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					                                 Slides prepared
                                 by John Loucks



ã 2002 South-Western/Thomson Learning TM           1
                                                   1
       Chapter 11

Supply Chain Management
     And E-Business




                          2
                      Overview

   Introduction
   Supply Chain Management
   Purchasing
   Logistics
   Warehousing
   Expediting
   Benchmarking the Performance of Materials Managers
   Third-Party Logistics Management Providers
   E-Business and Supply Chain Management
   Wrap-Up: What World-Class Companies Do
                                                    3
                      Introduction

   Materials - any commodities used directly or
    indirectly in producing a product or service.
      Raw materials, component parts, assemblies,
       finished goods, and supplies
   Supply chain - the way materials flow through
    different organizations from the raw material supplier
    to the finished goods consumer.




                                                         4
                   Supply Chain
         for Steel in an Automobile Door
  MINING                      STEEL                        STEEL
                 Iron                         Steel
 COMPANY                       MILL                       COMPANY
                  ore                        ingots
Mines iron ore           Forms steel ingot              Forms sheet metal
                 Sheet
                 metal
AUTOMOTIVE               AUTOMOBILE                         CAR
 SUPPLIER        Car     MANUFACTURER          Car       DEALERSHIP
                 door
 Makes door              Makes automobile               Does preparation
                                             Prepared
                                               car
                             FINAL
                           CONSUMER
                         Drives automobile

                                                                     5
             Supply Chain Management

   Refers to all the management functions related to the
    flow of materials from the company’s direct suppliers
    to its direct customers.
   Includes purchasing, traffic, production control,
    inventory control, warehousing, and shipping.
   Two alternative names:
      Materials management
      Logistics management



                                                        6
                    Supply Chain Management
                     in a Manufacturing Plant
                            Raw
                         Materials,




                                                                               Customers
                                                      Finished   Inspection,
Suppliers




            Receiving    Parts, and
                                                       Goods     Packaging,
               and       In-process      Production
                                                       Ware-        And
            Inspection     Ware-
                                                      housing     Shipping
                          Housing



                               Materials Management
                            Production         Warehousing and Shipping
            Purchasing
                             Control           Inventory Control and Traffic

               Physical materials flow
               Information flow
                                                                                     7
                     Purchasing

Factors increasing the importance of purchasing today:
 Tremendous impact of material costs on profit (60-

  70% of each sales dollar is paid to material suppliers)
 Popularity of just-in-time manufacturing (supply

  deliveries must be exact in timing, quantity, and
  quality)
 Increasing global competition (growing competition

  for scarce resources, and a geographically “stretched-
  out” supply chain)


                                                       8
                Mission of Purchasing

   Develop purchasing plans for each major product or
    service that are consistent with operations strategies:
      Low production costs
      Fast and on-time deliveries
      High quality products and services
      Flexibility




                                                              9
              Purchasing Management

   Maintain data base of available, qualified suppliers
   Select suppliers to supply each material
   Negotiate contracts with suppliers
   Act as interface between company and suppliers
   Provide training to suppliers on latest technologies




                                                           10
      Advantages of Centralized Purchasing

   Buying in large quantities - better prices
   More clout with suppliers - greater supply continuity
   Larger purchasing department - buyer specialization
   Combining small orders - less order cost duplication
   Combining shipments - lower transportation costs
   Better overall control




                                                            11
               Purchasing Process

                            From any department,
   Material Requisition
                            to purchasing
                            From purchasing,
 Request for Quotations
                            to potential suppliers
                            Based on quality, price,
   Select Best Supplier     lead time, dependability
                            From purchasing,
     Purchase Order         to selected supplier
                            From supplier, to receiving,
Receive and Inspect Goods   quality control, warehouse

                                                       12
                    Buyers’ Duties

   Know the market for their commodities
   Understand the laws.... tax, contract, patent..…
   Process purchase requisitions and quotation requests
   Make supplier selections
   Negotiate prices and conditions of sale
   Place and follow-up on purchase orders
   Maintain ethical behavior



                                                           13
              Make-or-Buy Analysis

Considerations in make-or-buy decisions:
 Lower cost - purchasing or production?

 Better quality - supplier or in-house?

 More-reliable deliveries - supplier or in-house?

 What degree of vertical integration is desirable?

 Should distinctive competencies be outsourced?




                                                      14
           Example: Make-or-Buy

    A firm manufactures a product that contains a
part requiring heat treatment. An analyst is trying to
decide whether it is more economical to buy the heat
treating service or perform the treatment in house.
Pertinent data is shown on the next slide.
    If part quality and delivery performance are about
the same for the two alternatives, which alternative
should be selected?



                                                    15
           Example: Make-or-Buy


                                        Purchase
                           Heat-Treat   Heat-Treat
                           In-House      Service
Number of parts annually     5,000        5,000
Fixed cost per year         $25,000         $0
Variable cost per part      $13.20       $17.50




                                                     16
               Example: Make-or-Buy

   Compute the total cost for each alternative
                     TC = FC + vQ
    TC1 = FC1 + v1Q = 25,000 + 13.20(5,000) = $91,000
    TC2 = FC2 + v2Q =      0 + 17.50(5,000) = $87,500
    The firm should buy the heat-treating service (the
    second alternative).
                                 continued


                                                         17
          Example: Make-or-Buy

    The analyst has assumed that 5,000 parts per year
will require heat treatment. By how many parts can
the firm’s requirements increase or decrease before
in-house heat treating is more economical? Should
the analyst rethink his/her decision?




                                                    18
              Example: Make-or-Buy

   Compute the break-even parts quantity
           FC1 + v1Q = FC2 + v2Q
           Q = (FC1 - FC2)/(v2- v1)
           Q = (25,000 – 0)/(17.50 – 13.20)
           Q = 5,814
        If the firm’s annual parts requirement increases
    by 814 (about 16%) or more, in-house heat treatment
    would be more economical. The analyst should give
    the decision more thought.
                                                       19
                       Logistics

   Logistics usually refers to management of:
     the movement of materials within the factory
     the shipment of incoming materials from suppliers
     the shipment of outgoing products to customers




                                                      20
   Movement of Materials within Factories

The typical locations from/to which material is moved:

Incoming       Receiving       Quality
                                            Warehouse
 Vehicles        Dock          Control


  Work        Other Work                     Finished
                             Packaging
  Center        Centers                       Goods


               Shipping       Outgoing
 Shipping
                Dock          Vehicles

                                                        21
            Shipments To and From Factories

   Traffic
     Traffic departments routinely examine shipping
      schedules and select:
         shipping methods
         time tables
         ways of expediting deliveries
     Traffic management is a specialized field requiring
      technical training in Department of Transportation
      (DOT) and Interstate Commerce Commission
      (ICC) regulations and rates.

                                                       22
        Shipments To and From Factories

   Distribution
     Distribution, or physical distribution, is the
      shipment of finished goods through the distribution
      system to customers.
     A distribution system is the network of shipping
      and receiving points starting with the factory and
      ending with the customers.




                                                       23
        Shipments To and From Factories

   Distribution Requirements Planning
     DRP is the planning for the replenishment of
      regional warehouse inventories.
     DRP uses MRP-type logic to translate regional
      warehouse requirements into central distribution-
      center requirements, which are then translated into
      gross requirements in the MPS at the factory.




                                                        24
            Shipments To and From Factories

   Distribution Requirements Planning
     Scheduled receipts are previously-placed orders that
      are expected to arrive in a given week
     Planned receipt of shipments are orders planned, but
      not yet placed, for the future
     Projected ending inventory is computed as:
         Previous week’s projected ending inventory
         + Planned receipt of shipments in current week
         + Scheduled receipt of shipments in current week
         -- Forecasted demand in current week
                                                       25
        Shipments To and From Factories

   DRP Time-Phased Order Point Record

Region. Warehouse #1 LT = 1              Week
Std. Quantity = 50   SS = 10   -1   1    2    3    4    5
Forecasted demand (units)           30   40   30   40   40
Scheduled receipts                  50
Projected ending inventory     60   80   40   10   20   30
Planned receipt of shipments                       50   50
Planned orders for shipments                  50   50



                                                        26
                Example: DRP

    Products are shipped from a company’s main
distribution center (adjacent to the factory) to two
regional warehouses. The DRP records on the next
two slides show – for the two regional warehouse –
the forecasted demand, scheduled receipts, and last
week’s projected ending inventories for a single
product.
    The third upcoming slide shows – for the main
distribution center – scheduled receipts and last
week’s projected ending inventory for the same
product. Complete the DRP records.
                                                       27
                     Example: DRP

   DRP Record for Regional Warehouse #1

Region. Warehouse #1 LT = 1                 Week
Std. Quantity = 100  SS = 50   -1    1     2     3    4    5
Forecasted demand (units)            80    100   80   60   100
Scheduled receipts                   100
Projected ending inventory     200
Planned receipt of shipments
Planned orders for shipments



                                                            28
                     Example: DRP

   DRP Record for Regional Warehouse #2

Region. Warehouse #2 LT = 2                Week
Std. Quantity = 200  SS = 80   -1    1     2   3   4   5
Forecasted demand (units)            100 200 200 240 200
Scheduled receipts                   200
Projected ending inventory     220
Planned receipt of shipments
Planned orders for shipments



                                                       29
                     Example: DRP

   DRP Record for Main Distribution Center

Main Distrib. Center LT = 1                 Week
Std. Quantity = 500  SS = 200   -1    1     2   3   4   5
Gross Requirements (units)
Scheduled receipts                    500
Projected ending inventory      250
Planned receipt of shipments
Planned orders for shipments



                                                        30
                     Example: DRP

   Completed DRP Record for Regional Warehouse #1

Region. Warehouse #1 LT = 1                Week
Std. Quantity = 100  SS = 50   -1   1     2     3     4     5
Forecasted demand (units)           80    100   80    60    100
Scheduled receipts                  100
Projected ending inventory     200 220 120 140        80    80
Planned receipt of shipments                    100         100
Planned orders for shipments              100         100



                                                             31
                     Example: DRP

   Completed DRP Record for Regional Warehouse #2

Region. Warehouse #2 LT = 2               Week
Std. Quantity = 200  SS = 80   -1   1     2   3    4   5
Forecasted demand (units)           100 200 200 240 200
Scheduled receipts                  200
Projected ending inventory     220 320 120 120    80   80
Planned receipt of shipments                  200 200 200
Planned orders for shipments        200 200 200



                                                        32
                    Example: DRP

   DRP Record for Main Distribution Center
     The “gross requirement” ( in row 1) for any week
      is determined by summing the “planned orders for
      shipment” for the same week at the two regional
      warehouses
     These gross requirements at the MDC are input to
      the master production schedule in the factory
     In other words, the timing and quantities of
      production in the factory are linked to the timing
      and quantities of demand at the regional
      warehouses

                                                       33
                     Example: DRP

   Completed DRP Record for Main Distribution Center

Main Distrib. Center LT = 1                 Week
Std. Quantity = 500  SS = 200   -1   1     2     3     4   5
Forecasted demand (units)            200 300 200 100
Scheduled receipts                   500
Projected ending inventory      250 550 250 550 450 450
Planned receipt of shipments                     500
Planned orders for shipments               500



                                                           34
         Shipments To and From Factories

   Distribution Resource Planning
     Distribution resource planning extends DRP so
      that the key resources of warehouse space,
      workers, cash, and vehicles are provided in the
      correct quantities at the correct times.




                                                        35
           Analyzing Shipping Decisions

   The “Transportation Problem”
     Problem involves shipping a product from several
      sources (ex. factories) with limited supply to
      several destinations (ex. warehouses) with demand
      to be satisfied
     Per-unit cost of shipping from each source to each
      destination is specified
     Optimal solution minimizes total shipping cost and
      specifies the quantity of product to be shipped
      from each source to each destination
                                                       36
  Example: Minimizing Shipping Costs

Pacer produces computer monitors in its three
factories and ships them to five regional warehouses.
The factory-to-warehouse shipping costs per monitor
are:
                        Warehouse
   Factory      A     B     C     D     E
      1       $2.10 $4.30 $3.60 $1.80 $2.70
      2        4.90 2.60 3.50 4.50 3.70
      3        3.90 3.60 1.50 5.80 3.30
                                 continued
                                                    37
  Example: Minimizing Shipping Costs

    The factories have the following capacities
(monitors produced per month): 1 = 10,000;
2 = 20,000; and 3 = 10,000.
    The warehouses need at least these numbers of
monitors per month: A = 5,000; B = 10,000; C =
10,000; D = 5,000; and E = 10,000.
    Use the POM Software Library to solve this
transportation problem.



                                                    38
      Example: Minimizing Shipping Costs

   Solution
                      Warehouse
      Factory A    B      C     D     E
         1   5,000 0       0  5,000    0
         2     0 10,000    0    0   10,000
         3     0   0    10,000 0       0
          Total monthly shipping cost = $97,500
          (Note: all warehouse demand is satisfied
           and no factory’s capacity is exceeded.)
                                                     39
               Innovations in Logistics

   New developments affecting logistics include:
     All-freight airports
     Inter-modal shipping
     In-transit rates
     Consolidated shipments
     Air-freight and trucking deregulation
     Advanced logistics software



                                                    40
                    Warehousing

   Warehousing is the management of materials while
    they are in storage.
   Warehousing activities include:
      Storing
      Dispersing
      Ordering
      Accounting




                                                       41
                     Warehousing

   Record keeping within warehousing requires a stock
    record for each item that is carried in inventories.
   The individual item is called a stock-keeping unit
    (SKU).
   Stock records are running accounts that show:
      On-hand balance
      Receipts and expected receipts
      Disbursements, promises, and allocations


                                                           42
               Inventory Accounting

   In the past, inventory accounting was based on:
      periodic inventory accounting systems -- periodic
       (end-of-day) updating of inventory records
      physical inventory counts -- periodic (end-of-year)
       physical counting of all SKUs at one time
   Today, more and more firms are using:
      perpetual inventory accounting systems -- real-time
       updating of records as transactions occur
      cycle counting -- ongoing (daily or weekly) physical
       counting of different SKUs
                                                       43
         Example: Cycle Counting

    A company is implementing a cycle-counting
program. Class A items will be counted monthly,
Class B items will be counted quarterly, and Class C
items will be counted semi-annually.
    5% of the firm’s inventory items are classified as
Class A, 20% are Class B, and 75% are Class C. If
the firm has 16,000 different SKUs (unique inventory
items), how many will need to be counted daily?
    Assume 200 days per year are available for cycle
counting.

                                                     44
          Example: Cycle Counting

                         Number
            Number      of Counts
 Class      of Items     per Item   Total Counts
of Item     per Class   per Year      per Year
  A             800        12          9,600
  B           3,200         4         12,800
  C          12,000         2         24,000
Total        16,000                   46,400


                                                   45
            Example: Cycle Counting

   Number of Inventory Items Counted Daily
                Total counts per year
          =
            Number of available days per year
         = 46,400/200 = 232 items per day




                                                46
             Example: Cycle Counting

        The cycle-counting personnel must count 232
    inventory items per day. If the average cycle-counter
    can count 24 items per day, how many counters are
    needed?
   Number of Cycle-Counting Personnel Required
            Number of items counted per day
         =
           Number of items per day per counter
         = 232/24 = 9.67 or 10 counters


                                                        47
                 Measuring the
         Performance Materials Managers
   Level and value of in-house inventories
   Percentage of orders delivered on time
   Number of stockouts
   Annual cost of materials
   Annual cost of transportation
   Annual cost of warehouse
   Number of customer complaints
   Other factors


                                              48
         Wrap-Up: World-Class Practice

   See materials management as key element in
    capturing global market share
   Form partnerships with suppliers
   Use computers extensively to manage logistics




                                                    49
End of Chapter 11




                    50

				
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