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
• 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
– lean production
– product/service design
• Activities to reliably obtain materials by the time they are
needed in the product supply process.
• Important considerations include price, quality, lead times,
• 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
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
• Fair prices.
• Able to respond to unforeseen changes.
• Continually improves products and services.
Four Major Areas in Evaluating Sources of
• Technical and Engineering Capability
• Manufacturing Strengths
• Financial Strengths
• Management Capability
• 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 should come down in accordance with the learning
• 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.
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
• 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
• A items
– 15-20% of items that account for 75-80% of annual inventory
• B items
– 30-40% of items that account for 15% of annual inventory
• C items
– 40-50% of items that account for 10-15% of annual inventory
Supplement: The Economic Order Quantity Model
• 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
Q = order quantity
U = annual usage
CO = order cost per order
CH = annual holding cost per unit
– 25,000 annual demand
– $3 per unit per year holding cost
– $100 ordering costs