Supply Chain Management: From Vision to Implementation

1. Supply Chain Management: From Vision to Implementation Chapter 5: The Order Fulfillment Process: Managing the Physical Flow Infrastructure

2. Chapter 5: Learning Objectives • Describe how purchasing, production, and logistics decisions work together to create customer value. • Identify and describe the steps in the purchasing process. • Identify and discuss design and control decisions in production operations management. Describe the underlying principles and practices lean manufacturing. Describe the characteristics of service operations.

3. Chapter 5: Learning Objectives • Identify the key decision-making elements of the logistics process. Discuss order fulfillment, transportation, and distribution strategies. • Describe how physical flow decisions affect the cost and service positions of the company as well as the design of the overall supply chain.

4. Order Fulfillment • Order fulfillment is the process that actually makes and delivers a product or service • Three functions are responsible: • Purchasing – acquires the inputs used to support production • Production – converts inputs into outputs that customers value • Logistics – transports and stores goods assuring access

5. SCOR Model • When purchasing, production, and logistics work in concert directed by overall strategy, they help deliver value to the customer. • The SCOR model helps to create a common vision for managing and coordinating five primary SC processes.

6. Elements of the SCOR Model • Plan: Processes that balance demand and supply to develop a course of action to meet sourcing, production, and delivery needs. This process aligns the supply chain plan with the financial plan. • Source: Processes that purchase goods and services to meet planned or actual demand. Emphasis is on selecting suppliers, establishing policies, scheduling deliveries, and assessing performance. • Make: Processes that transform product to a finished product to meet demand. Emphasis is on scheduling production, measuring performance, managing inventory, and configuring the network. • Deliver: Processes that provide finished goods and services to customers. Emphasis is on order management, warehouse management, and transportation management. • Return: Processes associated with the return of products for any reason, and includes post-delivery customer support. Emphasis is on reverse logistics and long-term customer support.

7. SCOR Model

8. Purchasing Management Four developments during the 80s and 90s increased the importance of purchasing: • Purchased inputs became a primary operating cost • Just-in-time emphasized cooperative, long-term buyer-supplier relationships • Information technology provided information needed to strategically manage relationships • Better trained and more competent managers entered supply arena

9. Purchasing Costs • Manufactures spend 55% of each dollar on purchased goods and services • Approximately 60-80% of operating expense • Direct manufacturing costs have declined to between five and 15% of total operating costs • As little as 2% for some high-tech industries • Service industries spend less on purchased materials than manufacturing

10. Purchased Inputs as a Percent of Sales

11. Outsourcing – Purchasing Role • Focusing on core competencies has led many companies to outsource value added activities • Sourcing professionals take on the role of acquiring and managing: • Inputs • Supplier capacity • Supplier capabilities

12. The Sourcing Process

13. Recognition and Description of Need • Well-managed companies use a purchasing policy or procedure handbook to guide interactions between internal users and sourcing • Purchase requisition is used to clearly describe and communicate needs to sourcing • Item description, requisitioning department, authorizing signature, purchase quantity, delivery day, and location are necessary information

14. Supplier Selection • Identification involves making a list of all potential suppliers. A purchaser might look to the company’s purchasing database or directories such the Thomas Register of American Manufacturers, which lists over 150,000 companies. • Evaluation involves the identification of supplier selection criteria and the gathering of performance information that can be used to assess and compare possible suppliers. • Frequently used criteria include quality, price, delivery dependability, capacity (current and future), service responsiveness, technical expertise, managerial ability (attitude, skills, and talent), and financial stability. • Approval identifies the suppliers that are eligible to receive an order. The number of suppliers on the approved list depends on the nature of the item being purchased. • For commodity-type items, multiple suppliers are generally used; for unique items, a sole-sourcing arrangement may be preferable. • Monitoring assures high levels of performance. Scorecards are often used to provide an overall supplier rating. • John Deere uses categories to rate suppliers into one of four groups: partner, key approved supplier, approved supplier, or conditional supplier

15. Transaction Management - Price • Price is the factor used most frequently to evaluate the sourcing group’s performance • Best price is pursued using: • List price – low-volume or low-value items • Competitive bidding – relies on market forces to obtain a fair price • Reverse auctions may achieve 10-30% reductions • Negotiation – high dollar value high uncertainty items, or when a long-term relationship is desired

16. Transaction Management - Orders • Purchase orders specify the terms and conditions of the purchase agreement and initiate supplier action • Blanket orders specify the overall terms of agreement for a given time period and cover the entire quantity to be purchased • Smaller quantities are periodically delivered under this agreement

17. Transaction Management - Expediting • Regular follow-up allows identification of quality or delivery problems • Expediting refers to efforts to speed up delivery of an order • Penalty clauses can be used in purchase agreements

18. Transaction Management - Inspection • Receipt and inspection matches the invoice the contents via physical count and quality inspection • Primary reason for failure: • The count is off (too much, too little) • Quality is inferior • Supplier certification programs focus on improving suppliers’ abilities to produce high quality products, eliminating the need for inspection

19. Transaction Management - Payment • Efficient procedures for invoice clearance improve: • Supplier relationships • Financial performance • Discounts for prompt payment

20. Performance Monitoring • Performance monitoring allows identification of candidates for increased collaboration and long-term supplier relationships • Four types of information should be tracked: • Current status of all purchase orders • Select evaluation criteria for all suppliers • Part or commodity information • Information regarding contracts of relationships

21. Purchasing Manager Skills • Knowledge Management – commodity expertise and understanding of supplier capacity and capability • Relationship Management - alliance relationships with critical suppliers, fair relationships with all; design of efficient transaction mechanisms • Process Management - continuous improvement, collaborative processes, supplier education • Technology Management - employed new technology to reengineer the sourcing process

22. Production Management • Also known as operations or manufacturing management - creates value by transforming capital, technology, labor, and materials into more highly valued products and services • Operations drive product of the growth, innovation, and generates higher living standards

23. Production Management • Operational excellence is a prerequisite for success • Operations managers must manage two groups of decision variables: • Design Decisions • Control Decisions

24. World Class Operations Management

25. Design Decisions • Facility location – affect access to factor inputs and customer markets • Facility layout – determine the positioning of equipment, the flow and handling of materials • Product design – impact the ability to profitably capture future market share • Process design – involves technology selection and work design

26. Control Decisions • Forecasting – estimate of what needs to be produced and when • Inventory control – determines how much and when to make specific products • Scheduling – two types: • Aggregate planning determines what needs to be produced • Process planning determines work done at each station • Quality control – designing, building, and inspecting quality into both the process and product

27. Product/Service Continuum

28. Labor Productivity- Manufacturing

29. Labor Productivity- Services

30. Operations Management Skills • Operational excellence is a prerequisite for success; however, competition is now between chains not just companies. Therefore, managers must understand and develop skills in dealing with: • Outsourcing • Supplier Integrated Manufacturing • Best Practices Dissemination

31. Lean Production Lean production relies on a number of interrelated practices: • Waste Elimination • Waste is defined as anything more than the absolute minimum necessary to add value • Inventory covers up problems, Lean works to systematically reduced inventory to identify problems • Workforce Participation • Jidoka - the authority to stop the line • Requires training, personal responsibility, and integration

32. Basic 5S Principles

33. Lean Production Managerial Responsibility • Managers take on the role of teacher, team facilitator, and motivator • Process Development • Line workers are trained and empowered to solve problems and improve processes • Network Orientation • Lean should be practiced by critical suppliers

34. Lean Production • Synchronization • Synchronization of material movement is accomplished by a pull or “kanban” system • Continuous Improvement • “Kaizen” - the quest for incremental productivity gains and consistent innovation

35. Logistics Management Logistics management is that part of SCM that plans, implements, and controls the efficient, effective forward and reverse flow and storage of goods, services, and related information between the point of origin and the point of consumption in order to meet customers’ requirements. - Council of Supply Chain Management Professionals

36. The Logistics Process • Materials management is concerned with the inbound movement and storage of raw materials, purchased components, and subassemblies entering and flowing through the conversion process. • Physical distribution focuses on the outbound transportation and storage of finished products from point of manufacture to where customers wish to acquire them.

37. Basic Logistics Activities

38. Basic Logistics Activities

39. Basic Logistics Activities

40. The Order Cycle

41. Order Fulfillment Activities

42. Order Fulfillment Activities • Placing facilities in the right location and leveraging appropriate process technologies to reduce the combined production and delivery time. • Carrying the right quantity and mix of inventory. • Streamlining order processing eliminating unnecessary steps. • Assure order-entry accuracy • Developing good relationships with reliable transportation companies reduces transit times and increases on-time delivery performance. • Adopting appropriate technologies and implementing innovative materials handling processes can increase flow speed through warehouses.

43. Transportation Modes - Rail

44. Transportation Modes – Motor Carrier

45. Transportation Modes - Pipeline

46. Transportation Modes - Ship

47. Transportation Modes - Airplane

48. Transportation Modes - Internet

49. Warehouse Activities • Shipping and receiving goods and materials • Materials handling and order processing • Consolidating and distributing shipments • Transportation management, such as routing, tracing, and monitoring movements • Product packaging and labeling (form postponement) • Re-packaging and mixing of products • Preparation of in-store displays (ready store delivery pallets) • Light manufacturing or assembly • Scrap and disposal

50. Cross-Dock Operations