Supply Chain Management PDF

1. UNDERSTANDING SUPPLY CHAIN The value is strongly correlated with supply chain profitability (also known as supply chain surplus), Supply Chain - is the sequence of organizations— the difference between the re...

1. UNDERSTANDING SUPPLY CHAIN The value is strongly correlated with supply chain profitability (also known as supply chain surplus), Supply Chain - is the sequence of organizations— the difference between the revenue generated their facilities, functions, and activities— that are from the customer and the overall cost across the involved in producing and delivering a product or supply chain. service. For any supply chain, there is only one source of Facilities include warehouses, factories, processing revenue: the CUSTOMER. centers, distribution centers, retail outlets, and offices. All flows information, product or funds generate costs within the supply chain. Functions and activities include forecasting, purchasing, inventory management, information Effective supply chain management involves the management, quality assurance, scheduling, management of supply chain assets and product, production, distribution, delivery, and customer information, and fund flows to maximize total service. supply chain profitability. A supply chain is dynamic and involves the Supply Chain Management constant flow of information, product, and funds - is the strategic coordination of business between different stages. functions within a business organization The primary purpose of any supply chain is to and throughout its supply chain for the satisfy customer needs and, in the process, purpose of integrating supply and demand generate profit for itself. management. Mostly supply chains are actually networks. Every business organization is part of at least one supply chain, and many are part of multiple supply It may be more accurate to use the term supply chains. network or supply web to describe the structure of most supply chains, as shown in Figure 1-2. Often the number and type of organizations in a supply chain are determined by whether the supply chain is manufacturing or service oriented. Figure 1-2 Supply Chain Stages Objective of a Supply Chain To maximize the overall value generated Value is the difference between what the final product is worth to the customer and the costs the supply chain incurs in filling the customer’s request.  The closer the organization is to the final customer, the shorter its demand component and the longer its supply component. Supply chains are the lifeblood of any business organization. Managing the supply chain is the process of planning, implementing, and controlling supply chain operations. GOAL of supply chain management is to match Figure 1-3 illustrates several perspectives of supply supply to demand as effectively and efficiently as chains. Figure 1-4 shows a more detailed version of possible. the farm-to-market supply chain with key suppliers Key issues relate to: at each stage included. 1. Determining the appropriate level of outsourcing. 2. Managing procurement. 3. Managing suppliers. 4. Managing customer relationships. 5. Being able to quickly identify problems and respond to them. FLOW MANAGEMENT Figure 1-4 [ A farm-to-market supply chain] 3 TYPES OF FLOW: Supply chains are sometimes referred to as value 1. Product and service flow chains, a term that reflects the concept that value - involves the movement of goods or is added as goods and services progress through services from suppliers to customers as well the chain. as handling customer service needs and product returns. The supply or value chain has two components for 2. Information flow each organization: - involves sharing forecast and sales data, 1. Supply Component transmitting orders, tracking shipments, - starts at the beginning of the chain and and updating order status. ends with the internal operations of the 3. Financial flow organization. - involves credit terms, payments, and consignment and title ownership 2. Demand Component arrangements. - starts at the point where the organization’s PORTER’S VALUE CHAIN output is delivered to its immediate customer and ends with the final customer in the chain.  Secondary activities are: 1. Procurement - is the acquisition of inputs, or resources, for the firm. 2. Human Resource management - consists of all activities involved in recruiting, hiring, - was designed by Michael Porter in 1985 as a training, developing, compensating and (if systematic way to examine how competitive necessary) dismissing or laying off personnel. advantage develops and to identify where 3. Technological Development - pertains to the value is added in an organization. equipment, hardware, software, procedures - a value chain consists of primary activities and technical knowledge brought to bear in the and support activities, all of which add value firm's transformation of inputs into outputs. to the products or services offered by the business. 4. Infrastructure - serves the company's needs - The primary activities focus on taking the and ties its various parts together, it consists of inputs, converting them into outputs, and functions or departments such as accounting, delivering the output to the customer. legal, finance, planning, public affairs, - The support activities play an auxiliary role government relations, quality assurance and in primary activities. general management. - When a company is efficient in combining DRIVERS OF SUPPLY CHAIN PERFORMANCE these activities to provide a superior product or service, then the customer is willing to pay Determine the supply chain’s performance in terms more for the product than the cost to make of responsiveness and efficiency and deliver the product which results in a GOAL: To structure the drivers to achieve the higher profit margin. desired level of responsiveness at the lowest The primary activities are: possible cost. 1. Inbound Logistics - involve relationships with 1. Facilities are the actual physical locations in suppliers and include all the activities required the supply chain network where product is to receive, store, and disseminate inputs. stored, assembled, or fabricated. The two major types of facilities are production sites 2. Operations - are all the activities required to and storage sites. transform inputs into outputs (products and 2. Inventory encompasses all raw materials, services). work in process, and finished goods within a 3. Outbound Logistics - include all the activities supply chain. required to collect, store, and distribute the 3. Transportation entails moving inventory output. from point to point in the supply chain. 4. Information consists of data and analysis 4. Marketing and Sales - activities inform buyers concerning facilities, inventory, about products and services, induce buyers to transportation, costs, prices, and customers purchase them, and facilitate their purchase. throughout the supply chain. 5. Service - includes all the activities required to 5. Sourcing is the choice of who will perform a keep the product or service working effectively particular supply chain activity such as for the buyer after it is sold and delivered. production, storage, transportation, or the management of information.  6. Pricing determines how much a firm will charge for the goods and services that it makes available in the supply chain. Framework for Structuring Drivers Most of the companies begin with a competitive strategy and then decide what their supply chain strategy ought to be. The supply chain strategy determines how the supply chain should perform with respect to efficiency and responsiveness. The supply chain must then use the three logistical and three cross-functional drivers to reach the performance level the supply chain strategy dictates and maximize the supply chain profits Supply Chain Decision-Making Framework Driver of supply chain Role in the supply chain Role in the competitive strategy performance 1. Facilities - The where of the supply chain Centralization increases - They are the locations to or from which efficiency the 10 inventory is transported. Locating facilities close to customers increases the number of facilities needed and consequently OVERALL TRADE-OFF: OVERALL TRADE-OFF: RESPONSIVENESS VERSUS EFFICIENCY. The fundamental trade-off that managers face when making facilities decisions is between the cost of the number, location, capacity, and type of facilities (efficiency) and the level of responsiveness that these facilities provide the company's customers. Increasing the number of facilities increases facility and inventory costs but decreases transportation costs and reduces response time. Increasing the flexibility or capacity of a facility increases facility costs but decreases inventory costs and response time. 2. Inventory - Increase the amount of demand that can - The form, location, and quantity be satisfied by having the product ready of inventory allow a supply and available when the customer wants chain to range from being very it. low cost to very responsive. - To reduce cost by exploiting economies of scale that may exist during production and distribution. - Inventory impacts the assets held, the costs incurred, and responsiveness provided in the supply chain. - significant impact on the material flow time in a supply chain. OVERALL TRADE-OFF: RESPONSIVENESS VERSUS EFFICIENCY. The fundamental trade-off that managers face when making inventory decisions is between responsiveness and efficiency. Increasing inventory generally makes the supply chain more responsive to the customer. A higher level of inventory also facilitates a reduction in production and transportation costs because of improved economies of scale in both functions. This choice, however, increases inventory holding cost. 3. Transportation - Faster transportation allows a supply - Transportation allows a firm to chain to be more responsive but reduces adjust the location of its its efficiency facilities and inventory to find - The type of transportation a company the right balance between uses also affects the inventory and facility responsiveness and efficiency locations in the supply chain OVERALL TRADE-OFF: RESPONSIVENESS VERSUS EFFICIENCY. The fundamental trade-off for transportation is between the cost of transporting a given product (efficiency) and the speed with which that product is transported (responsiveness). Using fast modes of transport raises responsiveness and transportation cost but lowers the inventory holding cost. 4. Information - Good information can help improve the - The appropriate investment in utilization of supply chain assets and the information technology coordination of supply chain flows to improves visibility of increase responsiveness and reduce transactions and coordination costs. of decisions across the supply chain OVERALL TRADE-OFF: COMPLEXITY VERSUS VALUE. Good information clearly helps a firm improve both its efficiency and responsiveness. There is a danger, however, in the assumption that more information is always better. As more information is shared across a supply chain, the complexity and cost of both the required infrastructure and the follow-up analysis grow exponentially. The marginal value provided by the information shared, however, diminishes as more and more information is available. It is thus important to evaluate the minimum information required to accomplish the desired objectives. 5. Sourcing - Sourcing is the set of business processes - Firms outsource to responsive required to purchase goods and services third parties if it is too expensive - Managers must first decide whether each for them to develop this task will be performed by a responsive or responsiveness on their own efficient source and then whether the - Firms have kept the responsive source will be internal to the company or process in-house to maintain a third party control OVERALL TRADE-OFF: Sourcing decisions should be made to increase the size of the total surplus to be shared across the supply chain. The total surplus is affected by the impact of sourcing on sales, service, production costs, inventory costs, transportation costs, and information costs. Outsourcing to a third party is meaningful if the third party raises the supply chain surplus more than the firm can on its own. In contrast, a firm should keep a supply chain function in-house if the third party cannot increase the supply chain surplus or if the risk associated with outsourcing is significant. 6. Pricing - Pricing is the process by which a firm - Steady prices also ensure that decides how much to charge customers demand stays relatively stable for its goods and services - some manufacturing and - Pricing is one of the most significant transportation firms use pricing factors that affect the level and type of that varies with the response demand that the supply chain will face time desired by the customer OVERALL TRADE-OFF: INCREASE FIRM PROFITS. All pricing decisions should be made with the objective of increasing firm profits. This requires an understanding of the cost structure of performing a supply chain activity and the value this activity brings to the supply chain. Strategies such as everyday low pricing may foster stable demand that allows for efficiency in the supply chain. Other pricing strategies may lower supply chain costs, defend market share, or even steal market share. Differential pricing may be used to attract customers with varying needs, as long as this strategy helps either increase revenues or shrink costs, preferably both. 2. PURCHASING ORGANIZATION IN THE ENTERPRISE IN-HOUSE VS. OUTSOURCING - One of the first steps in sourcing is the recognition of the need for outsourcing. Factors affecting the choice between in-housing and outsourcing: 1. Costs (including start-up investment) 2. Added-value 3. Time (response time) PURCHASING ORGANIZATION 4. Production capacity - A purchasing organization is a department 5. Financial capacity or group within a company that is responsible for purchasing materials, goods, 6. Control over production schedule and services from suppliers. 7. Quality control - Typically, responsible for negotiating contracts, managing relationships with 8. Workforce stability suppliers, and ensuring that the company 9. Technology transfer risk obtains the best value for its purchases. 10. Production volume IMPORTANCE OF A PURCHASING ORGANIZATION A well-functioning purchasing organization is 11. Know-how 12. Patent rights. critical to the success of an enterprise’s supply chain management. Effective purchasing can help a company reduce costs, improve quality, and maintain a reliable supply of goods and services. It is also essential for managing risk and ensuring compliance with regulations and industry standards ROLES AND RESPONSIBILITIES OF THE PURCHASING ORGANIZATION Identifying suppliers and evaluating their capabilities Negotiating contracts and terms with suppliers  Managing supplier relationships and performance Negotiates with selected suppliers Developing procurement strategies and policies Performs the buying of the goods and services Monitoring supplier compliance with contractual -By specific items, By commodity family, By service agreements and regulations categories Analyzing purchasing data and identifying 2. OPERATIONAL SUPPORT AND FOLLOW UP opportunities for cost savings and process improvement Supporting day-to-day operations including expediting ORGANIZATIONAL STRUCTURE Preparation and transfer of material releases Shrewd (wise) negotiations with vendors let purchasing departments economically source Strategic vs. Tactical purchasing quality items that are integral to the manufacturing 3. ADMINISTRATION AND SUPPORT process and essential to providing customers with desirable finished products. Developing policies and procedures Contrarily a purchasing arm's operational Administering and maintaining the purchasing inefficiencies can lead to high material costs, information system and database product inconsistencies, and customer Determining required staffing levels dissatisfaction Developing departmental plans ORGANIZATIONAL STRUCTURE Organizing training and development TIER 1 - Upper-level function reporting to an executive Vice President Developing Measurement systems TIER 2 - Mid Level function reporting to an 4. PURCHASING RESEARCH executive one level below an Executive Vice Developing long-term material forecast President Conducting value analysis programs TIER 3 - Lower-level function reporting at least two level below an Executive Vice President Assessing supplier capabilities FACTORS AFFECTING PURCHASING’S POSITION IN Analyzing supplier cost structures THE ORGANIZATIONAL HIERARCHY PURCHASING PARAMETERS The nature of the firm, product and services 1) Buying the material at the RIGHT PRICE The material/sales ratio 2) Buying the material of RIGHT QUALITY 3) In the RIGHT QUANTITY The importance of the supply management 4) At the RIGHT TIME function to senior management 5) From the RIGHT SOURCE The talent of purchasing staff and the extent to 6) At the RIGHT PLACE which the market their value-adding contributions 7) With the RIGHT MODE OF TRANSPORTATION 4 MAJOR AREAS OF PURCHASING OBJECTIVES OF PURCHASING 1. SOURCING AND NEGOTIATING To obtain the specific materials and supplies of Identifies potential suppliers quality  To procure the material and supplies in the time Consolidate purchase volumes and at the proper place Reduced duplication of purchasing effort To procure them at lowest possible ultimate cost Ability to coordinate plans and strategies To Maintain Vendor Relationship Ability to coordinate and manage To implement activities such as make-or-buy analysis, cost analysis, and value analysis to reduce company-wide purchasing systems cost Developing expertise To keep top management informed about the Managing company-wide range latest development To keep the expenses incurred as low as possible DISADVANTAGES To ensure continuity in supply of Raw Material ▪ Specific requirements may not be satisfied PURCHASING DEPARTMENT ACTIVITIES ▪ Centralized standard procedure may result in delays - Buying - Expediting ▪ Low skill of staff in buying varied type of items - Inventory Control ▪ May overlooked local purchase - Transportation - Managing Countertrade Arrangements ▪ Adversely affects employee morale - Insourcing- Outsourcing Decentralized Purchasing - Value Analysis - Purchasing Research When manufacturing plants are widely dispersed - Material Forecasting geographically and manufacture different products - Supply Management having materials decentralized purchasing is better FORM OF PURCHASING In such a case each manufacturing unit will have their own purchasing department - Centralized Purchasing - Decentralized Purchasing The individual purchasing department of each - Hybrid Combination plant will have functional relationship with the corporate director Centralized Purchasing The director will enforce general purchasing With centralized purchasing, all records are kept policies for all purchase department of their at one place and under one supervision and control organization Thus, it is more effective for taking action to meet ADVANTAGES the changing market needs. Speed and responsiveness Centralization aids in the standardization of specifications and tends towards lower inventory Understanding unique investments. operational requirements usually, any organization having a single location Product development support must adopt centralized purchasing as a rule Ownership ADVANTAGES DISADVANTAGES Price Analysis - A review, analysis or examination of the price proposed by a supplier and an ▪ Organization losses the benefit of a bulk assessment or evaluation as to whether or not it is purchase. fair and reasonable. ▪ Specialized knowledge may be lacking in Cost Analysis - Involves an examination of the individual cost elements that collectively comprise purchasing staff the seller's total price. ▪ There is a chance of over and under purchasing METHODS USED IN PRICE ANALYSIS of materials Price Competition –when two or more ▪ Fewer chances of effective control of materials. acceptable offers are received and the ▪ Lack of proper cooperation and co ordination lowest price is selected, the price of the lowest offered can be concluded to be fair and reasonable. among various departments HYBRID COMBINATION Comparable to price sold to government –the government often enters into contracts with - Many firms operating several plants whose various companies to establish the prices of items geographical locations may not be too widely that will be sold to the Government General scattered and whose products and material Services Administration. These are presumed to be requirements may cover a large number of similar fair and reasonable. parts and materials used in common and in large quantities, may adopt centralized-decentralized Catalog or Established Price List –Where only purchasing approach. one offer is received and the seller has a published or established price list or catalog, available to the ADVANTAGES general public, which sets forth the price of a Increased productivity commercial item, this fact can be used to find the price fair and reasonable Increased efficiency Market price –Where an item has an established Development of cross functional skills market price, verification of an equal or lower price also establishes the price to be fair and reasonable. Flexibility Historical prices –If the buyer has a history of Increased employee loyalty the purchase of the item over several years, this DISADVANTAGES information, taking into account inflation factors, can be used to determine a price fair and ▪ Conflict in reporting reasonable. ▪ Scheduling conflicts Price based on prior competition –it may be that ▪ Too much employee workload only one seller will make an offer. If this is the case and the item was previously purchased based on a ▪ Too much administration competition, this may be acceptable. overhead Independent estimate –If an independent PURCHASING COST estimate of the item has been prepared prior to contacting suppliers, and no other method or information is available, a price can be compared your approved suppliers is still the right fit two, to the estimate and if it compares favorably, this three, four and five years down the line can be a basis to find a price fair and reasonable. ADVANTAGES OF A SUPPLIER APPRAISAL PROCESS Comparison to a substantially similar item - Suppliers that are unlikely to perform as you Often an item is very similar to a commercial one wish, can be identified and avoided. but has added features that are required. If the seller can provide the price of the base item, by a Weaknesses in approved-supplier performance catalog, and then state the costs of the additional can be detected and addressed. features, the buyer can then find the price The process supports and secures your reasonable based on these two factors. organization’s customer service performance. Sales of the same item to other purchasers - if Buyer and supplier can work together to the seller has no catalog but has sold the same understand and leverage factors that influence the item to others in the recent past, the price can be ongoing relationship. determined to be fair and reasonable by verifying with those other purchasers what price they paid. SUPPLIER ASSESSMENT CRITERIA CHECKLIST THE BASICS OF COST ANALYSIS 1. QUALITY ▪ Ask for customer reviews and Personnel rate endorsements from independent sources Total hours of work by the personnel ▪ Check the company’s cultural and corporate values Evaluation of costs as necessary and reasonable ▪ Ask questions regarding supplier’s TQM Resource cost (includes raw components and process machine time) 2. Price/Cost ▪ Conduct full cost analysis to ensure the Projected indirect costs (e. g. warehousing, supplier has a well-established business transportation, taxes, fees, etc.) ▪ Price cost should fit well on quality, SUPPLIER’S APPRAISAL - An assessment of the service, and industry competition. supplier’s suitability and capability to supply 3. Performance Delivery specific goods or services, before awarding a ▪ Establish consistent quality and service contract levels with the supplier. ▪ Take full account of supplier efficiency in IMPORTANCE OF SUPPLIER’S APPRAISAL service ▪ Consider factors like reliable delivery time. Depending on your industry there may be 4. Service limited supplier base servicing your market, and ▪ Take full account of supplier efficiency in not all suppliers will be equipped to meet the service. specific needs of your organization. For this reason ▪ Select based on experience of supplier in alone, supplier appraisal should be an integral offering certain service/product. process in your company, ensuring that you 5. Financial Strength choose the right suppliers in the first place. ▪ Besides examining balance and P&L Once you build a pool of approved suppliers sheets, supplier’s credit rating should also that satisfy your criteria, the supplier appraisal be checked. process should continue on a cyclic basis, allowing you to review performance and assess if each of  ▪ Ask customers and analysts about the SUPPLIER SELECTION STEPS financial suitability of a prospective supplier. 6. Lead Time Take into consideration reliability issues like the time elapsed from order being placed to delivery. 7. Technical Ability ▪ To assess how technically capable and compatible a supplier is. 8. Flexibility ▪ Gather information about a supplier’s capacity to meet your requirements now and in the future. 9. Development ▪ For understanding business drivers a prospective partner should grasp what is important for your business, including the competitive landscape around you and latest innovations needed to help your COMMON SUPPLIER APPRAISAL MISTAKES organization scale. Inconsistent use of the agreed measurements, 10. Management Approach ▪ Put emphasis on common values that are Failing to provide regular feedback to suppliers beneficial to both parties and enable long- regarding performance term sustainable partnership. Neglecting to take notice of suppliers input to 11. Geographical Location performance discussions. ▪ Consider geographical distance and its impact on quality and cost. Failing to involve suppliers in determining ▪ Ensure the supplier follows ethical and measurement criteria legal standards including best practices, Use of overcomplicated KPIs and metrics compliance, and legislative requirements. 12. Environmental Compliance Suppliers can make mistakes in the appraisal ▪ Check for supplier’s ability to comply with process too, so if you are ever involved in supplier sustainability requirements. appraisal on the customer side, be alert to any ▪ Check supplier’s environmental overt signs of defensiveness on the part of a performance. supplier. It may be that the supplier is viewing appraisal efforts as a rationalization measure. In this case, the supplier will need to be reassured that your intention not to eliminate vendors, but to cultivate a two-way process of continuous improvement. ENUMERATION……. The supply or value chain has two components for 11. Sourcing each organization: 12. Pricing 3. Supply Component Factors affecting the choice between in- 4. Demand Component housing and outsourcing: Key issues relate to: 1. Costs (including start-up investment) 2. Added-value 1. Determining the appropriate level of 3. Time (response time) outsourcing. 4. Production capacity 2. Managing procurement. 5. Financial capacity 6. Control over production schedule 3. Managing suppliers. 7. Quality control 4. Managing customer relationships. 8. Workforce stability 9. Technology transfer risk 5. Being able to quickly identify problems and 10. Production volume respond to them. 11. Know-how 12. Patent rights. (FLOW MANAGEMENT) FACTORS AFFECTING PURCHASING’S POSITION IN 3 TYPES OF FLOW: THE ORGANIZATIONAL HIERARCHY 4. Product and service flow The nature of the firm, product and services 5. Information flow The material/sales ratio 6. Financial flow The importance of the supply management 5 Primary activities function to senior management 1. Inbound Logistics The talent of purchasing staff and the extent to 2. Operations which the market their value-adding contributions 3. Outbound Logistics 4 MAJOR AREAS OF PURCHASING 4. Marketing and Sales 1. SOURCING AND NEGOTIATING 2. OPERATIONAL SUPPORT AND FOLLOW UP 5. Service 3. ADMINISTRATION AND SUPPORT 4 Secondary Activities 4. PURCHASING RESEARCH 1. Procurement PURCHASING PARAMETERS 2. Human Resource management 8) Buying the material at the RIGHT PRICE 9) Buying the material of RIGHT QUALITY 3. Technological Development 10) In the RIGHT QUANTITY 4. Infrastructure 11) At the RIGHT TIME 12) From the RIGHT SOURCE DRIVERS OF SUPPLY CHAIN PERFORMANCE 13) At the RIGHT PLACE 7. Facilities 14) With the RIGHT MODE OF 8. Inventory TRANSPORTATION 9. Transportation 10. Information  OBJECTIVES OF PURCHASING Resource cost (includes raw components and machine time) To obtain the specific materials and supplies of quality Projected indirect costs (e. g. warehousing, transportation, taxes, fees, etc.) To procure the material and supplies in the time and at the proper place SUPPLIER ASSESSMENT CRITERIA CHECKLIST To procure them at lowest possible ultimate 13. QUALITY cost 14. Price/Cost 15. Performance Delivery To Maintain Vendor Relationship 16. Service To implement activities such as make-or-buy 17. Financial Strength analysis, cost analysis, and value analysis to 18. Lead Time reduce cost 19. Technical Ability 20. Flexibility To keep top management informed about the 21. Development latest development 22. Management Approach To keep the expenses incurred as low as 23. Geographical Location possible 24. Environmental Compliance To ensure continuity in supply of Raw COMMON SUPPLIER APPRAISAL MISTAKES Material Inconsistent use of the agreed PURCHASING DEPARTMENT ACTIVITIES measurements, - Buying Failing to provide regular feedback to - Expediting suppliers regarding performance - Inventory Control Neglecting to take notice of suppliers input to - Transportation performance discussions. - Managing Countertrade Arrangements - Insourcing- Outsourcing Failing to involve suppliers in determining - Value Analysis measurement criteria - Purchasing Research Use of overcomplicated KPIs and metrics - Material Forecasting - Supply Management Suppliers can make mistakes in the appraisal process too, so if you are ever involved in FORM OF PURCHASING supplier appraisal on the customer side, be - Centralized Purchasing alert to any overt signs of defensiveness on the - Decentralized Purchasing part of a supplier. - Hybrid Combination It may be that the supplier is viewing THE BASICS OF COST ANALYSIS appraisal efforts as a rationalization measure. In this case, the supplier will need to be Personnel rate reassured that your intention not to eliminate Total hours of work by the personnel vendors, but to cultivate a two-way process of continuous improvement. Evaluation of costs as necessary and reasonable