Operations Management Supply-Chain Management Chapter 11

1. Operations ManagementSupply-Chain ManagementChapter 11

2. Outline • Strategic Importance of the Supply-Chain. • Supply-Chain Strategies. • Purchasing & Acquisition. • Logistics & Materials Management.

3. Supply-Chain Management • Management of integrated activities that • procure materials, • transform them into final products, and • deliver them to customers. • Involves everyone in the supply-chain. • Example: Your supplier’s supplier.

4. The Supply-Chain VISA ® Credit Flow Material Flow Supplier Consumer Supplier Manufacturing Retailer Supplier Wholesaler Retailer Order Cash Schedules Flow Flow

5. Integration • Integrates operations, logistics, marketing, accounting and finance. • Manage: • Transportation. • Suppliers. • Warehousing and distribution. • Inventory levels. • Information sharing. • $ and credit transfers. • Order fulfillment.

6. Supply-Chain Trends • Global sourcing and markets. • Need local expertise to handle duties, trade, freight, customs and political issues. • Flexibility to react to sudden changes in parts availability, distribution, or shipping channels, import duties, and currency rates. • Information technology to manage storage and transportation networks.

7. Supply-Chain Strategies • How best to work with upstream suppliers and downstream distributors and customers. • To manage procurement, transportation, inventory, warehousing, distribution, etc. • Outsourcing: • Logistics activities (transportation, delivery, inventory, etc.). • Information systems. • Accounting and payroll. • Vertical integration.

8. Vertical Integration • Produce a good or service previously purchased. • Forward (towards customers) or backwards (towards supplier.). • Develop the capability independently or buy a firm. • Advantages: • May be less expensive than buying. • Provides more control. • Disadvantages: • Can be expensive. • Hard to do all things well.

9. Forms of Vertical Integration Raw Materials Silicon Iron Ore Backward Integration Steel Integrated Circuits Current Transformation Automobiles Forward Integration Distribution System Circuit Boards Computers Watches Calculators Dealers Finished Goods

10. Purchasing & Acquisition • Acquisition of goods & services. • Activities: • 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.

11. All industry Automobile Food Lumber Paper Petroleum Transportation 52% 61% 60% 61% 55% 74% 63% Purchasing Costs as a Percent of Sales Industry Percent of Sales

12. Lower cost to produce. Unsuitable suppliers. Poor quality. Price too high. Item not available. Utilize surplus labor. Protect proprietary design. Increase/maintain size of company. Lower cost to buy. Preserve supplier commitment. Obtain technical or management ability. Inadequate capacity. Item is protected by patent or trade secret. Frees management to deal with its primary business. Make/Buy Considerations Reasons for Making Reasons for Buying

13. Supplier Strategies • Negotiate with many suppliers; play one supplier against another. • Negotiated, sporadic small purchase orders. • Adversarial relationship with little openness. • Work with few suppliers and develop long-term “partnering” arrangements. • Exclusive long-term contracts with large orders (and lower prices). • Long-term, stable relationship.

14. Vendor Selection Steps • 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.

15. Company criteria Financial stability. Management. Location. Product criteria Quality. Price. Service criteria Delivery on time. Condition on arrival. Technical support. Training. Vendor Selection Criteria

16. Vendor Selection Rating Form

17. Negotiation Strategies • Cost-based price model. • Supplier opens its books to purchaser. • Price based on fixed cost plus escalation clause for materials and labor. • Market-based price model. • Price based on published price or index. • Competitive bidding. • Potential suppliers bid for contract.

18. Logistics & Materials Management • All transportation and storage activities for origin or to consumption. • Integrates: • Purchasing. • Inventory management. • Production control. • Inbound and outbound transportation. • Warehousing and stores. • Incoming quality control.

19. Operations ManagementE-Commerce and Operations ManagementSupplement 11

20. Outline • Electronic Commerce. • E-commerce Definitions. • B2B • B2C • C2C • C2B • E-Procurement

21. E-Commerce The use of computer networks, primarily the internet, to buy and sell products, services, and information.

22. E-Business “… all about cycle time, speed, globalization, enhanced productivity, reaching new customers and sharing knowledge across institutions for competitive advantage.” Louis Gerstner, Chairman, IBM

23. E-Commerce Definitions Business-to business (B2B) - Both sides of the transaction are businesses, non-profit organizations, or governments. Business-to-consumer (B2C) - Customers are individual consumers. Consumer-to-consumer (C2C) - Consumers sell directly to each other. Consumer-to-business (C2B) - Individuals sell services or goods to businesses.

24. E-Procurement • On-line purchasing – link buyers and sellers electronically. • Catalogs. • Auctions. • Internet trading exchanges: • Covisint: By auto industry (buyer). • Spot purchasing. • Example: Spare freight capacity.