PRODUCTION AND OPERATIONS MANAGEMENT

1. POM - J. Galván Ch. 12: Supply -Chain Management PRODUCTION AND OPERATIONS MANAGEMENT

2. POM - J. Galván Learning Objectives How do we organize supply mechanisms? Due time Right price

3. POM - J. Galván Planning, organizing, directing, & controlling flows of materials Begins with raw materials Continues through internal operations Ends with distribution of finished goods Involves everyone in supply-chain Example: Your supplier’s supplier Objective: Maximize value & lower waste Supply-Chain Management

4. POM - J. Galván The Supply-Chain VISA ® Credit Flow Materiall Flow Supplier Manufacturing Retailer Consumer Supplier Wholesaler Retailer Order Cash Schedules Flow Flow

5. Input flow of materials Inventory level Scrap flow Output flow of materials Creation of Inventory

6. Inventory at Different Stocking Points

7. Where Inventories Are Held Manufacturing (36%) Other (8%) Farm (8%) Retail trade (25%) Wholesale trade (23%)

8. Three Possible Structures of the SCM • Segmented (purchasing, production control, distribution departments) • Hybrid (purchasing+production control, distribution departments) • Integrated (material management or logistics department)

9. Customer Customer Customer Customer Distribution center Distribution center Manufacturer Tier 1 Tier 2 Tier 3 Legend Supplier of services Supplier of materials Supply Chain

10. Production control Purchasing Distribution Suppliers Customers Production control Purchasing Distribution Suppliers Customers Internal supply chain Materials management department Internal supply chain Suppliers Customers Integrated supply chain Integrated Supply-Chain Phase 1: Independent supply-chain entities Phase 2: Internal integration Phase 3: Supply-chain integration

11. The Acquisition Process • Recognize a need • Select suppliers • Place the order • Track the order • Receive the order

12. POM - J. Galván Acquisition of goods & services Activities Help decide whether to make or buy Identify sources of supply Select suppliers & negotiate contracts Control vendor performance Importance Major cost center Affects quality of final product Purchasing

13. Electronic Purchasing • EDI (electronic data interchanges, since 1970s) • machine-to-machine, phone or dedicated lines, complex (X12 form has 150 fields) and expensive software, batch processing (order, invoice, etc) • E-Commerce • flexible (Java applets) for any communication (ftp, http, email, etc), low cost, near real-time , reaches wider community of users.

14. Purchasing • Vendor/Supplier Selection • price, quality, delivery (on-time, short LT) • The impact of lead time (location) on inventory • “The cost of a 30-day inventory, including the cost of damages from handling, accounts for as much as 23% of the price of the parts to customers” Now, JIT delivery (20 minutes) to GM Leonard Kasle President, Kasle Steel

15. POM - J. Galván Objectives of the Purchasing Function Help identify the products and services that can be best obtained externally; and Develop, evaluate, and determine the best supplier, price, and delivery for those products and services

16. POM - J. Galván Traditional Purchasing Process Customer Supplier Purchase Order Mail Order Processing Receiving Receivables Report Dock Packing List Mail Invoice Accounts Payable Accounts Receivable Mail Check Reconcile

17. Delivery: American Hospital “Hospitals today are looking at more than price per case; they’re looking at the total cost of procurement, including logistics and INVENTORY.” Executive, American Hospital Supply

18. Purchasing--Supplier Relations • Competitive Orientation: • Zero-sum between seller and buyer • When a buyer has more clout? • Big share of supplier’s sales • Item is standardized • Buyer can integrate BACKFORWARD • Suppliers can’t integrate FORWARD • Switching cost is low

19. Purchasing--Supplier Relations • Cooperative Orientation: • Seller and buyer are partners • become popular with JIT success • a smaller number of suppliers • sole sourcing: required continuous improvement targets and risk • longer term commitment • early supplier involvement in value analysis • supplier certification

20. POM - J. Galván lower acquisition cost preserve supplier commitment obtain technical or management ability inadequate capacity reduce inventory costs ensure flexibility and alternate source of supply reciprocity item is protected by patent or trade secret frees management to deal with its primary business lower production cost unsuitable suppliers assure adequate supply utilize surplus labor and make a marginal contribution obtain desired quantity remove supplier collusion obtain a unique item that would entail a prohibitive commitment from the supplier maintain organizational talent protect proprietary design or quality increase/maintain size of company Make/Buy Considerations Reasons for Making Reasons for Buying

21. POM - J. Galván Plans to help achieve company mission Affect long-term competitive position Strategic options Many suppliers Few suppliers Keiretsu network Vertical integration Virtual company Purchasing Strategies Plan © 1995 Corel Corp.

22. POM - J. Galván Many Suppliers Strategy • Many sources per item • Adversarial relationship • Short-term • Little openness • Negotiated, sporadic PO’s • High prices • Infrequent, large lots • Delivery to receiving dock © 1995 Corel Corp.

23. POM - J. Galván Few Suppliers Strategy • 1 or few sources per item • Partnership (JIT) • Long-term, stable • On-site audits & visits • Exclusive contracts • Low prices (large orders) • Frequent, small lots • Delivery to point of use © 1995 Corel Corp.

24. POM - J. Galván Vertical Integration Strategy • Ability to produce goods previously purchased • Setup operations • Buy supplier • Make-buy issue • Major financial commitment • Hard to do all things well Raw Material (Suppliers) Backward Integration Current Transformation Forward Integration Finished Goods (Customers)

25. POM - J. Galván Forms of Vertical Integration Iron Ore Silicon Farming Raw Material (Suppliers) Steel Flour Milling Backward Integration Integrated Circuits Current Transformation Automobiles Distribution System Forward Integration Circuit Boards Computers Watches Calculators Finished Goods (Customers) Dealers Baked Goods

26. Centralized Buying • Pros: • Increased clout (savings of 10% or more) • Buyers develop specialized expertise • Consistent with globalization (global sourcing) • Cons: • Loss of local control • profit center responsibility • Unique items are not possible • Longer lead time • More difficult communication

27. Work Gloves at GM • Before Centralization • GM was spending $10 million per year on work gloves. Almost half was for one type, which was purchased from 95 different suppliers. One of the suppliers charged a different price in each of 5 divisions. The price ranged from $5.00 to $5.88 per dozen. • After Centralization • GM is down to only 6 suppliers and it negotiated a 12% price reduction. The annual savings is more than $1 million -- just for work gloves !

28. Distribution 1. Outbound flow from plant to customer 2. Forward placement of finished goods inventory • Pros: fast delivery, lower transportation costs • Cons: customized products not possible, loss of pooling effect 3. Transportation mode • Five mode: highway, rail, water, pipeline, air • Carriers: private, contract, common

29. Inventory Measures • Average Aggregate Inventory Value = total value of all item held in inventory • Weeks of Supply = dividing average aggregate inventory value (at all levels) by weekly sales at cost (I.e. cost of goods sold) of finished goods. • Inventory Turnover (or turns) = dividing annual sales at cost (cost of goods sold) by average aggregate inventory value.

30. Example: Inventory Measures • A recent accounting statement showed average aggregate inventories (RM + WIP + FG) to be $6,821,000. This year’s cost of goods sold is $19.2 million. The company operates 52 weeks per year. How many weeks of supply are being held? What is the inventory turnover? Solution: Weeks of supply Inventory turnover

31. $2 million ($10 million)/(52 weeks) Weeks of supply = $10 million $2 million Inventory turns = Inventory Measures Average inventory = $2 million Cost of goods sold = $10 million 52 business weeks per year = 10.4 weeks = 5 turns/year

32. Linking Supply-Chain Performance Measures to Financial Measures Operations Measure Financial Measure Aggregate inventory value  Current assets  Weeks of supply  Working capital  Inventory turns  Working capital  Production and material costs  Contribution margin  Percentage defects  Contribution margin  Percentage on-time delivery  Revenue  New product development time  Revenue  Supplier lead times  Working capital  Supply-Chain Performance

33. Environments Best Suited for Efficient and Responsive Supply Chains Factor Efficient Supply Chains Responsive Supply Chains Demand Predictable; Unpredictable; low forecast errors high forecast errors Competitive Low cost; Development speed; priorities consistent quality; fast delivery times; on-time delivery customization; volume flexibility; high-performance design quality New-product Infrequent Frequent introduction Contribution Low High margins Product variety Low High Supply-Chain Environments

34. Design Features for Efficient and Responsive Supply Chains Factor Efficient Supply Chains Responsive Supply Chains Flow strategy Line flows; emphasize high Flexible or intermediate volume, standardized flows; emphasize product products, or services or service variety Capacity Low High cushion Inventory Low; enable high As needed to enable fast investment inventory turns delivery time Lead time Shorten, but do not Shorten aggressively increase costs Supplier Emphasize low prices; Emphasize fast delivery selection consistent quality; on- time; customization; time delivery volume flexibility; high- performance design quality Supply-Chain Design

35. Customer Customer Firm C Firm A Materials Requirements Firm B Firm A Firm C Time Supply-Chain Dynamics (a) (b)

36. Supply-Chain Dynamics External Supply-Chain Causes Internal Supply-Chain Causes • Volume changes • Product/service mix changes • Late deliveries • Underfilled shipments • Internally generated shortages • Engineering changes • New product/service introductions • Product/service promotions • Information errors

37. POM - J. Galván Global Supply-Chain Issues Supply chains in a global environment must be: flexible enough to react to sudden changes in parts availability, distribution, or shipping channels, import duties, and currency rates able to use the latest computer and transmission technologies to manage the shipment of parts in and finished products out staffed with local specialists to handle duties, trade, freight, customs and political issues

38. POM - J. Galván Supply-Chain Strategies Negotiate with many suppliers; play one supplier against another Develop long-term “partnering” arrangements with a few suppliers who will work with you to satisfy the end customer Vertically integrate; buy the actual supplier Keiretsu - have your suppliers become part of a company coalition Create a virtual company that uses suppliers on an as-needed basis.

39. POM - J. Galván Japanese word for ‘affiliated chain’ System of mutual alliances and cross-ownership Company stock is held by allied firms Lowers need for short-term profits Links manufacturers, suppliers, distributors, & lenders ‘Partnerships’ extend across entire supply chain Keiretsu Network Strategy

40. POM - J. Galván Virtual Company Strategy • Network of independent companies • Linked by technology • PC’s, faxes, Internet etc. • Each contributes core competencies • Typically provide services • Payroll, editing, designing • May be long or short-term • Usually, only until opportunity is met © 1995 Corel Corp.

41. POM - J. Galván Vendor evaluation Identifying & selecting potential vendors Vendor development Integrating buyer & supplier Example: Electronic data exchange Negotiations Results in contract Specifies period of agreement, price, delivery terms etc. Vendor Selection Steps

42. POM - J. Galván Company Financial stability Management Location Product Quality Price Service Delivery on time Condition on arrival Technical support Training Supplier Selection Criteria

43. POM - J. Galván Negotiation Strategies Three types: cost-based price model - supplier opens its books to purchaser; price based upon fixed clause plus escalation clause for materials and labor market-based price model - published price or index competitive bidding - potential suppliers bid for contract

44. POM - J. Galván Materials Management Integrates all materials functions Purchasing Inventory management Production control Inbound traffic Warehousing and stores Incoming quality control Objective: Efficient, low cost operations

45. POM - J. Galván Goods Movement Options Trucking Railways Airfreight Waterways Pipelines