Operations
Management
Supply-Chain Management
Chapter 11
11-1
Outline
Strategic Importance of the Supply-Chain.
Supply-Chain Strategies.
Purchasing & Acquisition.
Logistics & Materials Management.
11-2
Supply-Chain Management
 Management of integrated activities that

procure materials,

transform them into final products, and

deliver them to customers.
 Focus on integration and system-wide view.
 Involves everyone in the supply-chain.

Example: Your supplier’s supplier.
11-3
The Supply-Chain
VISA
®
Credit Flow
Material Flow
Supplier
Supplier
Manufacturing
Supplier
Consumer
Retailer
Wholesaler
Schedules
Order
Flow
11-4
Retailer
Cash
Flow
Integration
 Integrates operations, logistics, marketing,
accounting and finance.
 Manage:
Transportation.
 Suppliers.
 Warehousing and distribution.
 Inventory levels.
 Information sharing.
 $ and credit transfers.
 Order fulfillment.

11-5
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.
11-6
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.
 Purchasing & Acquisition.
11-7
Outsourcing
 Having outside vendors provide services traditionally
done internally.

Payroll, logistics, legal, information systems, etc.
 Allows organizations to focus on what they do best.


May not have expertise in-house.
Outsourcing may reduce costs.

Economies of scale.
 Key question: What activities should be outsourced?

Consider: costs, loss of control, information sharing, loss of
expertise, etc.
11-8
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.

11-9
Forms of Vertical Integration
Raw Materials
Iron Ore
Silicon
Backward
Integration
Steel
Automobiles
Integrated
Circuits
Distribution
System
Circuit Boards
Dealers
Computers
Watches
Calculators
11-10
Current
Transformation
Forward
Integration
Finished Goods
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.
11-11
Purchasing Costs as a Percent of
Sales
Industry
Percent of Sales
 All industry
 Automobile
 Food
 Lumber
 Paper
 Petroleum
 Transportation
 52%
 61%
 60%
 61%
 55%
 74%
 63%
11-12
Make/Buy Considerations
Reasons for Making
 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.
Reasons for Buying
 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.
11-13
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.
11-14
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.
11-15
Vendor Selection Criteria
 Company criteria
 Service criteria

Financial stability.

Delivery on time.

Management.

Condition on arrival.

Location.

Technical support.

Training.
 Product criteria

Quality.

Price.
11-16
Vendor Selection Rating Form
11-17
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.
11-18
Logistics
 All transportation and storage activities from
origin or to consumption.
 Integrates:






Purchasing.
Inventory management.
Production control.
Inbound and outbound transportation.
Warehousing and stores.
Incoming quality control.
11-19
Logistics
 Very expensive: 10% of GDP in USA.
 Transportation:

5 modes: Trucking, Railroads, Waterways, Airfreight,
Pipeline.

Consider cost and service tradeoff.
 Inventory:

Very large and expensive for most firms.

Implications of global production and markets.

Recent security issues.
11-20
Operations
Management
E-Commerce and Operations
Management
Supplement 11
11-21
Outline
Electronic Commerce.
E-commerce Definitions.
B2B
 B2C
 C2C
 C2B

E-Procurement
11-22
E-Commerce
The use of computer networks, primarily the
internet, to buy and sell products, services,
and information.
Relies on secure, fast and reliable computer
and telecommunications networks.
11-23
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.
11-24
E-Procurement
 On-line purchasing – link buyers and sellers
electronically.
 Catalogs.
 Auctions.

www.freemarkets.com
 Internet trading exchanges:

Covisint: By auto industry (buyer).
 Spot purchasing.

Example: Spare freight capacity.
11-25
E-Logistics
 Inventory tracking.

Global communication.

Automatic identification.

Bar-codes and RFID.
 Real-time vehicle routing.

Avoid traffic congestion.

Provide accurate pickup-delivery times.
 Better use of vehicle capacity.

Spot markets for empty space in vehicles.
11-26