Supply Chain Management Crusade

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					         Chapter 7: Supply Chain Management

      Defining Supply Chain Management
• Coordination and integration of all supply chain activities
  into seamless process.
• Enables organizations to plan and collaborate across
  supply chain.
• Goal is to deliver right product to right place at right time in
  order to maximize profit.


     Supply Chain Management Crusade
• Focus is on entire value chain
• Includes
  – lean production
  – JIT
  – TQM
  – purchasing
  – product/service design


                        Purchasing
• Activities to reliably obtain materials by the time they are
  needed in the product supply process.
• Important considerations include price, quality, lead times,
  and reliability.
• Manufacturing organizations spend an average of 55
  percent of revenue for outside materials and services.
• These same organizations spend only 6 percent on labor
  and 3 percent on overhead.
          Potential for Lowering Cost and
                 Increasing Profits
Total Sales                   = $10,000,000
Purchased Materials           = 7,000,000
Labor and Salaries             = 2,000,000
Overhead                      =     500,000
Profit                         =    500,000


                  To Double Profits ...
•   Increase sales by 100 percent
•   Increase selling price by 5 percent
•   Decrease labor and salaries by 25 percent
•   Decrease overhead by 100 percent
•   Decrease purchase cost by 7.1 percent


                  JIT and Purchasing
Widespresd use of JIT has increased importance of
purchasing and procurement since delays in the receipt of
materials will stop a JIT program dead in its tracks.

         Characteristics of Good Suppliers
• Deliveries made on time and are of quality and in the
  quantity specified.
• Fair prices.
• Able to respond to unforeseen changes.
• Continually improves products and services.
    Four Major Areas in Evaluating Sources of
                     Supply
•   Technical and Engineering Capability
•   Manufacturing Strengths
•   Financial Strengths
•   Management Capability


                  Cost-Price Analysis
• Objective is to reduce total cost.
• Price is only one component of total cost.
• Many organizations have found the best way to lower total
  cost is to work with and help key suppliers lower their
  costs.
• Costs should come down in accordance with the learning
  curve.
• A low price is meaningless if quality is insufficient or
  delivered late disrupting schedules.


      Key Elements of Effective Purchasing
• They leverage their buying power.
• They commit to a small number of dependable suppliers.
• They work with and help their suppliers reduce total cost.
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                Functions of Inventories
•   Transit Inventories
•   Buffer Inventories (safety stocks)
•   Anticipation Inventories
•   Decoupling Inventories
•   Cycle Inventories

                  Forms of Inventories
•   Raw Materials
•   Maintenance, repair, and operating supplies
•   Work-In-Process (WIP)
•   Finished Goods

                Inventory-Related Costs
•   Ordering or Setup Costs
•   Inventory Carrying or Holding Costs
•   Stockout Costs
•   Capacity Associated Costs
•   Cost of Goods

        Decisions in Inventory Management
• When to order?

• How much to order?
 Types of Inventory Management Systems
• Reorder point systems
  – time between orders varies
  – constant order quantity
• Periodic review systems
  – time between orders fixed
  – order quantity varies
• Material requirements planning (MRP)
  – dependent demand items


 Priorities for Inventory Management: The
                  ABC Concept
• A items
  – 15-20% of items that account for 75-80% of annual inventory
    value
• B items
  – 30-40% of items that account for   15% of annual inventory
    value
• C items
  – 40-50% of items that account for 10-15% of annual inventory
    value
  Supplement: The Economic Order Quantity Model

                     ASSUMPTIONS
• Constant rate of demand
• Shortages not allowed
• Stock replenishment can be scheduled to arrive exactly when
  inventory drops to zero
• Purchase price, ordering cost, and per unit holding cost are
  independent of quantity ordered
• Items are ordered independently of each other

                            Notation
Q = order quantity
U = annual usage
CO = order cost per order
CH = annual holding cost per unit

                       EOQ Example
• Given:
  – 25,000 annual demand
  – $3 per unit per year holding cost
  – $100 ordering costs

				
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