholesale 71 in retail
• Purchasing cost are significant portion of sales
  and finished goods
• All industries 52
• Automobile 67
• Petroleum 79
• Food 60
• Transportation 62
• Purchasing savings have substantial impact upon
  profitability (relative to increasing sales) gt
  see Table 11.3 on page 436 in text
• Provides competitive advantage via cost, quality,
  responsiveness differentiation gt see Table 11.1
  on page 435 in test

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• Organization Structure SCM
• Evolution away from functional stove pipes to
  more integrated approaches (generally purchasing,
  production control, inventory, and
  distribution/logistics)
• Materials management often includes purchasing
  (matl services), inventory, production levels,
  schedules, distribution, and staffing patterns
• Also referred to as Logistics Management in more
  service oriented firms
• Segmented structure traditional, department
  organizations such as purchasing, production
  control and distribution reporting to separate
  managers
• Integrated structure incorporates functional
  groups into a single organization that elevates
  its manager to a higher level in the firm
  (director, executive, etc.)

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• Functional Aspects of the Supply Chain
• Purchasing
• Acquisition of materials, supplies, equipment and
  services
• 5 basic steps
• Recognize a need technical handoff
• Evaluate/select suppliers
• Issue/place the order or contract
• Track/manage the order or contract
• Receive the order inventory/logistics handoff

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• Purchasing
• E-Commerce/E-procurement
• E-Marketplace
• Competitive marketplace located on the internet
  generally formed around common industries such as
  auto, energy, etc. (vertical) horizontal
  support MRO commercial items
• Integration ranges from web-browser based
  transactions gt EDI gt integration w/E-P gt
  integration w. ERP system
• E-procurement
• Electronic purchase of goods services
• Hosted S/W is located on marketplace
  functionality differs based on host locations
• Non-hosted S/W is located maintained with the
  buyer

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• Purchasing
• E-Commerce/E-procurement
• Auctions
• Forward seller driven one seller, many buyers,
  price rises with time assets and surplus
  inventory
• Reverse buyer driven one buyer, many sellers,
  price falls with time materials services
• Business case usually required because of capital
  outlays required for S/W H/W
• Considerations core business function/competency,
  scope, volume, etc.

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• Reasons for Making
• Lower production costs
• Unsuitable suppliers
• Assure adequate supply
• Utilize surplus labor/facilities
• Obtain desired Q
• Remove supplier collusion
• Unique item would require prohibitive commitment
  for a supplier
• Maintain organizational talent preclude layoff
• Protect proprietary design
• Increase size of firm

• Reason for Buying
• Lower acquisition cost
• Preserve supplier commitment
• Obtain technical or management ability
• Inadequate capacity
• Reduce inventory costs
• Ensure alternative sources
• Inadequate managerial or technical resources
• Reciprocity
• Item protected by patent or trade secret
• Frees management to deal with primary business

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• Purchasing
• Orientation toward suppliers
• Competitive (Example U.S. auto industry)
• Negotiation is a zero-sum game winner loser
• Short-term advantages valued over long-term
  commitment
• Buyer pushes price to survival levels
• Seller pushes for higher price for specific
  levels of quality, customer services volume
  flexibility
• Cooperative (Example VW facility in Brazil)
• Work together toward common goals more
  information sharing partnership
• Favors few suppliers with 1-2 as the optimal
  numbers
• Suppliers become extension of buyer
• Fewer transactions lower internal cost reduction
  in supply chain reduces cost and complexity

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• Purchasing
• Centralize vs. local (de-centralized) buying
• Centralized
• Increased purchasing clout (volume) gt can lead to
  better service, better availability, improved
  development of supplier capability
• Favored by companies w/ overseas suppliers
  because of specialized skills required (language,
  international commercial/contract law) and use of
  info. tech. and internet
• Loss of control at local level can negatively
  affect responsiveness to customers
• Loss of appreciation of cultural impacts due to
  limited management experience
• Often have longer lead times, more internal
  bureaucracy and increase logistics cost
• Compromise IBMs centralized purchasing based
  on local needs.

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• Functional Aspects - Inventory Management
• Key issues
• Measurement average aggregate inventory value,
  weeks of supply, inventory turnaround (turns)
• Location and size of warehouse/distribution
  centers
• Standardization of materials/suppliers and
  related handling equipment
• Volume

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• Functional Aspects - Distribution/Logistics
• Inbound outbound materials flow
• Inbound sometimes considered as part of
  purchasing or logistics
• Outbound equated with distribution
• Considerations
• Placement of finished goods inventory critical
  for international operations (customer proximity,
  customs, etc.) gt forward (closer to customers)
  backward (centralized evens out regional
  demand)
• Selection of transportation mode carriers
• Truck 40 of U.S. freight
• Rail 30 of U.S. freight
• Scheduling/routing must align with purchasing and
  production schedules

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• Supply Chain Strategies
• Many suppliers
• Many sources per item
• Adversarial relationship
• Short-term emphasis
• Little openness
• Negotiated, sporadic POs
• High prices
• Infrequent, large lots
• Delivery to receiving dock

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BA 339, OM Chapter 11

• Supply Chain Strategies
• Few suppliers
• 1 or few sources per item
• Partnership (JIT)
• Emphasis on long-term, stability
• On-site audits visits
• Exclusive contract
• Low prices (large orders)
• Frequent, small lots
• Delivery to point of use
• E-commerce/E-procurement
• Vertical/horizontal marketplace, technology
  driven

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BA 339, OM Chapter 11

• Supplier Evaluation/Selection
• Considerations
• Alignment with business model, competitive
  strategy (cost, responsiveness, differentiation),
  product/service lifecycle, risk strategy
  purchasing strategy
• Evaluation models
• Company, product, service
• Financial stability, management, location
• Quality, price
• On-time delivery, condition on arrival, technical
  support, training
• Technical, business, services
• Design, production, quality
• Procurement, financial, logistics, customer
  satisfaction

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• Supplier Risk Assessment/Management
• Risk Assessment
• Act of identifying, classifying, quantifying
  analyzing risk
• Components
• Probability likelihood of some event occurring
• Impact consequence of that event occurring
• Includes internal and external sources of risk
• Includes qualitative (adjectival) and
  quantitative (numerical) assessments
• Risk Management
• Act of responding to, controlling, mitigating,
  influencing, avoiding, sharing, accepting, or
  diversifying risk
• Implies some method of assessment that can be
  qualitative or quantitative

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• Source of Risk in the Supply Chain
• Product complexity, maturity, criticality,
  technological maturity, delivery schedule
  criticality, performance history
• Process design/engineering, production/manufactu
  ring, quality
• System multiple, interlocking systems
  sub-systems
• Quality management system
• Logistics systems

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• Sources of Risk (cont.)
• Financial lack of capital, poor cash flow,
  product litigation, inefficient use of assets
• Useful ratios
• Current ratio ratio of assets to liabilities
• Quick ratio ratio of cash, marketable
  securities accounts receivables to current
  liabilities
• Return on sales ratio ratio of net income to
  net sales
• ROI (Net operating income/sales) x (Sales/avg.
  operating assets)

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BA 339, OM Chapter 11

• Managing Risk
• Understand your suppliers/service providers
  supply chain, critical processes and capability
• Define critical suppliers, supply chain processes
  and critical products/services
• Identify sources of risk or variation in the
  supply chain
• Cost
• Schedule
• Quality
• Requirements
• Technology

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• Managing Risk
• Asses measure risk
• Select develop a risk methodology based on
  organizational maturity/capability
• Develop measures based on availability and
  reliability of data
• Assessment measures can be qualitative or
  quantitative
• Approaches
• ORCA
• Identify business Objectives
• Identify operations and other Risks
• Define Controls
• Assess Process

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• SC 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
  technology to schedule and manage shipment of
  parts in and finished parts out
• Staffed with local specialists to handle duties,
  trade, freight, customs, and political issues