SUPPLY CHAIN MANAGEMENT SECTION 2 Supplier Relationships 1 - UNDERSTANDING AND DESIGNING THE SUPPLY CHAIN ALAN L. WHITEB

1. SUPPLY CHAIN MANAGEMENTSECTION 2Supplier Relationships1 - UNDERSTANDING AND DESIGNING THE SUPPLY CHAINALAN L. WHITEBREAD

2. FORCES SHAPING SCM TODAY • Competitive pressures • Rising customer expectations • Stakeholder [financial performance] pressure • Globalization • Capacity / inventory and its location[s] • Mergers and acquisitions • Rapid technology change • Need for ever-increasing speed to market

3. SCM SETTING TODAY • Rapid change in product life cycle stages / international product life cycles • Forecasting difficulties: individually understanding the elements of total demand • Critical lead times / commitments • Increasing storage costs • Highly variable transportation costs

4. FROM JIT TO SCM COLLABORATIVE – synchronize all aspects Collaborative Supply Chains Supply ChainOptimization Increasing benefits, capabilities, and flexibility OPTIMIZED – improve collaboration and control with suppliers and customers Supplier StrategicAlliances Supplier ManagedReplenishment SupplierPartnerships INTEGRATED – integrate functions of the existing supply chain Quick Response FUNDAMENTAL – the beginning Just In Time 1980 2008 1990 2000

5. JUST-IN-TIME [JIT] CONCEPT • Producing exactly what is needed, transferring it to where it is needed, in the required sequence, exactly when it is required. • Characteristics: • Focuses on having little or no inventory throughout the supply chain • Most items are make-to-order with short lead times and specific delivery times [windows] • Reduces variability from all sources • The supply chain is synchronized • There are numerous tightly scheduled events • Risks • Failure to deliver on time has serious consequences. • Large changes in demand or unexpected events can become difficult to handle. • A basic premise is that excess capacity or inventory are forms of waste that must be minimized.

6. SUPPLY CHAIN MANAGEMENT [SCM] A network of facilities and distribution options that perform the functions of: • Procurement [purchasing, expediting, …] • Transformation of materials through intermediate stages [WIP and assemblies] into finished components and products • Storage and management of inventories [asset management] • Distribution of finished products to customers at all levels [DC’s, logistics] • Support systems [administration, IT]

7. SCM: GENERAL FUNCTIONS MANAGING FLOWS – Information, Materials, and Money SUPPLIER’S SUPPLIERS SUPPLIERS FOCAL FIRM CUSTOMERS CUSTOMER’S CUSTOMERS Information, materials, and money flow freely back-and-forth between the supply chain entities. This ever-present need for information, materials, and money is what drives the need for cooperation in supply chains. The best supply chains typically have the best flows.

8. SCM: GENERAL FUNCTIONS • Managing relationships • Suppliers • Employees • Customers: Resellers • Customers: End-users • Managing functions and processes • Benchmarking and best practices • Translates user needs into production systems that make quality products. • A management philosophy for the continuous improvement of processes and products.

9. SCM: GENERAL FUNCTIONS Managing The Value Chain Organization of discrete yet interrelated activities that deliver more value at each and every step of the supply chain and enable excellent entity performance. Firm InfrastructureFinancing, planning, investor relations Human Resource ManagementRecruiting, training, compensation system SupportActivities Technology DevelopmentProduct design, testing, process design, market research, material research M A ProcurementRaw materials, advertising space, health services R G InboundLogistics Operations OutboundLogistics Marketingand Sales After-SaleService I N Primary Activities Installation, Customer support Data collection, Material storage Manufacturing, Operations Order processing, Warehousing, Distribution centers Sales, Proposal writing, Advertising, Trade shows

10. SCM: SPECIFIC FUNCTIONS Facility Location Customer Service Order Processing Demand forecasting Production Scheduling Facility Management Material Handling Inventory & Control Transportation Purchasing Packaging Standards Warehousing Return Goods Handling Salvage and scrap disposal

11. A TOY’S TRIPS TO MARKET Plastic eyes & transistors China Speakers for voice & wiring China Plastic body Malaysia Motor for legs China Manufacturer Outbound Port Inbound Port Warehouses and Distribution Centers Plastic legs & IC chips Taiwan Microfiber fabric coat Korea Voice recognition USA Thousands of Retail Stores Voice recognition programming Taiwan There are many steps / paths from the beginning of a supply chain to having a satisfied customer. Every red arrow indicates one or more transportation vehicles. Packaging China SATISFIED CUSTOMER

12. THE SUPPLY CHAIN AT WORK:AUTOMOTIVE INDUSTRY Raw materials, semi-finished, and component products Finished products and components To build more than hundreds of thousands of cars per year, an auto manufacturer is likely to utilize approximately 200 1ST TIER suppliers with hundreds of factories. The number of suppliers grows exponentially as add the 2ND and 3RD TIER suppliers. UPSTREAM DOWNSTREAM CONSUMERS AUTO MANU-FACTURER OEM VEHICLES DEALERS UPSTREAM SUPPLIER 2ND TIER FASTENERS DIRECT SUPPLIER 1ST TIER Manage all other tiers. RADIATORS STEEL COMPANY 3RD TIER STEEL RENTAL AGENCIES BUSINESS CONSUMERS FLEETS SPECIAL VEHICLES

13. DESIGNING THE SUPPLY CHAIN • Seamless supply chains have • excellent coordination among members; • compatible information systems; • outstanding communication; • little waste and few environmental issues; • minimal inventories; • exceeded customer and supplier expectations; and, • meet or exceed profit expectations.

14. TYPES OF SUPPLY CHAINS:7 DECISIONS: The two extremes

15. TYPES OF SUPPLY CHAINS: 7 DECISIONS: The two extremes

16. SCOR MODELFor complete details go to www.supply-chain.org • The SCOR [Supply-Chain Operations Reference-model] by the Supply-Chain Council provides a supply chain process framework of plan – source – make – deliver – return These elements are the key to SCOR success.

17. SCOR SPANS • All customer interactions • From order entry through final payment • All product and service transactions • From your supplier’s supplier to your customer’s customer • All market interactions • From understanding all of the elements

18. SCOR: THE CONFIGURATION OF A SUPPLY CHAIN • PLAN levels of aggregation and information • SOURCE locations and products • MAKE production sites and methods • DELIVER channels, inventory deployment and products • RETURN locations and methods

19. SCOR: MEASURE PERFORMANCE – INTERNAL & EXTERNAL • RELIABILITY – achievement of customer demand fulfillment complete and on-time • RESPONSIVENESS – the time it takes to react to and fulfill customer demand • AGILITY - the ability of supply chain to increase/decrease demand • COST – objective assessment of all supply chain cost elements • ASSETS – the assessment of all resources

20. SCOR: REALIGN SUPPLY CHAIN PROCESSES & BEST PRACTICES • Classic process re-engineering from "As-Is" to "To-Be" • Lean Manufacturing analysis and process change • Six-Sigma analysis of defective processes • ISO-9000 style process capture and control • Balanced SCORcards and benchmarking • Many more industrial engineering based best-practice techniques

21. SUPPLY CHAIN MANAGEMENT: Functional components MARKETS Consumers: Customers Prospects Suspects SUPPLIER’S SUPPLIERS SUPPLIERS FOCAL FIRM CUSTOMERS CUSTOMER’S CUSTOMERS Long range planning Demand planning Market assessment Logistics Master production schedule Customer order management Materials planning Supply chain planning Product & component design Procurement Product & component design Factory planning Years ← Quarters ← Quarters ← Months ← Weeks ← Weeks ← Days ← Minutes

22. NETWORK DESIGN • You need to thoroughly understand all the complex systems, how they are related, and integrated to make an intelligent network design decision. • That requires an understanding of these four phases of SCM. • Supply chain strategy • Facility configuration • Desirable sites • Location decisions

23. NETWORK DESIGN • Supply chain strategy is based on • competitive strategy, • domestic and international competition, and • Facility configuration is a function of • production technologies, methods, and scope, • aggregating and minimizing logistics costs, • regional demand, and • international affects.

24. NETWORK DESIGN • Desirable sites have good • production methods, • an adequate and available labor force. • Location decisions are determined by • factor costs • Labor, materials, site operations

25. SUPPLY CHAIN CYCLES CUSTOMER ORDER CYCLE CUSTOMER REPLENISHMENT CYCLE DEALER / RETAILER DISTRIBUTOR / WHOLESALER B2B CUSTOMER ORDER CYCLE PROCUREMENT CYCLE: SUPPLIERS MANUFACTURER

26. MANUFACTURING PROCESSES:BATCH • The equipment can make a variety of products in a class based on its capability. • An optimal batch size is determined. • Products are run in a sequence to optimize the process [as much as possible]. • Capacity can generally be added in a reasonable time frame.

27. MANUFACTURING PROCESSES:FLOW • The equipment runs at a [fast] steady rate. • The lead time is short with continuous production.

28. MANUFACTURING PROCESSES:LEAN PRODUCTION • The Production System Design Laboratory [PSD] at MIT http://lean2.mit.edu/ • “Lean production is aimed at the elimination of waste in every area of production including customer relations, product design, supplier networks and factory management. Its goal is to incorporate less human effort, less inventory, less time to develop products, and less space to become highly responsive to customer demand while producing top quality products in the most efficient and economical manner possible.” • Toyota was a pioneer and realized enormous cost savings.

29. MANUFACTURING PROCESSES:LEAN PRODUCTION: THE 5 S’s

30. MANUFACTURING PROCESSES:LEAN PRODUCTION PRINCIPLES • Managerial Responsibility • Managers must be teachers, team facilitators, and motivators. • Process Development • Line workers are trained to • Improve processes, and • Solve problems • Network Orientation • Lean should be practiced by

31. MANUFACTURING PROCESSES:LEAN PRODUCTION PRINCIPLES • Synchronization • Coordination of material movement is accomplished • developed by Toyota Corporation to signal when parts needed to be withdrawn from inventory or a feeding operation [like a supply bin] and leave a visible record of its withdrawal. • Continuous Improvement • – continuous improvement comes through productivity gains and innovation

32. SUPPLY CHAIN RISKS • Disruptions of any kind • Disasters, labor disputes, supplier problems, … • Delays in the systems • Inflexibility of supply sources, poor yield, capacity or bottlenecks, … • Systems issues • Lack of systems integration, system breakdowns, … • Forecasting problems • Excessive inaccuracy due to seasonality, SKU variety, short life cycles, small customer base, …

33. SUPPLY CHAIN MANAGEMENT:PROBLEMS & SOLUTIONS

34. SUPPLY CHAIN MANAGEMENTSECTION 2Supplier Management and Supplier Relationships2 – OUTSOURCING AND SUPPLIER SELECTIONALAN L. WHITEBREAD

35. OUTSOURCING • Outsourcing is the process of moving an aspect of production, service, or other business function from within an organization to an outside supplier. • By outsourcing non-strategic processes an organization can focus its attention on its primary business[es] and maximize customer satisfaction.

36. TYPES OF OUTSOURCING • a third-party makes an assembly, component, or finished product for another company. • a supplier that provides some or all logistics activities. • Offshoring • outsourcing a function to a different country. • Business Process Outsourcing [BPO] • outsourcing support functions such as: housekeeping, payroll, uniforms, … This is frequently included in with 3PLs.

37. BENEFITS OF OUTSOURCING • Frequently cited benefits include: • Reduce operating expenses • Focus on the core business • Create a variable cost structure • Improve skills due to business focus • Concentrate on increasing revenue • Conserve or more effectively utilize capital • Increase innovation • Improve quality

38. OUTSOURCING RISKS • Outsourcing the wrong [core or strategic] functions may interfere with the operation of an entity and may cause a long-term loss of competitive position. • Outsourcing risks • Strategic risk is long-term risk based on a • Tactical risk is short-term risk based on the use of a supplier for capacity. • BE CAREFUL! –

39. OUTSOURCING RISKS

40. OUTSOURCING POSSIBILITIES

41. MITIGATING OUTSOURCING RISKS

42. OUTSOURCING BY TYPE:CONTRACT MANUFACTURING • Contract manufacturing uses one or more selected suppliers to provide a product and/or service for the customer’s specific needs. • It involves • a contract, • extensive coordination, • specifications [product, packaging, and quality], and • possibly new product development activities.

43. OUTSOURCING BY TYPE:3PL EXAMPLES

44. OUTSOURCING BY TYPE: 3PL • PRIMARY REASONS FOR SELECTING A 3PL • REDUCE COST • Reduce operating costs • Reduce capital investment • INCREASE COMPETENCY FOCUS • Focus on core business • Gain access to technology not in firm • INCREASE REVENUE • Increase flexibility and responsiveness • Increase speed to market

45. OUTSOURCING BY TYPE: 3PL • HOW SHOULD I SELECT A 3PL? Some general items to evaluate • Price competitiveness • Evaluate on a total system cost basis – not a piece price basis • Financial stability • Experience in the same industry or with similar companies or products • ?

46. OUTSOURCING BY TYPE: 3PL • HOW SHOULD I SELECT A 3PL? • Quality • Service quality and performance [Six Sigma, ISO 9000, Malcom Baldridge [NIST], … • Six Sigma [defects per million] Six SigmaDefects 2 308,537 ? 3 66,807 25-40% 4 6,210 15-25% 5 233 5-15% 6 3.4 <1%

47. OUTSOURCING BY TYPE: 3PL • HOW SHOULD I SELECT A 3PL? • Quality [continued] • Quality of the supplier’s management team • Client Relationship • Availability of top management • Service cancellations, delays, and / or interruptions • General reputation • Human resource policies and availability of qualified talent

48. SCM ISSUES • SUPPLIER SELECTION • Capability and quality of supplier • Logistic compatibility • Systems compatibility • What form should it be? • Contract, partnership, or strategic alliance? • Setting requirements • Continuous improvement • Extensive corporate access • What are the key metrics that will be used to evaluate supplier performance?

49. SCM ISSUES • SUPPLIER CERTIFICATION • involves the process of selecting and qualifying suppliers through a series of tests. • It may require • initial interviews and tours, • initial samples, • a detailed facility review • production, systems, processes, quality, …, • and more.

50. SCM ISSUES • SUPPLIER LOGISTICS • How orders are placed and confirmed • Returns and rework