Chapter 11: Supply Chain Management EXAM 2

Centralized purchasing

- Leverage purchase volume for better pricing - Develop specialized staff expertise - Develop stronger supplier relationships - Maintain professional control over the purchasing process - Devote resources to the supplier selection and negotiation process - Reduce the duplication of tasks - Promote standardization

Supply chain's strategic importance (continued)

- Supplier relationships increasingly integrated and long term. Improve innovation, speed design, reduce costs. - Managing supplier relationships has added emphasis.

Security and JIT

- shipments get misrouted, stolen, damaged, or excessively delayed - technological innovations are improving security and inventory management - location, motion sensors, broken seals, temperature - tracking can help expedite shipments

Shipping systems

- trucking (vast majority of manufactured goods moves by truck and is flexible), - railroads (ships 40% of commodities like coal, cereal, basic chemicals), - airfreight (less than 1% of tonnage shipped, does medical, flowers, and fruit), - waterways (oldest means of freight transportation), - pipelines (used for oil, natural gas, petroleum, and chemicals), - multimodal (combines shipping methods to get a product to its final destination)

Supply Chain risk

-More reliance on supply chains means more risk -Fewer suppliers increase dependence -Compounded by globalization and logistical complexity -Vendor reliability and quality risks -Political and currency risks

Keiretsu

A Japanese term that describes suppliers who become part of a company coalition.

Few suppliers (second of the six sourcing strategies)

A buyer forms longer-term relationships with fewer dedicated suppliers. Long-term suppliers are more likely to understand the broad objectives of the procuring firm and the end customer. Using a few suppliers can create value through allowing suppliers to have economies of scale and learning curve improvements like lower transaction costs and lower production costs. Suppliers are more willing to participate in JIT programs and contribute design innovations and technological expertise. Cost of changing suppliers is huge Suppliers learn trade secrets and could make other alliances or go off on their own

Weeks of supply

Average inventory investment / (Annual cost of goods sold/52 weeks)

Competitive Bidding

Common policy for many firms for many of their purchases. Requires that the purchasing agent have several potential suppliers and quotations from each. Major disadvantage of this method, is that the development of long-term relations between buyer and seller is hindered.

Inventory turnover

Cost of goods sold /average inventory investment.

Low cost strategy

Demand stable and Supply stable Profit margin is thin. Lower the costs to gain profit commodities. Ex: milk, gas, butter. - Primary supplier selection criteria: cost - Supply chain inventory: Minimize inventory to hold down costs. - Distribution network: Inexpensive transportation and sell through discount distributors/retailers. - Product design characteristics: maximize performance and minimize cost.

Risk hedging strategy

Demand stable and supply unstable Not officially considered part of the supply chain strategies. This depends on if there is a new process coming out. ex: In summer, people want to use this new product but we don't know the new technology for a hyper electricity air vent and went to a competitor to get more help.

Response Strategy

Demand unstable and supply stable Profit margin is high. You don't know how much it will sell but they have been made for a while. Ex: laptops, ipads. - Primary supplier selection criteria: capacity, speed, flexibility. - Supply chain inventory: Use buffer stocks to ensure speedy supply - Distribution network: Fast transportation and provide premium customer service. - Product design characteristics: Low setup time and rapid production ramp-up.

Differentiation Strategy

Demand unstable and supply unstable Applies more for new objects in the market and don't know if people will like it in the market. Ex: iwatch, drones. - Primary supplier selection criteria: Product development skills, willing to share information, jointly and rapidly develop products. - Supply chain inventory: Minimize inventory to avoid product obsolescence. - Distribution network: Gather and communicate market research data. Knowledgeable sales staff. - Product design characteristics: Modular design to aid product differentiation

Contracting (part 4 of four step supplier evaluations)

Develop contracts to spell out terms of the relationship. Designed to share risks, share benefits, and create incentive structures to encourage supply chain members to adopt policies that are optimal for the entire chain. Goal is collaboration. Features include quantity discounts, buybacks, revenue sharing.

Vertical integration (third of the six sourcing strategies)

Developing the ability to produce goods or services previously purchased or actually buying a supplier or a distributor. Kind of like purchasing. Model of "doing everything" Can be forward, towards the customer, or backward, towards suppliers. Can improve with cost reduction, higher quality, and timely delivery, and inventory reduction but requires for firms to have capital, managerial skills, and demand.

Joint Ventures (fourth of the six sourcing strategies)

Firms may want to form some kind of formal collaboration with suppliers. Doing this will include benefits like - enhancing their product prowess or technological skills. - Secures supply - reduces costs Must make sure to cooperate without diluting the brand or conceding a competitive advantage.

Supplier evaluation (part 1 of four step supplier evaluations)

First find potential suppliers and determining the likelihood of their becoming good suppliers. The issues of financial strength, quality, management, research, technical ability, and potential for a close, long-term relationship play an increasingly important role. Also includes production process capability, location, and information systems. Buyers audit potential suppliers and award a certified status to those that meet the specified qualification. A certification process often involves three steps: 1. qualification 2. education 3. the certification performance process

The Cost-based price model

Requires that the supplier open its books to the purchaser. The contract price is then based on time and materials or on a fixed cost with an escalation clause to accommodate changes in the vendor's labor and materials cost.

Pull data

accurate sales data that initiate transactions to "pull" product through the supply chain

Channel assembly

postpones final assembly of a product so the distribution channel can assemble it. Sends individual components and modules, rather than finished products to the distributor.

E-procurement

purchasing facilitated through internet. Like online catalogs/exchanges and online auctions. Speeds purchasing, reduces costs, and integrates the supply chain. - online catalogs and exchanges: - standard items or industry-specific web sites - online auctions: - low barriers to entry - reverse auctions for buyers - price not always the most important factor

Percentage invested in inventory

The amount of money invested in inventory, usually expressed as percentage of assets. (average inventory investment/total assets) x 100 Home depot had $11.4b inventory and total assets of $44.4b: (11.4/44.4)X 100=25.7%

Bullwhip effect

The increasing fluctuation in orders that often occurs as orders move through the supply chain.

Reverse logistics

The process of spending returned products back up the supply chain for value recovery or disposal (or resale, repair, reuse, remanufacture, recycling, or disposal).

Logistics management

an approach that seeks efficiency of operations through the integration of all material acquisition, movement, and storage activities - is a frequent candidate for outsourcing - allows competitive advantage to be gained through reduced costs and improved customer service. Procurement activities may be combined with various shipping, warehousing, and inventory activities to form a logistics system.

The objective of supply chain management is to

coordinate activities within the supply chain to maximize the supply chain's competitive advantage and benefits to the ultimate consumer.

Postponement

delaying any modifications or customization to a product as long as possible in the production process.

Two issues operations management managers (OM) must address every day when dealing with supply chains are

ethics and sustainability

Single-stage control of replenishment

fixing responsibility for monitoring and managing inventory for the retailer.

Supplier development (part 2 of four step supplier evaluations)

integrate the supplier into the system by making sure the supplier has an appreciation of: - quality requirements - product specifications - schedules and delivery - procurement policies - training - engineering and production help - information transfer procedures

Many suppliers (first of the six sourcing strategies)

For this strategy, a supplier responds to the demands and specifications of a "request for quotation" meaning the order will go to the lowest bidder (purchasing based on price). Commonly used for commodity products. This is when suppliers compete with one another and it places the burden of meeting the buyer's demands on the supplier (to get the deal). This approach makes the suppliers responsible for maintaining the necessary technology, expertise, and forecasting abilities, as well as cost, quality, and delivery competencies. Long-term "partnering" relationships are not the goal.

Keiretsu Networks (Fifth of the six sourcing strategies)

It is part collaboration, part purchasing from few suppliers, and part vertical integration. A middle ground between few suppliers and vertical integration. These manufacturers often provide financial support for suppliers through ownership or loans. A Japanese term that describes suppliers who become part of a company coalition. Members expect long-term relationships and provide technical expertise and stable deliveries. May extend through several levels of the supply chain.

Purchasing

It is the acquisition of goods and services. objectives of purchasing: 1. identify the products and services that can be obtained externally 2. develop, evaluate and determine the best supplier, price, and delivery for those products.

Forward integration

Moving towards the customer and away from suppliers. Ex: Apple establishing its own revolutionary retail stores.

Backward integration

Moving towards the suppliers and away from buyers. Suggests a firm purchase its suppliers. Backward integration may be risky in industries with rapid technological change. Ex: Apple deciding to manufacture its own semiconductors.

Market-based Price Model

Price is based on published, auction, or indexed prices.

Risk and mitigation tactics

-Research and assess possible risks -Innovative planning -Reduce potential disruptions -Prepare responses for negative events -Flexible, secure supply chains -Diversified supplier base

Most firms spend a huge portion of their sales dollars on _________ (important)

Purchases. Because of this supply chains are a good place to look for savings. Effective cost-cutting may help a firm reach its profit goals more easily than would an increased sales effort. Because an increasing percentage of an organization's costs are determined by purchasing, relationships with suppliers are increasingly integrated and long term. Combined efforts that improve innovation, speed design, and reduce costs are common.

On the cost side three logistics-related costs are shown

inventory costs, transportation costs, and facility costs. (X)

Drop shipping

shipping directly from the supplier to the end consumer rather than from the seller, saving both time and reshipping costs

Supply chain management (important)

the coordination of all supply chain activities involved in enhancing customer value. Starting with raw materials and ending with a satisfied customer. Includes suppliers, manufacturers and/or service providers, and distributors, wholesalers, and/or retailers who deliver the product and/or service to the final customer.

Outsourcing

transferring a firm's activities that have traditionally been internal to external suppliers. Part of the continuing trend toward using the efficiency that comes with specialization. The vendor performing the outsourced service is an expert in that particular specialty. This leaves the outsourcing firm to focus on its key success factors and its core competencies.

Cross-sourcing

using one supplier for one component and a second supplier for another component, where each supplier acts as a backup for the other.

Opportunities in Managing the Integrated Supply Chain

1. Accurate "Pull" Data-shared information 2. Lot size reduction- shipping, discounts, reduced ordering costs 3. single-stage control of replenishment- single supply chain member responsible for ordering. 4. vendor-managed inventory 5. Collaborative planning, forecasting, and replenishment (CPFR)- through the supply chain 6. blanket orders- against which actual orders are released 7. standardization 8 .postponement- withholds modification as long as possible 9. electronic ordering and funds transfer- speed transactions and reduce paperwork 10. drop shipping and special packaging- bypasses the seller and reduces costs.

Integrated supply chain management ethical standards

1. perceived impropriety 2. conflicts of interest 3. issues of influence 4. responsibilities to your employer 5. suppler and customer relationships 6. sustainability and social responsibility 7. confidential and proprietary information 8. reciprocity 9. applicable laws, regulations and trade agreements 10. Professional competence.

Designing distribution networks to meet customer expectations suggests three criteria

1. rapid response 2. product choice 3. service

Supply Chain Operations Reference (SCOR) Model

A set of processes, metrics, and best practices developed by the APICS Supply Chain Council. Five parts are plan, source, make, deliver, and return.

Negotiations (part 3 of four step supplier evaluations)

A significant number of final prices paid in business-to-business transactions are negotiated. Highly valued skills. Uses three classic types of negotiation strategies: 1. the cost-based model 2. the market-based price model 3. competitive bidding

Closed-loop supply chain

A supply chain designed to optimize both forward and reverse flows.

Vendor-managed inventory (VMI)

A system in which a supplier maintains material for the buyer, often delivering directly to the buyer's using department.

Collaborative Planning, Forecasting, and Replenishment (CPFR)

A system in which members of a supply chain share information in a joint effort to reduce supply chain costs.

Virtual companies (six of the six sourcing strategies)

Companies that rely on a variety of good, stable supplier relationships to provide services on demand. Also known as hollow corporations or network companies. Suppliers may provide services like payroll, hiring personnel, designing products, providing consulting services, manufacturing components, conducting tests, or distributing products. Relationships with suppliers may be short or long term. Advantages include specialized management expertise, low capital investment, flexibility, and speed. The results are efficiency. Ex: Using only a laptop and cell phone to run a business. You could buy vehicles cheap and fix them up and sell them all online.

Three aspects of ethics

- personal ethics (promote and uphold responsibilities to one's employer and avoid perceived impropriety) - ethics within the supply chain - ethical behavior regarding the environment

Issues and Topics in the supply chain

1. Bullwhip effect- The increasing fluctuation in orders that often occurs as orders move through the supply chain. (small problems turn into big ones by the time it is caught.) 2 Postponement- Delaying any modifications or customization to a product as long as possible in the product process. 3. Drop shipping- shipping directly from the supplier to the end consumer rather than from the seller, saving both time and reshipping costs. 4. blanket order- a long-term purchase commitment to a supplier for items that are to be delivered against short-term releases to ship. (drowning down the price when buying in bulk) 5. electronic data interchange (EDI)- computer to computer communication. Block chain-> smart contract 6. channel assembly- assembling a product or not when shipping 7. standardization- trying to use standard parts for similar products to reduce the price. investment in new technology-> lower production cost-> increased demand-> standardization

Supply chain managers outsource logistics to third-party logistics to meet three goals

1. Drive down inventory investment 2. lower delivery costs 3. improve delivery reliability and speed

Three issues in managing and complicate development of an efficient integrated supply chain

1. Local optimization- members of the chain are inclined to focus on maximizing local profit or minimizing immediate cost based on their limited knowledge. 2. incentives (sales incentives, quantity discounts, quotas, and promotions)- push merchandise into the supply chain for sales that have not occurred. This fluctuations that are ultimately expensive for all. 3. large lots- reduce shipping costs but increase inventory holding and do not reflect actual sales.

(Hau Lee's) Three supply chain strategies are

1. Low cost strategy 2. Response strategy 3. Differentiation strategy (risk hedging strategy)

Six Sourcing strategies

1. Many suppliers 2. Few suppliers 3. Vertical integration 4. Joint ventures 5. Keiretsu networks 6. Virtual companies

Three distinct functions of supply chain are

1. Purchasing (produce)- procedure for raw material 2. Production/manufacture- transform them into intermediate goods and final products. 3. Distribution- deliver products to customers through a distribution system

Supply chain risks and tactics

1. Supplier failure to deliver 2. Supplier quality failures 3. outsourcing (take over production) 4. logistics delays or damage (redundant transportation, secure packaging, effective contracts with penalties) 5. distribution 6. information loss or distortion 7. Political 8. economic 9. natural catastrophes 10. Theft, vandalism, and terrorism

Examine Supplier evaluation with four steps

1. supplier evaluation 2. supplier development 3. negotiations 4. contracting

Make-or-buy decision

A choice between producing a component or service in-house or purchasing it from an outside source. Supply chain personnel evaluate alternative suppliers and provide current, accurate, and complete data relevant to the buy alternative. This allows firms to focus is on maintaining the core competencies, whatever provides that keep in house, other than that outsource it. Ex: janitors at western outsource- it is not the main focus at western.

Blanket order

A long-term purchase commitment to a supplier for items that are to be delivered against short-term releases to ship.