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Supply Chain
Strategy
Achieving the fit
Prof. Manoj K SrivastavaOperations Management Area
Management Development Institute-Gurgaon
Supply Chain Management
Chapter-04
[email protected]://mks507.vistapanel.net
Supply Chain Efficiency Curve
Fitting the SC to the customer or vice versa?
Understand the customer Wishes
Understand the Capabilities of your SC
Match the Wishes with the Capabilities
Challenge: How to meet extensive Wishes
with limited Capabilities?
Matching the supply chain with market requirements
Lean
supply chain management
Mismatch
MismatchAgile
supply chain management
Nature of demandFunctional products Innovative products
PredictableFew changesLow varietyPrice stableLong lead-timesLow margin
UnpredictableMany changesHigh varietyPrice markdownsShort lead-timesHigh margin
Su
pp
ly c
hai
n o
bje
cti
ves
Res
pons
ive
Effi
cien
t
Low
cos
tH
igh
utili
zatio
nM
inim
um in
vent
ory
Low
-cos
t sup
plie
rs
Low
thro
ughp
ut ti
mes
Hig
h ut
iliza
tion
Dep
loye
d in
vent
ory
Fle
xibl
e su
pplie
rs
ENVIRONMENTS BEST SUITED FOR EFFICIENT AND RESPONSIVE SUPPLY CHAINS
Factor Efficient Supply Chains Responsive Supply Chains
Demand Predictable, low forecast errors Unpredictable, high forecast errors
Competitive priorities
Low cost
consistent quality
on-time delivery
Development speed, fast delivery times
Customization, volume flexibility
variety, top quality
New-service/product introduction
Infrequent Frequent
Contribution margins Low High
Product variety Low High
Comparison of Efficient and Responsive Supply Chains
Efficient Responsive
Primary goal Lowest cost Quick response
Product design strategy Min product cost Modularity to allow postponement
Pricing strategy Lower margins Higher margins
Mfg strategy High utilization Capacity flexibility
Inventory strategy Minimize inventory Buffer inventory
Lead time strategy Reduce but not at expense of greater cost
Aggressively reduce even if costs are significant
Supplier selection strategy Cost and low quality Speed, flexibility, quality
Transportation strategy Greater reliance on low cost modes
Greater reliance on responsive (fast) modes
Achieving Strategic Fit Uncertainty/Responsiveness
Map
Implied uncertainty spectrum
Responsive supply chain
Efficient supply chain
Certain demand Uncertain demand
Responsiveness spectrum
Zone of
Strategic Fit
Low Cost
High CostCompanies try to move Zone of Strategic fit
SCM Impact on Strategic Thinking
Supply Chain Typology: Order Penetration Point/
Decoupling Point
Push-Pull Boundary of Supply Chains
Match Supply Chain Design with Product Category
Fit SC to the customerUnderstanding the Customer
Range of demand, pizza hut stable
Production lot size, seasonal products
Response time, organ transplantation
Service level, product availability
Product variety Innovation Accommodating poor quality
Implied trouble for SC
Achieving Strategic Fit:Consistent SCM and Competitive strategies
Implied (Demand) Uncertainty for
SC
Adding value along the chain is essential for competitiveness, however problems exist especially in complex or long chains and in cases where many business partners are involved.due to• uncertainties• need to coordinate several activities, internal units, and business partners.
• Demand forecasts are a major source of uncertainties• Competition• Prices• Weather conditions• Technological development• Customer confidence
• Uncertainties exist in delivery times• Machine failures• Road conditions• Shipments
• Quality problems may also create production delays
Supply Chain Problems
Fill Th
e G
ap
sNo clear identification of owner and customers of measures
(joint determination is very essential)Not evaluating consequences and outcomes
(Efficacy is prerequisite to customer satisfaction)Imbalance between efficiency and effectiveness
(key processes has to be identified and owned)Lack of Process Orientation of measurement
(Physical Orientation alone is not a suitable indicator)
Lack of Measures of relationships
(economic, physical, psychological measures are equally important)Lack of real-time visibility
(every affected party must be informed)Lack of Multi-firm optimization
(have to look beyond sub-optimization)* Source: various authors
Sustainability -must offer customers' consistent value. For example, based on their preferences for time, place, cost, flexibility, dependability and quality. Must identify order qualifiers and order winners and compete managing complexity
Service - the ability to deliver different quantities of goods through managing capacity not simply operationally but strategically (no longer sufficient to rely on economies of scale). Develop capabilities to manage capacity flexibly to deliver products and services to customers when they are required in the quantities demanded, e.g. from mass production to mass customization (from n to 1)
Speedy response- developing responsive capabilities to deliver goods and services when they are required, e.g. efficient consumer response, quick response
Suited to customer requirements -developing flexibility capabilities - e.g. agile, lean supply chains, innovations and new product developments
Standards - developing supply chain strategies to assure customer quality standards are met effectively and co-operate within supply chains to compete across supply chains
Systems focused on customer satisfaction -re-design business processes and develop enabling strategies for all relevant parties including customers to view supply chain information relevant to them (e.g. collaborative, co-operative rather than competitive strategies)
Structures and relationships - for example, develop digital supply chain strategies to replace unnecessary inventory movements by moving and exchanging information instead of goods
Supply chain strategies seven S's that deliver organizational strategies
Push Vs Pull Strategy
Which Strategy ?
Push / Pull Boundary
Furniture SC
Grocery SC
Traditional PC Industry
Dell - the Pull-Push boundary
When is the use of pure market mechanisms appropriate in buyer–supplier relationships?
Low HighCost of changing suppliers
Market mechanisms inappropriate
Resource dimension
Ma
rke
t d
ime
nsi
on
Market mechanisms appropriate
Leverage needs
uncertainty
Leverage market
uncertainty
Nu
mb
er
of
sup
ply
a
ltern
ativ
es
Fe
wM
an
y
Elements of process partnership relationships
Attitudes
Actions
Trust
Joint problem solving
Joint co-ordination of
activities
Joint learning
Long-term expectations
Sharing success
Multiple points of contact
Few relationships
Information transparency
Dedicated assets
Closeness of relationship
…trusting you is likely to give me more benefits than not trusting you...
Calculative trust
…I believe I can trust you because I think I
know you enough to be confident you will behave
as I would wish...
Cognitive trust
…I trust you because I know that you know that I wouldn’t let you down and you know that I know that
you wouldn’t either......
Bonding trust
De
gre
e o
f cl
ose
ne
ssBased on
knowledge
Based on feelings
Tim e
Cu
mu
lativ
e p
ositi
ve
exp
erie
nce
s
Degrees of trust
Market position
Competitive behaviour
Economies of scale
Resource deficiencies
Some factors influencing the nature of network relationships
Market risks
Market structure
Transaction costs
Learning potential
OPERATIONS RESOURCES
MARKET REQUIREMENTS
Nature of network
relationship
Other Issues Affecting Strategic Fit
Multiple products and customer segmentsProduct life cycleCompetitive changes over time
Multiple Products and Customer Segments
Firms sell different products to different customer segments (with different implied demand uncertainty)
The supply chain has to be able to balance efficiency and responsiveness given its portfolio of products and customer segments
Two approaches: Different supply chains Tailor supply chain to best meet the needs of
each product’s demand
Product Life Cycle
The demand characteristics of a product and the needs of a customer segment change as a product goes through its life cycle
Supply chain strategy must evolve throughout the life cycle
Early: uncertain demand, high margins (time is important), product availability is most important, cost is secondary
Late: predictable demand, lower margins, price is important
Examples: pharmaceutical firms, IntelAs the product goes through the life cycle, the
supply chain changes from one emphasizing responsiveness to one emphasizing efficiency
Competitive Changes Over Time
Competitive pressures can change over timeMore competitors may result in an increased emphasis on variety at a reasonable priceThe Internet makes it easier to offer a wide variety of productsThe supply chain must change to meet these changing competitive conditions
Expanding Strategic ScopeScope of strategic fit
The functions and stages within a supply chain that devise an integrated strategy with a shared objective
One extreme: each function at each stage develops its own strategy
Other extreme: all functions in all stages devise a strategy jointly
Five categories: Intracompany intraoperation scope Intracompany intrafunctional scope Intracompany interfunctional scope Intercompany interfunctional scope Flexible interfunctional scope
Different Scopes of Strategic Fit Across a Supply Chain
Suppliers Manufacturer Distributor Retailer Customer
Competitive Strategy
Product Development
Strategy
Supply Chain Strategy
Marketing Strategy
IntracompanyIntraoperationat Distributor
IntracompanyIntrafunctionalat Distributor
IntracompanyInterfunctional
at Distributor
IntercompanyInterfunctional
Bullwhip effect
What are the reasons for the channel not being coordinated?Lack of information
Information about the demand is not transmitted up stream.
Conflicting interest Retailers would like to have daily deliveries Daily deliveries are expensive for the suppliers Manufacturers would like to have a stable production
environment. Buyers would like to have the flexibility to adjust to the
demand and change orders with a short notice.
erratic shifts in orders up and down the supply chain
order batching
rationing within the chain
price fluctuation
poor demand forecasting
Bullwhip Effect
A common way to solve the bullwhip problem is by sharing information along the supply
chain through EDI, extranets, and groupware technologies. For example employing a vendor-
managed inventory (VMI) strategy, the vendor monitors inventory levels and when it falls
below the threshold for each product this automatically triggers an immediate shipment.
Distorted information can lead to tremendous inefficiencies
• excessive inventories• poor customer service• lost revenues• ineffective shipments• missed production schedules.
Even slight demand uncertainties and variability become magnified if each distinct entity on the chain, makes ordering and inventory decisions with respect to its own interest above those of the chain
Inaccurate information can cause minor fluctuations in demand for a product to be amplified as one moves further back in the supply chain. Minor fluctuations in retail
sales for a product can create excess inventory for distributors, manufacturers,
and suppliers.
Bullwhip effect Bullwhip effect refers to the phenomenon where orders to the supplier tend to
have larger variance than sales to the buyer (i.e., information distortion) and the distortion propagates upstream in an amplified form (i.e., variance amplification).
Examples
At P&G, diaper orders issued by distributors have a degree of variability that cannot be explained by consumer fluctuations alone
At Hewlett-Packard, the orders placed to the printer division by resellers have much bigger swings and variations that customer demands
Consequences of bullwhip effect
Increased safety stock
Reduced service level
Inefficient allocation of resources
Increased transportation costs
Bullwhip effect leads to higher variance in demands as observed by the upstream members of the supply chain. This requires
Higher safety stock
A more flexible production system and/or higher smoothing costs in production
A more flexible transportation system and/or higher smoothing costs in transportation
Order synchronization Multiple retailers who tend to order around the same time period Manufacturers responding to an MRP system that place raw material orders at the beginning of the month
Order batching In order to save on shipping or ordering costs, firms order a full pallet or full truck load
Trade promotions and forward buying Supplier offers a discount on product ordered in a specific time period Supplier offers a quantity discount A retailer orders a large quantity intending to take advantage of a discount and sells excess product to a
second retailer (this strategy is called diversion)
Reactive and over-reactive ordering A retailer who is not sure that demand is stable over time may act aggressively when faced with periods of
lower or higher than expected demand
Shortage gaming A retailer who wants to insure product from an under-capacitated supplier may over order expecting to only
receive a portion of the ordered quantity
Demand forecast updating / Inflated Orders IBM Aptiva orders increased by 2-3 times when retailers thought that IBM would be out of stock over
Christmas
Long cycle times Long lead times magnify this effect
Bullwhip effect: Causes
Centralizing demand information occurs when customer demand information is available to all members of the supply chain.
Reducing uncertainty. This can be accomplished by centralizing demand information.
Reducing variability. This can be accomplished by using a technique made popular by WalMart and then Home Depot called everyday low pricing (EDLP). EDLP eliminates promotions as well as the shifts in demand that accompany them.
Reducing lead time. Order times can be reduced by using EDI (electronic data interchange).
Strategic partnerships. The use of strategic partnerships can change how information is shared and how inventory is managed within the supply chain. These will be discussed later.
Bullwhip effect: Remedies
Cross-docking. This involves unloading goods arriving from a supplier and immediately loading these goods onto outbound trucks bound for various retailer locations. This eliminates storage at the retailer’s inbound warehouse, cuts the lead time, and has been used very successfully by WalMart and Xerox among others.
Delayed differentiation. This involves adding differentiating features to standard products late in the process. For example, Bennetton decided to make all of their wool sweaters in undyed yarn and then dye the sweaters when they had more accurate demand data. Another term for delayed differentiation is postponement.
Direct shipping. This allows a firm to ship directly to customers rather than through retailers. This approach eliminates steps in the supply chain and reduces lead time. Reducing one or more steps in the supply chain is known as disintermediation. Companies such as Dell use this approach.
Sharing Information: Retailers may give the supplier frequent access to actual consumer demand data so that the supplier can make its production plans accordingly.
Vendor Managed inventory: The retailer no longer decides when and how much inventory to order. Instead, the supplier decides the timing and quantity of shipments to the retailer (e.g. P&G and Wal-Mart)
Smoothing the flow of products: Supplier and the retailers coordinate the timing of orders so that retailers do not place orders at the same time.
Achieving Coordination in Practice
Quantify the bullwhip effect
Get top management commitment for coordination
Devote resources to coordination
Focus on communication with other stages
Try to achieve coordination in the entire supply chain network
Use technology to improve connectivity in the supply chain
Share the benefits of coordination equitably
Causes of bullwhip effect: Demand signal processing
Reasons
If the supply chain player updates the order-up-to-level based on its new estimate of demand, the variance in orders it places exceeds the variance in demand it observes.
This gets amplified if the supply chain player does not observe the final demand (at the retailer), but forecasts demand based on the orders it received from downstream
Larger the lead time, larger the bullwhip effects caused by demand signal processing
A special case where the demand is forecasted using moving average method (Chen et al)
Mitigating Strategies
Allow access to end customer demand to all members in the supply chain (share POS)
Sell-thru data in contracts at HP, Apple, IBM
Single control of replenishment
Make the manufacturer responsible for replenishing the supply chain, i.e., Vendor Managed Inventory (VMI) for companies like P&G and Wal-Mart
Reduce the lead times
Quick response systems in apparel industry, flexible manufacturing
Causes of bullwhip effect: Constrained SupplyReasons
When the demand downstream (e.g. retailers) exceeds the capacity upstream (e.g. manufacturer)
The typical practice for the upstream (manufacturer) is to allocate the supply to different downstream entities (retailers) in proportion to their orders.
This leads to retailers ordering more than they need in order to get more share from the supply
In theory, the order quantity (equilibrium order quantity) where retailers are competing in such a setting exceeds the order quantity (standard newsboy order quantity) where the retailers assume infinite capacity at the manufacturing level
Note also these inefficiencies may occur even though there is no real shortage, but the retailers perceive that there is shortage at the manufacturing level
Mitigating Strategies Allocate supply based on the final
demand not based on orders received GM, HP and TI allocating based
on sales history Remove the perceptions that the
supply will be short Share the production and
inventory information with downstream
Reduce the buyer’s flexibility Construct contracts that will
restrict the order quantities Eliminate constraints on the supply by
collaborating with retailers
Causes of bullwhip effect: Order batchingReasons Retailers do not order every time they face
a demand as a result of
Periodic review process
Setup costs associated with ordering
As a result, the retailers batch their orders which leads to distortion in demand information
This distortion is magnified when there are multiple retailers and their ordering is not synchronized
Distortion is highest when ordering is correlated
Distortion is smallest when ordering is balanced
Larger the review period, higher the distortion
Mitigating Strategies Reduce order costs
Reduce paperwork, implement EDI for ordering
Reduce transportation costs Reduce the desire for full truck
loads Allow mixed truckloads (P&G) Use third party logistics (3PL)
companies for efficient transportation
Synchronize ordering Move away from correlated
ordering to balanced ordering
Causes of bullwhip effect: Price variationsReasons If the manufacturers are offering
promotions, retailers may act by procuring more than they currently need in anticipation of future demand (i.e., forward buy)
In theory, the order-up-to-level in one period changes with the procurement cost in that period
This leads to further distortion in the demand information communicated to the manufacturer
The result is higher inventory costs at both ends
Since the retailers need to keep inventory ahead of the need
Since the manufacturers need to prepare in advance for the surge in demand created by the promotion
Mitigating Strategies Stop manufacturer’s trade promotions
Everyday Low Pricing (EDLP) by P&G, etc
Savings through forward buying may be illusive Justify forward buying by also
considering inventory carrying costs
Implement purchase contracts (synchronize purchase and delivery schedules) Still offer promotions and/or
quantity discounts but allow multiple shipments over time at the same price
Cause 1: Demand Forecast Updating (Demand Signal Processing)
• Retailers forecast customers demand and then place orders with manufacturer
• Manufacturer receives orders from retailers
Orders from downstream in the past p time periods Dt-p, Dt-p+1, …, Dt-1
Order Qt goes to upstream
CustomersMfctr.Lead time L
Demand variability gets amplified from downstream to upstream!
- Commonly, the variability of Q is 2 to 15 times the variability of D
Retailers
When product demand exceeds supply, a manufacturer often rations its product to customers. Example:
Cause 2: Rationing and Shortage Gaming
• Knowing the manufacturer policy, customers exaggerate their real needs when they order (game the system). Example:
• As a result, customers’ orders give the supplier little information on a product’s real demand, a particularly vexing problem for new products
Car ManufacturerAvailable = 200
Dealer 1
Dealer 2
Order = 100
Order = 200
Received = 67
Received = 133Only 2/3 of the order can be fulfilled
Car Manufacturer
Dealer 1
Dealer 2
Need = 120
Need = 180
Order = 180
Order = 270 Order more than needed so that if only 2/3 of the order is filled you still get what you actually need
Available = 500
Received = 180
Received = 270
Coping with the Bullwhip Effect in Leading Companies
Reduce uncertainty POS Sharing information Sharing forecasts and policies
Reduce variability Eliminate promotions Year-round low pricing
Reduce lead times EDI Cross docking
Strategic partnerships Vendor managed inventory Data sharing
Conflicting Objectives in Supply Chain
1. Decentralized supply chain: each member has his own interest and act independently
2. Self-interested decision makers: every member of the supply chain optimizes his own objective.
3. These self-interested members’ decisions may not align with the optimal decisions for the overall performance of the supply chain.
4. Inefficiencies across supply chain lead to decentralization cost
5. Solution: to coordinate the members to act as if they are a centralized supply chain (i.e., one decision-maker makes decisions in behalf of the whole supply chain)
Our goal: to attain performance of centralized supply chain with decentralized decision making
How do we do that?1. A contract is agreed by and announced to all members before
they make decisions2. Each member independently decides and acts3. The contract is executed
We say a decentralized SC is coordinated by a contract, if The total profit of decentralized SC equals the total profit of
centralized SC, and All members are better off under this contract, compared to the
case without such a contract (uncoordinated case)
Coordinating S.C. Inventory Consider a simple demand driven supply chain: a buyer and a
supplier
The buyer produces D = 10,000 units/year of a product at a constant rate. Each time the buyer places an order for a certain component, the ordering cost is Sb = $100. The buyer’s inventory holding cost is H = $10/yr and optimal ordering quantity:
The supplier produces an order whenever one is received from the buyer.
Each time the seller sets up to produce a batch of components, the production setup cost is Ss = $300.
The supplier’s total (setup) cost = Ss(D/EOQb) = 300(10,000/447) = 6711
Optimal ordering quantity for the centralized supply chain:
BuyerSupplier Customers
2 2(10,000)(100)447
10b
b
DSEOQ
H
2 ( ) 2(10,000)(100 300)894
10b s
SC
D S SEOQ
H
Supplier’s cost (at Q=447)
= Ss (D/EOQb) = 300(10,000/447)
= $6,711
Buyer’s cost (at Q=447)
= (2 x D x H x Sb)
= (2 x 10000 x 10 x 100)
= $ 4,472
Supplier’s cost (at Q=894)
= Ss (D/EOQb) = 300(10,000/894)
= $3,356
SC overall cost (at Q=894)
= (2 x D x H x (Sb + Ss))
= (2 x 10000 x 10 x 400)
= $ 8,944
$ 8,944
$ 5,589
$ 3,356
$ 4,472
$ 6,711
$ 11,184
TC = 894 x 10/2 + (10000/894) x 100 = $ 5,589
If buyer orders Q=894, supply chain’s total cost is reduced
But, buyer incurs a higher cost, and will not order Q=894
The SC is NOT coordinated without a compensation for buyer
Buyer's optimal quantity
Centralized supply chain's optimal quantity Cost saving
Q=447 Q=894Supplier cost $6,711 $3,356 $3,356Buyer cost $4,472 $5,589 -$1,116Supply chain cost $11,184 $8,944 $2,239
For any order quantity Q, the buyer always bears a fraction of of the total cost of the supply chain Supplier promises to pay buyer = (1–) (buy’s total holding and
setup cost) The buyer promises to pay the supplier = () (supplier’s total setup cost)
Buy’s optimal quantity = SC’s optimal quantity = centralized SC’s optimal quantity = 894
There exist a such that buyer and suppliers are both better off than ordering Q = 447
Example: Quick Response at Benetton
Benetton, the Italian sportswear manufacturer, was founded in 1964. In 1975 Benetton had 200 stores across Italy.
Ten years later, the company expanded to the U.S., Japan and Eastern Europe. Sales in 1991 reached 2 trillion.
Many attribute Benetton’s success to successful use of communication and information technologies.
Benetton uses an effective strategy, referred to as Quick Response, in which manufacturing, warehousing, sales and retailers are linked together. In this strategy a Benetton retailer reorders a product through a direct link with Benetton’s mainframe computer in Italy.
Using this strategy, Benetton is capable of shipping a new order in only four weeks, several week earlier than most of its competitors.
How Does Benetton Cope with the Bullwhip Effect?
1. Integrated Information Systems
• Global EDI network that links agents with production and inventory information
• EDI order transmission to HQ
• EDI linkage with air carriers
• Data linked to manufacturing
2. Coordinated Planning
• Frequent review allows fast reaction
• Integrated distribution strategy
Vendor Managed Inventory
Popularized in the late 1980s by Wal-Mart and Procter & Gamble, VMI became one of the key programs in the grocery industry’s pursuit of “efficient consumer response” and the garment industry’s “quick response.”
Successful VMI initiatives have been trumpeted by other companies in the United States, including Campbell Soup and Johnson & Johnson, and by European firms like Barilla (the pasta manufacturer).
The supplier—usually the manufacturer but sometimes a reseller or distributor—makes the main inventory replenishment decisions for the consuming organization.
The supplier monitors the buyer’s inventory levels (physically or via electronic messaging) and makes periodic resupply decisions regarding order quantities, shipping, and timing.
Transactions customarily initiated by the buyer (like purchase orders) are initiated by the supplier instead.
The purchase order acknowledgment from the supplier may be the first indication that a transaction is taking place; an advance shipping notice informs the buyer of materials in transit.
Solutions for Battling Bullwhip EffectVendor Managed Inventory (VMI)
Vendors take control of inventory management at the retailers
Quick Response (QR) Vendors receive POS data from retailers, and
use this information to synchronize their production and inventory activities.
Vendor Managed Inventory (VMI)How does it work?
The vendor (supplier) receives inventory and point-of-sales (POS) data from the retailers and calculates how much to ship to retailers.
The vendor places orders for supply.
VMI projects Dillard Department Stores, JCPenney and Wal-Mart Sales increases of 20 to 25% 30% inventory turnover improvements
Quick ResponseThe supplier receives POS data from
retailers, and use this information to synchronize their production and inventory activities.
The retailer prepares individual orders, but the POS data is used by the supplier to improve forecasting and scheduling.
Quick Response vs. VMISales information passed back to the
supplier.Bullwhip effect is reduced.What’s the difference?
Who chooses the order quantity? VMI: Supplier QR: Retailer
Who chooses when to order? VMI: Supplier QR: Retailer
Functional Products(Soup)
Innovative Products(Fashion clothing)
Demand Uncertainty Low (forecast error) High (forecast error)
Life Cycle Long Short
Risk of Obsolescence Low High
Profit Margin Low High
Variety Low High
Demand volume High Low
Two Types of Products
Tow Main Functions of Supply ChainsPhysical function
Transformation process – converting raw materials to finished goods and moving them along SC
Market mediation Ensuring that the right variety of products are
available at the right place, at the right time, in the right quantities
introducing
EPC
Information Visibility
Prof. Manoj K SrivastavaOperations Management Area
Management Development Institute-Gurgaon
Supply Chain Management
Chapter-09
[email protected]://mks507.vistapanel.net
What is EPC? The Electronic Product Code (EPC) is an identification scheme for universally
identifying physical objects via Radio Frequency Identification (RFID) tags and other means.
Extremely long barcodes, this greater data capacity affects the business process because it in turn allows a greater degree of unique identification.
The Key Difference
UPC – contains just enough information to identify the class of a product
EPC – contains more information to identify the product uniquely
It is not necessary for UPC to be “universal”
A typical example would be an automotive tyre
Universal Product Code (UPC) will say “this is a class-x tyre”
The Electronic Product Code (EPC) will say “this is a class-x tyre with a serial #35686975.”
RFID: UPC vs. EPCUPC
-Requires line-of-sight readers
-Only one product can be scanned at a time
EPC-Tags can be read from many ranges
-Many products can be scanned simultaneously
-Tags can store large amounts of data
-Uniquely identifies products
Research says worldwide RFID spending will jump
from $300 million in 2004 to $2.8 billion by 2009,
and that most will centre on the global supply chain
(EPC Global the Source January 2005)
An AMR Research study found early EPC/RFID adopters in the retail and consumer
packaged goods (CPG) industries have lowered their supply chain costs between
three and five percent.EPC= specific instance of a productUPC= A class of product
Beyond Barcode268 million companies can each categorize 16 million different products and each product category may contain over 687 billion individual items.
Electronic
Product Code (E
PC) 96 bits
How It works.
Types of Tags
Passive Operational power scavenged from reader radiated power• Require no internal power source or maintenance
Semi-passive Operational power provided by battery
Active Operational power provided by battery - transmitter built
into tag More reliable and efficient in rugged environments
DifferenceActive RFID Passive RFID
Tag Power Source Internal to tagEnergy transferred using RF from reader
Tag Battery Yes No
Availability of power
Continuous Only in field of reader
Required signal strength to Tag
Very Low Very High
Range Up to 100m Up to 3-5m, usually less
Multi-tag reading1000’s of tags recognized
Few hundred within 3m of reader
Data StorageUp to 128Kb or read/write with sophisticated search and access
128 bytes of read/write
100 kHz 1 MHz 10 MHz 100 MHz 1 GHz 10 GHz
Low Freq.
HighFreq.
MediumFreq.
134 kHz 13.56 MHz 915 MHz 2.45 GHz T1-RFID T1-RFID UHF T1-RFID1 Hyper X
Ultra High Freq.
Microwave
Freq.
ITEM PACKAGING TRANSPORT UNIT UNIT LOAD CONTAINER MOVEMENT VEHICLE
LF MF HF VHF UF MICROWAVE
Active RFID
ISO 18000-7
GPRS
Passive RFID
125 kHz & 13.56 MHz ISO 15693 & ISO 14443-3
868 MHz EPCglobal Gen 2 ISO 18000-6
Bar Code
Frequency Range Tag cost Applications
Low-frequency125 - 148 KHz
3 feet $1+ •Pet and ranch animal identification•Car key locks
High-frequency13.56 MHz
3 feet $0.50 •Library book identification•Clothing identification•smart cards
Ultra-high freq915 MHz
25 feet $0.50 •Supply chain tracking:• Box, pallet, container, trailer tracking
Microwave:2.45GHz
100 feet $25+ •Highway toll collection•Vehicle fleet identification
Tags need to be closer to the readerPoor discrimination
Tags can be read from relatively greater distancesTags can hold more information
Longest range
More interfe
rence
Frequencies of operation
2003
Source: http://www.symbol.com/products/rfid/rfid_next_generation.html
Comprehensiveness
Applications
Keyless entryEPCProximity cardsLibrariesSecurity device
Bookstores
• Animal and human implantation– Avid– Pet-ID– VeriChip
• RFID-privacy legislation– REAL ID Act
Balanced Supply Chain Scorecardformulating 3rd Generation BSC for supply chain
manoj kumar srivastava
The
Importance- performance
matrix
Performance Measurement
Categories of Performance Measurement
Cost Quality Time
Supplier
performance
Customer
satisfaction
Return on assets (ROA)
Increase ROA with higher net income and
fewer total assets
Total assetsAchieve the same or better performance with fewer assets
Working capitalReduce working capital by reducing inventory investment, lead times,
and backlogs
Fixed assetsReduce the number of warehouses through
improved supply chain design
Net incomeImprove profits with greater revenue and
lower costs
Measures of Supply Chain PerformanceTotal revenueIncrease sales through better customer service
Cost of goods soldReduce costs of
transportation and purchased materials
Operating expensesReduce fixed expenses by
reducing overhead associated with supply
chain operations
Net cash flowsImprove positive cash flows by reducing lead times and
backlogs
InventoryIncrease inventory turnover
How Supply Chain Decisions Can Affect ROA
Supply exceeds demand
New market and new productssupply and demand are low
Established market, supply anddemand are balanced
Demand exceeds supply
Four measurement categories:1. Customer Service
2. Internal Efficiency
3. Demand Flexibility
4. Product Development
1. Assets committed to inventory
Measuring Supply Chain Performance
2. Inventory turnover
Measuring Supply Chain Performance
Inventory
turnover
=Cost of goods sold
Inventory investment
Inventory turnover
Measuring Supply Chain Performance
Inventory turns =$34,416,000
$425, 000, 000
Days of supply =($425,000,000)/(365)
$34,416,000
= 12.3
= 29.6
1. Cost of goods sold: $425 million2. Production materials and parts: $4,629,0003. Work-in-process: $17,465,0004. Finished goods: $12,322,0005. Total average aggregate value of inventory (2+3+4): $34,416,000
Number of days to achieve an unplanned 20% change in orders without a cost penalty
Production flexibility
Number of days for supply chain to respond to an unplanned significant change in demand without a cost penalty
Supply chain response time
Supply Chain Flexibility
Number of days from order receipt to customer delivery
Order fulfillment lead time
Supply Chain Responsiveness
Percentage of orders delivered on time and in full, perfectly matched with order with no errors
Perfect order fulfillment
Percentage of orders shipped within24 hours of order receipt
Fill rate
Percentage of orders delivered on time and in full to the customer
Delivery performance
Supply Chain Delivery Reliability
DefinitionPerformance Metric
Performance Attribute
SCOR: Customer Facing
DefinitionPerformance Metric
Performance Attribute
SCOR: Internal Facing
Revenue divided by total assets including working capital and fixed assets
Asset turns
Number of days that cash is tied up as inventoryInventory days of supply
Number of days that cash is tied up as working capital
Cash-to-cash cycle time
Supply Chain Asset Management Efficiency
Direct and indirect costs associated with returns including defective, planned maintenance and excess inventory
Warranty/returns processing cost
Direct material cost subtracted from revenue and divided by the number of employees, similar to sales per employee
Value-added productivity
Direct cost of material and labor to produce a product or service
Cost of goods sold
Direct and indirect cost to plan, source and deliver products and services
Supply chain management cost
Supply Chain Cost
PART-IPerformance Measurement Systems
Balanced Scorecard Approach:A brief Introduction
recommends the use of executive information systems (EIS) limited number of balanced metrics, closely aligned to strategic objectives expected to be used by 40% of Fortune 1000 companies
When applied to supply chain context a small number of balanced supply chain measures be tracked based on four perspectives:
1. Financial perspective (e.g., cost of manufacturing and cost of warehousing )
2. Customer perspective (e.g., on-time delivery and order fill rate)
3. Internal business perspective (e.g., manufacturing adherence-to-plan and forecast errors)
4. Innovative and learning perspective (e.g., APICS-certified employees and new product
development cycle time)
Kaplan R S and Norton D P (1992) "The balanced scorecard: measures that drive performance", Harvard Business Review, Jan – Feb, pp71-80
aligning activities with strategy
The Vision & StrategyThe Vision & Strategy
To achieve and maintain a competitive position, how must the organization learn and improve?
To achieve and maintain a competitive position, how must the organization learn and improve?
Innovation, Learning & Growth
The Strategic Balanced Scorecard Framework
Cause
Results
Actions
Effect
To satisfy our customers, in which internal business processes must we excel?
To satisfy our customers, in which internal business processes must we excel?
Internal Business Process
To achieve our financial goals, what customer needs must we satisfy?
To achieve our financial goals, what customer needs must we satisfy?
Customer
To satisfy our shareholders, what financial objectives must we accomplish?
To satisfy our shareholders, what financial objectives must we accomplish?
Financial
What Questions Does a Scorecard System Answer?
Vision MissionStrategy
To succeed financially, how should we appear to
our owners?
To satisfy our customers, at what business processes
must we excel?To achieve our vision, how will we sustain our ability to learn
and improve?
To achieve our vision, how should we appear
to our customers?
Objective Measure Target InitiativeFinancial
Measure Target InitiativeInternal Business Process
Objective
Measure Target Initiative ObjectiveLearning & Growth
CustomerMeasure Target Initiative Objective
1. Stakeholder Satisfaction – who are the key stakeholders and what do they want and need?2. Strategies – what strategies do we have to put in place to satisfy the wants and needs of these key
stakeholders?3. Processes – what critical processes do we require if we are to execute these strategies?4. Capabilities – what capabilities do we need to operate and enhance these processes?5. Stakeholder Contribution – what contributions do we require from our stakeholders if we are to
maintain and develop these capabilities?
Neely, A.; Adams, C. (2001) “Perspectives on Performance: The Performance Prism”, Journal of Cost Management, Vol. 15, issue 1, p7-15
ThePerformance Prism
Know your stakeholders and their want
De
live
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Skandia Navigator™Edvinsson and Malone (1997)
Intellectual capital is measured through the analysis of up to 164 metric measures (91 intellectually based and 73 traditional metrics) that cover five components: (1) financial; (2) customer; (3) process; (4) renewal and development; and (5) human
The philosophy behind the report was that traditional financial statements represent only past financial information about an organization. Additional information about intellectual capital is needed to understand both an organization's current and future capabilities. To fill this void, Skandia developed a framework for reporting that combined traditional financial reporting with measures of intellectual capital. This reporting framework is called a "navigator" for two reasons. First, it is intended to guide an organization in managing intellectual assets. Second, it is intended to guide people through a comprehensive set of measures that represent the true resources, capabilities, and future potential of an organization.
Skandia, a Swedish insurance and financial services company, published a supplement to its 1994 annual report entitled "Visualizing Intellectual Capital in Skandia" (Skandia, 1995). Leif Edvinsson is the corporate director of intellectual capital for Skandia.
linking past, present, future
2nd Generation performance measurement Frameworks
Individual stock measures (Pike / Roos, 2001).
Strategy maps (Kaplan and Norton, 2000)
Success and risk maps (Andy Neely and colleagues, 2002)
IC-Navigator model (Roos et al., 1997; Chatzkel, 2002)
Strategic Linkage Model
Strategic Linkage ModelThe measurable strategic objectives organized in a cause and effect diagram to capture management thinking on the relationships of the medium term activities and outcomes
Success Map
Neely, A., Marr, B., Roos, G., Pike, S. and Gupta, O. (2003)‘Towards the third generation of performance measurement’, Controlling, Heft 3/4, März/April.
3rd Generation performance measurement Frameworks
1. Appropriateness and adequacy – the model must reflect reality.
2. Information adequacy – the right information must be provided.
3. Practicality and organizational alignment – the outcomes must be
practical insights that will enable action.
The third generation of performance measurement requires organizations to seek
greater clarity about the linkages between the non-financial and intangible dimensions
of organizational performance and the cash flow consequences of these. Before such
models can be developed it is essential that three fundamental criteria be satisfied
(Pike / Roos, 2001).
Pike, S. / Roos, G., Measuring and decision support in the knowledge society;The 4th World Congress on Intellectual Capital, Hamilton, 2001.
Second Generation Balanced Scorecardsdefined strategic objectives, linked together using a causal ‘strategy map’ to help identify the activities and results that needed to be measured
First Generation Balanced Scorecardsbroke new ground by combining financial and non-financial performance measures grouped into four perspectives
Third Generation Balanced Scorecardsuse the creation of a “Destination Statement” as the starting point for choosing Strategic Objectives, selecting measures and setting targets
Strategic Objectives developed directly
from a detailed “vision” of the
organization at a future date called a
Destination Statement
2016
Destination statement
Causality is shown by linkages
between the objectives selected
Strategic Linkage Model
Balanced scorecard measures and targets
To track whether objectives are being achievedTo drive the right management actions
BSC3 ideas build on these key performance management concepts:
Causality identify the
actions required to deliver key outcomes Learning
using feedback to identify ways of
improving performance
Ownershipusing consensus to ensure everyone is clear on what needs
to be done and is fully involved in the
process
Communicationproviding clear and
unambiguous information on goals
roles and performance
Destination Statement
A clearly articulated and quantified long-range description of the desired state of the business at a particular point in time; Typically this is focused on how the organization will look after 3-5 years
The document describes how things are at that time, rather than the things that were done between now and then to arrive at that end point.
To build management consensusTo articulate the intended results of implementing the chosen strategy
clearly articulated statement of ‘desired state’ or strategic destination
measurable medium-term strategic objectives broken down into activities and outcomesthen into the standard Kaplan & Norton perspectives if necessary
defined objectives
priority initiatives linked to strategic objectives
the measures themselves
BSC3 standard designs
comprise these
elements
Order Fill RateLine Item Fill RateQuantity Fill RateBackorders/stockoutsCustomer satisfaction% Resolution on first customer callCustomer returnsOrder track and trace performanceCustomer disputesOrder entry accuracyOrder entry times
Customer Service Measures
Forecast accuracyPercent perfect ordersNew product time-to-marketNew product time-to-first makePlanning process cycle timeSchedule changes
Process, Cross-Functional Measures
Total landed cost Point of consumption product
availability Total supply chain inventory Retail shelf display Channel inventories EDI transactions Percent of demand/supply on VMI/CRP Percent of customers sharing forecasts Percent of suppliers getting shared
forecast Supplier inventories Internet activity to suppliers/customers Percent automated tendering
Extended Enterprise Measures
Product qualityWIP inventoriesAdherence-to-scheduleYieldsCost per unit producedSetups/ChangeoversSetup/Changeover costsUnplanned stockroom issuesBill-of-materials accuracyRouting accuracyPlant space utilizationLine breakdownsPlant utilizationWarranty costsSource-to-make cycle timePercent scrap/reworkMaterial usage varianceOvertime usageProduction cycle timeManufacturing productivityMaster schedule stability
Manufacturing Related Measures Finished goods inventory turns Finished goods inventory days of supply On-time delivery Lines picked/hour Damaged shipments Inventory accuracy Pick accuracy Logistics cost Shipment accuracy On-time shipment Delivery times Warehouse space utilization End-of-life inventory Obsolete inventory Inventory shrinkage Cost of carrying inventory Documentation accuracy Transportation costs Warehousing costs Container utilization Truck cube utilization In-transit inventories Premium freight charges Warehouse receipts
Logistics Related Measures
Cash flow Income Revenues Return on capital employed Cash-to-cash cycle Return on investment Revenue per employee Invoice errors Return on assets
Administration/Financial Measures
Material inventories Supplier delivery performance Material/component quality Material stockouts Unit purchase costs Material acquisition costs Expediting activities
Purchasing Related Measures
Market share Percent of sales from new products-
to-market Percent of products representing
80% of sales Repeat versus new customer sales
Marketing Related Measures
APICS trained personnelPatents awardedEmployee turnoverNumber of employee suggestions
Other Measures
– On-time delivery 90%
– Quality of goods/services 83%
– Service capability/performance 69%
– Price competitiveness 55%
– Compliance with contract terms 51%
– Response 50%
– Lead time 44%
– Technical capability 34%
– Environmental, health, and safety performance 30%
– Innovation 29%
What Supplier Performance Metrics Do Companies Use?
Lapide (2000)
CustomerPerspectives
Customer satisfaction, Customer returns, Customer disputes, Market share, % Resolution on first customer call, Order track and trace performance, Order entry accuracy, Order entry times, Repeat versus new customer sales, Order fill rate, Line item fill rate, Quantity fill rate
ProcessPerspectives
Forecast accuracy, Percent perfect orders, Schedule changes, Supplier delivery performance, Material/component quality, Material stockout, Expediting activities, Product quality, Adherence-to-schedule, Yields, Setups/changeovers, Unplanned stockroom issues, Bill-of-material accuracy, Routing accuracy, Plant space utilization, Line breakdowns, Percent scrap/rework, Overtime usage, Manufacturing productivity, Master schedule stability, Total supply chain inventory, Channel inventories, Material inventories, WIP inventories, Finished goods inventory turns, Finished goods inventory days of supply, On-time delivery, Lines picked/hour, Damaged shipments, Inventory accuracy, Pick accuracy, Shipment accuracy, Warehouse space utilization, End-of-life inventory, Obsolete inventory, Inventory shrinkage, Documentation accuracy, Container utilization, Truck cube utilization, In-transit inventories, Premium freight charges, Warehouse receipts, New product time-to-market, New product time-to-first make, Planning process cycle time, Retail shelf display, Source-to-make cycle time, Production cycle time, On-time shipment, Delivery times, Material usage variance, Unit purchase cost, Material acquisition cost, Cost per unit produced, Setup/changeover costs, Warranty costs, Logistics cost, Cost of carrying inventory, Transportation costs, Warehousing costs
Innovationand LearningPerspectives
APICS trained personnel, Patents awarded, Time-to-market, Number of employee suggestions, Percent of sales from new product, Percent if demand/supply on VMI/CRP, Percent of customer sharing forecast, Percent of suppliers getting shared forecast, Supplier inventories, EDI transactions, Internet activity to suppliers/customers, Percent automated tendering
FinancialPerspectives
Income, Total landed cost, Cash flow, Cash-to-cycle time, Revenues, Revenue per employee, Return on capital employed, Return on investment, Return on assets
What latest? in supply chain performance measures…
SAP has commissioned this study with management consultancy Pittiglio Rabin Todd & McGrath (PRTM) and The Performance Measurement Group (PMG), a subsidiary of PRTM.
CUSTOMER PERSPECTIVE
GoalsCustomer view of ProductOf timelinessOf flexibilityCustomer value
MeasuresNo. of customer contact pointsRelative Customer order response timeCustomer perception of flexible responseCustomer value ratio
INTERNAL BUSINESS PERSPECTIVE
GoalsWaste ReductionTime CompressionFlexible Response
Unit cost reduction
MeasuresSC cost of OwnershipSC cycle efficiencyNo. of Choices / Av response time% of SC target costs Achieved
INNOVATION AND LEARNING PERSPECTIVE
GoalsProduct InnovationPartnership Mgmt.
Information FlowsThreats and Subsitutes
MeasuresProduct Finalization pointProduct category commitment ratioShared data set/total data setPerformance trajectories of Competing technologies
FINANCIAL PERSPECTIVE
GoalsProfit MarginsCash FlowRevenue GrowthReturn on assets
MeasuresProfit margin by Supply chain partnersCash to cash cycleCustomer Growth and profitabilityReturn on SC assets
Customer Benefits
SCM Goals
SCM Improvements
Financial Benefits
Purchasing and Strategic Sourcing
Sourcing decisions – High level, often strategic decisions regarding which products or services will be provided internally and which will be provided by external supply-chain partners
Purchasing – The activities associated with identifying needs, locating and selecting suppliers, negotiating terms, and following up to ensure supplier performance
Sourcing decisions and purchasing activities serve to link a company with its upstream supply chain partners
Focus
The Role of Purchasing in an Organization
The primary goals of purchasing are:1. Ensure uninterrupted flows of raw materials at the lowest total cost,
2. Improve quality of the finished goods produced, and
3. Optimize customer satisfaction.
Purchasing contributes to these objectives by: 4. Actively seeking better materials and reliable suppliers,
5. Work closely with strategic suppliers to improve quality materials, and
6. Involving suppliers and purchasing personnel in new product design and development efforts.
- To perform specialised tasks
- To achieve an output
- With production and warehousing
- Internal and external focus
- Knowledge based
- Demonstrable skills and knowledge
As a function
As a process
As a link in the supply chain
As a relationship
As a discipline
As a profession
What is Purchasing?
Perspectives on Purchasing
1
2
3
4
5
6
To buy materials of the right quality , in the right quantityfrom the right source delivered to the right place at theright time at the right price.
The process undertaken by the organisational unit that, either as afunction or as part of an integrated supply chain, is responsible forprocuring or assisting users to procure in the most efficient manner therequired supplies at the right time, quality, quantity and price andthe management of suppliers, thereby contributing to the competitiveadvantage of the enterprise and the achievement of its corporate strategy.
The Classic Definition
Modern Definition
What is Purchasing?
Definitions
To be Contrasted with
What is Purchasing?
The Evolution of Purchasing
The Reck and Long Model
Stage Characteristics
1. Product centered
2. Process centered
3. Relational
4. Performance centered
Focused on best product management methods. Employs an integrated methodology to manage relationships, processes and outcomes.
Process and relationally focused, expanded to includepurchaser-supplier relationships.
Moves beyond a concern with outcomes and begins tomeasure the process through which the outcome isdelivered.
Concerned with the five rights that concentrateexclusively upon the purchasing of tangible products and outcome dimensions.
What is Purchasing?
Purchasing and Change
Globalisation ImpactInformationTechnology
Impact
Chasing Production &Management
Philosophies Impact
• Transgression of national boundaries
• Advantage of cost
• Specialised labour skills
• Emerging economies
• Slicker transactions
• Quality of management data
• Strategic link with suppliers
• Paperless environment
• Competitive advantage
• Outsourcing
• Supply chain management
What is Purchasing?
Increase in strategic importance
Automated tactical activities
Master contracts
Electronic purchasing
Strategic purchasing competency centres
Shared supply chain resources
Profit contribution
Changed emphasis on individual skills
Purchasing in the Future
What is Purchasing?
World-class Purchasing
TQM
JIT
Total cycle time reduction
Long-range planning
Supplier relationship engineering
Strategic cost management
Performance accountability
Professional flexibility and development
Service excellence
Corporate social responsibility
Must Accommodate
• Power of purchasing to enhance profitability
Status Influenced by:
• Is it transactional, commercial or strategic?
What is Purchasing?
The Status of Purchasing and Supply Management
Leverage
Focus
Professionalism • Perception of influencers• Academic activity• Depth of knowledge and skill• Future focus
Introduction
Purchasing- Obtaining merchandise, capital equipment; raw materials, services, or maintenance, repair, and operating (MRO) supplies in exchange for money or its equivalent.
Merchant Buyers-wholesalers and retailers who purchase for resale.
Industrial Buyers- purchase raw materials for conversion, services, capital equipment, & MRO supplies.
Sourcing policy - determining dependency on suppliers and designing plans to reduce this dependency.
Direct versus indirect buying - determining the (possible) cost benefits of buying from importers and distributors, or buying directly from the manufacturer.
Make-or-buy analysis - analysis of savings opportunities by eliminating particular production activities and buying the required products from third parties; buy or lease may be considered as an alternative.
Integration between purchasing and other functional areas - plans aimed at removing interface problems between purchasing and materials management, pure engineering, and between purchasing and financial administration or treasury
Setting up a purchasing information and control system - analysis of purchasing information needs and design of an automation plan; possibilities of linking this system with existing information systems in other functional areas.
Centralized or decentralized purchasing - balancing cost benefits and strategic considerations related to a centralized or decentralized organization of purchasing
Standardization - determining possibilities to achieve standardization in order to reduce product and supplier variety; balancing savings and risks.
Sourcing policy - determining dependency on suppliers and designing plans to reduce this dependency.
Direct versus indirect buying - determining the (possible) cost benefits of buying from importers and distributors, or buying directly from the manufacturer.
Make-or-buy analysis - analysis of savings opportunities by eliminating particular production activities and buying the required products from third parties; buy or lease may be considered as an alternative.
Integration between purchasing and other functional areas - plans aimed at removing interface problems between purchasing and materials management, pure engineering, and between purchasing and financial administration or treasury
Setting up a purchasing information and control system - analysis of purchasing information needs and design of an automation plan; possibilities of linking this system with existing information systems in other functional areas.
Centralized or decentralized purchasing - balancing cost benefits and strategic considerations related to a centralized or decentralized organization of purchasing
Standardization - determining possibilities to achieve standardization in order to reduce product and supplier variety; balancing savings and risks.
Strategic Sourcing
Strategic sourcing methodology: Step 1: Project Planning and Kickoff, which suggests that a formal start to the strategic sourcing process is
warranted.
Step 2: Profile Spend, to develop an accurate understanding of requirements. Identify or reevaluate needs Define and evaluate user requirements Decide whether to make or buy
Step 3: Assess Supply Market very critical step in the strategic sourcing process all potential sources of supply are identified a thorough assessment of a supply market identify all possible suppliers prescreen all possible sources
Step 4: Develop Sourcing Strategy develop a sourcing strategy establish whether a supplier has the capabilities RFP provides specific information as to what the buying company
Step 5: Execute Sourcing Strategy begins with an evaluation of the suppliers that remain following the RFI and RFP processes and
culminates in the award of a contract. Step 6: Transition and Integrate
Important elements of this step are the finalization of the contractual agreement, planning the transition process, and receipt or delivery of the product or service.
Step 7: Measure and Improve Performance very important, involves making a post purchase performance evaluation.
E-Sourcing
The Purchasing Process
Manual Purchasing- Older system, prone to duplication of effort and error
Step 1-Material Requisition/Purchase Requisition- stating product, quantity, and delivery due date are clearly.
Step 2- The Request for Quotation (RFQ)- Buyer identifies suppliers & issues a request for quotation (RFQ). Step 3- The Purchase Order (PO)- The purchase order is the buyer’s offer & becomes a binding contract when accepted by supplier.
The e-Purchasing Process
Electronic Procurement (e-Procurement)
Step 1- Material user inputs a materials requisition- relevant information such as quantity and date needed.
Step 2- Materials requisition submitted to buyer- at purchasing department (hardcopy or electronically).
Step 3- Buyer assigns qualified suppliers to bid- Product description, closing date, & conditions are given.
Step 4- Buyer reviews closed bids & selects a supplier
Advantages for the e-Procurement System
Time savings Cost savings Accuracy Real time Mobility Trackability Management Benefits to the suppliers
Six stage purchasing developmental model:
Six stage purchasing developmental model:
1. ‘Transaction orientation; serve the factory’;
2. ‘Commercial orientation; lowest unit price’;
3. ‘Coordinated purchasing’
4. ‘Internal integration: cross-functional purchasing’;
5. ‘External integration; supply-chain management’;
6. ‘Value chain integration’
Effectiveness/Cumulative
savings
Transactional orientation
Commercialorientation
Purchasingco-ordination
Internalintegration
ExternalIntegration
Value chainintegration
Publicutilities
FinancialServices
Pharma
Food andbeverages
telecommu-nication
Retailers
automotive
Computer/PC’s
Consumerelectronics
time
focus
Activities
Dilemmas
‘serve the factory’
• Clerical• Order processing
• Initial purchasing• Control of purchasing• expenditure
‘Reduce cost’
• Commercial• Tendering• Negotiating• Apr supplier lists
• Supplier base management
‘Savings through synergy’
• Commercial• Contracting• Global sourcing
• Contract management• Ethics
‘Total Cost of ownership’
• Cross functional buying teams• Systems integration• Vendor rating etc.• Communication and information infrastructure
‘Supply chain optimization’
• Outsourcing• EDI/Internet• E-Commerce• Cost models• Social
resistance
‘Total Customer Satisfaction’
• Customer driven activities• Contact manufacturing• Supplier development• Global supplier network• Internationalization• HRM
CROSS-FUNCTIONAL FOCUSDECENTREALIZED
FUNCTIONAL FOCUS
CENTRE-LED
Supplier Development Through Procurement
The Procurement Viewpoint
Supplier PurchaserProcurement Initiative
Marketing Response
Supplier PurchaserMarketing Initiative
Purchasing Response
The Marketing Viewpoint
Procurement Process
Procurement Process
Invoice clearance & payments
Records maintenance
Receipt and inspection
Follow up and expediting
Purchase order preparation
Supplier selection
Supplier identification and evaluation
Description
Needs identification
Is there a preferred supplier?No
Yes
The Purchasing Process
Ordercycle
The Purchasing ProcessNeeds Identification
Needs identification
Purchase requisition – An internal document completed by a user that informs purchasing of a specific need
Reorder point system – A method used to initiate the purchase of routine items. Typically, each item has a predetermined order point and order quantity
The Purchasing ProcessDescription
Description by market grade/industry standard Description by brand Description by specification Description by performance characteristics Description by prototypes or samples
DescriptionThe communication of a user’s needs to potential suppliers in the most efficient and accurate way possible
The Purchasing ProcessSupplier Identification and Evaluation - I
Supplier identification and evaluation The complexity of the product
or service increasesThe amount of money that is
committed increasesThe length of the proposed
buyer-supplier relationship increases
The amount of effort increases as:
Supplier identification and evaluation Process and design capabilities
Management capabilityFinancial condition and cost structuresPlanning and control systemsEnvironmental regulation complianceLonger-term relationship potential
Criteria for supplier assessment:
The Purchasing ProcessSupplier Identification and Evaluation - II
Supplier Portfolio Screening Process
Supplier selection
Preferred supplierCompetitive biddingNegotiation
The Purchasing ProcessSupplier Selection - I
Supplier selection
Preferred supplierA supplier that has demonstrated its performance capabilities through previous purchase contracts and therefore receives preference during the supplier selection process
The Purchasing ProcessSupplier Selection - II
Supplier selection The buying firm can provide qualified suppliers with clear descriptions of the items or services
Volume is high enough to justify the cost and effort
The firm does not have a preferred supplier
Competitive bidding is most effective when:
The Purchasing ProcessSupplier Selection - III
Supplier selection
The item is new or technically complex with only vague specifications
The purchase requires agreement about a wide range of performance factors
The supplier must participate in the development effort
The supplier cannot determine risks and costs without input from the buyer
Negotiation is most effective when:
The Purchasing ProcessSupplier Selection - IV
Purchase order preparation
Records maintenance
Invoice clearing and payment
Receipt and inspection
Follow-up and expediting
Purchase order preparation74% of firms currently have electronic data interchange (EDI) with some part of their supply base
Follow-up and expediting Receipt and inspection Invoice clearance and payment Records maintenance
The Purchasing ProcessThe Order Cycle