of 104
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q Definition:
Supply Chain Management is primarily concernedwith the efficient integration of suppliers, factories,
warehouses and stores so that merchandise is produced anddistributed in the right quantities, to the right locations andat the right time, and so as to minimize total system costsubject to satisfying service requirements.
q Notice:
q Who is involvedq Cost and Service Levelq It is all about integration
Supply Chain ManagementSupply Chain Management
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Supply Chain ManagementSupply Chain Management
q
Refers to all the management functions related to the flow ofmaterials from the companys direct suppliers to its directcustomers.
q Includes purchasing, traffic, production control, inventorycontrol, warehousing, and shipping.
q Two alternative names:q Materials managementq Logistics management
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Supply Chain Management ---A RiverSupply Chain Management ---A River
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SCM Improvement PrinciplesSCM Improvement Principles
What Can BeWhat Is
The Seven Principles of Supply Chain Management
Segment customers based upon service needs
Customize the logistics network
Listen to the signals of the marketplace and planaccordingly
Differentiate products closer to the consumer
Source strategically
Develop a supply-chain-wide technology strategy
Adopt channel spanning performance measures
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Conflicting Objectives in the SupplyConflicting Objectives in the Supply
ChainChain1. Purchasing Stable volume requirements
Flexible delivery time Little variation in mix Large quantities2. Manufacturing
Long run production High quality High productivity Low production cost
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Conflicting Objectives in the SupplyConflicting Objectives in the Supply
ChainChain3. Warehousing Low inventory Reduced transportation costs Quick replenishment capability4. Customers Short order lead time High in stock Enormous variety of products Low prices
q
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The Bullwhip EffectThe Bullwhip Effect
The bullwhip Effect is a major cause of higher costs and
inefficiencies in supply chains. It describes how small fluctuationsin demand at the customer level are amplified as orders pass upthe supply chain through distributors, manufacturers, andsuppliers.
As an example, consider disposable diapers. Babies generally
consume diapers at a more or less consistent rate whenaggregated over a large group of customers. Nevertheless,
order fluctuations invariably become considerably larger as
one moves upstream in this chain.
The bullwhip Effect is a major cause of higher costs andinefficiencies in supply chains. It describes how small fluctuationsin demand at the customer level are amplified as orders pass upthe supply chain through distributors, manufacturers, andsuppliers.
As an example, consider disposable diapers. Babies generally
consume diapers at a more or less consistent rate whenaggregated over a large group of customers. Nevertheless,
order fluctuations invariably become considerably larger as
one moves upstream in this chain.
Consequences of the Bullwhip Effect include excess/ fluctuatinginventories, shortages/stockouts, longer lead times, highertransportation and manufacturing costs, and mistrust between
supply chain partners
Consequences of the Bullwhip Effect include excess/ fluctuatinginventories, shortages/stockouts, longer lead times, highertransportation and manufacturing costs, and mistrust between
supply chain partners
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The Dynamics of the Supply ChainThe Dynamics of the Supply Chain
Order S
ize
Time
Source: Tom Mc Guffry, Electronic Commerce and Value Chain Management, 1998
CustomerDemand
Retailer OrdersRetailer OrdersDistributor OrdersDistributor Orders
Production PlanProduction Plan
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The Dynamics of the Supply ChainThe Dynamics of the Supply Chain
Order S
ize
Time
Source: Tom Mc Guffry, Electronic Commerce and Value Chain Management, 1998
CustomerDemand
Production PlanProduction Plan
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Supply Chain upstream ActivitiesSupply Chain upstream Activities
We do it all for you! McDonalds
Have it your way Burger King
We do it all for you! McDonalds
Have it your way Burger King
In most supply chains, the upstream activities respond to forecast, while
somewhere on the downstream side the chain waits for orders to beplaced. Consider these two former fast slogans
In most supply chains, the upstream activities respond to forecast, while
somewhere on the downstream side the chain waits for orders to beplaced. Consider these two former fast slogans
Build to stock VS Build to OrderBuild to stock VS Build to Order
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INTEGRATING OPERATIONS MANAGEMENT WITH OTHER FUNCTIONSINTEGRATING OPERATIONS MANAGEMENT WITH OTHER FUNCTIONS
q
Customer choices introduce complexityq product variety, demand uncertainty, variable
capacity requirements
q Mass customization is replacing mass production in
many industriesq There is more opportunity to coordinate activities
because of information systems
q Supply chain management has become a criticalaspect of business success
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Classifications of OperationClassifications of Operation
ManagementManagement
q Productive Systemo Process Focused System
o Product Focused System
o Production to stock/order
o
q Service Systemo Stagnant personal services
o Substitutable personal Services
o Progressive serviceso Explosive services
q
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SUPPLY CHAIN MANAGEMENT: FROM HENRY FORD TO E-COMMERCESUPPLY CHAIN MANAGEMENT: FROM HENRY FORD TO E-COMMERCE
q
Ford motor company did everything from mining tofinal assembly of its Model T vehicles in the early1900s
q allowed coordination of all sequentially related
activities for large efficiency gainsq very difficult to accommodate product variety
or make model changes
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SUPPLY CHAIN MANAGEMENT: FROM HENRY FORD TO E-COMMERCESUPPLY CHAIN MANAGEMENT: FROM HENRY FORD TO E-COMMERCE
q
Other factors leading to division of supply chainsq technology, economies of scale, need for focus
in operations
q Supply chain improvementsq Just in Time (JIT) manufacturingq Lean production
S C A A AG C S O S
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SUPPLY CHAIN MANAGEMENT DECISIONS:SUPPLY CHAIN MANAGEMENT DECISIONS:
CONFIGURATION OF THE SUPPLY CHAINCONFIGURATION OF THE SUPPLY CHAIN
q
what the product service bundle will include(manufacturing to stock & manufacturing toorder
q what portion of bundle will be outsourced
q where facilities will be located and capacitiesq what technologies will be usedq how supplier-customer communications will be
handledq the expectations to which suppliers and
customers will be held
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SUPPLY CHAIN MANAGEMENT DECISIONS:SUPPLY CHAIN MANAGEMENT DECISIONS:
COORDINATION OF THE SUPPLY CHAINCOORDINATION OF THE SUPPLY CHAIN
q
determining when to provide products andservices and in what quantitiesq ensuring suppliers are able to provide the value
required of them
q setting appropriate levels for capacity,inventory and lead time
q communicating demand, performanceexpectations and performance results with
suppliers and customers
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SUPPLY CHAIN MANAGEMENT DECISIONS:SUPPLY CHAIN MANAGEMENT DECISIONS:
IMPROVEMENT OF THE SUPPLY CHAINIMPROVEMENT OF THE SUPPLY CHAIN
q
installing Enterprise Resource Planning (ERP)systems or other information technologiesq streamlining the channels of supplyq changing technologies or planning systems to
improve quality, lead time, cost or serviceq redesigning the product service bundle to make
it easier to provide or of greater value to thecustomer
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Supply-Chain Costs as a Percent of SalesSupply-Chain Costs as a Percent of Sales
q All industry
q Automobile
q
Foodq Lumber
q Paper
q Petroleum
q
Transportation
q 52%
q 67%
q
60%q 61%
q 55%
q 79%
q
62%
Industry ercent of Sales
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%1 %1 %8Material
ir WagesOther
%1%6%3 COGSPayroll
Other
%3
% COGSPayrollOther
Manufacturinanufacturing
Wholesaleholesale
Retailetail
Material Costs inMaterial Costs inSupply-ChainSupply-Chain
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Global Supply-Chain IssuesGlobal Supply-Chain Issues
Supply chains in a global environment must be:q Flexible enough to react to sudden changes in
parts availability, distribution, or shipping
channels, import duties, and currency ratesq Able to use the latest computer and
transmission technologies to schedule andmanage the shipment of parts in and finished
products outq Staffed with local specialists to handle duties,
trade, freight, customs and political issues
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q Plans to help achieve company missionq Affect long-term competitive position
q Strategic optionsq
Many suppliersq Few suppliersq Keiretsu networkq Vertical integrationq Virtual company
Plan
1995 Corel Corp.
Supply-Chain StrategiesSupply-Chain Strategies
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Supply-Chain StrategiesSupply-Chain Strategies
q Negotiate with many suppliers; play one supplier against another
q Develop long-term partnering arrangements with a few supplierswho will work with you to satisfy the end customer
q Vertically integrate; buy the actual supplier
q Keiretsu - have your suppliers become part of a company coalition
q Create a virtual company that uses suppliers on an as-needed basis.
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q Many sources per item
q Adversarial relationship
q Short-term
q Little openness
q Negotiated, sporadic POs
q High prices
q Infrequent, large lots
q Delivery to receiving dock
1995 Corel Corp.
Many Suppliers StrategyMany Suppliers Strategy
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q 1 or few sources per itemq Partnership (JIT)
q Long-term, stable
q On-site audits & visits
q Exclusive contractsq Low prices (large orders)
q Frequent, small lots
q Delivery to point of use
1995CorelCorp.
Few Suppliers StrategyFew Suppliers Strategy
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Tactics for Close Supplier RelationshipsTactics for Close Supplier Relationships
Tacticq Reduce total number of suppliers
q Certify suppliersq
q
q
Ask for JIT delivery from keysuppliers
q Involve key suppliers in newproduct design
q Develop software linkages to
suppliersq
Resultsq Average 20% reduction in 5 yearsq
q Almost 40% of all companiessurveyed were themselvescurrently certified
q About 60% ask for this
q About 54% do this
q Almost 80% claim to do this
About 50% claim this
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RawMaterial( )uppliersBackwardackwardIntegrationntegrationCurrenturrentTransformationransformationForwardorward
Integrationntegrationinished Goodsinished Goods( )ustomers)ustomers
q Ability to produce goodspreviously purchased
q Setup operationsq Buy supplier
q Make-buy issueq Major financial commitment
q Hard to do all things well
Vertical Integration StrategyVertical Integration Strategy
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Forms of Vertical IntegrationForms of Vertical Integration
Iron Ore
Steel
Automobiles
Distribution
System
Dealers
Silicon
IntegratedCircuits
Circuit Boards
ComputersWatches
Calculators
Farming
Flour Milling
aw Material( )uppliersBackwardIntegrationCurrentTransformation
ForwardIntegration
inished Goods( )ustomersBaked Goods
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Vertical Integration Can be Forward or BackwardVertical Integration Can be Forward or Backward
Vertical IntegrationVertical Integration Examples of Vertical IntegrationExamples of Vertical Integration
Raw material (suppliers)Raw material (suppliers) Iron oreIron ore SiliconSilicon FarmingFarming
Backward IntegrationBackward Integration SteelSteel
Current TransformationCurrent Transformation AutomobilesAutomobiles Integrated CircuitsIntegrated Circuits FlourFlourMillingMilling
Forward IntegrationForward Integration DistributionDistributionSystemSystem
Circuit boardsCircuit boards
Finished goods (customers)Finished goods (customers) DealersDealers Computers, watches,Computers, watches,calculatorscalculators
BakedBakedGoodsGoods
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q Japanese word for affiliated chain
q System of mutual alliances andcross-ownership
q Company stock is held by allied firmsq Lowers need for short-term profits
q Links manufacturers, suppliers, distributors, &lenders
q Partnerships extend across entire supply chain
Keiretsu Network StrategyKeiretsu Network Strategy
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Virtual CompaniesVirtual Companies
q
Companies that rely on a variety of supplierrelationships to provide services on demand.
q Also known as hollow corporations, or networkcorporations
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1995 Corel Corp.
Virtual Company StrategyVirtual Company Strategy
q Network of independent companiesq Linked by technology
q PCs, faxes, Internet etc.q Each contributes core competenciesq Typically provide services
q Payroll, editing, designingq May be long or short-term
q
Usually, only until opportunity is met
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Managing the Supply-ChainManaging the Supply-Chain
q Options:q Postponementq Channel assemblyq Drop shipping
q Blanket ordersq Invoiceless purchasingq Electronic ordering and funds transferq Stockless purchasingq Standardizationq Internet purchasing (e-procurement)
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Managing the Supply-Chain - Other OptionsManaging the Supply-Chain - Other Options
q
Establishing lines of credit for suppliersq Reducing bank float
q Coordinating production and shipping schedules withsuppliers and distributors
q Sharing market researchq Making optimal use of warehouse space
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Successful Supply-Chain Management Requires:Successful Supply-Chain Management Requires:
q
A mutual agreement on goalsq Trust
q Compatible organizational cultures
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ORGANIZATION STRUCTUREORGANIZATION STRUCTURE
SUPPLY CHAIN MANAGEMENT
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1-38 2001 The Gillette Company
GSCM Mission
The Gillette Company will be as highly
recognised and admired by our customers,
shareholders, and employees for SupplyChain performance as we are for our
product development and support of globalbrands. We will become World Class in
Planning & Executing Product Deliveryfrom Source to Customers Shelf.
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ORG
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Market Distribution Operating ConcernsMarket Distribution Operating Concerns
Market Distribution:
Activities related to providing customer service. Requires performingorder receipt and processing, deploying inventories, storage andhandling, and outbound transportation within a supply chain. Includes
the responsibility to coordinate with marketing planning in such areasas pricing, promotional support, customer service levels, deliverystandards, handling return merchandise, and life-cycle support. Theprimary market distribution objective is to assist in revenue generationby providing strategically desired customer service levels at the lowesttotal cost.
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Manufacturing Support Operating ConcernsManufacturing Support Operating Concerns
Manufacturing Support:
Activities related to planning, scheduling, and supportingmanufacturing operations. Requires master schedule planning andperforming work-in-process storage, handling, transportation, and
time phasing of components. Includes the responsibility for storage ofinventory at manufacturing sites and maximum flexibility in thecoordination of geographic and final assemblies postponementbetween manufacturing and market distribution operations.
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Procurement Operating ConcernsProcurement Operating Concerns
Procurement:
Activities related to obtaining products and materials from outsidesuppliers. Requires performing resource planning, supply sourcing,negotiation, order placement, inbound transportation, receiving and
inspection, storage and handling, and quality assurance. Includes theresponsibility to coordinate with suppliers in such areas as scheduling,supply continuity, hedging, and speculation, as well as researchleading to new sources or programs. The primary procurementobjective is to support manufacturing or resale organizations byproviding timely purchasing at the lowest total cost.
P h iP h i
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PurchasingPurchasing
Factors increasing the importance of purchasing today:q Tremendous impact of material costs on profit (60-
70% of each sales Rupee is paid to materialsuppliers)
q Popularity of just-in-time manufacturing (supplydeliveries must be exact in timing, quantity, andquality)
q Increasing global competition (growing competition
for scarce resources, and a geographicallystretched-out supply chain)
Mission of Purchasing
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Mission of Purchasing
The mission of purchasing is to sensethe competitive priorities necessary foreach major product/service (lowproduction costs, fast and on-timedeliveries, high quality /services, andflexibility) and to develop purchasingplans for each major product/service
that are consistent with operationsstrategies
Mi i f P h iMi i f P h i
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Mission of PurchasingMission of Purchasing
q
Develop purchasing plans for each major product orservice that are consistent with operationsstrategies:
q Low production costs
q Fast and on-time deliveriesq High quality products and servicesq Flexibility
P h i M tP h i M t
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Purchasing ManagementPurchasing Management
q
Maintain data base of available, qualified suppliersq Select suppliers to supply each material
q Negotiate contracts with suppliers
q Act as interface between company and suppliers
q Provide training to suppliers on latest technologies
Purchasing vs. ProcurementPurchasing vs. Procurement
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gg
q
Purchasing is normally associated with a functionalactivity
q Procurement/Sourcing should be viewed as a strategicactivity for the business.
Purchasing vs. Sourcing (contd)Purchasing vs. Sourcing (contd)
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g g ( )g g ( )
Purchasing Mentality Sourcing Mentality One contract at a time Continual Improvement
Win-lose Win-win
Immediate returns Long-term perspective
Secretive Trusting
Current needs can be met Strategic fit existsLowest purchase price Total cost of ownership
Multiple suppliers Supply-base reduction
Infrequent interaction Frequent interaction
Criticism Constructive evaluations
Buyer-sales relationship Cross-functional relationship
Safety in numbers Safety in knowledgeQuality inspected Quality at source
Inventory as safeguard Information as safeguard
S pplier De elopment Thro gh Proc rementSupplier Development Through Procurement
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Supplier Development Through ProcurementSupplier Development Through Procurement
The Procurement Viewpoint
Supplier PurchaserProcurement Initiative
Marketing Response
Supplier PurchaserMarketing Initiative
Purchasing Response
The Marketing Viewpoint
Importance of SourcingImportance of Sourcing
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Importance of SourcingImportance of Sourcing
q
In the average manufacturing firm purchased goodsand services account for 55% of every sales Dollar
q Direct labor costs account for only about 10% of thesales dollar
Procurements Potential PayoffProcurements Potential Payoff
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Procurement s Potential Payoffocu e e s o e yo
q Beginning Positionq Sales $100,000,000q
Purchases(55%) 55,000,000q Labor (15%) 15,000,000q Other (22%) 22,000,000q Pre-tax profit (8%) 8,000,000
Procurements Potential PayoffProcurements Potential Payoff
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Procurement s Potential Payoffy
Reduce
purchase cost
by 10%
Increase
sales by 68%
Reduce labor
cost by 36%
Sales $100,000,000 $168,000,000 $100,000,000
Purchases 49,500,000 92,400,000 55,000,000
Labor 15,000,000 25,200,000 9,600,000
Other 22,000,000 36,960,000 22,000,000
Pre-tax
Profit
13,500,000 13,440,000 13,400,000
Major Categories for the Components of Total Cost of OwnershipMajor Categories for the Components of Total Cost of Ownership
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Major Categories for the Components of Total Cost of OwnershipMajor Categories for the Components of Total Cost of Ownership
Pre-transaction Components1. Identifying need2. Investigating sources3. Qualifying sources4. Adding supplier to
internal systems5. Educating :
supplier in firms
operationsfirm in suppliersoperations
Post-transaction Components1. Line fallout2. Defective finished goods
rejected before sale3. Field failures4. Repair/ replacement in field5. Customer goodwill/ reputation
of firm6. Cost of repair parts7. Cost of maintenance and repairs
Transaction Components1. Price2.Order placement/preparation3. Delivery/ transportation4. Tariffs/ duties5. Billing/ payment
6. Inspection7. Return of parts8. Follow-up and correction
Total Cost of Ownership
Major Trends in ProcurementMajor Trends in Procurement
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Major Trends in ProcurementMajor Trends in Procurement
q Fewer sources of supply will be usedq Buyers will be more concerned with final customer satisfactionq Buyers will focus on lead supplier relationshipsq Buyers will drive shorter cycle timesq Design engineers and buyers will be part of sourcing teamsq Global sourcing will increaseq e-procurement will have a major impact-not all of it will be
positive for supply chain integrationq buying exchangesq auction sites
E ChemicalsE-Chemicals
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E-ChemicalsE-Chemicals
Advantages of Centralized PurchasingAdvantages of Centralized Purchasing
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Advantages of Centralized PurchasingAdvantages of Centralized Purchasing
q
Buying in large quantities - better pricesq More clout with suppliers - greater supply continuity
q Larger purchasing department - buyer specialization
q Combining small orders - less order cost duplication
q Combining shipments - lower transportation costs
q Better overall control
Purchasing ProcessPurchasing Process
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Purchasing ProcessPurchasing Process
Material RequisitionMaterial Requisition
Request for QuotationsRequest for Quotations
Select Best SupplierSelect Best Supplier
Purchase OrderPurchase Order
Receive and InspectReceive and InspectGoodsGoods
From purchasing,From purchasing,to potential suppliersto potential suppliers
From any department,From any department,to purchasingto purchasing
Based on quality, price,Based on quality, price,lead time, dependabilitylead time, dependability
From purchasing,From purchasing,to selected supplierto selected supplier
From supplier, to receiving,From supplier, to receiving,quality control, warehousequality control, warehouse
Content of Material RequisitionContent of Material Requisition
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Content of Material RequisitionContent of Material Requisition
q Requisition no.q
Requisition dateq Item master codeq Description of material or contentq Used in productq Unit of measureq Specificationq Lead timeq Sourcing data :supplier or producerq Mode of transportq Economic order lot size (packing unit)q Shelf life restrictionq Material handling requirement (control temperature)q Documents to accompany with the material
Content of Material RequisitionContent of Material Requisition
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Content of Material RequisitionContent of Material Requisition
q Item master codeq Quality control analysis days (quarantine)q Reorder quantityq Maximum inventoryq Standard priceq Duty and sales tax and other border crossing charges
dataq Clearing agent or mode of transportation while
handling locallyq Certificate of originq Labeling specificationq Any special handling restriction etc.
q Required dateq Authorized signature etc.
Content of Material RequisitionContent of Material Requisition
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Content of Material RequisitionContent of Material Requisition
q
Item master codeq Capital goodsq Equipment, machinery, installation, parts,
subassemblyq
Method of deliveryq Maintenance, pre-post, after sales service,
annual preventive, accidental,q Financial package, (supplier credit,
leasing, consignment sales, wet leasingetc.)q Insuranceq Commissioning, trial,
Content of quotation- invitationContent of quotation- invitation
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Content of quotation invitationContent of quotation invitation
q Will be address to the enlisted supplierq
Date of quotationq Deadline for the quotation to be receivedq All the details as mentioned on the companies master dataq Financial and payments procedure
q
Method of paymentq Term of paymentq Negotiable documentsq Companies bankers (L/C, Contract, Usance,)q Bullet delivery, or partial shipment allowedq Penalty clauseq Margin or deposit with the tender or bank guaranteeq Insuranceq Title of good transfer
Content of quotation- invitationContent of quotation- invitation
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Content of quotation invitationContent of quotation invitation
q Tentative date of intimation or opening of quotation.q Is it a revolving contract or one time delivery
q Condition for the visit of siteq Specimen samplesq Condition for the approval of sample etc.q Capital goods
q
Turn keyq Installationq Trainingq After sale serviceq Maintenance contractq Free maintenance periodq Pregnancy period before the deliveryq Supplier creditq Leasing facility etc.
Selection of supplier sourcingSelection of supplier sourcing
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Selection of supplier sourcingSelection of supplier sourcing
q Bench mark for spread sheet analysisq Lead timeq
Location of sourcing siteq Localq Importsq In-house configuration,q Outsourcingq Importing in bulk or mix
q Term offeredq Price (rupees, usd, euro, sterling)q Credit (local L/C, contract, letter of aware nessq Loading and unloadingq Transportationq Insuranceq Freight collect, freight prepaidq
Selection of supplier sourcingSelection of supplier sourcing
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Selection of supplier sourcingpp g
q Bench mark for spread sheet analysisq Term offered (more)
q Lot sizeq Negotiation documentation chargesq L/c opening commission on beneficiary
accountsq Accessibility (quick response, emergency,
replenishmentq Past experienceq Credibility financial, data from the contemporaries
q
Maintenance service post deliveryq After sale serviceq Turn key ---projectsq Implementation, installation, trial commissioning , etc.q Configuration, source key, parachute clause, divorce, notice
period etc.
Purchase orderPurchase order
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u c ase o de
q Date of orderq
Purchase order numberq Reference (indent number or confirmation)q Maximum detail from item master code.q Financial termsq Delivery dateq Method of shipmentq Lot sizeq Partial shipmentq Maintenance contractq Freight and other chargesq Margin, advance, guarantee, l/c contract, letter of awareness
commitment, other terms and conditions,q Documentation requiredq
Purchase orderPurchase order
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q Authorized
q Any special term (pre-shipment samples, qualitycontrol specification, standards,)
q Validation data
q Shelf life
q Guarantee
q Insurance condition
q Any special mode of handling
q Loading unloadingq Freight etc.
Allegations of improper Behaviour by BuyerAllegations of improper Behaviour by Buyer
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g p p y yg p p y y
q In exchange for cash and gifts, allowing supplier tostore tools and park vehicles on company propertyand awarding contracts to suppliers without
bidding.
q
Accepting gifts such as expensive perfumery, cloths,dinners, function cards, foreign trips, liquor, giftcoupon during festivals and holidays season.
q Accepting on sharing basis indenting commission
within or outside the countryq Bid rigging, accepting bribes, theft and tax evasion,
and accepting large sums of cash.
Allegations of improper Behaviour by BuyerAllegations of improper Behaviour by Buyer
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g p p y yg p p y y
q Payment processing on receipt of kickback
q Approval of product quality on receipt of kickback
q Accepting less quantity of goods in exchange ofbribes
q Accepting lot of bribes in acceptance enlistment ofapproved suppliers or contractors
q Benami Transaction through their own respectivecompanies
q Opening their own respective buying houses oragency and making the purchases from them.
q
Guidelines for Ethical Behaviour in PurchasingGuidelines for Ethical Behaviour in Purchasing
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gg
q The National Association for Purchasing Managers(NAPM) has developed a set of three principlesand 12 standards to help guide ethical behaviour in
purchasing. These are the principles:q
Loyalty to your organizationq Justice to those with whom you dealq Faith in your profession
q From these principles are derived the NAPM
standards of purchasing practice (domestic andinternational)
Guidelines for Ethical Behaviour in PurchasingGuidelines for Ethical Behaviour in Purchasing
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gg
q Avoid the intent and appearance of unethical or compromisingpractice in relationships, actions, and communications
q Demonstrate loyalty to the employer by diligently followingthe lawful instructions of the employer, using reasonablecare and only authority granted.
q Refrain from any private business or professional activity thatwould create a conflict between personal interests and theinterests of the employer
q Refrain from soliciting or accepting money, loans, credits, orprejudicial discounts, and the acceptance of gifts,entertainment favours, or services from present or
potential suppliers that might influence or appear toinfluence purchasing decisions.
Guidelines for Ethical Behaviour in PurchasingGuidelines for Ethical Behaviour in Purchasing
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g
q Handle confidential or proprietary informationbelonging to employers or suppliers with due careand proper consideration of ethical and legalramifications and governmental regulation
q Promote positive supplier relationships through
courtesy and impartiality in all phases of thepurchasing cycle.
q Refrain from reciprocal agreements that restraincompetition
q Know and obey the letter and spirit of laws governingthe purchasing function and remain alert to thelegal ramifications of purchasing decisions.
Guidelines for Ethical Behaviour in PurchasingGuidelines for Ethical Behaviour in Purchasing
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g
q Encourage all segments of society to participate bydemonstrating support for small, disadvantaged,and minority-owned businesses.
q Discourage purchasing involvement in employerssponsored programs of personal purchases that
are not business related.q Enhance the proficiency and stature of the purchasing
profession by acquiring and maintaining currenttechnical knowledge and the highest standards of
ethical behaviorq Conduct international purchasing in accordance with
the laws, customs, and practices of foreigncountries
Buyers DutiesBuyers Duties
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q Know the market for their commodities
q Understand the laws.... tax, contract, patent..
q Process purchase requisitions and quotation requests
q Make supplier selections
q Negotiate prices and conditions of saleq Place and follow-up on purchase orders
q Maintain ethical behavior
Make-or-Buy AnalysisMake-or-Buy Analysis
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Considerations in make-or-buy decisions:
q Lower cost - purchasing or production?
q Better quality - supplier or in-house?
q More-reliable deliveries - supplier or in-house?
q What degree of vertical integration is desirable?q Should distinctive competencies be outsourced?
Make/Buy ConsiderationsMake/Buy Considerations
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y
1. Maintain core competenciesand protect personnelfrom layoff
2. Lower production cost
3. Unsuitable suppliers
4. Assure adequate supply
5. Utilize surplus labor andmake a marginalcontribution
1. Frees management to dealwith its primary business
2. Lower acquisition cost
3. Preserve suppliercommitment
4. Obtain technical ormanagement ability
5. Inadequate capacity
Reasons for Making Reasons for Buying
Make/Buy Considerations - ContinuedMake/Buy Considerations - Continued
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6. Obtain desired quantity
7. Remove supplier collusion
8. Obtain a unique item thatwould entail a prohibitivecommitment from thesupplier
9. Protect proprietary design or
quality10.Increase or maintain size of
company11.
6. Reduce inventory costs
7. Ensure flexibility andalternate source of supply
8. Inadequate managerial ortechnical resources
9. Reciprocity
10.Item is protected by patent or
trade secret11.
Reasons for Making Reasons for Buying
Example: Make-or-BuyExample: Make-or-Buy
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A firm manufactures a product that contains apart requiring heat treatment. An analyst is trying todecide whether it is more economical to buy the heattreating service or perform the treatment in house.Pertinent data is shown on the next slide.
If part quality and delivery performance areabout the same for the two alternatives, whichalternative should be selected?
Example: Make-or-BuyExample: Make-or-Buy
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Purchase Heat-Treat
Heat-Treat
In-HouseService
Number of parts annually 5,000 5,000 Fixed cost per year $25,000 $0 Variable cost per part $13.20 $17.50
Example: Make-or-BuyExample: Make-or-Buy
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q 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 (thesecond alternative). continued
Example: Make-or-BuyExample: Make-or-Buy
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The analyst has assumed that 5,000 parts peryear will require heat treatment. By how many partscan the firms requirements increase or decrease
before in-house heat treating is more economical?Should the analyst rethink his/her decision?
Example: Make-or-BuyExample: Make-or-Buy
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q 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 firms annual parts requirement increasesby 814 (about 16%) or more, in-house heat treatmentwould be more economical. The analyst should givethe decision more thought.
LogisticsLogistics
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q Logistics usually refers to management of:q the movement of materials within the factoryq the shipment of incoming materials from
suppliers
q the shipment of outgoing products to customers
Movement of Materials within FactoriesMovement of Materials within Factories
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IncomingIncomingVehiclesVehicles
IncomingIncomingVehiclesVehicles
ReceivingReceivingDockDock
ReceivingReceivingDockDock
QualityQualityControlControlQualityQualityControlControl
WarehouseWarehouseWarehouseWarehouse
WorkWorkCenterCenterWorkWorkCenterCenter
Other WorkOther WorkCentersCenters
Other WorkOther WorkCentersCenters Packaging
PackagingPackagingPackagingFinishedFinishedGoodsGoods
FinishedFinishedGoodsGoods
ShippingShippingShippingShippingShippingShipping
DockDockShippingShipping
DockDockOutgoingOutgoingVehiclesVehicles
OutgoingOutgoingVehiclesVehicles
The typical locations from/to which material is moved:The typical locations from/to which material is moved:
Shipments To and From FactoriesShipments To and From Factories
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q Trafficq Traffic departments routinely examine shipping
schedules and select:q shipping methodsq
time tablesq ways of expediting deliveriesq Traffic management is a specialized field
requiring technical training in Department of
Transportation (DOT) and InterstateCommerce Commission (ICC) regulationsand rates.
Shipments To and From FactoriesShipments To and From Factories
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q Distributionq Distribution, or physical distribution, is the
shipment of finished goods through thedistribution system to customers.
q
A distribution system is the network ofshipping and receiving points starting withthe factory and ending with the customers.
Shipments To and From FactoriesShipments To and From Factories
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q Distribution Requirements Planningq DRP is the planning for the replenishment of
regional warehouse inventories.q DRP uses MRP-type logic to translate regional
warehouse requirements into centraldistribution-center requirements, which arethen translated into gross requirements in theMPS at the factory.
Shipments To and From FactoriesShipments To and From Factories
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q Distribution Requirements Planningq Scheduled receipts are previously-placed orders
that are expected to arrive in a given weekq Planned receipt of shipments are orders planned,
but not yet placed, for the futureq Projected ending inventory is computed as:
q Previous weeks projected endinginventory
q
+ Planned receipt of shipments in currentweek
q + Scheduled receipt of shipments incurrent week
q
-- Forecasted demand in current week
Shipments To and From FactoriesShipments To and From Factories
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q DRP Time-Phased Order Point Record
Forecasted demand (units)Forecasted demand (units)Scheduled receiptsScheduled receipts
Projected ending inventoryProjected ending inventory
Planned receipt of shipmentsPlanned receipt of shipments
Planned orders for shipmentsPlanned orders for shipments
Region. Warehouse #1Region. Warehouse #1 LT = 1LT = 1Std. Quantity = 50 SS = 10Std. Quantity = 50 SS = 10
6060
-1-1
8080
50503030
4040
4040
11 22 33
3030
50505050
50505050
303020201010
4040
5544
4040
WeekWeek
Example: DRPExample: DRP
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Products are shipped from a companys maindistribution center (adjacent to the factory) to tworegional warehouses. The DRP records on the nexttwo slides show for the two regional warehouse the forecasted demand, scheduled receipts, and lastweeks projected ending inventories for a single
product. The third upcoming slide shows for the main
distribution center scheduled receipts and lastweeks projected ending inventory for the same
product. Complete the DRP records.
Example: DRPExample: DRP
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q DRP Record for Regional Warehouse #1
Forecasted demand (units)Forecasted demand (units)Scheduled receiptsScheduled receipts
Projected ending inventoryProjected ending inventory
Planned receipt of shipmentsPlanned receipt of shipments
Planned orders for shipmentsPlanned orders for shipments
Region. Warehouse #1Region. Warehouse #1 LT = 1LT = 1Std. Quantity = 100 SS = 50Std. Quantity = 100 SS = 50
200200
-1-1
1001008080 100100
11 22 33
8080 6060
5544
100100
WeekWeek
Example: DRPExample: DRP
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q DRP Record for Regional Warehouse #2
Forecasted demand (units)Forecasted demand (units)Scheduled receiptsScheduled receipts
Projected ending inventoryProjected ending inventory
Planned receipt of shipmentsPlanned receipt of shipments
Planned orders for shipmentsPlanned orders for shipments
Region. Warehouse #2Region. Warehouse #2 LT = 2LT = 2Std. Quantity = 200 SS = 80Std. Quantity = 200 SS = 80
220220
-1-1
200200100100 200200
11 22 33
200200 240240
5544
200200
WeekWeek
Example: DRPExample: DRP
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q DRP Record for Main Distribution Center
Gross Requirements (units)Gross Requirements (units)Scheduled receiptsScheduled receipts
Projected ending inventoryProjected ending inventory
Planned receipt of shipmentsPlanned receipt of shipments
Planned orders for shipmentsPlanned orders for shipments
Main Distrib. CenterMain Distrib. Center LT = 1LT = 1Std. Quantity = 500 SS = 200Std. Quantity = 500 SS = 200
250250
-1-1
500500
11 22 33 5544
WeekWeek
Example: DRPExample: DRP
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q Completed DRP Record for Regional Warehouse #1
Forecasted demand (units)Forecasted demand (units)Scheduled receiptsScheduled receipts
Projected ending inventoryProjected ending inventory
Planned receipt of shipmentsPlanned receipt of shipments
Planned orders for shipmentsPlanned orders for shipments
Region. Warehouse #1Region. Warehouse #1 LT = 1LT = 1Std. Quantity = 100 SS = 50Std. Quantity = 100 SS = 50
200200
-1-1
220220
1001008080
100100
120120
100100
11 22 33
8080
100100
100100
100100
80808080140140
6060
5544
100100
WeekWeek
Example: DRPExample: DRP
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q Completed DRP Record for Regional Warehouse #2
Forecasted demand (units)Forecasted demand (units)Scheduled receiptsScheduled receipts
Projected ending inventoryProjected ending inventory
Planned receipt of shipmentsPlanned receipt of shipments
Planned orders for shipmentsPlanned orders for shipments
Region. Warehouse #2Region. Warehouse #2 LT = 2LT = 2Std. Quantity = 200 SS = 80Std. Quantity = 200 SS = 80
220220
-1-1
200200
320320
200200100100
200200
120120
200200
11 22 33
200200
200200200200200200
200200
80808080120120
240240
5544
200200
WeekWeek
Example: DRPExample: DRP
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q DRP Record for Main Distribution Centerq The gross requirement ( in row 1) for any
week is determined by summing the plannedorders for shipment for the same week at thetwo regional warehouses
q These gross requirements at the MDC are inputto the master production schedule in thefactory
q In other words, the timing and quantities of
production in the factory are linked to thetiming and quantities of demand at theregional warehouses
Example: DRPExample: DRP
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q Completed DRP Record for Main Distribution Center
Forecasted demand (units)Forecasted demand (units)Scheduled receiptsScheduled receipts
Projected ending inventoryProjected ending inventory
Planned receipt of shipmentsPlanned receipt of shipments
Planned orders for shipmentsPlanned orders for shipments
Main Distrib. CenterMain Distrib. Center LT = 1LT = 1Std. Quantity = 500 SS = 200Std. Quantity = 500 SS = 200
250250
-1-1
550550
500500200200
500500
250250
300300
11 22 33
200200
500500
450450450450550550
100100
5544
WeekWeek
Shipments To and From FactoriesShipments To and From FactoriesShipments To and From FactoriesShipments To and From Factories
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qDistribution Resource PlanningDistribution Resource PlanningqDistribution resource planningDistribution resource planning extends DRP soextends DRP so
that the key resources of warehouse space,that the key resources of warehouse space,workers, cash, and vehicles are provided in theworkers, cash, and vehicles are provided in the
correct quantities at the correct times.correct quantities at the correct times.
q
Analyzing Shipping DecisionsAnalyzing Shipping Decisions
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q The Transportation Problemq Problem involves shipping a product from
several sources (ex. factories) with limitedsupply to several destinations (ex.warehouses) with demand to be satisfied
q Per-unit cost of shipping from each source toeach destination is specified
q Optimal solution minimizes total shipping cost
and specifies the quantity of product to beshipped from each source to each destination
Example: Minimizing Shipping CostsExample: Minimizing Shipping Costs
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Pacer produces computer monitors in its threefactories and ships them to five regional warehouses.The factory-to-warehouse shipping costs per monitorare:
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 4.503.70
3 3.90 3.60 1.50 5.803.30
Example: Minimizing Shipping CostsExample: Minimizing Shipping Costs
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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 ofmonitors 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 thistransportation problem.
Example: Minimizing Shipping CostsExample: Minimizing Shipping Costs
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q 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 issatisfied
and no factorys capacity is
Innovations in LogisticsInnovations in Logistics
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q New developments affecting logistics include:q All-freight airportsq Inter-modal shippingq In-transit rates
q Consolidated shipmentsq Air-freight and trucking deregulationq Advanced logistics software
WarehousingWarehousing
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q Warehousing is the management of materials whilethey are in storage.
q Warehousing activities include:q Storing
q Dispersingq Orderingq Accounting
WarehousingWarehousing
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q Record keeping within warehousing requires a stockrecord for each item that is carried in inventories.
q The individual item is called a stock-keeping unit(SKU).
q
Stock records are running accounts that show:q On-hand balanceq Receipts and expected receiptsq Disbursements, promises, and allocations
Demand ManagementDemand Management
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q Review customer orders and promise shipment oforders as close to request date as possible
q Update MPS at least weekly.... work with Marketingto understand shifts in demand patterns
q
Produce to order..... focus on incoming customerorders
q Produce to stock ..... focus on maintaining finishedgoods levels
q Planning horizon must be as long as the longest leadtime item
EndEnd
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